CSW
================================================================================
Central and South West Corporation
---------------------------
1999 CSW FINANCIAL REPORT
TABLE OF CONTENTS
Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................1
Consolidated Statements of Income.............................................35
Consolidated Statements of Stockholders' Equity...............................36
Consolidated Balance Sheets...................................................37
Consolidated Statements of Cash Flows.........................................39
Notes to Consolidated Financial Statements....................................40
Reports of Independent Public Accountants.....................................88
Report of Management..........................................................91
Glossary of Terms.............................................................92
FORWARD-LOOKING INFORMATION
This report made by CSW contains forward-looking statements within the meaning
of Section 21E of the Exchange Act. Although CSW believes that its expectations
are based on reasonable assumptions, any such statements may be influenced by
factors that could cause actual outcomes and results to be materially different
from those projected. Important factors that could cause actual results to
differ materially from those in the forward-looking statements include, but are
not limited to:
- - increased competition and electric utility industry restructuring in the
United States,
- - the impact of the proposed AEP Merger, including any regulatory conditions
imposed on the merger or the inability to consummate the AEP Merger, or other
merger and acquisition activity,
- - federal and state regulatory developments and changes in law which may have a
substantial adverse impact on the value of CSW System assets,
- - the impact of general economic changes in the United States and in countries
in which CSW either currently has made or in the future may make investments,
- - timing and adequacy of rate relief,
- - adverse changes in electric load and customer growth,
- - climatic changes or unexpected changes in weather patterns,
- - changing fuel prices, generating plant and distribution facility performance,
- - decommissioning costs associated with nuclear generating facilities,
- - costs associated with any year 2000 computer-related failure(s) either within
the CSW System or supplier failures that adversely affect the CSW System,
- - uncertainties in foreign operations and foreign laws affecting CSW's
investments in those countries,
- - the effects of retail competition in the natural gas and electricity
distribution and supply businesses in the United Kingdom, and
- - the timing and success of efforts to develop domestic and international power
projects.
In the non-utility area, the previously mentioned factors apply and also
include, but are not limited to:
- - the ability to compete effectively in new areas, including telecommunications
and other energy-related services, and
- - evolving federal and state regulatory legislation and policies that may
adversely affect those industries generally or the CSW System's
business in areas in which it operates.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Reference is made to CSW's Consolidated Financial Statements and related
Notes to Consolidated Financial Statements. The information contained therein
should be read in conjunction with, and is essential in understanding, the
following discussion and analysis. The RESULTS OF OPERATIONS of CSW precede its
financial statements.
OVERVIEW
The electric utility industry is changing rapidly as it is becoming more
competitive. In anticipation of increasing competition and fundamental changes
in the industry, CSW's management is implementing a strategic plan designed to
help position CSW to be competitive in this rapidly changing environment and in
developing a global energy business.
CSW has undertaken key initiatives in the implementation of this overall
strategy. The centerpiece of these initiatives is the proposed merger between
AEP and CSW that was announced in December 1997 pursuant to which CSW would
become a wholly owned subsidiary of AEP. The proposed merger would join two
companies which are low cost providers of electricity and is expected to achieve
greater economies of scale than either company could achieve on its own. In
addition, CSW International continues to make investments in South America.
These initiatives are discussed in more detail below and elsewhere in this
report. See RECENT DEVELOPMENTS AND TRENDS - PROPOSED AEP MERGER and OTHER
INITIATIVES - DIVERSIFIED ELECTRIC.
Most states have considered the adoption of various legislative and
regulatory initiatives to restructure the electric utility industry and enact
retail competition, and several states, like Texas and Arkansas, have already
passed legislation that requires the implementation of retail access for
customers. In response to these changes, the CSW System is developing strategies
to appropriately deal with the changing environment. For example, the Texas
Electric Operating Companies have recently filed an unbundling plan in response
to legislation recently enacted in Texas. See RECENT DEVELOPMENTS AND TRENDS -
Industry Restructuring Initiatives in Arkansas, Oklahoma, Louisiana and Texas,
Texas Business Separation Plan and Securitization of Generation-related
Regulatory Assets and Stranded Costs.
CSW believes that compared to other electric utilities, the CSW System is
well positioned to capitalize on the opportunities resulting from an
increasingly deregulated and competitive market for the generation, transmission
and distribution of electricity. The CSW System should benefit from economies of
scale by virtue of its size and is a reliable and relatively low-cost provider
of electric power in its service area. Specifically, CSW will seek competitive
advantages through its diverse and stable customer base, competitive prices for
electricity, diversified fuel mix, extensive transmission interconnections,
diversity of regulation and financial flexibility. See RECENT DEVELOPMENTS AND
TRENDS for additional information. (The foregoing discussion contains
forward-looking statements within the meaning of Section 21E of the Exchange
Act. Actual results may differ materially from such projected information due to
changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION).
1
LIQUIDITY AND CAPITAL RESOURCES
Overview of Operating, Investing and Financing Activities
Net cash inflows from operating activities decreased $139 million to $803
million for the twelve month period ended December 31, 1999 compared to the same
period last year due primarily to increased payments on accounts payable, less
favorable fuel recovery positions and higher levels of fuel inventories related
to year 2000 contingency plans. Partially offsetting the decrease in cash flows
from operating activities was a lower change in accounts receivable balance in
1999 compared to 1998. Further offsetting the decrease in cash flows from
operating activities was the absence in 1999 of a refund paid to CPL customers
in 1998.
Net cash outflows from investing activities increased $123 million to $758
million during the twelve months ended December 31, 1999 compared to the same
period a year ago. The increase in net cash outflows from investing activities
was due primarily to higher levels of construction spending in 1999 at the U.S.
Electric Operating Companies and SEEBOARD. Also contributing to the increase in
cash outflows from investing activities were two transactions that occurred in
1998: (1) the sale of a portion of C3 Communication's interest in ChoiceCom and,
(2) the payment by CSW International's Altamira partner, Alpek, of a 50%
obligation related to the power plant project. The increase in net cash outflows
from investing activities was partially offset by cash inflows related to the
sale of a 50% interest in CSW Energy's Sweeny plant. Also partially offsetting
the increase in cash outflows from investing activities was the absence in 1999
of CSW International loans to Vale.
Net cash inflows from financing activities for the twelve months ended
December 31, 1999 were $71 million, a $296 million increase compared to a cash
outflow of $225 million for the same period in 1998. The increase in net cash
flows from financing activities was due primarily to higher proceeds from the
issuance of long-term debt and a higher level of change in short-term debt. Also
contributing to the increase in cash inflows from financing activities was the
absence in 1999 of the repayment of a $60 million variable rate bank loan at CSW
Services and the redemption of $28 million of preferred stock at SWEPCO.
Partially offsetting the increase in net cash inflows was a higher level of
long-term debt maturities and reacquisitions in 1999 compared to 1998 as well as
the redemption of $160 million of preferred stock at CPL.
The non-cash impacts of exchange rate differences on the translation of
foreign currency denominated assets and liabilities were recorded on a separate
line on the cash flow statement.
Internally Generated Funds
Internally generated funds, which consist of cash flows from operating
activities less common and preferred stock dividends, should meet most of the
capital requirements of the CSW System. However, CSW's strategic initiatives,
including expanding CSW's core electric utility and non-utility businesses
through acquisitions or otherwise, may require additional capital from external
sources. For a description of certain restrictions on CSW's ability to raise
capital from external sources, see MD&A, PROPOSED AEP MERGER and NOTE 15.
PROPOSED AEP MERGER. Productive investment of net funds from operations in
excess of capital expenditures and dividend payments is necessary to enhance the
long-term value of CSW for its investors. CSW is continually evaluating the best
use of internally generated funds, which totaled $426 million, $564 million and
$343 million for 1999, 1998 and 1997, respectively.
On December 2, 1999, OFGEM published its final price proposals from its
United Kingdom electricity distribution review. OFGEM has proposed revenue
reductions in SEEBOARD's distribution business of 21%. In addition, OFGEM has
proposed the reallocation of a further 12% of costs out of SEEBOARD's
distribution business into its supply business. These proposals were accepted on
December 20, 1999, and will take effect on April 1, 2000, and remain in effect
for five years. OFGEM's proposals will reduce net income for SEEBOARD in the
2
year 2000 by approximately $40 million, dependent upon the level of further cost
reductions that can be achieved, and by approximately $60 million in 2001. CSW's
net income from SEEBOARD U.S.A., its United Kingdom business segment, was $113
million for the twelve months ended December 31, 1999.
OFGEM's price proposals for SEEBOARD will have a material adverse effect
on the future results of operations of CSW, but are not be expected to adversely
affect the financial condition of CSW.
Capital Expenditures
The CSW System's need for capital results primarily from its construction
of facilities to provide reliable electric service to its customers. The
historical capital requirements of the CSW System have been primarily for the
construction of electric utility plant. However, current projected capital
expenditures are expected to be primarily for existing production, transmission
and distribution systems and for various non-utility investments. The U.S.
Electric Operating Companies maintain a continuing construction program, the
nature and extent of which is based upon current and estimated future demands
upon the system. Planned construction expenditures for the U.S. Electric
Operating Companies for the next three years are primarily to improve and expand
production, transmission and distribution facilities. These improvements will be
required to meet the anticipated needs of new customers and the growth in the
requirements of existing customers. These improvements will be funded primarily
through internally generated funds. However, some long-term financing will
likely be required.
CSW regularly evaluates its capital spending policies and generally seeks
to fund only those projects and investments that management believes will offer
satisfactory returns in the current environment. Consistent with this strategy,
the CSW System is likely to continue to make additional investments in
energy-related and non-utility businesses and will continue to search for other
electric utility properties to acquire. Primary sources of capital for these
expenditures are long-term debt, trust preferred securities and preferred stock
issued by the U.S. Electric Operating Companies, long-term and short-term debt
issued by CSW, as well as internally generated funds. Historically, the issuance
of common stock by CSW has also been a source of capital. CSW Energy and CSW
International typically use various forms of non-recourse project financing to
provide a portion of the capital required for their respective projects as well
as utilizing long-term debt for other investments. Although CSW and each of the
U.S. Electric Operating Companies expect to fund the majority of their
respective capital expenditures for their existing utility systems through
internally generated funds, for any significant investment or acquisition,
additional funds from the capital markets may be required. For a description of
certain restrictions on CSW's ability to make investments and raise capital from
external sources, including through the issuance of common stock, see MD&A
PROPOSED AEP MERGER and NOTE 15. PROPOSED AEP MERGER.
The historical and estimated capital expenditures for the CSW System,
including the U.S. Electric Operating Companies, SEEBOARD and other operations
are shown in the CAPITAL EXPENDITURES table. The amounts include construction
expenditures for the U.S. Electric Operating Companies and, for SEEBOARD and
CSW's other operations, construction expenditures and net equity investments.
The majority of the capital expenditures for the U.S. Electric Operating
Companies for 1997 through 1999 were spent on transmission and distribution
facilities. It is anticipated that the majority of the estimated capital
expenditures for 2000 through 2002 will be for production, transmission and
distribution facilities. For a description of certain restrictions on CSW's
ability to make capital expenditures, including through the issuance of common
stock, see PROPOSED AEP MERGER. (The table and statements below contain
forward-looking information within the meaning of Section 21E of the Exchange
Act. Actual results may differ materially from such projected information due to
changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION).
3
CAPITAL EXPENDITURES
Estimated Expenditures
1997 1998 1999 2000 2001 2002
------------------------------ --------------------------------
(millions including AFUDC)
CSW $901 $669 $774 $1,071 $817 $643
Estimated capital expenditures for 2000 - 2002 do not include expenditures
for acquisition-type investments.
Although CSW does not believe that the U.S. Electric Operating Companies
will require substantial additions of generating capacity over the next several
years, the U. S. Electric's internal resource plan presently anticipates that
any additional capacity needs will come from a variety of sources including
power purchases.
Inflation
Annual inflation rates, as measured by the U. S. Consumer Price Index,
have averaged approximately 2.0% during the three years ended December 31, 1999.
CSW believes that inflation, at this level, does not materially affect CSW's
results of operations or financial position. However, under existing regulatory
practice, only the historical cost of plant is recoverable from customers. As a
result, cash flows designed to provide recovery of historical plant costs may
not be adequate to replace plant in future years.
Financial Structure, Shelf Registrations and Credit Ratings As of December
31, 1999, the capitalization ratios of CSW were 47% common stock
equity, 4% Trust Preferred Securities and 49% long-term debt. CSW is committed
to maintaining financial flexibility through a strong capital structure and
favorable securities ratings in order to access capital markets
opportunistically or when required. CSW continually monitors the capital markets
for opportunities to lower its cost of capital through refinancing activities.
The estimated embedded cost of long-term debt for CSW at December 31, 1999 is
7.0%.
CSW can issue common stock, either through the purchase and reissuance of
shares from the open market or by issuing original shares, to fund its LTIP,
stock option plan, PowerShare plan and Retirement Savings Plan. CSW began
funding these plans through open market purchases on April 1, 1997. CPL has
shelf registration statements on file for the issuance of up to $60 million of
FMBs and up to $75 million of preferred stock. PSO has a shelf registration
statement on file for the issuance of up to $35 million of senior notes. SWEPCO
has a shelf registration statement on file for the issuance of up to $250
million of senior notes, of which $150 million was issued in the first quarter
of 2000. For a description of certain restrictions on CSW's ability to raise
capital from external sources, see PROPOSED AEP MERGER.
4
The current securities ratings for each of the Registrants is presented in
the following table, including the securities rating on the Trust Preferred
Securities issued by CPL Capital I, PSO Capital I and SWEPCO Capital I.
Moody's Duff & Phelps Standard & Poor's
---------------------------------------
CPL
First mortgage bonds A3 A A
Senior unsecured Baa1 A- A-
Preferred stock Baa1 BBB+ BBB+
Trust preferred (CPL
Capital I) Baa1 BBB+ BBB+
Junior subordinated
deferrable Interest
debentures Baa2 -- --
PSO
First mortgage bonds A1 AA- AA-
Senior unsecured A2 A+ A
Preferred stock a3 A+ A-
Trust preferred (PSO
Capital I) a2 A+ A-
Junior subordinated
deferrable Interest
debentures A3 -- --
SWEPCO
First mortgage bonds Aa3 AA AA-
Senior unsecured A1 AA- A
Preferred stock a1 AA- A-
Trust preferred (SWEPCO
Capital I) aa3 AA- A-
Junior subordinated
deferrable Interest
debentures A2 -- --
WTU
First mortgage bonds A2 A+ A
Senior unsecured A3 -- A-
Preferred stock a3 A BBB+
CSW
Commercial paper P-2 D-2 A-2
These securities ratings may be revised or withdrawn at any time, and each
rating should be evaluated independently of any other rating.
Long-Term Financing
On May 1, 1999, $100 million of CPL's 7.50% Series JJ FMBs matured, and on
December 1, 1999, $25 million of CPL's 7.125% Series DD FMBs matured. In June
1999, CPL reacquired $25 million of its 7.50% Series II FMBs, due April 1, 2023,
and in November and December 1999, CPL called $75 million of its money market
preferred stock and $85 million of its Series A and Series B preferred stock,
each at par.
In November 1999, CPL issued $200 million of unsecured floating rate notes
maturing November 23, 2001 and callable at par November 23, 2000. The interest
rate will reset quarterly at the then current three-month LIBOR plus 0.60%.
The reacquisition, redemptions and maturities were funded with short-term
debt and with proceeds from the issuance of the floating rate notes.
In November and December 1999, Matagorda County Navigation District No. 1
(Texas) sold for the benefit of CPL $111.7 million of 4.90% Series 1999A and $50
million of 4.95% Series 1999B unsecured tax exempt PCRBs. The bonds mature in
2030 but will be subject to remarketing and an interest rate reset in two years.
The proceeds were used to refund $111.7 million aggregate principal amount of
5
outstanding 7.50% Series T due December 15, 2014 and will be used to refund $50
million aggregate principal amount of outstanding 7.50% Series AA due March 21,
2020.
On January 1, 1999, $25 million of PSO's 7.25% Series K, FMBs matured. In
July 1999, the Oklahoma Development Finance Authority sold for the benefit of
PSO $33.7 million of 4.875% unsecured tax exempt PCRBs. The bonds mature in
fifteen years but will be subject to remarketing and an interest rate reset in
five years. In August 1999, the proceeds were used to refund $33.7 million
aggregate principal amount of outstanding Oklahoma Environmental Finance
Authority 5.9% Series A bonds due December 1, 2007.
On September 1, 1999, $40 million of SWEPCO's 6.125% Series W FMBs
matured.
On February 16, 2000, CPL sold $150 million of unsecured floating rate
notes. The bonds will have a two-year final maturity of February 22, 2002, but
may be redeemed at par after one year. The interest rate will reset quarterly at
the then current three-month LIBOR plus 0.45%. The initial rate, which was set
February 18, 2000, was 6.56%. Net proceeds of $149.6 million will be used to
refund $100 million of FMBs maturing April 1, 2000 and repay a portion of
short-term debt. CPL is replacing FMBs with unsecured debt, which provides more
financial flexibility as CPL unbundles its electric operations.
In the first quarter of 2000, SWEPCO sold $150 million of unsecured
floating rate notes. The notes will have a two-year final maturity at March 1,
2002, but may be redeemed at par after one year. The interest rate will reset
quarterly at the then current three-month LIBOR plus 0.23%. The initial rate,
which was set March 1, 2000, was 6.34%. Net proceeds of $149.6 million will be
used to refund $45 million of FMBs maturing April 1, 2000 and repayment of a
portion of outstanding short-term indebtedness.
Short-Term Financing and Accounts Receivable Factoring
The CSW System uses short-term debt, primarily commercial paper, to meet
fluctuations in working capital requirements and other interim capital needs.
CSW has established a system money pool to coordinate short-term borrowings for
certain of its subsidiaries, primarily the U.S. Electric Operating Companies. In
addition, CSW also incurs borrowings for other subsidiaries that are not
included in the money pool. As of December 31, 1999, CSW had revolving credit
facilities totaling $1.4 billion to back up its commercial paper program. At
December 31, 1999, CSW had $1.3 billion outstanding in short-term borrowings.
The maximum amount of short-term borrowings outstanding during the year, which
had a weighted average interest yield for the year of 5.5%, was $1.4 billion
during December 1999.
CSW Credit purchases, without recourse, the accounts receivable of the
U.S. Electric Operating Companies and certain non-affiliated electric utility
companies. The sale of accounts receivable provides the U.S. Electric Operating
Companies with cash immediately, thereby reducing working capital needs and
revenue requirements. In addition, CSW Credit's capital structure contains
greater leverage than that of the U.S. Electric Operating Companies, so CSW's
cost of capital is lowered. CSW Credit issues commercial paper to meet its
financing needs. At December 31, 1999, CSW Credit had a $1.2 billion revolving
credit agreement, secured by the assignment of its receivables, to back up its
commercial paper program, which had $754 million outstanding. The $1.2 billion
facility will expire on June 23, 2000. The maximum amount of such commercial
paper outstanding during the year, which had a weighted average interest yield
for the year of 5.3%, was $1.0 billion during August 1999.
CSW Energy and CSW International
CSW Energy has authority from the SEC to expend up to $250 million for
general development activities related to qualifying facilities and independent
power facilities. CSW Energy may seek specific authority to spend additional
amounts on certain projects subject to limitations contained in the AEP merger
6
agreement. See NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES, for a discussion
of CSW's investments and commitments in CSW Energy projects at December 31,
1999.
In January 1997, CSW received authority from the SEC under the Holding
Company Act to spend an amount up to 100% of consolidated retained earnings on
EWG or FUCO investments, subject to certain restrictions. As of December 31,
1999, CSW had invested an amount equal to 54% of consolidated retained earnings,
as defined by Rule 53 of the Holding Company Act, on EWG and FUCO investments.
For a description of certain restrictions on the ability of CSW and its
subsidiaries to make capital expenditures in respect of QFs and independent
power facilities and to make EWG and FUCO investments, see PROPOSED AEP MERGER.
RECENT DEVELOPMENTS AND TRENDS
PROPOSED AEP MERGER
On December 22, 1997, CSW and AEP announced that their boards of directors
had approved a definitive merger agreement for a tax-free, stock-for-stock
transaction. The combined company would serve more than 4.7 million customers in
11 states and approximately 4 million customers outside the United States. On
May 27, 1998, AEP shareholders approved the issuance of the additional shares of
stock required to complete the merger. On May 28, 1998, CSW stockholders
approved the merger. On December 16, 1999, the merger agreement was amended to
extend the term of the agreement to June 30, 2000. After June 30, 2000, either
party may terminate the merger agreement if the merger has not been consummated.
AEP is subject to the information requirements of the Securities and
Exchange Act of 1934, as amended, and in accordance therewith, files reports and
other information with the SEC. For additional information related to AEP, see
AEP's Current Reports on Form 8-K, its Quarterly Reports on Form 10-Q and its
Annual Report on Form 10-K and the documents referenced therein.
Under the AEP merger agreement, each common share of CSW will be converted
into 0.6 share of AEP common stock. CSW stockholders will own approximately 40%
of the combined company. CSW plans to continue to pay dividends on its common
stock until the closing of the AEP Merger at approximately the same times and
rates per share as in 1999, subject to the continuing evaluation of CSW's
earnings, financial condition and other factors by the CSW board of directors.
Under the AEP merger agreement, there will be no changes required with
respect to the public debt issues, the outstanding preferred stock or the Trust
Preferred Securities of CSW's subsidiaries.
AEP and CSW anticipate net savings related to the merger of approximately
$2 billion over a 10-year period from the elimination of duplication in
corporate and administrative programs, greater efficiencies in operations and
business processes, increased purchasing efficiencies and the combination of the
two work forces. As a result of the approved settlement and agreement with the
state commissions in CSW and AEP's respective service territories, AEP and CSW
have agreed to guarantee that approximately 55% of those savings will be passed
through to their customers. AEP and CSW continue to seek opportunities for
additional savings and expect to realize significant additional savings based
upon the work of the merger transitions teams over the last two years. The
preceding discussion constitutes forward-looking information within the meaning
of Section 21E of the Exchange Act. Actual results may differ materially from
such projected information. See FORWARD-LOOKING INFORMATION.
7
The electric systems of AEP and CSW will operate on an integrated and
coordinated basis as required by the Holding Company Act. AEP and CSW project
fuel savings of approximately $98 million over a 10-year period resulting from
the coordinated operation of the combined company, which will be passed through
to customers.
The AEP merger agreement contains covenants and agreements that restrict
the manner in which the parties may operate their respective businesses until
the time of closing of the merger. In particular, without the prior written
consent of AEP, CSW may not engage in a number of activities that could affect
its sources and uses of funds. Pending closing of the merger, CSW's and its
subsidiaries' strategic investment activity, capital expenditures and non-fuel
operating and maintenance expenditures are limited to specific agreed upon
projects and in agreed upon amounts. In addition, prior to consummation of the
merger, CSW and its subsidiaries are restricted from:
- - Issuing shares of common stock other than pursuant to employee benefit plans;
- - Issuing shares of preferred stock or similar securities other than to
refinance existing obligations or to fund permitted investment or capital
expenditures; and
- - Incurring indebtedness other than pursuant to existing credit facilities, in
the ordinary course of business, or to fund permitted projects or capital
expenditures. These limitations do not preclude CSW and its subsidiaries from
making investments and expenditures in amounts previously budgeted.
Cook Nuclear Plant
On June 25, 1999, AEP announced a comprehensive plan to restart the idle
Cook nuclear power plant. Unit 2 is scheduled to return to service in April
2000, and Unit 1 is scheduled to return to service in September 2000. AEP stated
that its announcement follows a comprehensive systems readiness review of all
operating systems at Cook nuclear power plant and a cost/benefit analysis of
whether to restart the plant or shut it down completely. Plant officials
originally shut down both units of the facility, located in Bridgman, Michigan,
in September 1997 because of questions raised during a design inspection by the
NRC. AEP estimated that its costs to restart the idle plant should be
approximately $574 million, of which $373 million has been spent through
December 31, 1999.
On February 24, 2000, AEP announced a three-week delay in the planned
April 1, 2000 restart. The delay is due to issues encountered during testing of
equipment necessary for core reload and power operations of its Cook Unit 2. The
testing process continues and may still encounter additional items that could
extend the delay.
Merger Regulatory Approvals
The merger is conditioned, among other things, upon the approval of
several state and federal regulatory agencies. Some of the merger conditions
cannot be waived.
State Regulatory Commissions
The U.S. Electric Operating Companies have received approval for the
merger from their respective state regulatory commissions in Arkansas,
Louisiana, Oklahoma and Texas.
FERC
On April 30, 1998, AEP and CSW jointly filed a request with the FERC for
approval of their proposed merger. On May 25, 1999, AEP and CSW announced they
had reached a settlement with the FERC trial staff resolving competition and
rate issues that related to the proposed merger. On July 13, 1999, AEP and CSW
reached an additional settlement with the FERC trial staff resolving energy
8
exchange pricing issues. The settlements were submitted to the FERC for
approval. Hearings at the FERC concluded on July 19, 1999. On November 23, 1999,
the ALJ who presided over the FERC merger hearing issued a recommendation to the
FERC that the merger be approved and found that the proposed merger is in the
public interest.
On March 15, 2000, the FERC conditionally approved the merger. Conditions
placed on the merger include:
- - Transfer operational control of AEP's east and west transmission
systems to a fully-functioning, FERC-approved regional transmission
organization by December 15, 2001, which is the same implementation
date included in the FERC's general order for regional transmission
organizations that applies to all transmission-owning utilities.
- - Two interim transmission-related mitigation measures consisting of
market monitoring and independent calculation and posting of available
transmission capacity to monitor the operation of AEP's east
transmission system.
- - Divestiture of 550 MW of generating capacity comprised of 300 MW of
capacity in SPP and 250 MW of capacity in ERCOT. The FERC will require
AEP and CSW to divest their entire ownership interest in the generating
facilities that are to be divested. Alternatively, AEP and CSW may
choose to divest the same or greater amount of capacity from different
generating plants in their entirety. However, such generating plants
must be of similar cost, operation and location characteristics of
generating plants AEP and CSW originally proposed.
- - AEP and CSW must complete divestiture of the ERCOT capacity by March
15, 2001 and divestiture of the SPP capacity by July 1, 2002.
The FERC found that certain energy sales in SPP and ERCOT would be
reasonable and effective interim mitigation measures until completion of the
required SPP and ERCOT divestitures. The FERC will require the proposed interim
energy sales to be in effect when the merger is consummated.
AEP and CSW must notify the FERC by March 30, 2000 whether they accept the
condition that they transfer operational control of their transmission
facilities to a fully-functioning, FERC-approved regional transmission
organization by December 15, 2001 and the condition requiring the interim
mitigation measures. If AEP and CSW accept the conditions, then AEP and CSW must
make a compliance filing at least 60 days prior to consummation of the merger
describing their plan to implement the interim mitigation measures. AEP and CSW
intend to make this compliance filing on a date that would permit completion of
the merger in the second quarter of 2000. AEP and CSW believe they can address
the conditions.
NRC
On June 19, 1998, CPL filed a license transfer application with the NRC
requesting the NRC's consent to the indirect transfer of control of CPL's
interests in the NRC licenses issued for STP from CSW to AEP. CPL would continue
to own its 25.2% interest in STP, and CPL's name would remain on the NRC
operating license. On November 5, 1998, the NRC approved the license transfer
application with a condition that the merger must be completed by December 31,
1999. The NRC has extended the condition relating to completion of the merger to
June 30, 2000.
Other Federal
On October 13, 1998, AEP and CSW jointly filed an application with the SEC
for approval of the proposed merger. The SEC merger filing requests approval of
the merger and related transactions and outlines the expected combined company
benefits of the merger to AEP and CSW customers and shareholders. Since then,
9
AEP and CSW have filed several amendments to the application. Several parties
have filed petitions opposing the proposed merger at the SEC which have not been
withdrawn.
On July 29, 1999, applications were made with the FCC to authorize the
transfer of control of licenses of several CSW entities to AEP. In February
2000, the FCC authorized the transfer which will be effective upon the
completion of the proposed merger.
On July 26, 1999, AEP and CSW submitted filings to the Department of
Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. On
February 2, 2000, AEP and CSW announced that their proposed merger received
antitrust clearance from the Department of Justice.
United Kingdom
CSW has a 100% interest in SEEBOARD, and AEP has a 50% interest in
Yorkshire. The proposed merger of CSW into AEP would result in common ownership
of these United Kingdom entities. On January 25, 2000, the United Kingdom's
Department of Trade and Industry approved the common ownership of the United
Kingdom entities that would result from the proposed merger, subject to certain
conditions concerning the separate operation of their respective distribution
and supply businesses.
Other
On April 20, 1999, AEP reached a settlement with the Indiana Utility
Regulatory Commission staff addressing matters pertinent to Indiana regarding
the proposed merger. The Indiana Utility Regulatory Commission approved the
settlement on April 26, 1999. The settlement agreement resulted from an
investigation of the proposed merger between AEP and CSW initiated by the
Indiana Utility Regulatory Commission.
On April 21, 1999, AEP and CSW announced that they had reached separate
settlements with six wholesale customers that address issues related to the
proposed merger.
On April 28, 1999, AEP and CSW announced that they ratified a settlement
agreement with local unions of the IBEW representing employees of AEP and CSW.
The settlement agreement covered issues related to the pending merger between
AEP and CSW. As part of the settlement, the IBEW local unions have withdrawn
their opposition to the merger.
On May 26, 1999, AEP and CSW announced that they had reached a settlement
agreement with the Kentucky Attorney General and several AEP customers in
Kentucky addressing matters pertinent to Kentucky regarding the pending merger
between AEP and CSW. The Kentucky Public Service Commission has approved the
settlement.
On August 6, 1999, AEP announced that it had ratified a settlement
agreement with local unions of the UWUA representing employees of AEP. The
settlement agreement covered issues raised in the pending merger between AEP and
CSW. As part of the settlement, the UWUA local unions will not oppose the
merger.
On October 21, 1999, the Public Utility Commission of Ohio issued a
decision stating that it will notify the FERC that it is no longer opposed to
AEP's proposed merger with CSW and that it will no longer seek conditions to the
merger.
AEP and CSW also have reached settlements with the Missouri Public Service
Commission, the Michigan Public Service Commission and various wholesale
customers and intervenors in the FERC merger proceeding.
10
Completion of the Merger
AEP and CSW have targeted consummation of the AEP Merger in the second
quarter of 2000. The merger is conditioned, among other things, upon the
approval of several state and federal regulatory agencies. All of such
approvals, except from the SEC, have been obtained. The transaction must satisfy
many conditions, including the condition that it must be accounted for as a
pooling of interests. The parties may not waive some of these conditions. AEP
and CSW continue the process of seeking regulatory approvals, but there can be
no assurance as to when, on what terms or whether the required approvals will be
received. After June 30, 2000, either CSW or AEP may terminate the merger
agreement if all of the conditions to its obligation to close have not been
satisfied. There can be no assurance that the AEP Merger will be consummated.
Merger Costs
As of December 31, 1999, CSW had deferred $43 million in costs related to
the AEP Merger on its consolidated balance sheet, which will be charged to
expense if AEP and CSW do not complete their proposed merger. If the merger is
consummated, such costs would be recovered in rates pursuant to merger sharing
provisions contained in the state settlement agreements.
See NOTE 15. PROPOSED AEP MERGER.
COMPETITION AND INDUSTRY CHALLENGES
Competitive forces at work in the electric utility industry are affecting
the CSW System and other electric utilities, generally. Increased competition
facing electric utilities is driven by complex economic, political and
technological factors. These factors have resulted in legislative and regulatory
initiatives that are likely to result in even greater competition at both the
wholesale and retail levels in the future. As competition in the industry
increases, the U.S. Electric Operating Companies will have the opportunity to
seek new customers and at the same time be at risk of losing customers to other
competitors. Additionally, the U.S. Electric Operating Companies will continue
to compete with suppliers of alternative forms of energy, such as natural gas,
fuel oil and coal, some of which may be less expensive than electricity. In the
United Kingdom, the franchised electricity supply business opened to full
competition on a phased-in basis beginning October 1998. As a result, SEEBOARD
is able to seek new customers while risking the loss of existing customers to
other competitors. CSW believes that, overall, its prices for electricity and
the quality and reliability of its service currently place it in a position to
compete effectively in the energy marketplace. (The foregoing statement
constitutes a forward-looking statement within the meaning of Section 21E of the
Exchange Act. Actual results may differ materially from such projected
information due to changes in the underlying assumptions. See FORWARD-LOOKING
INFORMATION). See RATES AND REGULATORY MATTERS for a discussion of several
current issues affecting the CSW System.
Electric industry restructuring and the development of competition in the
generation and sale of electric power requires resolution of several important
issues, including, but not limited to:
- - Who will bear the costs of prudent utility investments or past
commitments incurred under traditional cost-of-service regulation that
will not be economically viable in a competitive environment, sometimes
referred to as stranded costs;
- - Whether all customers have access to the benefits of competition;
- - How, and by whom, the rules of competition will be established;
11
- - What the impact of deregulation will be on conservation, environmental
protection and other regulator-imposed programs; and
- - How transmission system reliability will be ensured.
The degree of risk to CSW and the U.S. Electric Operating Companies
associated with various federal and state restructuring proposals aimed at
resolving any or all of these issues will vary depending on many factors,
including the proposals' competitive position and treatment of stranded utility
investment, primarily at CPL, resulting from such proposals. In CSW's service
territory, the states of Arkansas and Texas have passed legislation addressing
most of these issues while work continues on the remaining issues. The U.S.
Electric Operating Companies believe they are in a position to compete
effectively in a deregulated, more competitive marketplace. However, if events
and circumstances arise in the future that would indicate all costs previously
incurred are not recoverable from customers, then the U.S. Electric Operating
Companies may be required by existing accounting standards to recognize
potentially significant losses from unrecovered costs. (The foregoing statement
constitutes a forward-looking statement within the meaning of Section 21E of the
Exchange Act. Actual results may differ materially from such projected
information due to changes in the underlying assumptions. See FORWARD-LOOKING
INFORMATION). See Regulatory Accounting for additional information. See NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility Restructuring
Legislation for information on electric utility restructuring.
Wholesale Electric Competition in the United States
The Energy Policy Act, which was enacted in 1992, significantly altered
the way in which electric utilities compete. The Energy Policy Act created
exemptions from regulation under the Holding Company Act and permits utilities,
including registered utility holding companies and non-utility companies, to own
EWGs.
EWGs are wholesale power producers that are free from most federal and
state regulation, including restrictions under the Holding Company Act. These
provisions enable broader participation in wholesale power markets by reducing
regulatory hurdles to such participation.
The Energy Policy Act also allows the FERC, on a case-by-case basis and
with certain restrictions, to order wholesale transmission access and to order
electric utilities to enlarge their transmission systems. A FERC order requiring
a transmitting utility to provide wholesale transmission service must include
provisions generally that permit the utility to recover from the FERC applicant
all of the costs incurred in connection with the transmission services and any
enlargement of the transmission system and associated services.
Wholesale energy markets, including the market for wholesale electric
power, have been increasingly competitive since enactment of the Energy Policy
Act. The U.S. Electric Operating Companies must compete in the wholesale energy
markets with other public utilities, cogenerators, QFs, EWGs and others for
sales of electric power. While CSW believes the Energy Policy Act will continue
to make the wholesale markets more competitive, CSW is unable to predict how the
Energy Policy Act will ultimately impact the U.S. Electric Operating Companies.
FERC Orders No. 888 and No. 889
The FERC issued Order No. 888 in 1996, which is the final comparable open
access transmission service rule. The provisions of FERC Order No. 888 provide
for comparable transmission service between utilities and their transmission
12
customers by requiring utilities to take transmission service under their open
access tariffs for wholesale sales and purchases and by requiring utilities to
rely on the same transmission information that their transmission customers rely
on to make wholesale purchases and sales.
In addition, the Texas Commission adopted amendments to its transmission
rule in 1999 that requires 100% postage stamp pricing in ERCOT which began in
September 1999. Postage stamp pricing is fixed rate pricing regardless of
transmission distance traveled. CPL and WTU began recording transmission
revenues and expenses in accordance with the Texas Commission's transmission
rule on January 1, 1997.
In 1996, the FERC issued Order No. 889 requiring transmitting utilities to
establish and operate an OASIS for the dissemination of information regarding
available transfer capability for their respective transmission systems. The
OASIS is an on-line information system that provides the same information about
the utility's transmission system to all transmission customers. The U.S.
Electric Operating Companies utilize, and participate in the OASIS systems for
ERCOT and SPP. FERC Order No. 889 also created standards of conduct requiring
utilities to operate any wholesale power sales business separately from their
transmission operations. The standards of conduct are designed to ensure that
utilities and their affiliates, as sellers of power, do not have preferential
access to information about wholesale transmission prices and availability.
Independent System Operators
On December 20, 1999, the FERC issued Order No. 2000 relating to RTOs.
FERC Order No. 2000 describes the characteristics that an RTO should have as
well as the functions an RTO should perform. Every jurisdictional utility must
file at the FERC either:
- - A proposal to participate in an RTO;
- - A petition asking whether a proposed transmission entity would qualify as an
RTO, or
- - An alternative filing describing the utility's efforts to participate in an
RTO and the reasons those efforts were unsuccessful.
Such filings must be made by October 15, 2000 for utilities that are not
members of a FERC approved ISO. Utilities that are members of a FERC approved
ISO have until January 15, 2001, to file with the FERC demonstrating compliance
of their ISOs with FERC Order 2000. On December 30, 1999, the SPP filed at the
FERC a proposal for recognition as an ISO and an RTO. In addition, on September
7, 1999, the SPP submitted various tariff revisions to the FERC that resulted in
an SPP open access tariff offering all of the services required by FERC Order
No. 888 as of February 1, 2000.
Retail Electric Competition in the United States
Most states have considered the adoption of various legislative and
regulatory initiatives to restructure the electric utility industry and enact
retail competition, and several states have already passed legislation that
requires the implementation of retail access for customers.
Industry Restructuring Initiatives in Arkansas, Oklahoma, Louisiana and
Texas
Several initiatives to restructure the electric utility industry and enact
retail competition legislation have been undertaken in the four states in which
the U.S. Electric Operating Companies operate. Arkansas, Oklahoma and Texas have
enacted restructuring legislation.
13
Arkansas
In April 1999, legislation was enacted for electric utility restructuring
in Arkansas. Some major provisions of that legislation include:
- - Retail competition begins January 1, 2002. The Arkansas Commission can
delay implementation, but not beyond June 30, 2003.
- - Companies with transmission lines must operate those facilities through
a transmission organization approved by FERC.
- - A one-year rate freeze after restructuring will be implemented for
default service customers of companies that do not apply for stranded
cost recovery. A three-year rate freeze will be implemented for
companies with stranded costs.
- - The Arkansas Commission has authority to address market power issues.
Oklahoma
In 1997, the Oklahoma legislature passed restructuring legislation
providing for retail access by July 1, 2002. That legislation called for a
number of studies to be completed on a variety of restructuring issues,
including independent system operator, technical, financial, transition and
consumer issues. The study on independent system operator issues was completed
in January 1998.
In 1998, the Oklahoma Legislature passed Senate Bill 888, which
accelerated the schedule for completion of the remaining studies to October
1999. Those studies were conducted under the direction of the Legislative Joint
Electric Utility Task Force. The task force organized the study effort into
several working groups, which were directed to evaluate assigned issues. On
October 1, 1999, the task force completed its report to the Oklahoma
Legislature based on the work performed by these working groups. The report
primarily is a compilation of the positions taken by the various parties
participating in the working groups. The information, in the report, is
expected to be used in the development of additional industry legislation
during the 2000 legislative session.
Several additional electric industry restructuring bills have been filed
in the 2000 Oklahoma Legislative session. The proposed bills generally
supplement the industry restructuring legislation previously enacted in
Oklahoma. CSW is unable to predict what, if any, additional legislation will be
passed on industry restructuring.
Louisiana
In 1998, a special legislative committee created by the Louisiana Senate
studied the impact of retail competition on the state of Louisiana. No
legislation was enacted as a result of that effort. In addition, during 1998
and 1999, the Louisiana Commission conducted a proceeding to study
restructuring and retail competition. Since the Louisiana Commission is a
constitutionally created body, it can implement industry restructuring on its
own without additional legislation. Parties submitted comments, and hearings
were held on a number of specific restructuring topics. Also, as a part of that
proceeding, utilities filed rate unbundling information with the Louisiana
Commission staff.
As a result of those hearings, the Louisiana Commission staff released its
report on industry restructuring, including its recommendations regarding
retail competition in Louisiana. In its report, the Louisiana Commission staff
recommended that electric industry restructuring should not proceed at this
14
time because it is not in the public interest. However, the Louisiana
Commission staff proposed a restructuring plan as an alternative, in the event
the Louisiana Commission decides to move forward with electric industry
restructuring and competition. The Louisiana Commission voted to begin
additional study and analysis of the issues associated with restructuring and
has adopted a procedural schedule that will result in a final restructuring
plan by January 1, 2001.
Texas
On June 18, 1999, legislation was signed into law in Texas that will
restructure the electric utility industry in that state. The new law gives Texas
customers of investor-owned utilities the opportunity to choose their electric
provider beginning January 1, 2002. The legislation also provides a rate freeze
until that date followed by a 6% rate reduction for residential and small
commercial customers, additional rate reductions for low income customers and a
number of customer protections. Rural electric cooperatives and municipal
electric systems can choose whether to participate in retail competition.
Some of the key provisions of the legislation include:
- - Each utility must unbundle its business activities into a retail electric
provider, a power generation company and a transmission and distribution
utility. Beginning January 1, 2002, retail customers of investor-owned
electric companies will be able to choose their retail electric provider.
The affiliated retail electric provider of the utility that serves the
customer on December 31, 2001 will serve the customer unless the customer
chooses another retail electric provider. Delivery of the electricity
will continue to be the responsibility of the transmission and
distribution utility company at regulated prices.
- - Retail electric cooperatives and municipal electric systems can choose
whether to participate in retail competition.
- - Investor-owned utilities must freeze their rates effective September 1,
1999, through the start of competition on January 1, 2002.
Investor-owned utilities at January 1, 2002 will lower rates for
residential and small commercial customers by 6%. This reduced rate is
known as the "Price to Beat," which will be available to those
customers for five years.
- - The legislation establishes a system benefit fund for low-income
customer assistance, customer education and to offset reductions in
school property tax revenues. The fund will be funded through a charge
on retail electric providers that can be set by the Texas Commission up
to $0.65 per MWH.
- - Electric utilities are allowed to recover all of their net, verifiable,
non-mitigable stranded costs that otherwise may not be recoverable in
the future competitive market. A majority of those regulatory assets
and stranded costs can be recovered through securitization, which is a
financing to recover generation-related regulatory assets and stranded
costs through the use of debt that lowers the carrying cost of assets
compared to conventional utility financing methods.
- - Each year during the 1999 through 2001 rate freeze period, utilities
with stranded costs are required to apply any earnings in excess of the
most recently approved cost of capital (if issued on or after January
1, 1992) to reduce stranded costs. Utilities without stranded costs
must either flow such amounts back to customers or make capital
expenditures to improve transmission or distribution facilities or to
improve air quality.
15
- - The affiliated power generation company of the utility that serves the
customer on December 31, 2001 will be required to auction entitlements
to at least 15% of its generating capacity for five years or until 40%
of the residential and small commercial consumption of electricity in
the utility's service area is provided by nonaffiliated retail electric
providers.
- - Grandfathered power plants, those built or started prior to
implementation of the Texas Clean Air Act of 1972, must reduce
emissions of nitrogen oxide by 50% and sulfur dioxide by 25% by May
2003. The law also requires an additional 2,000 MW of renewable power
generation in Texas by 2009 from retail electric providers, municipally
owned utilities and electric cooperatives.
- - A legislative oversight committee will monitor the implementation and
effectiveness of electric utility restructuring and make
recommendations for any necessary further legislative action.
The Texas Commission has established numerous rulemakings and other
processes to address various issues associated with the restructuring
legislation and to provide for further guidance regarding implementation of the
restructuring.
Restructuring Readiness
CSW has initiated a restructuring readiness effort to prepare for
competition in the states served by the U.S. Electric Operating Companies. This
effort includes the development and implementation of a business separation plan
and the system and process changes required to prepare for competition. The
business separation plan filed with the Texas Commission in January, 2000, is
discussed below. An analysis of the processes and systems in place and those
needed in the future has been completed, and CSW is beginning the implementation
phase of the restructuring readiness effort.
Texas Business Separation Plan
On January 10, 2000, CSW filed with the Texas Commission its business
separation plan required by the Texas Legislation on electric utility
restructuring. The business separation plan describes the approach proposed by
CSW to unbundle the business activities of each of its Texas Electric Operating
Companies into three entities: the PGC, the EDC and the REP. Under CSW's
business separation plan, all three new entities would continue to be owned by
CSW. The PGC would own a CPL PGC and a WTU PGC. The EDC would own CPL, WTU and
SWEPCO EDCs. Although the plan is directed to meet the requirements of the Texas
Legislation, CSW expects the plan will also meet the restructuring requirements
anticipated to be enacted in Arkansas, Louisiana and Oklahoma.
As a result of rulings by the Texas Commission on March 16, 2000, CSW's
unbundling will include full structural separations for CPL and WTU by January
1, 2002. This includes the structural separation of the management and control
of the EDCs from the PGCs as well as the creation of a separate REP. For CPL and
WTU, unbundling will require that legal ownership of generation, transmission
and distribution assets will be separated and transferred to or vested in new
entities, the CPL and WTU PCGs and EDCs, respectively. The CPL and WTU EDCs
would be regulated utilities under Texas law. Office systems, computer systems,
accounting systems and similar equipment would be segregated and an employee
code of conduct would restrict information exchanges between employees of the
regulated entities and the other business units. Because SWEPCO also is
regulated in Arkansas and Louisiana, the Texas Commission deferred its decision
on the appropriate separation for SWEPCO until interested parties have an
opportunity to discuss issues that could result in a separation plan acceptable
in each state. CSW believes that its total cost to restructure the CSW System,
which includes costs for the EDC, PGC and REP in implementing retail competition
in its service territory is approximately $200 million, including refinancing
costs of approximately $70 million. Recognition in rates of the Texas
16
jurisdictional EDC portion of these costs will be sought in the Texas Electric
Operating Companies' cost unbundling filings to establish new EDC regulated
rates during the year 2000.
Code of Conduct Under Customer Choice
Legislation was enacted in Arkansas and Texas in 1999 to restructure the
electric utility industry in those states. These two new laws require that the
CSW System begin to operate its utilities as separate power generation entities,
retail electric providers and transmission and distribution entities. Power
generation entities and retail electric providers will be non-regulated;
transmission and distribution entities will continue to be regulated. On or
before September 1, 2000, the Texas operations portion of each of the U.S.
Electric Operating Companies will functionally separate their regulated and
non-regulated utility activities.
The purpose of these laws and the separation they impose is to create
financial and informational firewalls between regulated and non-regulated
activities of the CSW System so that competitive sensitive information cannot be
shared by regulated and non-regulated entities.
In order to comply with the new Arkansas and Texas laws, the Registrants
will follow a "code of conduct," which requires the non-regulated business
activities to be separate from the regulated activities. Transactions between
the regulated and non-regulated activities are subject to an information-sharing
"firewall" and the requirement to act on an arm's-length basis.
Other
Management cannot predict the ultimate outcome of the initiatives
concerning restructuring and retail competition in Arkansas, Louisiana, Oklahoma
and Texas, or their ultimate impact on results of operations, financial
condition, or competitive position of CSW and the U.S. Electric Operating
Companies.
Holding Company Act and Electric Industry Restructuring Legislation
In 1995, the SEC issued a report to the U.S. Congress advocating repeal of
the Holding Company Act, which restricts certain activities of CSW and other
registered holding companies, finding the Holding Company Act anachronistic and
duplicative of other federal and state regulatory regimes.
HR 2944, "The Electricity Competition and Reliability Act," was reported
by the House Commerce Subcommittee on Energy and Power on October 27, 1999. If
enacted, the legislation would repeal the Holding Company Act twelve months
after the bill is signed into law and clarifies that states have the authority
to order retail competition without a federal mandate.
The U.S. Congress continues to consider legislative initiatives, which
provide for the restructuring and/or deregulating of the electric utility
industry. Several similar bills have been introduced in the 106th Congress. Most
of the bills seek to clarify state authority to mandate retail choice, repeal
the Holding Company Act, repeal the Public Utility Regulatory Policies Act of
1978, expand FERC authority over public power entities, address transmission
reliability and other issues. Management cannot predict the ultimate outcome of
any legislative initiatives.
Regulatory Accounting
Consistent with industry practice and the provisions of SFAS No. 71, which
allows for the recognition of regulatory assets, the U.S. Electric Operating
Companies have recognized significant regulatory assets and liabilities. As a
result of legislation passed in Arkansas and Texas, the retail electricity
generation business of CPL, SWEPCO and WTU, in those jurisdictions, no longer
meets the criteria to apply SFAS No. 71. Instead, the principles of SFAS No.
17
101, as interpreted by EITF 97-4, have been applied. Management believes that
CPL, SWEPCO and WTU currently meet the criteria for following SFAS No. 71 for
the remainder of their electric utility business.
Additional non-cash write-offs of regulatory assets and liabilities would
be required if additional portions of the electric utility business of the U.S.
Electric Operating Companies no longer meet the criteria for applying SFAS No.
71, absent a means of recovering such assets or settling such liabilities. For
additional information regarding regulatory accounting, reference is made to
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Securitization of Generation-related Regulatory Assets and Stranded Costs
Electric utilities under the Texas Legislation are allowed to recover
generation-related regulatory assets and stranded costs that otherwise may not
be recoverable in the future competitive market. All or a majority of those
costs can be refinanced through securitization, which is a financing structure
designed to provide lower financing costs than is available through the
conventional utility cost of capital model. The securitized amounts are then
recovered through a non-bypassable wires charge. On October 18, 1999, CPL filed
an application with the Texas Commission to securitize approximately $1.27
billion of its retail generation-related regulatory assets and approximately $47
million in other qualified costs. The Texas Commission held hearings on December
7 and 8, 1999 on CPL's securitization application.
On February 10, 2000, the Texas Commission tentatively approved a
settlement, which will permit CPL to securitize approximately $764 million of
regulatory assets. The Texas Commission is expected to grant final approval by
March 27, 2000. If approval is received from the Texas Commission, CPL expects
to issue the securitization bonds in 2000, depending on market conditions and
the timing of any appeals of the Texas Commission order.
The settlement calls for CPL to reduce its proposed amount to be
securitized from $1.27 billion to approximately $764 million of regulatory
assets plus an estimated $29 million of other qualified costs. The settlement
also calls for $290 million of the amount originally requested to be included in
the calculation of stranded costs in CPL's April 2000 transmission and
distribution cost filing. This filing will establish stranded costs, of which
75% can be securitized and 25% can be recovered through a competitive transition
charge.
The securitization amount was reduced by $186 million from the amount
originally requested to reflect customer benefits associated with accumulated
deferred income taxes. CPL previously had proposed to flow these benefits back
to customers over a 14-year term of the bonds.
CPL could issue the bonds associated with securitization as early as April
2000, depending on timing of receipt of a non-appealable financing order from
the Texas Commission and depending on market conditions. A second phase of
securitization could occur when the Texas Commission makes a preliminary
determination of stranded costs, currently expected to occur in the first half
of 2001. CPL's stranded costs are subject to a final determination by the Texas
Commission in 2004.
Under the provisions of EITF 97-4, CPL's generation-related net regulatory
assets were transferred to the transmission and distribution portion of the
business and will be amortized as they are recovered through charges to
customers. Management currently believes all generation-related regulatory
assets for CPL will be recovered as provided under the Texas Legislation. If
future events were to occur that made the recovery of these assets no longer
probable, CPL would write-off any non-recoverable portion of such assets as a
non-cash charge to earnings.
18
CPL believes it will also have stranded costs, which are the excess of net
book value of generation assets as defined over the market value of those
assets. CPL's amount of regulatory assets and stranded costs are subject to a
final determination by the Texas Commission in 2004. The Texas Legislation
provides that all such finally determined stranded costs will be recovered.
Since SWEPCO and WTU are not expected to have net stranded costs, all
generation-related non-recoverable net regulatory assets were written off and
are reflected on their statements of income as an extraordinary loss in 1999.
See NOTE 16. EXTRAORDINARY ITEMS.
CPL, SWEPCO and WTU performed an accounting impairment analysis of
generation assets under SFAS No. 121 at September 30, 1999, and concluded there
was no impairment of generation assets at that time. An impairment analysis
involves estimating future net cash flows arising from the use of an asset. If
the net cash flows exceed the net book value of the asset, then there is no
impairment of the asset for accounting purposes. CPL, SWEPCO and WTU will
continue to review their assets for potential impairment if events or changes in
circumstances indicate the carrying cost of an asset may not be recoverable.
Beginning January 1, 2002, fuel costs will not be subject to Texas
Commission fuel reconciliation proceedings. Consequently, CPL, SWEPCO, and WTU
will file a final fuel reconciliation with the Texas Commission reconciling fuel
costs through the period December 31, 2001. These final fuel balances will be
included in each company's true-up proceeding in 2004.
CPL - Wholesale Customers
Certain CPL wholesale customers have given notice of their intent to
terminate their contracts when they expire in 2001 through 2004. During 1999,
these customers represented 3% of CPL's total electric operating revenues.
PSO Union Negotiations
In March 1999, PSO and its Local Union 1002 of the IBEW reached an
agreement for contract negotiations, which began in July 1996. In December 1996,
PSO had implemented portions of its then final proposal after declaring an
impasse. The principal issue of disagreement involved PSO's need for flexibility
in a deregulated environment. In April 1997, Oklahoma's governor signed into law
an electric industry restructuring bill. The law mandates the implementation of
retail competition to begin on July 1, 2002. Following the passage of the law,
PSO negotiated a new contract with the union. The new contract allows PSO to be
in a better position to compete in a deregulated environment. The effective date
of the new agreement was April 4, 1999, and it will remain in effect until
September 30, 2000. As a result of the agreement, the union agreed to withdraw
its opposition to the AEP Merger proceedings.
In October 1998, PSO received an adverse ruling from a NLRB ALJ on the
union's unfair labor practice charge against PSO. The ALJ ruled that PSO did
negotiate in good faith but that PSO's position on some issues was too harsh,
and therefore the December 1996 implementation of PSO's then final proposal
should be rolled back and employees made whole from that date. The ALJ upheld
PSO's right to cease collecting union dues through payroll deductions.
Additionally, the ALJ ruled that PSO improperly solicited employees to withdraw
from the union. In December 1998, PSO appealed the ALJ's ruling to the NLRB. In
June 1999, PSO made a settlement offer to the union to resolve the pending
charges against PSO. The union rejected this offer and indicated it would wait
for a ruling from the NLRB before deciding on further action. Should PSO receive
an adverse ruling from the NLRB, PSO will have the option of appealing that
decision to a circuit court. At this time, management cannot predict the
ultimate outcome of the NLRB matter. However, management believes that it will
not have a material adverse effect on CSW's results of operations or financial
condition. The preceding discussion constitutes forward-looking information
19
within the meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information. See FORWARD-LOOKING INFORMATION.
WTU Changes in Operations
On February 22, 2000, WTU announced that as a result of an operational
review, the WTU Merchandise Program was being discontinued as of September 30,
2000, since the merchandise program no longer fits WTU's business strategy.
Under the merchandise program, WTU sold electric appliances and other items at
local offices across the WTU service territory.
WTU also announced that as part of the operational review, bill payments
and other traditional customer transactions would no longer be accepted at local
offices as of September 30, 2000. Due to improvements in technology, WTU offers
bill payment service through the Internet as well as other alternative payment
programs.
WTU estimates that 65 employees will be affected by the changes in
operations, including 49 merchandise employees. Although WTU has not completed
its analysis, the cost of these changes is not expected to have a material
adverse effect on CSW's results of operations or financial condition.
SEEBOARD - Third Party Pension Litigation
In the U.K., National Grid and National Power PLC have been involved in
continuing litigation regarding their use of actuarial surpluses disclosed in
the 1992 and 1995 valuations of the electricity industry's occupational pension
plan, the ESPS. A High Court decision in favor of the National Grid and National
Power PLC was appealed. On February 10, 1999, the U.K. Court of Appeal ruled
that the particular arrangements made by these corporations to dispose of part
of the surplus were invalid due to procedural defects. This decision was
confirmed at a later hearing of the U.K. Court of Appeal held in May 1999. The
National Grid has appealed to the House of Lords, the highest court of appeal in
the U.K., and a decision is expected in late 2000 or early 2001. The final
outcome of this appeal cannot presently be determined.
SEEBOARD employees are members of the ESPS, and SEEBOARD has made similar
use of actuarial surpluses disclosed in the 1992 and 1995 valuations. As a
result of subsequent legal clarification of certain issues arising from the
hearing held in May 1999, the potential impact of the ruling on SEEBOARD has
increased. The amount of the payments cancelled by SEEBOARD in recognition of
these surpluses amounts to approximately $78 million, excluding any accrued
interest.
The U.K. Court of Appeal did not order the National Grid or National Power
PLC to make payment into the ESPS, and the court indicated that any requirement
to make such payments would be harsh since the relevant sections of the ESPS
already have a surplus. In the event the court decides a payment by SEEBOARD
into the ESPS is necessary, such a payment is likely to create additional
pension fund surplus, which SEEBOARD would be able to utilize over the next
several years to reduce pension expense.
Management is unable currently to predict the amount of any payment that
it may be required to make to ESPS, but the payment should not have a material
adverse affect on CSW's results of operations or financial condition.
The foregoing discussion constitutes forward-looking information within
the meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information. See FORWARD - LOOKING INFORMATION.
20
RATES AND REGULATORY MATTERS
U.S. ELECTRIC
CPL Rate Review - Docket No 14965
In November 1995, CPL filed with the Texas Commission a request to
increase its retail base rates by $71 million. On October 16, 1997, the Texas
Commission issued the CPL 1997 Final Order which lowered the annual retail base
rates of CPL by approximately $19 million, or 2.5%, from CPL's rate level
existing prior to May 1996. The Texas Commission also included a "glide path"
rate methodology in the CPL 1997 Final Order pursuant to which CPL's annual
rates were reduced by $13 million beginning May 1, 1998 with an additional
reduction of $13 million on May 1, 1999.
CPL filed an appeal of the CPL 1997 Final Order to the State District
Court of Travis County to raise several issues related to the rate case. The
primary issues include: (i) the classification of $800 million of invested
capital in STP as ECOM which was also assigned a lower return on equity than
non-ECOM property; (ii) the Texas Commission's use of the "glide path" rate
reduction methodology applied on May 1, 1998 and May 1, 1999; and (iii) the $18
million of disallowed affiliate expenses from CSW Services. As part of the
appeal, CPL sought a temporary injunction to prohibit the Texas Commission from
implementing the "glide path" rate reduction methodology. The court denied the
temporary injunction and the "glide path" rate reduction was implemented in May
1998 and May 1999. Hearings on the appeal were held during the third quarter of
1998, and a judgment was issued in February 1999 affirming the Texas Commission
order, except for a consolidated tax issue in the amount of $6 million, which
was remanded to the Texas Commission. CPL filed an appeal of this most recent
order to the Third District of Texas Court of Appeals and management is unable
to predict how the final resolution of these issues will ultimately affect CSW's
results of operations and financial condition.
On May 4, 1999, AEP and CSW announced that they had reached a stipulated
agreement with the General Counsel of the Texas Commission and other intervenors
in the state of Texas related to the AEP/CSW merger case. The Texas Commission
approved the AEP Merger in early November 1999. If the AEP Merger is ultimately
consummated, CSW will withdraw its appeal with respect to the "glide path" rate
reduction methodology as discussed above as issue "(ii)" but will continue
seeking the appeal of issues "(i) and (iii)" as discussed above. See NOTE 15.
PROPOSED AEP MERGER for a discussion of the stipulated agreement.
See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for information on the
CPL 1997 Final Order.
SWEPCO Louisiana Rate Review
In December 1997, the Louisiana Commission announced it would review
SWEPCO's rates and service. In October 1999, SWEPCO and the staff of the
Louisiana Commission reached an Agreement and Stipulation, which was filed on
October 14, 1999. The significant provisions of the Agreement and Stipulation
are as follows:
- - SWEPCO's Louisiana retail jurisdictional revenues were reduced by $11
million, effective with the December 1999 billing cycle;
- - SWEPCO is allowed to earn an 11.1% return on common equity;
- - SWEPCO is allowed to recover certain regulatory assets totaling $7.1
million;
21
- - SWEPCO will be subject to a two-year base rate freeze, which includes
force majeure provisions; and
- - SWEPCO will be allowed to increase depreciation rates for transmission,
distribution and generation plant.
The Louisiana Commission approved the Agreement and Stipulation in
November 1999 which was implemented in December 1999.
SWEPCO Arkansas Rate Review
In July 1998, the Arkansas Commission began a review of SWEPCO's earnings.
On July 30, 1999, SWEPCO entered into a settlement agreement with the general
staff of the Arkansas Commission and the Arkansas Attorney General's Office. The
settlement agreement reduces SWEPCO's Arkansas annual revenues by $5.4 million
or 3%. Additionally, the stipulation and settlement agreement provides for a
10.75% return on common equity, an increase in depreciation rates, and an
agreement by SWEPCO not to seek recovery of generation-related stranded costs.
On September 23, 1999, the Arkansas Commission issued an order approving
the stipulation and settlement agreement. On October 25, 1999, SWEPCO filed
compliance rate tariffs with the Arkansas Commission, which are consistent with
the Arkansas Commission order. The provisions of the settlement agreement were
implemented in December 1999.
Other
Reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for
information regarding fuel proceedings at CPL, SWEPCO and WTU.
U.K. ELECTRIC
SEEBOARD Recent Regulatory Actions
Following the commencement of the phased-in opening of the United Kingdom
domestic and small business electricity market to competition, since September
1998, many customers are now able to choose their electricity supplier. SEEBOARD
competes for customers in its own area as well as throughout the rest of the
United Kingdom. The DGEGS has allowed a significant portion of the system
development costs associated with the introduction of competition to be
recovered by the regional electricity companies through a charge to all
customers over the next five years. The DGEGS has also announced price
restraints which set a maximum amount that existing electricity supply companies
can charge their domestic and small business customers, taking into account its
view of future electricity purchase costs. For SEEBOARD, these price restraints
reduced prices in real terms by 6% for the regulatory year ending March 31,
1999, and a further 3% for the following regulatory year ending March 31, 2000.
Regulatory Price Proposal for SEEBOARD
On December 2, 1999, OFGEM published its final price proposals from its
United Kingdom electricity distribution review. OFGEM has proposed revenue
reductions in SEEBOARD's distribution business of 21%. In addition, OFGEM has
proposed the reallocation of a further 12% of costs out of SEEBOARD's
distribution business into its supply business. These proposals were accepted on
December 20, 1999, and will take effect on April 1, 2000, and remain in effect
for five years. OFGEM's proposals will reduce net income for SEEBOARD in the
year 2000 by approximately $40 million, dependent upon the level of further cost
22
reductions that can be achieved, and by approximately $60 million in 2001. CSW's
net income from SEEBOARD U.S.A., its United Kingdom business segment, was $113
million for the twelve months ended December 31, 1999.
OFGEM's price proposals for SEEBOARD will have a material adverse effect
on the future results of operations of CSW, but are not be expected to adversely
affect the financial condition of CSW.
OFGEM also published the final price proposals for the electricity supply
price review. OFGEM has recommended that the price cap for charges levied to
electricity supply domestic and small business customers should be extended for
two years from April 1, 2000. Overall, these proposals are expected to have a
broadly neutral effect on the results of CSW.
In the fourth quarter of 1999, a rating agency downgraded SEEBOARD's
credit rating to BBB+ due to recent U.K. regulatory action.
The foregoing discussion constitutes forward-looking information within
the meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information. See FORWARD-LOOKING INFORMATION.
OTHER INITIATIVES
As described in OVERVIEW, a vital part of CSW's future strategy involves
initiatives that are outside of the traditional United States electric utility
industry due to increasing competition and fundamental changes in this industry.
In addition, lower anticipated growth rates in CSW's core United States electric
utility business combined with the previously mentioned industry factors have
resulted in CSW pursuing other initiatives. These initiatives have taken a
variety of forms; however, they are all consistent with the overall plan for CSW
to develop a global energy business. CSW has restrictions on the amounts it may
invest under the AEP merger agreement. While CSW believes that such initiatives
are necessary to maintain its competitiveness and to supplement its growth in
the future, the Holding Company Act may impede or delay its ability to
successfully pursue such initiatives. (The foregoing statement constitutes a
forward-looking statement within the meaning of Section 21E of the Exchange Act.
Actual results may differ materially from such projected information due to
changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). See
OVERVIEW and RECENT DEVELOPMENTS AND TRENDS.
DIVERSIFIED ELECTRIC
CSW Energy
CSW Energy presently owns interests in seven operating power projects
totaling 1,308 MW which are located in Colorado, Florida and Texas. In addition
to these projects, CSW Energy has other projects in various stages of
development.
CSW Energy began construction in August 1998 of a 500 MW power plant,
known as Frontera, in the Rio Grande Valley, near the city of Mission, Texas.
The natural gas-fired facility began simple cycle operation of 330 MW in July
1999 and is scheduled to commence combined cycle operation in early 2000.
Pursuant to AEP's and CSW's stipulated agreement with several intervenors in the
state of Texas related to the AEP Merger, CSW Energy may sell 250 MW of Frontera
upon completion of the merger. See PROPOSED AEP MERGER and NOTE 15. PROPOSED AEP
MERGER for additional information.
23
CSW Energy also has entered into an agreement with Eastman Chemical
Company to construct and operate a 440 MW cogeneration facility in Longview,
Texas. This facility will be known as the Eastex Cogeneration Project.
Construction of the facility began in the fourth quarter of 1999, with expected
operation in early 2001. Excess electricity generated by the plant will be sold
by CSW Energy in the wholesale electricity market.
In October 1999, GE Capital Structured Finance Group purchased 50% of the
equity ownership of Sweeny Cogeneration Limited Partnership. CSW Energy's
after-tax earnings from the proceeds of the transaction were approximately $33
million and were recorded in the fourth quarter of 1999. The agreement between
CSW Energy and GE Capital Structured Finance Group also provides for additional
payments to CSW Energy, subject to completion of a planned expansion of the
Sweeny cogeneration facility, which may be operational in the fourth quarter of
2000.
The preceding discussion contains forward-looking information within the
meaning of Section 21E of the Exchange Act. Actual results may differ materially
from such projected information due to changes in the underlying assumptions.
See FORWARD-LOOKING INFORMATION.
CSW International
CSW International was organized to pursue investment opportunities in EWGs
and FUCOs and currently holds investments in the United Kingdom, Mexico and
South America.
CSW International and its 50% partner, Scottish Power plc have entered
into a joint venture to construct and operate the South Coast power project, a
400 MW combined cycle gas turbine power station in Shoreham, United Kingdom. CSW
International has guaranteed approximately (pound)19 million of the (pound)190
million construction financing. Both the guarantee and the construction
financing are denominated in pounds sterling. The U.S. dollar equivalent at
December 31, 1999 would be $31 million and $308 million respectively, using a
conversion rate of (pound)1.00 equals $1.62. The permanent financing is
unconditionally guaranteed by the project. Construction of the project began in
March 1999, and commercial operation is expected to begin in late 2000.
Through November 1999, CSW International had purchased a 36% equity
interest in Vale for $80 million. CSW International also extended $100 million
of debt convertible into equity in Vale in 1998. In December 1999, CSW
International converted $69 million of that $100 million into equity, thereby
raising its equity interest in Vale to 44%. CSW International anticipates
converting the remaining debt into equity over the next two years.
In January 1999, amid market instability, the Brazilian government
abandoned its policy of pegging the Brazilian Real in a range against the U.S.
dollar. This action resulted in a 49% devaluation of the Brazilian currency by
the end of December 1999. Vale is unfavorably affected by the devaluation due
primarily to the revaluation of foreign denominated debt.
CSW International has a put option, which, if exercised, requires Vale to
purchase CSW International shares at a minimum price equal to the U.S. dollar
equivalent of the purchase price for Vale. As a result of the put option
arrangement, CSW International's investment carrying amount will not be reduced
below the put option value unless there is deemed to be a permanent impairment.
Pursuant to this arrangement, CSW International will not recognize its
proportionate share of any future earnings until its proportionate share of any
losses of Vale is recognized. At December 31, 1999, CSW International had
deferred losses, after tax, of approximately $21 million related to its Vale
investment. CSW International views its investment in Vale as a long-term
24
investment, which has significant long-term value. Management will continue to
closely evaluate the changes in the Brazilian economy and its impact on CSW
International's investment in Vale.
As of December 31, 1999, CSW International had invested $110 million in
common stock of a Chilean electric company. The investment is classified as
securities available for sale and accounted for by the cost method. Based on the
current market value of the shares and the year-end foreign exchange rate, the
value of the investment at December 31, 1999 was $62 million. The reduction in
the carrying value of this investment has been reflected in Other Comprehensive
Income in CSW's Consolidated Statements of Stockholders' Equity. Management
views its investment in Chile as a long-term investment strategy and believes
this investment continues to have significant long-term value and that it is
recoverable. Management will continue to closely evaluate the changes in the
South American economy and its impact on CSW International's investment in the
Chilean electric company.
In addition to these projects, CSW Energy and CSW International have other
projects in various stages of development. CSW, CSW Energy and CSW International
have provided letters of credit and guarantees on behalf of CSW Energy and CSW
International projects of approximately $62 million, $41 million and $233
million, respectively, as of December 31, 1999.
The preceding discussion contains forward-looking information within the
meaning of Section 21E of the Exchange Act. Actual results may differ materially
from such projected information due to changes in the underlying assumptions.
See FORWARD-LOOKING INFORMATION.
ENERGY SERVICES
C3 Communications
C3 Communications has two active business units, C3 Networks and C3
Utility Automation. C3 Networks offers wholesale, high capacity, long-haul
regional and metropolitan fiber and collocation services to telecommunications
carriers and Internet service providers in Texas and Louisiana.
C3 Networks has approximately 1,500 miles of fiber network in Texas and
Louisiana and offers collocation services to carriers and Internet service
providers through sites in Dallas, Houston, Austin, San Antonio, Abilene, San
Angelo, Corpus Christi, Harlingen, Laredo, and McAllen, Texas and Tulsa,
Oklahoma.
In 1999, C3 Utility Automation launched a new energy information service,
PurView(TM). In addition, EnerACT(TM) advisory services was transferred from
EnerShop to better align products and marketing. PurView(TM) is a service for
collecting meter data and interactively viewing, manipulating and analyzing
consumption information over the Internet. EnerACT(TM) is an energy information
and advisory service for multi-site building owners and managers.
C3 Communications believes that electric utility industry restructuring
will continue to fuel interest in its energy information services. Evaluation of
partnerships and acquisitions will also be a key element of growth for C3
Communications in 2000. The foregoing statement constitutes a forward-looking
statement within the meaning of Section 21E of the Exchange Act. Actual results
may differ materially from such projected information due to changes in the
underlying assumptions. See FORWARD-LOOKING INFORMATION.
25
EnerShop
EnerShop's two product lines in 1999 were performance contracting and
EnerACT(TM) advisory services until August 1999, when EnerACT(TM) was
transferred to C3 Communications to better align products and marketing.
EnerShop continues to provide energy services to customers in Texas and
Louisiana that help reduce customers' operating costs through increased energy
efficiencies and improved equipment operations. EnerShop utilizes the skills of
local trade allies in offering services that include energy and facility
analysis, project management, engineering design, equipment procurement and
construction and performance monitoring.
Business Ventures
The CSW Services' Business Ventures is comprised of companies that pursue
energy-related businesses. Projects include providing energy management systems,
electric substation automation software and the marketing and distribution of
electric bikes and associated accessories under the TotalEV name.
In late 1997, CSW Energy Services was launched to explore the electric
utility industry's emerging retail supply markets as they were deregulated on a
state-by-state basis. In January 1999, CSW Energy Services announced that it was
ceasing its business as a retail electric supplier and that it would assign its
existing electricity supply contracts to other suppliers or terminate them. In
the fourth quarter of 1999, the CSW Business Ventures group's investment in an
energy-related company that provides staffing services for nuclear power plants
was transferred from PSO to CSW Energy Services.
SOUTH TEXAS PROJECT
CPL owns 25.2% of STP, a two-unit nuclear power plant that is located near
Bay City, Texas. Reliant Energy Resources Corporation owns 30.8%, the City of
San Antonio owns 28.0%, and the City of Austin owns 16.0% of STP. STP Unit 1 was
placed in service in August 1988, and STP Unit 2 was placed in service in June
1989. In November 1997, STPNOC assumed the duties of STP operator. Each of the
four STP co-owners are represented on the STPNOC board of directors.
STP Unit 1 and Unit 2 were removed temporarily from service during 1999
for scheduled refueling and ten-year inspection outages. During 1999, Units 1
and 2 operated at net capacity factors of 88.0% and 89.4%, respectively.
For additional information regarding STP and the accounting for the
decommissioning of STP, see NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS.
ENVIRONMENTAL MATTERS
The operations of the CSW System, like those of other utility systems,
generally involve the use and disposal of substances subject to environmental
laws. CERCLA, the federal "Superfund" law, addresses the cleanup of sites
contaminated by hazardous substances. Superfund requires that PRPs fund remedial
actions regardless of fault or the legality of past disposal activities. PRPs
include owners and operators of contaminated sites and transporters and/or
generators of hazardous substances. Many states have similar laws. Legally, any
26
one PRP can be held responsible for the entire cost of a cleanup. Usually,
however, cleanup costs are allocated among PRPs.
The U.S. Electric Operating Companies are subject to various pending
claims alleging that they are PRPs under federal or state remedial laws for
investigating and cleaning up contaminated property. CSW believes that
resolution of these claims, individually or in the aggregate, will not have a
material adverse effect on CSW's or any U.S. Electric Operating Company's
results of operations or financial condition. Although the reasons for this
expectation differ from site to site, factors that are the basis for the
expectation for specific sites include the volume and/or type of waste allegedly
contributed by the U.S. Electric Operating Company, the estimated amount of
costs allocated to the U.S. Electric Operating Company and the participation of
other parties. (The foregoing statements constitute forward-looking statements
within the meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information due to changes in the underlying
assumptions. See FORWARD-LOOKING INFORMATION). See NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for
additional discussion regarding environmental matters.
The EPA recently promulgated revised, more stringent ambient air quality
standards for ozone and particulates. While these standards do not mandate
emission constraints or reductions for facilities such as electricity generating
power plants, they may result in more areas being designated as non-attainment
for these two pollutants. States will be required to develop strategies to
achieve compliance in these areas, strategies that may include lower emission
levels for electricity generating power plants, possibly including facilities
within the CSW System. The impact, if any, on CSW or the U.S. Electric Operating
Companies cannot yet be determined, but the impact could be significant.
At the Kyoto, Japan Conference on Global Warming held in December 1997,
U.S. representatives agreed to a treaty which could require new limitations on
"greenhouse gases" from power plants. CSW and the U.S. Electric Operating
Companies could be affected if this treaty, in its present form, is approved by
the United States Congress. The impact, if any, on CSW or the U.S. Electric
Operating Companies cannot be determined because most of the greenhouse gas
emission reduction would come from coal generation that would have to be
switched to natural gas or retired. During 1999, 50% of the U.S. Electric
Operating Companies' MWH generation of which, at December 31, 1999, 33% of its
installed generating capacity was coal and lignite.
RISK MANAGEMENT
In 1997, CSW's board of directors adopted a risk management resolution
authorizing CSW to engage in currency, interest rate and energy spot and forward
transactions and related derivative transactions on behalf of CSW with foreign
and domestic parties as deemed appropriate by executive officers of CSW. The
risk management program is necessary to meet the growing demands of CSW's
customers for competitive prices and price stability, to enable CSW to compete
in a deregulated power industry, to manage the risks associated with domestic
and foreign investments and to take advantage of strategic investment
opportunities.
The U.S. Electric Operating Companies experience commodity price exposures
related to the purchase of fuel supplies for the generation of electricity and
for the purchase of power and energy from other generation sources. Contracts
that provide for the future delivery of these commodities can be considered
forward contracts which contain pricing and/or volume terms designed to
stabilize the cost of the commodity. Consequently, the U.S. Electric Operating
27
Companies manage their price exposure for the benefit of customers by balancing
their commodity purchases through a combination of long-term and short-term or
spot market agreements.
In response to the development of a more competitive electric energy
market, CSW has received regulatory approval, which authorizes the U.S. Electric
Operating Companies to conduct a pilot program offering power sales agreements
at tariffed rates with a fixed fuel cost. To offset the commodity price risk
associated with these contracts, CSW has purchased natural gas swaps and futures
contracts. These arrangements cover estimated natural gas deliveries beginning
in January 2000 and continuing for the remainder of 2000. Natural gas volumes
purchased to serve these contracts, for which CSW has secured swap or futures
contracts, represents approximately 1% of annual natural gas purchases.
Based on year-end contractual commitments, CSW's natural gas futures and
swap contracts and electricity forward contracts that are sensitive to changes
in commodity prices include fair value of assets of $157,260 and fair value of
liabilities of $396,440. These swap and future contracts hedge their related
commodity price exposure for 2000. Cash outflows on the swap agreements should
be offset by increased margins on electricity sales to customers under tariffed
rates with fixed fuel costs. The electricity forward contracts hedge a portion
of CSW's energy requirements through February 2000. The average contract price
for forward purchases is $30 per MWH and $2.32 per MMbtu. The average price for
natural gas futures contracts is $2.47 per MMbtu and $2.37 per MMbtu for swaps.
SEEBOARD has entered into contracts for differences to reduce exposure to
fluctuations in the price of electricity purchased from the United Kingdom's
electricity power pool. This pool was established at privatization of the United
Kingdom's electric industry for the bulk trading of electricity between
generators and suppliers. At December 31, 1999, the gross value of such
contracts for differences was approximately 83% of the expected power purchases
for 2000.
CSW has, at times, been exposed to currency and interest rate risks which
reflect the floating exchange rate that exists between the U.S. dollar and the
British pound. CSW has utilized certain risk management tools to manage adverse
changes in exchange rates and to facilitate financing transactions resulting
from CSW's acquisition of SEEBOARD. At December 31, 1999, CSW had positions in
two cross currency swap contracts. The following table presents information
relating to these contracts. The fair value of cross currency swaps reflect
third party valuations calculated using proprietary pricing models. Based on
these valuations, CSW's position in these cross currency swaps represented an
unrealized loss of $41.8 million at December 31, 1999. This unrealized loss is
offset by unrealized gains related to the underlying transactions being hedged.
CSW expects to hold these contracts to maturity. At current exchange rates, this
liability is included in long-term debt on CSW's consolidated balance sheet at a
carrying value of approximately $418 million.
Expected Expected Cash
Cash Inflows Outflows
Contract Maturity Date (Maturity Value) (Market Value)
- --------------------------------------------------------------------------------
(millions)
Cross currency swaps August 1, 2001 $200 $213
Cross currency swaps August 1, 2006 $200 $229
For information related to currency risk in South America see OTHER
INITIATIVES, DIVERSIFIED ELECTRIC, CSW International and NOTE 18. SOUTH AMERICAN
INVESTMENTS. For information on commodity contracts see NOTE 7. FINANCIAL
INSTRUMENTS.
28
OTHER MATTERS
Year 2000
On a system-wide basis, CSW initiated and implemented a year 2000 project
to prepare internal computer systems and applications for the year 2000. These
systems and applications include management information systems that support
business operations such as customer billing, payroll, inventory and
maintenance. Other systems with computer-based controls such as
telecommunications, elevators, building environmental management, metering,
plant, transmission, distribution and substations were included in this project
as well.
Cost to Address Year 2000 Issues
As of December 31, 1999, cost incurred for the year 2000 project amounted
to approximately $33 million, including $21 million in 1999. Remaining
activities are expected to cost an additional $3 million in the first quarter of
2000.
In the first quarter of 1999, a software version upgrade to provide
contract management features to the materials management information system was
deferred until 2000 in order to minimize risk. The financial impact of this
deferral was minimal, as minor enhancements to the current design provided an
alternative, interim solution for the needed functionality. The deferred system
upgrade is now scheduled for implementation in the May to November 2000 time
frame. No other planned CSW computer information system projects were affected
by the year 2000 project, even though a moratorium was implemented during the
month of December 1999 to further minimize risk. Accordingly, no estimate was
made for the financial impact of any future projects foregone due to resources
allocated to the year 2000 project.
Contingency Plans
Contingency plans have been in place in CSW's domestic electric operation
for years to address problems resulting from weather. These plans were updated
to include year 2000 issues. Contingency planning is engineered into the
transmission and distribution systems as it is designed with the capability to
bypass failed equipment. A margin of power generation reserve above what is
needed is normally maintained. This reserve is a customary operating contingency
plan that allows CSW to operate normally even when a power plant unexpectedly
quits operating. Backup supplies of fuels are normally maintained at CSW power
plants. Natural gas plants have fuel oil as a backup and multiple pipelines
provide redundant supplies. At coal plants about 40 to 45 days of extra coal is
kept on hand.
SEEBOARD also has well established contingency plans to address problems
resulting from weather. These plans are covered effectively within the
distribution and customer service business areas and were updated to include
year 2000 scenarios.
Transition Results to Date
The results of the readiness activities described in the foregoing have
all been positive. The CSW System completed the year 2000 transition without any
year 2000 related electric system problems. The business support systems in each
of CSW and its subsidiaries also made the transition from 1999 to 2000 without
any year 2000 related impact on the operations they support or the customers
they serve. CSW continues to closely monitor its electric and business support
systems.
Portions of the preceding discussion contain forward-looking information
within the meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information due to changes in the underlying
assumptions. See FORWARD-LOOKING INFORMATION.
29
NEW ACCOUNTING STANDARDS
SFAS No. 133 as amended by SFAS No. 137
SFAS No. 133 as amended by SFAS No. 137 is effective for fiscal years
beginning after June 15, 2000 or January 1, 2001, for calendar year entities.
SFAS No. 133 replaces existing pronouncements and practices with a single
integrated accounting framework for derivatives and hedging activities and
eliminates previous inconsistencies in generally accepted accounting principles.
SFAS No. 133 expands the accounting definition of derivatives, which had focused
on freestanding contracts (futures, forwards, options and swaps) to include
embedded derivatives and many commodity contracts. All derivatives will be
reported on the balance sheet either as an asset or liability measured at fair
value. Changes in a derivative's fair value will be recognized currently in
earnings unless specific hedge accounting criteria are met. CSW has established
a project team to implement SFAS No. 133. CSW has not yet quantified the effects
of adopting SFAS No. 133 on its financial statements, although application of
SFAS No. 133 could increase volatility in earnings and other comprehensive
income. See NOTE 17. NEW ACCOUNTING STANDARDS.
30
CENTRAL AND SOUTH WEST CORPORATION
RESULTS OF OPERATIONS
Reference is made to CSW's Consolidated Financial Statements, Notes to
Consolidated Financial Statements and Selected Financial Data. Referenced
information should be read in conjunction with, and is essential to
understanding, the following discussion and analysis. CSW's results fluctuate,
in part, with the weather. Also, other than certain one-time items, as discussed
throughout the results of operations, CSW's income statement line items as a
percentage of total revenues remain fairly consistent, due primarily to the
regulatory environment in which CSW operates. The preceding discussion contains
forward-looking information within the meaning of Section 21E of the Exchange
Act. Actual results may differ materially from such projected information due to
changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998
CSW's earnings increased to $455 million in 1999 from $440 million in
1998. CSW's return on average common stock equity was 12.8% in 1999 compared to
12.4% in 1998. The primary reason for the higher earnings and higher return on
average common stock equity was the previously planned sale of 50% of CSW's 100%
equity ownership interest in a cogeneration partnership. CSW's after-tax
earnings recorded in the fourth quarter of 1999 from the proceeds of the
transaction were $33 million. Earnings also increased due to the absence in 1999
of a charge for accelerated capital recovery of STP and the absence of asset
write-offs at several of CSW's business segments recorded in 1998.
Partially offsetting the higher earnings was higher operations and
maintenance expense at SEEBOARD, CSW Energy and the U.S. Electric Operating
Companies. Also partially offsetting the higher earnings was a charge to
earnings at CPL, SWEPCO and WTU that was made to reflect the excess earnings
provision of the Texas Legislation enacted in 1999. Another factor partially
offsetting higher 1999 earnings was the extraordinary loss resulting from
legislation enacted in Texas and Arkansas under which the electricity generation
portion of CPL's, SWEPCO's and WTU's business in those states no longer meets
the criteria to apply SFAS No. 71. See MD&A - Securitization of
Generation-related Regulatory Assets and Stranded Cost, NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS - Electric Utility Restructuring Legislation and NOTE 16.
EXTRAORDINARY ITEMS for additional information.
Operating revenues increased $55 million in 1999 compared to 1998. The revenue
variances are shown in the following table.
1999 REVENUE VARIANCES
Increase (decrease) from prior year, millions
U.S. Electric
KWH Sales, Weather-Related $(64)
KWH Sales, Growth and Usage 65
Fuel Revenue 37
Sales for Resale 22
Other Electric (24)
-------
36
United Kingdom (64)
Other Diversified 83
-------
$55
-------
31
U.S. Electric revenues increased $36 million, or 1% in 1999 compared to
1998. Retail U.S. Electric revenues increased due to higher customer usage and
growth and higher off-system sales. An increase in fuel revenues due to higher
fuel prices and purchased power expense, discussed below, also contributed to
the higher revenues. Milder weather in 1999 when compared to the previous year
partially offset the increase in revenues. MWH sales decreased 1.5% due
primarily to a decrease in sales to the residential customer class as a result
of the milder weather.
United Kingdom revenues decreased $64 million in 1999 compared to 1998 due
to lower sales volumes in the business market and the loss of domestic customers
following the opening of the electricity market to competition. Also
contributing to the decrease in U.K. electric revenues were the absence in
revenues in 1999 from SEEBOARD's retail business, which was sold in June 1998,
and unfavorable British pound to U.S. dollar exchange rate movements. Other
diversified revenues increased $83 million in 1999 compared to 1998 due
primarily to increased business activity at CSW Energy.
During 1999 and 1998, the U.S. Electric Operating Companies generated 86%
and 92% of their electric energy requirements, respectively. U.S. Electric fuel
expense decreased $14 million in 1999 compared to 1998 due primarily to a $41
million decrease in the recovery of deferred fuel costs that resulted from a
significant difference in fuel factors used to recover fuel expense from
customers at PSO. The decrease in fuel expense was offset in part by an increase
in fuel prices to $1.78 per MMbtu in 1999 from $1.67 per MMbtu in 1998. U.S.
Electric purchased power expense increased $46 million, or 41% due primarily to
an increase in economy energy purchases.
United Kingdom cost of sales decreased $71 million in 1999 compared to
1998 due primarily to a lower level of sales of electricity and the absence in
1999 of cost of sales for SEEBOARD's retail business and a lower British pound
to U.S. dollar exchange rate compared to 1998.
Other operating expense increased $27 million in 1999 compared to 1998 due
in part to increased expenses at SEEBOARD. Expenses increased at SEEBOARD as a
result of additional operating costs from SEEBOARD's Powerlink joint venture to
operate and maintain the electricity assets for the London Underground Rail
System as well as increased expenses associated with operating in the
competitive electricity market in the United Kingdom. CSW Energy's operating
expenses also increased as a result of increased business activity at several of
its plants. Operating expenses increased at the U.S. Electric Operating
Companies due primarily to a settlement with a transmission service provider and
increased power plant operating costs. Maintenance expense increased $31 million
due primarily to increased expenses associated with the 10-year inspection of
STP Unit 1 and 2, higher scheduled maintenance at other CSW System power plants
and higher tree trimming expenses.
Depreciation and amortization expense increased $31 million in 1999 due
primarily to accelerated capital cost recovery under the excess earnings
provisions of the Texas Legislation, as well as increases in depreciable
property.
Other income and deductions increased to $59 million in 1999 from $42
million in 1998 due primarily to gains from the sale of investments at SEEBOARD
and interest income recognized by CSW Energy related to the Sweeny power plant.
The gain was offset, in part, by the absence in 1999 of the gain from the sale
of investments by C3 Communications in 1998. Long-term interest expense
decreased $11 million in 1999 due primarily to the maturity and reacquisition of
long-term debt.
The extraordinary losses resulted from legislation enacted in Arkansas and
Texas under which the electricity generation portion of CPL's, SWEPCO's and
WTU's business in those states no longer meet the criteria to apply SFAS No. 71.
These legislative changes resulted in an extraordinary loss at SWEPCO and WTU,
32
which had a cumulative effect of decreasing net income by $8.0 million. These
legislative changes also resulted in an extraordinary loss at CPL of $6 million
associated with a loss on reacquired debt and the discontinuance of SFAS No. 71.
See MD&A - Securitization of Generation-related Regulatory Assets and Stranded
Costs.and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility
Restructuring Legislation, and NOTE 16. EXTRAORDINARY ITEMS for additional
information.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997
CSW's earnings increased to $440 million in 1998 from $153 million in
1997. CSW's return on average common stock equity was 12.4% in 1998 compared to
4.2% in 1997. The primary reason for the higher earnings and higher return on
average common stock equity was the absence in 1998 of the accrual of $176
million for the one-time United Kingdom windfall profits tax. Hotter than normal
summer weather and increased customer growth and usage at the U.S. Electric
Operating Companies were also factors in the increase in earnings over 1997.
Additionally, the sale of a telecommunications partnership interest in 1998 and
a decrease in the United Kingdom corporate tax rate contributed to the earnings
increase. The absence of the impact of CSW's final settlement of litigation with
El Paso in 1997 contributed to the increase in earnings in 1998 as well. Also
contributing to the increase in earnings was the absence in 1998 of the effect
of both the PSO 1997 Rate Settlement Agreement and the CPL 1997 Final Order. See
NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the
CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. See NOTE 16.
EXTRAORDINARY ITEMS for additional information on the windfall profits tax.
Partially offsetting the higher earnings was a charge for accelerated capital
recovery of STP and asset write-offs at several of CSW's business segments.
Operating revenues increased $214 million in 1998 compared to 1997. The revenue
variances are shown in the following table.
1998 REVENUE VARIANCES
Increase (decrease) from prior year, millions
U.S. Electric
KWH Sales, Weather-Related $72
KWH Sales, Growth and Usage 53
Fuel Revenue 31
Sales for Resale 6
Other Electric 5
-----------
167
United Kingdom (101)
Other Diversified 148
-----------
$214
-----------
U.S. Electric revenues increased $167 million, or 5%, in 1998 compared to
1997. Retail MWH sales increased 6% with increases in all customer classes. U.S.
Electric revenues increased due primarily to higher MWH sales resulting from
hotter than normal summer weather and increased customer usage and growth. An
increase in fuel revenues due to an increase in fuel expense, discussed below,
also contributed to the higher revenues. United Kingdom revenues decreased $101
million, or 5%, in 1998 compared to 1997 due to the loss of revenues associated
with the sale of its retail stores in the second quarter of 1998 and the effect
of price control on the supply business. Other diversified revenues increased
$148 million in 1998 compared to 1997 due primarily to increased revenues from
CSW Energy, CSW Credit and EnerShop.
33
During 1998 and 1997 the U.S. Electric Operating Companies generated 92%
and 93% of their electric energy requirements, respectively. U.S. Electric fuel
expense increased $13 million in 1998 compared to 1997 due primarily to
increased generation offset in part by a decrease in fuel prices to $1.67 per
MMbtu in 1998 from $1.83 per MMbtu in 1997. United Kingdom cost of sales
decreased $87 million in 1998 compared to 1997 due primarily to lower cost of
sales associated with the sale of SEEBOARD's retail stores and a decrease in the
cost of purchased power reflecting lower business volumes.
Other operating expense increased $48 million in 1998 compared to 1997 due
in part to a CSW Energy power plant that went into service in February 1998. The
increase in other operating expense was offset in part by the absence in 1998 of
the settlement of litigation with El Paso which increased other operating
expense $35 million in 1997. Further offsetting the increase in other operating
expense in 1998 was the absence of the $12 million impact of the CPL 1997 Final
Order and the $4 million impact of the PSO 1997 Rate Settlement Agreement. See
NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the
CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. Also partially
offsetting the increase in other operating expense was reduced pension expense
in 1997 resulting from changes made to the pension plan for CSW's domestic
employees. See NOTE 5. BENEFIT PLANS for additional information related to the
changes in the pension plan.
Depreciation and amortization expense increased $24 million, or 5% in 1998
due primarily to accelerated recovery of ECOM property recorded in 1998 related
to the CPL 1997 Final Order, a charge for accelerated capital recovery of STP,
as well as increases in depreciable property. Income tax expense increased $52
million due primarily to higher pre-tax income.
Other income and deductions increased to $42 million in 1998 from $32
million in 1997 due primarily to the sale of a telecommunications partnership
interest. Long-term interest expense decreased $22 million in 1998 due primarily
to the prepayment of a $60 million variable rate bank loan due December 1, 2001;
the maturity of $200 million of CPL FMBs on October 1, 1997 and $28 million of
CPL FMBs on January 1, 1998; and the redemption of $91 million of FMBs of
certain of the U.S. Electric Operating Companies on September 1, 1998. See NOTE
8. LONG-TERM DEBT for additional information on the redemption of these
securities. Short-term debt was used to prepay the variable rate bank loan in
two $30 million installments on January 28, 1998 and April 27, 1998. Short-term
borrowings and internal cash generation were used to fund the maturities and
redemption of the previously mentioned FMBs. Short-term and other interest
expense increased $35 million in 1998 when compared to 1997 due primarily to
higher levels of short-term borrowings. Distributions on Trust Preferred
Securities increased interest and other charges by $10 million in 1998. The
Trust Preferred Securities were outstanding for all of 1998, while they were
outstanding for only part of 1997. See NOTE 10. TRUST PREFERRED SECURITIES for
additional information on these securities.
34
CSW
Consolidated Statements of Income
Central and South West Corporation
- --------------------------------------------------------------------------------
For the Years Ended December 31,
---------------------------------
1999 1998 1997
-------- ------- --------
($ in millions, except share amounts)
Operating Revenues
U.S. Electric $ 3,524 $ 3,488 $ 3,321
United Kingdom 1,705 1,769 1,870
Other diversified 308 225 77
-------- ------- --------
5,537 5,482 5,268
-------- ------- --------
Operating Expenses and Taxes
U.S. Electric fuel 1,176 1,190 1,177
U.S. Electric purchased power 157 111 89
United Kingdom cost of sales 1,133 1,204 1,291
Other operating 1,056 1,029 981
Maintenance 200 169 152
Depreciation and amortization 552 521 497
Taxes, other than income 193 189 195
Income taxes 204 203 151
-------- ------- --------
4,671 4,616 4,533
-------- ------- --------
Operating Income 866 866 735
-------- ------- --------
Other Income and Deductions
Other 78 60 26
Non-operating income taxes (19) (18) 6
-------- ------- --------
59 42 32
-------- ------- --------
Income Before Interest and Other Charges 925 908 767
-------- ------- --------
Interest and Other Charges
Interest on long-term debt 300 311 333
Distributions on Trust Preferred Securities 27 27 17
Interest on short-term debt and other 119 121 86
Preferred dividend requirements of subsidiaries 7 8 12
Gain (Loss) on reacquired preferred stock 3 1 (10)
-------- ------- --------
456 468 438
-------- ------- --------
Income before Extraordinary Items 469 440 329
-------- ------- --------
Extraordinary loss - Discontinuance of SFAS
No. 71(net of tax of $5) (8) -- --
Extraordinary loss - Loss on Reacquired Debt
(net of tax of $3) (6) -- --
Extraordinary loss - United Kingdom windfall
profits tax -- -- (176)
-------- ------- --------
Net Income for Common Stock $ 455 $ 440 $ 153
======== ======= ========
Average Common Shares Outstanding 212.6 212.4 212.1
Basic and Diluted EPS before Extraordinary Items $2.21 $2.07 $1.55
Basic and Diluted EPS from Extraordinary Items (0.07) -- (0.83)
-------- ------- --------
Basic and Diluted EPS $2.14 $2.07 $0.72
======== ======= ========
Dividends Paid per Share of Common Stock $1.74 $1.74 $1.74
======== ======= ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
35
CSW
Consolidated Statements of Stockholders' Equity
Central and South West Corporation
(millions)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income(Loss) Total
-------------------------------------------- -------
Beginning Balance -- January 1, 1997 $740 $1,022 $1,967 $73 $3,802
Sale of common stock 3 17 -- -- 20
Common stock dividends -- -- (369) -- (369)
-------
3,453
Comprehensive Income:
Foreign currency translation adjustment
(net of tax of $23) -- -- -- (48) (48)
Unrealized loss on securities
(net of tax of $0.3) -- -- -- (1) (1)
Minimum pension liability (net of
tax of $0.3) -- -- -- (1) (1)
Net Income -- -- 153 -- 153
-------
Total comprehensive income 103
------------------------------------------ -------
Ending Balance -- December 31, 1997 $743 $1,039 $1,751 $23 $3,556
========================================== =======
Beginning Balance -- January 1, 1998 $743 $1,039 $1,751 $23 $3,556
Sale of common stock 1 10 -- -- 11
Common stock dividends -- -- (370) -- (370)
Other -- -- 2 -- 2
-------
3,199
Comprehensive Income:
Foreign currency translation
adjustment (net of tax of $2) -- -- -- 7 7
Unrealized loss on securities
(net of tax of $8) -- -- -- (14) (14)
Adjustment for gain included in net
income (net of tax $4) -- -- -- (7) (7)
Minimum pension liability (net of
tax of $0.6) -- -- -- (1) (1)
Net Income -- -- 440 -- 440
-------
Total comprehensive income 425
------------------------------------------ -------
Ending Balance -- December 31, 1998 $744 $1,049 $1,823 $8 $3,624
========================================== =======
Beginning Balance -- January 1, 1999 $744 $1,049 $1,823 $8 $3,624
Sale of common stock -- 1 -- -- 1
Common stock dividends -- -- (370) -- (370)
Other -- 1 (2) -- (1)
-------
3,254
Comprehensive Income:
Foreign currency translation
adjustment (net of tax of $15) -- -- -- (28) (28)
Minimum pension liability (net of
tax of $0.7) -- -- -- 2 2
Net Income -- -- 455 -- 455
-------
Total comprehensive income 429
------------------------------------------ -------
Ending Balance -- December 31, 1999 $744 $1,051 $1,906 ($18) $3,683
========================================== =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
36
CSW
Consolidated Balance Sheets
Central and South West Corporation
- --------------------------------------------------------------------------------
As of December 31,
--------------------
1999 1998
--------- ---------
(millions)
ASSETS
Fixed Assets
Electric
Production $ 5,901 $ 5,887
Transmission 1,663 1,594
Distribution 4,896 4,681
General 1,437 1,380
Construction work in progress 205 166
Nuclear fuel 227 207
------- -------
14,329 13,915
Other diversified 353 333
------- -------
14,682 14,248
Less - Accumulated depreciation and amortization 6,008 5,652
------- -------
8,674 8,596
------- -------
Current Assets
Cash and temporary cash investments 270 157
Special deposits for reacquisition of long-term debt 50 --
Accounts receivable 1,140 1,110
Materials and supplies, at average cost 149 191
Electric utility fuel inventory 129 90
Under-recovered fuel costs 52 4
Notes receivable 53 109
Prepayments and other 84 90
------- -------
1,927 1,751
------- -------
Deferred Charges and Other Assets
Regulatory assets 219 1,113
Regulatory assets designated for securitization 953 --
Other non-utility investments 454 432
Securities available for sale 62 66
Benefit costs 202 185
Goodwill 1,330 1,402
Other 341 352
------- -------
3,561 3,550
------- -------
$14,162 $13,897
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
37
Consolidated Balance Sheets
Central and South West Corporation
- ---------------------------------------------------------------------------
As of December 31,
----------------------
1999 1998
-------- --------
CAPITALIZATION AND LIABILITIES (millions)
Capitalization
Common stock: $3.50 par value
Authorized shares: 350.0 million shares
Issued and outstanding: 212.6 million shares
in 1999 and 212.6 million shares in 1998 $ 744 $ 744
Paid-in capital 1,051 1,049
Retained earnings 1,906 1,823
Accumulated other comprehensive income (18) 8
-------- --------
3,683 47% 3,624 45%
------------- -------------
Preferred Stock 18 --% 176 2%
Certain Subsidiary-obligated, mandatorily redeemable
preferred securities of subsidiary trusts holding
solely Junior Subordinated Debentures of such
Subsidiaries 335 4% 335 4%
Long-term debt 3,821 49% 3,938 49%
------------- -------------
Total Capitalization 7,857 100% 8,073 100%
------------- -------------
Current Liabilities
Long-term debt due within twelve months 256 169
Short-term debt 1,346 811
Short-term debt - CSW Credit 754 749
Loan notes 24 32
Accounts payable 581 624
Accrued taxes 187 190
Accrued interest 64 84
Other 175 218
-------- --------
3,387 2,877
-------- --------
Deferred Credits
Accumulated deferred income taxes 2,431 2,410
Investment tax credits 254 267
Other 233 270
-------- --------
2,918 2,947
-------- --------
$14,162 $13,897
======== ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
38
Consolidated Statements of Cash Flows
Central and South West Corporation
- --------------------------------------------------------------------------------
For the Years Ended December 31,
--------------------------------
1999 1998 1997
-------- ------ -------
(millions)
OPERATING ACTIVITIES
Net income for common stock $ 455 $ 440 $ 153
Non-cash Items and Adjustments
Depreciation and amortization 580 552 529
Deferred income taxes and investment
tax credit 24 (56) 110
Preferred stock dividends 7 8 12
Gain on reacquired preferred stock 3 1 (10)
Charges for investments and assets -- 39 53
Extraordinary loss - Discontinuance of
SFAS No. 71 8 -- --
Extraordinary loss - Loss on Reacquired
Debt 6 -- --
Gain on sale of investments (35) (13) --
Changes in Assets and Liabilities
Accounts receivable (49) (187) (140)
Accounts payable (19) 69 59
Accrued taxes -- 20 (153)
Fuel recovery (75) 109 (37)
Fuel inventory (38) (25) 37
Other (64) (15) 113
----- ----- -----
803 942 726
----- ----- -----
INVESTING ACTIVITIES
Construction expenditures (639) (492) (507)
Disposition of plant (1) (5) 6
CSW Energy/CSW International projects (182) (184) (382)
Cash proceeds from sale of investments 80 56 --
Other (16) (10) (21)
----- ----- -----
(758) (635) (904)
----- ----- -----
FINANCING ACTIVITIES
Common stock sold 1 11 20
Proceeds from issuance of long-term debt 500 154 --
Reacquisition/Maturity of long-term debt (342) (182) (253)
Redemption of preferred stock (160) (28) (114)
Trust Preferred Securites sold -- -- 323
Special deposits for reacquisitions of
long-term debt (50) -- --
Other financing activities (41) (4) (3)
Change in short-term debt 541 202 414
Payment of dividends (378) (378) (383)
----- ----- -----
71 (225) 4
----- ----- -----
Effect of exchange rate changes on cash and cash
equivalents (3) -- (5)
----- ----- -----
Net Change in Cash and Cash Equivalents 113 82 (179)
Cash and Cash Equivalents at Beginning of Year 157 75 254
----- ----- -----
Cash and Cash Equivalents at End of Year $ 270 $ 157 $ 75
===== ===== =====
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $ 466 $ 446 $ 413
===== ===== =====
Income taxes paid $ 175 $ 258 $ 412
===== ===== =====
The accompanying notes to consolidated financial statements are an integral
part of these statements.
39
CENTRAL AND SOUTH WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
CSW is a registered holding company under the Holding Company Act subject
to regulation by the SEC. The U.S. Electric Operating Companies are also
regulated by the SEC under the Holding Company Act.
The principal business of the U.S. Electric Operating Companies is the
generation, transmission, and distribution of electric power and energy. These
companies are subject to regulation by the FERC under the Federal Power Act and
follow the Uniform System of Accounts prescribed by the FERC. They are subject
to further regulation with regard to rates and other matters by state regulatory
commissions as follows: CPL and WTU are subject to the Texas Commission; PSO is
subject to the Oklahoma Commission; and SWEPCO is subject to the Arkansas,
Louisiana, Oklahoma and Texas Commissions.
The principal business of SEEBOARD is the distribution and supply of
electricity and gas in South East England. SEEBOARD is subject to rate
regulation by the DGEGS.
In addition to electric utility operations, CSW has subsidiaries involved
in a variety of business activities. CSW Energy and CSW International pursue
cogeneration and other energy-related ventures. CSW Credit factors the accounts
receivable of affiliated and non-affiliated companies. C3 Communications pursues
telecommunications projects. CSW Leasing has investments in leveraged leases.
EnerShop offers energy-management services. CSW Energy Services pursued retail
energy markets outside of CSW's traditional service territory, until these
activities were discontinued in early 1999. In the fourth quarter of 1999, CSW
Energy Services began operating a staffing services company for electric utility
nuclear power plants, which was previously a PSO investment.
The more significant accounting policies of the CSW System are summarized
below.
Principles of Consolidation
The consolidated financial statements include the accounts of CSW and its
subsidiary companies. The consolidated financial statements for CPL, PSO and
SWEPCO include their respective capital trusts. All significant intercompany
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities along
with disclosure of contingent liabilities at the date of financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fixed Assets and Depreciation
U.S. Electric fixed assets are stated at the original cost of
construction, which includes the cost of contracted services, direct labor,
materials, overhead items and allowances for borrowed and equity funds used
during construction. SEEBOARD's fixed assets are stated at their original fair
40
market value which existed on the date of acquisition plus the original cost of
property acquired or constructed since the acquisition, less disposals.
Provisions for depreciation of plant are computed using the straight-line
method, generally at individual rates applied to the various classes of
depreciable property. The annual average consolidated composite rates of the
Registrants are presented in the following table.
CSW CPL PSO SWEPCO WTU
--------------------------------------------------
1999 3.3% 3.1% 3.1% 3.3% 3.3%
1998 3.4% 3.0% 3.1% 3.3% 3.2%
1997 3.4% 3.0% 3.3% 3.2% 3.3%
CPL Nuclear Decommissioning of STP
At the end of STP's service life, decommissioning is expected to be
accomplished using the decontamination method, which is one of the techniques
acceptable to the NRC. Using this method, the decontamination activities occur
as soon as possible after the end of plant operations. Contaminated equipment is
cleaned and removed to a permanent disposal location, and the site is generally
returned to its original condition.
CPL's decommissioning costs are accrued and funded to an external trust
over the expected service life of the STP units. The existing NRC operating
licenses will allow the operation of STP Unit 1 until 2027 and Unit 2 until
2028. CPL pays annual decommissioning costs based on the estimated future cost
to decommission STP, including escalation for expected inflation to the expected
time of decommissioning.
CPL estimates its portion of the costs of decommissioning STP to be $289
million in 1999 dollars based on a study completed in 1999. CPL is accruing and
recovering these decommissioning costs through rates based on the service life
of STP at a rate of $8.2 million per year. The funds are deposited with a
trustee under the terms of an irrevocable trust and are reflected in CPL's
consolidated balance sheets as Nuclear decommissioning trust, with a
corresponding amount accrued in Accumulated depreciation. On CSW's consolidated
balance sheets, the irrevocable trust is included in Deferred Charges and Other
Assets, Other, with a corresponding amount accrued in Accumulated depreciation.
In CSW's and CPL's consolidated statements of income, the income related to the
irrevocable trust is recorded in Other Income and Deductions, Other. In CPL's
consolidated statements of income, the interest expense related to the
irrevocable trust is recorded in Interest Charges, Interest on short-term debt
and other. In CSW's consolidated statements of income the interest expense
related to the irrevocable trust is recorded in Interest and Other Charges,
Interest on short-term debt and other. At December 31, 1999, the nuclear trust
balance was $86.1 million.
Electric Revenues and Fuel
The U.S. Electric Operating Companies record revenues based upon
cycle-billings. Electric service provided subsequent to billing dates through
the end of each calendar month are accrued for by estimating unbilled revenues
in accordance with industry standards.
CPL, SWEPCO and WTU recover retail fuel costs in Texas as a fixed
component of rates whereby over-recoveries of fuel are payable to customers and
under-recoveries may be billed to customers after Texas Commission approval. The
cost of fuel is charged to expense as incurred, with resulting fuel
over-recoveries and under-recoveries recorded as regulatory liabilities and
assets. PSO recovers fuel costs in Oklahoma through service level fuel cost
adjustment factors, and SWEPCO recovers fuel costs in Arkansas and Louisiana
through automatic fuel recovery mechanisms. The application of these mechanisms
varies by jurisdiction. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS, for
further information about fuel recovery.
41
CPL, PSO and WTU recover fuel costs applicable to wholesale customers,
which are regulated by the FERC, through an automatic fuel adjustment clause.
SWEPCO recovers fuel costs applicable to wholesale customers through formula
rates.
CPL amortizes direct nuclear fuel costs to fuel expense on the basis of a
ratio of the estimated energy used in the core to the energy expected to be
derived from such fuel assembly over its life in the core. In addition to fuel
amortization, CPL also records nuclear fuel expense as a result of other items,
including spent fuel disposal fees assessed on the basis of net MWHs sold from
STP and DOE special assessment fees for decontamination and decommissioning of
the enrichment facilities on the basis of prior usage of enrichment services.
Accounts Receivable
CSW Credit purchases, without recourse, the billed and unbilled accounts
receivable of the U.S. Electric Operating Companies and certain non-affiliated
public utility companies.
Regulatory Assets and Liabilities
For their regulated activities, the U.S. Electric Operating Companies
follow SFAS No. 71, which defines the criteria for establishing regulatory
assets and regulatory liabilities. See NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS - Electric Utility Restructuring Legislation for a discussion of the
continued application of SFAS No. 71 to the Texas Electric Operating Companies.
Regulatory assets represent probable future revenue to the company associated
with certain costs, which will be recovered from customers through the
ratemaking process. Regulatory liabilities represent probable future refunds to
customers. The regulatory assets are currently being recovered in rates or are
probable of being recovered in rates. The unamortized balances are included in
the table below.
1999 1998
-------- --------
(millions)
As of December 31
Regulatory Assets
Deferred plant costs (1) $491 $497
Mirror CWIP asset 257 257
Income tax related regulatory assets, net 318 308
Deferred restructuring and rate case costs (2) 22 26
OPEBs 2 2
Under-recovered fuel costs (3) 52 4
Loss on reacquired debt 133 153
Fuel settlement (4) 7 14
Other 11 10
-------- --------
$1,293 $1,271
======== ========
Regulatory Liabilities
Refunds due customers (5) $15 $22
Income tax related regulatory
liabilities, net -- --
-------- --------
$15 $22
======== ========
(1) $8 million and $15 million earning no return in 1999 and 1998, amortized
through 2001.
(2) $8 million and $16 million earning no return in 1999 and 1998, amortized
by the end of 2000; $7 million and $10 million earning no return in 1999
and 1998, amortized through 2001.
(3) $6 million earning no return in 1999, amortized over twelve month period,
recalculated twice each year.
(4) $7 million and $14 million earning no return in 1999 and 1998, amortized
by the end of 2006.
(5) $15 million earning no return in 1998, amortized over twelve month period,
recalculated twice each year.
Under provisions of the Texas Legislation, CPL filed an application with
the Texas Commission to securitize generation-related regulatory assets.
Management believes the unamortized regulatory asset amounts at December 31,
42
1999 will either be recovered through: (1) regulated rates; (2) stranded cost
recovery; or (3) FERC jurisdictional rates. The legislation provides for
securitization of 100% of regulatory assets and 75% of ECOM. Regulatory assets
in the amount of $763.7 million have been approved for securitization by the
Texas Commission, and a draft order has been prepared in this case. The Texas
Commission has indicated that it expects to issue a final order in late March
2000. The settlement also calls for $290 million of the amount originally
requested to be included in the calculation of stranded costs in CPL's March
2000 transmission and distribution cost filing. The securitization amount was
reduced by $186 million from the amount originally requested to reflect customer
benefits associated with accumulated deferred income taxes. CPL previously had
proposed to flow these benefits back to customers over the 14-year bond term.
See MD&A Securitization of Generation-related Regulatory Assets and Stranded
Costs and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility
Restructuring Legislation for a discussion of CPL's securitization application
and the Texas Legislation.
Discontinuance of SFAS No. 71
Application of SFAS No. 71 was discontinued in 1999 for CPL's and WTU's
generation business in Texas and SWEPCO's generation business in Arkansas and
Texas resulting from legislation passed in those states. See MD&A -
Securitization of Generation-related Regulatory Assets and Stranded Costs and
NOTE 2. LITIGATION AND REGULATORY PROCEDURES - Electric Utility Restructuring
Legislation for additional information. The following table summarizes the net
assets included in Electric Utility Plant related to each company's generation
plant for which the application of SFAS No. 71 was discontinued, compared to
total assets at December 31, 1999.
Generation Net Assets
Which For
SFAS No. 71 Was
Company Discontinued Total Assets
------------------------------------------------------------
(millions)
CPL $1,872 $4,848
SWEPCO 226 2,108
WTU 168 861
Goodwill Resulting from SEEBOARD Acquisition
The acquisition of SEEBOARD was accounted for as a purchase combination.
The purchase price has been allocated and is reflected in the consolidated
financial statements. The goodwill, resulting from the SEEBOARD acquisition, is
being amortized on a straight-line basis over 40 years. The unamortized balance
of the SEEBOARD goodwill at December 31, 1999 was $1.3 billion. CSW continually
evaluates whether circumstances have occurred that indicates the remaining
useful life of goodwill warrants revision.
Long-Term Contract
In a joint venture, SEEBOARD Powerlink won a 30-year, $1.6 billion
contract to operate, maintain, finance and renew the high-voltage power
distribution network of the London Underground. Revenues from this contract are
recognized under the percentage of completion method in line with progress on
defined contract segments.
Foreign Currency Translation
The financial statements of SEEBOARD U.S.A., which are included in CSW's
consolidated financial statements, have been translated from British pounds to
U.S. dollars in accordance with SFAS No. 52. All asset and liability accounts
are translated at the exchange rate at the end of the period, and all income
statement items are translated at the weighted average exchange rate for the
applicable period. All the resulting translation adjustments are recorded
directly to "Accumulated other comprehensive income" on CSW's Consolidated
Balance Sheets. Cash flow statement items are translated at a combination of
43
average, historical and current exchange rates. The non-cash impact of the
changes in exchange rates on cash and cash equivalents, resulting from the
translation of items at the different exchange rates, is shown on CSW's
Consolidated Statements of Cash Flows in "Effect of exchange rate changes on
cash and cash equivalents."
One British pound equals the following U.S. dollar amounts:
1999 1998 1997
--------- ---------- -----------
At December 31 $1.62 $1.66 $1.65
Weighted average for
the 12 months ended
December 31 $1.62 $1.66 $1.58
See NOTE 18. SOUTH AMERICAN INVESTMENTS for information regarding CSW's
investments in Brazil and Chile.
Cash Equivalents
Cash equivalents are considered to be highly liquid instruments with a
maturity of three months or less. Accordingly, temporary cash investments and
advances to affiliates are considered cash equivalents.
Risk Management
CSW has, at times, been exposed to currency and interest rate risks which
reflect the floating exchange rate that exists between the U.S. dollar and the
British pound. CSW has utilized certain risk management tools, including cross
currency swaps, foreign currency futures and foreign currency options, to manage
adverse changes in exchange rates and to facilitate financing transactions
resulting from CSW's acquisition of SEEBOARD.
SEEBOARD has entered into contracts for differences to reduce exposure to
fluctuations in the price of electricity purchased from the United Kingdom's
electricity power pool. This pool was established at privatization of the United
Kingdom's electric industry for the bulk trading of electricity between
generators and suppliers.
CSW accounts for these transactions as hedge transactions and any gains or
losses associated with the risk management tools are recognized in the financial
statements at the time the hedge transactions are settled. CSW believes its
credit risk in these contracts is negligible. See MD&A, RISK MANAGEMENT, NOTE 7.
FINANCIAL INSTRUMENTS; NOTE 17. NEW ACCOUNTING STANDARDS and NOTE 18. SOUTH
AMERICAN INVESTMENTS for additional information.
Securities Available for Sale
CSW accounts for its investments in equity securities in accordance with
SFAS No. 115. The investments have been designated as available for sale, and as
a result are stated at fair value. Unrealized holding gains and losses, net of
related taxes, are included in Accumulated other comprehensive income on CSW's
Consolidated Balance Sheets. Information related to these securities available
for sale as of December 31, 1999 is presented in the following table.
Original Unrealized Holding
Cost Gains / (Losses) Fair Value
---------------------------------------------------------------
(millions)
Securities available
for sale $110 $(48) $62
44
As of December 31, 1999, CSW International has invested $110 million in
stock of a Chilean electric company. The investment is classified as securities
available for sale and accounted for by the cost method. Based on the year-end
market value of the shares and foreign exchange rates, the value of the
investment at December 31, 1999 is $62 million. The reduction in the carrying
value of this investment has been reflected in Accumulated other comprehensive
income in CSW's Consolidated Balance Sheets. Management views its investment in
Chile as a long-term investment strategy and believes this investment continues
to have significant long-term value and that it is recoverable. Management will
continue to closely evaluate the changes in the South American economy and its
impact on CSW International's investment in the Chilean electric company. See
NOTE 18. SOUTH AMERICAN INVESTMENTS.
Inventory
CPL, PSO and WTU utilize the LIFO method for the valuation of all fossil
fuel inventories. SWEPCO continues to utilize the weighted average cost method
pending approval of the Arkansas Commission to utilize the LIFO method. At
December 31, 1999, none of the U.S. Electric Operating Companies had LIFO
reserves. LIFO reserves are the excess of the inventory replacement cost over
the carrying amount on the balance sheet.
Comprehensive Income
Consistent with the requirements of SFAS No. 130, CSW discloses
comprehensive income. Comprehensive income is defined as the change in equity
(net assets) of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners.
Components of Other Comprehensive Income
The following table provides the components that comprise the balance
sheet amount in Accumulated other comprehensive income.
Components 1999 1998 1997
----------------------------------------------------------------
(millions)
Foreign Currency Adjustments $6 $34 $27
Unrealized Losses on Securities (20) (20) 1
Minimum Pension Liability (4) (6) (5)
---------------------------
$(18) $8 $23
---------------------------
Segment Reporting
CSW has adopted SFAS No. 131, which requires disclosure of select
financial information by business segment as viewed by the chief operating
decision-maker. See NOTE 14. BUSINESS SEGMENTS.
Reclassification
Certain financial statement items for prior years have been reclassified
to conform to the 1999 presentation.
45
2. LITIGATION AND REGULATORY PROCEEDINGS
Litigation Related to the Rights Plan and AEP Merger
Two lawsuits were filed in Delaware state court seeking to enjoin the AEP
Merger. CSW and each of its directors were named as defendants in both cases.
The first suit alleged that the Rights Plan, approved by the CSW Board of
Directors on September 27, 1997, constituted a "poison pill" precluding
acquisition offers and resulting in a heightened fiduciary duty on the part of
the CSW Board of Directors to pursue an auction-type sales process to obtain the
best value for CSW stockholders. The second suit alleged that the AEP Merger was
unfair to CSW stockholders in that it did not recognize the underlying intrinsic
value of CSW's assets and its future profitability. Both suits were dismissed in
1999.
Electric Utility Restructuring Legislation
On June 18, 1999, legislation was signed into law in Texas that will
restructure the electric utility industry in the state. The new law, among other
things,
- - gives Texas customers of investor-owned utilities the opportunity to choose
their electric provider beginning January 1, 2002;
- - provides for the recovery of stranded costs, which are defined as the excess
of net book value of generation assets over the defined market value of
those assets;
- - requires reductions in nitrogen oxide and sulfur dioxide emissions;
- - provides a rate freeze until January 1, 2002 followed by a 6% rate reduction
for residential and small commercial customers, an additional rate reduction
for low-income customers and a number of customer protections; and
- - sets certain limits on capacity owned and controlled by power generation
companies.
Rural electric cooperatives and municipal electric systems can choose
whether to participate in retail competition. Delivery of the electricity at
regulated prices will continue to be the responsibility of the local electric
transmission and distribution utility company. Each utility must unbundle its
business activities into a retail electric provider, a power generation company
and a transmission and distribution utility.
CPL, SWEPCO and WTU filed their business separation or "unbundling" plans
with the Texas Commission on January 10, 2000. The filing gives an overview of
how the Texas Electric Operating Companies could separate into three separate
companies to meet the requirements of the Texas Legislation. Specifically, the
filing describes the financial aspects of separating the companies, lists the
functions each of the new business entities will perform, describes how the
companies will physically separate their operations, discusses the accounting
aspects, describes how the companies will handle competitive energy services,
and introduces interim and permanent codes of conduct. The main issues the Texas
Commission will determine in this case are whether CSW's proposed business
separation method and the proposed code of conduct are in compliance with the
Texas Legislation. Other separation issues will be presented in a March 31, 2000
cost unbundling filing. CPL, SWEPCO and WTU expect an order from the Texas
Commission on this case in the second quarter of 2000.
During 1999, legislation was also enacted in Arkansas that will ultimately
restructure the electric utility industry in that state. SWEPCO will file a
business unbundling plan in Arkansas in mid-2000.
46
The financial statements of the U.S. Electric Operating Companies have
historically reflected the effects of applying the requirements of SFAS No. 71.
Pursuant to those requirements, the U.S. Electric Operating Companies have
recorded regulatory assets and liabilities (probable future revenues and
refunds) to reflect the economic effect of cost-based regulation. When a company
determines that its operations or a segment of its operations no longer meets
the criteria for applying SFAS No. 71, it is required to apply the requirements
of SFAS No. 101. Pursuant to those requirements and further guidance provided in
EITF 97-4, a company is required to write-off regulatory assets and liabilities
related to deregulated operations, unless recovery of such amounts is provided
through rates to be collected in a continuing regulated portion of the company's
operations. Additionally, it is required to determine if any plant assets are
impaired under SFAS No. 121.
As a result of the scheduled deregulation of generation in Texas and
Arkansas, CSW concluded that it should discontinue the application of SFAS No.
71 for the Texas generation portion of the business for CPL and WTU and the
Texas and Arkansas jurisdictional portions of the generation business for
SWEPCO. Consequently, WTU recorded an extraordinary charge to earnings of $5.5
million and SWEPCO recorded an extraordinary charge to earnings of $3.0 million
to reflect the effects of discontinuing the application of SFAS No. 71 and to
write-off net regulatory assets that are not probable of recovery.
The discontinuance of SFAS No. 71 for CPL did not result in a net charge
to earnings as such net regulatory assets, pursuant to the legislation, are
expected to be recovered from transmission and distribution customers through
rates that will continue to be regulated.
Electric utilities who have stranded costs under the Texas Legislation are
allowed to recover generation-related regulatory assets that otherwise may not
be recoverable in the future competitive market. All or a majority of those
costs can be refinanced through securitization, which is a financing structure
designed to provide lower financing costs than is available through the
conventional utility cost of capital model. The securitized amounts are then
recovered through a non-bypassable wires charge. On October 18, 1999, CPL filed
an application with the Texas Commission to securitize approximately $1.27
billion of its retail generation-related regulatory assets and approximately $47
million in other qualified costs. CPL expects to issue the securitization bonds
in 2000, depending on market conditions and the timing of an order from the
Texas Commission. Hearings were held in December 1999. CPL reached settlement
agreements which resolved all issues except the role of the Texas Commission's
financial advisor.
On Feburary 10, 2000, the Texas Commission tentatively approved a
settlement, which will permit CPL to securitize approximately $764 million of
regulatory assets. The Texas Commission is expected to grant final approval by
March 27, 2000. The settlement calls for CPL to reduce its proposed amount to be
securitized from $1.27 billion to approximately $764 million of regulatory
assets plus an estimated $29 million of other qualified costs. The settlement
also calls for $290 million of the amount originally requested to be included in
the calculation of stranded costs in CPL's March 2000 transmission and
distribution cost filing. This filing will establish stranded costs, of which
75% can be securitized and 25% can be recovered through a competitive transition
charge. The securitization amount was reduced by $186 million from the amount
originally requested to reflect customer benefits associated with accumulated
deferred income taxes. CPL previously had proposed to flow these benefits back
to customers over the 14-year bond term. A second phase of securitization could
occur when the Texas Commission makes a preliminary determination of stranded
costs, currently expected to occur in the first half of 2001. A non-bypassable
charge will be used to recover additional unsecuritized stranded cost amounts.
Under the provisions of EITF 97-4, CPL's generation-related net regulatory
assets were transferred to the transmission and distribution portion of the
business and will be amortized as they are recovered through charges to
customers. Management currently believes all generation-related regulatory
assets for CPL will be recovered as provided under Texas Legislation. If future
events were to occur that made the recovery of these assets no longer probable,
47
CPL would write-off any non-recoverable portion of such assets as a non-cash
charge to earnings.
The discontinuance of SFAS No. 71 for CPL's and WTU's Texas generation
business and SWEPCO's Texas and Arkansas generation business requires that these
businesses no longer defer costs or recognize liabilities strictly resulting
from the actions of a regulator. For example, operations and maintenance
expenditures will be expensed as incurred regardless of regulatory treatment. In
addition, the equity component of allowance for funds used during construction
can no longer be accrued for generation-related capital projects. Instead, the
businesses will be required to follow the interest capitalization rules in SFAS
No. 34. SFAS No. 71 also allowed for the deferral of the loss on any reacquired
debt. In December 1999, CPL incurred a loss totaling approximately $8.5 million
that was expensed as an extraordinary item, since CPL is no longer able to apply
the provisions of SFAS No. 71 to its Texas generation-related operations.
CPL's amount of regulatory assets and stranded costs are subject to a
final determination by the Texas Commission in 2004. The Texas Legislation
provides that all such finally determined stranded costs will be recovered.
Since SWEPCO and WTU are not expected to have net stranded costs, all
generation-related non-recoverable net regulatory assets were written off and
reflected on the statement of income as an extraordinary loss. See NOTE 16.
EXTRAORDINARY ITEMS.
Additionally, CPL, SWEPCO and WTU performed an accounting impairment
analysis of generation assets under SFAS No. 121 and concluded there was no
impairment of generation assets at that time. An impairment analysis involves
estimating future net cash flows arising from the use of an asset. If the net
cash flows exceed the net book value of the asset, then there is no impairment
of the asset for accounting purposes. CPL, SWEPCO and WTU will continue to
review their assets for potential impairment if events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
The Texas Legislation also provides that each year during the 1999 through
2001 rate freeze period, utilities with stranded costs are required to apply any
earnings in excess of the most recently approved cost of capital in a company's
last rate case (if issued on or after January 1, 1992) to reduce stranded costs.
As a result, CPL recorded a net charge to earnings of $12.0 million for 1999 to
reflect the impact of this provision. Utilities without stranded costs must
either flow such amounts back to customers or make capital expenditures, at no
charge to customers, to improve transmission or distribution facilities or to
improve air quality. As a result, WTU recorded a net charge to 1999 earnings of
$3.9 million and SWEPCO recorded a net charge of $4.2 million to 1999 earnings
from the effect of the excess earnings under the Texas Legislation. The charges
were based on estimates for the current year and are subject to final
determination by the Texas Commission.
Beginning January 1, 2002, fuel costs will not be subject to Texas
Commission fuel reconciliation proceedings. Consequently, CPL, SWEPCO, and WTU
will file a final fuel reconciliation with the Texas Commission reconciling fuel
costs through the period December 31, 2001. These final fuel balances will be
included in each company's true-up proceeding in 2004.
CSW continues to analyze the impact of the electric utility industry
restructuring legislation on the U.S. Electric Operating Companies. The Texas
Commission has established numerous task forces, including representatives from
CPL, SWEPCO and WTU, to address various issues associated with the Texas
Legislation and to provide guidance regarding implementation of restructuring.
As previously discussed, as a result of the Texas Legislation, CPL filed
its application for securitization on October 18, 1999 with the Texas
Commission. CPL, SWEPCO and WTU filed business separation plans with the Texas
48
Commission on January 10, 2000, and will file excess earnings reports and cost
unbundling plans in March 2000 and CPL will file its ECOM report in March 2000.
Also see MD&A - RECENT DEVELOPMENTS AND TRENDS, Electric Utility
Restructuring Legislation for a discussion on restructuring legislation.
CPL Rate Review - Docket No. 14965
In November 1995, CPL filed with the Texas Commission a request to
increase its retail base rates by $71 million. On October 16, 1997, the Texas
Commission issued the CPL 1997 Final Order which lowered the annual retail base
rates of CPL by approximately $19 million, or 2.5%, from CPL's rate level
existing prior to May 1996. The Texas Commission also included a "glide path"
rate methodology in the CPL 1997 Final Order pursuant to which CPL's annual
rates were reduced by $13 million beginning May 1, 1998 with an additional
reduction of $13 million on May 1, 1999.
CPL filed an appeal of the CPL 1997 Final Order to the State District
Court of Travis County to raise several issues related to the rate case. The
primary issues include: (i) the classification of $800 million of invested
capital in STP as ECOM which was also assigned a lower return on equity than
non-ECOM property; (ii) the Texas Commission's use of the "glide path" rate
reduction methodology applied on May 1, 1998 and 1999; and (iii) the $18 million
of disallowed affiliate expenses from CSW Services. As part of the appeal, CPL
sought a temporary injunction to prohibit the Texas Commission from implementing
the "glide path" rate reduction methodology. The court denied the temporary
injunction and the "glide path" rate reduction was implemented in May 1998 and
May 1999. Hearings on the appeal were held during the third quarter of 1998, and
a judgment was issued in February 1999 affirming the Texas Commission order,
except for a consolidated tax issue in the amount of $6 million, which was
remanded to the Texas Commission.
CPL filed an appeal of this most recent order to the Third District of
Texas Court of Appeals and management is unable to predict how the final
resolution of these issues will ultimately affect CSW's and CPL's results of
operations and financial condition. On May 4, 1999, AEP and CSW announced that
they had reached a stipulated agreement with the General Counsel of the Texas
Commission and other intervenors in the state of Texas related to the AEP/CSW
merger case. The Texas Commission approved the AEP Merger in early November
1999. If the AEP Merger is ultimately consummated, CSW will withdraw its appeal
with respect to the "glide path" rate reduction methodology as discussed above
as issue "(ii)" but will continue seeking the appeal of issues "(i) and (iii)"
as discussed above. See NOTE 15. PROPOSED AEP MERGER and MD&A - PROPOSED AEP
MERGER for a discussion on the stipulated agreement.
See MD&A - RATES AND REGULATORY MATTERS, CPL Rate Review - Docket No.
14965 for a discussion of the CPL 1997 Final Order.
CPL Deferred Accounting
By orders issued in 1989 and 1990, the Texas Commission authorized CPL to
defer certain STP Unit 1 and Unit 2 costs incurred between the commercial
operation dates of those units and the effective date of rates reflecting the
operation of those units. Upon appeal of the 1989 CPL order, and a related order
involving another utility, the Supreme Court of Texas in 1994 sustained deferred
accounting as an appropriate mechanism for the Texas Commission to use in
preserving the financial integrity of CPL, but remanded CPL's case to the Third
District of Texas Court of Appeals to consider certain substantial evidence
points of error not previously decided by the Third District of Texas Court of
Appeals. On August 16, 1995, the Third District of Texas Court of Appeals
rendered its opinion in the remand proceeding and affirmed the Texas
Commission's order in all respects.
49
By orders issued in October 1990 and December 1990, the Texas Commission
quantified the STP Unit 1 and Unit 2 deferred accounting costs and authorized
the inclusion of the amortization of the costs and associated return in CPL's
retail rates. These Texas Commission orders were appealed to the Travis County
District Court where the appeals are still pending. Language in the Supreme
Court of Texas' opinion in the appeal of the deferred accounting authorization
case suggests that the appropriateness of including deferred accounting costs in
rates charged to customers is dependent on a finding in the first case in which
the deferred STP costs are recovered through rates that the deferral was
actually necessary to preserve the utility's financial integrity. If in the
appeals of the October 1990 and December 1990 rate orders, the courts decide
that subsequent review under the financial integrity standard is required and
was not made in those orders, such rate orders would be remanded to the Texas
Commission for the purpose of entering findings applying the financial integrity
standard. Pending the ultimate resolution of CPL's deferred accounting issues,
management is unable to predict how its deferred accounting orders will
ultimately be resolved by the Texas Commission.
If CPL's deferred accounting matters are not favorably resolved, CSW could
experience a material adverse effect on its results of operations and financial
condition. While management is unable to predict the ultimate outcome of these
matters, management believes either that CPL will receive approval of its
deferred accounting amounts or that CPL will be successful in renegotiation of
its rate orders, so that there will be no material adverse effect on CSW's
results of operation or financial condition.
The deferred accounting amounts are included in the amounts to be
securitized as part of the settlement amount approved by the Texas Commission in
its October 18, 1999 securitization filing. See MD&A - Securitization of
Generation-related Regulatory Assets and Stranded Costs.
CPL Fuel Reconciliation
On December 31, 1998, CPL filed with the Texas Commission an application
to reconcile fuel costs and to request authorization to carry the reconciled
balance forward into the next reconciliation period. During the reconciliation
period of July 1, 1995 through June 30, 1998, CPL incurred $828.5 million in
eligible fuel and fuel-related expenses. The Texas jurisdictional allocation of
such fuel and fuel-related expenses is $783.4 million.
In addition to requesting reconciliation of its fuel and fuel-related
expenses for the reconciliation period, CPL requested authority from the Texas
Commission to recover the reward earned during the reconciliation period under
the performance standard adopted in the CPL 1997 Final Order for CPL's share of
STP. The Texas Commission adopted a three-year average capacity factor of 83%
performance standard for STP in that order. During the reconciliation period,
STP operated at a net capacity factor of 93.1%, resulting in a reward of $19.2
million.
CPL requested authority to recover the Texas portion of 50% of the reward
by including 1/36th of this amount in Texas retail eligible fuel expense each
month for the three-year period following the Texas Commission's order in the
fuel reconciliation case. CPL further requested authority to apply the amounts
of the reward recovered through Texas retail eligible fuel expense toward
additional amortization of its STP deferred accounting regulatory asset. The
remaining 50% of the reward would be "banked" to be used against potential
future penalties or other disallowance of fuel costs. Hearings were held before
an ALJ in June 1999. In July 1999, all parties reached a settlement in
principle. The settlement resolves all disputed issues and includes a
disallowance of $7.44 million recorded in the third quarter of 1999. The
settlement provides for no STP performance reward either now or in the future.
The Texas Commission issued its final order on September 23, 1999 approving the
settlement.
50
CPL Fuel Factor Filing
In January 2000, CPL filed with the Texas Commission an Application for
Authority to implement an increase in fuel factors of $55.4 million, or 16.5% on
an annual basis effective with the March 2000 billing month. Additionally, CPL
proposed to implement an interim fuel surcharge of $36.5 million, including
accumulated interest over a six-month period to collect its under-recovered fuel
costs beginning in April 2000. CPL entered into a settlement providing for an
increase in fuel factors of $43.3 million or 12.9% and a surcharge of $24.7
million. The settlement will be implemented in March and April 2000.
CPL Municipal Franchise Fee Litigation
In May 1996, the City of San Juan, Texas filed a class action suit in
Hidalgo County, Texas District Court on behalf of all cities served by CPL based
upon CPL's alleged underpayment of municipal franchise fees. The plaintiffs'
third amended petition, filed in January 2000, asserts various contract and tort
claims against CPL as well as certain audit rights. The third amended petition
seeks actual damages of up to $200 million, punitive damages of up to $100
million and attorneys' fees. CPL filed a counterclaim for any overpayment of
franchise fees it may have made as well as its attorneys' fees. CPL also filed a
motion to transfer venue to Nueces County, Texas, and a plea to the jurisdiction
and pleas in abatement asserting that the Texas Commission has primary
jurisdiction over the claims. In May 1996 and December 1996, respectively, the
Cities of Pharr, Texas and San Benito, Texas filed individual suits making
claims virtually identical to those claimed by the City of San Juan. The suit
filed by the City of San Benito has been voluntarily dismissed.
In January 1997, CPL filed an original petition at the Texas Commission
requesting the Texas Commission to declare its jurisdiction over CPL's
collection and payment of municipal franchise fees. In April 1997, the Texas
Commission issued a declaratory order in which it declined to assert
jurisdiction over the claims of the City of San Juan. CPL appealed the Texas
Commission's decision to the Travis County, Texas District Court, which affirmed
the Texas Commission ruling on February 19, 1999. CPL appealed this ruling to
the Austin Court of Appeals; oral argument was heard on this appeal in November
1999.
After the Texas Commission's order, the Hidalgo County District Court
overruled CPL's plea to the jurisdiction and plea in abatement. In July 1997,
the Hidalgo County District Court entered an order certifying the case as a
class action. CPL appealed this order to the Corpus Christi Court of Appeals. In
February 1998, the Corpus Christi Court of Appeals affirmed the trial court's
order certifying the class. CPL appealed the Corpus Christi Court of Appeals
ruling to the Texas Supreme Court, which declined to hear the case. In August
1998, the Hidalgo County District Court ordered the case to mediation and
suspended all proceedings pending the completion of the mediation. The mediation
was completed in December 1998, but the case was not resolved.
On January 5, 1999, a class notice was mailed to each of the cities served
by CPL. Over 90 of the 128 cities declined to participate in the lawsuit.
However, CPL has pledged that if any final, non-appealable court decision in the
litigation awards a judgement against CPL for a franchise underpayment, CPL will
extend the principles of that decision, with regard to the franchise
underpayment, to the cities that decline to participate in the litigation. The
plaintiffs filed a motion to extend the time for the cities to decide whether to
participate in the lawsuit. In December 1999, the court ruled that the class
would consist of 30 cities, and the plaintiffs' motion to extend the time for
the cities to participate in the lawsuit was withdrawn. The City of Weslaco has
recently joined as an additional class representative.
Although CPL believes that it has substantial defenses to the cities'
claims and intends to defend itself against the cities' claims and pursue its
counterclaims vigorously, management cannot predict the outcome of the municipal
franchise fee litigation or its impact on CSW's results of operations or
financial position.
51
CPL Anglo Iron Litigation
In April 1998, CPL was sued by Anglo Iron in the United States District
Court for the Southern District of Texas, Brownsville Division, for claims
arising from the clean-up of a site owned and operated by Anglo Iron in
Harlingen, Texas. Anglo Iron sought reimbursement pursuant to CERCLA and common
law contribution and indemnity for alleged response and clean-up costs of
$328,139 and damages of $150,000 for "loss of fair market value" of the site. In
1999, the parties settled the case for $137,500, and the case was dismissed with
prejudice.
CPL Sinton Landfill Litigation
CPL, along with over 30 others, was named as a defendant in the district
court in San Patricio County, Texas. The plaintiffs are approximately 500
current and former landowners in the vicinity of a landfill site near Sinton,
Texas. Each plaintiff alleges $10 million property damage and personal injury as
a result of alleged contamination from the site. Plaintiffs made a collective
settlement demand upon CPL for $1.1 million. In January 1999, in exchange for a
de minimus sum, CPL reached an agreement with Browning Ferris Industries, Inc.,
the operator of the site, to indemnify CPL for any judgment or settlement amount
that CPL may owe to the plaintiffs in this case, as well as CPL's attorney's
fees incurred after the agreement. In August 1999, the trial court granted
summary judgment for CPL. The plaintiffs appealed the summary judgment ruling.
Management believes that the ultimate resolution of this matter will not have a
material adverse impact on CSW's consolidated results of operations or financial
condition.
CPL Valero Litigation
In April 1998, Valero filed suit against CPL in Nueces County, Texas
District Court, alleging claims for breach of contract and negligence. Valero's
suit seeks in excess of $11 million as damages for property loss and lost
profits allegedly incurred after an interruption of electricity to its facility
in Corpus Christi, Texas in April 1996. The parties held a settlement conference
in August 1999, but no progress was made toward settlement of the case. The case
is currently in discovery. Management cannot predict the outcome of this
litigation. However, management believes that CPL has valid defenses to Valero's
claims and intends to defend the matter vigorously. Management also believes
that the claims are covered by insurance and that the ultimate resolution of
this matter will not have a material adverse impact on CSW's consolidated
results of operations or financial condition.
CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No.
17285)
A joint complaint filed by CPL and WTU with the Texas Commission asserted
that since January 1, 1997, Texas Utilities Electric Company had been
effectively double charging for transmission service within ERCOT. A proposal
for decision received in February 1998 recommended approval of a proposal by CPL
and WTU to reduce by $15.5 million annually their payments to Texas Utilities
Electric Company. The Texas Commission approved the proposal in September 1998.
Although Texas Utilities Electric Company appealed the Texas Commission final
order, it refunded $26.6 million to CPL and WTU in November 1998. Prior to the
Texas Commission's September 1998 decision, the $15.5 million annual payment to
Texas Utilities Electric Company was allocated to the U.S. Electric Operating
Companies. As a result of this order, the payment continues to be recorded on
CPL's and WTU's books as a reduction to ERCOT transmission expense and there
will be no future expenses recorded on the books of PSO and SWEPCO.
On November 15, 1999, CPL and WTU reached a settlement with Texas
Utilities Electric Company. This settlement resulted in the execution of two new
Transmission Service Agreements retroactive to January 1, 1997. As a result of
this settlement, all pending litigation between Texas Utilities Electric Company
and CSW will be terminated and Texas Utilities Electric Company will withdraw
its appeal in Docket No. 17285. CPL and WTU agreed to pay Texas Utilities
Electric Company $12 million during 2000. The $12 million liability was accrued
on CPL's and WTU's books during the fourth quarter of 1999. CPL accrued $6.4
52
million and WTU accrued $5.6 million. In addition, the two new Transmission
Service Agreements require CPL and WTU to pay for export transmission service
along with the ERCOT transmission charges approved by the Texas Commission.
Transmission Coordination Agreement
The transmission coordination agreement provides the means by which the
U.S. Electric Operating Companies plan, operate and maintain the four separate
transmission systems as a single unit. The agreement also establishes the method
by which the U.S. Electric Operating Companies allocate revenues received under
open access transmission tariffs. In August 1998, the FERC accepted the
transmission coordination agreement for filing, suspended it for a nominal
period, and made it effective retroactive to January 1, 1997, subject to refund
and investigation. In the fourth quarter of 1998, the U.S. Electric Operating
Companies and supporting intervenor signatories filed an uncontested offer of
settlement. The FERC issued an order on June 18, 1999, accepting the offer of
settlement. The FERC further ordered that appropriate refunds be made to reflect
the terms of the revised transmission coordination agreement. In the second
quarter of 1999, the FERC also issued an order accepting the U.S. Electric
Operating Companies' compliance filing of their open access transmission tariff.
The FERC previously had ordered the compliance filing to review the method by
which certain open access transmission tariff customers were to be charged for
transmission service. As a result of that order, certain changes were made in
the transmission coordination agreement related to the allocation of certain
open access transmission tariff revenues. Each U.S. Electric Operating Company
will be allocated revenue in proportion to each company's respective revenue
requirement for the service it provides under the revised open access
transmission tariff. The U.S. Electric Operating Companies requested and
received from the FERC a deferral of their refund obligation until the FERC
issues an order accepting the revised transmission coordination agreement.
On October 29, 1999, CSW filed with the FERC a revised transmission
coordination agreement. The revised transmission coordination agreement includes
changes to the original transmission coordination agreement to ensure the
above-mentioned allocation of revenues to each U.S. Electric Operating Company.
In 1999, each of the U.S. Electric Operating Companies recorded the estimated
impact of the reallocation of open access transmission tariff revenues, which
increased CSW's income before taxes by approximately $2.4 million. The earnings
increase was related to additional non-affiliated revenues resulting from the
open access transmission tariff. On December 16, 1999, the FERC accepted the
revised transmission coordination agreement, which is retroactive to January 1,
1997.
PSO Rate Review
In July 1996, the Oklahoma Commission staff filed an application seeking a
review of PSO's earnings and in July 1997 recommended a rate reduction of $76.8
million for PSO.
On October 23, 1997, the Oklahoma Commission issued a final order
approving a stipulated agreement with parties to settle the rate inquiry. The
PSO 1997 Rate Settlement Agreement called for PSO to lower its retail base rates
beginning with the December 1997 billing cycle by approximately $35.9 million
annually, or a 5.3% decrease below the then current level of retail rates. Part
of the rate reduction included a reduction in annual depreciation expense of
approximately $10.9 million. In addition, the PSO 1997 Rate Settlement Agreement
resulted in PSO making a one-time $29 million refund to customers in December
1997.
The PSO 1997 Rate Settlement Agreement also called for PSO to eliminate
or amortize before its next rate filing approximately $41 million in certain
deferred assets, approximately $26 million of which had been expensed in 1996.
The remaining $15 million of deferred assets, which included approximately $9
million of costs incurred for customer energy management incentive programs,
were written off in 1997. The financial impact of the PSO 1997 Rate Settlement
Agreement on PSO's 1997 results of operations was a reduction in revenues of
53
$31.5 million and a reduction in expenses of $4.1 million which included the
write-off of the previously mentioned deferred assets.
The PSO 1997 Rate Settlement Agreement resulted in a material adverse
effect on PSO's, but not CSW's, results of operations for 1997 that will have a
continuing impact because of the rate decrease. However, it reduced significant
risks for PSO related to this regulatory proceeding and should allow PSO's rates
to remain competitive for the foreseeable future.
PSO PCB Cases
PSO was named a defendant in petitions filed in state court in Oklahoma in
1996. The petitions allege that the plaintiffs suffered personal injury and fear
future injury as a result of contamination by PCBs from a transformer
malfunction that occurred in April 1982 at the Page Belcher Federal Building in
Tulsa, Oklahoma. Each of the plaintiffs seeks actual and punitive damages in
excess of $10,000. Other claims arising from this incident were settled and the
suits dismissed. During 1999, eleven cases were settled for a nominal amount
covered by PSO's insurance, and two cases were dismissed for failure to
prosecute. At December 31, 1999, nine cases remain pending. Management believes
that PSO has defenses to the remaining cases and intends to defend them
vigorously. Management believes that the remaining claims, excluding claims for
punitive damages, are covered by insurance and that the ultimate resolution of
the remaining lawsuits will not have a material effect on CSW's results of
operations or financial condition.
SWEPCO Louisiana Rate Review
In December 1997, the Louisiana Commission announced it would review
SWEPCO's rates and service. In October 1999, SWEPCO and the staff of the
Louisiana Commission reached an agreement and stipulation, which was filed on
October 14, 1999. The significant provisions of the agreement and stipulation
follow:
- - SWEPCO's Louisiana retail jurisdictional revenues were reduced by $11
million, effective with the December 1999 billing cycle;
- - SWEPCO is allowed to earn an 11.1% return on common equity;
- - SWEPCO is allowed to recover certain regulatory assets totaling $7.1
million;
- - SWEPCO will be subject to a two-year base rate freeze, which includes force
majeure provisions; and
- - SWEPCO will be allowed to increase depreciation rates for transmission,
distribution and general plant.
The Louisiana Commission approved the agreement and stipulation in
November 1999, which was implemented in December 1999.
SWEPCO Arkansas Rate Review
In July 1998, the Arkansas Commission began a review of SWEPCO's earnings.
On July 30, 1999, SWEPCO entered into a settlement agreement with the general
staff of the Arkansas Commission and the Arkansas Attorney General's Office. The
settlement agreement reduces SWEPCO's Arkansas annual revenues by $5.4 million,
or 3%. Additionally, the stipulation and settlement agreement provides for a
10.75% return on common equity, an increase in depreciation rates, and an
agreement by SWEPCO not to seek recovery of generation-related stranded costs.
54
On September 23, 1999, the Arkansas Commission issued an order approving
the stipulation and settlement agreement. On October 25, 1999, SWEPCO filed
compliance rate tariffs with the Arkansas Commission, which are consistent with
the Arkansas Commission order. The provisions of the settlement agreement were
implemented in December 1999.
SWEPCO Fuel Proceeding
In May 1997, SWEPCO filed with the Texas Commission an application to
reconcile fuel costs and implement a 12-month surcharge of fuel cost
under-recoveries. Because of the uncertainty as to when a surcharge may be
implemented, SWEPCO did not propose a surcharge period or a total surcharge
amount, which would include interest through the entire surcharge period.
However, SWEPCO indicated that it had under-recovered Texas jurisdictional fuel
costs of approximately $16.8 million, including interest through December 1996.
Included in the $16.8 million balance are fuel-related litigation expenses of
$5.0 million and an interest return of $2.0 million on the unamortized balance
of a fuel contract termination payment.
On December 8, 1997, SWEPCO and the other parties to the proceedings
before the Texas Commission filed a settlement on all issues except as to
whether transmission equalization payments should be included in fuel or base
revenues. The settlement resulted in a decrease of the under-recovered fuel
costs, and the resulting surcharge recovery, by $6.0 million, which was recorded
in 1997. The settlement also provides that SWEPCO's fuel and fuel-related
expenses during the reconciliation period were reasonable and necessary and
recoverable as fuel expense. Also, the settlement provides that SWEPCO's actions
in litigating and renegotiating certain fuel contracts, together with the
prices, terms and conditions of the renegotiated contracts, were prudent.
On April 8, 1998, the ALJ issued a proposal for decision regarding the
only outstanding issue, recommending that SWEPCO be allowed to include
transmission equalization expense in eligible fuel expense. On May 19, 1998, the
Texas Commission reversed the ALJ and ordered an earnings reduction of
approximately $1.8 million, recorded in the second quarter of 1998. On June 8,
1998, SWEPCO filed a motion for rehearing on the transmission equalization
issue, which was denied through operation of law. After the Texas Commission's
order on May 19, 1998, SWEPCO had still under-recovered its fuel and fuel
related expenses. On July 1, 1998, the Texas Commission issued an order allowing
SWEPCO to surcharge its Texas retail customers $6.9 million of under-recovered
fuel and fuel-related expenses and associated interest. The surcharge began in
July 1998 and ended in June 1999. SWEPCO has filed an appeal regarding this
matter in the State District Court of Travis County, Texas. Management is unable
to predict the ultimate outcome of this litigation. However, SWEPCO has agreed
to withdraw the appeal if the AEP Merger is consummated. See NOTE 15. PROPOSED
AEP MERGER for additional information.
SWEPCO Interim Fuel Refund
On August 24, 1999, SWEPCO filed an application at the Texas Commission to
make an interim refund of fuel cost over-recoveries of $7.5 million received by
SWEPCO from its Texas retail jurisdictional customers. The application requested
that the refund be made in October 1999. On September 20, 1999, a stipulation
between all parties was filed with the Texas Commission, which preserved
SWEPCO's application to refund $7.5 million to SWEPCO's Texas retail customers.
An order granting interim approval to make the refund in October 1999 was issued
by the hearing examiner on September 24, 1999. SWEPCO began implementing the
refund on customer bills during the first billing cycle of October 1999. On
October 21, 1999, the Texas Commission issued a final order which affirmed
approval to refund the fuel cost over-recoveries.
55
SWEPCO Lignite Mining Agreement Litigation
SWEPCO and CLECO are each a 50% owner of Dolet Hills Power Station Unit 1
and jointly own lignite reserves in the Dolet Hills area of northwestern
Louisiana. In 1982, SWEPCO and CLECO entered into a lignite mining agreement
with the DHMV, a partnership for the mining and delivery of lignite from a
portion of these reserves.
On April 15, 1997, SWEPCO and CLECO sued DHMV and its partners in the
United States District Court for the Western District of Louisiana seeking to
enforce various obligations of DHMV to SWEPCO and CLECO under the lignite mining
agreement, including provisions relating to the quality of the delivered
lignite, pricing, and mine reclamation practices. On June 15, 1997, DHMV filed
an answer denying the allegations in the suit and filed a counterclaim asserting
various contract-related claims against SWEPCO and CLECO. SWEPCO and CLECO have
denied the allegations contained in the counterclaims. On January 8, 1999,
SWEPCO and CLECO amended the claims against DHMV in the lawsuit to include a
request that the lignite mining agreement be terminated. The parties engaged in
unsuccessful settlement discussions in the third quarter of 1999 and early 2000.
The trial date is May 22, 2000.
Although management cannot predict the ultimate outcome of this matter,
management believes that the resolution of this matter will not have a material
effect on CSW's results of operations or financial condition.
Withdrawal of SWEPCO Cajun Asset Proposal
Cajun filed a petition for reorganization under Chapter 11 of the United
States Bankruptcy Code on December 21, 1994 under the supervision of the United
States Bankruptcy Court for the Middle District of Louisiana. Both SWEPCO and
Louisiana Generating LLC had filed competing plans of reorganization for the
non-nuclear assets of Cajun with the bankruptcy court.
On August 26, 1999, SWEPCO, together with the Cajun Members Committee and
Washington-St. Tammany Electric Cooperative, reached a settlement agreement to
withdraw the jointly filed July 1999 SWEPCO Plan to acquire all of the
non-nuclear assets of Cajun. SWEPCO had deferred approximately $13.0 million in
costs related to the Cajun acquisition on its consolidated balance sheet. Under
the settlement agreement, SWEPCO received $7.5 million on November 8, 1999. The
remaining balance was written off in the third quarter of 1999, resulting in a
$3.7 million after tax charge to earnings.
WTU Fuel Factor and Interim Fuel Surcharge Filing
In March 1998, WTU filed with the Texas Commission an application for
authority to implement an increase in fuel factors of $7.4 million, or 7.3% on
an annual basis. Additionally, WTU proposed to implement a fuel surcharge of
$6.8 million, including accumulated interest over a six-month period to collect
its under-recovered fuel costs. WTU implemented the revised fuel factors with
its June 1998 billing.
In September 1999, WTU filed with the Texas Commission an application for
authority to implement an increase in fuel factors of $13.5 million or 12.2% on
an annual basis. Additionally, WTU proposed to implement an interim fuel
surcharge of $6.5 million, including accumulated interest over a six-month
period to collect its under-recovered fuel costs. WTU proposed to implement the
revised fuel factors with its December 1999 cycle billing. On November 4, 1999,
the Texas Commission approved WTU's application. The order allows an increase in
fuel factors of 12.2% on an annual basis beginning in the billing cycle for
December 1999 and to surcharge customers to recover $6.5 million of
under-recovered fuel costs and associated interest for six months beginning in
the billing cycle for January 2000.
56
Regulatory Price Proposal for SEEBOARD
On December 2, 1999, OFGEM published its final price proposals from its
United Kingdom electricity distribution review. OFGEM has proposed revenue
reductions in SEEBOARD's distribution business of 21%. In addition, OFGEM has
proposed the reallocation of a further 12% of costs out of SEEBOARD's
distribution business into its supply business. These proposals were accepted on
December 20, 1999 and will take effect from April 1, 2000, and remain in effect
for five years. OFGEM's proposals will reduce net income for SEEBOARD in the
year 2000 by approximately $40 million, dependent upon the level of further cost
reductions that can be achieved, and by approximately $60 million in 2001. CSW's
net income from SEEBOARD U.S.A., its United Kingdom business segment, was $113
million for the twelve months ended December 31, 1999.
OFGEM also published the final price proposals for the electricity supply
price review. OFGEM has recommended that the price cap for charges levied to
electricity supply domestic and small business customers should be extended for
two years from April 1, 2000. Overall, these proposals are expected to have a
broadly neutral effect on the results of CSW.
The foregoing discussion constitutes forward-looking information within
the meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information. See FORWARD-LOOKING INFORMATION.
CSW Energy, Texas-New Mexico Power Company Phillips Litigation
In May 1997, equipment operated by an unrelated third party allegedly came
in contact with a Texas-New Mexico Power Company transmission line rendering
Texas-New Mexico Power Company's Old Ocean switching station inoperable. As a
result, Phillips' refinery, located in Sweeny, Texas, lost power.
In October 1997, Phillips filed suit against Texas-New Mexico Power
Company in the District Court of Brazoria County, Texas, seeking damages in
excess of $36 million associated with the loss of power to its refinery in
Sweeny, Texas. Texas-New Mexico Power Company denies any liability to Phillips.
In June 1999, Sweeny Cogeneration Limited Partnership was notified that
Texas-New Mexico Power Company had joined Sweeny Cogeneration Limited
Partnership as a third party defendant to the pending litigation. Texas-New
Mexico Power Company is claiming that during the construction of Sweeny
Cogeneration Limited Partnership's cogeneration facility adjacent to Phillips'
refinery, Sweeny Cogeneration Limited Partnership modified Texas-New Mexico
Power Company's equipment which was supplying power to the Phillips refinery. In
this connection, Texas-New Mexico Power Company alleges that Sweeny Cogeneration
Limited Partnership was negligent in the construction of the cogeneraiton
facility.
Sweeny Cogeneration Limited Partnership believes these allegations are
without merit and intends to contest vigorously any claims made against it by
Phillips or Texas-New Mexico Power Company. Management is unable to predict the
ultimate outcome of this pending litigation. If Texas-New Mexico Power Company
prevailed in the litigation, then CSW could experience a material adverse effect
on its results of operations but not on its financial condition.
Other
The Registrants are party to various other legal claims, actions and
complaints arising in the normal course of business. Management does not expect
disposition of these matters to have a material adverse effect on the
Registrants' results of operations or financial condition.
57
3. COMMITMENTS AND CONTINGENT LIABILITIES
Construction and Capital Expenditures
It is estimated that CSW, including the U.S. Electric Operating Companies,
SEEBOARD and other operations, will spend approximately $1,071 million in
capital expenditures (but excluding capital that may be required for
acquisitions) during 2000. Substantial commitments have been made in connection
with these programs. See MD&A - LIQUIDITY AND CAPITAL RESOURCES for expected use
of these expenditures.
CPL - $229 million PSO - $174 million SWEPCO - $159 million WTU - $55 million
Fuel and Related Commitments
To supply a portion of their fuel requirements, the U.S. Electric
Operating Companies have entered into various commitments for the procurement of
fuel.
SWEPCO Henry W. Pirkey Power Plant
In connection with the South Hallsville lignite mining contract for its
Henry W. Pirkey Power Plant, SWEPCO has agreed, under certain conditions, to
assume the obligations of the mining contractor. As of December 31, 1999, the
amount SWEPCO may have to assume is $69 million, which is the contractor's
actual obligation outstanding at December 31, 1999.
SWEPCO South Hallsville Lignite Mine
As part of the process to receive a renewal of a Texas Railroad Commission
permit for lignite mining at the South Hallsville lignite mine and expansion
into the Marshall South Lignite Project area, SWEPCO has agreed to provide
guarantees of mine reclamation in the amount of $85 million. Since SWEPCO uses
self-bonding, the guarantee provides for SWEPCO to commit to use its resources
to complete the reclamation in the event the work is not completed by the third
party miner. At December 31, 1999 the cost to reclaim the mine is estimated to
be approximately $36 million.
Other Commitments and Contingencies
CPL Nuclear Insurance
In connection with the licensing and operation of STP, the owners have
purchased nuclear property and liability insurance coverage as required by law,
and have executed indemnification agreements with the NRC in accordance with the
financial protection requirements of the Price-Anderson Act.
The Price-Anderson Act, a comprehensive statutory arrangement providing
limitations on nuclear liability and governmental indemnities, is in effect
until August 1, 2002. The limit of liability under the Price-Anderson Act for
licensees of nuclear power plants is $8.92 billion per incident, effective as of
December 1997. The owners of STP are insured for their share of this liability
through a combination of private insurance amounting to $200 million and a
mandatory industry-wide program for self insurance totaling $9.145 billion. The
maximum amount that each licensee may be assessed under the industry-wide
program of self insurance following a nuclear incident at an insured facility is
$83.9 million per reactor, for any one nuclear incident payable at $10 million
per year per reactor. An additional surcharge of 5% of the maximum may be
payable if the total amount of public claims and legal costs exceeds the limit.
CPL and each of the other STP owners are subject to such assessments, which CPL
and the other owners have agreed will be allocated on the basis of their
58
respective ownership interests in STP. For purposes of these assessments, STP
has two licensed reactors. CPL owns 25.2% of each reactor.
The owners of STP currently maintain on-site decontamination liability and
property damage insurance in the amount of $2.75 billion provided by NEIL.
Policies of insurance issued by NEIL stipulate that policy proceeds must be used
first to pay decontamination and cleanup costs before being used to cover direct
losses to property. Under project agreements, CPL and the other owners of STP
will share the total cost of decontamination liability and property insurance
for STP, including premiums and assessments, on a pro rata basis, according to
each owner's respective ownership interest in STP.
CPL purchases, for its own account, a NEIL I Business Interruption and/or
Extra Expense policy. This insurance will reimburse CPL for extra expenses
incurred for replacement generation or purchased power as the result of a
covered accident that shuts down production at one or both of the STP Units for
more than 23 consecutive weeks. In the event of an outage which is the result of
the same accident, insurance will reimburse CPL up to 80% of the recovery. The
maximum amount recoverable for a single unit outage is $133.8 million for both
Units 1 and 2. CPL is subject to an additional assessment of up to $1.54 million
for the current policy year in the event that insured losses at a nuclear
facility covered under the NEIL I policy exceed the accumulated funds available
under the policy. CPL renewed its current NEIL I Business Interruption and/or
Extra Expense policy on October 1, 1999.
SWEPCO Rental and Lease Commitments
SWEPCO has entered into various financing arrangements primarily with
respect to coal transportation and related equipment which are treated as
operating leases for rate-making purposes. At December 31, 1999, leased assets
of $45.7 million, less accumulated amortization of $45.7 million, were included
in Electric Utility Plant on the Consolidated Balance Sheets, and at December
31, 1998, leased assets were $45.7 million, less accumulated amortization of
$41.4 million.
SWEPCO Biloxi, Mississippi MGP Site
SWEPCO was notified by Mississippi Power in 1994 that it may be a PRP at a
MGP site in Biloxi, Mississippi, which was formerly owned and operated by a
predecessor of SWEPCO. Since then, SWEPCO has worked with Mississippi Power on
both the investigation of the extent of contamination on the site as well as the
subsequent sampling of the site. The sampling results indicated contamination at
the property as well as the possibility of contamination of an adjacent
property. A risk assessment was submitted to the MDEQ, and the MDEQ requested
that a future residential exposure scenario be evaluated for comparison with
commercial and industrial exposure scenarios. However, Mississippi Power and
SWEPCO do not believe that clean-up to a residential scenario is appropriate
since this site has been industrial/commercial for more than 100 years, and
Mississippi Power plans to continue this type of usage. Mississippi Power and
SWEPCO also presented a report to the MDEQ demonstrating that the ground water
on the site was not potable, further demonstrating that clean-up to residential
standards is not necessary. Resolution of this issue is still pending.
A feasibility study was conducted to evaluate remedial strategies and
costs associated with cleanup activities. SWEPCO and Mississippi Power agreed to
a buyout agreement for the amount of $1.5 million, in which SWEPCO received full
indemnification for any liabilities associated with contamination and/or any
clean-up efforts.
SWEPCO Marshall Street Site
SWEPCO owns a tract of land known as the Marshall Street site in
Shreveport, Louisiana, which was previously a MGP site. The City of Shreveport
may acquire the Marshall Street site from SWEPCO to expand its convention
center. In 1999, environmental testing was performed at the site and
contaminants were discovered that could be related to a MGP. SWEPCO is
59
negotiating with the City of Shreveport to determine under what terms the city
may acquire the Marshall Street site and who would pay for any potential
clean-up costs related to the site. In the fourth quarter of 1999, SWEPCO
accrued $4.0 million for SWEPCO's portion of any potential clean-up costs
related to the Marshall Street site.
SWEPCO Wilkes Power Plant Copper Limit Compliance
The EPA has issued to SWEPCO's Wilkes power plant, an administrative order
for wastewater permit violations related to copper limits. Planned compliance
activities, including activities that have been conducted to determine the
source of copper, were presented by SWEPCO to the EPA during an administrative
meeting, held on August 13, 1998. SWEPCO and the EPA negotiated a $41,500
penalty pending final approval from the EPA.
Clean Air Provisions of the Texas Legislation
The Texas Legislation requires that grandfathered electric generating
facilities be permited to reduce emission levels 50% and provides for a cost
recovery mechanism. Final regulations are still being developed. The estimated
total costs to comply with the expected regulations are approximately $4.2
million, $4.8 million and $10 million for CPL, SWEPCO and WTU, respectively.
Expenditures have begun to meet the requirements of the legislation.
Proposed Regional Control Strategy Regulations
The TNRCC released for comment proposed regulations that, if adopted as
proposed, would require reductions in nitrogen oxide emissions for existing
permited electric generating facilities in the East Texas Region in addition to
the Clean Air provisions of the Texas Legislation discussed above. The final
regulations could be issued in April 2000 with an implementation date of May
2003. The current estimate for compliance with the proposed rules could be as
much as $38 million for CPL and $151 million for SWEPCO in capital projects
costs and as much as $3 million for CPL and $11 million for SWEPCO in additional
annual operating costs.
The foregoing discussion constitutes forward-looking information within
the meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information. See FORWARD-LOOKING INFORMATION.
SEEBOARD London Underground Commitment
SEEBOARD has committed (pound)57 million, or $92 million (converted at
(pound)1.00 equals $1.62), for costs associated with its contract related to the
London Underground transportation system. In 1998, SEEBOARD, through its
subsidiary, SEEBOARD Powerlink, signed a $1.6 billion, 30-year contract as a
joint venture partner to operate, maintain, finance and renew the high-voltage
power distribution network of the London Underground.
SEEBOARD - Third Party Pension Litigation
In the U.K., National Grid and National Power PLC have been involved in
continuing litigation regarding their use of actuarial surpluses disclosed in
the 1992 and 1995 valuations of the electricity industry's occupational pension
plan, the ESPS. A High Court decision in favor of the National Grid and National
Power PLC was appealed. On February 10, 1999, the U.K. Court of Appeal ruled
that the particular arrangements made by these corporations to dispose of part
of the surplus were invalid due to procedural defects. This decision was
confirmed at a later hearing of the U.K. Court of Appeal held in May 1999. The
National Grid has appealed to the House of Lords, the highest court of appeal in
the U.K., and a decision is expected in late 2000 or early 2001. The final
outcome of this appeal cannot presently be determined.
60
SEEBOARD employees are members of the ESPS, and SEEBOARD has made similar
use of actuarial surpluses disclosed in the 1992 and 1995 valuations. As a
result of subsequent legal clarification of certain issues arising from the
hearing held in May 1999, the potential impact of the ruling on SEEBOARD has
increased. The amount of the payments cancelled by SEEBOARD in recognition of
these surpluses amounts to approximately $78 million, excluding any accrued
interest.
The U.K. Court of Appeal did not order the National Grid or National Power
PLC to make payment into the ESPS, and the court indicated that any requirement
to make such payments would be extreme since the relevant sections of the ESPS
are already in surplus. In the event that the court finally decides a payment by
SEEBOARD into the ESPS is necessary, such a payment is likely to create
additional pension fund surplus, which the company should then be able to
utilize over the next several years to reduce pension expense.
Management is unable currently to predict the amount of any payment that
it may be required to make to ESPS, but the payment should not have a material
adverse affect on CSW's results of operations or financial condition.
The foregoing discussion constitutes forward-looking information within
the meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information. See FORWARD-LOOKING INFORMATION.
Diversified Electric - Commitments and Contingencies
In June 1998, the 330 MW Sweeny cogeneration facility, an entity 50% owned
by CSW Energy, obtained permanent project financing. The $149 million of debt,
with an effective interest rate of 7.4%, is unconditionally guaranteed by the
project and is non-recourse to CSW Energy and CSW. Concurrently, the project
repaid its outstanding note to CSW Energy for construction financing.
In October 1999, GE Capital Structured Finance Group purchased 50 percent
of the equity ownership of Sweeny Cogeneration Limited Partnership. CSW Energy's
after-tax earnings from the proceeds of the transaction were approximately $33
million and were recorded in the fourth quarter of 1999. The agreement between
CSW Energy and GE Capital Structured Finance Group also provides for additional
payments to CSW Energy subject to completion of a planned expansion of the
Sweeny cogeneration facility.
CSW Energy began construction in August 1998 of a 500 MW power plant,
known as Frontera, in the Rio Grande Valley, near the city of Mission, Texas.
The natural gas-fired facility began simple cycle operation of 330 MW in July
1999 and is scheduled to commence combined cycle operation in early 2000.
Pursuant to AEP's and CSW's stipulated agreement with several intervenors in the
state of Texas related to the AEP Merger, CSW Energy may sell 250 MW of
Frontera. See NOTE 15. PROPOSED AEP MERGER and MD&A, PROPOSED AEP MERGER for a
discussion including timing of sale.
CSW International and its 50% partner, Scottish Power plc have entered
into a joint venture to construct and operate the South Coast power project, a
400 MW combined cycle gas turbine power station in Shoreham, United Kingdom. CSW
International has guaranteed approximately (pound)19 million of the (pound)190
million construction financing. Both the guarantee and the construction
financing are denominated in pounds sterling. The U.S. dollar equivalent at
December 31, 1999 would be $31 million and $308 million respectively, using a
conversion rate of (pound)1.00 equals $1.62. The permanent financing is
unconditionally guaranteed by the project. Construction of the project began in
March 1999, and commercial operation is expected to begin in late 2000.
61
CSW Energy's Colorado facilities are cogeneration plants with steam as a
by-product of its electricity generation. In February 2000, notice was received
that the lessee of the facilities utilizing the steam had filed for
reorganization under Chapter 11 of the Bankruptcy Code, which could result in
the lessee rejecting the leases. Should that occur, management is positioned to
pursue other lease arrangements. Management believes the resolution of this
matter will not have a material adverse effect on CSW's results of operations or
financial condition.
CSW, CSW Energy and CSW International have provided letters of credit and
guarantees on behalf of CSW Energy and CSW International projects of
approximately $62 million, $41 million, and $233 million, respectively, as of
December 31, 1999.
4. INCOME TAXES
CSW files a consolidated United States federal income tax return and
participates in a tax sharing agreement with its subsidiaries. Income tax
includes United States federal income taxes, applicable state income taxes and
SEEBOARD's United Kingdom corporation taxes. Total income taxes differ from the
amounts computed by applying the United States federal statutory income tax rate
to income before taxes for a number of reasons which are presented in the INCOME
TAX RATE RECONCILIATION table below. Information concerning income taxes,
including total income tax expense, the reconciliation between the United States
federal statutory tax rate and the effective tax rate and significant components
of deferred income taxes follow.
--------------------------
INCOME TAX EXPENSE 1999 1998 1997
--------------------------
(millions)
Current (1) $177 $253 $47
Deferred (1) 40 (38) 117
Deferred ITC (2) (13) (12) (13)
--------------------------
204 203 151
Included in Other Income and Deductions
Current 18 18 --
Deferred 1 -- (6)
--------------------------
19 18 (6)
Included in Extraordinary Item (8) -- --
--------------------------
$215 $221 $145
--------------------------
(1)Approximately $3 million, $14 million and $30 million of CSW's Current
Income Tax Expense was attributable to SEEBOARD U.S.A. operations and was
recognized as United Kingdom corporation tax expense for 1999, 1998 and 1997,
respectively. In addition, approximately $16 million, $9 million and $7
million of CSW's Deferred Income Tax Expense in 1999, 1998 and 1997,
respectively, was attributed to SEEBOARD U.S.A.
(2)ITC deferred in prior years are included in income over the lives of the
related properties.
62
-------------------------
INCOME TAX RATE RECONCILIATION 1999 1998 1997
-------------------------
(millions)
Income before taxes attributable to:
Domestic operations $541 $558 $327
Foreign operations 128 112 147
-------------------------
Income before taxes $669 $670 $474
Tax at U.S. statutory rate $234 $235 $166
Differences
Amortization of ITC (13) (12) (13)
Mirror CWIP -- 10 5
Other regulated flowthrough items 5 5 3
Non-deductible goodwill amortization 12 12 12
Foreign tax benefits (28) (41) (19)
State income taxes, net of
Federal income tax benefit 13 8 5
Adjustments (19) 14 (4)
Other 11 (10) (10)
-------------------------
$215 $221 $145
-------------------------
Effective rate 32% 33% 31%
-----------------
DEFERRED INCOME TAXES (1) 1999 1998
-----------------
(millions)
Deferred Income Tax Liabilities
Depreciable utility plant $1,944 $1,936
Deferred plant costs 3 174
Mirror CWIP asset 1 90
Income tax related regulatory assets 156 224
Regulatory assets designated for
securitization 332 --
Other 280 257
-----------------
2,716 2,681
Deferred Income Tax Assets
Income tax related regulatory
liability (95) (117)
Unamortized ITC (91) (96)
Alternative minimum tax
carryforward (11) (11)
Other (106) (75)
-----------------
(303) (299)
-----------------
Net Accumulated Deferred Income Taxes $2,413 $2,382
-----------------
Net Accumulated Deferred Income
Taxes
Noncurrent $2,430 $2,410
Current (17) (28)
-----------------
$2,413 $2,382
-----------------
(1)Other than excess foreign tax credits, CSW did not have other valuation
allowances recorded against other deferred tax assets at December 31, 1999
and 1998 due to a favorable earnings history. At December 31, 1999, CSW had
$117 million of foreign tax credits, for which a 100% valuation allowance has
been provided. At December 31, 1998, CSW had $145 million of foreign tax
credits, for which a 100% valuation allowance has been provided.
CSW has not provided for U.S. federal income and foreign withholding taxes on
$62 million of non-U.S. subsidiaries' undistributed earnings as of December
31, 1999, because such earnings are intended to be reinvested indefinitely.
63
If these earnings were distributed, foreign tax credits should become
available under current law to reduce or eliminate the resulting U.S. income
tax liability.
5. BENEFIT PLANS
Cash Balance and Non-qualified Pension Plans
CSW maintains a tax qualified, non-contributory defined benefit cash
balance pension plan covering substantially all CSW employees in the United
States. Under the cash balance formula, each participant has an account, for
recordkeeping purposes only, to which credits are allocated annually based on a
percentage of the participant's pay. The applicable percentage is determined by
age and years of vested service the participant has with CSW as of December 31
of each year. The fair value of the plan assets are measured as of September 30
of each year. Pension plan assets consist primarily of stocks and short-term and
intermediate-term fixed income investments.
In addition, CSW has a non-qualified excess benefit pension plan. This
plan is available to all pension plan participants who are entitled to receive a
pension benefit from CSW which is in excess of the limitations imposed on
benefits by the Internal Revenue Code through the qualified plan.
As the plan sponsor, CSW will continue to reflect the cost of the pension
plans according to the provisions of SFAS No. 87 and allocate such costs to each
of the participating employers. SFAS No. 132, adopted by CSW in 1998, amended
the disclosure requirements of SFAS No. 87 and SFAS No. 88 and have been
incorporated in the following disclosures.
U.K. Pension Plans
The majority of SEEBOARD's employees joined a pension plan that is
administered for the United Kingdom's electricity industry. The assets of this
plan are held in a separate trustee-administered fund that is actuarially valued
every three years. SEEBOARD and its participating employees both contribute to
the plan. Subsequent to July 1, 1995, new employees were no longer able to
participate in that plan. Instead, two new pension plans were made available to
new employees, both of which are also separate trustee-administered plans.
CSW Retirement Savings Plan
The CSW System Retirement Savings Plan is a defined contribution plan
offered to all full time employees and certain part time employees who meet plan
eligibility requirements. Company contributions to this plan totaled $15 million
in 1999, $15 million in 1998 and $11 million in 1997.
1999 1998
Pension Retirement Plans CSW U.S. U.K. CSW U.S. U.K.
TOTAL PLANS PLANS TOTAL PLANS PLANS
------------------------------- -------------------------
Change in Benefit Obligations (millions) (millions)
Benefit obligation at beginning of year $ 2,111 $ 991 $ 1,120 $ 1,978 $ 955 $ 1,023
Service cost 35 21 14 36 22 14
Interest cost 123 65 58 137 69 68
Plan participants' contributions 3 - 3 3 - 3
Amendments 7 - 7 58 - 58
Foreign currency translation adjustment (26) - (26) 9 - 9
Acquistions - - - 7 - 7
Actuarial (gain) loss (11) (47) 36 11 11 -
Benefits paid (129) (63) (66) (128) (66) (62)
------------------------------- -------------------------
Benefit obligation at end of year $ 2,113 $ 967 $ 1,146 $ 2,111 $ 991 $ 1,120
------------------------------- -------------------------
64
1999 1998
Pension Retirement Plans CSW U.S. U.K. CSW U.S. U.K.
TOTAL PLANS PLANS TOTAL PLANS PLANS
------------------------------- -------------------------
Change in Plan Assets (millions) (millions)
Fair value of plan assets at beginning
of year $ 2,326 $ 1,014 $ 1,312 $ 2,290 $ 1,109 $ 1,181
Actual return on plan assets 274 122 152 143 (30) 173
Employer contributions 9 2 7 7 1 6
Plan participants' contributions 3 - 3 3 - 3
Foreign currency translation adjustment (33) - (33) 11 - 11
Benefits paid (129) (63) (66) (128) (66) (62)
------------------------------- -------------------------
Fair value of plan assets at end
of year $ 2,450 $ 1,075 $ 1,375 $ 2,326 $ 1,014 $ 1,312
------------------------------- -------------------------
Reconciliation of Funded Status
Funded status at end of year $ 337 $ 108 $ 229 $ 214 $ 23 $ 191
Unrecognized:
Transition obligation 8 8 - 10 10 -
Prior service cost (64) (75) 11 (77) (81) 4
Actuarial (gain) loss (88) 88 (176) 26 159 (133)
------------------------------- -------------------------
Prepaid benefit cost $ 193 $ 129 $ 64 $ 173 $ 111 $ 62
------------------------------- -------------------------
Amounts Recognized in Balance Sheet
Prepaid benefit cost $ 209 $ 145 $ 64 $ 188 $ 126 $ 62
Additional minimum liability (23) (23) - (25) (25) -
Intangible asset - - - 2 2 -
Accumulated other comprehensive expense 7 7 - 8 8 -
------------------------------- -------------------------
Net amount recognized on balance sheet $ 193 $ 129 $ 64 $ 173 $ 111 $ 62
------------------------------- -------------------------
Other comprehensive expense(income)
attributable to change in additional
minimum liability recognition $ (2) $ (2) $ -- $ 1 $ 1 $ --
------------------------------- -------------------------
Additional Information for Plans With Non Qualified Plan
Unfunded Accumulated Benefit Obligations ------------------
(thousands)
1999 1998
---------- -----------
Projected benefit obligation $ 24,676 $ 27,379
Accumulated benefit obligation 22,875 25,137
Plan assets at fair value - -
65
Pension Retirement Plans
CSW U.S. U.K.
Components of Net Periodic Benefit Costs TOTAL PLANS PLANS
-------------------------------
1999 (millions)
Service cost $ 35 $ 21 $ 14
Interest cost 123 65 58
Expected return on plan assets (167) (98) (69)
Amortization of:
Unrecognized transition obligation 2 2 -
Prior service cost (6) (6) -
-------------------------------
Net periodic benefit cost $ (13) $ (16) $ 3
-------------------------------
Weighted-average assumptions as of year end
Discount rate 7.50% 6.00%
Expected return on plan assets 9.00% 6.50%
Rate of compensation increase 4.96% 4.00%
CSW U.S. U.K.
TOTAL PLANS PLANS
-------------------------------
1998 (millions)
Service cost $ 36 $ 22 $ 14
Interest cost 137 69 68
Expected return on plan assets (174) (97) (77)
Amortization of:
Unrecognized transition obligation 2 2 -
Prior service cost (6) (6) -
-------------------------------
Net periodic benefit cost $ (5) $ (10) $ 5
-------------------------------
Weighted-average assumptions as of year end
Discount rate 6.75% 5.50%
Expected return on plan assets 9.00% 6.25%
Rate of compensation increase 4.96% 3.50%
66
Pension Retirement Plans
CSW U.S. U.K.
Components of Net Periodic Benefit Costs TOTAL PLANS PLANS
-------------------------------
1997 (millions)
Service cost $ 34 $ 20 $ 14
Interest cost 139 66 73
Expected return on plan assets (173) (92) (81)
Amortization of:
Unrecognized transition obligation 2 2 -
Prior service cost (6) (6) -
Net actuarial (gain) loss 1 1 -
-------------------------------
Net periodic benefit cost $ (3) $ (9) $ 6
-------------------------------
Weighted-average assumptions as of year end
Discount rate 7.50% 6.75%
Expected return on plan assets 9.00% 7.25%
Rate of compensation increase 5.46% 4.75%
As permitted, the amortization of any prior service cost is determined
using a straight-line amortization of the cost over the average remaining period
of employees expected to receive benefits under the plan.
Post-retirement Benefits Other Than Pensions
CSW, including each of the U.S. Electric Operating Companies, adopted SFAS
No. 106 effective January 1, 1993. The transition obligation established at
adoption is being amortized over twenty years, with thirteen years remaining.
Prior to 1993, these benefits were accounted for on a pay-as-you-go basis.
Pursuant to an order by the Oklahoma Commission, PSO established a regulatory
asset of approximately $5 million in 1993 for the difference between the
pay-as-you-go basis and the costs determined under SFAS No. 106. PSO is
recovering the amortization of this regulatory asset over a ten year period.
67
Post- Retirement Benefits Other Than Pensions 1999 1998
--------------------
(millions)
Change in Benefit Obligation
Benefit obligation at beginning of year $ 275 $ 241
Service cost 11 8
Interest cost 18 17
Plan participants' contributions 2 1
Amendments - (5)
Actuarial (gain) loss (19) 28
Benefits paid (21) (15)
--------------------
Benefit obligation at end of year $ 266 $ 275
--------------------
Change in Plan Assets
Fair value of plan assets at beginning of year $ 164 $ 158
Actual return on plan assets 23 3
Employer contributions 25 17
Plan participants' contributions 2 1
Benefits paid (21) (15)
--------------------
Fair value of plan assets at end of year $ 193 $ 164
--------------------
Reconciliation of Funded Status
Funded status at end of year $ (73) $ (111)
Unrecognized:
Transition obligation 117 126
Actuarial (gain) loss (44) (15)
--------------------
Prepaid (accrued) benefit cost $ - $ -
--------------------
68
Post- Retirement Benefits Other Than Pensions 1999 1998
--------------------
(millions)
Amounts Recognized in Balance Sheet
Prepaid benefit costs $ 3 $ 2
Accrued benefit (liability) (3) (2)
--------------------
Net amount recognized $ - $ -
--------------------
Components of Net Periodic Benefit Cost 1999 1998 1997
---------------------------
(millions)
Service cost $ 11 $ 8 $ 8
Interest cost 18 17 18
Expected return on plan assets (13) (12) (10)
Amortization of:
Transition obligation 9 9 9
Net actuarial (gain) loss (2) (1)
---------------------------
Net periodic benefit cost $ 25 $ 20 $ 24
---------------------------
Weighted-average assumptions as of year end
Discount rate 7.5% 6.75% 7.50%
Expected return on plan assets 9.0% 9.00% 9.00%
Health care cost trend rate 6.0% 6.50% 7.00%
(Ultimate rate of 5.0% in 2001)
Effect of 1% Change in Assumed Health Total CSW
-----------
Care Cost Trend Rate (millions)
1% Increase
Service cost plus interest cost $ 4
APBO 28
1% Decrease
Service cost plus interest cost $ (3)
APBO (24)
As permitted, the amortization of any prior service cost is determined
using a straight-line amortization of the cost over the average remaining
service period of employees expected to receive benefits under the plan.
69
6. JOINTLY OWNED ELECTRIC UTILITY PLANT
The U.S. Electric Operating Companies are parties to various joint
ownership agreements with other non-affiliated entities. Such agreements provide
for the joint ownership and operation of generating stations and related
facilities, whereby each participant bears its share of the project costs. At
December 31, 1999, the U.S. Electric Operating Companies had undivided interests
in five such generating stations and related facilities as shown in the
following table.
CPL SWEPCO SWEPCO SWEPCO CSW(1)
STP Flint Creek Pirkey Dolet Hills Oklaunion
Nuclear Plant Coal Plant Lignite Plant Lignite Plant Coal Plant
-------------------------------------------------------------------
($ millions)
Plant in service $2,352 $82 $435 $231 $400
Accumulated depreciation 746 52 204 99 143
Plant capacity-MW 2,501 528 675 650 690
Participation 25.2% 50.0% 85.9% 40.2% 78.1%
Share of capacity-MW 630 264 580 262 539
(1) CPL, PSO and WTU have joint ownership agreements with each other and
other non-affiliated entities. Such agreements provide for the joint
ownership and operation of Oklaunion Power Station. Each participant provided
financing for its share of the project, which was placed in service in
December 1986. CPL's 7.8%, PSO's 15.6% and WTU's 54.7% ownership interest
represents CSW's 78.1% participation in the plant. The statements of income
reflect CPL's, PSO's and WTU's respective portions of the operating costs of
Oklaunion Power Station. The total investments, including AFUDC, in Oklaunion
Power Station for CPL, PSO and WTU were $37 million, $81 million and $282
million, respectively, at December 31, 1999. Accumulated depreciation was $13
million, $36 million and $94 million for CPL, PSO and WTU, respectively, at
December 31, 1999.
7. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the following
fair values of each class of financial instruments for which it is practicable
to estimate fair value. The fair value does not affect any of the liabilities
unless the issues are redeemed prior to their maturity dates.
Cash, temporary cash investments, accounts receivable, other financial
instruments and short-term debt
The fair value equals the carrying amount as stated on the balance sheets
due to the short maturity of those instruments.
Securities available for sale
The fair values, which are based on quoted market prices, equal the
carrying amounts as stated on the balance sheet as prescribed by SFAS No. 115.
See NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Long-term debt
The fair value of long-term debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates offered to CSW for
debt of the same remaining maturities.
Trust Preferred Securities
The fair value of the Trust Preferred Securities are based on quoted
market prices on the New York Stock Exchange.
70
Long-term debt and preferred stock due within 12 months
The fair value of current maturities of long-term debt and preferred stock
due within 12 months are estimated based on quoted market prices for the same or
similar issues or on the current rates offered for long-term debt or preferred
stock with the same or similar remaining redemption provisions.
CARRYING VALUE AND
ESTIMATED FAIR VALUE 1999 1998
---------- ----------
(millions)
Long-term debt
carrying amount $3,821 $3,938
fair value 3,828 4,025
Trust Preferred Securities
carrying amount 335 335
fair value 290 345
Long-term debt and preferred
stock duewithin 12 months
carrying amount 256 169
fair value 256 169
Commodity Contracts
CSW utilizes commodity forward contracts which contain pricing and/or
volume terms designed to stabilize market risk associated with fluctuations in
the price of natural gas used in generation and electric energy sold under firm
commitments with certain of our customers.
During 1999 and 1998, CSW did not utilize any contracts for commodities
that would be classified as a financial instrument under generally accepted
accounting principles, since physical delivery of natural gas and electricity
may, and most frequently does, occur pursuant to these contracts. These
contracts are, however, the major part of CSW's risk management program.
Based on year-end contractual commitments, CSW's natural gas futures and
swap contracts and electricity forward contracts that are sensitive to changes
in commodity prices include fair value of assets of $157,260 and fair value of
liabilities of $396,440. These swap and future contracts hedge their related
commodity price exposure for 2000. Cash outflows on the swap agreements should
be offset by increased margins on electricity sales to customers under tariffed
rates with fixed fuel costs. The electricity forward contracts hedge a portion
of CSW's energy requirements through February 2000. The average contract price
for forward purchases is $30 per MWH and $2.32 per MMbtu. The average price for
natural gas futures contracts is $2.47 per MMbtu and $2.37 MMbtu for swaps.
Cross-currency swaps and SEEBOARD's electricity contracts for differences
The fair value of cross currency swaps reflect third-party valuations
calculated using proprietary pricing models. Based on these valuations, CSW's
position in these cross currency swaps represented an unrealized loss of $41.8
million at December 31, 1999. This unrealized loss is offset by unrealized gains
related to the underlying transactions being hedged. CSW expects to hold these
71
contracts to maturity. The fair value of SEEBOARD's contracts for differences is
not determinable due to the absence of a trading market.
Expected Expected Cash
Cash Inflows Outflows
Contract Maturity Date (Maturity Value) (Market Value)
- -----------------------------------------------------------------------------
(millions)
Cross currency swaps August 1, 2001 $200 $213
Cross currency swaps August 1, 2006 $200 $229
8. LONG-TERM DEBT
The CSW System's long-term debt outstanding as of the end of the last two
years is presented in the following table.
Maturities Interest Rates December 31,
From To From To 1999 1998
-----------------------------------------------------------------------------
(millions)
Secured bonds
2001 2025 5.25% 7.75% $1,452 $1,824
Unsecured bonds
2001 2030 3.33% (1) 8.88% 1,701 1,359
Notes and Lease
Obligations
2001 2021 5.91% 9.25% 672 765
Unamortized discount (4) (10)
-------------------------
$3,821 $3,938
-------------------------
(1) Variable rate.
The mortgage indentures, as amended and supplemented, securing FMBs issued
by the U.S. Electric Operating Companies, constitute a direct first mortgage
lien on substantially all electric utility plants. The U.S. Electric Operating
Companies may offer additional FMBs, medium-term notes and other securities
subject to market conditions and other factors.
CSW's year end weighted average cost of long-term debt was 7.0% for 1999,
7.3% for 1998 and 7.2% for 1997. For additional information about the U.S.
Electric Operating Companies' long-term debt, see their Statements of
Capitalization in the Financial Statements.
Annual Requirements
Certain series of outstanding FMBs have annual sinking fund requirements,
which are generally 1% of the amount of each such series issued. These
requirements may be, and generally have been, satisfied by the application of
net expenditures for bondable property in an amount equal to 166-2/3% of the
annual requirements. Certain series of pollution control revenue bonds also have
sinking fund requirements. At December 31, 1999, the annual sinking fund
requirements and annual maturities (including sinking fund requirements) for all
long-term debt for the next five years are presented in the following table.
72
Sinking fund Annual
Requirements Maturities
------------------------
(millions)
2000 $1 $256
2001 1 421
2002 1 151
2003 1 388
2004 1 271
Dividends
At December 31, 1999, approximately $1.5 billion of CSW's subsidiary
companies' retained earnings were available for payment of cash dividends by
such subsidiaries to CSW.
Long-term Debt
CPL
On February 16, 2000, CPL sold $150 million of unsecured floating rate
notes. The notes will have a two-year final maturity of February 22, 2002, but
may be redeemed at par after one year. The interest rate will reset quarterly at
the then current three-month LIBOR plus 0.45%. The initial rate, which was set
February 18, 2000, was 6.56%. Net proceeds of $149.6 million will be used to
refund $100 million of FMBs maturing April 1, 2000 and repay a portion of
short-term debt. CPL is replacing FMBs with unsecured debt, which provides more
financial flexibility as CPL unbundles its electric operations.
On May 1, 1999, $100 million of CPL's 7.50% Series JJ FMBs matured and on
December 1, 1999, $25 million of CPL's 7.125% Series DD FMBs matured. In June
1999, CPL reacquired $25 million of its 7.50% Series II FMBs due April 1, 2023.
In November 1999, CPL issued $200 million of unsecured floating rate notes
maturing November 23, 2001 and callable at par November 23, 2000. The interest
rate will reset quarterly at the then current three-month LIBOR plus 0.60%.
In November and December 1999, Matagorda sold, for the benefit of CPL,
$111.7 million of 4.90% Series 1999A and $50 million of 4.95% Series 1999B
unsecured tax exempt PCRBs. The bonds mature in 2030 but will be subject to
remarketing and an interest rate reset in two years. The proceeds were used to
refund $111.7 million aggregate principal amount of outstanding 7.50% Series T
due December 15, 2014 and will be used to refund $50 million aggregate principal
amount of outstanding 7.50% Series AA due March 21, 2020.
In September 1998, CPL reacquired $36 million principal amount outstanding
of Series L FMBs, in its entirety, at a call price of 100.53.
PSO
In July 1999, the Oklahoma Development Finance Authority sold for the
benefit of PSO $33.7 million of 4.875% unsecured tax exempt pollution control
revenue refunding bonds. The bonds mature in fifteen years but will be subject
to remarketing and an interest rate reset in five years. In August 1999, the
proceeds were used to refund $33.7 million aggregate principal amount of
outstanding Oklahoma Environmental Finance Authority (PSO Project) 5.9% Series A
bonds due December 1, 2007.
73
In September 1998, PSO reacquired $25 million principal amount outstanding
of Series K and $30 million principal amount outstanding of Series L FMBs, in
their entirety, at call prices of 100 and 100.77, respectively.
SWEPCO
In the first quarter of 2000, SWEPCO sold $150 million of unsecured
floating rate notes. The bonds will have a two-year final maturity of March 1,
2002, but may be redeemed at par after one year. The interest rate will reset
quarterly at the then current three-month LIBOR plus 0.23%. The initial rate,
which was set March 1, 2000, was 6.34%. Net proceeds of $149.6 million will be
used to refund $45 million of FMBs maturing April 1, 2000 and to repay of a
portion of outstanding short-term indebtedness.
On September 1, 1999, $40 million of SWEPCO's 6.125% Series W FMBs
matured.
The reacquisitions and maturities were funded with short-term debt and
with proceeds from the issuance of the floating rate notes.
Reference is made to MD&A, LIQUIDITY AND CAPITAL RESOURCES for further
information related to long-term debt, including new issues and reacquisitions
of long-term debt during 1999.
9. PREFERRED STOCK
The outstanding preferred stock of the U.S. Electric Operating Companies
as of the end of the last two years is presented in the following table.
Current
Dividend Rate December 31, Redemption Price
From To 1999 1998 From - To
--------------------------------------------
(millions)
Not subject to mandatory
redemption
182,907 shares 4.00% - 5.00% $18 $19 $103.19 - $107.00
Auction -- 160
Issuance expenses/premiums -- (3)
-------------
$18 $176
-------------
Total authorized shares
6,405,000
All of the outstanding preferred stock is redeemable at the option of the
U.S. Electric Operating Companies upon 30 days' notice at the current redemption
price per share. During November and December 1999, CPL called $75 million of
its money market preferred stock and $85 million of its Series A and Series B
preferred stock at par. During 1997, SWEPCO redeemed $1.2 million pursuant to
its annual sinking fund requirement. During 1997, each of the U.S. Electric
Operating Companies reacquired a significant portion of its outstanding
preferred stock. As a result of differences between the dividend rates on the
reacquired securities and prevailing market rates, CSW realized an overall gain
of approximately $10 million on the transactions. This gain is shown separately,
as Gain on Reacquired Preferred Stock, on the Consolidated Statements of Income.
74
CPL
The dividends on CPL's $160 million auction and money market preferred
stocks are adjusted every 49 days, based on current market rates. The dividend
rates averaged 4.3%, 4.4% and 4.3% during 1999, 1998 and 1997, respectively. In
November and December 1999, CPL called $75 million of its money market preferred
stock and $85 million of its Series A and Series B Auction Preferred Stock at
par.
SWEPCO
On April 1, 1998, SWEPCO called the remaining 274,010 shares of its $100
par value 6.95% preferred stock. SWEPCO used short-term debt to fund the
redemption.
10. TRUST PREFERRED SECURITIES
The following Trust Preferred Securities issued by the wholly-owned
statutory business trusts of CPL, PSO and SWEPCO were outstanding at December
31, 1999. They are classified on the balance sheets as CPL, PSO or SWEPCO
Obligated, Mandatorily Redeemable Preferred Securities of Subsidiary Trusts
Holding Solely Junior Subordinated Debentures of CPL, PSO or SWEPCO,
respectively.
Amount Description of Underlying
Business Trust Security Units (millions) Debentures of Registrant
- ------------------------------------------------------------------------------------------
CPL Capital I 8.00%, Series A 6,000,000 $150 CPL, $154.6 million, 8.00%, Series A
PSO Capital I 8.00%, Series A 3,000,000 75 PSO, $77.3 million, 8.00%, Series A
SWEPCO Capital I 7.875%, Series A 4,400,000 110 SWEPCO, $113.4 million, 7.875%, Series A
---------------------
13,400,000 $335
---------------------
Each of the business trusts will be treated as a subsidiary of its parent
company. The only assets of the business trusts are the subordinated debentures
issued by their parent company as specified above. In addition to the
obligations under their subordinated debentures, each of the parent companies
has also agreed to a security obligation which represents a full and
unconditional guarantee of its capital trust obligation.
11. SHORT-TERM FINANCING
The CSW System uses short-term debt, primarily commercial paper, to meet
fluctuations in working capital requirements and other interim capital needs.
CSW has established a money pool to coordinate short-term borrowings for certain
subsidiaries and also incurs borrowings outside the money pool for other
subsidiaries. As of December 31, 1999, CSW had revolving credit facilities
totaling $1.4 billion to backup its commercial paper program. At December 31,
1999, CSW had $1.3 billion outstanding in short-term borrowings. The maximum
amount of such short-term borrowings outstanding during the year, which had a
weighted average interest yield for the year of 5.5%, was $1.4 billion during
December 1999.
CSW Credit, which does not participate in the money pool, issues
commercial paper on a stand-alone basis. At December 31, 1999, CSW Credit had a
$1.2 billion revolving credit agreement that is secured by the assignment of its
receivables to back up its commercial paper program which had $754 million
outstanding. The maximum amount of such commercial paper outstanding during the
year, which had a weighted average interest yield for the year of 5.3%, was $1.0
billion during August 1999.
75
12. COMMON STOCK
CSW's basic earnings per share of common stock are computed by dividing
net income for common stock by the average number of common shares outstanding
for the respective periods. Diluted earnings per share reflect the potential
dilution that could occur if all options outstanding under CSW's stock incentive
plan were converted to common stock and then shared in the income for common
stock. CSW's basic earnings per share equalled diluted earnings per share for
each of the years 1997-1999. CSW's dividends per common share reflect per share
amounts paid for each of the periods.
CSW can issue common stock, either through the purchase and reissuance of
shares from the open market or by issuing original shares, through the LTIP, a
stock option plan, PowerShare and Retirement Savings Plan. CSW began funding
these plans through open market purchases, effective April 1, 1997. Information
concerning common stock activity issued through the LTIP, the stock option plan,
PowerShare and the Retirement Savings Plan is presented in the following table.
1999 1998 1997
----------------------------------------------------------
Number of new shares issued
(thousands) 41 372 765
Range of stock price for new
shares $23 1/8 - $26 7/16 $25 5/8 - $30 1/16 $21 1/4 - $25 5/8
New common stock equity (millions) $1 $10 $20
13. STOCK-BASED COMPENSATION PLANS
CSW has a key employee incentive plan. This plan is accounted for under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized. Had compensation cost for this plan been determined consistent
with SFAS No. 123, pro forma calculations of CSW's and each of the U.S. Electric
Operating Companies' net income for common stock and earnings per share as
required by SFAS No. 123 would not have changed significantly from amounts
reported.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
CSW may grant options for up to 4.0 million shares of CSW common stock
under the stock option plan. Under the stock option plan, the option exercise
price equals the stock's market price on the date of grant. The grant vests over
three years, one-third on each of the three anniversary dates of the grant and
expires 10 years after the original grant date. CSW has granted 2.8 million
shares through December 31, 1999. A summary of the status of CSW's stock option
plan at December 31, 1999, 1998, and 1997 and the changes during the years then
ended is presented in the following table.
76
1999 1998 1997
-----------------------------------------------------------------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
(thousands) Exercise Price (thousands) Exercise Price (thousands) Exercise Price
Outstanding at
beginning of year 1,446 $24 1,902 $24 1,412 $26
Granted -- -- -- -- 694 21
Exercised (37) 23 (337) 24 -- --
Canceled (30) 26 (119) 24 (204) 28
---------- ---------- ---------
Outstanding at end
of year 1,379 24 1,446 24 1,902 24
Exercisable at end
of year 1,178 not applicable 1,010 not applicable 1,162 not applicable
77
14. BUSINESS SEGMENTS
CSW's business segments at December 31, 1999, included U.S. Electric and
U.K. Electric. Eight additional non-utility companies are included with CSW in
Other and Reconciling Items (CSW Energy, CSW International, C3 Communications,
EnerShop, CSW Energy Services, CSW Credit, CSW Leasing and CSW Services). CSW's
business segment information is presented in the following tables.
U.S. U.K. Other Reconciling CSW
Electric Electric Segments Items Consolidated
--------------------------------------------------------
(millions)
1999
Operating revenues $3,524 $1,705 $342 $(34) $5,537
Depreciation and amortization 400 128 24 -- 552
Interest income 10 6 92 (54) 54
Interest expense 196 105 159 (54) 406
Operating income tax expense 191 6 7 -- 204
Net income from equity method
subsidiaries -- -- -- -- --
Income before extraordinary item 370 113 508 (522) 469
Extraordinary loss -
discontinuance of SFAS No. 71 (8) -- -- -- (8)
Extraordinary loss - loss on
reacquired debt (6) -- -- -- (6)
Total assets 9,391 3,024 7,217 (5,470) 14,162
Investments in equity method
subsidiaries 17 -- -- -- 17
Capital expenditures 474 153 138 -- 765
1998
Operating revenues $3,488 $1,769 $258 $(33) $5,482
Depreciation and amortization 399 95 27 -- 521
Interest income 6 6 73 (55) 30
Interest expense 197 116 160 (57) 416
Operating income tax expense 235 1 (33) -- 203
Net income from equity method
subsidiaries (1) -- -- -- (1)
Income before extraordinary item 374 117 441 (492) 440
Total assets 9,151 3,032 6,656 (4,942) 13,897
Investments in equity method
subsidiaries 15 -- -- -- 15
Capital expenditures 313 106 100 -- 519
1997
Operating revenues $3,321 $1,870 $112 $(35) $5,268
Depreciation and amortization 389 92 16 -- 497
Interest income 8 12 34 (34) 20
Interest expense 212 120 105 (23) 414
Operating income tax expense 144 31 (24) -- 151
Net income from equity method
subsidiaries (1) -- -- -- (1)
Income before extraordinary item 289 117 149 (226) 329
Extraordinary loss U.K.
windfall profits tax -- (176) -- -- (176)
Total assets 9,337 2,931 6,267 (4,919) 13,616
Investments in equity method
subsidiaries 15 -- -- -- 15
Capital expenditures 346 126 279 -- 751
Products and Services
The U.S. Electric Operating Companies' products and services primarily consist
of the generation, transmission and distribution of electricity. The U.K.
Electric segment's primary lines of business are the supply and distribution of
electricity. CSW is currently developing computer systems to provide information
by product and services rather than by legal entity.
78
Geographic Areas
Revenues
---------------------------------------------------
United CSW
United States Kingdom Other Foreign Consolidated
---------------------------------------------------
(millions)
1999 $3,828 $1,705 $4 $5,537
1998 3,705 1,769 8 5,482
1997 3,390 1,870 8 5,268
Long-Lived Assets
---------------------------------------------------
United CSW
United States Kingdom Other Foreign Consolidated
---------------------------------------------------
(millions)
1999 $7,850 $2,499 $257 $10,606
1998 7,831 2,530 201 10,562
1997 7,801 2,551 254 10,606
15. PROPOSED AEP MERGER
On December 22, 1997, CSW and AEP announced that their boards of directors
had approved a definitive merger agreement for a tax-free, stock-for-stock
transaction. The combined company would serve more than 4.7 million customers in
11 states and approximately 4 million customers outside the United States. On
May 27, 1998, AEP shareholders approved the issuance of the additional shares of
stock required to complete the merger. On May 28, 1998, CSW stockholders
approved the merger. On December 16, 1999, the merger agreement was amended to
extend the term of the agreement to June 30, 2000. After June 30, 2000, either
party may terminate the merger agreement if the merger has not been consummated.
AEP is subject to the information requirements of the Securities and
Exchange Act of 1934, as amended, and in accordance therewith, files reports and
other information with the SEC. For additional information related to AEP, see
AEP's Current Reports on Form 8-K, its Quarterly Reports on Form 10-Q and its
Annual Report on Form 10-K and the documents referenced therein.
Under the AEP merger agreement, each common share of CSW will be converted
into 0.6 share of AEP common stock. CSW stockholders will own approximately 40%
of the combined company. CSW plans to continue to pay dividends on its common
stock until the closing of the AEP Merger at approximately the same times and
rates per share as in 1999, subject to continuing evaluation of CSW's earnings,
financial condition and other factors by the CSW board of directors.
Under the AEP merger agreement, there will be no changes required with
respect to the public debt issues, the outstanding preferred stock or the Trust
Preferred Securities of CSW's subsidiaries.
AEP and CSW anticipate net savings related to the merger of approximately
$2 billion over a 10-year period from the elimination of duplication in
corporate and administrative programs, greater efficiencies in operations and
business processes, increased purchasing efficiencies and the combination of the
two work forces. As a result of the approved settlement and agreement with the
state commissions in CSW and AEP's respective service territories, AEP and CSW
have agreed to guarantee that approximately 55% of those savings will be passed
through to their customers. AEP and CSW continue to seek opportunities for
additional saving and expect to realize significant additional savings based
upon the work of the merger transitions teams over the last two years. The
preceding discussion constitutes forward-looking information within the meaning
79
of Section 21E of the Exchange Act. Actual results may differ materially from
such projected information. See FORWARD-LOOKING INFORMATION.
The electric systems of AEP and CSW will operate on an integrated and
coordinated basis as required by the Holding Company Act. AEP and CSW project
fuel savings of approximately $98 million over a 10-year period resulting from
the coordinated operation of the combined company, which will be passed through
to customers.
The AEP merger agreement contains covenants and agreements that restrict
the manner in which the parties may operate their respective businesses until
the time of closing of the merger. In particular, without the prior written
consent of AEP, CSW may not engage in a number of activities that could affect
its sources and uses of funds. Pending closing of the merger, CSW's and its
subsidiaries' strategic investment activity, capital expenditures and non-fuel
operating and maintenance expenditures are limited to specific agreed upon
projects and in agreed upon amounts. In addition, prior to consummation of the
merger, CSW and its subsidiaries are restricted from:
- - Issuing shares of common stock other than pursuant to employee benefit plans;
- - Issuing shares of preferred stock or similar securities other than to
refinance existing obligations or to fund permitted investment or capital
expenditures; and
- - Incurring indebtedness other than pursuant to existing credit facilities, in
the ordinary course of business, or to fund permitted projects or capital
expenditures. These limitations do not preclude CSW and its subsidiaries from
making investments and expenditures in amounts previously budgeted.
Cook Nuclear Plant
On June 25, 1999, AEP announced a comprehensive plan to restart the idle
Cook nuclear power plant. Unit 2 is scheduled to return to service in April
2000, and Unit 1 is scheduled to return to service in September 2000. AEP stated
that its announcement follows a comprehensive systems readiness review of all
operating systems at Cook nuclear power plant and a cost/benefit analysis of
whether to restart the plant or shut it down completely. Plant officials
originally shut down both units of the facility, located in Bridgman, Michigan,
in September 1997 because of questions raised during a design inspection by the
NRC. AEP estimated that its costs to restart the idle plant should be
approximately $574 million, of which $373 million has been spent through
December 31, 1999.
On February 24, 2000, AEP announced a three-week delay in the planned
April 1, 2000 restart. The delay is due to issues encountered during testing of
equipment necessary for core reload and power operations of its Cook Unit 2. The
testing process continues and may still encounter additional items that could
extend the delay.
Merger Regulatory Approvals
The merger is conditioned, among other things, upon the approval of
several state and federal regulatory agencies. Some of the merger conditions
cannot be waived by the parties.
State Regulatory Commissions
Arkansas
On June 12, 1998, AEP and CSW jointly filed a request with the Arkansas
Commission for approval of the proposed merger. The Arkansas Commission issued
an order approving the merger on August 13, 1998, subject to approval of the
associated regulatory plan. On December 17, 1998, the Arkansas Commission issued
a final order granting conditional approval of a stipulated agreement related to
80
a proposed merger regulatory plan. The stipulated agreement calls for SWEPCO to
reduce rates through a net merger savings rider for its Arkansas retail
customers by $6 million over the five-year period following completion of the
merger. The Arkansas Commission order notes the possibility of decisions in
other jurisdictions adversely affecting provisions of the stipulated agreement.
Consequently, the Arkansas Commission conditioned its final order on its
consideration of approval of the merger in other state and federal
jurisdictions.
Louisiana
On May 15, 1998, AEP and CSW jointly filed a request with the Louisiana
Commission for approval of the proposed merger and for a finding that the merger
is in the public interest.
On September 27, 1999, the Louisiana Commission issued a final order
granting conditional approval of the pending merger between AEP and CSW. In
granting approval, the Louisiana Commission also approved a stipulated
settlement with the Louisiana Commission staff. Under the stipulated settlement,
AEP and CSW have agreed to share with SWEPCO's Louisiana customers merger
savings created as a result of the merger over the eight years following its
completion. A savings mechanism will be implemented to calculate merger savings
annually. AEP and CSW estimate that the customer rate credits in Louisiana will
total more than $18 million during that eight-year period. During the second
year following completion of the merger, customers will begin receiving a
monthly rate credit for 50% of calculated merger savings. This credit will be
updated annually and continue for the remainder of the eight-year period
following the merger's completion.
Oklahoma
On August 14, 1998, AEP and CSW jointly filed a request with the Oklahoma
Commission for approval of their proposed merger.
An amended application was filed with the Oklahoma Commission on February
25, 1999. On May 11, 1999, the Oklahoma Commission approved the proposed merger
between AEP and CSW. The approval follows a partial settlement between the
Oklahoma Commission Utility Division Staff, the Oklahoma Commission Consumer
Services Division, the Office of the Attorney General for Oklahoma, PSO, AEP and
CSW. The Oklahoma Commission order was appealed by the Municipal Electric
Systems of Oklahoma, Inc. and the Oklahoma Association of Electric Cooperatives.
On October 13, 1999, the Oklahoma Supreme Court dismissed the appeal of the
Oklahoma Association of Electric Cooperatives. The Municipal Electric System of
Oklahoma, Inc. withdrew its appeal and the Oklahoma Association of Electric
Cooperatives filed a motion to dismiss its appeal of the Oklahoma Commission
order approving the merger.
Under the partial settlement agreement, AEP and CSW would:
- - Share merger savings with Oklahoma customers as well as AEP shareholders,
effective with the merger closing;
- - Not increase Oklahoma base rates prior to January 1, 2003;
- - File by December 31, 2001 with the FERC an application to join a regional
transmission organization; and
- - Establish additional quality of service standards for PSO's retail customers.
Oklahoma's share of the $50.2 million in guaranteed net merger savings over
the first five years after the merger is consummated would be split between
Oklahoma customers and AEP shareholders, with customers receiving
approximately 55% of the savings.
81
The Oklahoma Commission has withdrawn its opposition to the merger at the
FERC.
Texas
On April 30, 1998, AEP and CSW jointly filed a request with the Texas
Commission for a finding that the merger is in the public interest.
On May 4, 1999, AEP and CSW announced a proposed settlement with several
intervenor groups for the proposed merger between AEP and CSW. The settlement
would result in combined rate reductions totaling $221 million over a six-year
period for Texas customers of the three CSW Texas Electric Operating Companies
if the merger is completed as planned and issues are resolved associated with
the three CSW Texas Electric Operating Companies rate and fuel reconciliation
proceedings.
The settlement was reached with the General Counsel of the Texas
Commission, the State of Texas, the Texas Industrial Energy Consumers, the Low
Income Intervenors, the Office of Public Utility Counsel of Texas and the
steering committee of the Cities of McAllen, Corpus Christi, Victoria, Abilene,
Big Lake, Vernon and Paducah. The settlement expands upon a previous Texas
settlement announced on November 12, 1998, with the Office of Public Utility
Counsel of Texas and the cities' steering committee. That prior settlement
agreement provided for Texas retail rate reductions of $180 million over the six
years following completion of the merger. The new settlement agreement proposes
additional rate reductions totaling $41 million for a total of $221 million. The
settlement also calls for the divestiture of a total of 1,604 MW of existing and
proposed generating capacity within Texas.
The first rate-reduction rider provides for $84.4 million in net-merger
savings. The amounts are to be credited to Texas customers' bills through a
net-merger-savings rate-reduction rider over six years following completion of
the merger.
Additional rate-reduction riders will be implemented to resolve issues
associated with the three CSW Texas Electric Operating Companies rate and fuel
reconciliation proceedings and court appeals in Texas. The settlement provides
for an additional reduction of $136.6 million, which will be implemented over
the six years following completion of the merger.
Hearings on the merger in Texas began August 9, 1999 and concluded on
August 10, 1999. As the hearings began, settlements were reached with all but
one of the parties in the case. The settling parties are all wholesale electric
customers of the three CSW Texas electric operating companies, and the
settlements call for the withdrawal of their opposition to the merger in all
regulatory approval proceedings. On October 1, 1999, an ALJ for the Texas State
Office of Administrative Hearings issued a proposal for decision recommending
that the Texas Commission approve the pending merger between AEP and CSW. In the
proposal for decision, the ALJ determined that, consistent with the terms of the
proposed settlement, the merger is in the public interest. On November 2, 1999,
the Texas Commission approved the proposed merger with AEP.
FERC
On April 30, 1998, AEP and CSW jointly filed a request with the FERC for
approval of their proposed merger. On May 25, 1999, AEP and CSW announced they
had reached a settlement with the FERC trial staff resolving competition and
rate issues that related to the proposed merger. On July 13, 1999, AEP and CSW
reached an additional settlement with the FERC trial staff resolving energy
exchange pricing issues. The settlements were submitted to the FERC for
approval. Hearings at the FERC concluded on July 19, 1999. On November 23, 1999,
the ALJ who presided over the FERC merger hearing issued a recommendation to the
FERC that the merger be approved and found that the proposed merger is in the
public interest.
82
On March 15, 2000, the FERC conditionally approved the merger. Conditions
placed on the merger include:
- - Transfer operational control of AEP's east and west transmission
systems to a fully-functioning, FERC-approved regional transmission
organization by December 15, 2001, which is the same implementation
date included in the FERC's general order for regional transmission
organizations that applies to all transmission-owning utilities.
- - Two interim transmission-related mitigation measures consisting of
market monitoring and independent calculation and posting of available
transmission capacity to monitor the operation of AEP's east
transmission system.
- - Divestiture of 550 MW of generating capacity comprised of 300 MW of
capacity in SPP and 250 MW of capacity in ERCOT. The FERC will require
AEP and CSW to divest their entire ownership interest in the generating
facilities that are to be divested. Alternatively, AEP and CSW may
choose to divest the same or greater amount of capacity from different
generating plants in their entirety. However, such generating plants
must be of similar cost, operation and location characteristics of
generating plants AEP and CSW originally proposed.
- - AEP and CSW must complete divestiture of the ERCOT capacity by March
15, 2001 and divestiture of the SPP capacity by July 1, 2002.
The FERC found that certain energy sales in SPP and ERCOT would be
reasonable and effective interim mitigation measures until completion of the
required SPP and ERCOT divestitures. The FERC will require the proposed interim
energy sales to be in effect when the merger is consummated.
AEP and CSW must notify the FERC by March 30, 2000 whether they accept the
condition that they transfer operational control of their transmission
facilities to a fully-functioning, FERC-approved regional transmission
organization by December 15, 2001 and the condition requiring the interim
mitigation measures. If AEP and CSW accept the conditions, then AEP and CSW must
make a compliance filing at least 60 days prior to consummation of the merger
describing their plan to implement the interim mitigation measures. AEP and CSW
intend to make this compliance filing on a date that would permit completion of
the merger in the second quarter of 2000. AEP and CSW believe they can address
the conditions.
NRC
On June 19, 1998, CPL filed a license transfer application with the NRC
requesting the NRC's consent to the indirect transfer of control of CPL's
interests in the NRC licenses issued for STP from CSW to AEP. CPL would continue
to own its 25.2% interest in STP, and CPL's name would remain on the NRC
operating license. On November 5, 1998, the NRC approved the license transfer
application with a condition that the merger must be completed by December 31,
1999. The NRC has extended the condition relating to completion of the merger to
June 30, 2000.
Other Federal
On October 13, 1998, AEP and CSW jointly filed an application with the SEC
for approval of the proposed merger. The SEC merger filing requests approval of
the merger and related transactions and outlines the expected combined company
benefits of the merger to AEP and CSW customers and shareholders. Since then,
AEP and CSW have filed four amendments to the application. Several parties have
filed petitions opposing the proposed merger at the SEC which have not been
withdrawn.
83
On July 29, 1999, applications were made with the FCC to authorize the
transfer of control of licenses of several CSW entities to AEP. In February
2000, the FCC approved the transfer which will be effective upon completion of
the proposed merger.
On July 26, 1999, AEP and CSW submitted filings to the Department of
Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. On
February 2, 2000, AEP and CSW announced that their proposed merger received
antitrust clearance from the Department of Justice.
United Kingdom
CSW has a 100% interest in SEEBOARD, and AEP has a 50% interest in
Yorkshire. The proposed merger of CSW into AEP would result in common ownership
of these United Kingdom entities. On January 25, 2000, the United Kingdom's
Department of Trade and Industry approved the common ownership of the United
Kingdom entities that would result from the proposed merger, subject to certain
conditions concerning the separate operation of their respective distribution
and supply businesses.
Other
On April 20, 1999, AEP reached a settlement with the Indiana Utility
Regulatory Commission staff addressing matters pertinent to Indiana regarding
the proposed merger. The Indiana Utility Regulatory Commission approved the
settlement on April 26, 1999. The settlement agreement resulted from an
investigation of the proposed merger between AEP and CSW initiated by the
Indiana Utility Regulatory Commission.
On April 21, 1999, AEP and CSW announced that they had reached separate
settlements with six wholesale customers that address issues related to the
proposed merger.
On April 28, 1999, AEP and CSW announced that they ratified a settlement
agreement with local unions of the IBEW representing employees of AEP and CSW.
The settlement agreement covered issues related to the pending merger between
AEP and CSW. As part of the settlement, the IBEW local unions have withdrawn
their opposition to the merger.
On May 26, 1999, AEP and CSW announced that they had reached a settlement
agreement with the Kentucky Attorney General and several AEP customers in
Kentucky addressing matters pertinent to Kentucky regarding the pending merger
between AEP and CSW. The Kentucky Public Service Commission has approved the
settlement.
On August 6, 1999, AEP announced that it had ratified a settlement
agreement with local unions of the UWUA representing employees of AEP. The
settlement agreement covered issues raised in the pending merger between AEP and
CSW. As part of the settlement, the UWUA local unions will not oppose the
merger.
On October 21, 1999, the Public Utility Commission of Ohio issued a
decision stating that it will notify the FERC that it is no longer opposed to
AEP's proposed merger with CSW and that it will no longer seek conditions to the
merger.
AEP and CSW also have reached settlements with the Missouri Public Service
Commission, the Michigan Public Service Commission and various wholesale
customers and intervenors in the FERC merger proceeding.
Completion of the Merger
AEP and CSW have targeted consummation of the AEP Merger in the second
quarter of 2000. The merger is conditioned, among other things, upon the
approval of several state and federal regulatory agencies. All of such
84
approvals, except from the SEC, have been obtained. The transaction must satisfy
many conditions, including the condition that it must be accounted for as a
pooling of interests. The parties may not waive some of these conditions. AEP
and CSW continue the process of seeking regulatory approvals, but there can be
no assurance as to when, on what terms or whether the required approvals will be
received. After June 30, 2000, either CSW or AEP may terminate the merger
agreement if all of the conditions to its obligation to close have not been
satisfied. There can be no assurance that the AEP Merger will be consummated.
Merger Costs
As of December 31, 1999, CSW had deferred $43 million in costs related to
the AEP Merger on its consolidated balance sheet, which will be charged to
expense if AEP and CSW do not complete their proposed merger. If the merger is
consummated, such costs would be recovered in rates pursuant to merger sharing
provisions contained in the state settlement agreements.
16. EXTRAORDINARY ITEMS
Texas Electric Operating Companies Discontinuance of SFAS No. 71
The discontuance of SFAS No. 71 in 1999 for SWEPCO's Arkansas and Texas
generation business and WTU's Texas generation business created certain
write-offs for those companies, which are categorized as extraordinary losses on
their income statements. The extraordinary loss at SWEPCO was $3.0 million. The
extraordinary loss at WTU was $5.5 million. The extraordinary loss in 1999 at
CPL was $5.5 million as a result of the write-off of losses on the reacquisition
of long-term debt associated with generation-related assets. See NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility Restructuring
Legislation for additional discussion of discontinuing SFAS No. 71.
United Kingdom Windfall Profits Tax
In the general election held in the United Kingdom on May 1, 1997, the
United Kingdom's Labour Party won control of the government with a considerable
majority. Prior to the general election, the Labour Party had announced that if
elected, it would impose a windfall profits tax on certain industries in the
United Kingdom, including the privatized utilities, to fund a variety of social
improvement programs. On July 2, 1997, the one-time windfall profits tax was
introduced in the Labour Party's budget and the legislation enacting the tax
subsequently was passed during the third quarter of 1997. Accordingly, during
the third quarter of 1997, SEEBOARD U.S.A. accrued, as an extraordinary item,
(pound)109.5 million (or $176 million when converted at (pound)1.00 = $1.61) for
a one-time windfall profits tax enacted by the United Kingdom government.
The windfall profits tax was payable in two equal installments, due
December 1, 1997 and December 1, 1998. The tax was charged at a rate of 23% on
the difference between nine times the average profits after tax for the four
years following flotation in 1990, and SEEBOARD's market capitalization
calculated as the number of shares issued at flotation multiplied by the
flotation price per share.
17. NEW ACCOUNTING STANDARDS
SFAS No. 133 as amended by SFAS No. 137
SFAS No. 133 as amended by SFAS No. 137 is effective for fiscal years
beginning after June 15, 2000 or January 1, 2001, for calendar year entities.
SFAS No. 133 replaces existing pronouncements and practices with a single
85
integrated accounting framework for derivatives and hedging activities and
eliminates previous inconsistencies in generally accepted accounting principles.
SFAS No. 133 expands the accounting definition of derivatives, which had focused
on freestanding contracts (futures, forwards, options and swaps) to include
embedded derivatives and many commodity contracts. All derivatives will be
reported on the balance sheet either as an asset or liability measured at fair
value. Changes in a derivative's fair value will be recognized currently in
earnings unless specific hedge accounting criteria are met. CSW has established
a project team to implement SFAS No. 133. CSW has not yet quantified the effects
of adopting SFAS No. 133 on its financial statements, although application of
SFAS No. 133 could increase volatility in earnings and other comprehensive
income. See MD&A - NEW ACCOUNTING STANDARDS.
18. SOUTH AMERICAN INVESTMENTS
Through November 1999, CSW International had purchased a 36% equity
interest in Vale for $80 million. CSW International also extended $100 million
of debt convertible to equity in Vale in 1998. In December of 1999, CSW
International converted $69 million of the $100 million into equity, thereby
raising the equity interest to 44%. CSW International anticipates converting the
remaining debt into equity over the next two years.
In January 1999, amid market instability, the Brazilian government
abandoned its policy of pegging the Brazilian Real in a range against the
dollar. This action resulted in a 49% devaluation of the Brazilian currency by
the end of December 1999. Vale is unfavorably affected by the devaluation due
primarily to the revaluation of foreign denominated debt.
CSW International has a put option, which, if exercised, requires Vale to
purchase CSW International shares at a minimum price equal to the U.S. dollar
equivalent of the purchase price for Vale. As a result of the put option
arrangement, management has concluded that CSW International's investment
carrying amount will not be reduced below the put option value unless there is
deemed to be a permanent impairment. Pursuant to the put option arrangement, CSW
International will not recognize its proportionate share of any future earnings
until its proportionate share of any losses of Vale is recognized. At December
31, 1999, CSW International had deferred losses, after tax, of approximately $21
million related to its Vale investment. CSW International views its investment
in Vale as a long-term investment, which has significant long-term value and is
recoverable. Management will continue to closely evaluate the changes in the
Brazilian economy and its impact on CSW International's investment in Vale.
As of December 31, 1999, CSW International had invested $110 million in
stock of a Chilean electric company. The investment is classified as securities
available for sale and accounted for by the cost method. Based on the current
market value of the shares and the year end foreign exchange rate, the value of
the investment at December 31, 1999 was $62 million. The reduction in the
carrying value of this investment has been reflected in Other Comprehensive
Income in CSW's Consolidated Statements of Stockholders' Equity. Management
views its investment in Chile as a long-term investment strategy and believes
this investment continues to have significant long-term value and that it is
recoverable. Management will continue to closely evaluate the changes in the
South American economy and its impact on CSW International's investment in the
Chilean electric company.
86
19. QUARTERLY INFORMATION (UNAUDITED)
The following unaudited quarterly information includes, in the opinion of
management all adjustments necessary for a fair presentation of such amounts.
Information for quarterly periods is affected by seasonal variations in sales,
rate changes, timing of fuel expense recovery and other factors.
QUARTER ENDED 1999 1998
-----------------------------------------------------------------
(millions, except EPS)
March 31
Operating Revenues $1,225 $1,257
Operating Income 147 163
Net Income for Common Stock 45 60
Basic and Diluted EPS $0.21 $0.28
June 30
Operating Revenues $1,319 $1,344
Operating Income 206 214
Net Income for Common Stock 103 107
Basic and Diluted EPS $0.49 $0.50
September 30
Operating Revenues $1,618 $1,581
Operating Income 335 344
Income before Extraordinary Item 230 233
Extraordinary Loss (8) --
Net Income for Common Stock 222 233
Basic and Diluted EPS before
Extraordinary Item $1.08 $1.10
Basic and Diluted EPS from
Extraordinary Loss ($0.04) $--
Basic and Diluted EPS $1.04 $1.10
December 31
Operating Revenues $1,375 $1,300
Operating Income 178 145
Income before Extraordinary Item 91 40
Extraordinary Loss (6) --
Net Income for Common Stock 85 40
Basic and Diluted EPS before
Extraordinary Item $0.43 $0.19
Basic and Diluted EPS from
Extraordinary Loss ($0.03) $--
Basic and Diluted EPS $0.40 $0.19
Total
Operating Revenues $5,537 $5,482
Operating Income 866 866
Income before Extraordinary Item 469 440
Extraordinary Loss (14) --
Net Income for Common Stock 455 440
Basic and Diluted EPS before
Extraordinary Item $2.21 $2.07
Basic and Diluted EPS from
Extraordinary Loss ($0.07) $--
Basic and Diluted EPS $2.14 $2.07
87
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Central and South West
Corporation:
We have audited the accompanying consolidated balance sheets of Central
and South West Corporation (a Delaware corporation) and subsidiary companies as
of December 31, 1999 and 1998, and the related consolidated statements of
income, stockholders' equity and cash flows, for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits. We did not audit
the financial statements of CSW UK Holdings (1999) and CSW UK Finance Company
(1998 and 1997) which statements reflect total assets and total revenues of 20
percent and 31 percent in 1999, 22 percent and 32 percent in 1998 and 22 percent
and 35 percent in 1997, respectively, of the related consolidated totals. Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to the amounts included for those
entities, is based solely on the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Central and South West Corporation and subsidiary
companies as of December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States.
Arthur Andersen LLP
Dallas, Texas
February 25, 2000
88
AUDITOR'S REPORT TO THE MEMBERS OF CSW UK HOLDINGS
We have audited the consolidated balance sheets of CSW UK Holdings and
subsidiaries as of 31 December 1999 and the related consolidated statement of
earnings and statements of cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes assessing, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CSW UK
Holdings and subsidiaries at 31 December 1999 and the result of their operations
and cash flows for the year then ended in conformity with generally accepted
accounting principles in the United Kingdom.
Generally accepted accounting principles in the United Kingdom vary in
certain significant respects from generally accepted accounting principles in
the United States. Application of generally accepted accounting principles in
the United States would have affected results of operations and shareholders'
equity as of and for the year ended 31 December 1999 to the extent summarised in
Note 23 to the consolidated financial statements.
KPMG Audit Plc
Chartered Accountants London
Registered Auditor 17 January 2000
89
AUDITOR'S REPORT TO THE MEMBERS OF CSW UK FINANCE COMPANY
We have audited the consolidated balance sheets of CSW UK Finance Company
and subsidiaries as of 31 December 1998 and 1997 and the related consolidated
statement of earnings and statements of cash flows for the years then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CSW UK
Finance Company and subsidiaries at 31 December 1998 and 1997 and the results of
their operations and cash flows for the years then ended in conformity with
generally accepted accounting principles in the United Kingdom.
Generally accepted accounting principles in the United Kingdom vary in
certain significant respects from generally accepted accounting principles in
the United States. Application of generally accepted accounting principles in
the United States would have affected results of operations and shareholders'
equity as of and for the years ended 31 December 1998 and 1997 to the extent
summarised in Note 23 to the consolidated financial statements.
KPMG Audit Plc
Chartered Accountants London, England
Registered Auditor 18 January 1999
90
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and objectivity
of the consolidated financial statements of Central and South West Corporation
and subsidiary companies as well as other information contained in this annual
report. The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis and,
in some cases, reflect amounts based on the best estimates and judgments of
management giving due consideration to materiality. Financial information
contained elsewhere in this annual report is consistent with that in the
consolidated financial statements.
The consolidated financial statements have been audited by CSW's
independent public accountants who were given unrestricted access to all
financial records and related data, including minutes of all meetings of
stockholders, the board of directors and committees of the board. CSW and its
subsidiaries believe that representations made to the independent public
accountants during their audit were valid and appropriate. The reports of
independent public accountants are presented elsewhere in this report.
CSW, together with its subsidiary companies, maintains a system of
internal controls to provide reasonable assurance that transactions are executed
in accordance with management's authorization, that the consolidated financial
statements are prepared in accordance with generally accepted accounting
principles and that the assets of CSW and its subsidiaries are properly
safeguarded against unauthorized acquisition, use or disposition. The system
includes a documented organizational structure and division of responsibility,
established policies and procedures including a policy on ethical standards
which provides that the companies will maintain the highest legal and ethical
standards, and the careful selection, training and development of our employees.
Internal auditors continuously monitor the effectiveness of the internal
control system following standards established by the Institute of Internal
Auditors. Actions are taken by management to respond to deficiencies as they are
identified. The board, operating through its audit committee, which is comprised
entirely of directors who are not officers or employees of CSW or its
subsidiaries, provides oversight to the financial reporting process.
Due to the inherent limitations in the effectiveness of internal controls,
no internal control system can provide absolute assurance that errors will not
occur. However, management strives to maintain a balance, recognizing that the
cost of such a system should not exceed the benefits derived.
CSW and its subsidiaries believe that, in all material respects, its
system of internal controls over financial reporting and over safeguarding of
assets against unauthorized acquisition, use or disposition functioned
effectively as of December 31, 1999.
E. R. Brooks Glenn D. Rosilier Lawrence B. Connors
Chairman and Executive Vice President and Controller
Chief Executive Officer Chief Financial Officer
91
GLOSSARY OF TERMS
The following abbreviations or acronyms used in this Financial Report are
defined below:
Abbreviation or Acronym Definition
AEP.....................American Electric Power Company, Inc.
AEP Merger .............Proposed Merger between AEP and CSW where CSW would
become a wholly owned subsidiary of AEP
AFUDC ..................Allowance for funds used during construction
AIP.....................Annual Incentive Plan
ALJ ....................Administrative Law Judge
Alpek ..................Alpek S.A. de C.V.
Altamira................CSW International cogeneration project in Altamira,
Tamaulipas, Mexico
Anglo Iron..............Anglo Iron and Metal, Inc.
APBO....................Accumulated Postretirement Benefit Obligation
Arkansas Commission ....Arkansas Public Service Commission
Bankruptcy Code.........Title 11 Of The United States Bankruptcy Code, as
amended
BP Amoco................BP Amoco plc
Btu ....................British thermal unit
Burlington Northern ....Burlington Northern Railroad Company
C3 Communications ......C3 Communications, Inc., Austin, Texas (formerly CSW
Communications, Inc.)
CAAA ...................Clean Air Act/Clean Air Act Amendments
Cajun ..................Cajun Electric Power Cooperative, Inc.
Cash Balance Plan ......CSW's tax-qualified Cash Balance Retirement Plan
CEO ....................Chief Executive Officer
CERCLA .................Comprehensive Environmental Response, Compensation and
Liability Act of 1980
ChoiceCom ..............CSW/ICG ChoiceCom, L.P., a terminated joint venture
between C3 Communications and ICG Communications, Inc.
CLECO ..................Central Louisiana Electric Company, Inc.
CPL ....................Central Power and Light Company, Corpus Christi, Texas
CPL 1997 Final Order ...Final orders received from the Texas Commission in CPL's
rate case Docket No. 14965, including both the order
received on September 10, 1997 and the revised order
received on October 16, 1997
CSW ....................Central and South West Corporation, Dallas, Texas
CSW Credit .............CSW Credit, Inc., Dallas, Texas
CSW Energy .............CSW Energy, Inc., Dallas, Texas
CSW Energy Services ....CSW Energy Services, Inc., Dallas, Texas
CSW International ......CSW International, Inc., Dallas, Texas
CSW Investments ........CSW Investments, an unlimited company organized in the
United Kingdom through which CSW International owns
SEEBOARD
CSW Leasing ............CSW Leasing, Inc., Dallas, Texas
CSW Services ...........Central and South West Services, Inc., Dallas, Texas and
Tulsa, Oklahoma
CSW System .............CSW and its subsidiaries
CSW UK Finance Company..An unlimited company organized in the United Kingdom
through which CSW International owns CSW Investments
CSW UK Holdings.........An unlimited company organized in the United Kingdom
through which CSW International owns CSW UK Finance
Company
CSW U.S. Electric
System.................CSW and the U.S. Electric Operating Companies
DeSoto..................Parish of DeSoto, State of Louisiana pollution control
revenue bond issuing authority
DGEGS ..................Director General of Electricity and Gas Supply
DHMV ...................Dolet Hills Mining Venture
Diversified Electric ...CSW Energy and CSW International
DOE ....................United States Department of Energy
ECOM ...................Excess cost over market
EDC.....................Energy Delivery Company
EITF....................Emerging Issues Task Force
EITF 97-4...............Deregulation of the Pricing of Electricity - Issues
Related to the Application of SFAS Nos. 71 and 101
El Paso ................El Paso Electric Company
EMF ....................Electric and magnetic fields
EnerACT.................EnerACT(TM), Energy Aggregation and Control Technology
Energy Policy Act ......National Energy Policy Act of 1992
EnerShop ...............EnerShopsm Inc., Dallas, Texas
EPA ....................United States Environmental Protection Agency
EPS ....................Earnings per share of common stock
ERCOT ..................Electric Reliability Council of Texas
ERISA ..................Employee Retirement Income Security Act of 1974, as
amended
ESPS....................Electric Supply Pension Scheme
Exchange Act ...........Securities Exchange Act of 1934, as amended
92
GLOSSARY OF TERMS (continued)
The following abbreviations or acronyms used in this Financial Report are
defined below:
Abbreviation or Acronym Definition
FCC.....................Federal Communications Commission
FERC ...................Federal Energy Regulatory Commission
FMB ....................First mortgage bond
FUCO ...................Foreign utility company as defined by the Holding
Company Act
Guadalupe...............Guadalupe-Blanco River Authority pollution control
revenue bond issuing authority
HL&P ...................Houston Lighting & Power Company
Holding Company Act ....Public Utility Holding Company Act of 1935, as amended
HVdc ...................High-voltage direct-current
IPP ....................Independent power producer
IBEW ...................International Brotherhood of Electrical Workers
ISO ....................Independent system operator
ITC ....................Investment tax credit
Joint Proxy Statement...The Notice of Annual Meeting and Joint Proxy Statement
of American Electric Power Company, Inc. and Central and
South West Corporation
July 1999 SWEPCO Plan ..The amended plan of reorganization for Cajun filed by
the Members Committee and SWEPCO on July 28, 1999 with
the U.S. Bankruptcy Court for the Middle District of
Louisiana
KWH ....................Kilowatt-hour
LIBOR...................London Inter-Bank Overnight Rate
LIFO ...................Last-in first-out (inventory accounting method)
Louisiana Commission ...Louisiana Public Service Commission
LTIP ...................Amended and Restated 1992 Long-Term Incentive Plan
Matagorda ..............Matagorda County Navigation District Number One (Texas)
pollution control revenue bond issuing authority
MD&A ...................Management's Discussion and Analysis of Financial
Condition and Results of Operations
MDEQ ...................Mississippi Department of Environmental Quality
MGP ....................Manufactured gas plant or coal gasification plant
Mirror CWIP ............Mirror construction work in progress
Mississippi Power ......Mississippi Power Company
MMbtu ..................Million Btu
MW .....................Megawatt
MWH ....................Megawatt-hour
Named Executive
Officers..............The CEO and the four most highly compensated Executive
Officers, as defined by regulation
National Grid ..........National Grid Group plc
NEIL ...................Nuclear Electric Insurance Limited
NLRB ...................National Labor Relations Board
NRC ....................Nuclear Regulatory Commission
OASIS ..................Open access same time information system
OEFA....................Oklahoma Environmental Finance Authority pollution
control revenue bond issuing authority
OFGEM...................Office of Gas and Electricity Markets
Oklahoma Commission ....Corporation Commission of the State of Oklahoma
Oklaunion ..............Oklaunion Power Station Unit No. 1
OPEB ...................Other postretirement benefits (other than pension)
PCB ....................Polychlorinated biphenyl
PCRB....................Pollution control revenue bond
PGC.....................Power Generation Company
Phillips................Phillips Petroleum Company
PowerShare .............CSW's PowerShareSM Dividend Reinvestment and Stock
Purchase Plan
PRP ....................Potentially responsible party
PSO ....................Public Service Company of Oklahoma, Tulsa, Oklahoma
PSO 1997 Rate Settlement
Agreement..............Joint stipulation agreement reached by PSO and other
parties to settle PSO's rate inquiry
PURPA...................Public Utility Regulatory Policies Act of 1978
QF......................Qualifying Facility as defined in PURPA
RCRA....................Federal Resource Conservation and Recovery Act of 1976
Red River...............Red River Authority of Texas pollution control revenue
bond issuing authority
Registrant(s) ..........CSW, CPL, PSO, SWEPCO and WTU
RESCTA .................Retail Electric Supplier Certified Territory Act
REP.....................Retail Electric Provider
Retirement Savings Plan.CSW's employee retirement savings plan
Rights Plan ............Stockholders Rights Agreement between CSW and CSW
Services, as Rights Agent
RTO.....................Region Transmission Organization
Sabine..................Sabine River Authority of Texas pollution control
revenue bond issuing authority
93
GLOSSARY OF TERMS (continued)
The following abbreviations or acronyms used in this Financial Report are
defined below:
Abbreviation or Acronym Definition
SEC ....................United States Securities and Exchange Commission
SEEBOARD ...............SEEBOARD Group plc, Crawley, West Sussex, United Kingdom
SEEBOARD U.S.A..........CSW's investment in SEEBOARD consolidated and converted
to U.S. Generally Accepted Accounting Principles
SERP....................Special Executive Retirement Plan
SFAS....................Statement of Financial Accounting Standards
SFAS No. 34.............Capitalization of Interest Cost
SFAS No. 52 ............Foreign Currency Translation
SFAS No. 71 ............Accounting for the Effects of Certain Types of
Regulation
SFAS No. 87.............Employers' Accounting for Pensions
SFAS No. 88.............Employers' Accounting for Settlements and Curtailments
of Defined Pension Plans and for Termination Benefits
SFAS No. 101............Regulated Enterprises - Accounting for the
Discontinuation of Application of SFAS No. 71
SFAS No. 106 ...........Employers' Accounting for Postretirement Benefits Other
than Pensions
SFAS No. 115 ...........Accounting for Certain Investments in Debt and Equity
Securities
SFAS No. 121............Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of
SFAS No. 123 ...........Accounting for Stock-Based Compensation
SFAS No. 130 ...........Reporting Comprehensive Income
SFAS No. 131 ...........Disclosure about Segments of an Enterprise and Related
Information
SFAS No. 132 ...........Employers' Disclosures about Pensions and Other
Postretirement Benefits
SFAS No. 133 ...........Accounting for Derivative Instruments and Hedging
Activities
SFAS No. 137............Deferral of the Effective Date of Statement No. 133
SPP ....................Southwest Power Pool
Siloam Springs..........City of Siloam Springs, Arkansas pollution control
revenue bond issuing authority
STP ....................South Texas Project nuclear electric generating station
STPNOC .................STP Nuclear Operating Company, a non-profit Texas
corporation, jointly owned by CPL, HL&P, City of Austin,
and City of San Antonio
SWEPCO .................Southwestern Electric Power Company, Shreveport,
Louisiana
Texas Commission .......Public Utility Commission of Texas
Texas Electric Operating
Companies..............CPL, SWEPCO and WTU
Texas Legislation.......Texas Senate Bill 7 relating to deregulation of electric
utility industry
Titus County............Titus County Fresh Water Supply District No. 1 pollution
control revenue bond issuing authority
TNRCC...................Texas Natural Resource Conservation Commission
Transok.................Transok, Inc. and subsidiaries
Trust Preferred
Securities.............Collective term for securities issued by business trusts
of CPL, PSO and SWEPCO classified on the balance sheet
as "Certain Subsidiary (or CPL/PSO/SWEPCO)-obligated,
mandatorily redeemable preferred securities of
subsidiary trusts holding solely Junior Subordinated
Debentures of such Subsidiaries (or CPL/PSO/SWEPCO)"
U.K. Electric...........SEEBOARD U.S.A.
Union Pacific ..........Union Pacific Railroad Company
U.S. Electric Operating Companies or
U.S. Electric .....CPL, PSO, SWEPCO and WTU
UWUA....................Utility Workers Union of America
Vale ...................Empresa De Electricidade Vale Paranapanema SA, a
Brazilian Electric Distribution Company
Valero..................Valero Refining Company-Texas, Valero Refining Company
and Valero Energy Company
WTU ....................West Texas Utilities Company, Abilene, Texas
Yorkshire ..............Yorkshire plc, a regional electricity company in the
United Kingdom
94