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

                                  FORM 10-Q

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

           For the quarterly period ended September 30, 1998

                      OR

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

           For the transition period from _____________   to   ____________

            Exact name of registrant as specified in its charter,
            State or other jurisdiction of incorporation or 
            organization, Address of principal executive 
Commission  offices and Registrant's Telephone Number,including    IRS Employer
File Number area code Identification No.               
----------- -------------------------------------------------      -------------
1-12927    NEW CENTURY ENERGIES, INC.                               84-1334327
           (a Delaware Corporation)
           1225 17th Street
           Denver, Colorado  80202
           Telephone (303) 571-7511

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

1-3789     SOUTHWESTERN PUBLIC SERVICE COMPANY                      75-0575400
           (a New Mexico Corporation)
           Tyler at Sixth
           Amarillo, Texas  79101
           Telephone (303) 571-7511
                             -------------------
      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 6, 1998,  114,303,004 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 $5,557,983,570.

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


<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 ...........................  35


                          PART II - OTHER INFORMATION


Item 1.  Legal Proceedings................................................. 56

Item 6.  Exhibits and Reports on Form 8-K.................................. 56








This  combined  Form 10-Q is  separately  filed by New Century  Energies,  Inc.,
Public Service  Company of Colorado and  Southwestern  Public  Service  Company.
Information contained herein relating to any individual company is filed by such
company on its own behalf.  Each  registrant  makes  representations  only as to
itself and makes no other representations  whatsoever as to information relating
to the other registrants.

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

                         FORWARD-LOOKING INFORMATION

The  following  discussions  include  "forward-looking  statements"  within  the
meaning of Section  27A of the  Securities  Act of 1933 and  Section  21E of the
Securities  Exchange  Act of  1934.  Investors  and  prospective  investors  are
cautioned that the forward-looking  statements  contained herein with respect to
the  revenues,   earnings,  capital  expenditures,   resolution  and  impact  of
litigation, Year 2000 readiness, competitive performance, or other prospects for
the business of New Century  Energies,  Inc., Public Service Company of Colorado
and/or  Southwestern  Public  Service  Company  or their  affiliated  companies,
including any and all underlying assumptions and other statements that are other
than  statements  of  historical  fact,  may be influenced by factors that could
cause actual  outcomes and results to be materially  different  than  projected.
Such  factors  include,  but are not limited to, the effects of weather,  future
economic  conditions,  the  performance  of  generating  units,  fuel prices and
availability,  regulatory  decisions  and the  effects  of  changes in state and
federal  laws,  the pace of  deregulation  of  domestic  retail  natural gas and
electricity markets, the timing and extent of change in commodity prices for all
forms of energy,  capital spending  requirements,  the evolution of competition,
earnings   retention  and  dividend  payout  policies,   changes  in  accounting
standards,  and other factors.  From time to time, New Century  Energies,  Inc.,
Public Service Company of Colorado and  Southwestern  Public Service Company may
publish  or  otherwise  make  available  forward-looking  statements.  All  such
subsequent forward-looking statements,  whether written or oral and whether made
by or on  behalf  of  each  company,  are  also  expressly  qualified  by  these
cautionary statements.


                                       i
<PAGE>


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

Abbreviation or Acronym                                           Term
-----------------------                                           ----

AEP....................................... American Electric Power Company, Inc.
CDPHE...................................... Colorado Department of Public Health
                                                                 and Environment
Cheyenne..................................Cheyenne Light, Fuel and Power Company
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
Dth....................................................................Dekatherm
e prime...........................................e prime, inc. and subsidiaries
ECA.......................................................Energy Cost Adjustment
FERC........................................Federal Energy Regulatory Commission
Fort St. Vrain ......................Fort St. Vrain Electric Generating Station,
                                           formerly a nuclear generating station
ICA....................................................Incentive Cost Adjustment
IRS.....................................................Internal Revenue Service
Kwh................................................................kilowatt-hour
Merger.............................the business combination between PSCo and SPS
Natural Fuels.........................................Natural Fuels Corporation
NCE or Company........................................New Century Energies, Inc.
NC Enterprises..............................................NC Enterprises, Inc.
NCI..............................................New Century International, 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
QSP......................................................Quality of Service Plan
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"
Thunder Basin.........................................Thunder Basin Coal Company
TNP...............................................Texas-New Mexico Power Company
UE..............................Utility Engineering Corporation and subsidiaries
WGI.....................................................WestGas InterState, Inc.
WPSC...........................................Wyoming Public Service Commission
Yorkshire Electricity............................Yorkshire Electricity Group plc
Yorkshire Power.......................................Yorkshire Power Group Ltd.


                                       ii
<PAGE>


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


                                    ASSETS

                                                      September 30, December 31,
                                                            1998        1997
                                                            ----        ----


Property, plant and equipment, at cost:
   Electric...........................................   $6,938,975  $6,703,863
   Gas................................................    1,186,166   1,136,231
   Steam and other....................................      121,838     120,322
   Common to all departments..........................      475,008     437,636
   Construction in progress...........................      388,426     318,124
                                                            -------     -------
                                                          9,110,413   8,716,176
   Less: accumulated depreciation ....................    3,349,321   3,182,800
                                                          ---------   ---------
     Total property, plant and equipment..............    5,761,092   5,533,376
                                                          ---------   ---------



Investments, at cost:
   Investment in Yorkshire Power and other
      unconsolidated  subsidiaries (Note 2)  .........      301,460     295,316
   Other..............................................       65,604      71,411
                                                            -------      ------
    Total investments.................................      367,064     366,727
                                                            -------     -------


Current assets:
   Cash and temporary cash investments................       70,827      72,623
   Accounts receivable, less reserve for uncollectible
     accounts ($5,861 at September 30, 1998; $5,355 
     at December 31, 1997)............................      313,951     315,539
   Accrued unbilled revenues..........................      116,200     110,877
   Recoverable purchased gas and electric energy 
     costs - net .....................................       46,884     129,292
   Materials and supplies, at average cost............       68,872      68,411
   Fuel inventory, at average cost....................       22,861      23,162
   Gas in underground storage, at cost (LIFO).........       54,359      47,394
   Prepaid expenses and other.........................       66,212      56,868
                                                            -------      ------
    Total current assets..............................      760,166     824,166
                                                            -------     -------

Deferred charges:
   Regulatory assets (Note 1).........................      388,143     430,475
   Unamortized debt expense...........................       27,829      20,833
   Other..............................................      157,534     134,704
                                                            -------     -------
    Total deferred charges............................      573,506     586,012
                                                            -------     -------
                                                         $7,461,828  $7,310,281
                                                         ==========  ==========


      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
                                 (Unaudited)
                            (Thousands of Dollars)

                           CAPITAL AND LIABILITIES
    

                                                      September 30, December 31,
                                                            1998        1997
                                                            ----        ----
Common stock.........................................   $1,737,585   $1,694,195
Retained earnings....................................      698,685      659,050
                                                          -------       -------
    Total common equity..............................    2,436,270    2,353,245

Preferred stock of subsidiaries:
   Not subject to mandatory redemption...............            -      140,002
   Subject to mandatory redemption at par............            -       39,253
PSCo and SPS obligated mandatorily redeemable
  preferred securities of subsidiary trusts holding 
  solely subordinated debentures of PSCo and
  SPS (Note 6)........................................     294,000      100,000
Long-term debt of subsidiaries........................   2,222,143    1,987,955
                                                         ---------    ---------
                                                         4,952,413    4,620,455
                                                         ---------    ---------

Noncurrent liabilities:
   Employees' postretirement benefits other than
     pensions ........................................      73,684       62,716
   Employees' postemployment benefits.................      27,332       27,953
                                                           -------       ------
    Total noncurrent liabilities......................     101,016       90,669
                                                           -------       ------

Current liabilities:
   Notes payable and commercial paper.................     563,307      588,343
   Long-term debt due within one year.................     121,117      257,469
   Preferred stock subject to mandatory redemption 
     within one year .................................           -        2,576
   Accounts payable...................................     236,464      298,469
   Dividends payable..................................      67,670       68,296
   Customers' deposits................................      29,805       27,993
   Accrued taxes......................................      98,893       66,587
   Accrued interest...................................      41,263       52,615
   Current portion of accumulated deferred income taxes     10,682       27,391
   Other..............................................     110,573       87,380
                                                           -------       ------
    Total current liabilities.........................   1,279,774    1,477,119
                                                         ---------    ---------

Deferred credits:
   Customers' advances for construction...............      54,495       53,041
   Unamortized investment tax credits.................     102,311      106,147
   Accumulated deferred income taxes..................     921,693      922,341
   Other..............................................      50,126       40,509
                                                           -------       ------
    Total deferred credits............................   1,128,625    1,122,038
                                                         ---------    ---------

Commitments and contingencies (Notes 4 and 5).........   ---------    ---------
                                                        $7,461,828   $7,310,281
                                                        ==========   ==========


      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)

                                                            Three Months Ended
                                                               September 30,
                                                               1998      1997
                                                               ----      ----

Operating revenues:
   Electric...........................................      $ 784,465 $ 670,787
   Gas................................................        115,526   109,396
   Other..............................................         15,907    13,289
                                                              -------    ------
                                                              915,898   793,472

Operating expenses:
   Fuel used in generation............................        200,039   199,726
   Purchased power....................................        223,685   138,149
   Cost of gas sold...................................         70,054    63,403
   Other operating and maintenance expenses...........        157,851   144,241
   Depreciation and amortization......................         65,520    61,359
   Taxes (other than income taxes)....................         34,576    33,426
                                                              -------    ------
                                                              751,725   640,304
                                                              -------   -------
Operating income......................................        164,173   153,168

Other income and deductions:
   Merger expenses....................................              -   (18,584)
   Equity in earnings of Yorkshire Power and other
     unconsolidated subsidiaries (Note 2).............         10,247    17,047
   Miscellaneous income and deductions - net..........            905      (163)
                                                              -------    ------
                                                               11,152    (1,700)

Interest charges and preferred dividends of subsidiaries:
   Interest on long-term debt.........................         42,737    41,892
   Other interest.....................................          7,602    10,503
   Allowance for borrowed funds used during construction       (3,962)   (2,874)
   Dividends on PSCo and SPS obligated mandatorily
     redeemable preferred securities of subsidiary
     trusts holding solely subordinated debentures
     of PSCo and SPS (Note 6).........................          5,763     1,963
   Dividend requirements on preferred stock of 
     subsidiaries ....................................              -     2,929
                                                                -----     -----
                                                               52,140    54,413
                                                               ------    ------

Income before income taxes and extraordinary item.....        123,185    97,055
Income taxes..........................................         32,413    33,715
                                                              -------    ------
Income before extraordinary item......................         90,772    63,340
Extraordinary item - U.K. windfall tax (Note 2).......              -  (110,565)
                                                              -------  --------

Net income (loss).....................................        $90,772  $(47,225)
                                                              =======  ========

Weighted average common shares outstanding............        111,606   104,481
                                                              =======   =======

Basic and diluted earnings per share of common 
  stock outstanding:
   Income before extraordinary item...................        $  0.82   $ 0.61
   Extraordinary item.................................              -    (1.06)
                                                              -------   ------
   Net income.........................................        $  0.82   $(0.45)
                                                              =======   ======


      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)

                                                           Nine Months Ended
                                                             September 30,
                                                             1998      1997
                                                             ----      ----
Operating revenues:
   Electric...........................................   $2,044,218  $1,853,809
   Gas................................................      613,363     571,494
   Other..............................................       57,442      33,332
                                                            -------      ------
                                                          2,715,023   2,458,635

Operating expenses:
   Fuel used in generation............................      512,238     512,498
   Purchased power....................................      526,742     389,925
   Cost of gas sold...................................      419,364     385,898
   Other operating and maintenance expenses...........      468,499     427,757
   Depreciation and amortization......................      195,012     182,843
   Taxes (other than income taxes)....................      100,492     100,007
                                                            -------     -------
                                                          2,222,347   1,998,928
                                                          ---------   ---------
Operating income......................................      492,676     459,707

Other income and deductions:
   Merger expenses....................................         (790)    (33,040)
   Write-off of investment in Carolina Energy
      Project (Note 3)                                            -     (16,052)
   Equity in earnings of Yorkshire Power and other
      unconsolidated subsidiaries (Note 2)............        6,430      21,319
   Miscellaneous income and deductions - net..........         (250)     (8,438)
                                                            -------      ------
                                                              5,390     (36,211)

Interest charges and preferred dividends of subsidiaries:
   Interest on long-term debt.........................      125,928     123,969
   Other interest.....................................       25,054      22,243
   Allowance for borrowed funds used during construction    (12,883)     (7,624)
   Dividends on PSCo and SPS obligated mandatorily 
     redeemable preferred securities of subsidiary trusts
     holding solely  subordinated  debentures of 
     PSCo and SPS (Note 6).............................      11,799       5,888
   Dividend requirements on preferred stock of subsidiaries   5,332       8,814
                                                              -----       -----
                                                            155,230     153,290
                                                            -------     -------

Income before income taxes and extraordinary item.....      342,836     270,206
Income taxes..........................................      109,322      94,665
                                                            -------      ------
Income before extraordinary item......................      233,514     175,541
Extraordinary item - U.K. windfall tax (Note 2).......            -    (110,565)
                                                            -------    --------
Net income............................................     $233,514    $ 64,976
                                                           ========    ========

Weighted average common shares outstanding............      111,320     104,247
                                                            =======     =======

Basic and diluted earnings per share of common
  stock outstanding:
   Income before extraordinary item...................      $  2.10     $  1.68
   Extraordinary item.................................            -       (1.06)
                                                            -------     -------
   Net income.........................................      $  2.10     $  0.62
                                                            =======     =======


      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,
                                                               1998      1997
                                                               ----      ----

Operating activities:
   Net income.........................................       $233,514  $ 64,976
   Adjustments to reconcile net income to net
    cash provided by operating activities:
     Extraordinary item - U.K. windfall tax (Note 2)..              -   110,565
     Depreciation and amortization....................        203,036   188,969
     Amortization of investment tax credits...........         (3,836)   (3,943)
     Deferred income taxes............................        (12,328)   40,957
     Equity in earnings of Yorkshire Power and other
       unconsolidated subsidiaries, net...............         (6,430)  (20,099)
     Allowance for funds used during construction.....              -        (4)
     Write-off of investment in Carolina Energy Project             -    16,052
     Change in accounts receivable....................          7,220     9,384
     Change in inventories............................         (7,002)  (11,951)
     Change in other current assets...................         67,840   (43,100)
     Change in accounts payable.......................        (62,319)  (87,503)
     Change in other current liabilities..............         50,545   (33,716)
     Change in deferred amounts.......................         22,398   (32,371)
     Change in noncurrent liabilities.................         10,347     1,885
     Other............................................             (8)      921
                                                              -------   -------
       Net cash provided by operating activities......        502,977   201,022

Investing activities:
   Construction expenditures..........................       (411,778) (307,338)
   Allowance for equity funds used during construction              -         4
   Proceeds from disposition of property, plant and equipment   3,755     2,163
   Investment in Yorkshire Power......................              -  (362,430)
   Acquisition of subsidiary, net of cash acquired (Note 3)   (13,725)        -
   Purchase of other investments......................         (4,006)  (26,283)
   Sale of other investments..........................          6,313    17,971
                                                              -------   -------
       Net cash used in investing activities..........       (419,441) (675,913)

Financing activities:
   Proceeds from sale of common stock.................         34,280    25,027
   Proceeds from sale of PSCo obligated mandatorily 
     redeemable  preferred securities (Note 6)........        187,700         -
   Proceeds from sale of long-term debt...............        247,961   333,517
   Redemption of long-term notes and bonds............       (156,838)  (85,468)
   Short-term borrowings - net........................        (25,036)  374,331
   Redemption of preferred stock of 
     subsidiaries (Note 6) ...........................       (181,824)     (666)
   Dividends on common stock..........................       (191,575) (164,432)
                                                             --------  -------- 
       Net cash (used in) provided by financing activities    (85,332)  482,309
                                                              -------   -------
       Net (decrease) increase in cash and temporary cash
           investments                                         (1,796)    7,418
       Cash and temporary cash investments at beginning 
           of period                                            72,623   50,015
                                                                ------   ------
       Cash and temporary cash investments at end of period   $ 70,827 $ 57,433
                                                              ======== ========



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


                                       5
<PAGE>


                      PUBLIC SERVICE COMPANY OF COLORADO
                               AND SUBSIDIARIES
                    CONSOLIDATED CONDENSED BALANCE SHEETS
                                 (Unaudited)
                            (Thousands of Dollars)

                                    ASSETS

                                                      September 30, December 31,
                                                           1998        1997
                                                           ----        ----


Property, plant and equipment, at cost:
   Electric .........................................  $4,237,141    $4,088,447
   Gas................................................  1,146,250     1,100,003
   Steam and other....................................     79,113        78,740
   Common to all departments..........................    470,202       432,840
   Construction in progress...........................    262,444       170,503
                                                          -------       -------
                                                        6,195,150     5,870,533
   Less: accumulated depreciation.....................  2,261,903     2,145,673
                                                        ---------     ---------
     Total property, plant and equipment..............  3,933,247     3,724,860
                                                        ---------     ---------

Investments, at cost:
   Investment in Yorkshire Power (Note 2).............          -       286,703
   Note receivable from affiliate (Note 2)............    292,620             -
   Other..............................................     21,492        43,311
                                                          -------        ------
    Total investments.................................    314,112       330,014
                                                          -------       -------

Current assets:
   Cash and temporary cash investments................     30,043        18,909
   Accounts receivable, less reserve for uncollectible
     accounts ($2,917 at September 30, 1998; $2,272 
     at December 31, 1997) ...........................    156,671       191,155
   Accrued unbilled revenues..........................    100,556        94,284
   Recoverable purchased gas and electric energy
      costs - net ....................................     39,659       103,197
   Materials and supplies, at average cost............     46,597        48,030
   Fuel inventory, at average cost....................     20,568        20,862
   Gas in underground storage, at cost (LIFO).........     53,287        46,576
   Prepaid expenses and other.........................     36,282        39,594
                                                          -------        ------
    Total current assets..............................    483,663       562,607
                                                          -------       -------

Deferred charges:
   Regulatory assets (Note 1).........................    275,736       310,658
   Unamortized debt expense...........................     18,136        10,800
   Other..............................................     78,949        55,794
                                                          -------        ------
    Total deferred charges............................    372,821       377,252
                                                          -------       -------
                                                       $5,103,843    $4,994,733
                                                       ==========    ==========



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

                                       6
<PAGE>


                      PUBLIC SERVICE COMPANY OF COLORADO
                               AND SUBSIDIARIES
                    CONSOLIDATED CONDENSED BALANCE SHEETS
                                 (Unaudited)
                            (Thousands of Dollars)

                           CAPITAL AND LIABILITIES

                                                     September 30,  December 31,
                                                         1998          1997
                                                         ----          ----




Common stock........................................   $1,302,119    $1,302,119
Retained earnings...................................      315,392       319,280
                                                          -------       -------
    Total common equity.............................    1,617,511     1,621,399

Preferred stock:
   Not subject to mandatory redemption..............            -       140,002
   Subject to mandatory redemption at par...........            -        39,253
PSCo obligated  mandatorily  redeemable preferred
  securities of subsidiary trust holding solely
  subordinated debentures of PSCo (Note 6) .........      194,000             -
Long-term debt......................................    1,568,409     1,338,138
                                                        ---------     ---------
                                                        3,379,920     3,138,792
                                                        ---------     ---------

Noncurrent liabilities:
   Employees' postretirement benefits other 
     than pensions .................................       69,530        58,695
   Employees' postemployment benefits...............       25,031        25,031
                                                          -------       -------
    Total noncurrent liabilities....................       94,561        83,726
                                                          -------       -------

Current liabilities:
   Notes payable and commercial paper...............      404,200       348,555
   Long-term debt due within one year...............      120,417       257,160
   Preferred stock subject to mandatory redemption 
     within one year ...............................            -         2,576
   Accounts payable.................................      156,120       218,773
   Dividends payable................................       58,640        40,975
   Customers' deposits..............................       23,263        21,888
   Accrued taxes....................................       60,901        42,549
   Accrued interest.................................       31,603        39,177
   Current portion of accumulated deferred income taxes     8,267        19,872
   Other............................................       66,595        59,880
                                                          -------       -------
    Total current liabilities.......................      930,006     1,051,405
                                                          -------     ---------

Deferred credits:
   Customers' advances for construction.............       53,342        51,830
   Unamortized investment tax credits...............       95,764        99,355
   Accumulated deferred income taxes................      519,754       534,246
   Other............................................       30,496        35,379
                                                          -------       -------
    Total deferred credits..........................      699,356       720,810
                                                          -------       -------

Commitments and contingencies (Notes 4 and 5).......   ----------    ----------
                                                       $5,103,843    $4,994,733
                                                       ==========    ==========



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

                                       7
<PAGE>


                      PUBLIC SERVICE COMPANY OF COLORADO
                               AND SUBSIDIARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF INCOME
                                 (Unaudited)
                            (Thousands of Dollars)


                                                             Three Months Ended
                                                                September 30,
                                                               1998      1997
                                                               ----      ----

Operating revenues:
   Electric...........................................       $466,221  $382,360
   Gas................................................         74,635    83,372
   Other..............................................            745       850
                                                              -------   -------
                                                              541,601   466,582

Operating expenses:
   Fuel used in generation............................         61,019    56,535
   Purchased power....................................        182,852   126,668
   Gas purchased for resale...........................         32,928    39,503
   Other operating and maintenance expenses...........         99,529    97,768
   Depreciation and amortization......................         45,344    42,374
   Taxes (other than income taxes)....................         21,279    21,101
   Income taxes.......................................         21,816    12,261
                                                              -------   -------
                                                              464,767   396,210
                                                              -------   -------
Operating income......................................         76,834    70,372

Other income and deductions:
   Merger expenses....................................              -   (11,384)
   Equity earnings in Yorkshire Power (Note 2)........              -    17,317
   Miscellaneous income and deductions - net..........          3,558    (2,397)
                                                              -------   -------
                                                                3,558     3,536

Interest charges:
   Interest on long-term debt.........................         29,628    28,949
   Amortization of debt discount and expense less premium       1,153     1,019
   Other interest.....................................          4,816     8,196
   Allowance for borrowed funds used during construction       (3,020)   (1,736)
   Dividends on PSCo obligated  mandatorily  redeemable
    preferred securities of subsidiary trust holding
    solely subordinated debentures of PSCo (Note 6)...          3,800         -
                                                                -----    ------
                                                               36,377    36,428
                                                               ------    ------

Income before extraordinary item......................         44,015    37,480
Extraordinary item - U.K. windfall tax (Note 2).......              -  (110,565)
                                                              -------  --------
Net income (loss).....................................         44,015   (73,085)
Dividend requirements on preferred stock..............              -     2,929
                                                              -------   -------
Earnings (loss) available for common stock............        $44,015  $(76,014)
                                                              =======  =========



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

                                       8
<PAGE>


                      PUBLIC SERVICE COMPANY OF COLORADO
                               AND SUBSIDIARIES
                 CONSOLIDATED CONDENSED STATEMENTS OF INCOME
                                 (Unaudited)
                            (Thousands of Dollars)


                                                            Nine Months Ended
                                                             September 30,
                                                             1998        1997
                                                             ----        ----

Operating revenues:
   Electric...........................................   $1,211,607  $1,116,457
   Gas................................................      473,288     545,470
   Other..............................................        5,946       6,542
                                                            -------     -------
                                                          1,690,841   1,668,469

Operating expenses:
   Fuel used in generation............................      161,202     148,278
   Purchased power....................................      430,783     370,313
   Gas purchased for resale...........................      293,468     361,998
   Other operating and maintenance expenses...........      296,038     296,668
   Depreciation and amortization......................      135,035     127,413
   Taxes (other than income taxes)....................       62,185      64,832
   Income taxes.......................................       72,184      59,205
                                                            -------     -------
                                                          1,450,895   1,428,707
                                                          ---------   ---------
Operating income......................................      239,946     239,762

Other income and deductions:
   Merger expenses....................................          418     (17,801)
   Equity earnings in Yorkshire Power (Note 2)........        3,446      21,430
   Miscellaneous income and deductions - net..........        2,223     (10,980)
                                                            -------    --------
                                                              6,087      (7,351)

Interest charges:
   Interest on long-term debt.........................       86,899      85,902
   Amortization of debt discount and expense less premium     3,148       2,964
   Other interest.....................................       14,967      17,145
   Allowance for borrowed funds used during construction     (8,712)     (4,568)
   Dividends on PSCo obligated mandatorily redeemable 
     preferred securities of subsidiary trust holding
     solely subordinated debentures of PSCo (Note 6)...       5,911           -
                                                              -----      ------
                                                            102,213     101,443
                                                            -------     -------

Income before extraordinary item......................      143,820     130,968
Extraordinary item - U.K. windfall tax (Note 2).......            -    (110,565)
                                                            -------    --------
Net income............................................      143,820      20,403
Dividend requirements and redemption premium on
 preferred stock .....................................        5,332       8,814 
                                                            -------       -----
Earnings available for common stock...................     $138,488     $11,589
                                                           ========     =======



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

                                       9
<PAGE>


                      PUBLIC SERVICE COMPANY OF COLORADO
                               AND SUBSIDIARIES
                CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                                 (Unaudited)
                            (Thousands of Dollars)


                                                              Nine Months Ended
                                                                September 30,
                                                               1998      1997
                                                               ----      ----

Operating activities:
   Net income.........................................       $143,820  $ 20,403
   Adjustments to reconcile net income to net
    cash provided by operating activities:
     Extraordinary item - U.K. windfall tax (Note 2)..              -   110,565
     Depreciation and amortization....................        139,227   130,692
     Amortization of investment tax credits...........         (3,591)   (3,241)
     Deferred income taxes............................        (14,798)   37,010
     Equity in earnings of Yorkshire Power............         (3,446)  (21,430)
     Change in accounts receivable....................         37,457    23,121
     Change in inventories............................         (4,984)  (10,061)
     Change in other current assets...................         60,580   (20,894)
     Change in accounts payable.......................        (61,444)  (93,266)
     Change in other current liabilities..............         18,111   (28,341)
     Change in deferred amounts.......................        (16,389)    8,432
     Change in noncurrent liabilities.................         10,834       479
     Other............................................              -       514
                                                              -------   -------
       Net cash provided by operating activities......        305,377   153,983

Investing activities:
   Construction expenditures..........................       (338,663) (217,656)
   Proceeds from disposition of property, 
     plant and equipment ............................           6,207     1,806
   Investment in Yorkshire Power (Note 2).............              -  (362,430)
   Transfer of subsidiaries to NCE (Note 1)...........              -    (2,229)
   Purchase of other investments......................           (466)   (6,675)
   Sale of other investments..........................          4,394    11,979
                                                              -------   -------
       Net cash used in investing activities..........       (328,528) (575,205)

Financing activities:
   Proceeds from sale of common stock.................              -    20,517
   Proceeds from sale of PSCo obligated mandatorily
     redeemable preferred securities (Note 6).........        187,700         -
   Proceeds from sale of long-term debt...............        247,274   332,484
   Redemption of long-term notes and bonds............       (156,414)  (69,275)
   Short-term borrowings - net........................         67,600   252,536
   Dividends on common stock..........................       (121,790) (102,663)
   Redemption of preferred stock (Note 6).............       (181,824)     (665)
   Dividends and redemption premium on preferred 
     stock (Note 6) ..................................         (8,261)   (8,828)
                                                              -------    ------
       Net cash provided by financing activities......         34,285   424,106
                                                              -------   -------
       Net increase in cash and temporary cash investments     11,134     2,884
       Cash and temporary cash investments at beginning
         of period ...................................         18,909     9,406
                                                               ------     -----
       Cash and temporary cash investments at end
         of period ...................................        $30,043   $12,290
                                                              =======   =======


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


                                       10
<PAGE>


                     SOUTHWESTERN PUBLIC SERVICE COMPANY
                           CONDENSED BALANCE SHEETS
                                 (Unaudited)
                            (Thousands of Dollars)

                                    ASSETS

                                                     September 30,  December 31,
                                                          1998         1997
                                                          ----         ----

Property, plant and equipment, at cost:
   Electric .......................................    $2,640,497    $2,557,579
   Construction in progress........................       120,523       144,452
                                                          -------       -------
                                                        2,761,020     2,702,031
   Less: accumulated depreciation..................     1,033,792       987,487
                                                        ---------       -------
    Total property, plant and equipment............     1,727,228     1,714,544
                                                        ---------     ---------

Investments, at cost:
   Notes receivable from affiliate.................       119,036       119,036
   Other...........................................         5,646         5,832
                                                          -------       -------
    Total investments..............................       124,682       124,868
                                                          -------       -------

Current assets:
   Cash and temporary cash investments.............         5,647           986
   Accounts receivable, less reserve for 
     uncollectible accounts ($1,996 at September 
     30, 1998; $2,442 at December 31, 1997)........        98,613        96,548
   Accrued unbilled revenues.......................        13,727        15,468
   Recoverable electric energy costs - net.........         4,721        23,086
   Materials and supplies, at average cost.........        17,339        16,337
   Fuel inventory, at average cost.................         2,293         2,301
   Prepaid expenses and other......................         4,558         3,367
                                                          -------       -------
    Total current assets...........................       146,898       158,093
                                                          -------       -------

Deferred charges:
   Regulatory assets (Note 1)......................       111,921       119,244
   Unamortized debt expense........................         8,912         9,395
   Other...........................................        32,022        55,349
                                                          -------       -------
    Total deferred charges.........................       152,855       183,988
                                                          -------       -------
                                                       $2,151,663    $2,181,493
                                                       ==========    ==========



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

                                       11
<PAGE>


                     SOUTHWESTERN PUBLIC SERVICE COMPANY
                           CONDENSED BALANCE SHEETS
                                 (Unaudited)
                            (Thousands of Dollars)


                           CAPITAL AND LIABILITIES

                                                     September 30,  December 31,
                                                         1998           1997
                                                         ----           ----


Common stock........................................    $348,402      $348,402
Retained earnings...................................     386,822       349,988
                                                         -------       -------
    Total common equity.............................     735,224       698,390

SPS obligated mandatorily redeemable preferred
  securities of subsidiary trust holding solely
  subordinated debentures of SPS ....................    100,000       100,000
Long-term debt.......................................    620,699       620,598
                                                         -------       -------
                                                       1,455,923     1,418,988
                                                       ---------     ---------

Noncurrent liabilities:
   Employees' postretirement benefits other 
     than pensions ..................................      3,432         3,800
   Employees' postemployment benefits................      1,825         2,446
                                                         -------       -------
    Total noncurrent liabilities.....................      5,257         6,246
                                                         -------       -------

Current liabilities:
   Notes payable and commercial paper................    126,107       154,244
   Notes payable to affiliates.......................      9,000        25,160
   Long-term debt due within one year................        113           173
   Accounts payable..................................     75,119       107,465
   Dividends payable.................................      6,168        22,546
   Customers' deposits...............................      5,725         5,471
   Accrued taxes.....................................     37,682        28,051
   Accrued interest..................................      9,219        12,715
   Current portion of accumulated deferred income taxes    1,872        10,740
   Other.............................................     20,591         7,415
                                                         -------       -------
    Total current liabilities........................    291,596       373,980
                                                         -------       -------

Deferred credits:
   Unamortized investment tax credits................      5,281         5,469
   Accumulated deferred income taxes.................    377,978       372,447
   Other.............................................     15,628         4,363
                                                         -------       -------
    Total deferred credits...........................    398,887       382,279
                                                         -------       -------

Commitments and contingencies (Notes 4 and 5)........  ---------      ---------
                                                      $2,151,663     $2,181,493
                                                      ==========     ==========



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


                                       12
<PAGE>


                     SOUTHWESTERN PUBLIC SERVICE COMPANY
                        CONDENSED STATEMENTS OF INCOME
                                 (Unaudited)
                            (Thousands of Dollars)


                                                             Three Months Ended
                                                                September 30,
                                                               1998      1997
                                                               ----      ----

Operating revenues:
   Electric...........................................       $284,648  $279,511
   Other..............................................              -     4,645
                                                              -------   -------
                                                              284,648   284,156

Operating expenses:
   Fuel used in generation............................        139,021   141,907
   Purchased power....................................          9,946     3,957
   Other operating & maintenance expenses.............         34,189    35,187
   Depreciation and amortization......................         17,754    17,272
   Taxes (other than income taxes)....................         12,525    11,969
   Income taxes.......................................         21,755    22,888
                                                              -------   -------
                                                              235,190   233,180
                                                              -------   -------
Operating income......................................         49,458    50,976

Other income and deductions:
   Merger expenses....................................              -    (7,200)
   Interest income and other  - net...................          2,233     1,692
                                                                -----     -----
                                                                2,233    (5,508)

Interest charges:
   Interest on long-term debt.........................         10,992    11,000
   Amortization of debt discount and expense less premium         561       560
   Other interest.....................................          2,163     1,963
   Allowance for borrowed funds used during construction         (917)   (1,129)
   Dividends on SPS obligated  mandatorily  redeemable
     preferred securities of subsidiary trust holding
     solely subordinated debentures of SPS ............         1,963     1,963
                                                                -----     -----
                                                               14,762    14,357
                                                               ------    ------

Net income............................................        $36,929   $31,111
                                                              =======   =======


         Theaccompanying notes to condensed financial statements are an
                  integral part of these financial statements.

                                       13
<PAGE>


                     SOUTHWESTERN PUBLIC SERVICE COMPANY
                        CONDENSED STATEMENTS OF INCOME
                                 (Unaudited)
                            (Thousands of Dollars)


                                                              Nine Months Ended
                                                                September 30,
                                                               1998      1997
                                                               ----      ----

Operating revenues:
   Electric...........................................       $748,386  $728,436
   Other..............................................              -    20,236
                                                              -------   -------
                                                              748,386   748,672

Operating expenses:
   Fuel used in generation............................        351,036   364,221
   Purchased power....................................         19,666    12,088
   Other operating & maintenance expenses.............        103,650   119,755
   Depreciation and amortization......................         53,291    53,717
   Taxes (other than income taxes)....................         35,918    34,819
   Income taxes.......................................         54,709    36,894
                                                              -------   -------
                                                              618,270   621,494
                                                              -------   -------
Operating income......................................        130,116   127,178

Other income and deductions:
   Merger expenses....................................         (1,208)  (15,239)
   Write-off of investment in Carolina Energy 
     Project (Note 3) ................................              -   (16,052)
   Interest income and other  - net...................          6,779     2,113
                                                              -------   -------
                                                                5,571   (29,178)

Interest charges:
   Interest on long-term debt.........................         32,972    33,057
   Amortization of debt discount and expense less premium       1,682     1,683
   Other interest.....................................          7,275     4,710
   Allowance for borrowed funds used during construction       (4,115)   (3,047)
   Dividends on SPS obligated mandatorily redeemable 
    preferred securities of subsidiary trust holding
    solely subordinated debentures of SPS ............          5,888     5,888
                                                                -----     -----
                                                               43,702    42,291
                                                               ------    ------
Net income............................................        $91,985   $55,709
                                                              =======   =======


         Theaccompanying notes to condensed financial statements are an
                  integral part of these financial statements.

                                       14
<PAGE>


                      SOUTHWESTERN PUBLIC SERVICE COMPANY
                      CONDENSED STATEMENTS OF CASH FLOWS
                                 (Unaudited)
                            (Thousands of Dollars)


                                                              Nine Months Ended
                                                                September 30,
                                                               1998      1997
                                                               ----      ----

Operating activities:
   Net income.........................................        $91,985  $55,709
   Adjustments to reconcile net income to net
    cash provided by operating activities:
     Depreciation and amortization....................         56,593   56,290
     Write-off of investment in Carolina Energy Project             -   16,052
     Amortization of investment tax credits...........           (188)    (188)
     Deferred income taxes............................         (1,524)   1,957
     Allowance for funds used during construction.....              -       (5)
     Change in accounts receivable....................         (2,065) (37,112)
     Change in inventories............................           (994)  (1,419)
     Change in other current assets...................         18,915    1,543
     Change in accounts payable.......................        (32,346)  39,276
     Change in other current liabilities..............         19,565  (10,565)
     Change in deferred amounts.......................         38,588  (52,143)
     Change in noncurrent liabilities.................           (989)   1,419
     Other............................................              -      312
                                                              -------  -------
       Net cash provided by operating activities......        187,540   71,126

Investing activities:
   Construction expenditures..........................        (64,838) (87,707)
   Allowance for equity funds used during construction              -        5
   Proceeds from (cost of) disposition of property,
     plant and equipment .............................         (2,345)      61
   Proceeds from the sale of Quixx and UE, net of cash
      disposed (Note 1) ...............................             -  (29,567)
   Sale (purchase) of other investments...............            186   (4,583)
                                                              -------  --------
       Net cash used in investing activities..........        (66,997) (121,791)

Financing activities:
   Redemption of long-term notes and bonds............            (58)  (16,099)
   Short-term borrowings - net........................        (44,297)  101,495
   Dividends on common stock..........................        (71,527)  (61,769)
                                                              -------   -------
       Net cash (used in) provided by financing
         activities ..................................       (115,882)   23,627
                                                             --------    ------
       Net increase (decrease) in cash and temporary 
         cash investments ............................          4,661   (27,038)
       Cash and temporary cash investments at 
         beginning of period .........................            986    40,610
                                                                  ---    ------
       Cash and temporary cash investments at end of period   $ 5,647  $ 13,572
                                                              =======  ========


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



                                       15
<PAGE>


                 NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                                  (Unaudited)


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

      Effective August 1, 1997,  following the receipt of all required state and
Federal  regulatory  approvals,  PSCo and SPS  merged in a  tax-free  "merger of
equals"   transaction  and  became   wholly-owned   subsidiaries  of  NCE.  Each
outstanding share of PSCo common stock was canceled and converted into the right
to receive  one share of NCE common  stock,  and each  outstanding  share of SPS
common stock was canceled  and  converted  into the right to receive 0.95 of one
share   of   NCE   common   stock.   The   Merger   was   accounted   for  as  a
pooling-of-interests. Effective with the Merger, certain utility and non-utility
subsidiaries were transferred within NCE's common controlled  subsidiaries.  The
common stock of Quixx and UE, former SPS subsidiaries,  was transferred  through
the sale by SPS of the  common  stock of such  subsidiaries  at net book  value,
aggregating  approximately  $119.0  million,  to NC  Enterprises in exchange for
notes payable of NC Enterprises.  Subsidiaries  of PSCo (Cheyenne,  WGI, e prime
and  Natural  Fuels)  were  transferred  by a  declaration  of a dividend of the
subsidiaries' stock, at net book value, aggregating  approximately $49.9 million
to NCE. NCE subsequently made a capital  contribution of the e prime and Natural
Fuels common stock, at net book value,  aggregating  approximately $29.5 million
to NC  Enterprises.  Subsequent to the Merger and effective March 31, 1998, PSCo
sold  its  investment  in NCI to NC  Enterprises  (see  Note  2.  Investment  in
Yorkshire Power).

Business, Utility Operations and Regulation

      NCE  is  a  registered   holding  company  under  PUHCA  and  its  utility
subsidiaries (PSCo, SPS and Cheyenne) are engaged principally in the generation,
purchase,  transmission,  distribution  and  sale  of  electricity  and  in  the
purchase, distribution, sale and transportation of natural gas. Both the Company
and its  subsidiaries  are subject to the  regulatory  provisions of 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.



                                       16
<PAGE>


      NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

      The  following   regulatory  assets  are  reflected  in  the  accompanying
consolidated condensed balance sheets (in thousands):

September 30, 1998                          NCE           PSCo            SPS
                                          ------         ------         -----

Income taxes .......................      $149,874       $ 73,057      $ 77,348
Nuclear decommissioning costs.......        71,571         71,571             -
Employees' postretirement benefits
  other than pensions ..............        58,771         55,847         2,924
Early retirement costs..............         1,091              -         1,091
Employees' postemployment 
  benefits (Note 4) ................        24,093         23,643             -
Demand-side management costs........        38,938         34,009         4,929
Unamortized debt reacquisition costs        34,033         16,274        17,192
Thunder Basin judgment (Note 4).....         1,784              -         1,784
Other...............................         7,988          1,335         6,653
                                            ------         ------        ------
  Total.............................      $388,143       $275,736      $111,921
                                          ========       ========      ========

December 31, 1997                           NCE           PSCo            SPS
                                          ------         ------         -----

Income taxes........................      $162,985       $ 84,356      $ 79,161
Nuclear decommissioning costs.......        76,881         76,881             -
Employees' postretirement benefits
  other than pensions...............        63,023         59,995         3,028
Early retirement costs..............         8,008          6,645         1,363
Employees' postemployment
  benefits (Note 4) ................        24,455         23,932             -
Demand-side management costs........        42,503         38,518         3,985
Unamortized debt reacquisition costs        36,717         17,791        18,344
Thunder Basin judgment (Note 4).....         5,912              -         5,912
Other...............................         9,991          2,540         7,451
                                            ------         ------        ------
  Total.............................      $430,475       $310,658      $119,244
                                          ========       ========      ========

      The regulatory  assets of the Company's  regulated  subsidiaries  that are
currently  being  recovered as of  September  30, 1998 and December 31, 1997 are
reflected in rates charged to customers over periods  ranging from two to thirty
years.  The recovery of regulatory  assets over the next five years is estimated
to exceed $200 million.  For further discussion,  see the NCE, PSCo and SPS 1997
Annual Report on Form 10-K. The Company believes its utility  subsidiaries  will
continue  to be  subject  to rate  regulation.  In the event  that a portion  of
regulated  subsidiaries'  operations  are no longer subject to the provisions of
SFAS 71, as a result of a change in  regulation  or the effects of  competition,
the  Company's  subsidiaries  could be required to  write-off  their  regulatory
assets, determine any impairment to other assets resulting from deregulation and
write-down any impaired assets to their estimated fair value, which could have a
material adverse effect on NCE's, PSCo's and SPS's financial  position,  results
of operations and cash flows.

      On January  27,  1997,  the CPUC  issued its order on PSCo's 1996 gas rate
case. The CPUC allowed  recovery of  postemployment  benefit costs on an accrual
basis under SFAS 112 and denied  amortization of the approximately  $8.9 million
regulatory  asset recognized upon the adoption of SFAS 112. PSCo has appealed in
the Denver District Court the decision related to this issue. PSCo believes that
it will be  successful  on appeal and that the  associated  regulatory  asset is
realizable.  On April  1,  1998,  in  connection  with  PSCo's  annual  electric
department earnings test filing, PSCo requested approval to recover its electric
jurisdictional  portion of the  postemployment  benefits cost  regulatory  asset
totaling approximately $15 million over three years. The CPUC staff and Colorado
Office of  Consumer  Counsel  are  proposing  to  exclude  these  costs from the
electric  department  earnings  test.  PSCo  believes  that it  will be  allowed
recovery  of  SFAS  112  costs  on an  accrual  basis.  If  PSCo  is  ultimately
unsuccessful  in its appeal of the gas rate case decision  and/or in its request
to recover its  electric


                                       17
<PAGE>

      NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

  jurisdictional  regulatory  asset,  all  unrecoverable
amounts  will  be  written-off  (see  Note  4.  Regulatory  Matters  -  Electric
Department Earnings Test and Quality of Service Plan).

      As of September 30, 1998, SPS has approximately  $1.8 million in remaining
regulatory  assets  associated  with the Thunder  Basin  judgment.  The judgment
amount  which has been paid by SPS is  recoverable  from  customers,  subject to
review by various regulatory agencies (see Note 4. Regulatory Matters - Electric
Cost Adjustment Mechanisms).

Other Property

      Property,  plant and equipment  includes  approximately  $18.4 million and
$25.4 million, respectively, for costs associated with the engineering design of
the future  Pawnee 2  generating  station and certain  water  rights  located in
southeastern Colorado, obtained for a future generating station. PSCo is earning
a return on these  investments  based on its  weighted  average cost of debt and
preferred  stock in  accordance  with a CPUC rate order (see Note 4.  Regulatory
Matters - Electric Department Earnings Test and Quality of Service Plan).

Diversified Energy Businesses

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

Statements of Cash Flows - Non-cash Transactions:

      Effective  February 26, 1998,  the Company  issued  222,362  shares of its
common  stock,   valued  at  the  market  price  on  the  date  of  issuance  of
approximately $10 million to the Employees'  Savings and Stock Ownership Plan of
Public Service Company of Colorado and Participating Subsidiary Companies. Prior
to the Merger,  during 1997,  PSCo issued  250,058 shares of its common stock to
the Employees'  Savings and Stock  Ownership  Plan of Public Service  Company of
Colorado and  Participating  Subsidiary  Companies valued at the market price on
the date of issuance of approximately $10 million. The estimated issuance values
were  recognized in other  operating  expenses  during the respective  preceding
years.

Comprehensive Income

      The Company and its subsidiaries adopted Statement of Financial Accounting
Standards No. 130, "Reporting  Comprehensive Income," effective January 1, 1998.
The individual and cumulative  components of other comprehensive  income are not
material to the Company and its subsidiaries.

General

      See Note 1. of the Notes to  Consolidated  Financial  Statements in NCE's,
PSCo's and SPS' 1997 Annual  Report on Form 10-K for a summary of the  companies
and their  subsidiaries  significant  accounting  policies.  Certain  prior year
amounts have been reclassified to conform to the current year's classification.


                                       18
<PAGE>

      NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

2. Investment in Yorkshire Power (NCE and PSCo)

Acquisition

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

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

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

Investment in Ionica

      In  June  1998,  Yorkshire  Power  recognized  a $54.7  million  after-tax
impairment of its investment in Ionica, a wireless  telecommunications  company,
upon the May 22, 1998,  announcement by Ionica that  negotiations for release of
lines  of  credit  from  existing   providers  of  bank   facilities   had  been
unsuccessful. The impairment,  reflecting a write-down to fair market value, was
offset, in part, by an unrelated tax adjustment of approximately $21.5 million.

Generation Sale

      In October 1998,  Yorkshire  Electricity  announced  that it had agreed to
sell  its  75%  interest  in  Regional  Power  Generators,  Ltd.,  which  owns a
272-megawatt  combined  cycle,  gas fired plant  located in North  Lincolnshire,
England.  Proceeds  from the sale will be used to reduce  the debt of  Yorkshire
Electricity.  Yorkshire  Electricity  is  focusing  its  main  business  on  the
distribution and supply of electricity and the supply of natural gas.  Yorkshire
Power expects to complete the sale by the end of 1998.


                                       19
<PAGE>

      NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


      Summarized  income  statement   information  for  the  nine  months  ended
September 30, 1998, and from the date of acquisition, April 1, 1997 to September
30, 1997, is presented below (in millions):

                                                     1998     1997
                                                     ----     ----
    Yorkshire Power:
      Operating revenues.......................    $1,677.3 $  917.6
                                                   -------- --------

      Operating income.........................       264.8    124.1
                                                   -------- --------

      Income before extraordinary item.........        13.6     42.8
                                                   -------- --------

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

      Net income (loss)........................    $   13.6 $ (178.3)
                                                   ======== =========

    NCI's equity in earnings (losses):
      Equity in earnings of Yorkshire Power....         6.8     21.4
      Extraordinary item - U.K. windfall tax...           -   (110.6)
                                                     ------ ---------
                                                   $    6.8 $  (89.2)
                                                   ======== =========


      The  unaudited pro forma  financial  information  presented  below for NCE
assumes  that  Yorkshire  Power was  acquired on January 1, 1997.  The pro forma
adjustments include recognition of equity in the estimated earnings of Yorkshire
Power, an adjustment for interest expense on debt associated with the investment
in Yorkshire Power and related income taxes. The estimated earnings of Yorkshire
Power were based on historical earnings of Yorkshire  Electricity,  prior to its
acquisition by Yorkshire Power,  adjusted for the estimated  effects of purchase
accounting (including the amortization of goodwill), conversion to United States
generally  accepted  accounting  principles,  interest expense on debt issued by
Yorkshire Power associated with the acquisition and related income taxes.  Sales
of electricity are affected by seasonal  weather  patterns and,  therefore,  the
results of Yorkshire Power/Yorkshire  Electricity will not be distributed evenly
during  the year.  Equity  in  earnings  (losses)  of  Yorkshire  Power has been
converted at the average  exchange rates for the nine months ended September 30,
1998 and September 30, 1997, of $1.652/pound and $1.631/pound, respectively.

      Based on the  above  assumptions,  shown  below  is  unaudited  pro  forma
financial  information for the nine months ended September 30, 1998 and 1997 (in
millions, except per share amounts):

                                                      NCE Earnings
                                             Available for
                                             common stock     Per share (1)
                                             ------------     -------------

                                              1998   1997     1998    1997
                                              ----   ----     ----    ----

Net income before extraordinary item...      $233.5 $175.5    $2.10   $1.68
                                                              =====   =====

Pro forma adjustments:

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

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

Pro forma result.......................      $233.5 $161.9    $2.10   $1.55
                                             ====== ======    =====   =====

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

                                       20
<PAGE>

        NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

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

      Based  upon the above  assumptions,  shown  below is  unaudited  pro forma
financial  information for the nine months ended September 30, 1998 and 1997 (in
millions):

                                                                  PSCo
                                                                Earnings
                                                              1998    1997
                                                              ----    ----

Net income before extraordinary item.....................    $143.8  $131.0

Pro forma adjustments:

  NCI's net income before extraordinary item.............      (2.8)  (22.4)
  Interest income from promissory note, net of tax.......       3.2     6.3
                                                              -----   -----

Pro forma result.........................................    $144.2  $114.9
                                                             ======  ======

3.  Acquisition and Divestiture of Investments

Acquisition of the Planergy Group (NCE)

      Effective  April 1, 1998,  the  Company  acquired  all of the  outstanding
common stock of Falcon Seaboard Energy Services, Inc. ("the Planergy Group") and
assumed other outstanding debt. The Planergy Group includes  Planergy,  Inc. and
Planergy Services.  Such acquisition was 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.  The  Planergy  Group  has been
consolidated  as a subsidiary of NC  Enterprises  in the Company's  consolidated
financial  statements.  The  Planergy  Group  is  primarily  engaged  in  energy
consulting, energy efficiency management,  conservation programs and mass market
services.

Carolina Energy Limited Partnership Investment (NCE and SPS)

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


                                       21
<PAGE>

      NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

4. Regulatory Matters (NCE, PSCo and SPS)

Merger Rate Filings

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

PSCo

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

   -  a $6 million annual electric rate reduction, which was instituted October
      1, 1996,  followed by an  additional  $12  million  annual  electric  rate
      reduction  effective with the  implementation of new gas rates on February
      1, 1997;
   -  an annual electric  department earnings test with the sharing of earnings
      in excess of an 11% return on equity for the calendar years  1997-2001 and
      the implementation of a Quality of Service Plan;
   -  a freeze in base electric rates for the period through  December 31, 2001
      with the  flexibility to make certain other rate changes,  including those
      necessary   to  allow  for  the   recovery  of  DSM,   QF   capacity   and
      decommissioning costs. The freeze in base electric rates does not prohibit
      PSCo from filing a general rate case or deny any party the  opportunity to
      initiate a complaint or show cause proceeding; and
   -  the replacement of the ECA with an ICA.

      Subsequent to the CPUC's decision  approving the Merger, the CPUC approved
the recovery of merger costs,  amortized  from the effective  date of the Merger
through  December  31,  2001.  PSCo has  expensed  merger  costs as incurred and
recovery of such costs will be  reflected in the  electric  department  earnings
test,  discussed  below in  Electric  Department  Earnings  Test and  Quality of
Service Plan.  Merger costs  attributable to Colorado gas retail  customers were
included  in the gas rate case  approved  by the CPUC,  discussed  below in Rate
Cases- PSCo Retail Gas.

SPS

      Under the  various  regulatory  commission  approvals,  SPS is required to
provide  credits to  customers  over five  years for  one-half  of the  measured
non-fuel  operation and maintenance  expense savings associated with the Merger.
SPS will provide  guaranteed  minimum annual  credits to retail  customers of $3
million  in Texas,  $1.2  million  in New  Mexico  (which  will be  discontinued
effective with the new retail rates as discussed below in Rate Cases - SPS - New
Mexico),  $100,000  in  Oklahoma  and  $10,000  in Kansas  and $1.5  million  to
wholesale customers.

Cheyenne

      The WPSC  approved the Merger on August 16, 1996.  Cheyenne  agreed not to
file a retail  electric  rate  case for two years  after  August  1,  1997,  the
effective  date of the  Merger.  Cheyenne  expects  to file a  combined  gas and
electric rate case with the WPSC in 1999,  following  the  expiration of the two
year moratorium.

Electric Department Earnings Test and Quality of Service Plan

PSCo

      The CPUC's  decision  on the Merger  implemented  an  electric  department
earnings  test with the sharing of earnings in excess of an 11% return on equity
for the calendar years 1997-2001 as follows:

                                       22
<PAGE>

       NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

        Electric Department            Sharing of Excess Earnings
        Return on Equity         Customers        Shareholders
        ----------------         ---------        ------------
          11-12%                    65%               35%
          12-14%                    50%               50%
          14-15%                    35%               65%
          over 15%                 100%                0%

      The CPUC's  decision on the Merger also  implemented a QSP which  provides
for bill  credits  totaling up to $5 million in year one and  increasing  to $11
million in year five,  if PSCo does not  achieve  certain  performance  measures
relating to electric reliability,  customer complaints and telephone response to
inquiries.  On  October  15,  1997,  the CPUC  issued  an order  addressing  the
implementation  of a reward mechanism in the QSP which provides up to $3 million
of annual  rewards if PSCo achieves  certain  performance  measures  relating to
electric  reliability.  During  the  third  quarter  of  1998,  PSCo  reached  a
settlement  agreement  with the  Staff of the CPUC and the  Colorado  Office  of
Consumer  Counsel  ("OCC") which modifies the current bill credit  structure and
eliminates  the reward  structure for the years 1999 through  2001.  Approval of
this modification, by the CPUC, is expected in the fourth quarter of 1998.

      On April 1, 1998, PSCo filed with the CPUC its proposed Performanced-Based
Regulatory  Plan adjustment for calendar year 1997. This adjustment will provide
the means for implementing the sharing  mechanism for the customers'  portion of
earnings over PSCo's  authorized  return on equity threshold  resulting from the
1997 electric  department earnings test, net of QSP reward earned revenue. As of
December 31, 1997,  PSCo  recorded an estimated  customer  refund  obligation of
approximately  $16.4 million  related to the 1997 electric  department  earnings
test, net of QSP rewards.  A final refund  obligation  has not been  determined.
PSCo believes that its accrued obligation will be adequate.

      PSCo,  the OCC and the CPUC staff have all filed  testimony in  connection
with the 1997 electric  earnings test. The  significant  issues,  which have not
been resolved and will impact the determination of the final refund, include the
recovery of  postemployment  benefit  costs under SFAS 112,  regulatory  capital
structure and the recovery of costs associated with certain future use plant and
water rights (see Note 1. Summary of Significant Accounting Policies - Business,
Utility  Operations and Regulation - Other Property).  Hearings are scheduled to
begin on November 16, 1998 and settlement  discussions are  continuing.  For the
nine months  ended  September  30, 1998,  PSCo has recorded an estimated  refund
obligation  of  approximately  $7.4  million  for the 1998  electric  department
earnings test.

Rate Cases

PSCo
Retail - Gas

      On June 5, 1996, PSCo filed a retail rate case with the CPUC requesting an
annual increase in its jurisdictional  gas department  revenues of approximately
$34  million.   In  early  1997,  the  CPUC  approved  an  overall  increase  of
approximately $18 million with an 11.25% return on equity, effective February 1,
1997 and as  modified  on May 15,  1997.  The CPUC  disallowed  the  recovery of
certain  postemployment  benefit  costs under SFAS 112 and  imputed  anticipated
merger  related  savings net of costs  related to the gas business  (see Note 1.
Summary of  Significant  Accounting  Policies).  PSCo filed a petition  with the
Denver District Court appealing the CPUC's decision.  A decision from the Denver
District Court is expected during the fourth quarter of 1998.

      On  November  2,  1998,  PSCo  filed a retail  gas rate case with the CPUC
requesting  an annual  increase in rates of  approximately  $23.4  million.  The
request for a rate increase reflects revenues for additional plant investment, a
12.0% return on equity and the recovery of incremental year 2000 costs (see Note
5.  Commitments  and   Contingencies  -  Year  2000  Costs).   The  recovery  of
postemployment benefit costs was not included in this request pending a decision
from the Denver District Court, as discussed  above. If approved,  the new rates
would become effective July 1, 1999.

                                       23
<PAGE>

      NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

SPS

New Mexico

      On November 17, 1997, the NMPUC issued an order investigating SPS's rates.
In the order, the NMPUC  determined that because of the rapid changes  occurring
in the electric  industry the NMPUC would require rate case filings by the major
electricity  suppliers who have not adopted a plan to provide retail open access
and customer choice of suppliers.  SPS made a compliance  filing on May 5, 1998,
which proposed a $1.7 million annual rate reduction for certain retail customers
in New Mexico,  and  incorporated  the $1.2 million  guaranteed  minimum  annual
credits,  discussed  above.  On October 2, 1998, SPS entered into an uncontested
stipulation  agreement  settling the rate  investigation  case.  As part of this
settlement,  SPS would  institute a $6 million  annual  reduction  in base rates
(discontinuing  the $1.2  million in  guaranteed  minimum  annual  credits)  for
certain  retail  customers with an  anticipated  effective date during  December
1998. Additionally,  SPS will implement full normalization in its accounting for
income taxes with recovery of the New Mexico  jurisdictional  portion of the tax
regulatory  asset over 16.8 years.  This  settlement is currently  pending NMPUC
approval.

Wholesale - FERC

      On December  19,  1989,  the FERC issued its final order  regarding a 1985
wholesale rate case. SPS appealed  certain portions of the order that related to
recognition in rates of the reduction of the federal income tax rate from 46% to
34%. The United  States  Court of Appeals for the  District of Columbia  Circuit
remanded the case directing the FERC to reconsider  SPS's claim of an offsetting
cost and  limiting  the FERC's  actions.  The FERC issued its Order on Remand in
July  1992,  the  required  filings  were made and a hearing  was  completed  in
February  1994. In October 1994, the  Administrative  Law Judge ("ALJ") issued a
favorable  initial  decision  that,  if approved by the FERC,  would result in a
revenue recovery for SPS. Negotiated settlements with SPS's partial requirements
customers  and TNP were  approved by the FERC in July 1993 and  September  1993,
respectively,  and SPS received approximately $2.8 million,  including interest.
In a settlement with SPS's New Mexico rural electric cooperative customers,  SPS
received approximately $7.0 million,  including interest. The FERC approved this
settlement  in July  1995.  Resolutions  of these  matters  with  the  remaining
wholesale customers, the Golden Spread member cooperatives and Lyntegar Electric
Cooperative,  were not  achieved.  On May 5, 1998,  the FERC  issued its opinion
substantially modifying the ALJ's initial decision. The net positive impact from
this decision,  which was recorded in June 1998, was approximately  $7.7 million
($4.9 million after tax). SPS, Golden Spread and Lyntegar  Electric  Cooperative
have sought  rehearing  by FERC of its order.  The requests  for  rehearing  are
pending.

Cheyenne

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

Electric Cost Adjustment Mechanisms

SPS

Texas

      A PUCT  substantive rule requires  periodic  examination of SPS's fuel and
purchased  power costs,  the  efficiency  of the use of such fuel and  purchased
power, fuel acquisition and management  policies and purchase power commitments.
Under the PUCT's  regulations,  SPS is required to file an  application  for the
Commission to retrospectively review, at least every three years, the operations
of a utility's electricity  generation and fuel management  activities.  In June
1998,  SPS filed  its  reconciliation  for the  generation  and fuel  management
activities totaling 

                                       24
<PAGE>

      NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

approximately $690 million, for the period from January 1995
through December 1997. For this same period, SPS had approximately $21.4 million
in  underrecovered  fuel costs  associated  with the Texas retail  jurisdiction.
Currently,  Texas retail customers are being surcharged for  approximately  $6.4
million of such  underrecovered  fuel costs.  The Company has also requested the
prospective  sharing of margins from wholesale  non-firm  sales.  The outcome of
this fuel reconciliation proceeding is pending.

      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 and the  expense
recorded in April 1996. Additionally,  the order required SPS to pass through to
customers  100% of margins from  wholesale  non-firm  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 a waiver.  A motion for  rehearing on
the fuel  disallowance  (which was adjusted to $1.9  million)  was  subsequently
denied by the PUCT and SPS was  ordered  to flow  through  100% of the  non-firm
off-system sales margin effective with the first billing cycle after the date of
the order.  Upon appeal by SPS to the Travis County  District Court in May 1996,
the PUCT's  decision on the disallowed  fuel costs was upheld.  SPS appealed the
decision  and, on January 29, 1998,  the Texas Court of Appeals  upheld the PUCT
decision to disallow fuel costs.  On March 16, 1998,  SPS filed an appeal to the
Supreme Court of Texas which, on August 25, 1998, refused to hear the appeal.

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

      On September 17, 1996, the FERC issued an order  granting SPS  conditional
approval  to  collect  the FERC  jurisdictional  portion  of the  Thunder  Basin
judgment  from  wholesale  customers.  On October 24, 1997,  the NMPUC issued an
order granting recovery of the New Mexico retail  jurisdictional  portion of the
judgment.  On May 1,  1997,  SPS  filed a  request  with the  PUCT to  surcharge
undercollected fuel and purchased power expenses, which included $9.1 million of
the Thunder Basin  judgment.  In November 1997, the PUCT issued a decision which
denied  recovery of the judgment  through a  surcharge,  on the grounds that the
costs were not  classified as fuel costs.  In 1997,  SPS expensed  approximately
$12.1  million of the Texas retail  jurisdictional  portion of the Thunder Basin
judgment and recognized an equal amount as deferred  revenue in  anticipation of
future recovery through the pending fuel reconciliation proceeding.

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

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

Environmental Issues

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


                                       25
<PAGE>


      NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Environmental Site Cleanup

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

      Under the Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), the U.S. Environmental Protection Agency ("EPA") identified, and
a  Phase  II   environmental   assessment   revealed,   low  level,   widespread
contamination from hazardous  substances at the Barter Metals Company ("Barter")
properties located in central Denver. For an estimated 30 years, PSCo sold scrap
metal and electrical  equipment to Barter for  reprocessing.  PSCo has completed
the cleanup of this site at a cost of  approximately $9 million and has received
responses  from  the  Colorado  Department  of  Public  Health  and  Environment
("CDPHE")  indicating  that no  further  action  is  required  related  to these
properties.  On January 3, 1996,  in a lawsuit  by PSCo  against  its  insurance
providers,  the Denver District Court entered final judgment in favor of PSCo in
the amount of $5.6 million for certain cleanup costs at Barter.  Several appeals
and cross appeals have been filed by one of the insurance  providers and PSCo in
the Colorado  Court of Appeals.  The insurance  provider has posted  supersedeas
bonds in the amount of $9.7 million  ($7.7  million  attributable  to the Barter
judgment).  On July 10,  1997,  the  Colorado  Court of Appeals  overturned  the
previously awarded $7.7 million judgment on the basis that the jury had not been
properly  instructed  by the Judge  regarding  a narrow  issue  associated  with
certain policies.  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.  Both sides of the  litigation  filed  petitions  for  certiorari  to the
Colorado  Supreme Court which granted a hearing on several issues,  although the
matter is still  pending.  In  addition,  in August  1996,  PSCo filed a lawsuit
against four PRPs seeking  recovery of certain Barter related costs.  Settlement
has been  achieved  with two smaller  PRP's.  On December  16,  1997,  the U. S.
District Court awarded  summary  judgment in favor of the remaining PRPs, on the
basis that PSCo failed to follow CERCLA  guidelines  in the cleanup.  On January
15, 1998,  PSCo appealed the summary  judgment to the U.S. Court of Appeals.  In
March 1998, PSCo sold the remaining  Barter  properties,  and the total proceeds
were $1.2 million.

      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,  in October
1993, the owners filed a civil action against PSCo in the Denver District Court.
The  action  alleged  that  PSCo  was  responsible  for  the  PCB  releases  and
additionally  claimed other damages in unspecified amounts. In August, 1994, the
Denver  District  Court  entered a judgment  approving a $5.3  million  offer of
settlement  between  PSCo and the  building  owners  resolving  all  claims.  In
December 1995,  complaints  were filed by PSCo against all applicable  insurance
carriers in the Denver District Court. In June 1997, the Court ruled in favor of
the  carriers  on summary  judgment  motions  addressing  late  notice and other
issues.  In August 1997,  PSCo filed an appeal of the decision with the Colorado
Court of Appeals,  which is still  pending.  One carrier was  excluded  from the
summary judgment;  subsequently,  that carrier received approval to be dismissed
on the  same  basis as the  other  carriers.  In  March  1998,  PSCo  reached  a
settlement with  another carrier who was not  part of the  Denver District Court
action.  PSCo is pursuing the recovery of  approximately  $3.3 million net costs
in the electric department earnings test.

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


                                       26
<PAGE>


      NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Other Environmental Matters

      Under the Clean Air Act  Amendments  of 1990  ("CAAA"),  coal fueled power
plants are required to reduce SO2 and NOx emissions to specified  levels through
a phased  approach.  PSCo's and SPS's  facilities  must comply with the Phase II
requirements,  which  will be  effective  in the  year  2000.  Currently,  these
regulations  permit  compliance  with SO2  emission  limitations  by  using  SO2
allowances  allocated  to  plants  by the EPA,  using  allowances  generated  by
reducing  emissions at existing  plants and by using  allowances  purchased from
other  companies.  The Company  expects to meet the Phase II emission  standards
placed on SO2  through the  combination  of: a) use of low sulfur  coal,  b) the
operation of air quality control equipment on certain generation facilities, and
c) allowances issued by the EPA and purchased from other companies. In addition,
PSCo and SPS will be  required  to modify  certain  boilers  by the year 2000 to
reduce the NOx  emissions  in order to comply  with Phase II  requirements.  The
estimated Phase II costs for future plant modifications to meet NOx requirements
total  approximately  $14.4 million and pertain to the following plants:  PSCo's
Cherokee Unit 1 and 2 and Arapahoe Unit 3.

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

Hayden Steam Electric Generating Station

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

Craig Steam Electric Generating Station

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

                                       27
<PAGE>

      NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Pepsi Center

      Hazardous substances resulting from manufactured gas plant operations have
been  identified  at  the  site  of the  Pepsi  Center,  a  sports  arena  under
construction in lower downtown Denver.  In September 1998, a settlement with the
site owners was achieved,  and subsequently,  a cleanup plan was approved by the
state of Colorado.  Neither the  settlement  nor the approved  cleanup plan will
have a  material  adverse  impact  on  PSCo's  financial  position,  results  of
operations or cash flows.

Fort St. Vrain

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

      On February 9, 1996, PSCo and the DOE entered into an agreement  resolving
all the  defueling  issues.  As part of this  agreement,  PSCo has agreed to the
following:  1) the DOE assumed title to the fuel currently  stored in the ISFSI,
2) the DOE will assume title to the ISFSI and will be responsible for the future
defueling and decommissioning of the facility, 3) the DOE agreed to pay PSCo $16
million  for the  settlement  of  claims  associated  with the  ISFSI,  4) ISFSI
operating and maintenance costs,  including  licensing fees and other regulatory
costs, will be the  responsibility of the DOE, and 5) PSCo provided to the DOE a
full and complete  release of claims  against the DOE resolving all  contractual
disputes  related to  storage/disposal  of Fort St. Vrain spent nuclear fuel. On
December  17,  1996,  the DOE  submitted  a request  to the  Nuclear  Regulatory
Commission  ("NRC") to transfer  the title of the ISFSI.  This  request is being
reviewed by the NRC and PSCo anticipates approval in late-1998.

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

Leyden Gas Storage Facility

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

Employee Matters

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

Tax Matters

      PSR  Investments,  Inc., a subsidiary of PSCo, owns and manages  permanent
life insurance policies on certain past and present  employees.  These corporate
owned life insurance  ("COLI") policies were entered into prior to July 1, 1986.
In 1996,  Congress passed legislation to phase out the tax benefits with certain
COLI policies,  however,  the Company's policies were  grandfathered  under this
legislation.  On August 27, 1998, the IRS issued a Notice of Proposed

                                       28
<PAGE>

      NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

Adjustment  proposing  to  disallow  the 1993 and 1994  deductions  of  interest
expense  related to policy  loans on the COLI  policies  totaling  approximately
$54.6 million.  The IRS Auditing Agent is requesting  technical  advice from the
IRS National Office with respect to the proposed adjustment.

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

Year 2000 Issue

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

      In 1997,  the Company  established  the Y2K Program  Office to oversee all
corporate-wide  Y2K  initiatives.   These  initiatives  encompass  all  computer
software,  embedded systems, as well as contingency planning.  Teams of internal
and external  specialists  were  established  to  inventory  and assess and test
critical  computer programs and automated  operational  systems and modify those
that may not be Y2K  compliant.  The inventory  phase and  assessment  phase for
information technology ("IT") systems have been completed. Approximately seventy
percent of the remediation and testing phase for all critical IT systems will be
completed  in 1998  with the  remaining  portion  being  completed  in the first
quarter of 1999. For non-IT  systems,  which exist  primarily in the generation,
transmission  and  distribution  areas  of  the  business,   the  inventory  and
assessment  phases are complete.  Remediation  and testing for non-IT systems is
expected to be completed in the third quarter of 1999.

      The  Company  has  identified  third  parties  with which it has  material
business relationships,  including interconnected utilities,  telecommunications
service  providers,  fuel  and  water  suppliers,  equipment  suppliers,  leased
facilities and financial  institutions.  Inquiries as to the status of their Y2K
readiness  have been made and  follow-ups  are scheduled to be completed in late
1998.  Subject  matter  experts,  along with  functional  managers,  continue to
evaluate the current list of third  parties and have  ongoing  discussions  with
these and other  critical  suppliers  about their Y2K readiness and  contingency
planning efforts.

      The Company has refined its second quarter cost estimate of  approximately
$30  million  for such  activities  and  currently  expects  to  incur  costs of
approximately  $25 million to modify its computer  software,  hardware and other
automated systems used in operations enabling proper data processing relating to
the  year  2000  and  beyond.   Furthermore,   the  Company   expects  to  spend
approximately  $15  million  more  for  the  accelerated  replacement  of  eight
non-compliant  IT systems.  The work  associated  with the  replacement of these
eight  systems is  scheduled to be completed  throughout  1999.  The majority of
these costs will be incurred by PSCo and SPS. A significant portion of the costs
incurred to address the Company's Y2K issues will represent the  redeployment of
existing information  technology  resources.  The table below details the actual
costs  incurred to date and the  estimated  costs to be  incurred in  subsequent
periods.

                                       29
<PAGE>

      NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)


                                                   Estimated
                                            Actual   Fourth
                                            Costs  Quarter  Estimated  Estimated
                                           To Date   1998     1999       Total
                                           -------   ----     ----       -----
                                                      (in millions)

Operating expenses.....................      $ 6.1  $  7.8   $ 11.4     $ 25.3
Capital expenditures ..................        2.0     4.9      7.8       14.7

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

      The  Company  continues  to  evaluate  appropriate  courses of  preventive
corrective  action,  including  the  replacement  of  certain  systems.  If such
modifications  and  conversions  are not  completed on a timely  basis,  the Y2K
issues may have a  material  impact on the  operations  of the  Company  and its
subsidiaries.  Management,  however,  does not anticipate  these activities will
have a material adverse impact on the financial position,  results of operations
or cash flows of the Company or its subsidiaries.

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

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

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

                                       30
<PAGE>

      NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)

7.  Management's Representations (NCE, PSCo and SPS)

      In the opinion of the registrants, the accompanying unaudited consolidated
condensed  financial  statements  for NCE, PSCo and SPS include all  adjustments
necessary for the fair presentation of the financial position of the Company and
its  subsidiaries at September 30, 1998 and December 31, 1997 and the results of
operations  for the three and nine months ended  September 30, 1998 and 1997 and
cash flows for the nine months ended  September 30, 1998 and 1997. The unaudited
consolidated condensed financial information and notes thereto should be read in
conjunction with the consolidated financial statements and notes included in the
combined 1997 Form 10-K for NCE, PSCo and SPS.

      Because of seasonal and other  factors,  the results of operations for the
three  and nine  months  ended  September  30,  1998  should  not be taken as an
indication of earnings for all or any part of the balance of the year.



                                       31
<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, 1998, and the related  consolidated  condensed  statements of income for the
three  and  nine-month  periods  ended  September  30,  1998  and  1997  and the
consolidated condensed statements of cash flows for the nine-month periods ended
September 30, 1998 and 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, 1997, and the related consolidated statements of
income,  shareholders'  equity  and cash  flows  for the year  then  ended  (not
presented  separately  herein),  and in our report dated  February 13, 1998,  we
expressed  an  unqualified  opinion on those  statements.  In our  opinion,  the
information set forth in the accompanying  consolidated  condensed balance sheet
as of December 31, 1997, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.




Denver, Colorado,                                      ARTHUR ANDERSEN LLP
November 5, 1998


                                       32
<PAGE>



                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


TO PUBLIC SERVICE COMPANY OF COLORADO:

We have reviewed the accompanying consolidated condensed balance sheet of Public
Service  Company of Colorado (a Colorado  corporation)  and  subsidiaries  as of
September 30, 1998, and the related consolidated  condensed statements of income
for the three and nine-month  periods ended  September 30, 1998 and 1997 and the
consolidated condensed statements of cash flows for the nine-month periods ended
September 30, 1998 and 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 and statement of  capitalization  of
Public Service Company of Colorado and subsidiaries as of December 31, 1997, and
the related  consolidated  statements of income,  shareholder's  equity and cash
flows for the year then  ended (not  presented  separately  herein),  and in our
report dated  February 13, 1998,  we expressed an  unqualified  opinion on those
statements.  In our  opinion,  the  information  set  forth in the  accompanying
consolidated  condensed balance sheet as of December 31, 1997, is fairly stated,
in all material  respects,  in relation to the  consolidated  balance sheet from
which it has been derived.




Denver, Colorado,                                      ARTHUR ANDERSEN LLP
November 5, 1998



                                       33
<PAGE>



                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


TO SOUTHWESTERN PUBLIC SERVICE COMPANY:

We have reviewed the accompanying condensed balance sheet of Southwestern Public
Service  Company (a New Mexico  corporation)  as of September 30, 1998,  and the
related  condensed  statements  of income for the three and  nine-month  periods
ended September 30, 1998 and 1997 and the condensed statements of cash flows for
the  nine-month  periods  ended  September  30, 1998 and 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 balance sheet and statement of  capitalization  of  Southwestern
Public Service  Company as of December 31, 1997,  and the related  statements of
income,  shareholder's  equity  and cash  flows  for the year  then  ended  (not
presented  separately  herein),  and in our report dated  February 13, 1998,  we
expressed  an  unqualified  opinion on those  statements.  In our  opinion,  the
information set forth in the accompanying condensed balance sheet as of December
31, 1997, is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.




Denver, Colorado,                                      ARTHUR ANDERSEN LLP
November 5, 1998



                                       34
<PAGE>



Item 2.  Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of Operations (NCE, PSCo and SPS)

NCE's Management's  Discussion and Analysis of Financial Condition and Results
of Operations

Three  Months  Ended  September  30, 1998  Compared to the Three  Months Ended
September 30, 1997

Earnings

      Earnings per share were $0.82 for the third quarter of 1998 as compared to
a net loss of $0.45 per share for the  third  quarter  of 1997.  The net loss in
1997 was primarily  attributed to the  recognition  of an  extraordinary  charge
related to the U.K. windfall tax of approximately  $110.6 million,  or $1.06 per
share, by Yorkshire Electricity,  a 50% owned investment (see Note 2. Investment
in  Yorkshire  Power  in Item  1.  FINANCIAL  STATEMENTS).  Income  before  this
extraordinary  charge increased  approximately $27.4 million, or $0.21 per share
from the previous year.  Higher earnings were primarily  attributed to increased
electric sales  resulting from continued  customer growth and warmer than normal
weather.

Electric Operations

      The following table details the change in electric  operating revenues and
energy  costs for the third  quarter of 1998 as  compared  to the same period in
1997 (thousands of dollars).
                                                      Increase (Decrease)
                                                      -------------------
Electric operating revenues:
 Retail...............................................     $31,284
 Wholesale............................................      55,620
 Non-regulated power marketing........................      19,949
 Other (including unbilled revenues and provision for
        rate refunds) ................................       6,825
                                                             -----
  Total revenues......................................     113,678
Fuel used in generation...............................         313
Purchased power.......................................      85,536
                                                           -------
  Net increase in electric margin.....................     $27,829
                                                           =======

      The following table compares  electric Kwh sales by major customer classes
for the third quarter of 1998 and 1997.
                                              Millions of Kwh Sales
                                                1998      1997    % Change *
                                                ----      ----    ----------
Residential ...............................     2,885     2,634      9.5%
Commercial and Industrial  ................     7,572     7,334      3.2
Public Authority ..........................       247       219     12.8
                                                -----     -----
  Total Retail.............................     10,704    10,187     5.1
Wholesale..................................     5,189     3,516     47.6
Non-regulated power marketing..............       666       205      **
                                                -----     -----
Total......................................     16,559    13,908    19.1
                                                ======    ======

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

      Electric  margin  increased in the third quarter of 1998, when compared to
the third  quarter of 1997,  due  primarily  to a 5.1%  increase in total retail
sales and a 19.1%  increase in total sales  resulting  from customer  growth and
hotter than normal weather.  In addition,  PSCo's margin was positively impacted
by  lower  accruals  of  approximately  $5.6  million  for the  customer  refund
obligation associated with the earnings test in Colorado (see Note 4. Regulatory
Matters in Item 1.  FINANCIAL  STATEMENTS).  PSCo's  higher  wholesale  electric
sales,  reflecting increased marketing  activities for economy,  short-term firm
and off-system  sales,  contributed  to

                                       35
<PAGE>

increased  operating revenues,  but the margin on such sales was minimal.  SPS's
higher retail and wholesale sales resulted  primarily from hotter and dryer than
normal weather during the third quarter of 1998 and a resulting  increase in the
air conditioning and irrigation load in Texas and New Mexico.

      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. PSCo's
ICA,  which  allows  for a 50%/50%  sharing  of  certain  fuel and  energy  cost
increases and decreases among customers and shareholders,  did not significantly
impact electric margin for the third quarter of 1998 or 1997.

      Fuel  used in  generation  expense  increased  slightly  during  the third
quarter  of 1998 as  compared  to the  same  quarter  in 1997 due  primarily  to
increased generation levels.

      Purchased  power expense  increased $85.5 million during the third quarter
of 1998,  as compared to the same  quarter in 1997,  primarily  due to purchases
related  to  wholesale  marketing  activities  at PSCo  ($56.2  million)  and an
increase  in  power   marketing   activities  at  the  Company's   non-regulated
subsidiaries ($23.3 million).  Purchased power at SPS increased $6.0 million due
to a 48%  increase in wholesale  purchases  and higher spot market  prices.  SPS
generates  substantially  all of its  power  for  sale to its  firm  retail  and
wholesale customers and sells non-firm energy as the market demands.  Similarly,
SPS purchases low-cost non-firm energy when available.

Gas Operations

      The following  table details the change in revenues from gas sales and gas
purchased  for resale  for the third  quarter  of 1998 as  compared  to the same
period in 1997 (thousands of dollars).

                                                     Increase (Decrease)
                                                     -------------------

Revenues from gas sales (including unbilled revenues).     $ 6,130
Gas purchased for resale..............................       6,651
                                                           -------
 Net decrease in gas sales margin.....................     $  (521)
                                                           ========

      The following table compares gas Dth deliveries by major customer  classes
for the third quarter of 1998 and 1997.
                                      Millions of Dth Deliveries
                                                1998  1997    % Change *
                                                ----  ----    ----------
Residential................................      6.6   6.2       5.9%
Commercial.................................      4.1   4.0       3.0
Non-regulated gas marketing................     16.4  13.7      19.3
                                               ----- -----
  Total Sales..............................     27.1  23.9      13.1
Transportation.............................     25.8  22.3      15.6
                                               ----- -----
  Total....................................     52.9  46.2      14.3
                                               ===== =====

*  Percentages are calculated using unrounded amounts

      Gas sales margin decreased slightly during the third quarter of 1998, when
compared to the third quarter of 1997.  Total gas sales  increased  13.1% during
the third quarter of 1998 as compared with the prior year  primarily as a result
of non-regulated  sales.  However,  the gross margin on these  non-regulated gas
sales declined $0.4 million.  PSCo's gas sales increased 3.7% during the quarter
primarily due to a 2.8% increase in customers.

      Gas   transportation,   gathering  and   processing   revenues   increased
approximately  $0.4 million  during the third quarter of 1998,  when compared to
the third quarter of 1997,  primarily due to higher deliveries.  The increase in
transport  deliveries  continues  to be  impacted  by the  shifting  of  various
commercial customers to transport customers.

                                       36
<PAGE>

      PSCo and  Cheyenne  have in place a GCA  mechanism  for natural gas sales,
which  recognizes  the  majority  of the  effects  of changes in the cost of gas
purchased  for resale and adjusts  revenues to reflect such changes in cost on a
timely  basis.  As a result,  the  changes  in  revenues  associated  with these
mechanisms during the third quarter of 1998, as compared to the third quarter of
1997, 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.  The higher per-unit  average cost of gas
during the third quarter of 1998,  along with an increase in the quantity of gas
purchased, contributed to the increase in cost of gas purchased for resale.

Other Operating Revenues

      Other  operating  revenues  increased  approximately  $2.6  million due to
higher  revenues from  diversified  energy  businesses,  primarily  engineering,
design and construction management, energy management and consulting services.

Non-Fuel Operating Expenses and Other Income and Deductions

      Other  operating and maintenance  expenses  increased $13.6 million during
the third quarter of 1998, as compared to the same period in 1997,  due in large
part to higher operating costs from non-regulated operations ($7.0 million) as a
result of the acquisition of new businesses,  severence  payments made to former
executives and growth of existing  businesses.  Increases in other operating and
maintenance  expenses  at PSCo  is  primarily  due to  higher  gas and  electric
distribution  expenses  and at SPS the  result  of higher  maintenance  costs at
generation stations.

      Depreciation and amortization expense increased $4.2 million primarily due
to an increase in electric  property,  plant and  equipment  at PSCo and SPS and
higher amortization of software costs at PSCo.

      Other income and deductions  increased  approximately $12.9 million during
the third quarter of 1998, when compared to the third quarter of 1997, primarily
due to the absence of merger related expenses in 1998 ($18.6 million).

      Interest  charges and preferred  dividends of subsidiaries  decreased $2.3
million  during the third quarter of 1998,  when compared to the same quarter in
1997. Proceeds from the issuance,  by PSCo, of $250 million of long-term debt in
April 1998 were used, in part, to reduce  short-term debt. Higher interest costs
on additional long-term debt, net of retirements,  was offset, in part, by lower
interest  rates.  Other  interest  expense  decreased  primarily  due  to  lower
short-term  borrowings.  The increase in dividends on PSCo obligated mandatorily
redeemable  preferred securities of subsidiary trust holding solely subordinated
debentures of PSCo resulted from the May 1998 issuance of such  securities  (see
Note 6. PSCo Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trust Holding Solely Subordinated Debentures in Item 1. FINANCIAL STATEMENTS).

      Income taxes declined $1.3 million during the third quarter of 1998,  when
compared to the same quarter in 1997 primarily due to an increase in foreign tax
credits recognized and  non-deductible  merger costs in 1997 offset, in part, by
higher pre-tax income.

Nine  Months  Ended  September  30, 1998  Compared  to the Nine  Months  Ended
September 30, 1997

Earnings

      Earnings  per  share  were  $2.10  for the  first  nine  months of 1998 as
compared to $0.62 for the first nine months of 1997.  The higher  earnings  were
primarily  attributable  to increases in electric and gas sales  resulting  from
continued  customer  growth,  hotter than normal  weather  during the second and
third quarters of 1998, the


                                       37
<PAGE>

recognition of an extraordinary  item related to the one-time U.K.  windfall tax
of approximately $110.6 million, or $1.06 per share, by Yorkshire Power in 1997,
the  absence of  significant  merger  costs in 1998,  and the  write-off  of the
Carolina  Energy  Project  in June  1997.  Earnings  for the nine  months  ended
September   30,  1998  were  reduced  by  an  investment   impairment,   net  of
non-recurring tax adjustments, by Yorkshire Power in the second quarter of 1998,
which reduced earnings  approximately 15 cents per share (see Note 2. Investment
in Yorkshire Power in Item 1. FINANCIAL STATEMENTS).

Electric Operations

      The following table details the change in electric  operating revenues and
energy costs for the first nine months of 1998 as compared to the same period in
1997 (thousands of dollars).
                                                      Increase (Decrease)
                                                      -------------------
Electric operating revenues:
 Retail...............................................    $ 55,424
 Wholesale............................................      88,633
 Non-regulated power marketing........................      43,862
 Other (including unbilled revenues and provision for
   rate refunds) .....................................       2,490
                                                             -----
  Total revenues......................................     190,409
Fuel used in generation...............................        (260)
Purchased power.......................................     136,817
                                                           -------
  Net increase in electric margin.....................     $53,852
                                                           =======

      The following table compares  electric Kwh sales by major customer classes
for the first nine months of 1998 and 1997.
                                              Millions of Kwh Sales
                                                 1998     1997      %Change *
                                                 ----     ----      ---------
Residential ...............................      7,781     7,370     5.6%
Commercial and Industrial  ................     20,849    20,370     2.4
Public Authority ..........................        625       578     8.0
                                                -----     -----
  Total Retail.............................     29,255    28,318     3.3
Wholesale..................................     11,623     8,478    37.1
Non-regulated power marketing..............      2,269       783      **
                                                 -----     -----
Total .....................................     43,147    37,579    14.8
                                                ======    ======

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

      Electric margin  increased in the first nine months of 1998, when compared
to the prior year,  primarily due to higher retail sales  resulting  from hotter
than  normal  weather  during  the  second  and  third  quarters  of 1998.  Also
contributing  to the higher  margin was the favorable  $7.7 million  impact of a
FERC  decision  in a 1985  wholesale  rate case  proceeding  at SPS (see Note 4.
Regulatory  Matters  in Item 1.  FINANCIAL  STATEMENTS).  Higher  wholesale  and
non-regulated power marketing electric sales,  reflecting  marketing  activities
for economy,  short-term  firm and  off-system  sales,  contributed to increased
revenues, but had little impact on electric margin.

      The Company's regulated subsidiaries have cost adjustment mechanisms which
recognize the majority of the effects of changes in fuel used in generation  and
purchased power costs and allow recovery of such costs on a timely basis. PSCo's
ICA,  which  allows  for a 50%/50%  sharing  of  certain  fuel and  energy  cost
increases and decreases among customers and shareholders,  did not significantly
impact electric margin for the first nine months of 1998 or 1997.

      Fuel used in generation expense for the first nine months of 1998 and 1997
were  comparable.  Lower per unit cost of coal and  natural  gas were  offset by
increased generation levels.

                                       38
<PAGE>

      Purchased  power expense  increased  $136.8  million during the first nine
months of 1998,  as compared  to the same period in 1997,  due to an increase in
power  marketing  activities at the  Company's  non-regulated  subsidiaries  and
purchases related to wholesale marketing activities at PSCo.

Gas Operations

      The following  table details the change in revenues from gas sales and gas
purchased  for resale for the first nine  months of 1998 as compared to the same
period in 1997 (thousands of dollars).

                                                          Increase
                                                          --------

Revenues from gas sales (including unbilled revenues).     $39,565
Gas purchased for resale..............................      33,466
                                                           -------
 Net increase in gas sales margin.....................     $ 6,099
                                                           =======

      The following table compares gas Dth deliveries by major customer  classes
for the first nine months of 1998 and 1997.
                                      Millions of Dth Deliveries
                                                1998  1997    % Change *
                                                ----  ----    ----------
Residential................................     65.2  64.3       1.3%
Commercial.................................     32.8  35.1      (6.6)
Non-regulated gas marketing................     48.2  44.4       8.7
                                               ----- -----
  Total Sales..............................    146.2 143.8       1.6
Transportation, gathering and processing...     80.6  69.9      15.6
                                               ----- -----
  Total....................................    226.8 213.7       6.2
                                               ===== =====

*  Percentages are calculated using unrounded amounts

      Gas sales  margin  increased  during the first nine  months of 1998,  when
compared  to the  first  nine  months of 1997,  due to higher  margin at PSCo of
approximately  $2.8 million resulting  primarily from a rate increase  effective
February 1, 1997,  an increase in the margin at Cheyenne of  approximately  $1.5
million  resulting  from increases in base rates and an increase in the quantity
of gas sold, and growth of the Company's non-regulated gas marketing business.

            Gas transportation, gathering and processing revenues increased $2.3
million  during the first nine months of 1998,  when  compared to the first nine
months of 1997, primarily due to higher  transportation rates effective February
1, 1997,  resulting  from PSCo's  1996 rate case and an  increase  in  transport
deliveries. The increase in transport deliveries continues to be impacted by the
shifting  of various  commercial  customers  to  transport  customers  as retail
customers procure their unbundled gas supply from other sources.

      PSCo and  Cheyenne  have in place a GCA  mechanism  for natural gas sales,
which  recognizes  the  majority  of the  effects  of changes in the cost of gas
purchased  for resale and adjusts  revenues to reflect such changes in cost on a
timely  basis.  As a result,  the  changes  in  revenues  associated  with these
mechanisms  during the first nine months of 1998,  as compared to the first nine
months of 1997, 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.  The higher per-unit average cost of
gas during the first nine months of 1998, along with an increase in the quantity
of gas  purchased,  contributed  to the  increase in cost of gas  purchased  for
resale.


                                       39
<PAGE>


Other Operating Revenues

      Other  operating  revenues  increased  approximately  $24.1 million due to
higher  revenues from  diversified  energy  businesses,  primarily  engineering,
design and construction management and consulting services.

Non-Fuel Operating Expenses and Other Income and Deductions

      Other  operating and maintenance  expenses  increased $40.7 million during
the first nine months of 1998, as compared to the same period in 1997, primarily
due to higher operating costs from non-regulated operations ($30.5 million). The
increase in non-regulated  operations  operating and maintenance expenses is due
to the  acquisition  of  subsidiaries  and growth of  existing  businesses.  The
remaining   increase  is  primarily  due  to  higher   electric   operating  and
distribution  expenses and a reduction,  in 1997,  of the nuclear  defueling and
decommissioning  liability,  which  served  to  lower  expense,  at PSCo  ($12.2
million)  offset,  in part,  by lower  pension  and  benefit  costs at SPS ($2.5
million).

      Other income and deductions  increased  approximately $41.6 million during
the first nine months of 1998,  when  compared to the first nine months of 1997,
primarily due to a decrease in merger expenses ($32.2 million), the write-off of
the investment in the Carolina Energy Project in 1997, (see Note 3.  Acquisition
and Divestiture of Investments in Item 1. FINANCIAL STATEMENTS), ($16.1 million)
and  accruals  for  estimated  legal and other costs  associated  with  employee
lawsuits  in 1997.  Equity in  earnings  of  Yorkshire  Power were lower  ($14.6
million) as a result of the second quarter 1998  impairment of its investment in
Ionica,  a wireless  telecommunications  company,  which was partially offset by
unrelated tax adjustments.

      Interest  charges and preferred  dividends of subsidiaries  increased $1.9
million  during the first nine months of 1998,  when compared to the same period
in 1997,  primarily  due to interest on borrowings  utilized to finance  capital
expenditures  and the April  1997  investment  in  Yorkshire  Power (see Note 2.
Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS).

Commitments and Contingencies

Year 2000 Issue

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

      In 1997,  the Company  established  the Y2K Program  Office to oversee all
corporate-wide  Y2K  initiatives.   These  initiatives  encompass  all  computer
software,  embedded systems, as well as contingency planning.  Teams of internal
and external  specialists  were  established  to  inventory  and assess and test
critical  computer programs and automated  operational  systems and modify those
that may not be Y2K  compliant.  The inventory  phase and  assessment  phase for
information technology ("IT") systems have been completed. Approximately seventy
percent of the remediation and testing phase for all critical IT systems will be
completed  in 1998  with the  remaining  portion  being  completed  in the first
quarter of 1999. For non-IT  systems,  which exist  primarily in the generation,
transmission  and  distribution  areas  of  the  business,   the  inventory  and
assessment  phases are complete.  Remediation  and testing for non-IT systems is
expected to be completed in the third quarter of 1999.

      The  Company  has  identified  third  parties  with which it has  material
business relationships,  including interconnected utilities,  telecommunications
service  providers,  fuel  and  water  suppliers,  equipment  suppliers,

                                       40
<PAGE>

leased  facilities  and  financial  institutions.  Inquiries as to the status of
their Y2K readiness  have been made and follow-ups are scheduled to be completed
in late 1998. Subject matter experts,  along with functional managers,  continue
to evaluate the current list of third parties and have ongoing  discussions with
these and other  critical  suppliers  about their Y2K readiness and  contingency
planning efforts.

      The Company has refined its second quarter cost estimate of  approximately
$30  million  for such  activities  and  currently  expects  to  incur  costs of
approximately  $25 million to modify its computer  software,  hardware and other
automated systems used in operations enabling proper data processing relating to
the  year  2000  and  beyond.   Furthermore,   the  Company   expects  to  spend
approximately  $15  million  more  for  the  accelerated  replacement  of  eight
non-compliant  IT systems.  The work  associated  with the  replacement of these
eight  systems is  scheduled to be completed  throughout  1999.  The majority of
these costs will be incurred by PSCo and SPS. A significant portion of the costs
incurred to address the Company's Y2K issues will represent the  redeployment of
existing information  technology  resources.  The table below details the actual
costs  incurred to date and the  estimated  costs to be  incurred in  subsequent
periods.

                                                   Estimated
                                            Actual  Fourth
                                            Costs   Quarter Estimated Estimated
                                           To Date  1998      1999      Total
                                           -------  -----     ----      -----
                                                      (in millions)

Operating expenses.....................      $ 6.1  $  7.8   $ 11.4  $ 25.3
Capital expenditures ..................        2.0     4.9      7.8    14.7


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

      The  Company  continues  to  evaluate  appropriate  courses of  preventive
corrective  action,  including  the  replacement  of  certain  systems.  If such
modifications  and  conversions  are not  completed on a timely  basis,  the Y2K
issues may have a  material  impact on the  operations  of the  Company  and its
subsidiaries.  Management,  however,  does not anticipate  these activities will
have a material adverse impact on the financial position,  results of operations
or cash flows of the Company or its subsidiaries.

Tax Matters

      PSR  Investments,  Inc., a subsidiary of PSCo, owns and manages  permanent
life insurance policies on certain past and present  employees.  These corporate
owned life insurance  ("COLI") policies were entered into prior to July 1, 1986.
In 1996,  Congress passed legislation to phase out the tax benefits with certain
COLI policies,  however,  the Company's policies were  grandfathered  under this
legislation.  On August 27, 1998, the IRS issued a Notice of Proposed Adjustment
proposing to disallow the 1993 and 1994  deductions of interest  expense related
to policy loans on the COLI policies totaling  approximately $54.6 million.  The
IRS Auditing Agent is requesting  technical  advice from the IRS National Office
with respect to the proposed adjustment.

      Management plans to vigorously  contest this issue.  PSCo has not recorded
any  provision  for  income tax or  interest  expense  related  to this  matter.
Management believes that the Company's tax deduction of interest expense on life


                                       41
<PAGE>

insurance  policy loans was in full compliance with IRS regulations and believes
that the  resolution of this matter will not have a material  adverse  impact on
PSCo's financial position, results of operations or cash flows.

Other

      Issues relating to regulatory matters,  environmental  issues and employee
lawsuits are discussed in Notes 4 and 5 in Item 1. FINANCIAL  STATEMENTS.  These
matters  and the future  resolution  thereof  may impact  the  Company's  future
financial position, results of operations or cash flows.

Common Stock Dividend

      The Board of  Directors  approved  a $0.58 per share  dividend  payable to
shareholders  of the Company  for the third  quarter of 1998 and $1.74 per share
for the  year-to-date.  The Company's  common stock  dividend level is dependent
upon the Company's  financial  position,  results of operations,  cash flows and
other  factors.  The Board of Directors of the Company will continue to evaluate
the common stock dividend on a quarterly basis.

Liquidity and Capital Resources

Cash Flows - Nine Months Ended September 30
                                                1998       1997       Increase
                                                ----       ----       --------

Net cash provided by operating 
  activities (in millions) ...............      $503.0    $201.0      $302.0

      Cash  provided by  operating  activities  increased  during the first nine
months of 1998, when compared to the first nine months of 1997, primarily due to
higher  earnings  from  utility  operations  and a decrease  in  payments to gas
suppliers  resulting  from lower gas costs during the 1998 period.  A portion of
these lower gas costs have been  deferred  through the GCA and have  reduced the
amount to be recovered  from  customers in the future.  Additionally,  SPS and a
non-regulated subsidiary of NCE recorded combined cash proceeds of approximately
$67 million for the recovery of deferred costs and income from the investment in
a non-regulated energy development project during the second quarter of 1998.

                                                1998         1997     Decrease
                                                ----         ----     --------
Net cash used in investing 
  activities (in millions) ................     $(419.4)   $(675.9)   $(256.5)

      Cash used in investing  activities decreased during 1998, when compared to
1997,  primarily  due  to the  acquisition  of  Yorkshire  Electricity  in  1997
partially  offset by higher 1998  construction  expenditures and payment for the
purchase of an energy management and consulting services company in 1998.

                                                1998         1997     Decrease
                                                ----         ----     --------
Net cash (used in) provided by financing 
  activities (in millions) .................    $(85.3)     $482.3    $(567.6)

      Cash provided by financing activities decreased during 1998, when compared
to 1997,  primarily due to PSCo's  issuance of medium-term  notes in January and
March 1997. The proceeds from the $75 million  financing by PSCo in January 1997
and the  $250  million  financing  by  PSCo  in  March  1997  were  used to fund
construction  expenditures  and the  investment in Yorkshire  Power (See Note 2.
Investment in Yorkshire  Power in Item 1. FINANCIAL  STATEMENTS).  Proceeds from
PSCo's  issuance of $250  million of  long-term  debt in April 1998 were used to
repay  short-term  and other debt. In May 1998,  the PSCo Capital Trust I issued
$194 million of Trust Originated Preferred Securities the proceeds of which were
used to redeem  all of  PSCo's  outstanding  preferred  stock  (totaling  $181.8
million) on June 10, 1998. Additionally, cash provided by operations during 1998
has  increased  significantly  allowing  the  Company to reduce  its  short-term
borrowings.


                                       42
<PAGE>


Financing Activities

Common Stock

      NCE has an  effective  registration  statement  covering the issuance of 9
million  shares  of  common  stock.  NCE  sold 5.9  million  shares  under  this
registration  statement in December  1997 and sold 2.5 million of the  remaining
shares in November 1998. The proceeds of this November 1998 financing,  totaling
approximately  $116.6 million,  were used for general corporate  purposes and to
reduce short-term borrowings.

Long-Term Debt

            On April 20, 1998,  PSCo issued $250 million of 6% First  Collateral
Trust Bonds due April 15, 2003, which are not redeemable prior to maturity.  The
principal and accrued interest on the bonds are secured by PSCo's First Mortgage
Bonds.  Substantially  all  properties of PSCo are subject to the liens securing
its First Mortgage  Bonds.  The proceeds from the issuance were used for general
corporate  purposes  and to repay  short-term  and other debt  incurred for such
purposes.

PSCo Obligated Mandatorily Redeemable Preferred Securities

      In May 1998, PSCo Capital Trust I, a wholly-owned trust of PSCo, issued in
a  public  offering  $194  million  of  its  7.60%  Trust  Originated  Preferred
Securities.  The sole  asset of the trust is $200  million  principal  amount of
PSCo's 7.60% Deferrable Interest Subordinated Debentures, due June 30, 2038. The
net proceeds from the sale of the 7.60% Trust  Originated  Preferred  Securities
were used to redeem all of PSCo's  outstanding  preferred  stock totaling $181.8
million on June 10, 1998 and for general corporate purposes.

Bank Lines of Credit and Compensating Bank Balances

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

      During the second  quarter of 1998,  PSCo entered into a credit  facility,
which  provides  for $150  million in  committed  lines of credit,  replacing an
existing $125 million  credit  facility.  During the first quarter of 1998,  SPS
entered  into a credit  facility  which  provides  for $200 million in committed
lines of credit,  replacing  the two existing  credit  facilities  totaling $180
million.

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 nonutility power producers and the FERC is requiring utilities,
including the Company's subsidiaries,  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.

                                       43
<PAGE>

New Accounting Standards

      In March 1998,  the American  Institute of  Certified  Public  Accountants
issued  Statement  of  Position  98-1,  "Accounting  for the  Costs of  Computer
Software  Developed for Internal Use". This statement requires companies expense
costs as incurred in the preliminary project stage,  training,  data conversion,
internal maintenance and other indirect payroll related costs. This Statement is
not expected to have a material impact on the Company's  consolidated  financial
statements.  This  Statement  is  effective  for fiscal  years  beginning  after
December 15, 1998, with earlier adoption encouraged. The Company will adopt this
accounting standard as required by January 1, 1999.

      In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging Activities". This Statement requires companies to record derivatives
on the balance sheet as assets and liabilities, measured at fair value. Gains or
losses  resulting  from  changes  in the  values of those  derivatives  would be
accounted  for depending on the use of the  derivative  and whether it qualifies
for hedge accounting.  The Company is currently  evaluating the potential impact
of this new  accounting  standard.  This Statement is effective for fiscal years
beginning after June 15, 1999,  with earlier  adoption  encouraged.  The Company
will adopt this accounting standard as required by January 1, 2000.


                                       44
<PAGE>


PSCo's  Management's  Discussion  and  Analysis  of  Financial  Condition  and
Results of Operations

Three  Months  Ended  September  30, 1998  Compared to the Three  Months Ended
September 30, 1997

Merger

      Effective  August 1, 1997,  following  receipt of all  required  state and
Federal  regulatory  approvals,  PSCo and SPS  merged in a  tax-free  "merger of
equals"  transaction  and became  wholly-owned  subsidiaries  of NCE, which is a
registered  holding company under PUHCA. This transaction was accounted for as a
pooling  of  interests  for  accounting  purposes.  Effective  with the  Merger,
Cheyenne,  WGI, e prime and Natural Fuels were transferred by a declaration of a
dividend  of  the   subsidiaries'   stock,   at  net  book  value,   aggregating
approximately   $49.9  million,   to  NCE.  NCE  subsequently   made  a  capital
contribution  of the e prime and Natural Fuels common stock,  at net book value,
aggregating approximately $29.5 million, to NC Enterprises.  See Note 1. Summary
of  Significant   Accounting  Policies  in  Item  1.  FINANCIAL  STATEMENTS  for
additional  discussion  regarding PSCo, the Merger and the transfer of Cheyenne,
WGI, e prime and Natural Fuels. The consolidated  condensed statements of income
for the three and nine months  ended  September  30, 1997 and  statement of cash
flows for the nine  months  ended  September  30,  1997,  reflect the results of
operations  through July 31, 1997 for Cheyenne,  WGI, e prime and Natural Fuels.
Where relevant,  additional information has been presented to discuss the impact
of the transfer of these subsidiaries.

Earnings Available for Common Stock

      Earnings  available  for common  stock  increased to  approximately  $44.0
million for the third quarter of 1998,  as compared a net loss of  approximately
$76.0  million  for the  third  quarter  of 1997.  The  increase  was  primarily
attributable to the recognition of an  extraordinary  charge related to the U.K.
windfall tax of  approximately  $110.6 million in the third quarter of 1997 (see
Note  2.  Investment  in  Yorkshire  Power  in Item  1.  FINANCIAL  STATEMENTS).
Excluding the impact of this extraordinary charge,  quarterly earnings increased
approximately  $9.5  million or 27% from the  previous  year.  The  increase was
attributable to an increase in the current period electric margin resulting from
higher  electric  sales in 1998  and the  recognition  of  merger  and  business
integration costs in 1997.

Electric Operations

      The following table details the change in electric  operating revenues and
energy costs for the three months ended  September  30, 1998, as compared to the
same period in 1997 (in thousands of dollars).

                                                       Increase (Decrease)
                                                       -------------------
                                                           Cheyenne
                                                PSCo Only  &e prime Consolidated
                                                ---------  -------- ------------
Electric operating revenues:
 Retail.......................................    $16,046   $ (2,944)  $13,102
 Wholesale - regulated........................     42,999          -    42,999
 Non-regulated power marketing................          -     (1,715)   (1,715)
 Other (including unbilled revenues and 
  provision for rate refunds) ................     29,593       (118)   29,475
                                                   ------        ---    ------
  Total revenues..............................     88,638     (4,777)   83,861
Fuel used in generation.......................      4,484          -     4,484
Purchased power...............................     60,170     (3,986)   56,184
                                                  -------   --------   -------
  Net increase (decrease) in electric margin..    $23,984   $   (791)  $23,193
                                                  =======   ========   =======


                                       45
<PAGE>


       The following table compares electric Kwh sales by major customer classes
for the three months ended September 30, 1998 and 1997.

                                     Millions of Kwh Sales     % Change *
                                        1998     1997    Consolidated  PSCo Only
                                        ----     ----     -----------  ---------
Residential .....................       1,779    1,669        6.6%      7.6%
Commercial and Industrial .......       4,278    4,224        1.3       2.5
Public Authority ................          54       49       10.2      10.9
                                       ------   ------
  Total Retail...................       6,111    5,942        2.9       4.0
Wholesale - Regulated............       2,389    1,232       94.0      94.0
Non-regulated Power Marketing....           -       81       **         -
                                       ------   ------
Total............................       8,500    7,255       17.2      19.6
                                       ======   ======

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

      Electric  margin  increased in the third quarter of 1998, when compared to
the third  quarter of 1997,  primarily  due to an overall 4%  increase in PSCo's
electric  retail sales resulting  primarily from customer growth  (approximately
1.9%) and the effects of warmer than normal weather.  Estimated  customer refund
obligations  decreased in the third quarter of 1998,  when compared to the third
quarter of 1997, by approximately $5.6 million in connection with the sharing of
earnings in excess of an 11% return on equity resulting from the 1996 settlement
of the Merger proceedings in Colorado (see Note 4. Regulatory Matters in Item 1.
FINANCIAL  STATEMENTS).  Higher wholesale electric sales,  reflecting  increased
marketing  activities for economy,  short-term firm and off-system  sales,  also
contributed to increased operating revenues;  however,  the margin on such sales
is minimal.

      PSCo has cost  adjustment  mechanisms  which recognize the majority of the
effects of changes in fuel used in  generation  and  purchased  power  costs and
allow  recovery of such costs on a timely basis.  PSCo's ICA, which allows for a
50%/50%  sharing of certain fuel and energy cost  increases and decreases  among
customers and shareholders, did not significantly impact the electric margin for
the third quarter of 1998 or 1997.

      Fuel used in  generation  expense  increased  approximately  $4.5  million
during  the third  quarter of 1998,  as  compared  to the same  quarter in 1997,
primarily due to increased generation levels at PSCo's power plants.

      Purchased  power expense  increased $56.2 million during the third quarter
of 1998,  as compared to the same  quarter in 1997,  primarily  due to purchases
related to wholesale marketing activities.

Gas Operations

      The following  table details the change in revenues from gas sales and gas
purchased  for resale for the third  quarter of 1998,  as  compared  to the same
period in 1997 (in thousands of dollars).

                                                        Increase (Decrease)
                                                        -------------------
                                                             Cheyenne,
                                                          Natural Fuels,
                                                               WGI &
                                                 PSCo Only e prime  Consolidated
                                                 --------- -------  ------------
Revenues from gas sales (including 
   unbilled revenues)                             $3,744   $(12,699)  $ (8,955)
Gas purchased for resale........................   4,086    (10,661)    (6,575)
                                                  ------   -------     -------
  Net decrease in gas sales margin..............  $ (342)  $ (2,038)  $ (2,380)
                                                  ======   =======    ========


                                       46
<PAGE>


      The following table compares gas Dth deliveries by major customer  classes
for the third quarter of 1998 and 1997.

                                  Millions of Dth Deliveries        % Change *
                                     1998      1997     Consolidated  PSCo Only
                                     ----      ----     ------------  ---------
Residential...................       6.4       6.1         4.5%        5.7%
Commercial....................       3.8       3.9        (1.3)        0.5
Non-regulated gas marketing...       -         4.5        **           -
                                   ------   --------
  Total sales.................      10.2      14.5       (29.6)        3.7
Transportation, gathering and
   processing ................      22.2      19.8        12.6        18.5 
                                   -----    --------
  Total.......................      32.4      34.3        (5.3)       13.4
                                   =======  ========

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

      Gas sales margin decreased slightly during the third quarter of 1998, when
compared to the third quarter of 1997,  primarily due to a $1.4 million decrease
in unbilled  revenues,  which is gas  delivered to  customers  that has not been
billed,  offset, in part by the effects of higher gas sales. Gas sales increased
3.7%  during  the third  quarter of 1998  primarily  due to a 2.8%  increase  in
customers.

      PSCo has in place a GCA mechanism for natural gas sales,  which recognizes
the majority of the effects of changes in the cost of gas  purchased  for resale
and adjusts  revenues to reflect  such changes in cost on a timely  basis.  As a
result,  the changes in revenues  associated  with these  mechanisms  during the
third  quarter of 1998,  as compared to the second  quarter of 1997,  had little
impact on net income.  However,  the fluctuations in gas sales impact the amount
of gas PSCo must purchase and, therefore, along with the increases and decreases
in the per-unit cost of gas, affect total gas purchased for resale. The decrease
in the  quantity of gas  purchased in the third  quarter of 1998  resulted in an
overall decrease in the total cost of gas purchased for resale.

      Gas  transportation,  gathering and  processing  revenues  increased  $0.2
million during the third quarter of 1998, compared to the third quarter of 1997,
primarily  due to  higher  deliveries.  The  increase  in  transport  deliveries
continues  to be impacted by the  shifting of various  commercial  customers  to
transport customers.

Non-Fuel Operating Expenses and Other Income and Deductions

      Depreciation  and  amortization  increased  $3.0 million  during the third
quarter of 1998, as compared to the third quarter of 1997,  primarily due to the
depreciation  of  property  additions  and the higher  amortization  of software
costs.

      Income taxes increased approximately $9.6 million during the third quarter
of 1998,  as  compared  to the third  quarter of 1997,  primarily  due to higher
pre-tax income.

      Other income and deductions  was relatively  flat when comparing the third
quarter of 1998 to the third  quarter of 1997.  On March 31,  1998,  NCI and its
subsidiaries  were  transferred  through the sale by PSCo of all the outstanding
common  stock of NCI at net book value  (approximately  $292.6  million),  to NC
Enterprises,   an   intermediate   holding  company  of  NCE,  and  received  as
consideration a promissory  note from NC Enterprises  (see Note 2. Investment in
Yorkshire  Power in Item 1.  FINANCIAL  STATEMENTS).  The third  quarter of 1998
includes  approximately  $5.1 million of interest  income on the promissory note
compared to the recognition of equity earnings associated with PSCo's investment
in Yorkshire Power of approximately  $17.3 million in the third quarter of 1997.
The third quarter of 1997 also reflects the  recognition  of merger and business
integration costs of approximately $11.4 million.

      Interest charges and dividends on preferred stock decreased  approximately
$3.0 million  during the third  quarter of 1998 as compared to the third quarter
of 1997.  Proceeds from the issuance of $250 million of long-

                                       47
<PAGE>

term debt in April 1998 were used, in part, to reduce  short-term  debt.  Higher
interest costs on additional long-term debt, net of retirements,  was offset, in
part, by lower interest rates. Other interest expense decreased primarily due to
lower  short-term  borrowings.  The  increase  in  dividends  on PSCo  obligated
mandatorily  redeemable  preferred securities of subsidiary trust holding solely
subordinated debentures of PSCo resulted from the issuance in May 1998 (see Note
6. PSCo  Obligated  Mandatorily  Redeemable  Preferred  Securities of Subsidiary
Trust Holding Solely Subordinated Debentures in Item 1. FINANCIAL STATEMENTS).

Nine  Months  Ended  September  30, 1998  Compared  to the Nine  Months  Ended
September 30, 1997

Earnings Available for Common Stock

      Earnings available for common stock were $138.5 million for the first nine
months of 1998,  as compared to $11.6 million for the first nine months of 1997.
The  significant  increase was primarily  attributable  to the recognition of an
extraordinary  charge related to the U.K.  windfall tax of approximately  $110.6
million in 1997.  Excluding the impact of this  extraordinary  charge,  earnings
increased  approximately  $16.3  million  or 13% from  the  previous  year.  The
increase was primarily  attributable to an increase in electric margin resulting
from higher sales in 1998 and higher  merger and business  integration  costs in
1997.

Electric Operations

      The following table details the change in electric  operating revenues and
energy  costs for the nine months  ended  September  30, 1998 as compared to the
same period in 1997 (in thousands of dollars).

                                                       Increase (Decrease)
                                                           Cheyenne
                                               PSCo Only  &e prime  Consolidated
                                               ---------  --------  ------------
Electric operating revenues:
 Retail.......................................    $34,806   $(21,492)  $13,314
 Wholesale - regulated........................     64,915          -    64,915
 Non-regulated power marketing................          -    (10,448)  (10,448)
 Other (including unbilled revenues and 
  provision for rate refunds) ................     27,388        (19)   27,369
  Total revenues..............................    127,109    (31,959)   95,150
                                                  -------    -------    ------
Fuel used in generation.......................     12,924          -    12,924
Purchased power...............................     86,281    (25,811)   60,470
                                                  -------   --------   -------
  Net increase (decrease)  in electric margin.    $27,904   $ (6,148)  $21,756
                                                  =======   ========   =======

       The following table compares electric Kwh sales by major customer classes
for the nine months ended September 30, 1998 and 1997.

                                     Millions of Kwh Sales     % Change *
                                     ---------------------     ----------
                                        1998     1997    Consolidated  PSCo Only
                                        ----     ----    ------------  ---------
Residential .....................       5,135    5,044        1.8%      4.4%
Commercial and Industrial  ......      11,754   11,909       (1.3)      1.8
Public Authority ................         140      138        1.8       3.5
                                       ------   ------
  Total Retail...................      17,029   17,091       (0.4)      2.6
Wholesale - Regulated............       5,291    3,110       70.2      70.2
Non-regulated Power Marketing....           -      660       **         -
                                       ------   ------
Total............................      22,320   20,861        7.0      13.2
                                       ======   ======

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

      Electric margin increased  (excluding the results of Cheyenne and e prime)
in the first nine  months of 1998,  when  compared  to the first nine  months of
1997,  primarily  due to an  overall  increase  in PSCo's  retail  sales

                                       48
<PAGE>

of 2.6% resulting from customer growth of approximately 1.9% and a $25.1 million
increase in unbilled revenues,  which is electricity delivered to customers that
has not been billed at the end of the period.  Higher wholesale  electric sales,
reflecting  increased  marketing  activities  for economy,  short-term  firm and
off-system sales,  contributed to increased  operating  revenues;  however,  the
margin on such sales is minimal.

      PSCo has cost  adjustment  mechanisms  which recognize the majority of the
effects of changes in fuel used in  generation  and  purchased  power  costs and
allow  recovery of such costs on a timely basis.  PSCo's ICA, which allows for a
50%/50%  sharing of certain fuel and energy cost  increases and decreases  among
customers and shareholders, did not significantly impact the electric margin for
the first nine months of 1998 or 1997.

      Fuel used in  generation  expense  increased  approximately  $12.9 million
during the first nine months of 1998, as compared to the same period in 1997 due
to increased generation levels at PSCo's power plants.

      Purchased power expense increased  approximately  $60.5 million during the
first nine months of 1998, as compared to the same period in 1997, primarily due
to purchases related to wholesale marketing activities.

Gas Operations

      The following  table details the change in revenues from gas sales and gas
purchased  for resale for the first nine  months of 1998 as compared to the same
period in 1997 (in thousands of dollars).

                                                        Increase (Decrease)
                                                        -------------------
                                                             Cheyenne
                                                           Natural Fuels
                                                               WGI &
                                                PSCo Only  e prime  Consolidated
                                                ---------  -------  ------------
Revenues from gas sales (including 
  unbilled revenues) ......................... $35,959   $(110,064)   $(74,105)
Gas purchased for resale......................  33,120    (101,650)    (68,530)
                                                ------    --------    --------
  Net increase (decrease) in gas sales margin.  $2,839   $  (8,414)    $(5,575)
                                                ======   =========     =======

      The following table compares gas Dth deliveries by major customer  classes
for the first nine months of 1998 and 1997.

                              Millions of Dth Deliveries        % Change *
                              --------------------------        ----------
                                     1998      1997      Consolidated  PSCo Only
                                     ----      ----      ------------  ---------
Residential...................       63.3      64.2         (1.5)%       1.2%
Commercial....................       31.1      35.1        (11.3)       (7.8)
Non-regulated gas marketing...          -      35.2         **           -
                                   ------   --------
  Total sales.................       94.4     134.5        (29.8)       (1.9)
Transportation, gathering and 
  processing .................       68.3      67.3          1.5       18.1
                                     ----      ----
  Total.......................      162.7     201.8        (19.4)      5.6
                                   =======  ========

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

      Gas sales  margin  increased  (excluding  the  results of  Cheyenne,  WGI,
Natural Fuels and e prime)  during the first nine months of 1998,  when compared
to the first nine  months of 1997,  primarily  due to an increase in PSCo's base
revenues associated with the higher rates effective February 1, 1997,  resulting
from the 1996 general rate case.  This  increase was offset,  in part, by a 1.9%
decrease in PSCo's sales which  resulted  from warmer  weather  during the first
nine months of 1998, despite a 2.8% increase in customers.

      Gas   transportation,   gathering  and   processing   revenues   increased
approximately  $1.9 million during the first nine months of 1998,  when compared
to the first nine months of 1997, primarily due to higher  transportation

                                       49
<PAGE>

rates,  effective February 1, 1997, resulting from PSCo's 1996 general rate case
and an increase in transport  deliveries.  The increase in transport  deliveries
continues  to be impacted by the  shifting of various  commercial  customers  to
transport  customers as such customers  procure their  unbundled gas supply from
other sources.

      PSCo has in place a GCA mechanism for natural gas sales,  which recognizes
the majority of the effects of changes in the cost of gas  purchased  for resale
and adjusts  revenues to reflect such changes in costs on a timely  basis.  As a
result,  the changes in revenues  associated  with these  mechanisms  during the
first nine months of 1998,  as  compared  to the first nine months of 1997,  had
little impact on net income.  However,  the fluctuations in gas sales impact the
amount of gas PSCo must  purchase and,  therefore,  along with the increases and
decreases in the per-unit  cost of gas,  affect total gas  purchased for resale.
The  decrease in the quantity of gas  purchased  during the first nine months of
1998 resulted in a decrease in cost of gas purchased for resale.

Non-Fuel Operating Expenses and Other Income and Deductions

      Depreciation and amortization  expense increased $7.6 million in the first
nine months of 1998,  as compared to the same period in 1997,  primarily  due to
the depreciation of property  additions and the higher  amortization of software
costs.

      Income taxes increased  approximately  $13.0 million during the first nine
months of 1998,  as compared to the first nine months of 1997,  primarily due to
higher pre-tax income.

      Other income and deductions  increased  approximately $13.4 million during
the first nine months of 1998,  when  compared to the first nine months of 1997,
primarily due to the  recognition  of merger and business  integration  costs in
1997. On March 31, 1998, NCI and its  subsidiaries,  including  Yorkshire Power,
were transferred through the sale by PSCo of all the outstanding common stock at
net  book  value  (approximately   $292.6  million),   to  NC  Enterprises,   an
intermediate holding company for NCE, and received as consideration a promissory
note from NC Enterprises  (see Note 2.  Investment in Yorkshire Power in Item 1.
FINANCIAL   STATEMENTS).   The  second  and  third   quarter  of  1998   include
approximately  $10.2 million of interest  income on the promissory note compared
to equity earnings  associated with the Company's  investment in Yorkshire Power
($3.4 million) during the first quarter of 1998 offset, in part, equity earnings
of Yorkshire Power during the second and third quarter of 1997 ($21.4  million).
Accruals for estimated legal and other costs  associated  with various  employee
lawsuits are also included in 1997.

      Interest charges and dividends on preferred stock decreased  approximately
$2.7 million  during the first nine months of 1998 as compared to the first nine
months of 1997.  Proceeds from the issuance of $250 million of long-term debt in
April 1998 were used, in part, to reduce  short-term debt. Higher interest costs
on additional long-term debt, net of retirements,  was offset, in part, by lower
interest  rates.  Other  interest  expense  decreased  primarily  due  to  lower
short-term  borrowings.  The increase in dividends on PSCo obligated mandatorily
redeemable  preferred securities of subsidiary trust holding solely subordinated
debentures  of PSCo  resulted  from the  issuance  in May 1998 (see Note 6. PSCo
Obligated  Mandatorily  Redeemable  Preferred  Securities  of  Subsidiary  Trust
Holding Solely Subordinated Debentures in Item 1. FINANCIAL STATEMENTS).


                                       50
<PAGE>

Commitments and Contingencies

       See  Note  5.  Commitments  and  Contingencies  in  Item  1.  FINANCIAL
STATEMENTS.

Liquidity and Capital Resources

Cash Flows - Nine Months Ended September 30
                                            1998          1997         Increase
                                            ----          ----         --------
Net cash provided by operating 
  activities (in millions) ...........     $305.4        $154.0         $151.4

      Cash  provided by  operating  activities  increased  during the first nine
months of 1998, when compared to the first nine months of 1997, primarily due to
the decrease in payments to gas suppliers  resulting from lower gas costs during
the first nine months of 1998 as  compared  to the first nine months of 1997.  A
portion of these  lower gas costs have been  deferred  through  the GCA and have
reduced the amount to be recovered from customers in the future. Higher earnings
from utility operations have also contributed to the increase.

                                                1998         1997       Decrease
                                                ----         ----       --------
Net cash used in investing 
  activities (in millions) ............     $(328.5)      $(575.2)       $246.7

      Cash used in investing  activities  decreased during the first nine months
of 1998, when compared to the first nine months of 1997, primarily due to PSCo's
acquisition  of  Yorkshire  Electricity  in April  1997 for  approximately  $360
million offset, in part by higher construction  expenditures and the purchase of
certain leased assets in 1998.

                                                1998          1997      Decrease
                                                ----          ----      --------
Net cash provided by financing 
  activities (in millions) ............      $34.3          $424.1      $(389.8)

      Cash  provided by  financing  activities  decreased  during the first nine
months of 1998, when compared to the first nine months of 1997, primarily due to
the issuance of $75 million and $250 million of medium-term notes in January and
March 1997,  respectively.  The proceeds from these financings were used to fund
PSCo's  construction  program and the investment in Yorkshire Power. See Note 2.
Investment in Yorkshire  Power in Item 1. FINANCIAL  STATEMENTS.  In April 1998,
$250 million of 5 year 6% First Collateral Trust Bonds were issued. The proceeds
were used for  general  corporate  purposes.  Additionally,  in May  1998,  $194
million of Trust Originated  Preferred Securities were issued. The proceeds were
used to redeem  all of  PSCo's  outstanding  preferred  stock  (totaling  $181.8
million)  on June  10,  1998.  See  Note  6.  Obligated  Mandatorily  Redeemable
Preferred Securities of Subsidiary Trust Holding Solely Subordinated  Debentures
in Item 1. FINANCIAL STATEMENTS.

Financing Activities

      Discussion  relating  to PSCo's  financing  activities  is  covered  under
"Financing Activities" in NCE's Management's Discussion and Analysis of
Financial Condition and Results of Operations.


                                       51
<PAGE>


SPS's Management's  Discussion and Analysis of Financial Condition and Results
of Operations

Three  Months  Ended  September  30, 1998  Compared to the Three  Months Ended
September 30, 1997

Merger

      Effective  August 1, 1997,  following  receipt of all  required  state and
Federal  regulatory  approvals,  SPS and PSCo  merged in a  tax-free  "merger of
equals"  transaction  and became  wholly-owned  subsidiaries  of NCE, which is a
registered  holding company under PUHCA. This transaction was accounted for as a
pooling of interests for accounting  purposes.  Effective with the Merger, Quixx
and UE, previously wholly-owned subsidiaries,  were transferred through the sale
by SPS of all of the outstanding  common stock of such  subsidiaries at net book
value, to NC Enterprises, an intermediate holding company of NCE. The statements
of  income  for the three  and nine  months  ended  September  30,  1997 and the
statement of cash flows for the nine months ended September 30, 1997 reflect the
results of operations of Quixx and UE through July 31, 1997.

Earnings Available for Common Stock

      Earnings  available  for common stock  increased  $5.8 million  during the
third  quarter of 1998  compared  to the same  quarter in 1997.  Earnings in the
prior year were  impacted  by the  recognition  of merger  related  costs  ($7.2
million).

Operating Revenues

Electric Operations

      Substantially  all of SPS's  operating  revenues  result  from the sale of
electric energy.  The principal  factors  impacting  revenues are the amount and
price of energy  sold.  The  following  table  details  the  change in  electric
operating  revenues and energy costs for the three  months ended  September  30,
1998, as compared to the same period in 1997 (thousands of dollars).

                                            Increase (Decrease)
                                            -------------------

     Electric operating revenues:
      Retail..............................        $15,244
      Wholesale...........................         12,619
      Other (including unbilled revenues).        (22,726)
                                                  -------
        Total revenues....................          5,137
     Fuel used in generation..............         (2,886)
     Purchased power......................          5,989
                                                  -------
        Net increase in electric margin...        $ 2,034
                                                  =======

      The following table compares  electric Kwh sales by major customer classes
for the three months ended September 30, 1998 and 1997.

                              Millions of Kwh Sales
                              ---------------------
                                      1998        1997        % Change*
                                      ----       ------       ---------
      Residential ............       1,060         936          13.2%
      Commercial  ............         940         881           6.7
      Industrial  ............       2,193       2,120           3.5
      Public Authority .......         192         170          13.4
                                     -----       -----
        Total Retail..........       4,385       4,107           6.8
      Wholesale...............       2,800       2,284          22.6
                                     -----       -----
      Total...................       7,185       6,391          12.4
                                     =====       =====

* Percentages are calculated using unrounded amounts.

                                       52
<PAGE>


      Electric  operating  revenues  increased  $5.1  million or 1.8% during the
third quarter in 1998,  when compared to the same period in 1997,  primarily due
to higher retail and wholesale  electric sales offset,  in part by approximately
$1.0 million of merger savings which are passed on to customers. The hotter than
normal weather  contributed to the increased  sales in 1998, with an increase in
the irrigation load in Texas and New Mexico.  Under the various state regulatory
approvals,  SPS is required  to provide  credits to retail  customers  over five
years for one-half of the measured  non-fuel  operation and maintenance  expense
savings associated with the Merger. SPS will provide a guaranteed minimum annual
savings to retail customers of $3.0 million in Texas, $1.2 million in New Mexico
(which will be  discontinued  effective with the new retail rate  decrease,  see
Note 4.  Regulatory  Matters  in  Item 1.  FINANCIAL  STATEMENTS),  $100,000  in
Oklahoma, $10,000 in Kansas and $1.5 million to wholesale customers.

      Fuel used in generation  expense decreased $2.9 million or 2.0% during the
third quarter of 1998,  when compared to the same period in 1997,  primarily due
to lower coal expense for the quarter offset, in part, by higher gas expense and
increased  generation  levels required to serve retail and wholesale  customers.
The decrease in coal expense is primarily due to the expiration of a coal supply
contract in 1997 and negotiation  with a new supplier in 1998 for consumption at
the Harrington generating station. SPS coal generation levels increased slightly
in 1998 as compared  to the same  period of the prior year.  Cost of natural gas
used in  generation  increased  $1.7  million  during the third  quarter of 1998
primarily due to generation at the new  Cunningham  Station  combustion  turbine
unit offset, in part, by lower gas prices during the current period.

      SPS has fuel cost  adjustment  mechanisms  which recognize the majority of
the effects of changes in fuel used in generation and purchased  power costs and
allow  recovery  of such costs on a timely  basis.  As a result,  the changes in
revenues associated with these mechanisms during the third quarter of 1998, when
compared to the third quarter of 1997, had little impact on net income.

      Purchased  power  increased $6.0 million during the third quarter of 1998,
when compared to the same period in 1997, due to higher spot market prices and a
48% increase wholesale purchases.  SPS generates  substantially all of its power
for sale to its firm retail and wholesale customers and sells non-firm energy as
the market demands.  Similarly,  SPS will purchase low-cost non-firm energy when
available and as needed to meet customer requirements.

Other Operating Revenues

      Other operating  revenues  decreased $4.6 million during the third quarter
of 1998, when compared to the same period in 1997,  primarily due to the sale of
Quixx and UE in connection with the Merger as discussed above.

Non-Fuel Operating Expenses

      Other  operating and maintenance  expenses  decreased $1.0 million or 2.8%
during  the  third  quarter  of 1998 as  compared  to the same  period  in 1997.
Excluding the effects of Quixx and UE, other operating and maintenance  expenses
increased $1.7 million  primarily due to higher  maintenance costs at generation
stations.

      Income taxes  decreased  $1.1 million during the third quarter of 1998, as
compared to the same period in 1997,  primarily due to the additional income tax
expense recognized in 1997 for  non-deductible  merger costs offset, in part, by
the effect of higher  pre-tax  income.  The  effective  income tax rates for the
third quarters of 1998 and 1997 were 37.1% and 42.4%, respectively.

Other Income and Deductions

      Other  income  and  deductions  increased  $7.7  million  during the third
quarter of 1998,  as compared to the same period in 1997,  primarily  due to the
absence of merger and  business  integration  expenses in 1998 ($7.2 


                                       53
<PAGE>

million  in  1997)  and  higher  interest  income  in 1998  related  to the note
receivable from NC Enterprises for the sale of Quixx and UE.

Nine  Months  ended  September  30, 1998  Compared  to the Nine  Months  ended
September 30, 1997

Earnings Available for Common Stock

      Earnings  available  for common stock were $92.0 million and $55.7 million
during  the  nine  months  ended  September  30,  1998 and  1997,  respectively.
Operating  income  increased  due to the  increase in electric  margin and lower
operating and maintenance  expense.  The 1997 write-off of the investment in the
Carolina  Energy  Project and lower merger  related costs in 1998 also favorably
impacted 1998 net income compared to the prior period.

Operating Revenues

Electric Operations

      Substantially  all of SPS's  operating  revenues  result  from the sale of
electric energy.  The principal  factors  impacting  revenues are the amount and
price of energy  sold.  The  following  table  details  the  change in  electric
operating revenues and energy costs for the nine months ended September 30, 1998
as compared to the same period in 1997 (thousands of dollars).

                                            Increase (Decrease)
                                            -------------------
     Electric operating revenues:
      Retail..............................        $20,429
      Wholesale...........................         23,717
      Other (including unbilled revenues).        (24,196)
                                                  -------
        Total revenues....................         19,950
     Fuel used in generation..............        (13,185)
     Purchased power......................          7,578
                                                  -------
        Net increase in electric margin...        $25,557
                                                  =======

      The following table compares  electric Kwh sales by major customer classes
for the nine months ended September 30, 1998 and 1997.

                                   Millions of Kwh Sales
                                   ---------------------
                                      1998        1997        % Change*
                                     -----       ------       ---------
      Residential ............       2,490       2,296           8.5%
      Commercial  ............       2,315       2,246           3.1
      Industrial  ............       6,306       6,106           3.3
      Public Authority .......         481         439           9.5
                                     -----       -----
        Total Retail..........      11,592      11,087           4.6
      Wholesale...............       6,332       5,368          18.0
                                     -----       -----
      Total...................      17,924      16,455           8.9
                                    ======      ======

* Percentages are calculated using unrounded amounts.

      Electric  operating  revenues  increased  $20.0 million or 2.7% during the
nine months ended  September 30, 1998, when compared to the same period in 1997,
primarily  due to higher retail and wholesale  electric  sales.  The increase in
revenues  is  substantially  attributable  to the  effects of hotter than normal
weather during the second and third quarters of 1998 resulting in an increase in
the  irrigation  load in Texas and New Mexico.  The  decrease in other  electric
operating revenues was due in part to the recognition in 1997 of higher deferred
fuel revenues related to the Texas  jurisdictional  portion of the Thunder Basin
judgment offset,  in part, by $7.7 million of 

                                       54
<PAGE>

additional  revenue  recognized in 1998 from the  resolution of a 1985 FERC rate
case. Under the various state regulatory  approvals,  SPS is required to provide
credits  to retail  customers  over  five  years for  one-half  of the  measured
non-fuel  operation and maintenance  expense savings associated with the Merger.
SPS will provide a guaranteed minimum annual savings to retail customers of $3.0
million  in Texas,  $1.2  million  in New  Mexico  (which  will be  discontinued
effective with the new retail rate decrease,  see Note 4. Regulatory  Matters in
Item 1. FINANCIAL STATEMENTS),  $100,000 in Oklahoma, $10,000 in Kansas and $1.5
million to wholesale customers.

      Fuel used in generation expense decreased $13.2 million or 3.6% during the
nine months ended September 30, 1998,  when compared to the same period in 1997,
primarily  due to lower  prices of coal and  natural  gas  offset,  in part,  by
increased generation levels to required to serve retail and wholesale customers.
The decrease in coal costs was  primarily  due to: a) the  expiration  of a coal
supply  contract  in 1997  and  negotiation  with a new  supplier  in  1998  for
consumption at the Harrington  generating station, and b) the recognition of the
Thunder Basin judgment costs in 1997. Cost of natural gas used in generation and
SPS  gas  generation  levels  for the  nine  months  ended  September  30,  1998
increased, when compared to the same period in 1997, primarily due to generation
at the new Cunningham Station combustion turbine unit.

      SPS has fuel cost  adjustment  mechanisms  which recognize the majority of
the effects of changes in fuel used in generation and purchased  power costs and
allow  recovery  of such costs on a timely  basis.  As a result,  the changes in
revenues associated with these mechanisms during the nine months ended September
30, 1998,  when  compared to the same period in 1997,  had little  impact on net
income.

      Purchased power increased $7.6 million or 63% during the nine months ended
September 30, 1998,  when compared to the same period in 1997,  primarily due to
an increase in spot market prices and a 15.2%  increase in wholesale  purchases.
SPS  generates  substantially  all of its power for sale to its firm  retail and
wholesale customers and sells non-firm energy as the market demands.  Similarly,
SPS  purchases  low-cost  non-firm  energy when  available and as needed to meet
customer requirements.

Other Operating Revenues

      Other  operating  revenues  decreased $20.2 million during the nine months
ended  September 30, 1998,  when compared to the same period in 1997,  primarily
due to the sale of Quixx  and UE in  connection  with the  Merger  as  discussed
above.

Non-Fuel Operating Expenses

      Other operating and maintenance  expenses decreased $16.1 million or 13.4%
during the nine months ended  September 30, 1998, as compared to the same period
in 1997.  Excluding the effects of the sale of Quixx and UE, other operating and
maintenance expenses decreased $2.5 million,  primarily due to lower pension and
benefit costs.

     Income taxes increased $17.8 million during the nine months ended September
30,  1998,  when  compared to the same period in 1997,  primarily  due to higher
pre-tax  income.  Additional  income  tax  expense  was  recognized  in 1997 for
non-deductible  merger costs.  The effective income tax rate for the nine months
ended September 30 was 37.3% in 1998 and 39.8% in 1997.

Other Income and Deductions

      Other income and deductions increased $34.7 million during the nine months
ended September 30, 1998, as compared to the same period in 1997,  primarily due
to the 1997  write-off of the  investment in the Carolina  Energy Project ($16.1
million), the absence of merger and business integration expenses in 1998 ($14.0
million) and higher  interest income in 1998 related to the note receivable from
NC Enterprises for the sale of Quixx and UE.


                                       55
<PAGE>


                         PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

      Part 1.  See Note 5.  Commitments and Contingencies in Item 1, Part 1.

Item 6.  Exhibits and Reports on Form 8-K

(a)   Exhibits

      10(a) Employment  Agreement,  effective  December 15, 1997,  between the
            Company and Mr. Paul J. Bonavia.

      12(a) Computation of Ratio of Consolidated  Earnings to Consolidated Fixed
            Charges for PSCo is set forth at page 59 herein.

      12(b) Computation of Ratio of Consolidated  Earnings to Consolidated Fixed
            Charges for SPS is set forth at page 60 herein.

      15(a) Letter  from  Arthur  Andersen  LLP  regarding   unaudited   interim
            information is set forth at page 61 herein for NCE.
      15(b) Letter  from  Arthur  Andersen  LLP  regarding   unaudited   interim
            information is set forth at page 62 herein for PSCo.
      15(c) Letter  from  Arthur  Andersen  LLP  regarding   unaudited   interim
            information is set forth at page 63 herein for SPS.

      27(a)  Financial Data  Schedule for NCE as of September  30, 1998.
      27(b)  Financial Data Schedule for PSCo as of September 30, 1998.
      27(c)  Financial Data Schedule for SPS as of September 30, 1998.

(b)    Reports on Form 8-K

The following report on Form 8-K was filed by NCE since  the  beginning  of the
third quarter of 1998.

    - A report on Form 8-K dated  October 19, 1998,  was filed by NCE on October
   19, 1998. The item reported was Item 5. Other Events:  The Company's earnings
   release for the quarter ended  September 30, 1998,  including  summary income
   statement information.

    - A report on Form 8-K dated  October 29,  1998,  1998,  was filed by NCE on
   November 2, 1998.  The item  reported was Item 5. Other  Events:  Filing of a
   Purchase  Agreement in connection with the sale of 2,500,000 shares of common
   stock together with associated preferred stock purchase rights.


                                       56
<PAGE>


                          NEW CENTURY ENERGIES, INC.
                                  SIGNATURE

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, New Century Energies,  Inc. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on the 9th
day of November, 1998.

                                          NEW CENTURY ENERGIES, INC.

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


                      PUBLIC SERVICE COMPANY OF COLORADO
                                  SIGNATURE

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934,  Public  Service  Company of Colorado has duly caused this
report to be signed on its behalf by the undersigned,  thereunto duly authorized
on the 9th day of November, 1998.


                                          PUBLIC SERVICE COMPANY OF COLORADO

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



                     SOUTHWESTERN PUBLIC SERVICE COMPANY
                                  SIGNATURE

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934,  Southwestern  Public Service Company has duly caused this
report to be signed on its behalf by the undersigned,  thereunto duly authorized
on the 9th day of November, 1998.


                                          SOUTHWESTERN PUBLIC SERVICE COMPANY

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


                                       57
<PAGE>



                                EXHIBIT INDEX

10(a) Employment Agreement, effective December 15, 1997, between the Company
      and Mr. Paul J. Bonavia.

12(a) Computation  of Ratio  of  Consolidated  Earnings  to  Consolidated  Fixed
      Charges for PSCo is set forth at page 59 herein.

12(b) Computation  of Ratio  of  Consolidated  Earnings  to  Consolidated  Fixed
      Charges for SPS is set forth at page 60 herein.

15(a) Letter from Arthur Andersen LLP regarding unaudited interim information is
      set forth at page 61 herein for NCE.

15(b) Letter from Arthur Andersen LLP regarding unaudited interim information is
      set forth at page 62 herein for PSCo.

15(c) Letter from Arthur Andersen LLP regarding unaudited interim information is
      set forth at page 63 herein for SPS.

27(a) Financial Data Schedule for NCE as of September 30, 1998.

27(b) Financial Data Schedule for PSCo as of September 30, 1998.

27(c) Financial Data Schedule UT for SPS as of September 30, 1998.


                                       58
<PAGE>


                                                                 EXHIBIT 12(a)

                      PUBLIC SERVICE COMPANY OF COLORADO
                               AND SUBSIDIARIES

                 COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS
                         TO CONSOLIDATED FIXED CHARGES

           (not covered by Report of Independent Public Accountants)



                                                     Nine Months Ended
                                                      September 30,
                                                      1998       1997
                                                      ----       ----
                                           (Thousands of Dollars, except ratios)

Fixed charges:
   Interest on long-term debt...................     $ 86,899    $85,902
   Interest on borrowings against corporate-owned
     life insurance contracts...................       38,004     34,049
   Other interest...............................       14,967     17,150
   Amortization of debt discount and expense 
     less premium ..............................        3,148      2,964
   Interest component of rental expense.........        6,166      6,887
   Dividends on PSCo obligated mandatorily
     redeemable preferred securities............        5,911          -
                                                       ------     ------

     Total .....................................     $155,095   $146,952
                                                     ========   ========

Earnings (before fixed charges and taxes on income):
   Net income...................................     $143,820   $130,968
   Fixed charges as above.......................      155,095    146,952
   Provisions for Federal and state taxes on income,
   net of investment tax credit amortization....       72,184     59,205
                                                       ------     ------

     Total......................................     $371,099   $337,125
                                                     ========   ========

Ratio of earnings to fixed charges..............         2.39       2.29
                                                       ======     ======

                                       59
<PAGE>



                                                                 EXHIBIT 12(b)

                      SOUTHWESTERN PUBLIC SERVICE COMPANY
                               AND SUBSIDIARIES

                 COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS
                         TO CONSOLIDATED FIXED CHARGES

           (not covered by Report of Independent Public Accountants)



                                                     Nine Months Ended
                                                      September 30,
                                                      1998       1997
                                                      ----       ----
                                           (Thousands of Dollars, except ratios)

Fixed charges:
   Interest on long-term debt...................     $ 32,972    $ 33,057
   Dividends on SPS obligated mandatorily 
     redeemable preferred securities............        5,888       5,888
   Other interest...............................        7,275       4,710
   Amortization of debt discount and expense 
     less premium ..............................        1,682       1,683
   Interest component of rental expense.........          606         934
                                                       ------      ------

     Total .....................................     $ 48,423    $ 46,272
                                                     ========    ========

Earnings (before fixed charges and taxes on income):
   Net income...................................     $ 91,985    $ 55,709
   Fixed charges as above.......................       48,423      46,272
   Provisions for Federal and state taxes on income,
   net of investment tax credit amortization....       54,709      36,894
                                                     --------    --------

     Total......................................     $195,117    $138,875
                                                     ========    ========

Ratio of earnings to fixed charges..............         4.03        3.00
                                                        =====       =====


                                       60
<PAGE>



                                                                 EXHIBIT 15(a)

November 5, 1998


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;  its  Registration   Statement  (Form  S-3,  File  No.
333-28637) pertaining to the Dividend Reinvestment and Cash Payment Plan and its
Registration Statements (Form S-3, File Nos. 333-40361 and 333-64067) pertaining
to the registration of NCE Common Stock;  its Registration  Statement (Form S-8,
File No.  333-58117)  pertaining  to the NCE  Employee  Investment  Plan and NCE
Employees'  Savings and Stock  Ownership  Plan and its Form 10-Q for the quarter
ended  September  30, 1998,  which  includes our report dated  November 5, 1998,
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



                                       61
<PAGE>



                                                                 EXHIBIT 15(b)

November 5, 1998


Public Service Company of Colorado:

      We are aware that Public Service  Company of Colorado has  incorporated by
reference in its Registration Statement (Form S-3, File No. 33-62233) pertaining
to the Automatic  Dividend  Reinvestment  and Common Stock  Purchase  Plan;  its
Registration  Statement (Form S-3, File No.  33-37431) as amended on December 4,
1990,  pertaining  to the  shelf  registration  of  Public  Service  Company  of
Colorado's First Mortgage Bonds; its Registration  Statement (Form S-8, File No.
33-55432)  pertaining to the Omnibus Incentive Plan; its Registration  Statement
(Form S-3, File No.  33-51167)  pertaining to the shelf  registration  of Public
Service Company of Colorado's  First  Collateral  Trust Bonds;  its Registration
Statement (Form S-3, File No. 33-54877)  pertaining to the shelf registration of
Public Service Company of Colorado's First Collateral Trust Bonds and Cumulative
Preferred  Stock and its Form 10-Q for the quarter  ended  September  30,  1998,
which  includes  our report  dated  November  5, 1998,  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



                                       62
<PAGE>



                                                                 EXHIBIT 15(c)
November 5, 1998


Southwestern Public Service Company:

      We are aware that Southwestern  Public Service Company has incorporated by
reference  in  its  Registration   Statement  (Form  S-3,  File  No.  333-05199)
pertaining to  Southwestern  Public Service  Company's  Preferred Stock and Debt
Securities;  its Registration Statement (Form S-8, File No. 33-27452) pertaining
to  Southwestern  Public  Service  Company's  1989 Stock  Incentive Plan and its
Registration  Statement (Form S-8, File No. 33-57869) pertaining to Southwestern
Public Service  Company's  Employee  Investment  Plan and  Non-Qualified  Salary
Deferral Plan and its Form 10-Q for the quarter ended September 30, 1998,  which
includes our report dated  November 5, 1998,  covering the  unaudited  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


                                       63

<PAGE>
                                                                   EXHIBIT 10(a)

                              EMPLOYMENT AGREEMENT

                                     BETWEEN

                           NEW CENTURY ENERGIES, INC.

                                       AND

                                 PAUL J. BONAVIA

<PAGE>

                                    Contents



Section 1. Term of Employment

Section 2. Position and Responsibilities

Section 3. Executive to Devote Full Time

Section 4. Compensation

Section 5. Expenses

Section 6. Disability

Section 7. Termination of Employment

Section 8. Compensation Upon Termination

Section 9. Offset for Compensation Earned Subsequent to Termination

Section 10.  Covenants

Section 11.  Indemnification

Section 12.  Assignment

Section 13.  Income Tax

Section 14.  Dispute Resolution and Notice

Section 15.  Miscellaneous

Section 16.  Governing Law





<PAGE>


         This  Employment  Agreement  is made and entered into this 28th day of
September,  1998,  and is effective  retroactive  to December  15, 1997,  by and
between New Century  Energies,  Inc.,  (hereinafter  referred to as "NCE" or, as
defined in Section 12, below, as the "Company"), having its principal offices at
1225 17th Street, Denver, Colorado, and Paul J. Bonavia (hereinafter referred to
as the "Executive"):

     WHEREAS,  Executive possesses considerable experience in, and knowledge of,
the electric and natural gas utility industries; and

       WHEREAS, the Company desires to employ Executive in an executive capacity
for the Company;

         NOW,  THEREFORE,  in  consideration  of the foregoing and of the mutual
covenants  and  agreements of the parties set forth in this  Agreement,  and for
other good and valuable consideration,  the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, agree as
follows:

Section 1. Term of Employment

         The Company  hereby agrees to employ  Executive,  and Executive  hereby
agrees to serve the Company,  in accordance  with the terms and  conditions  set
forth  herein,  commencing  as of the  effective  date  of  this  Agreement,  as
indicated above, and ending on December 14, 2000,  unless earlier  terminated as
provided herein.

Section 2. Position and Responsibilities

         Executive  shall serve as Senior Vice President and General  Counsel of
the Company,  or in any other similar executive capacity for the Company,  if so
elected  by the  Board of  Directors,  and  shall  report  to  either  the Chief
Executive  Officer or Chief  Operating  Officer  of the  Company . Any change in
these  terms  will be by  mutual  agreement  of the  Executive  and the Board of
Directors.

Section 3. Executive to Devote Full Time

         During  the  term  of  this  Agreement,   Executive  agrees  to  devote
substantially his full time,  attention,  and energies to the Company's business
and shall not be engaged directly or indirectly in any other business  activity,
whether or not such  business  activity  is pursued for gain,  profit,  or other
pecuniary  advantage  without  prior  approval  of the  Board of  Directors,  as
expressed by formal  resolution.  This prohibition does not include  charitable,
civic,  nonprofit,  or  other  community  service  activities,  nor  shall it be
construed as preventing  the  Executive  from  investing  assets in such form or
manner as will not require his services in the daily  operations  of the affairs
of the companies in which such investments are made, or serving as a director of
other companies (subject to the covenants of Section 10 herein).



<PAGE>


Section 4. Compensation

         4.1 Base  Salary.  The Company  shall pay  Executive a salary at a rate
(hereinafter  referred to as "Base Salary") that shall be established  from time
to time by the  Board of  Directors  of the  Company  or the  Board's  designee;
provided,  however, that such Base Salary shall not be less than Two Hundred and
Seventy Thousand Dollars  ($270,000.00) per year. This Base Salary shall be paid
to Executive in equal semi-monthly  installments throughout the year, consistent
with the normal payroll practices of the Company.  Base Salary shall be reviewed
periodically  by the Board of Directors or the Board's  designee  following  the
effective date of this Agreement, while this Agreement is in force, to ascertain
whether, in the judgment of the Board or the Board's designee,  such Base Salary
should be increased  (but not  decreased).  If so  increased,  that salary shall
become the Base Salary for all purposes of this Agreement.

         4.2      Incentive Compensation.

         (a) Annual  Bonus.  During the term of this  Agreement,  the  Executive
         shall be eligible to  participate  in the New  Century  Energies,  Inc.
         Annual Incentive Plan.  Executive's annual target bonus potential shall
         not be less than  forty-five  (45%) of Base  Salary.  Awards under this
         Plan may be made in cash or stock,  at the election of  Executive,  and
         are  conditioned  upon the  attainment of certain goals  established by
         Company  management and approved by the  Compensation  Committee of the
         Board. In addition,  upon the  commencement  of Executive's  employment
         with the Company, Executive shall receive a guaranteed award of $20,000
         under the Annual  Incentive  Plan for the plan year 1997,  payable  not
         earlier than January 5, 1998. This is in addition to Executive's actual
         participation in the Plan for the month of December 1997.

         (b) Long Term Incentive  Plan.  Executive  will  participate in the New
         Century Energies, Inc., Long Term Incentive Plan with a target award of
         not less than 65% of Base Salary. As currently designed,  two-thirds of
         the  awards  under  this Plan are  provided  through  the  issuance  of
         non-qualified  stock  options and the  remaining  one-third is provided
         through a Value Creation Plan.  Executive's  initial stock option grant
         under this Plan is 88,000 shares of New Century Energies,  Inc., common
         stock,  which shall vest on December  15,  1998.  This grant covers the
         years  1998,  1999,  and 2000.  The grant price will be the fair market
         value (the closing price) of New Century Energies Inc., common stock on
         December  15, 1997.  The Company  reserves the right to amend or modify
         the design of the Long Term  Incentive  Plan subject to approval of the
         Compensation Committee.

         4.3 Executive Benefits.  The Company shall provide to the Executive all
benefits  which other  officers  and  employees  of the Company are  entitled to
receive, as commensurate with the Executive's position,  pursuant and subject to
the terms and  conditions of all then  applicable  plans.  Such  benefits  shall
include, but not be limited to, group term life insurance,  comprehensive health
and  major  medical  insurance, 


<PAGE>

long-term  disability,  accidental  death and  dismemberment  insurance,  travel
accident  insurance,   and  participation  in  any  supplemental  benefit  plans
(including a supplemental  executive  retirement plan),  employee savings plans,
supplemental  savings plan, all employee  welfare  benefit  plans,  and employee
pension benefit plans.

     4.4 Supplemental Retirmenet Benefit. Executive shall be entitled under this
Agreement  to a  supplemental  retirement  benefit.  Assuming  full  vesting and
accrual,  such benefit shall be equal each year to  fifty-five  percent (55%) of
Executive's Annual Compensation, minus any benefit received by Executive in that
year  pursuant to any Company  qualified  retirement  plan or Company SERP Plan.
"Annual  Compensation"  is  defined  as the  average  of the  highest  three  of
Executive's  last five years of both Annual  Base  Salary and annual  incentives
earned in the  corresponding  year.  The  Company  may  modify  its  salary  and
incentive  compensation  structure after the date hereof,  provided that no such
modification shall have the effect of reducing the monetary value of Executive's
benefit  under this  Section.  So long as  Executive  shall be  employed  by the
Company,  the benefit  shall  accrue at the rate of five  percent (5%) of Annual
Compensation  per  year  of  service,   to  reach  fifty-five  (55%)  of  Annual
Compensation  not later than  December  15, 2008.  The benefit  shall become one
hundred  percent (100%) vested on December 15, 2002, or upon a Change in Control
as that term is defined in the Change in  Control  Agreement,  whichever  occurs
earlier.  Yearly benefit payments shall commence at age 60 or at separation from
service,  whichever  occurs  later.  The  benefit  shall be funded in a mutually
acceptable manner through a rabbi trust or other funding vehicle.

         4.4A SERP Plan.  Executive  shall be a participant in the  Supplemental
Executive Retirement Plan for key management employees,  which may be amended or
revised from time to time by the Company  ("SERP  Plan").  Terms and  conditions
applicable to any benefit to which Executive may be entitled thereunder shall be
governed by the SERP Plan documents.

         4.5 Executive Life Insurance.  The Company shall provide Executive with
a life  insurance  policy with a death  benefit  equal to 400% of Base Salary if
death occurs during employment,  and equal to 200% of final Base Salary if death
occurs during retirement.

         4.6 Paid time Off.  Executive  shall be entitled  each calendar year to
paid vacation in  accordance  with the standard  vacation  policy of the Company
with regard to vacations of Executive  Officers.  Executive shall receive a sick
leave accrual according to standard Company policy with regard to sick leave for
Executive Officers as of the date hereof.

         4.7  Perquisites.  The  Company  shall  provide  to  Executive,  at the
Company's  cost,  all  perquisites  to which  other  officers of the Company are
entitled.  The  Company  also shall  provide  such other  perquisites  which are
suitable to the character of Executive's  position with the Company and adequate
for the performance of his duties hereunder,  including,  but not limited to, In
addition,  executive shall receive:  (i) a monthly flexible perquisite allowance
of $750.00;  (ii) an annual  allowance  for  financial/estate  planning  and tax



<PAGE>

preparation of $3500.00;  (iii) an annual  medical  examination at the Company's
expense; and (iv) a furnished executive office and a full-time secretary located
at the  Company's  corporate  headquarters.  Executive  shall  likewise have the
benefit of any additional  benefits,  as may be  established  during the term of
this Agreement, by written policy of the Company

     4.8  Participation  in  Programs.  In  addition,  and without  limiting the
generality of the foregoing,  during the term hereof: (A) the Executive shall be
entitled to  participate  in all  applicable  incentive,  savings and retirement
plans, practices, policies and programs of the Company and its affiliates to the
same extent as other senior  executives  of the Company;  and (B) the  Executive
and/or  the  Executive's  family,  as the case may be,  shall  be  eligible  for
participation  in, and shall receive all benefits under, all applicable  welfare
benefit plans, practices,  policies and programs provided by the Company and its
affiliates,  other than severance  plans,  practices,  policies and programs but
including, without limitation,  medical, prescription,  dental, disability, sick
leave,  employee life  insurance,  group life  insurance,  accidental  death and
travel  accident  plans  and  programs,  to the  same  extent  as  other  senior
executives of the Company.

     4.9  Modifications  to Programs.  Sections 4.2, 4.3,  4.4A,  and 4.5 herein
refer to plans or  programs  in  effect  or under  consideration  as of the date
hereof.  By reason of such  sections,  the  Company  shall not be  obligated  to
institute,  maintain,  or refrain from changing,  amending, or discontinuing any
benefit  plan,  program,  or  perquisite,  so long as such changes are similarly
applicable to the  Company's  senior  executive  employees  generally.  However,
notwithstanding  any  change or  amendment  to,  discontinuance  of, or  benefit
limitation set forth in any plan or program,  Executive  shall be entitled under
this Agreement (a) during  Executive's  term of employment under this Agreement,
to  incentive  compensation  opportunities  at least equal in monetary  value to
those provided for in Section 4.2, above,  and (b) during and after  Executive's
term of  employment,  to the  supplemental  retirement  benefit as  provided  in
Section 4.4, above.

Section 5. Expenses

         5.1 Moving and Relocation Expenses. The Company shall pay, or reimburse
Executive,  for reasonable and necessary moving and relocation expenses incurred
in the relocation of Executive's  principal  residence,  in accordance  with the
Company's existing relocation policy.

         5.2 Ongoing Expenses.  The Company shall pay, or reimburse Executive in
accordance with Company policies,  for all ordinary and necessary expenses, in a
reasonable  amount,  which Executive  incurs in performing his duties under this
Agreement,  including, but not limited to, travel,  entertainment,  professional
dues and  subscriptions,  and all  dues,  fees,  and  expenses  associated  with
membership in various professional, business, social, and civic associations and
societies in which  Executive's  participation  is in the best  interests of the
Company.



<PAGE>


Section 6. Disability

         6.1 Long Term  Disability.  The Company will  provide to the  Executive
benefits  pursuant  and  subject  to the terms and  conditions  of the Long Term
Disability Plan then in effect.


Section 7. Termination of Employment

          7.1 Termination  for Good Reason.  "Good Reason" means the occurrence,
              on or after  the  date of a Change  In  Control  (as that  term is
              defined in the Change in Control Agreement between Paul J. Bonavia
              and New Century  Energies,  Inc.,  effective  December  15,  1997,
              referred  to  in  this   Agreement   as  the  "Change  in  Control
              Agreement") and which is Executive's  written  consent,  of any of
              the following events or circumstances, as determined in good faith
              by Executive:

                (a) A reduction in Executive's base salary in effect immediately
                    prior to the Change in Control

                (b) A   material   reduction   in   Executive's   target
                    opportunity,  measured as a percentage of base salary,  to
                    earn annual or long-term incentives or bonuses.

                (c) A failure to provide to  Executive  employee  benefits
                    and   perquisites   (other  than   amounts   described  in
                    subsections  (a) and (b)) which are reasonably  equivalent
                    in  the   aggregate   to  those   provided  to   Executive
                    immediately prior to the Change In Control.

                (d) A material  reduction by NCE of Executive's job duties
                    and responsibilities that existed immediately prior to the
                    Change  In  Control,  including  but  not  limited  to the
                    assignment  to  Executive  of duties and  responsibilities
                    which   are   materially   inconsistent   with   those  of
                    Executive's  position  immediately  prior to the Change In
                    Control.

                (e)  Assignment  or  reassignment  of Executive to another
                     place of employment  that is more than 50 miles  (measured
                     by the  shortest  paved  highway  route) from  Executive's
                     place of  employment  immediately  prior to the  Change In
                     Control.

                 (f) A  failure  by NCE to pay to  Executive  when  due any
                     deferred compensation that was deferred by Executive prior
                     to the Change In Control.

                 (g) A  failure  by  NCE  to  comply  with  the  terms  and
                     conditions of this Agreement.


<PAGE>


         Notwithstanding the foregoing:
               aa) An event or  circumstance  shall not  constitute  Good
               Reason unless  Executive  provides  written  notice to NCE
               specifying the basis for  Executive's  determination  that
               Good Reason  exists  within six months after the first day
               on which such Good Reason existed.  If NCE cures the event
               or  circumstance  within 30 days of receiving such written
               notice  (including  retroactive  restoration  of any  lost
               compensation or benefits, where reasonably possible), Good
               Reason shall be deemed never to have existed.

               bb) NCE and Executive may, upon mutual written  agreement,
               waive any provision of this Section which would  otherwise
               constitute Good Reason.

          7.2  Termination  by Notice.  Either the Company or the  Executive may
terminate  this Agreement  without cause by delivering  proper written notice to
the other party, as follows:

               (a)  Notice  by  Executive.   Executive  may  terminate   this
               Agreement  at any  time  by  giving  the  Company's  Board  of
               Directors a minimum of ninety (90) days' prior written  notice
               of his intent to  terminate.  In such case,  the Company shall
               pay Executive his full Base Salary through the ninety (90) day
               period,  with  termination  being  effective on whatever  date
               during that period is  designated  by the Board of  Directors,
               but in any  event not  later  than the last day of the  ninety
               (90) day  period.  As of the last day of the  ninety  (90) day
               period, Executive shall forfeit all rights and benefits (other
               than vested benefits) he would otherwise have been entitled to
               receive under this Agreement  (including,  if applicable,  the
               Executive's  annual expected target bonus for that year).  The
               Company  and  Executive   thereafter  shall  have  no  further
               obligations under this Agreement.

               (b) Notice by the  Company.  The  Company may  terminate  this
               Agreement  at  any  time  by the  Board  of  Directors  giving
               Executive written notice of the Company's intent to terminate.
               Subject to the  consulting  requirements  of Section 8 herein,
               Executive's obligation to serve the Company, and the Company's
               obligation  to  employ  Executive  under  the  terms  of  this
               Agreement shall terminate simultaneously on the date specified
               in the written  notice,  and the Executive shall receive those
               benefits specified in Section 8 herein.


           7.3  Termination  for  Cause.  Nothing  in this  Agreement  shall  be
construed  to  prevent  the  Company's  Board  of  Directors  from   terminating
Executive's  employment under this Agreement for cause.  "Termination for cause"
shall have the same  definition  herein as the term "Discharge for Cause" in the
Change in Control Agreement.


<PAGE>


           In the event this  Agreement is  terminated by the Company for cause,
the  Company  shall pay  Executive  his full  Base  Salary  through  the date of
termination,  and Executive shall immediately  thereafter forfeit all rights and
benefits  (other than vested  benefits) he would otherwise have been entitled to
receive under this Agreement (including,  if applicable,  the Executive's annual
expected target bonus for that year). The Company and Executive thereafter shall
have no further obligations under this Agreement, except as set forth in Section
15.6.

         7.4 Termination After a Change in Control.  In the event of a Change in
Control (as defined in Executive's Change in Control  Agreement),  the Executive
shall be  entitled to the greater  of: (a) the  payments he would  otherwise  be
entitled to receive for the remaining term of employment  under this  Agreement;
or (b) those payments provided for under the Change in Control Agreement.  If it
is determined that payments will be made pursuant to this Agreement  following a
Change in Control, the Executive shall be entitled to tax-free reimbursements of
any excise taxes that may arise as a result of such payments.

Section 8.  Compensation Upon Termination

         In the event this  Agreement is terminated for good reason (as provided
in Section 7.1 herein) or by notice by the Company as provided in Section 7.2(b)
herein,  the Company shall continue the Executive's total  compensation  package
for the remaining  term of this Agreement  which shall  constitute the following
amounts upon the effective date of such termination, or as otherwise specified:

            (a)  Executive's  annual Base Salary (as stated in Section 4.1
            herein and adjusted by the Board from time to time), continued
            for  the  remaining  term  of  this  Agreement,  paid  to  the
            Executive in equal semi-monthly  installments  consistent with
            the normal payroll practices of the Company;


            (b) For annual  incentive  plan(s) in place and operational on
            the date of termination, the greater of target or actual bonus
            paid for the year in which employment  termination  occurs, as
            provided  in the  annual  incentive  plan and  subject  to the
            authority  of the Board  under  such plan,  continued  for the
            remaining term of this Agreement;

            (c) For long-term  incentive  plan(s) in place and operational
            on the  date  of  termination,  an  immediate  vesting  of all
            outstanding  long-term incentive awards held by the Executive,
            plus the economic  equivalent value of any long-term incentive
            awards the  Executive  would have  received had the  Executive
            remained employed for the remaining term of this Agreement, as
            provided in the  long-term  incentive  plan and subject to the
            authority of the Board under such plan;



<PAGE>

            (d) For the  supplemental  retirement  benefit provided for in
            Section 4.4 and the SERP Plan (or any successor plan) in place
            and  operational  on the  date  of  termination,  payment,  in
            accordance  with the  terms of the  plan,  of the  Executive's
            accrued benefits,  vested or otherwise;  plus, Executive shall
            receive credit for such  additional  years of service equal to
            the number of years,  or partial years,  remaining  under this
            Agreement at the time of termination;

            (e) For the Supplemental  Savings Plan (or any successor plan)
            in place and operational on the date of termination,  payment,
            in accordance  with the terms of the plan,  within thirty (30)
            days  of  termination,  of the  Executive's  account  balances
            therein;  plus  credit  for  the  maximum  additional  Company
            contributions  the  Executive  would  have  been  entitled  to
            receive had the Executive  remained employed for the remaining
            term of this Agreement;

            (f) For welfare  benefit  plan(s) in place and  operational on
            the date of termination,  Executive shall receive full benefit
            coverage for the remaining term of this Agreement;

            (g)  For  all   qualified   retirement   plans  in  place  and
            operational  on  the  date  of  termination,  Executive  shall
            receive, by direct payment from the Company, the present value
            of the benefits  that would have been paid under the qualified
            plans if the  Executive  had  received  credit for  additional
            years of service equal to the number of years  remaining under
            this  Agreement at the time of  termination;  plus the maximum
            Company  matching  contributions  and accruals  under any such
            retirement plans Executive would have been entitled to receive
            had his  employment  continued for the remaining  term of this
            Agreement; and

            (h) For all  perquisite  programs in place and  operational on
            the  date  of   termination,   Executive  shall  receive  full
            perquisites for the remaining term of this Agreement.

           As consideration  for the continuation of the above-stated  benefits,
Executive  agrees to make himself  available  during the  remaining  term of the
Agreement,  at  reasonable  times and  location,  to the  Company  and/or to the
successor  to his  position at the  Company,  to provide  consulting  advice (as
requested).

Section 9.  Offset for Compensation Earned Subsequent to Termination

           In the  event  this  Agreement  is  terminated  for good  reason  (as
provided  in Section  7.1  herein) or by notice by the  Company as  provided  in
Section 7.2 herein, the continuation of the Executive's Base Salary (as provided
in Section 8(a) herein),  any annual incentive award, if applicable (as provided
in Section 8(b) herein), long-term incentive plan(s) awards, if any (as provided
in Section 8(c) herein),  the SERP Plan and supplemental  retirement benefit, if
any (as provided in Section 8(d) herein),  and 


<PAGE>

the  Supplemental  Savings  Plan,  if any (as provided in Section 8(e)  herein),
shall not be offset by compensation earned from a subsequent employer during the
remaining term of employment under this Agreement.

Section 10.  Covenants

         10.1 Non-competition. Without the prior written consent of the Company,
for the  greater  of  twenty-four  (24)  months  following  the  termination  of
Executive's employment under Section 7 of this Agreement,  or the remaining term
of employment  under this Agreement,  the Executive shall not, as a shareholder,
employee, officer, director, partner,  consultant, or otherwise, engage directly
or indirectly in any business or enterprise which is "in  competition"  with the
Company or its successors or assigns.

              A business or enterprise is deemed to be "in  competition"  if
it  is  engaged  in  the  business  of   generation,   purchase,   transmission,
distribution,  or  sale  of  electricity,  or  in  the  purchase,  transmission,
distribution,  sale or  transportation  of  natural  gas,  within  the states of
Colorado, Wyoming or Texas.

         10.2 Disclosure of  Information. Executive recognizes that he will have
access to and knowledge of certain  confidential and proprietary  information of
the Company and its  subsidiaries  which is essential to the  performance of his
duties under this Agreement. Executive will not, during or after the term of his
employment by the Company, in whole or in part, disclose such information to any
person,  firm,  corporation,  association,  or other  entity  for any  reason or
purpose  whatsoever,  nor shall he make any use of any such  information for his
own purposes.

         10.3  Covenants   Regarding  Other   Employees.   For  the  greater  of
twenty-four  (24)  months  following  a  termination  under  Section  7 of  this
Agreement,  or the  remaining  term of  employment  under  this  Agreement,  the
Executive  agrees not to induce any employees of the Company to terminate  their
employment,  accept  employment  with anyone else,  or to interfere in a similar
manner with the business of the Company.

Section 11.  Indemnification

         The Company hereby  covenants and agrees to indemnify and hold harmless
Executive fully,  completely,  and absolutely against, and in respect to any and
all actions, suits,  proceedings,  claims, demands,  judgments,  costs, expenses
(including attorneys' fees), losses, and damages resulting from Executive's good
faith  performance  of his  duties  and  obligations  under  the  terms  of this
Agreement.

Section 12.   Assignment and Successors

         This Agreement  shall be binding upon and shall inure to the benefit of
any successor to or assign of NCE. The term  "Company" as used in this Agreement
is defined as NCE and any successor or assign.  The term  "successor" is defined
to include any person, firm,  corporation or entity which at any time and by any
means, 


<PAGE>

directly or indirectly (a) merges or consolidates  with NCE; (b) acquires all or
the majority of NCE's voting  shares or assets;  or (c) obtains  control of NCE,
its voting shares, assets or business activities.  NCE (if it should continue to
exist  following  the  occurrence  of any such event) shall  remain  jointly and
severally liable for all of its obligations hereunder.

     Except  as herein  provided,  this  Agreement  may not be  assigned  by the
Company without the written consent of the Executive

     This  Agreement  shall  inure to the  benefit  of, and be  enforceable  by,
Executive's personal or legal  representatives,  executors,  and administrators,
successors, heirs, distributees, devisees, and legatees. If Executive should die
while any amounts payable to Executive  hereunder remain  outstanding,  all such
amounts,  unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to Executive's  devisee,  legatee, or other designee or,
in the absence of such designee, the Executive's estate.

            Other  than a  transfer  by reason of death,  the  rights  and
duties  of  Executive  hereunder  are  personal  and  may  not  be  assigned  or
transferred.

Section 13. Income Tax

           The  Company  may  withhold,  from any  benefits  payable  under this
Agreement,  all federal, state, city, or other taxes as may be required pursuant
to any law or governmental regulation or ruling.

Section 14.  Dispute Resolution and Notice

         14.1  Dispute  Resolution.  The  parties  agree  that  any  dispute  or
controversy  arising  under  or in  connection  with  this  Agreement  shall  be
submitted to arbitration as the exclusive forum;  provided that if a party gives
notice to the other party of his or its desire that the  arbitration  hearing be
held forthwith and a hearing is not conducted  within ninety (90) days following
said notice,  the party having  given such notice may  initiate  litigation,  in
which case the Court's  jurisdiction  shall  supersede  and replace  that of the
arbitrators.  The arbitrators shall have all powers of a court to grant legal or
equitable relief to remedy any breach of this Agreement.

               Arbitration  proceedings  shall be conducted before a panel of
three (3)  arbitrators  sitting in a location  selected by the Executive  within
fifty (50) miles from the  location of his  principal  place of  employment,  in
accordance  with  the  rules of the  American  Arbitration  Association  then in
effect.  Judgment  may be entered on the award of the  arbitrators  in any court
having competent jurisdiction.

               The  arbitrators'  fees shall be divided  and paid  equally by
Executive and the Company. Executive and the Company shall pay his/its own costs
and attorneys'  fees, if any, in the  arbitration  proceedings,  preliminary and
ancillary  proceedings,  and any  court  proceedings  to  enforce  or  vacate an
arbitration award,  provided that if 


<PAGE>

Executive  recovers  through such action some amount or benefit  (regardless  of
size or value) in excess of what NCE had offered  prior to  commencement  of the
proceeding,  NCE will pay or reimburse  Executive for all arbitration  expenses,
costs and attorney's fees.

         14.2 Notice. Any notices,  requests,  demands, and other communications
provided  for by this  Agreement he be  sufficient  if in writing and if sent by
registered  or  certified  mail to Executive at the last address he has filed in
writing  with the  Company  or,  in the case of the  Company,  at its  principal
executive offices.

Section 15.   Miscellaneous

         15.1 Waiver. A waiver of any breach of this Agreement,  or a failure to
enforce any provision hereof,  shall not be a waiver of any subsequent breach of
the Agreement.

         15.2  Modification.  This  Agreement  shall  not  be  varied,  altered,
modified, canceled, changed, or in any way amended except by mutual agreement of
the parties in a written  instrument  executed  by the  parties  hereto or their
legal representatives.

         15.3  Severability.  In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining  provisions of this  Agreement  shall be unaffected  thereby and shall
remain in full force and effect.

         15.4  Integration  Clause.  This  Agreement  and the  Change in Control
Agreement set forth the complete  agreement  between the parties,  and supersede
all prior statements, stipulations, representations, promises, or agreements, if
any, between the parties. No other  consideration,  other than that set forth in
this Agreement and the Change in Control Agreement, is due between the parties.

         15.5  Counterparts.  This  Agreement may be executed in one (1) or more
counterparts,  each of which shall be deemed to be an original, but all of which
together will constitute one (1) and the same Agreement.

         15.6 Survival of Obligations  According to Their Terms.  The provisions
of Sections 4.4, 4.9, 8, 9, 10, 11, 12, 13 and 14 shall survive the  termination
of this  Agreement  for any  reason,  whether  such  termination  is by NCE,  by
Executive, or otherwise, and shall survive the expiration of Executive's term of
employment. Such obligations shall continue thereafter in full force and effect.

         15.7 No  Attachment.  Except as  required  by law,  no right to receive
payments under this  Agreement  shall be subject to  anticipation,  commutation,
alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to
execution,  attachment,  levy or similar  process or  assignment by operation of
law,


<PAGE>

and any attempt,  voluntary or involuntary,  to effect such action shall be
null, void and of no effect.


Section 16.  Governing Law

This  Agreement  shall be construed and enforced in accordance  with the laws of
the State of Colorado.  The parties understand and intend that this Agreement is
a fully enforceable contract and not a benefit plan within the meaning of ERISA.

         IN WITNESS WHEREOF,  Executive has executed,  and the Company (pursuant
to a resolution adopted at a duly constituted meeting of its Board of Directors)
has executed this Agreement, effective as December 15, 1997.



ATTEST:                                            NEW CENTURY ENERGIES, INC.

  /s/Cathy Hart                                     /s/ Wayne Brunetti
---------------------------                      ----------------------------
By: Cathy Hart                              By:  __________________________
Its: Corporate Secretary                    Its: __________________________


                                    EXECUTIVE
                                                     /s/ Paul Bonavia
                                                 ----------------------------
                                                     Paul J. Bonavia