UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934]
FOR THE TRANSITION PERIOD FROM _____TO_____
COMMISSION REGISTRANT, STATE OF INCORPORATION, I.R.S. EMPLOYER
FILE NUMBER ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO.
1-1443 CENTRAL AND SOUTH WEST CORPORATION 51-0007707
(A Delaware Corporation)
1616 Woodall Rodgers Freeway
Dallas, Texas 75202-1234
(214) 777-1000
0-346 CENTRAL POWER AND LIGHT COMPANY 74-0550600
(A Texas Corporation)
539 North Carancahua Street
Corpus Christi, Texas 78401-2802
(512) 881-5300
0-343 PUBLIC SERVICE COMPANY OF OKLAHOMA 73-0410895
(An Oklahoma Corporation)
212 East 6th Street
Tulsa, Oklahoma 74119-1212
(918) 599-2000
1-3146 SOUTHWESTERN ELECTRIC POWER COMPANY 72-0323455
(A Delaware Corporation)
428 Travis Street
Shreveport, Louisiana 71156-0001
(318) 222-2141
0-340 WEST TEXAS UTILITIES COMPANY 75-0646790
(A Texas Corporation)
301 Cypress Street
Abilene, Texas 79601-5820
(915) 674-7000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
REGISTRANT TITLE OF EACH CLASS ON WHICH REGISTERED
Central and South West Common Stock, $3.50 New York Stock Exchange, Inc.
Corporation Par Value Chicago Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
REGISTRANT TITLE OF EACH CLASS
Central Power and Light Company Cumulative Preferred Stock, $100 Par Value
Public Service Company of Cumulative Preferred Stock, $100 Par Value
Oklahoma
Southwestern Electric Power Cumulative Preferred Stock, $100 Par Value
Company
West Texas Utilities Company Cumulative Preferred Stock, $100 Par Value
INDICATE BY CHECK MARK WHETHER THE REGISTRANTS (1) HAVE FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS AND (2) HAVE BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED,
TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K:
CENTRAL AND SOUTH WEST CORPORATION [ X ]
CENTRAL POWER AND LIGHT COMPANY [ ]
PUBLIC SERVICE COMPANY OF OKLAHOMA [ ]
SOUTHWESTERN ELECTRIC POWER COMPANY [ ]
WEST TEXAS UTILITIES COMPANY [ ]
AGGREGATE MARKET VALUE OF THE COMMON STOCK OF CENTRAL AND SOUTH WEST
CORPORATION AT MARCH 4, 1997 HELD BY NON-AFFILIATES WAS APPROXIMATELY $5.0
BILLION. NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT MARCH 4,
1997:212,140,504. CENTRAL AND SOUTH WEST CORPORATION IS THE SOLE HOLDER OF THE
COMMON STOCK OF CENTRAL POWER AND LIGHT COMPANY, PUBLIC SERVICE COMPANY OF
OKLAHOMA, SOUTHWESTERN ELECTRIC POWER COMPANY AND WEST TEXAS UTILITIES COMPANY.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Notice of Annual Meeting and Proxy Statement of
Central and South West Corporation dated March 7, 1997 are incorporated by
reference into Part III hereof.
This combined Form 10-K is separately filed by Central and South West
Corporation, Central Power and Light Company, Public Service Company of
Oklahoma, Southwestern Electric Power Company and West Texas Utilities Company.
Information contained herein relating to any individual Registrant is filed by
such Registrant on its own behalf. Each Registrant makes no representation as to
information relating to the other Registrants.
i
TABLE OF CONTENTS
GLOSSARY OF TERMS.........................................................ii
FORWARD LOOKING INFORMATION...............................................v
PART I
ITEM 1. BUSINESS
Overview.....................................................1-1
U.S. Utility Operations......................................1-3
United Kingdom Operations....................................1-25
Non-Utility Operations.......................................1-28
Other Information............................................1-30
ITEM 2. PROPERTIES...................................................1-31
ITEM 3. LEGAL PROCEEDINGS............................................1-31
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..........1-31
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..........................................2-1
ITEM 6. SELECTED FINANCIAL DATA......................................2-4
Central Power and Light Company..............................2-76
Public Service Company of Oklahoma...........................2-102
Southwestern Electric Power Company..........................2-123
West Texas Utilities Company.................................2-147
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................2-5
Central Power and Light Company..............................2-77
Public Service Company of Oklahoma...........................2-103
Southwestern Electric Power Company..........................2-124
West Texas Utilities Company.................................2-148
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................2-34
Central Power and Light Company..............................2-92
Public Service Company of Oklahoma...........................2-113
Southwestern Electric Power Company..........................2-137
West Texas Utilities Company.................................2-160
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..........................2-169
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS..........3-1
ITEM 11. EXECUTIVE COMPENSATION.......................................3-7
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT...................................................3-12
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............3-13
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K..................................................4-1
ii
GLOSSARY OF TERMS
The following abbreviations or acronyms used in this Form 10-K are defined
below:
ABBREVIATION OR ACRONYM DEFINITION
APBO................................Accumulated Postretirement Benefit
Obligation
AFUDC...............................Allowance for funds used during construction
ALJ.................................Administrative Law Judge
Alpek...............................Alpek S.A. de C.V.
ANI.................................American Nuclear Insurance
Arkansas Commission.................Arkansas Public Service Commission
Ash Creek...........................Ash Creek Mining Company, a wholly owned
subsidiary of PSO
Big Cajun I.........................A two unit, natural gas-fired power plant
owned and operated by Cajun and located in
New Roads, Louisiana
Big Cajun II........................A three unit, coal fired power plant owned
and operated by Cajun and located in New
Roads, Louisiana
BREMCO..............................Bossier Rural Electric Membership
Cooperative
Btu.................................British themal unit
Burlington Northern.................Burlington Northern Railroad Company
CAAA................................Clean Air Act/Clean Air Act Amendments
Cajun...............................Cajun Electric Power Cooperative, Inc.
Cajun Trustee.......................Cajun's court appointed trustee in
bankruptcy
CEO.................................Chief Executive Officer
CERCLA..............................Comprehensive Environmental Response,
Compensation and Liability Act of 1980
Court of Appeals....................Court of Appeals, Third District of Texas,
Austin, Texas
CPL.................................Central Power and Light Company, Corpus
Christi, Texas
CPL 1995 Agreement..................Settlement agreement filed by CPL with the
Texas Commission to settle certain CPL
regulatory matters
CPL 1996 Fuel Agreement.............Fuel settlement agreement entered into by
CPL and other parties to CPL's current rate
review matters
CSW.................................Central and South West Corporation, Dallas,
Texas
CSW Common..........................CSW common stock, $3.50 par value per share
CSW Communications..................CSW Communications, Inc., Austin, Texas
CSW Credit..........................CSW Credit, Inc., Dallas, Texas
CSW Credit Agreement................$850 million senior credit agreement
previously entered into by CSW with a
consortium of banks to partially fund the
SEEBOARD acquisition which has since been
repaid in full
CSW Energy..........................CSW Energy, 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 Investments Credit Facility.....(pound)1.0 billion senior credit facility
previously arranged by CSW Investments with
a consortium of banks to partially fund the
SEEBOARD acquisition which has since been
repaid in full
CSW Investments Group...............Consolidated SEEBOARD, SEEBOARD Group plc
(which has replaced CSW (UK) plc.) and CSW
Investments converted to U.S. Generally
Accepted Accounting Principles
CSW Leasing.........................CSW Leasing, Inc., Dallas, Texas
CSW Services........................CSW Services, Inc., Dallas, Texas and Tulsa,
Oklahoma
CSW System..........................CSW and its subsidiaries
CWIP................................Construction work in progress
DeSoto..............................Parish of DeSoto, State of Louisiana
pollution control revenue bond issuing
authority
DGES................................Director General Electricity Supply
DOE.................................United States Department of Energy
El Paso.............................El Paso Electric Company
El Paso Merger......................The proposed merger whereby El Paso would
have become a wholly owned subsidiary of
CSW
EMF.................................Electric and Magnetic Fields
Energy Policy Act...................National Energy Policy Act of 1992
EnerShop............................EnerShopSM Inc., Dallas, Texas
Entergy Gulf States.................Gulf States Utilities Company
EPA.................................United States Environmental Protection
Agency
EPS.................................Earnings per share
ERCOT...............................Electric Reliability Council of Texas
ERISA...............................Employee Retirement Income Security Act of
1974, as amended
Exchange Act........................Securities Exchange Act of 1934, as amended
iii
GLOSSARY OF TERMS (CONTINUED)
The following abbreviations or acronyms used in this Form 10-K are defined
below:
ABBREVIATION OR ACRONYM DEFINITION
EWG.................................Exempt Wholesale Generator
FASB................................Financial Accounting Standards Board
FCC.................................Federal Communications Commission
FERC................................Federal Energy Regulatory Commission
First Amended SWEPCO Plan...........The plan of reorganization for Cajun filed
by the Members Committee, SWEPCO and Entergy
Gulf States on September 30, 1996 with the
U.S. Bankruptcy Court for the Middle
District of Louisiana
FMB.................................First Mortgage Bond
Guadalupe...........................Guadalupe-Blanco River Authority pollution
control revenue bond issuing authority
HLP.................................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
KW..................................Kilowatt
KWH.................................Kilowatt-hour
LIFO................................Last-in First-out (inventory accounting
method)
Louisiana Commission................Louisiana Public Service Commission
LTIP................................Long-Term Incentive Plan
Magic Valley........................Magic Valley Electric Cooperative
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
Members Committee...................The members committee of Cajun, which
currently represents 8 of the 12 Louisiana
member distribution cooperatives that are
served by Cajun
Merger Agreement....................Agreement and Plan of Merger between El Paso
and CSW, dated as of May 3, 1993, as amended
MGP.................................Manufactured gas plant or coal gasification
plant
Mirror CWIP.........................Mirror construction work in progress
Mississippi Power...................Mississippi Power Company
MMbtu...............................Million Btu
Mmcf/d..............................Million cubic feet of gas per day
MTN.................................Medium-term note
MW..................................Megawatt
MWH.................................Megawatt-hour
National Grid.......................National Grid Group plc
NEIL................................Nuclear Electric Insurance Limited
NRC.................................Nuclear Regulatory Commission
OEFA................................Oklahoma Environmental Finance Authority
pollution control revenue bond issuing
authority
Oklahoma Commission.................Corporation Commission of the State of
Oklahoma
Oklaunion...........................Oklaunion Power Station Unit No. 1
ONEOK Gas...........................ONEOK Gas Marketing Company
OPEB................................Other Postretirement Benefits (other than
pension)
Original SWEPCO Plan................The plan of reorganization for Cajun filed
by the Members Committee, SWEPCO and
Entergy Gulf States on April 19, 1996 with
the U.S. Bankruptcy Court for the Middle
District of Louisiana
PCB.................................Polychlorinated biphenyl
PCRB................................Pollution Control Revenue Bond
PowerShare..........................CSW's PowerShareSM Dividend Reinvestment and
Stock Purchase Plan
PRP.................................Potentially responsible party
PSO.................................Public Service Company of Oklahoma, Tulsa,
Oklahoma
PURA................................Public Utility Regulatory Act of Texas
(including amendments to the law)
PURPA...............................Public Utility Regulatory Policies Act of
1978
iv
GLOSSARY OF TERMS (CONTINUED)
The following abbreviations or acronyms used in this Form 10-K are defined
below:
ABBREVIATION OR ACRONYM DEFINITION
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..............................Rural Electric Supplier Certified Territory
Act
RUS.................................Rural Utilities Service of the federal
government
Sabine..............................Sabine River Authority of Texas pollution
control revenue bond issuing authority
Siloam Springs......................City of Siloam Springs, Arkansas pollution
control revenue bond issuing authority
SAR.................................Stock Appreciation Right
SEC.................................United States Securities and Exchange
Commission
SEEBOARD............................SEEBOARD plc., Crawley, West Sussex, United
Kingdom
Second Amended SWEPCO Plan..........The plan of reorganization for Cajun filed
by the Members Committee, SWEPCO and
Entergy Gulf States on October 26, 1996 with
the U.S. Bankruptcy Court for the Middle
District of Louisiana (amends both the
Original SWEPCO Plan and the First Amended
SWEPCO Plan)
SERP................................Special Executive Retirement Plan
SFAS................................Statement of Financial Accounting Standards
SFAS No. 52.........................Foreign Currency Translation
SFAS No. 71.........................Accounting for the Effects of Certain Types
of Regulation
SFAS No. 106........................Employers' Accounting for Postemployment
Benefits
SFAS No. 121........................Accounting for the Impairment of Long-Lived
Assets
SFAS No. 123........................Accounting for Stock-Based Compensation
SFAS No. 125........................Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of
Liabilities
SFAS No. 128........................Earnings Per Share
SPP.................................Southwest Power Pool
STB.................................Surface Transportation Board of the United
States Department of Transportation
STP.................................South Texas Project nuclear electric
generating station
Supreme Court.......................Supreme Court of Texas
SWEPCO..............................Southwestern Electric Power Company,
Shreveport, Louisiana
Tender Offer........................CSW (UK)'s approximately $2.12 billion
tender offer in the United Kingdom for all
the outstanding share capital of SEEBOARD
Tejas...............................Tejas Gas Corporation
Texas Commission....................Public Utility Commission of Texas
Tex-La..............................Tex-La Electric Cooperative of Texas, Inc.
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, Tulsa,
Oklahoma
Trustee Plan........................The plan of reorganization for Cajun filed
by the Cajun Trustee on April 22, 1996 with
the U.S. Bankruptcy Court for the Middle
District of Louisiana
UK RPI..............................United Kingdom Retail Price Index
U.S. Electric or U.S. Electric
Operating Companies............CPL, PSO, SWEPCO and WTU
WTU.................................West Texas Utilities Company, Abilene, Texas
WTU 1995 Stipulation and Agreement..Stipulation and Agreement to settle certain
WTU regulatory matters
v
FORWARD LOOKING INFORMATION
This report and other presentations made by CSW and its subsidiaries
contain forward looking statements within the meaning of Section 21E of the
Exchange Act. Although CSW and each of its subsidiaries believe that, in making
any such statements, 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: the impact of general
economic changes in the U.S. and in countries in which CSW either currently has
made or in the future may make investments; the impact of deregulation on the
U.S. electric utility business; increased competition and electric utility
industry restructuring in the U.S.; federal and state regulatory developments
and changes in law which may have a substantial adverse impact on the value of
CSW System assets; 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; 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 aforementioned factors would also
apply, and, in addition, would include: the ability to compete effectively in
new areas, including telecommunications, power marketing and brokering, and
other energy related services, as well as 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.
1-1
PART I
ITEM 1. BUSINESS.
OVERVIEW
CSW, incorporated under the laws of Delaware in 1925, is a Dallas-based
public utility holding company registered under the Holding Company Act. CSW
owns all of the outstanding shares of common stock of the U.S. Electric
Operating Companies, CSW Services, CSW Credit, CSW Energy, CSW International,
CSW Communications and EnerShop and indirectly owns all of the outstanding share
capital of SEEBOARD. In addition, CSW owns 80% of the outstanding shares of
common stock of CSW Leasing.
The U.S. Electric Operating Companies are public utility companies
engaged in generating, purchasing, transmitting, distributing and selling
electricity. Information concerning the incorporation of each of the U.S.
Electric Operating Companies is presented in the following table.
State of Year of
Registrant Incorporation Incorporation
- -------------------------- ------------------- -------------------
CPL Texas 1945
PSO Oklahoma 1913
SWEPCO Delaware 1912
WTU Texas 1927
The U.S. Electric Operating Companies serve approximately 1.7 million
customers in one of the largest combined service territories in the U.S.
covering approximately 152,000 square miles in portions of Texas, Oklahoma,
Louisiana and Arkansas. CPL and WTU operate in portions of south and central
west Texas, respectively. PSO operates in portions of eastern and southwestern
Oklahoma, and SWEPCO operates in portions of northeastern Texas, northwestern
Louisiana and western Arkansas. The U.S. Electric Operating Companies' customer
base includes a mix of residential, commercial and diversified industrial
customers.
SEEBOARD is one of the 12 regional electricity companies which came
into existence as a result of the restructuring and subsequent privatization of
the United Kingdom electricity industry in 1990. CSW acquired control of
SEEBOARD in April 1996, through intermediate subsidiaries, for an aggregate
adjusted purchase price of approximately $2.1 billion assuming average exchange
rates during the purchase period. SEEBOARD is headquartered in Crawley, West
Sussex and serves approximately two million customers with a distribution
territory in Southeast England that covers approximately 3,000 square miles.
SEEBOARD's principal regulated businesses are the distribution and supply of
electricity. SEEBOARD is also involved in other activities, including gas
supply, electricity generation, electrical contracting and retailing through
appliance shops and superstores.
On June 6, 1996, CSW sold Transok, an intrastate natural gas pipeline
and gas marketing company that was previously a wholly owned subsidiary of CSW,
to Tejas. See ITEM 7-MD&A AND ITEM 8-NOTE 14. TRANSOK DISCONTINUED OPERATIONS
for additional information related to the sale of Transok.
CSW is committed to expanding its electric utility business through
strategic domestic and international acquisitions and through marketing
initiatives inside and outside of the service territories of the U.S. Electric
Operating Companies. Acquisitions of utility assets must meet defined criteria,
including the potential to lower costs, increase long-term efficiency and
competitiveness and provide an acceptable rate of return to CSW.
1-2
CSW continues to seek opportunities to expand its non-utility business
in areas related to its core electric utility business. CSW Energy develops and
operates independent power and cogeneration projects. CSW International was
formed to invest internationally either alone or with local or other partners.
CSW International will continue CSW's efforts in Mexico and Brazil and will seek
to expand into other countries in Latin and South America, Europe and Asia that
meet CSW's investment criteria (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). CSW Communications
provides communications services to the U.S. Electric Operating Companies and
non-affiliated companies, including enhancement of services through fiber-optic
and other telecommunication technologies. EnerShop provides commercial,
industrial, institutional and governmental customers with energy management
services designed to control energy costs, enhance productivity and improve
convenience, safety and comfort.
CSW Services performs, at cost, various accounting, engineering, tax,
legal, financial, electronic data processing, centralized economic dispatching
of electric power and other services for the CSW System. In April 1996, CSW
announced organizational and executive changes to help prepare CSW for increased
competition and unbundling of the electric utility industry into generation,
transmission, distribution and service segments. As a result of these changes,
in 1996 CSW functionally reorganized its domestic utility operations into three
organizational units which are centrally managed from CSW Services.
CSW created a power generation business unit to provide energy
generation and production services. All phases of management of the U.S.
Electric Operating Companies' energy production activities have been
consolidated into the power generation business unit. These activities include
management of all generating facilities, including nuclear facilities, and fuel
procurement.
CSW created an energy delivery business unit to provide services for
the long-distance transmission and local distribution of electricity to retail
customers, including attendant customer services such as meter reading, billing
and accounting. All phases of management of the U.S. Electric Operating
Companies' energy delivery activities have been consolidated into the energy
delivery business unit.
CSW created an energy services business unit to provide marketing
services, along with new energy efficiency products and services as they become
available, to existing and future customers of the U.S. Electric Operating
Companies. The energy services unit also manages CSW Communications and
EnerShop.
Functional unbundling of CSW's vertically integrated structure is
expected to provide a more competitive organizational structure for CSW. Some
employees have been reassigned from the U.S. Electric Operating Companies to CSW
Services to provide these centrally managed services.
CSW Credit purchases accounts receivable of the U.S. Electric Operating
Companies and certain non-affiliated utilities, and CSW Leasing has investments
in leveraged leases.
The CSW System is subject to the jurisdiction of the SEC under the
Holding Company Act with respect to the issuance, acquisition and sale of
securities, the acquisition and sale of utility assets or any interest in any
business and accounting practices and other matters. See REGULATION below, and
ITEM 7-MD&A for additional information regarding the Holding Company Act.
1-3
In 1996, the U.S. Electric Operating Companies, SEEBOARD and Transok
contributed the following percentages to aggregate operating revenues, operating
income and net income for CSW Common.
INVESTMENT
IN TOTAL
CPL PSO SWEPCO WTU SEEBOARD ELECTRIC TRANSOK(2) OTHER TOTAL
---------------------------------------------------------------------
Operating Revenues 25% 14% 17% 7% 36% 99% --(3) 1% 100%
Operating Income 38% 12% 12% 10% 24% 96% --(3) 4% 100%
Net Income for CSW Common 31% 7% 15% 4% 24% 81%(1) 3%(4) 16%(5) 100%
(1) Net Income for CSW common reflects a one-time charge associated with
certain investments for plant sites, engineering studies and lignite
reserves.
(2) On June 6, 1996, CSW sold Transok to Tejas. See ITEM 8-NOTE 14. TRANSOK
DISCONTINUED OPERATIONS.
(3) Transok's Operating Revenues and Operating Income are shown as Income from
Discontinued Operations in CSW's Consolidated Statements of Income.
(4) Net Income for CSW Common includes earnings from Transok for January
through May 1996 only.
(5) Includes CSW's gain on the sale of Transok.
The relative contributions of the U.S. Electric Operating Companies and
SEEBOARD to the aggregate operating revenues, operating income and net income
for CSW Common differ from year to year due to variations in weather, fuel costs
reflected in charges to customers, timing and amount of rate changes and other
factors, including changes in business conditions and the results of non-utility
businesses. For additional detail related to CSW's reportable business segments,
see ITEM 8-NOTE 13. BUSINESS SEGMENTS.
U.S. UTILITY OPERATIONS
GENERAL
Information concerning the service territories of the U.S. Electric
Operating Companies at December 31, 1996 is set forth in the following table.
Company and Largest Cities Estimated Approximate Retail Rural Electric
Served Population Square Miles Customers Municipalities Cooperatives
- ------------------------------------------------------------------------------------------------
CPL 1,525,000 44,000 625,000 1 4
Corpus Christi, Texas 278,000
Laredo, Texas 158,000
McAllen, Texas 107,000
PSO 1,101,000 30,000 479,000 2 2
Tulsa, Oklahoma 396,000
Lawton, Oklahoma 86,000
Bartlesville, Oklahoma 35,000
SWEPCO 973,000 25,000 414,000 3 8
Shreveport/Bossier City,
Louisiana 178,000
Longview, Texas 75,000
Texarkana, Texas and
Arkansas 56,000
WTU 404,000 53,000 186,000 2 13
Abilene, Texas 111,000
San Angelo, Texas 92,000
1-4
In 1996, approximately 64% of the U.S. Electric Operating Companies'
electric revenues were earned in Texas, 22% in Oklahoma, 8% in Louisiana and 6%
in Arkansas.
CPL
The economic base of CPL's service territory includes manufacturing,
mining, agricultural, transportation and public utilities sectors. Major
activities in these sectors include oil and gas extraction, food processing,
apparel, metal refining, chemical and petroleum refining, plastics and machinery
equipment. In 1996, excluding the effects of the provisions for rate refunds,
industrial customers accounted for approximately 23% of CPL's total operating
revenues. Contracts with substantially all large industrial customers provide
for both demand and energy charges. Demand charges continue under such contracts
even during periods of reduced industrial activity, thus mitigating the effect
of reduced activity on operating income.
PSO
The economic base of PSO's service territory includes mining, petroleum
products, manufacturing and agriculture. The principal industries in the
territory include natural gas and oil production, oil refining, steel
processing, aircraft maintenance, paper manufacturing and timber products,
glass, chemicals, cement and aircraft components.
SWEPCO
The economic base of SWEPCO's service territory includes mining,
manufacturing, chemical products, petroleum products, agriculture and tourism.
The principal industries in the territory include natural gas and oil
production, petroleum refining, manufacturing of pulp and paper, chemicals, food
processing and metal refining. The territory also has several military
installations, colleges and universities.
WTU
The economic base of WTU's service territory includes agricultural
businesses, such as the production of cattle, sheep, goats, cotton, wool, mohair
and feed crops. Significant gains have been made in economic diversification
through value added processing of these products. The natural resources of the
territory include oil, natural gas, sulfur, gypsum and ceramic clays. Important
manufacturing and processing plants served by WTU produce cotton seed products,
oil products, electronic equipment, precision and consumer metal products, meat
products and gypsum products. The territory also has several military
installations and state correctional institutions.
COMPETITION AND INDUSTRY CHALLENGES
Competitive forces at work in the electric utility industry are
affecting the CSW System and 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 level 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 cheaper than electricity. As a whole,
the U.S. Electric Operating Companies believe that their prices for electricity
and the quality and reliability of their service currently place them in a
position to compete effectively in the 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).
For additional information regarding competition and industry
challenges, including legislative initiatives at both the state and federal
level, see ITEM 7-MD&A.
1-5
REGULATION
The CSW System is subject to the jurisdiction of the SEC under the
Holding Company Act. The Holding Company Act generally limits the operations of
a registered holding company to a single integrated public utility system, plus
such additional businesses as are functionally related to such system.
The U.S. Electric Operating Companies have been classified as public
utilities under the Federal Power Act, and accordingly, the FERC has
jurisdiction in certain respects over their electric utility facilities and
operations, wholesale rates, and in certain other matters.
The U.S. Electric Operating Companies are subject to the jurisdiction
of various state commissions as to retail rates, accounting matters, standards
of service and, in some cases, issuance of securities, certification of
facilities and extensions and division of service territory.
See ITEM 7-MD&A for a discussion of possible changes to the Holding
Company Act as well as discussion of current industry restructuring activities
that could have a significant impact on the CSW System.
NUCLEAR REGULATION - CPL
Ownership of an interest in a nuclear generating unit exposes CPL and,
indirectly, CSW to regulation not common to a fossil fuel generating unit. Under
the Atomic Energy Act of 1954 and the Energy Reorganization Act of 1974,
operation of nuclear plants is intensively regulated by the NRC, which has broad
power to impose licensing and safety-related requirements. Along with other
federal and state agencies, the NRC also has extensive regulations pertaining to
the environmental aspects of nuclear reactors. The NRC has the authority to
impose fines and/or shut down a unit until compliance is achieved, depending
upon its assessment of the severity of the situation. For additional information
regarding STP, see ITEM 7-MD&A.
ENVIRONMENTAL REGULATION
For a discussion of regulation by the various environmental agencies
that applies to the U.S. Electric Operating Companies, see ENVIRONMENTAL MATTERS
below.
RATES
The retail rates of the U.S. Electric Operating Companies are subject
to regulation by the state utility commissions in the states in which they
operate. As discussed above, the wholesale rates of the U.S. Electric Operating
Companies are subject to regulation by the FERC. In addition, SWEPCO has
agreements, which have been approved by the FERC, with all of its wholesale
customers under which rates are based upon an agreed cost of service formula.
These rates are adjusted periodically to reflect the actual cost of providing
service.
TEXAS RATES - CPL, SWEPCO AND WTU
The Texas Commission has original jurisdiction over retail rates in the
unincorporated areas of Texas. The governing bodies of incorporated
municipalities have original jurisdiction over rates within their incorporated
limits. Municipalities may elect, and some have elected, to surrender this
jurisdiction to the Texas Commission. The Texas Commission has appellate
jurisdiction over rates set by incorporated municipalities.
In Texas, electric service areas are approved by the Texas Commission.
A given tract in a utility's overall service area may be singly certificated to
a utility, to one of several competing electric cooperatives, investor owned
utilities or to one of the competing municipal electric systems, or it may be
dually or triply certificated to these entities. These certificated areas have
changed only slightly since the formation of the Texas Commission in 1976.
1-6
OKLAHOMA RATES - PSO
PSO is subject to the jurisdiction of the Oklahoma Commission with
respect to retail prices. Pursuant to authority granted under RESCTA, the
Oklahoma Commission established service territorial boundary maps in all
unincorporated areas for all regulated retail electric suppliers serving
Oklahoma. In accordance with RESCTA, a retail electric supplier may not extend
retail electric service into the certified territory of another supplier, except
to serve its own facilities or to serve a new customer with an initial full load
of 1,000 KW or more. RESCTA provides that when any territory certified to a
retail electric supplier or suppliers is annexed and becomes part of an
incorporated city or town, the certification becomes null and void. However,
once established in the annexed territory, a supplier may generally continue to
serve within the annexed area.
ARKANSAS AND LOUISIANA RATES - SWEPCO
SWEPCO is subject to the jurisdiction of the Arkansas Commission and
Louisiana Commission with respect to retail rates, as well as the Texas
Commission as described above.
FUEL RECOVERY
The recovery of fuel costs from retail customers by the U.S. Electric
Operating Companies is subject to regulation by the state utility commissions in
the states in which they operate. All of the U.S. Electric Operating Companies'
contracts with their wholesale customers contain FERC approved fuel-adjustment
provisions for recovery of fuel costs.
TEXAS FUEL RECOVERY - CPL, SWEPCO AND WTU
Electric utilities in Texas, including CPL, SWEPCO and WTU, are not
allowed to make automatic adjustments to recover changes in fuel costs from
retail customers. A utility is allowed to recover its known or reasonably
predictable fuel costs through a fixed fuel factor. The Texas Commission
established procedures whereby each utility under its jurisdiction may petition
to revise its fuel factor every six months according to a specified schedule.
Fuel factors may also be revised in the case of emergencies or in a general rate
proceeding. Fuel factors are in the nature of temporary rates and the utility's
collection of revenues by such factors is subject to adjustment at the time of a
fuel reconciliation. Under these procedures, at its semi-annual adjustment date,
a utility is required to petition the Texas Commission for a surcharge or to
make a refund when it has materially under- or over-collected its fuel costs and
projects that it will continue to materially under- or over-collect. Material
under- or over-collections including interest are defined as variances of four
percent or more of the most recent Texas Commission adopted annual estimated
fuel cost for the utility. A utility does not have to revise its fuel factor
when requesting a surcharge or refund. An interim emergency fuel factor order
must be issued by the Texas Commission within 30 days after such petition is
filed by the utility. Final reconciliation of fuel costs is made through a
reconciliation proceeding, which may contain a maximum of three years and a
minimum of one year of reconcilable data, and must be filed with the Texas
Commission no later than six months after the end of the period to be
reconciled. In addition, a utility must include a reconciliation of fuel costs
in any general rate proceeding regardless of the time since its last fuel
reconciliation proceeding. Any fuel costs that are determined unreasonably
incurred in a reconciliation proceeding are not recoverable from retail
customers.
OKLAHOMA FUEL RECOVERY - PSO
All KWH sales to PSO's retail customers were made under rates which
include a fuel cost adjustment clause. Oklahoma law requires that an examination
of PSO's retail fuel cost adjustment clause be performed annually by the
Oklahoma Commission which approves the utility's embedded fuel rate per KWH. The
fuel cost adjustment is computed for each month on the basis of the average cost
of fuel consumed in the month. The amount of any difference in such cost over or
under the embedded rate is applied on a KWH basis and reflected in adjustments
to customers' bills during the second month subsequent to the month in which the
difference occurred.
1-7
ARKANSAS AND LOUISIANA FUEL RECOVERY - SWEPCO
SWEPCO's retail rates currently in effect in Louisiana are adjusted
based on SWEPCO's cost of fuel in accordance with a fuel cost adjustment which
is applied to each billing month based on the second previous month's average
cost of fuel. Provision for any over- or under-recovery of fuel costs is allowed
under an automatic fuel clause. Under SWEPCO's fuel adjustment rider currently
in effect in Arkansas, the fuel cost adjustment is applied to each billing month
on a basis which permits SWEPCO to recover the level of fuel cost experienced
two months earlier. SWEPCO's fuel recovery mechanisms are subject to the
jurisdiction of the Arkansas Commission and the Louisiana Commission.
RECOVERABILITY OF FUEL
The inability of any U.S. Electric Operating Company to recover its
fuel costs under the procedures described above could have a material adverse
effect on such company's results of operations and financial condition.
See ITEM 7-MD&A and ITEM 8-NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS for further information with respect to regulatory, rate and fuel
proceedings.
OPERATING DATA
FACILITIES, PLANTS AND PROPERTIES
At December 31, 1996, the U.S. Electric Operating Companies owned the
following electric generating plants, or portions thereof in the case of jointly
owned plants, substantially all of which were steam electric units.
Net Dependable
Summer Rating
Principal Fuel Capability
Plant Name and Location Source (A) (MW) (B)
- -------------------------------------------------------------------------------
CPL
La Palma, San Benito, Texas Gas 205 (C)
Victoria, Victoria, Texas Gas 432 (C)
Nueces Bay, Corpus Christi, Texas Gas 560
Lon C. Hill, Corpus Christi, Texas Gas 547
Laredo, Laredo, Texas Gas 177
J. L. Bates, Mission, Texas Gas 182
E.S. Joslin, Point Comfort, Texas Gas 249
Barney M. Davis, Corpus Christi, Texas Gas 695
Coleto Creek, Goliad, Texas Coal 632
Oklaunion, Vernon, Texas (B) Coal 53
STP, Bay City, Texas (B) Nuclear 630
Eagle Pass, Eagle Pass, Texas Hydro 6
-----------
4,368
-----------
PSO
Tulsa, Tulsa, Oklahoma Gas 165 (C)
Oil 8
Riverside, Jenks, Oklahoma Gas 916
Oil 3
Northeastern, Oologah, Oklahoma Gas 637
Coal 900
Oil 4
Southwestern, Washita, Oklahoma Gas 475
Oil 2
Comanche, Lawton, Oklahoma Gas 273
Oil 4
Weleetka, Weleetka, Oklahoma Gas 151
Oil 4
Oklaunion, Vernon, Texas (B) Coal 106
----------
3,648
----------
1-8
Net Dependable
Summer Rating
Principal Fuel Capability
Plant Name and Location Source (A) (MW) (B)
- -------------------------------------------------------------------------------
SWEPCO
Arsenal Hill, Shreveport, Louisiana Gas 112
Lieberman, Mooringsport, Louisiana Gas 273
Knox Lee, Cherokee Lake, Texas Gas 478
Wilkes, Jefferson, Texas Gas 875
Lone Star, Daingerfield, Texas Gas 50
Welsh, Cason, Texas Coal 1,584
Flint Creek, Gentry, Arkansas (B) Coal 240
Henry W. Pirkey, Hallsville, Texas (B) Lignite 559
Dolet Hills, Mansfield, Louisiana (B) Lignite 262
----------
4,433
----------
WTU
Paint Creek, Haskell, Texas Gas 237
Rio Pecos, Girvin, Texas Gas 137
San Angelo, San Angelo, Texas Gas 125
Fort Phantom, Abilene, Texas Gas 362
Oak Creek, Bronte, Texas Gas 85
Abilene, Abilene, Texas Gas 7
Lake Pauline, Quanah, Texas Gas 45
Ft. Stockton, Ft. Stockton, Texas Gas 5
Vernon, Vernon, Texas Oil 9
Oklaunion, Vernon, Texas (B) Coal 370
Presidio, Presidio, Texas Oil 2
--------
1,384
--------
Total, excluding plant in storage 13,833
Plant in storage 358
--------
CSW TOTAL 14,191
--------
(A) Some plants have the capability of burning oil in combination with gas.
Use of oil in facilities primarily designed to burn gas results in
increased maintenance expense and a reduction of approximately 4% to 10%
in capability. PSO and WTU have 25 MW and 11 MW, respectively, of
facilities primarily designed to burn oil.
(B) Data reflects only the U.S. Electric Operating Companies' portion of
plants which are jointly owned with non-affiliates. For additional
information concerning jointly owned facilities see ITEM 8-NOTE 6.
JOINTLY OWNED ELECTRIC UTILITY PLANT.
(C) Excludes 358 MW from units in storage, consisting of 48 MW at La Palma
and 60 MW at Victoria for CPL and 250 MW at Tulsa for PSO. It is
currently anticipated that one unit in storage (85 MW) at Tulsa for PSO
will be dismantled in 1998. Refer to ITEM 7-MD&A for additional
information.
All of the generating plants described above are located on land owned
by the U.S. Electric Operating Companies or, in the case of jointly owned
plants, jointly with other participants. The U.S. Electric Operating Companies'
electric transmission and distribution facilities are mostly located over or
under highways, streets and other public places or property owned by others, for
which permits, grants, easements or licenses (which the U.S. Electric Operating
Companies believe to be satisfactory, but without examination of underlying land
titles) have been obtained. The principal plants and properties of the U.S.
Electric Operating Companies are subject to the liens of the first mortgage
indentures under which the U.S. Electric Operating Companies' bonds are issued.
CONSTRUCTION EXPENDITURES
The U.S. Electric Operating Companies maintain a continuing
construction program, the nature and extent of which is based upon current and
estimated demands upon the system. See ITEM 7-MD&A for additional information
related to construction expenditures.
1-9
PEAK LOADS AND SYSTEM CAPABILITIES OF THE U.S. ELECTRIC OPERATING
COMPANIES
The following tables set forth for the last three years (i) the net
system capability, including the net amounts of contracted purchases and
contracted sales, at the time of peak demand, (ii) the maximum coincident system
demand on a one-hour integrated basis, exclusive of sales to other electric
utilities and (iii) the respective amounts and percentages of peak demand
generated by the U.S. Electric Operating Companies and net purchases and sales.
CSW 1996 1995 1994
- -----------------------------------------------------------------------------------------------
Net system capability (MW) 14,377 (1) 14,168 (1),(2) 13,549 (1),(3)
Maximum coincident system demand (MW) 12,613 12,314 11,434
Percentage increase (decrease) in peak demand
over prior period 2.4% 7.7% (0.3)%
Generation at time of peak (MW) 11,625 12,053 11,353
Percent of peak demand generated 92.2% 97.9% 99.3%
Net purchases at time of peak (MW) 988 261 81
Percent of net purchases at time of peak 7.8% 2.1% 0.7%
Date of maximum coincident system demand July 22 July 28 June 27
(1) Does not include 358 MW of system capability in storage in 1996 as
described above in FACILITIES, PLANTS AND PROPERTIES, 392 MW of system
capability in storage in 1995 and 557 MW of system capability in
storage in 1994.
(2) Does not include 54 MW of SWEPCO capability in 1995 that was not
available at the peak due to fuel procurement issues.
(3) Does not include 324 MW of SWEPCO capability in 1994 that was
unavailable due to inefficiencies as a result of slag build-ups
and fuel procurement issues.
CPL 1996 1995 1994
- -----------------------------------------------------------------------------
Net system capability (MW) 4,380 (1) 4,200 (1) 3,969 (1)
Maximum coincident system demand (MW) 4,046 3,862 3,732
Percentage increase (decrease) in
peak demand over prior period 4.8% 3.5% 6.1%
Generation at time of peak (MW) 3,484 3,846 3,074
Percent of peak demand generated 86.1% 99.6% 82.4%
Net purchases (sales) at time of peak (MW) 562 16 658
Percent of net purchases (sales) at time
of peak 13.9% 0.4% 17.6%
Date of maximum coincident system demand August 13 July 26 August 18
(1) Does not include 108 MW of system capability in storage in 1996 as
described above in FACILITIES, PLANTS AND PROPERTIES, 142 MW of system
capability in storage in 1995 and 310 MW of system capability in
storage in 1994.
PSO 1996 1995 1994
- -----------------------------------------------------------------------------
Net system capability (MW) 3,848 (1) 3,759 (1) 3,664 (1)
Maximum coincident system demand (MW) 3,360 3,292 3,167
Percentage increase (decrease) in peak
demand over prior period 2.1% 3.9% 0.6%
Generation at time of peak (MW) 3,009 3,025 2,645
Percent of peak demand generated 89.6% 91.9% 83.5%
Net purchases (sales) at time of peak (MW) 351 267 522
Percent of net purchases (sales) at time
of peak 10.4% 8.1% 16.5%
Date of maximum coincident system demand August 7 August 28 June 27
(1) Does not include 250 MW of system capability in storage in 1996 as
described above in FACILITIES, PLANTS AND PROPERTIES, 250 MW of system
capability in storage in 1995 and 247 MW of system capability in
storage in 1994.
1-10
SWEPCO 1996 1995 1994
- -----------------------------------------------------------------------------
Net system capability (MW) 4,554 4,783 (1) 4,464 (2)
Maximum coincident system demand (MW) 4,018 3,932 3,526
Percentage increase (decrease) in peak
demand over prior period 2.2% 11.5% (3.4%)
Generation at time of peak (MW) 3,608 4,022 3,987
Percent of peak demand generated 89.8% 102.3% 113.1%
Net purchases (sales) at time of peak (MW) 410 (90) (461)
Percent of net purchases (sales) at time
of peak 10.2% (2.3%) (13.1%)
Date of maximum coincident system demand July 22 July 28 June 27
(1) Does not include 54 MW of capability in 1995 that was not available at
the peak due to fuel procurement issues. (2) Does not include 324 MW of
capability in 1994 that was unavailable due to inefficiencies as a
result of slag build-ups and fuel procurement issues.
WTU 1996 1995 1994
- -----------------------------------------------------------------------------
Net system capability (MW) 1,595 1,426 1,459
Maximum coincident system demand (MW) 1,433 1,435 1,262
Percentage increase (decrease) in peak
demand over prior period (0.1)% 13.7% 5.1%
Generation at time of peak (MW) 1,048 1,167 1,401
Percent of peak demand generated 73.1% 81.3% 111.0%
Net purchases (sales) at time of peak (MW) 385 268 (139)
Percent of net purchases (sales) at time
of peak 26.9% 18.7% (11.0%)
Date of maximum coincident system demand July 8 July 28 June 27
1-11
U.S. ELECTRIC OPERATING STATISTICS
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
(EXCLUDES SEEBOARD)
1996 1995 1994
----------------------------
Kilowatt-hour sales (millions)
Residential 17,883 16,872 16,368
Commercial 14,256 13,755 13,463
Industrial 20,266 19,321 18,869
Other retail 1,592 1,518 1,501
------ ------ -------
Sales to retail customers 53,997 51,466 50,201
Sales for resale 8,428 8,468 7,133
------ ------ -------
Total 62,425 59,934 57,334
------ ------ -------
Number of electric customers at end of period
(thousands)
Residential 1,456 1,437 1,417
Commercial 211 209 205
Industrial 23 24 24
Other 14 13 15
------ ------ -------
Total 1,704 1,683 1,661
------ ------ -------
Residential sales averages
KWH per customer 12,392 11,840 11,665
Revenue per customer (a), (b) $861 $799 $824
Revenue per KWH (cents) (a), (b) 6.95 6.75 7.06
Revenue per KWH on total sales (cents) (a), (b) 5.20 4.81 5.35
Fuel cost data (a)
Average Btu per net KWH 10,440 10,299 10,344
Cost per MMBtu $1.81 $1.58 $1.82
Cost per KWH generated (cents) 1.89 1.63 1.88
Cost, including purchased power, as a
percentage of revenue (b) 37.4% 35.0% 36.7%
(a) These statistics reflect the outage at STP in early 1994.
(b) These statistics reflect the refunds and fuel disallowances that
occurred as a result of the CPL 1995 Agreement, the CPL 1996 Fuel
Agreement, management's judgment concerning the effect of the probable
outcome of CPL's pending rate case and the WTU 1995 Stipulation and
Agreement. For additional information, see ITEM 8-NOTE 2 LITIGATION
AND REGULATORY PROCEEDINGS.
1-12
OPERATING STATISTICS
CENTRAL POWER AND LIGHT COMPANY
1996 1995 1994
-------------------------------
Kilowatt-hour sales (millions)
Residential 6,680 6,223 5,954
Commercial 4,773 4,656 4,523
Industrial 7,610 7,250 6,910
Other retail 499 465 457
------- ------- -------
Sales to retail customers 19,562 18,594 17,844
Sales for resale 2,029 1,680 1,286
------- ------- -------
Total 21,591 20,274 19,130
------- ------- -------
Number of electric customers at end of period
Residential 536,504 526,909 516,355
Commercial 78,890 77,743 76,739
Industrial 5,702 5,731 5,864
Other 3,855 3,561 3,577
------- ------- -------
Total 624,951 613,944 602,535
------- ------- -------
Residential sales averages
KWH per customer 12,623 11,985 11,729
Revenue per customer (a), (b) $1,000 $896 $935
Revenue per KWH (cents) (a), (b) 7.92 7.48 7.97
Revenue per KWH on total sales (cents) (a), (b) 6.02 5.29 6.37
Fuel cost data (a)
Average Btu per net KWH 10,391 10,175 10,289
Cost per MMBtu $1.62 $1.37 $1.75
Cost per KWH generated (cents) 1.68 1.39 1.80
Cost, including purchased power, as a
percentage of revenue (b) 30.8% 28.7% 30.4%
(a) These statistics reflect the outage at STP in early 1994.
(b) These statistics reflect the refund and fuel disallowance that
occurred as a result of the CPL 1995 Agreement, the refund associated
with the CPL 1996 Fuel Agreement and management's judgment concerning
the effect of the probable outcome of CPL's pending rate case. For
additional information, see ITEM 8-NOTE 2 LITIGATION AND REGULATORY
PROCEEDINGS.
1-13
OPERATING STATISTICS
PUBLIC SERVICE COMPANY OF OKLAHOMA
1996 1995 1994
-------------------------------
Kilowatt-hour sales (millions)
Residential 5,098 4,753 4,749
Commercial 4,621 4,427 4,434
Industrial 4,581 4,307 4,360
Other retail 81 80 89
------- ------- -------
Sales to retail customers 14,381 13,567 13,632
Sales for resale 1,487 1,617 1,509
------- ------- -------
Total 15,868 15,184 15,141
------- ------- -------
Number of electric customers at end of period
Residential 417,158 412,765 409,675
Commercial 54,849 54,102 53,454
Industrial 5,158 5,205 5,156
Other 1,390 1,353 1,287
------- ------- -------
Total 478,555 473,425 469,572
------- ------- -------
Residential sales averages
KWH per customer 12,290 11,563 11,640
Revenue per customer $722 $682 $726
Revenue per KWH (cents) 5.89 5.89 6.24
Revenue per KWH on total sales (cents) 4.63 4.55 4.89
Fuel cost data
Average Btu per net KWH 10,225 10,151 10,231
Cost per MMBtu $2.04 $1.73 $1.96
Cost per KWH generated (cents) 2.09 1.75 2.00
Cost, including purchased power, as a
percentage of revenue 45.1% 43.0% 47.5%
1-14
OPERATING STATISTICS
SOUTHWESTERN ELECTRIC POWER COMPANY
1996 1995 1994
-------------------------------
Kilowatt-hour sales (millions)
Residential 4,487 4,406 4,157
Commercial 3,658 3,521 3,378
Industrial 6,833 6,531 6,357
Other retail 432 424 400
------- ------- -------
Sales to retail customers 15,410 14,882 14,292
Sales for resale 6,395 5,002 5,189
------- ------- -------
Total 21,805 19,884 19,481
------- ------- -------
Number of electric customers at end of period
Residential 355,095 351,131 346,227
Commercial 50,091 49,123 48,153
Industrial 5,915 5,864 5,747
Other 2,727 2,615 2,609
------- ------- -------
Total 413,828 408,733 402,736
------- ------- -------
Residential sales averages
KWH per customer 12,704 12,627 12,107
Revenue per customer $821 $798 $776
Revenue per KWH (cents) 6.46 6.32 6.41
Revenue per KWH on total sales (cents) 4.22 4.21 4.24
Fuel cost data
Average Btu per net KWH 10,606 10,531 10,489
Cost per MMBtu $1.76 $1.61 $1.75
Cost per KWH generated (cents) 1.87 1.70 1.84
Cost, including purchased power, as a
percentage of revenue 45.1% 40.3% 43.2%
1-15
OPERATING STATISTICS
WEST TEXAS UTILITIES COMPANY
1996 1995 1994
-------------------------------
Kilowatt-hour sales (millions)
Residential 1,620 1,490 1,508
Commercial 1,203 1,152 1,128
Industrial 1,241 1,233 1,241
Other retail 581 549 556
------- ------- -------
Sales to retail customers 4,645 4,424 4,433
Sales for resale 2,411 2,268 2,051
------- ------- -------
Total 7,056 6,692 6,484
------- ------- -------
Number of electric customers at end of period
Residential 146,607 146,235 144,966
Commercial 27,645 27,243 26,618
Industrial 6,019 7,317 7,392
Other 5,837 5,685 5,533
------- ------- -------
Total 186,108 186,480 184,509
------- ------- -------
Residential sales averages
KWH per customer 11,059 10,224 10,449
Revenue per customer (a) $848 $784 $822
Revenue per KWH (cents) (a) 7.67 7.67 7.86
Revenue per KWH on total sales (cents) (a) 5.34 4.78 5.29
Fuel cost data
Average Btu per net KWH 10,568 10,370 10,424
Cost per MMBtu $2.01 $1.83 $1.88
Cost per KWH generated (cents) 2.12 1.90 1.96
Cost, including purchased power, as a
percentage of revenue (a) 43.5% 42.1% 39.8%
(a) These statistics reflect the refund and lower rates that occurred as a
result of the WTU 1995 Stipulation and Agreement. See ITEM 8-NOTE 2
LITIGATION AND REGULATORY PROCEEDINGS.
1-16
POWER PURCHASES AND SALES
Various municipalities, electric cooperatives and public power
authorities are served by the U.S. Electric Operating Companies. The U.S.
Electric Operating Companies exchange power on an emergency or economy basis
with various neighboring systems and engage in economy interchanges with each
other. In addition, they contract with certain suppliers including power
marketers and independent power producers for the purchase or sale of power on a
unit capacity basis, firm energy, responsive reserves and other wholesale
services.
CPL - MAGIC VALLEY
Magic Valley, CPL's largest wholesale customer, is currently served
under an agreement that requires a five year notice of termination. During 1996,
Magic Valley exercised such notice of termination. Pursuant to Texas Commission
rules, Magic Valley has issued a solicitation for 250 MW of load beginning in
2001. CPL has submitted a bid in response to the solicitation. Magic Valley
anticipates a final decision regarding the solicitation in late 1997.
SWEPCO - BREMCO
As part of the agreement to acquire BREMCO, SWEPCO entered into a
long-term purchased power contract with Cajun, BREMCO's previous
full-requirements wholesale supplier. The contract covered the purchase of
energy and capacity.
SWEPCO AND WTU - TEX-LA
WTU serves approximately 120 MW of load for Tex-La. WTU will serve this
load until Tex-La facilities are completed to connect Tex-La to SWEPCO, at which
time SWEPCO will serve approximately 85 MW and WTU will continue to serve
approximately 35 MW of the load. To date, approximately 15 MW of this load has
been transferred to SWEPCO.
SWEPCO - CAJUN
See ITEM 7-MD&A for information regarding SWEPCO's pending proposal to
acquire all of Cajun's non-nuclear assets.
WTU - CITY OF WEATHERFORD, TEXAS
On January 1, 1997, the City of Weatherford, Texas became a new
wholesale customer of WTU. WTU initially served 25 MW of load for the city,
until February 1, 1997, when it began serving the entire load of approximately
55 MW.
OTHER OPERATIONAL INFORMATION
SYSTEM INTERCONNECTION
The CSW U.S. Electric system operates on an interstate basis to
facilitate exchanges of power. PSO and WTU are interconnected through the 200 MW
North HVdc transmission interconnection. SWEPCO and CPL are interconnected
through the 600 MW East HVdc transmission interconnection which became
operational in August, 1996.
CPL and WTU are members of ERCOT which operates in Texas. Other ERCOT
members include Texas Utilities Electric Company, HLP, Texas Municipal Power
Agency, Texas Municipal Power Pool, Lower Colorado River Authority, the
municipal systems of San Antonio, Austin and Brownsville, the South Texas and
Medina Electric Cooperatives, and several other interconnected systems and
cooperatives. PSO and SWEPCO are members of the SPP, which is comprised of 43
members, including 17 investor-owned utilities, 12 municipalities, 10
cooperatives, 3 state and 1 federal agency operating in the states of Arkansas,
Kansas, Louisiana, Oklahoma and parts of Mississippi, Missouri, New Mexico and
1-17
Texas. ERCOT members interchange power and energy with one another on a firm,
economy and emergency basis, as do the members of the SPP.
SEASONALITY
Sales of electricity by the U.S. Electric Operating Companies tend to
increase during warmer summer months and, to a lesser extent, cooler winter
months, because of higher demand for power.
FRANCHISES
The U.S. Electric Operating Companies hold franchises to provide
electric service in various municipalities in their service areas. These
franchises have varying provisions and expiration dates including, in some
cases, termination and buy-out provisions. CSW considers the U.S. Electric
Operating Companies' franchises to be adequate for the conduct of their
business.
FUEL SUPPLY
GENERAL
The U.S. Electric Operating Companies' present net dependable summer
rating power generation capabilities and the type of fuel used are set forth in
FACILITIES, PLANTS AND PROPERTIES above. The fuel mix of the U.S. Electric
Operating Companies' generating capability and generation mix for 1996 is set
forth in the tables presented below.
Aggregate Capability
(MW) CSW CPL PSO SWEPCO WTU
- ----------------------------------------------------------------------------
Natural Gas 8,455 3,047 2,617 1,788 1,003
Coal 3,885 685 1,006 1,824 370
Lignite 821 -- -- 821 --
Nuclear 630 630 -- -- --
Hydro and Oil 42 6 25 -- 11
------------------------------------------------------
13,833 4,368 3,648 4,433 1,384
Plant in Storage 358 108 250 -- --
------------------------------------------------------
Total 14,191 4,476 3,898 4,433 1,384
------------------------------------------------------
Generation Mix
(as a % of MWH) CSW CPL PSO SWEPCO WTU
- ---------------------------------------------------------------------------
Natural Gas 39 49 49 17 57
Coal 43 25 51 54 43
Lignite 10 -- -- 29 --
Nuclear 8 26 -- -- --
Hydro and Oil -- -- -- -- --
-----------------------------------------------------
100 100 100 100 100
-----------------------------------------------------
While the CSW-installed capacity of natural gas-fired units is higher
than the capacity of solid-fuel units, the primary determinant for utilization
is fuel cost. Consequently, as solid-fuel prices were substantially less than
natural gas in 1996, the utilization of solid-fuel units was higher than natural
gas-fueled units.
NATURAL GAS
The U.S. Electric Operating Companies purchase their natural gas from a
number of suppliers operating in and around their service territories. In 1996,
approximately 45% of the U.S. Electric Operating Companies' total natural gas
purchases were made under long-term contracts and approximately 55% came from
short-term contracts and spot market purchases.
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CPL
CPL's eight gas-fired electric generating plants are supplied by a
portfolio of long-term and short-term natural gas purchase agreements through
multiple natural gas pipeline systems. Approximately 60% of CPL's total natural
gas requirements in 1996 were purchased under long-term arrangements
representing both purchase obligations and discretionary purchases. The balance
of CPL's natural gas requirements was acquired under short-term arrangements
from the spot market.
PSO
PSO's six gas-fired electric generating plants are supplied by a
portfolio of long-term and short-term natural gas purchase agreements. In 1996,
approximately 54% of PSO's natural gas requirements were provided under firm
contracts with the remaining requirements acquired from the spot market. These
natural gas supplies were transported to PSO facilities through the pipeline
system of Transok, a former affiliate. In accordance with an order issued by the
Oklahoma Commission in 1991, which required a phase-in of competitive bidding of
natural gas transportation requirements, PSO has entered into a five-year
natural gas transportation and sales agreement with ONEOK Gas. During 1997,
ONEOK will build pipelines to three of PSO's six natural gas-fired generating
stations and will begin providing natural gas transportation and supply on
January 1, 1998. CSW and PSO do not expect the sale of Transok to have an
adverse impact in its ability to secure natural gas in the future. Negotiations
are currently in progress with third party pipelines to provide additional
pipeline interconnections to other natural gas suppliers besides Transok.
SWEPCO
SWEPCO purchased approximately 89% of its natural gas requirements in
1996 pursuant to spot purchase contracts. Due to the peaking operation of
SWEPCO's five gas-fired electric generating plants, a majority of SWEPCO's
natural gas requirements will continue to be purchased on the spot market and
will be subject to market conditions.
WTU
WTU purchases its natural gas requirements from numerous suppliers. The
most significant contract is the long-term firm contract with Lone Star Gas
Company which provided approximately 11% of WTU's total natural gas requirements
in 1996. WTU purchased approximately 9% of its natural gas requirements from
supplemental firm contracts with several suppliers and the remaining 80% was
purchased from a number of suppliers on the spot market.
COAL AND LIGNITE
The U.S. Electric Operating Companies purchase coal from a number of
suppliers. In 1996, approximately 80% of the U.S. Electric Operating Companies'
total coal purchases were supplied under long-term contracts with the balance
procured on the spot market. The coal for the CSW U.S. Electric system plants
comes primarily from Wyoming or Colorado mines which are located between 1,000
and 1,700 rail miles from the generating plants.
OKLAUNION - CPL, PSO AND WTU
The jointly-owned Oklaunion plant is supplied coal under a coal supply
contract with Caballo Coal Company. Approximately 67% of the total 1996
Oklaunion coal requirements for WTU, 67% for CPL, and 68% for PSO were supplied
under the Caballo Coal Company contract with the balance procured on the spot
market. As of December 31, 1996, CPL's share of the year-end 1996 coal inventory
at Oklaunion was approximately 49,632 tons, representing approximately a 65-day
supply. PSO's share was approximately 91,053 tons, representing approximately a
59-day supply. WTU's share was approximately 349,277 tons, representing
approximately a 65-day supply.
Coal needed at Oklaunion is transported in Burlington Northern supplied
rail cars pursuant to a tariff filed with the Interstate Commerce Commission,
whose authority in the matter was transferred to the STB effective January 1,
1996. In a decision issued May 3, 1996, the STB declared the rate set forth in
Burlington Northern's tariff of $19.36 per ton to be unreasonably high and made
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certain other rulings having the effect of limiting the rate to a maximum of
$13.68 per ton. On July 2, 1996, Burlington Northern established such rate for
the transportation of coal to Oklaunion. Burlington Northern has appealed the
May 3, 1996, decision and a related June 25, 1996, decision to the U.S. Court of
Appeals for the District of Columbia Circuit. If the STB decisions are upheld,
WTU will be entitled to recovery, with interest, of excess charges between the
expiration of the contract and July 2, 1996. If the STB decisions are not
upheld, WTU will be required to reimburse Burlington Northern, with interest,
for the amount, if any, by which the rate ultimately determined to apply, up to
its tariff rate, exceeds the amount charged to WTU. WTU does not believe
resolution of this matter will have a material impact on its results of
operations or financial condition.
COLETO CREEK - CPL
CPL has a long-term coal supply agreement with Colowyo Coal Company
covering approximately 25% of the coal requirements of its Coleto Creek plant.
During 1996, this agreement was suspended and replaced with an agreement
pursuant to which both coal and coal transportation, using CPL-owned rail cars,
were provided by Colowyo Coal Company which, in turn, entered into
transportation arrangements with Southern Pacific Transportation Company.
Approximately 70% of Coleto Creek's requirements were furnished under this
agreement. The balance of the plant's requirements consisted of carry-over
tonnage shortfalls under the long-term Colowyo Contract and spot purchases of
Powder River Basin Coal that were delivered under spot rail transportation
agreements. At December 31, 1996, CPL had approximately 171,000 tons of coal in
inventory at Coleto Creek, representing approximately a 27-day supply.
CPL has entered into an agreement with Colowyo Coal Company for
deliveries in 1997 that is similar to the 1996 agreement. After 1997, CPL
intends to utilize Powder River Basin coal for all or a portion of the Coleto
Creek plant requirements and will transport such coal either in common carrier
rail service or pursuant to negotiated rail transportation arrangements. Powder
River Basin coal is transported approximately 1,700 miles, using either
Burlington Northern or Union Pacific as the originating carrier and Southern
Pacific Transportation Company as the destination carrier.
Southern Pacific Transportation Company is currently the only rail
carrier with access to the Coleto Creek Plant. In 1994, CPL instituted a
proceeding at the Interstate Commerce Commission requesting a reasonable rate
for the 16 mile movement from Victoria, Texas, a station served by another
carrier, to Coleto Creek. Southern Pacific Transportation Company moved to
dismiss the complaint and, in a decision issued December 31, 1996, the STB
granted the motion. CPL has appealed this decision to the U.S. Court of Appeals
for the Eighth Circuit.
NORTHEASTERN STATION - PSO
PSO has a contract with Kerr-McGee Coal Corporation, which
substantially covers the coal supply for PSO's Northeastern Station coal units
through at least 2004. Coal delivery is by unit trains from mines located in the
Gillette, Wyoming vicinity, a distance of about 1,100 rail miles from
Northeastern Station. PSO owns sufficient rail cars and spares for operation of
six unit trains. Coal is transported to Northeastern Station pursuant to a
long-term contract with Burlington Northern. The plant also has physical access
to deliveries from Union Pacific. At December 31, 1996, PSO had approximately
321,000 tons of coal in inventory at Northeastern Station representing
approximately a 28-day supply.
WELSH AND FLINT CREEK - SWEPCO
Long-term coal supply for SWEPCO's Welsh plant and its 50 percent-owned
Flint Creek plant is provided under a contract with Cyprus/Amax. Coal under this
contract is mined near Gillette, Wyoming, a distance of about 1,500 and 1,100
miles, respectively, from the Welsh and Flint Creek plants. Coal is delivered to
the plants under rail transportation contracts with Burlington Northern and the
Kansas City Southern Railroad Company having expiration dates ranging between
1997 and 2007. SWEPCO owns or leases under long-term leases sufficient railcars
and spares for operation of twelve unit trains. SWEPCO has supplemented its
railcar fleet from time to time with short-term leases. At December 31, 1996,
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SWEPCO had coal inventories of 1,175,000 tons at Welsh representing
approximately a 58-day supply and 437,000 tons at Flint Creek representing
approximately a 52-day supply. See ITEM 8-NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS and ITEM 8-NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for
additional information.
PIRKEY AND DOLET HILLS - SWEPCO
SWEPCO has acquired lignite leases covering an aggregate of about
27,000 acres near the Henry W. Pirkey power plant. Sabine Mining Company is the
contract miner of these reserves. At December 31, 1996, 213,000 tons of lignite
were in SWEPCO's inventory at the Pirkey plant representing a 19-day supply.
Another 25,000 acres are jointly leased in equal portions by SWEPCO and Central
Louisiana Electric Company in the Dolet Hills area of Louisiana near Dolet Hills
Power Plant. The Dolet Hills Mining Venture is the contract miner for these
reserves. At December 31, 1996, SWEPCO had approximately 177,000 tons of lignite
in inventory at the Dolet Hills plant representing a 34-day supply. In the
opinion of the management of SWEPCO, the acreage under lease in these areas
contains sufficient reserves to cover the anticipated lignite requirements for
the estimated useful lives of the lignite-fired plants.
NUCLEAR FUEL - CPL
The supply of fuel for STP involves a complex process. This process
includes the acquisition of uranium concentrate, the conversion of uranium
concentrate to uranium hexafluoride, the enrichment of uranium hexafluoride in
the isotope U235 and the fabrication of the enriched uranium into fuel rods and
incorporation of fuel rods into fuel assemblies. The fuel assemblies are the
final product loaded into the reactor core. The time associated with this
process requires that fuel decisions be made years in advance of the actual need
to refuel the reactor. Fuel requirements for STP are being handled by the STP
Management Committee, comprised of representatives of all participants in STP.
Outages are necessary approximately every 18 months for refueling.
Because STP's fuel costs are significantly lower than any of the other CPL
units, CPL's average fuel costs are expected to be higher whenever an STP unit
is down for refueling or maintenance.
CPL and the other STP participants have entered into contracts with
suppliers for uranium concentrate and conversion service sufficient for the
operation of both STP units through May 1998. Additional flexible contracts are
in place to provide 50% of the uranium concentrate and 100% of the conversion
service needed for STP from mid-1998 through mid-1999. Enrichment contracts were
secured for a 30-year period from the initial operation of each unit. The STP
participants have canceled the enrichment requirements for the period from
October 2000 to September 2006 under a ten year no cost termination provision of
the enrichment contract. The STP participants believe that other, lower cost
options will be available in the future. Also, fuel fabrication services have
been contracted for operation through 2005 for Unit 1 and 2006 for Unit 2.
Although CPL and the other STP owners cannot predict the availability of uranium
and related services, CPL and the other STP owners do not currently expect to
have difficulty obtaining uranium and related services required for the
remaining years of STP operation.
The Energy Policy Act has provisions for the recovery of a portion of
the costs associated with the decommissioning and decontamination of the gaseous
diffusion plants used in the enrichment process. These costs are being recovered
on the basis of enrichment services purchased by utilities from the DOE prior to
October of 1992. The total annual assessment for all domestic utilities is
limited to $150 million per federal fiscal year and assessable until October
2007. The STP assessment will be approximately $2.0 million each year with CPL's
share being 25.2% of the annual STP assessment.
The Nuclear Waste Policy Act of 1982, as amended, requires the DOE to
develop a permanent high level waste disposal facility for the storage of spent
nuclear fuel by 1998. The DOE last estimated that the permanent facility will
not be available until 2010. The DOE will be taking possession of all spent fuel
generated at STP as a result of a contract CPL and other STP participants have
entered into with the DOE. STP has on-site storage facilities with the
1-21
capability to store all the spent nuclear fuel generated by the STP units over
their lives. Therefore, the DOE delay in providing the disposal facility will
not impact the operation of the STP units. Under provisions of the Nuclear Waste
Policy Act of 1992, a one-mill per KWH assessment on electricity generated and
sold from nuclear reactors funds the DOE waste disposal program.
Risks of substantial liability could arise from the operation of STP
and from the use, handling, disposal and possible radioactive emissions
associated with nuclear fuel. While CPL carries insurance, the availability,
amount and coverage thereof is limited and may become more limited in the
future. The available insurance may not cover all types or amounts of loss or
expense which may be experienced in connection with the ownership of STP. See
ITEM 8-NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for information relating
to nuclear insurance.
GOVERNMENTAL REGULATION
The price and availability of each of the foregoing fuel types are
significantly affected by governmental regulation. Any inability in the future
to obtain adequate fuel supplies or adoption of additional regulatory measures
restricting the use of such fuels for the generation of electricity might affect
the CSW U.S. Electric system's ability to economically meet the needs of its
customers and could require the U.S. Electric Operating Companies to supplement
or replace, prior to normal retirement, existing generating capability with
units using other fuels. This would be impossible to accomplish quickly, would
require substantial additional expenditures for construction and could have a
significant adverse effect on CSW's and/or the U.S. Electric Operating
Companies' financial condition and results of operations.
FUEL COSTS AND CONSUMPTION
Additional fuel cost data for the CSW U.S. Electric system appears
under U.S. ELECTRIC OPERATING STATISTICS above. Average fuel costs and
consumption by fuel type for 1996 are presented in the following table.
Average
Cost per Consumption
Fuel Type MMbtu (millions)
- -------------------------------------------------------------------
MMbtus Mcfs Tons
CPL
Natural gas $2.25 105 102
Coal 1.43 51 3
Nuclear 0.55 54
Composite 1.62
PSO
Natural gas $2.84 74 72
Coal 1.26 78 4
Composite 2.04
SWEPCO
Natural gas $2.64 39 39
Coal 1.77 116 7
Lignite 1.13 63 5
Composite 1.76
WTU
Natural gas $2.37 38 38
Coal 1.46 28 2
Composite 2.02
CSW
Natural gas $2.50 256 251
Coal 1.54 273 16
Lignite 1.16 63 5
Nuclear .55 54
Composite 1.81
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The Registrants are unable to reliably predict the future cost of fuel
(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 ITEM 7-MD&A and ITEM 8-NOTE 2. LITIGATION
AND REGULATORY PROCEEDINGS for additional information concerning fuel costs.
ENVIRONMENTAL MATTERS
The U.S. Electric Operating Companies and CSW Energy are subject to
regulation with respect to air and water quality and solid waste standards and
other environmental matters by various federal, state and local authorities.
These authorities have continuing jurisdiction in most cases to require
modifications in the U.S. Electric Operating Companies' and CSW Energy
facilities and operations. Changes in environmental statutes or regulations
could require substantial additional expenditures to modify the U.S. Electric
Operating Companies' facilities and operations and CSW Energy could have a
material adverse effect on CSW's and each of the U.S. Electric Operating
Companies' and CSW Energy's results of operations and financial condition.
Violations of environmental statutes or regulations can result in fines and
other costs.
AIR QUALITY
Air quality standards and emission limitations are subject to the
jurisdiction of state regulatory authorities in each state in which the CSW
System operates, with oversight by the EPA. In accordance with regulations of
these state authorities, permits are required for all generating units on which
construction is commenced or which are substantially modified after the
effective date of the applicable regulations.
In 1990, the U.S. Congress amended the Clean Air Act. CAAA places
varying restrictions on the emission of sulfur dioxide from gas-, coal- and
lignite-fired generating plants. Beginning in the year 2000, the U.S. Electric
Operating Companies will be required to hold allowances in order to emit sulfur
dioxide. The EPA issues allowances to owners of existing generating units based
on historical operating conditions. Based on the CSW U.S. Electric system
facilities plan, CSW believes that the U.S. Electric Operating Companies'
allowances are adequate to meet their needs at least through 2008. Public and
private markets are developing for trading of excess allowances.
As a result of requirements imposed by the CAAA, CSW expects to spend
approximately $1.7 million over a three year period from 1995 to 1997 for annual
testing of, software modifications to, and maintenance of continuous emission
monitoring equipment. Of this, approximately $0.5 million was spent in 1995 and
$0.6 million in 1996.
The expected expenditures to meet CAAA requirements and the 1996 and
1995 expenditures for each of the U.S. Electric Operating Companies are
presented in the following table.
CPL PSO SWEPCO WTU
----------------------------------
(thousands)
Total expected expenditures (1995-1997) $540 $329 $488 $309
Expenditures in 1996 190 108 172 112
Expenditures in 1995 146 98 131 86
The CAAA also directed the EPA to issue regulations governing nitrogen
oxide emissions and require government studies to determine what controls, if
any, should be imposed on utilities to control air toxics emissions. The acid
rain rules have not been released; accordingly, the impact on CSW and the U.S.
Electric Operating Companies cannot be determined at this time.
1-23
Under the Acid Rain Title IV rules of the CAAA for nitrogen oxide
control for coal units, the U.S. Electric Operating companies have early-elected
their units under an optional provision. This will eliminate any capital
expenses through 2007, if alternate standards are met.
WATER QUALITY
Water quality is subject to the jurisdiction of each of the state
regulatory authorities in which the U.S. Electric Companies operate as well as
the EPA. These authorities have jurisdiction over all wastewater discharges into
state waters and also for establishing water quality standards and issuing waste
control permits covering discharges which might affect the quality of state
waters. The EPA has jurisdiction over point source discharges through the
National Pollutant Discharge Elimination System provisions of the Clean Water
Act.
RCRA AND CERCLA
The RCRA and the Arkansas, Louisiana, Oklahoma and Texas solid waste
rules provide for comprehensive control of all solid wastes from generation to
final disposal. The appropriate state regulatory authorities in the states in
which the U.S. Electric Companies operate have received authorization from the
EPA to administer the RCRA solid waste control program for their respective
states.
The operations of the U.S. Electric Companies, 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. Theoretically, any one PRP can be held responsible for the entire cost of
a cleanup. Typically, however, cleanup costs are allocated among PRPs.
CSW's subsidiaries incur significant costs for the handling,
transportation, storage and disposal of hazardous and non-hazardous waste
materials. Unit costs for waste classified as hazardous exceed by a substantial
margin unit costs for waste classified as non-hazardous.
The U.S. Electric Operating Companies, like other electric utilities,
produce combustion and other generation by-products, such as ash, sludge, slag,
low-level radioactive waste and spent nuclear fuel. The U.S. Electric Operating
Companies own distribution poles treated with creosote or other substances. The
EPA currently exempts coal combustion by-products from regulation as hazardous
wastes. Distribution poles treated with creosote or other substances are not
expected to exhibit characteristics that would cause them to be hazardous waste.
In connection with their operations, the U.S. Electric Operating Companies also
have used asbestos, PCBs and materials classified as hazardous waste. If
additional by-products or other materials generated or used by companies in the
CSW U.S. Electric system were reclassified as hazardous wastes, or other new
laws or regulations concerning hazardous wastes or other materials were put in
effect, CSW System disposal and remedial costs could increase materially. The
EPA is expected to issue new regulations stating whether certain other materials
will be classified as hazardous.
PSO SAND SPRINGS/GRANDFIELD, OKLAHOMA SITES
In 1989, PSO investigated a Sand Springs, Oklahoma PCB storage facility
and found some PCB contamination. The cleanup plan was approved by the EPA and
cleanup of the facility began in November 1994. In October 1996, EPA filed a
complaint against PSO alleging PSO failed to comply with provisions of the Toxic
Substances Control Act. The complaint has three counts, two of which pertain to
the Sand Springs facility and the third deals with a substation in Grandfield,
Oklahoma. The EPA alleges improper disposal of PCBs at the Sand Springs site due
to the length of time between discovery of the contamination and the actual
cleanup at the site. The complaint at the Grandfield site relates to failure to
date PCB articles at the site. The total proposed penalty for the three counts
is $479,500 which has been accrued by PSO. PSO has filed a response to the
complaint and is currently awaiting an answer from the EPA. PSO is unable to
predict the outcome of this matter.
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PSO COMPASS INDUSTRIES SUPERFUND SITE
PSO has received notice from the EPA that it is a PRP under CERCLA and
may be required to share in the reimbursement of cleanup costs for the Compass
Industries Superfund site which has been remediated. PSO has been named
defendant in a lawsuit filed in Federal District Court in Tulsa, Oklahoma on
August 29, 1994, for reimbursement of the cleanup costs. PSO's degree of
responsibility, if any, as a de minimis party appears to be insignificant and
management expects that PSO will have an opportunity to pay its share of costs
and remove itself from the case. Accordingly, in 1995, PSO accrued a $100,000
liability for this matter.
On March 19, 1996, a district judge ruled in favor of the defendants on
a summary judgment that the plaintiffs do not have a cause of action under
CERCLA and that the only action allowed the plaintiffs is a right to
contribution on funds expended after August 29, 1991. This severely limits PSO's
liability since most of the remediation was completed prior to this date. In
October, 1996, the plaintiffs appealed this ruling, and PSO is awaiting the
outcome of this matter.
PSO ASH CREEK COAL MINE RECLAMATION
In August 1994, PSO received approval from the Wyoming Department of
Environmental Quality to begin reclamation of a coal mine in Sheridan, Wyoming,
owned by Ash Creek, a wholly owned subsidiary of PSO. Ash Creek recorded a $3
million liability in 1993 for the estimated reclamation costs and subsequently
accrued an additional $500,000 in 1995. Actual reclamation work was completed in
August, 1996, at a total cost of $3.6 million. Surveillance monitoring will
continue for ten years after final reclamation. Management believes that
ultimate resolution of this matter will not have a material adverse effect on
CSW's or PSO's consolidated results of operations or financial condition.
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, 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 on
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, whose ensuing
comments requested that a future residential exposure scenario be evaluated for
comparison with commercial and industrial exposure scenarios. However,
Mississippi Power and SWEPCO do not feel that cleanup 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 cleanup to
residential standards is not necessary.
The MDEQ has not agreed to a non-residential future land use scenario
as of this date and has requested further testing. Following the additional
testing and resolution of whether cleanup is necessary to meet a residential
usage scenario or if cleanup to a commercial/industrial scenario is appropriate,
a feasibility study will be conducted to more definitively evaluate remedial
strategies for the property. This will require public input prior to a final
decision being made.
A final range of cleanup costs has not been determined, but based on
preliminary estimates, SWEPCO has incurred to date approximately $200,000 for
its portion of the cleanup of this site and anticipates that an additional $2
million may be required. Accordingly, SWEPCO has accrued $2 million for the
cleanup.
SWEPCO SUSPECTED MGP SITE IN TEXARKANA, ARKANSAS
SWEPCO owns a suspected former MGP site in Texarkana, Arkansas. The EPA
ordered an initial investigation of this site. The contractor who performed the
investigation of the site recommended to the EPA that no further action be
taken. SWEPCO discovered that an underground storage tank in place at the site
was leaking and removed the tank in early 1995. Based on soil and ground water
quality results, SWEPCO received a closure letter for this project.
1-25
SWEPCO SUSPECTED MGP SITE IN MARSHALL, TEXAS
SWEPCO owns a suspected former MGP site in Marshall, Texas. SWEPCO
notified the TNRCC that evidence of contamination was found at the site. After
soil, groundwater and other testing were completed during 1993 through 1995 with
satisfactory results, SWEPCO proceeded with closure of the site with the TNRCC.
Costs related to the site were substantially less than the preliminary $2
million estimate that was accrued in 1993. In 1996, both the TNRCC and the EPA
approved SWEPCO's closure request.
SWEPCO VODA PETROLEUM SUPERFUND SITE
On April 10, 1996, SWEPCO received correspondence from the EPA
providing notification that SWEPCO is a PRP to a cleanup action planned for the
Voda Petroleum Superfund Site located in Clarksville, Texas. At this time,
SWEPCO is conducting a records review to compile documentation relating to
SWEPCO's past use of the Voda Petroleum site. The proposed cleanup of the site
is estimated by the EPA to cost approximately $2 million and to take
approximately twelve months to complete. An opportunity for over 30 PRPs to
conduct the cleanup in lieu of EPA conducting the cleanup is under
consideration. SWEPCO's liability associated with this project is not expected
to be material.
EMFS
Research is ongoing whether exposure to EMFs may result in adverse
health effects. Although a few of the studies to date have suggested certain
associations between EMFs and some types of effects, the research to date has
not established a cause-and-effect relationship between EMFs and adverse health
effects from electric lines. CSW cannot predict the impact on CSW or the
electric utility industry if further investigations or proceedings were to
establish that the present electricity delivery system is contributing to
increased risk or incidence of health problems.
OTHER ENVIRONMENTAL MATTERS
From time to time the Registrants are made aware of various other
environmental issues or are named as a party to various other legal claims,
actions, complaints or other proceedings related to environmental matters.
Management does not expect disposition of any such pending environmental
proceedings to have a material adverse effect on CSW's or any of the U.S.
Electric Operating Companies' results of operations or financial condition.
See ITEM 7-MD&A, ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS
and ITEM 8-NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES, for additional
information relating to environmental matters.
UNITED KINGDOM OPERATIONS
GENERAL
SEEBOARD's primary regulated businesses are the distribution and supply
of electricity within its Southeast England service area. During 1996, these two
businesses jointly generated approximately 97.6% of SEEBOARD's operating profits
on sales of 19.4 billion KWH for the distribution business and 16.0 billion KWH
for the supply business. SEEBOARD is also involved in other activities,
including gas supply, electricity generation, electrical contracting and
retailing. See ITEM 7-MD&A for additional information regarding the acquisition
of SEEBOARD and also SEEBOARD's operating results.
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DISTRIBUTION AND SUPPLY BUSINESSES
SERVICE AREA
SEEBOARD's service area covers approximately 3,000 square miles in
Southeast England, extending from the outlying areas of London to the English
Channel, and including large towns such as Kingston-upon-Thames, Croydon,
Crawley, Maidstone, Ashford and Brighton, as well as substantial rural areas.
The area has a population of approximately 4.6 million people with significant
portions of the area, such as south London, having a high population density.
Over the past 25 years, the services sector of the area's economy has become
increasingly important, while the industrial sector has been in decline. There
has been considerable commercial development in a number of towns in the area
over the last ten years, in particular in the areas around Gatwick Airport and
the English Channel ports.
DISTRIBUTION BUSINESS
Distribution is the core business of SEEBOARD and involves the
distribution of electricity to consumers over SEEBOARD's distribution system.
Electricity is transported from generating plants across the United Kingdom via
the National Grid system to supply points within SEEBOARD's geographical area
where it is then transformed down and enters SEEBOARD's distribution system.
Almost all of the electricity that enters SEEBOARD's system is received at these
National Grid supply points. However, a small amount of electricity is received
from power stations within SEEBOARD's geographical area. At December 31, 1996,
SEEBOARD's distribution system consisted of approximately 7,650 miles of
overhead lines and approximately 19,900 miles of underground cables. The bulk of
SEEBOARD's tangible fixed assets is currently employed in the distribution
business.
SUPPLY BUSINESS
SEEBOARD's supply business consists of the bulk purchase of electricity
and its sale to customers. The majority of electricity sold by SEEBOARD in its
supply business is purchased through a pool created in 1990 for the bulk trading
of electricity. Pool prices are variable and difficult to predict. Accordingly,
in an effort to control exposure to prices, SEEBOARD has a portfolio of
contracts with major generators as a means of hedging price fluctuations in the
pool. The physical delivery of electricity via SEEBOARD's distribution network
results in a cost to the supply business and income to the distribution
business.
SEEBOARD currently has the sole right to supply substantially all of
the consumers in its authorized area, except where demand is above 100 KW. As a
part of the restructuring of the electricity industry in the United Kingdom,
competition is being introduced into the market for electricity supply on a
phased basis. The threshold for competitive supply was reduced from 1 MW to 100
KW effective April 1, 1994. SEEBOARD, as well as other licensed suppliers
(second-tier license), are permitted to supply electricity to customers whose
peak demand exceeds 100 KW in the areas of other regional electricity companies.
All holders of a second-tier license, including SEEBOARD, who supply electricity
to non-franchise customers (i.e., demand of 100 KW or above) must pay charges to
the host regional electricity company for the use of its distribution network.
It is currently intended that, effective April 1, 1998, the regional electricity
companies' supply businesses, including SEEBOARD's, will no longer be protected
by a franchise. SEEBOARD has always been a strong supporter of extending
competition in electricity whenever feasible and practicable. To date, SEEBOARD
has established a profitable business in supplying customers outside of its
franchise area. While SEEBOARD is currently unable to predict the impact that
the transition in 1998 to full competition will have on its electricity supply
business, its primary objective is one of profit and not market share.
SEASONALITY
The sale of electricity by SEEBOARD tends to increase during colder
winter months because of a higher demand for power.
1-27
REGULATION
The distribution and supply businesses of SEEBOARD are principally
regulated by the Electricity Act of 1989 and by the conditions contained in
SEEBOARD's public electricity supply license. The public electricity supply
license generally continues until at least 2025, although it may be revoked upon
25 years prior notice after 2000. In addition, the public electricity supply
license may be revoked by the United Kingdom's Secretary of State in certain
specified circumstances.
Most of the income of the distribution business is regulated by a
formula set by the DGES based upon, among other factors, the UK RPI. The formula
generally sets a cap on the average price per unit distributed, with allowed
annual increases based upon changes in the UK RPI plus a percentage factor set
from time to time by the DGES, which was initially set at 0.75%. In August 1994,
the DGES announced that SEEBOARD's allowed per unit price would be reduced by
14% effective April 1, 1995 and that increases, or if applicable, decreases, in
the allowed per unit price in subsequent years would be based upon changes in
the UK RPI minus 2%. In July 1995, the DGES announced a further revision to
SEEBOARD's price controls which further reduced the allowed per unit price by
13%, effective April 1, 1996, and restricts increases, or if applicable,
requires decreases, in the allowed per unit price in each of the three
subsequent years based upon changes in the UK RPI minus 3%. The DGES is not
scheduled to review the allowed distribution charges for the regional
electricity companies, including SEEBOARD, until 2000, although the DGES may
reopen the review before such time under certain circumstances.
The prices charged by SEEBOARD in its franchise supply business are
also determined from a formula set from time to time by the DGES. The formula
generally provides for the pass through to customers of certain costs incurred
by SEEBOARD in supplying the electricity, which include electricity purchase
costs, transmission charges, and distribution costs, together with an allowed
margin as determined by the DGES. Under the current formula, SEEBOARD is
permitted annual increases, or if applicable, decreases, in its allowed margin
by an amount equal to the UK RPI minus 2%. The DGES is not scheduled to review
the allowed supply charges for the regional electricity companies, including
SEEBOARD, until 1998.
The Conservative Party has held power in the United Kingdom since 1979.
The next general election in the United Kingdom must be held no later than May
1997, and may be called upon approximately three weeks notice at any time before
then. If the Labour Party, which is the main opposition party, takes control, it
may introduce certain policies, including a windfall tax on excess profits of
privatized utilities. There can be no assurance that the policies of the United
Kingdom's government after the next general election, by whichever party it is
controlled, will not have a material adverse effect on CSW's consolidated
results of operations or financial condition.
OTHER BUSINESSES
In addition to its distribution and supply businesses, SEEBOARD is also
engaged in other activities, including gas supply, electricity generation,
electrical contracting and retailing. SEEBOARD's gas supply business was
established in 1993 to compete in the competitive commercial and industrial
markets. In 1995, SEEBOARD entered into a joint venture with Amoco to take
advantage of the extension of competition into the United Kingdom natural gas
domestic market. Through the joint venture, SEEBOARD will be able to supply
natural gas throughout the United Kingdom. SEEBOARD's electricity generation
business is conducted through its 37.5% interest in Medway Power Ltd's 675 MW
gas-fired power plant located on the Isle of Grain on the Thames estuary in
Kent. SEEBOARD also provides electrical contracting services as both a primary
contractor and subcontractor to a variety of industrial, commercial and domestic
customers. These operations are primarily in Southeast England but include a
growing national element. Finally, SEEBOARD conducts an electrical retailing
business through its chain of retail appliance shops and superstores. Although
the retail business remains concentrated in SEEBOARD's authorized service area,
a small number of superstores have been developed successfully outside of the
region.
1-28
ENVIRONMENTAL REGULATION
SEEBOARD's operations are subject to regulation with respect to water
quality standards and other environmental matters by various authorities within
the United Kingdom. Under certain circumstances, these authorities may require
modifications to SEEBOARD's facilities and operations or impose fines and other
costs for violations of applicable statutes and regulations. From time to time
SEEBOARD is made aware of various environmental issues or is named as a party to
various legal claims, actions, complaints or other proceedings related to
environmental matters. Management does not expect disposition of any such
pending environmental proceedings to have a material adverse effect on CSW's
consolidated results of operations or financial condition.
NON-UTILITY OPERATIONS
CSW ENERGY
CSW Energy develops, owns and operates independent power and
cogeneration facilities, subject to regulatory approval. The table below
summarizes CSW Energy's participation in projects as of December 31, 1996.
CAPACITY COMMERCIAL
(IN MW) OPERATION OWNERSHIP THERMAL
PROJECT LOCATION TOTAL COMMITTED DATE INTEREST HOST HOST UTILITY
- -----------------------------------------------------------------------------------------------------------------------
Brush II Brush, CO 68 68 January 1994 47% Greenhouse Public Service Company
of Colorado
Ft. Lupton Ft. Lupton, CO 272 272 June 1994 50% Greenhouse Public Service Company
of Colorado
Mulberry Polk County, FL 120 110 August 1994 50% Distilled Florida Power Corporation
Water/Ethanol Plant
Orange Cogen Polk County, FL 103 97 June 1995 50% Orange Juice Florida Power Corporation
Processor Tampa Electric Company
Newgulf Wharton, TX 85 -- Mid 1997 (2) 100% IPP Merchant plant
Phillips Sweeny Sweeny, TX 330 90 (1) Mid 1998 (2) 100%(3) Refinery Undetermined (1)
(1) The Phillips Sweeny project has the unexercised option to sell 90 MW of
capacity to Phillips Petroleum Company.
(2) Anticipated commercial operation date.
(3) CSW Energy presently intends to sell a 50% ownership interest.
Please refer to ITEM 7-MD&A for a discussion of Senior Notes issued by
CSW Energy during 1996.
CSW INTERNATIONAL
CSW International engages in international activities, including
developing, acquiring, financing and owning EWGs and foreign utility companies.
The company's most significant investment is SEEBOARD. For additional
information related to SEEBOARD, see UNITED KINGDOM OPERATIONS.
In July 1996, CSW International announced a joint venture with Alpek,
through a subsidiary, to build, own and operate a 109 MW, gas-fired cogeneration
project at Alpek's Petrocel industrial complex in Altamira, Tamaulipas, Mexico.
CSW International and Alpek each will have a 50% ownership in the project,
Enertek, which is expected to commence commercial operation in the first quarter
of 1998.
In December 1996, CSW International acquired a minority interest in a
Brazilian electric utility company which serves approximately 600,000 customers
in an area of approximately 118,000 square miles.
1-29
CSW COMMUNICATIONS
CSW Communications, the first company to be granted "exempt
telecommunications company" status by the FCC under the 1996 Telecommunications
Act, was formed to provide communication services to the U.S.
Electric Operating Companies, non-affiliates and retail customers.
CSW Communications presently owns and manages three fiber-optic lines
for the sale of high-capacity, city-to-city circuits to telecommunications
service providers. The three fiber-optic lines connect the South Texas cities of
Corpus Christi, Harlingen and McAllen; the West Texas cities of Abilene and San
Angelo; and Shreveport, Louisiana to Longview, Texas.
CSW Communications is currently engaged in projects to provide
communications-based energy management and utility management services. Since
1994, CSW Communications has been conducting a pilot project in Laredo, Texas to
demonstrate the energy efficiency and cost savings that result from giving
customers greater choice and control over their electric service. The project is
based on services provided over a fiber-optic and coaxial cable network passing
5,000 homes. Approximately 800 customers are currently participating.
During 1996, CSW Communications was awarded contracts to provide
communications-based utility management systems for the cities of Georgetown and
Austin, Texas. These systems will enable advanced energy management, water
management and other communications based services to be delivered to electric
and water customers of the municipal utilities in those cities. The Georgetown
project will cover more than 10,000 customers and is expected to be completed in
March 1998. The Austin project is currently a pilot project covering a limited
number of customers.
ENERSHOP
EnerShop currently provides energy services to customers in Texas.
These are services 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 and equipment
procurement and construction, third party financing and equipment leasing,
savings and performance guarantees and performance monitoring. In 1996, EnerShop
secured several contracts and has bids outstanding for several additional
projects in 1997.
CSW CREDIT
CSW Credit was originally formed to purchase, without recourse,
accounts receivable from the U.S. Electric Operating Companies. The cash
received by each U.S. Electric Operating Company from the sale of its accounts
receivables reduces its working capital requirements. Additionally, CSW Credit's
capital structure contains greater leverage than that of the U.S. Electric
Operating Companies, consequently lowering CSW's overall cost of capital.
Subsequent to its formation, CSW Credit's business expanded to include
the purchase, without recourse, of accounts receivable from certain
non-affiliated parties as long as the average twelve month rolling average of
accounts receivables from non-affiliates remains less than 50% of the twelve
month rolling average of total accounts receivables purchased by CSW Credit,
which is a limitation imposed by the SEC under the Holding Company Act.
When CSW sold Transok, CSW Credit lost a portion of affiliated accounts
receivable business as well as the ability to conduct a corresponding amount of
non-affiliated business, due to the 50% restriction. As a result, CSW Credit has
applied for relief from the 50% restriction from the SEC. Until such relief is
granted, CSW Credit may utilize an agreement to sell to a third party certain
non-affiliated accounts receivable in excess of the 50% restriction. CSW Credit
1-30
maintains the accounts receivables sale agreement to ensure compliance with the
SEC restriction.
SALE OF TRANSOK
For information related to the sale of Transok, a former wholly owned
intrastate natural gas pipeline and gas marketing company, reference is made to
ITEM 7 - MD&A.
OTHER INFORMATION
EMPLOYEES AND EXECUTIVE OFFICERS
The number of employees in the CSW System at December 31, 1996 is
presented in the table below. Of the employees listed below, approximately 560
of the positions at PSO and 740 of the positions at SWEPCO are covered under
collective bargaining agreements with the IBEW. In addition, approximately 2,600
employees at SEEBOARD are covered by collective agreements with several
different unions. These unions include the Amalgamated Electrical and
Engineering Union, GMB, Electrical Power Engineers Association, Unison and the
Transport and General Workers Union. For information related to ongoing union
negotiations at PSO, reference is made to ITEM 7 - MD&A.
CSW SYSTEM EMPLOYEES
CPL 1,801
PSO 1,337
SWEPCO 1,665
WTU 994
SEEBOARD 4,154
CSW ENERGY 91
CSW COMMUNICATIONS 26
ENERSHOP 15
CSW SERVICES 1,354
---------
11,437
---------
EXECUTIVE Age at
OFFICERS March 1, 1997 Present Position
- -------------------------------------------------------------------------------
E. R. Brooks 59 Chairman, President and CEO, Director
T. V. Shockley, III 51 Executive Vice President, Director
Glenn Files 49 Executive Vice President, Director
Ferd. C. Meyer, Jr. 56 Senior Vice President and General Counsel
Glenn D. Rosilier 49 Senior Vice President and Chief Financial
Officer
Thomas M. Hagan 52 Senior Vice President External Affairs
Venita McCellon-Allen 37 Senior Vice President Corporate
Development
Kenneth C. Raney 45 Associate General Counsel and Corporate
Secretary
Wendy G. Hargus 39 Treasurer
Lawrence B. Connors 45 Controller
The information in the foregoing table is included in Part I pursuant to
Regulation S-K, Item 401(b), Instruction 3. Each of the executive officers of
CSW is elected to hold office until the first meeting of CSW's Board of
Directors after the next annual meeting of stockholders. CSW's next annual
meeting of stockholders is scheduled to be held April 17, 1997. Each of the
executive officers listed in the table above has been employed by CSW or an
affiliate of CSW in an executive or managerial capacity for more than the last
five years.
1-31
ITEM 2. PROPERTIES.
See ITEM 1. BUSINESS for a description of the Registrants' properties.
ITEM 3. LEGAL PROCEEDINGS.
The Registrants are party to various legal claims, actions and
complaints arising in the normal course of business that are not described
herein. Management does not expect disposition of these matters to have a
material adverse effect on any of the Registrants' results of operations or
financial condition. See ITEM 1-BUSINESS, ITEM 7-MD&A and ITEM 8-NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS for information relating to pending legal,
environmental and regulatory proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
CSW None.
CPL None.
PSO None.
SWEPCO None.
WTU None.
2-1
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
CSW COMMON STOCK INFORMATION
1996 1995
Market Price Dividends Market Price Dividends
High Low Paid High Low Paid
------------------------------- -----------------------------
First Quarter $28 1/2 $26 3/8 43.5(cent) $24 7/8 $22 3/8 43.0(cent)
Second Quarter 28 7/8 26 1/2 43.5 26 5/8 23 7/8 43.0
Third Quarter 28 1/2 25 3/4 43.5 26 3/8 24 1/8 43.0
Fourth Quarter 28 25 1/2 43.5 28 1/2 24 3/4 43.0
CSW's common stock is traded under the ticker symbol CSR and listed on
the New York Stock Exchange, Inc. and Chicago Stock Exchange, Inc. For 1996, the
market price for CSW Common consists of closing prices whereas it includes all
trades for 1995. Such prices were obtained from the composite listing of CSW
Common trades as reported on Bloomberg Financial Commodities News.
In January 1997, CSW's board of directors elected to maintain the
quarterly dividend, payable on February 28, 1997, to stockholders of record on
February 7, 1997, unchanged at $0.435 per share, or an indicated rate of $1.74
per year. The decision to hold the dividend constant marked an end to 45 years
of consecutive increases in CSW's dividend. This decision is based upon several
factors including CSW's goal to achieve a 75 percent dividend payout ratio and
increased regulatory uncertainty facing both CSW and the electric utility
industry. The decision to retain more earnings is expected to permit CSW to
further strengthen its cash flow in order to fund utility and non-utility
investments and support growing non-utility businesses.
Cash dividends in the future will be dependent upon the policies of
CSW's board of directors and CSW's earnings, financial condition and other
factors. Traditionally, the CSW board of directors has declared dividends to be
payable on the last business day of February, May, August, and November.
There were approximately 74,000 record holders of CSW's common stock as
of March 4, 1997. See NOTE 11. COMMON STOCK for a discussion of new common stock
issued during 1996.
CPL, PSO, SWEPCO AND WTU COMMON STOCK INFORMATION
All of the outstanding shares of common stock of the U.S. Electric
Operating Companies are owned by CSW. Consequently, there is no market for their
common stock. Cash dividends declared and paid to CSW on their common stock for
1996 and 1995 are presented in the following table.
CPL PSO SWEPCO WTU
------------------------------------------------
(thousands)
1996 $128,000 $35,000 $44,000 $19,000
1995 186,000 55,000 109,000 41,000
During 1996, the common stock dividends paid to CSW by the U.S.
Electric Operating Companies were lower than 1995 because of the lower earnings
available for common stock during 1996. This resulted primarily from the
establishment of reserves for previously incurred plant development costs at
each of the U.S. Electric Operating Companies during 1996. For information
2-2
related to restrictions on the ability of the U.S. Electric Operating Companies
to pay dividends to CSW, see NOTE 8. LONG-TERM DEBT.
Reference is made to the page numbers noted in the table below for the locations
of the following items:
ITEM 6. SELECTED FINANCIAL DATA.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page Number
CSW CPL PSO SWEPCO WTU
-----------------------------------------
SELECTED FINANCIAL DATA 2-4 2-76 2-102 2-123 2-147
MD&A 2-5 2-77 2-103 2-124 2-148
FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA 2-34 2-92 2-113 2-137 2-160
REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS 2-72 2-99 2-120 2-144 2-167
REPORT OF MANAGEMENT 2-74 2-100 2-121 2-145 2-168
CENTRAL AND SOUTH WEST
CORPORATION
SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended
December 31 is provided to highlight significant trends in the financial
condition and results of operations for CSW. All common stock data have been
adjusted to reflect the two-for-one common stock split, effected by a 100% stock
dividend paid on March 6, 1992. CSW sold Transok on June 6, 1996. CSW realized
an after-tax gain on the sale of $120 million. Accounting rules require the
classification of both the sale and the actual operating results prior to such
sale as discontinued operations. Accordingly, Transok's operating results have
been excluded from (i) Revenues, (ii) Income from continuing operations, and
(iii) EPS of common stock from continuing operations in all the years presented
in the following table. In addition to the Transok reclassifications, certain
other financial statement items for prior years have been reclassified to
conform to the most recent period presented.
1996(1) 1995 1994 1993(2) 1992
------------------------------------------
(millions, except per share and ratio data)
INCOME STATEMENT DATA
Revenues $5,155 $3,143 $3,105 $3,084 $2,793
Income from continuing operations 315 396 387 268 384
Income before cumulative effect of
changes in accounting principles 315 396 387 281 384
Net income for common stock 429 402 394 308 382
EPS of common stock from continuing
operations $1.43 $1.97 $1.95 $1.32 $1.92
EPS of common stock $2.07 $2.10 $2.08 $1.63 $2.03
Dividends paid per share of common
stock $1.74 $1.72 $1.70 $1.62 $1.54
Average common shares outstanding 207.5 191.7 189.3 188.4 188.3
BALANCE SHEET DATA
Assets $13,332 $13,869 $11,066 $10,604 9,829
Long-term obligations (3) 4,057 3,948 2,975 2,807 2,722
Capitalization ratios
Common stock equity 47% 43% 48% 49% 49%
Preferred stock 4 4 5 6 6
Long-term debt 49 53 47 45 45
(1) Revenues in 1996 increased significantly due to the acquisition of
SEEBOARD. Earnings in 1996 were significantly impacted by the establishment
of reserves for certain investments at the U.S. Electric Operating
Companies, the write-off of certain investments at CSW Energy and the gain
realized on the sale of Transok.
(2) Earnings in 1993 were significantly affected by restructuring charges, the
$46 million cumulative effect of changes in accounting principles, the
establishment of reserves for fuel and other properties and prior year tax
adjustments.
(3) Long-term obligations includes long-term debt and preferred stock subject
to mandatory redemption.
2-5
CENTRAL AND SOUTH WEST CORPORATION
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 and Selected Financial Data.
The information contained therein should be read in conjunction with, and is
essential in understanding, the following discussion and analysis.
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 to develop an emerging global energy business.
CSW has undertaken key initiatives in the implementation of this
overall strategy. In 1996, these initiatives were marked by the restructuring of
CSW's core U.S. electric business, completion of the acquisition of SEEBOARD, an
investment in a Brazilian electric distribution utility and implementation of an
executive exchange agreement with a Philippine utility. In addition, CSW has
proposed to acquire the non-nuclear generating assets of Cajun, a Louisiana
member electric cooperative. In January 1997, CSW announced that its CSW
Communications subsidiary had entered into a joint venture limited partnership
to market telecommunications services. These events are discussed below and
elsewhere in this report.
CSW believes that, compared to other electric utilities, the CSW System
is well positioned to capitalize on the opportunities and challenges of an
increasingly deregulated and competitive market for the generation, transmission
and distribution of electricity (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). The CSW System
benefits from economies of scale by virtue of its size and is a reliable and
relatively low-cost provider of electric power. More specifically, CSW seeks
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.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995
OVERVIEW OF RESULTS
CSW's earnings increased to $429 million in 1996 compared to $402
million in 1995. Although earnings increased, earnings per share decreased from
$2.10 in 1995 to $2.07 in 1996 due to the issuance of additional shares of
common stock during 1996. The return on average common stock equity was 12.1% in
1996 compared to 13.1% in 1995. U.S. Electric operations contributed
approximately 57% of total earnings in 1996 and approximately 105% of total
earnings in 1995. The lower percent for U.S. Electric operations is mostly
attributed to the gain on the sale of Transok, higher earnings from CSW's
investment in SEEBOARD and the recording of reserves at each of the U.S.
Electric Operating Companies for certain investments and contingencies. CSW's
investment in SEEBOARD contributed 24% of total earnings in 1996 as compared to
2% in 1995, reflecting a full year of earnings in 1996 compared to only a
partial quarter in 1995.
2-6
Earnings increased in 1996 compared to 1995 due primarily to the gain
from the sale of Transok, the additional earnings from CSW's investment in
SEEBOARD, the absence of charges in 1996 related to the termination of the
proposed El Paso Merger in June 1995 and the effect of the CPL 1995 Agreement.
Also contributing to the increase were higher non-fuel electric revenues
resulting from increased usage, customer growth and weather-related demand.
Partially offsetting these increases in earnings were the recording of reserves
by the U.S. Electric Operating Companies in June 1996 associated with certain
investments and contingencies, write-offs of certain equity investments and
other project development costs for CSW Energy, restructuring charges, the
effect of the CPL 1996 Fuel Agreement, the asset reserves for the pending CPL
rate case and the absence in 1996 of favorable tax adjustments made in 1995. For
additional information relating to the reserves recorded in June 1996, see OTHER
INCOME AND DEDUCTIONS. For further discussion of CPL's regulatory activities,
see NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. Increased depreciation and
amortization, increased other operating expense, increased interest expense and
the loss of Mirror CWIP earnings also reduced the increase in earnings.
Significant items impacting 1996 earnings are listed below (in millions, net of
tax).
* Gain on the Sale of Transok, $120
* Reserves for Certain Investments and Contingencies, $(104)
* CPL Pending Rate Case Write-offs, $(8)
* CPL 1996 Fuel Agreement, $(7)
OPERATING REVENUES
Revenues increased approximately $2.0 billion or 64% in 1996 when
compared to 1995. The revenue variances are shown in the following table.
1996 REVENUE VARIANCES
INCREASE (DECREASE) FROM PRIOR YEAR, MILLIONS
U.S. Electric
Fuel Revenues $181
CPL 1995 Agreement 112
KWH Sales, Growth and Usage 83
KWH Sales, Weather-Related 21
WTU 1995 Stipulation and Agreement 21
Other Electric (35)
CPL 1996 Fuel Agreement (18)
-----
365
United Kingdom 1,640
Other Diversified 7
-----
$2,012
-----
U.S. ELECTRIC REVENUES
U.S. Electric revenues increased $365 million or 13% in 1996 compared
to 1995. Total U.S. Electric KWH sales increased 4.2%, with increases in sales
among all retail customer classes. Customer growth, increased usage and
weather-related demand contributed to the increased revenues along with higher
fuel revenues as discussed below. Also contributing to the increase was the
absence in 1996 of reserves for refunds recorded in 1995 in accordance with the
CPL 1995 Agreement and the WTU 1995 Stipulation and Agreement.
2-7
KWH sales to retail customers increased in 1996 as a result of customer
growth, increased customer usage and weather-related demand. The percentage
increases/(decreases) in U.S. Electric KWH sales in 1996 from 1995 are listed
below.
* Residential, 6.0%
* Commercial, 3.6%
* Industrial, 4.9%
* Sales for Resale, (0.5)%
* Total Sales, 4.2%
UNITED KINGDOM REVENUES
CSW's operating revenues include $1.8 billion from a full year of
revenues from CSW's investment in SEEBOARD for 1996 compared to $208 million of
revenues for a partial quarter of operations in 1995.
OTHER DIVERSIFIED REVENUES
Other diversified revenues increased 13% to $59 million in 1996 as
compared to $52 million in 1995 due primarily to increased revenues from CSW
Energy projects, increased factoring revenues at CSW Credit and new revenues
from CSW Communications and EnerShop.
OPERATING EXPENSES AND TAXES
U.S. ELECTRIC FUEL
During 1996 and 1995 the U.S. Electric Operating Companies generated
most of their electric energy requirements. U.S. Electric fuel expense increased
15% to approximately $1.1 billion in 1996 at the U.S. Electric Operating
Companies due primarily to an increase in the average unit cost of fuel to $1.81
per MMbtu in 1996 from $1.58 per MMbtu in 1995, reflecting higher natural gas
prices. Partially offsetting this increase was a reduction in the delivered cost
of coal at the U.S. Electric Operating Companies resulting from lower coal
transportation costs and lower spot market coal prices.
U.S. ELECTRIC PURCHASED POWER
U.S. Electric purchased power increased $36 million to $77 million in
1996 due primarily to increased economy energy purchases at a higher cost per
MWH.
UNITED KINGDOM COST OF SALES
CSW's operating expenses include $1.3 billion for cost of sales from a
full year of United Kingdom operations in 1996 compared to $158 million recorded
in United Kingdom cost of sales for a partial quarter of operations in 1995.
OTHER OPERATING
Other operating expenses in 1996 increased $228 million, or 41%, from
1995 due primarily to the addition in 1996 of a full year of operating expenses
from CSW's investment in SEEBOARD as well as the impact in 1995 of $28 million
of regulatory assets established for previously expensed restructuring charges
and the reversal of rate case costs pursuant to the CPL 1995 Agreement. Also
contributing to the increase was the recognition in 1995 of a $13 million
regulatory asset for previously recorded restructuring charges in accordance
with the WTU 1995 Stipulation and Agreement. Another factor contributing to
increased other operating expense was a CSW restructuring charge recorded in
1996. For additional information on this restructuring, see CSW RESTRUCTURING. A
$42 million reserve for deferred merger and acquisition costs was recorded in
1995 from the terminated El Paso Merger.
2-8
MAINTENANCE
Maintenance expense decreased $5 million to $150 million in 1996 from
$155 million in 1995 due primarily to a $10 million decrease in maintenance
expense at CPL resulting from lower production and distribution maintenance.
Partially offsetting this decrease was a $7 million increase in maintenance due
to a write-down of production inventory at the U.S. Electric Operating Companies
in 1996.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 31% to $464 million in 1996
from $353 million in 1995 due primarily to the addition of depreciable fixed
assets and the goodwill amortization related to the purchase of SEEBOARD, as
well as increases in depreciable fixed assets at the U.S. Electric Operating
Companies. Also contributing to the increase were the amortization of the
regulatory assets established in 1995 associated with the CPL 1995 Agreement and
the WTU 1995 Stipulation and Agreement along with accelerated amortization of
deferred Oklaunion plant costs in accordance with the WTU 1995 Stipulation and
Agreement.
TAXES, OTHER THAN INCOME
Taxes, other than income increased 10% to $178 million in 1996 from
$162 million in 1995. The increase was due primarily to lower 1995 ad valorem
taxes resulting from revisions of prior year estimates recorded in 1995. Also
contributing to the increase were higher ad valorem and state franchise taxes at
SWEPCO in 1996. The higher ad valorem taxes resulted primarily from a higher
state assessed value in Louisiana and the addition of the HVdc tie in Texas. The
state franchise taxes increased due mainly to higher federal taxable income
associated with Texas franchise tax.
INCOME TAXES
Income taxes increased $132 million to $224 million during 1996
compared to 1995. During 1995, income taxes were lower primarily due to
adjustments relating to prior year taxes, as well as the tax effect from both
the CPL 1995 Agreement and the WTU 1995 Stipulation and Agreement. Income taxes
of $46 million were recorded for CSW's investment in SEEBOARD from a full year
of operations in 1996 compared to $6 million for a partial quarter of operations
in 1995.
OTHER ITEMS
OTHER INCOME AND DEDUCTIONS
Other income and deductions decreased $160 million in 1996 when
compared to 1995 due primarily to charges recorded in June 1996 associated with
certain investments for plant sites, engineering studies and lignite reserves
for the U.S. Electric Operating Companies. See the U.S. ELECTRIC OPERATING
COMPANY RESERVES table below for additional detail on these reserves. Other
income and deductions was also lower as a result of certain write-offs recorded
by CSW Energy. In addition, CPL's Mirror CWIP liability, which has now been
fully amortized, contributed $41 million to income in 1995.
U.S. ELECTRIC OPERATING COMPANY RESERVES
Pre-tax effect Income tax Net income
on income benefit effect
-------------------------------------------
(thousands)
CPL $(21,509) $5,940 $(15,569)
PSO (51,109) 15,401 (35,708)
SWEPCO (29,700) 7,885 (21,815)
WTU (14,949) 4,003 (10,946)
------------------------------------------
$(117,267) $33,229 $(84,038)
------------------------------------------
2-9
INTEREST CHARGES
Interest on long-term debt increased $102 million or 46% during 1996
compared to 1995 due to higher levels of long-term debt outstanding related to
the SEEBOARD acquisition. CSW's 1996 embedded cost of long-term debt was
unchanged from 1995 at 7.2%. Interest on short-term debt decreased $7 million or
7% in 1996 compared to 1995 due to both lower interest rates and lower levels of
short-term debt outstanding. CSW used a portion of the proceeds from the sale of
Transok to reduce short-term debt.
DISCONTINUED OPERATIONS
The $120 million gain on the sale of Transok as well as Transok's 1996
operations are shown separately in discontinued operations. Transok's earnings
for the first five months of 1996 were $12 million compared to $25 million from
a full year of operations for 1995. Since Transok was sold on June 6, 1996,
CSW's results for 1996 do not reflect a full year of earnings from Transok. See
NOTE 14. TRANSOK DISCONTINUED OPERATIONS for information, including comparative
statements of income, related to the sale of Transok.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND 1994
OVERVIEW OF RESULTS
CSW's earnings increased to $402 million or $2.10 per share in 1995 as
compared to $394 million or $2.08 per share in 1994. The return on average
common stock equity was 13.1% in 1995 compared to 13.4% in 1994. U.S. Electric
operations contributed approximately 105% of total earnings in 1995 and
approximately 100% in 1994. In 1995, increased corporate expenses, including $42
million of pre-tax expense related to the terminated El Paso Merger, were offset
in part by earnings from Transok, CSW Energy, CSW's investment in SEEBOARD and
CSW Credit, totaling $51 million in the aggregate.
Earnings increased in 1995 compared to 1994 due primarily to higher
U.S. Electric revenues resulting from customer growth and increased usage along
with lower operation and maintenance expenses. Also contributing to the increase
were the 1995 earnings from CSW's investment in SEEBOARD. Partially offsetting
these factors were higher depreciation and amortization, higher interest and
lower earnings from Mirror CWIP. Significant items impacting 1995 earnings are
listed below (in millions, net of tax):
* Tax Adjustments, $30
* Merger Termination, $(27)
* CPL 1995 Agreement, $(16)
2-10
OPERATING REVENUES
Operating revenues increased $38 million or 1% in 1995 as shown in the
table below.
1995 REVENUE VARIANCES
INCREASE (DECREASE) FROM PRIOR YEAR
U.S. Electric
KWH Sales, Growth and Usage $62
Other Electric 3
CPL 1995 Agreement (112)
Fuel Revenues (106)
WTU 1995 Stipulation and Agreement (21)
KWH Sales, Weather-Related (8)
-----
(182)
United Kingdom 208
Other Diversified 12
-----
$38
-----
U.S. ELECTRIC REVENUES
U.S. Electric revenues decreased $182 million or 6% in 1995 compared to
1994. Total U.S. Electric KWH sales increased 4.5% with increases in sales among
all customer classes. During 1995, the average number of customers increased
approximately 2%. In addition to customer growth, customer usage increased
during 1995 as compared to 1994. Partially offsetting these revenue increases
were customer refunds made by CPL and WTU resulting from the resolution of rate
proceedings during 1995 along with lower fuel revenues and weather-related
demand.
KWH sales to retail customers increased in 1995 as a result of
increased customer usage and customer growth. The percentage changes in U.S.
Electric KWH sales from 1994 to 1995 are listed below.
* Residential, 3.1%
* Commercial, 2.2%
* Industrial, 2.4%
* Sales for Resale, 18.7%
* Total Sales, 4.5%
Sales for resale increased in 1995 because STP was operational for the
full year in 1995 compared to a partial year in 1994, making more energy
available for sale. In addition, during 1995, WTU began supplying a major new
wholesale customer. The U.S. Electric Operating Companies have maintained
relatively low rates in an increasingly competitive marketplace.
UNITED KINGDOM REVENUES
CSW's operating revenues include $208 million of revenues from CSW's
investment in SEEBOARD for a partial quarter in 1995. Pursuant to its effective
control of SEEBOARD in December 1995 through its 76.45% ownership interest, CSW
began full consolidation accounting for SEEBOARD in its consolidated financial
statements.
OTHER DIVERSIFIED REVENUES
Other diversified revenues increased 30% to $52 million in 1995 as
compared to $40 million in 1994 due primarily to two CSW Energy projects that
went into operation during the second and third quarters of 1994 along with
increased factoring revenues at CSW Credit.
2-11
OPERATING EXPENSES AND TAXES
U.S. ELECTRIC FUEL
During 1995 and 1994, the U.S. Electric Operating Companies generated
most of their electric energy requirements. U.S. Electric fuel expense decreased
$109 million during 1995 due mainly to a decrease in natural gas prices and
increased usage of lower cost nuclear fuel at STP. The average unit cost of fuel
was $1.58 per MMbtu during 1995 compared to $1.82 per MMbtu in 1994. This
decrease was due primarily to lower cost spot market natural gas prices,
favorable fuel contract negotiations and a greater use of lower unit cost
nuclear fuel at STP.
U.S. ELECTRIC PURCHASED POWER
U.S. Electric purchased power decreased $7 million during 1995 due
primarily to increased generation from STP which replaced power that had been
purchased during the first six months of 1994 when STP was out of service.
UNITED KINGDOM COST OF SALES
CSW recorded $158 million of cost of sales from CSW's investment in
SEEBOARD for a partial quarter in 1995 after taking effective control of that
company.
OTHER OPERATING
Other operating expense in 1995 increased $18 million compared to 1994
due primarily to the establishment of a $42 million reserve for expenses
incurred for the terminated El Paso Merger, the recording of a partial quarter
of operating expenses of $22 million from CSW's investment in SEEBOARD and
increased transmission expenses associated with the completion of an HVdc tie in
1995. These increases were offset in part by the recording in 1995 of $41
million in regulatory assets in accordance with the CPL 1995 Agreement and the
WTU 1995 Stipulation and Agreement. Also partially offsetting the increase were
benefits realized from a cost reduction initiative that paid CSW System
employees a portion of the operating expense savings.
MAINTENANCE
Maintenance expense decreased $16 million or 9% in 1995 compared to
1994 due primarily to the write-off in 1994 of certain deferred expenses related
to PSO's Tulsa Power Station, the postponement of previously scheduled
maintenance at CPL and savings from cost containment efforts at the U.S.
Electric Operating Companies.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $29 million in 1995
when compared to 1994 due primarily to increases in depreciable plant at the
U.S. Electric Operating Companies.
TAXES, OTHER THAN INCOME
Taxes other than income decreased $14 million or 8% in 1995 compared to
1994 due primarily to lower 1995 ad valorem taxes resulting from revisions of
prior year estimates recorded in 1995.
INCOME TAXES
Income taxes decreased $87 million in 1995 compared to 1994 due to
prior year adjustments recorded in 1995, the reserve established in connection
with the termination of the El Paso Merger and the tax effects of both the CPL
1995 Agreement and the WTU 1995 Stipulation and Agreement.
2-12
OTHER ITEMS
OTHER INCOME AND DEDUCTIONS
Other income and deductions decreased $10 million or 9% in 1995
compared to 1994 as a result of decreased Mirror CWIP liability amortization of
$27 million offset in part by the recognition of approximately $16 million in
factoring income by CPL in 1995 pursuant to the CPL 1995 Agreement, increased
interest income and a $3 million gain on PSO's sale of a non-utility,
fiber-optic telecommunication property.
INTEREST CHARGES
Interest expense on long-term debt increased 10% in 1995 from 1994 due
to higher levels of debt outstanding. CSW's embedded cost of long-term debt
decreased to 7.2% in 1995 from 7.7% in 1994. Short-term interest expense
increased 36% in 1995 as compared to 1994 due primarily to higher short-term
interest rates combined with higher general corporate borrowings.
DISCONTINUED OPERATIONS
The results of Transok are shown separately in discontinued operations
as a result of the sale of Transok in June 1996. Transok's earnings were
relatively unchanged in 1995 compared to 1994. CSW began reporting Transok's
operations as discontinued operations in the first quarter of 1996. Accordingly,
the prior comparative periods have been restated for consistency. See NOTE 14.
TRANSOK DISCONTINUED OPERATIONS for comparative statements of income and
information related to the sale of Transok.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW OF OPERATING, INVESTING AND FINANCING ACTIVITIES
Net cash provided by operating activities increased $76 million during
1996 compared to 1995. The increase was primarily attributable to the inclusion
of a full year of operations for CSW's investment in SEEBOARD compared to only
one partial quarter of operations for 1995 as well as higher rates, collected
under bond, at CPL. The increase was offset in part by higher natural gas prices
not yet recovered from customers in Texas and the loss of approximately seven
months of operations in 1996 for Transok as compared to 1995. See NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS for information related to the recovery of
fuel costs.
Net cash used in investing activities was $1.3 billion in 1996 compared
to $812 million used in 1995. The change is primarily the result of the
culmination of CSW's acquisition of the share capital of SEEBOARD. The investing
activities of SEEBOARD also caused CSW's construction expenditures to increase
compared to 1995. In addition, a combined total of approximately $100 million
was invested in several projects by CSW Energy and CSW International. These uses
of cash were partially offset by the cash received on the sale of both Transok
and the National Grid shares.
Net cash flows provided from financing activities totaled $320 million
for 1996 compared to $306 million in 1995. Cash proceeds from the primary
offering of CSW Common in February 1996 contributed $398 million in cash. These
proceeds were subsequently used to pay down a portion of the interim SEEBOARD
acquisition debt. In addition, the financing and subsequent refinancing related
to CSW's acquisition of SEEBOARD, including the use of a portion of the proceeds
from the sale of Transok, had a significant impact on financing activities
during 1996. CSW also used a portion of the proceeds from the sale of Transok to
reduce its short-term borrowings. For additional information see CAPITAL
STRUCTURE and SEEBOARD ACQUISITION FINANCING.
Finally, non-cash impacts of exchange rate differences on the
translation of British pound denominated assets and liabilities were recorded on
a separate line on the cash flow statement in accordance with accounting
guidelines.
2-13
INTERNALLY GENERATED FUNDS
Internally generated funds, which consist of cash flows from operating
activities less common and preferred stock dividends, totaled $499 million, $451
million and $424 million for 1996, 1995 and 1994, respectively, 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. Productive investment of net funds from operations in
excess of capital expenditures and dividend payments are necessary to enhance
the long-term value of CSW for its investors. CSW is continually evaluating the
best use of these funds. Subject to certain exceptions, CSW is required to
obtain authorization from various regulators in order to invest in certain new
business activities. See HOLDING COMPANY ACT.
CSW CAPITAL EXPENDITURES
Total capital expenditures for CSW, including the U.S. Electric
Operating Companies, SEEBOARD and other diversified operations, but excluding
capital that may be required for acquisitions, are estimated to be approximately
$539 million, $546 million and $512 million for the years 1997 through 1999,
respectively (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).
Although the historical capital requirements of the CSW System have
been primarily for the construction of electric utility plant, current projected
capital expenditures are expected to be primarily for existing distribution
systems and non-utility investments. Primary sources of capital for these
expenditures are long-term debt and preferred stock issued by the U.S. Electric
Operating Companies, long-term and short-term debt and common stock issued by
CSW and internally generated funds. 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.
CSW periodically reevaluates 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 electric utility companies or other electric utility properties to
acquire. CSW expects to fund the majority of its capital expenditures through
internally generated funds. However, for any significant investment or
acquisition, additional funds from the capital markets, including from the
issuance and sale of additional CSW Common, and short-term and long-term
borrowings, may be required.
U.S. ELECTRIC OPERATING COMPANIES' CONSTRUCTION EXPENDITURES
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 distribution facilities and will be funded primarily through
internally generated funds. These improvements will be required to meet the
anticipated needs of new customers and the growth in the requirements of
existing customers. Construction expenditures, including AFUDC, for the U.S.
Electric Operating Companies were approximately $363 million in 1996, $417
million in 1995 and $505 million in 1994. The estimated total construction
expenditures, including AFUDC, for the U.S. Electric Operating Companies for the
years 1997 through 1999 are presented in the following table (The foregoing
statement constitutes a forward looking statement within the meaning of Section
2-14
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).
CONSTRUCTION EXPENDITURES
1997 1998 1999 Total
------------------------------------
(millions)
Production $73 $47 $47 $167
Transmission 43 60 67 170
Distribution 182 186 191 559
Fuel 13 19 25 57
Other 44 45 40 129
------------------------------------
$355 $357 $370 $1,082
------------------------------------
The U.S. Electric Operating Companies plan to dismantle certain power
plant properties during late 1997 and 1998. Dismantling includes the removal,
disposal and/or salvage of retired equipment and ancillary buildings. Of the
units anticipated to be dismantled, only one unit currently in storage (85 MW),
is considered part of CSW's aggregate capability. The depreciation rates of the
U.S. Electric Operating Companies include a component for net removal cost and
therefore are being recovered from customers currently through rates. As a
result, actual dismantling of these units will not have a material impact on net
income. Current estimates of capital resources that will be required to
dismantle these units range from $10 million to $15 million and are not
reflected in the above construction numbers. It is anticipated that a request
for dismantling bids will be issued by mid-1997 (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).
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 system's internal resource plan presently
anticipates that any additional capacity needs will come from a variety of
sources including power purchases. Therefore, during 1996, the U.S. Electric
Operating Companies recorded reserves and write-offs in the amount of $84
million, net of tax, for certain investments in plant sites, engineering studies
and lignite reserves. Refer to INTEGRATED RESOURCE PLAN for additional
information regarding the U.S. Electric System's capacity needs.
INFLATION
Annual inflation rates, as measured by the Consumer Price Index, have
averaged approximately 2.8% during the three years ended December 31, 1996.
Management believes that inflation, at this level, does not materially effect
CSW's consolidated 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
As of December 31, 1996, the capitalization ratios of CSW were 47%
common stock equity, 4% preferred stock 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.
During the period from 1992 to 1996, CSW has refinanced approximately $2.2
2-15
billion. At December 31, 1996, CSW's embedded cost of debt was 7.2%. CSW's
significant financing activities for 1996 are summarized in the following table.
ISSUED/UTILIZED REACQUIRED (IF APPLICABLE)
Financing Amount Financial Amount
Instrument (millions) Rate % Maturity Instrument (millions) Rate % Maturity
---------------------------------------------- -------------------------------------------
CSW Common Stock (1) $397.8
CPL PCRB (2) 6.3 6.0 2020 PCRB $6.3 7 7/8 2014
PCRB 60.0 6 1/8 2030 PCRB 60.0 7 7/8 2016
PSO MTN (3) 40.0 various various none
PCRB (2) 12.7 6.0 2020 PCRB 12.7 7 7/8 2014
SWEPCO PCRB 81.7 6.1 2018 PCRB 81.7 8.2 2014
WTU PCRB (2) 44.3 6.0 2020 PCRB 44.3 7 7/8 2014
CSW ENERGY Senior Notes 200.0 6.875 2001
SEEBOARD
ACQUISITION
REFINANCING (4)
$ denominated Yankee Notes (5) $200.0 6.95 2001
200.0 7.45 2006
(pound) Eurobonds(pound) 100.0 8.875 2006
denominated
Fixed Rate Loan 173.8 8.25 2003
Accounts Receivable
Securitization 155.0
(1) In February 1996, CSW sold 15,525,000 shares of CSW Common and received net
proceeds of approximately $397.8 million, which were used to repay a
portion of the indebtedness incurred by CSW to fund the acquisition of
SEEBOARD.
(2) Reflects the individual company's proportionate share of Red River Series
PCRBs.
(3) PSO issued $30 million in March 1996 and an additional $10 million in April
1996. The proceeds were used to repay a portion of PSO's short-term
borrowings and to reimburse PSO's treasury for the scheduled maturity of
$25 million FMBs on March 1, 1996. The MTNs are a series of PSO's Senior
Notes. The rates on the MTNs range from 5.89% to 6.43% with various
maturity dates in 2000 and 2001.
(4) During 1996, several financing transactions were undertaken to refinance
borrowings incurred to complete the acquisition of SEEBOARD. Both the CSW
Credit Agreement and the CSW Investments Credit Facility, which were
utilized during the acquisition period, were repaid by the end of 1996. See
SEEBOARD ACQUISITION FINANCING for details of these transactions as well as
the activities related to obtaining permanent financing for the
acquisition.
(5) Yankee Notes were swapped into British pounds using cross-currency swaps
with notional amounts of(pound)129 million each and Sterling rates of 7.98%
for the 2001 Notes and 8.75% for the 2006 Notes.
CSW and the U.S. Electric Operating Companies may issue additional
securities subject to market conditions and other factors. 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, and PSO has a shelf registration
statement on file for the issuance of up to $35 million of Senior Notes.
Additionally, CPL, PSO and SWEPCO, along with certain affiliated capital trusts
established by each company, have filed shelf registration statements with the
SEC for the issuance from time to time of up to $150 million, $75 million and
$110 million, respectively, of preferred securities and/or junior subordinated
deferrable interest debentures.
2-16
The current securities ratings for CSW and each of the U.S. Electric
Operating Companies is presented in the following table.
Duff & Standard
Moody's Phelps & Poors
------------------------------------
CPL (1)
FMB A2 A A
Senior unsecured A3 A- A-
Preferred stock a3 BBB+ A-
PSO (1)
FMB Aa3 AA A+
Senior unsecured A1 AA- A
Preferred stock aa3 AA- A
SWEPCO (1)
FMB Aa2 AA+ AA-
Senior unsecured Aa3 AA A+
Preferred stock aa2 AA A+
WTU (1)
FMB A1 AA- A+
Senior unsecured A2 A+ A
Preferred stock a2 A+ A
CSW
Commercial Paper P-2 D-1 A-2
(1) Securities ratings are on Negative Outlook by both Moody's
and Standard & Poors
These securities ratings may be revised or withdrawn at any time, and
each rating should be evaluated independently of any other rating.
COMMON STOCK
In order to strengthen its capital structure and support growth from
time to time, CSW may issue additional shares of CSW Common. During 1996, CSW
issued new common equity via: (i) a primary public offering; (ii) the PowerShare
dividend reinvestment and stock purchase plan; and (iii) the CSW Common option
in CSW's ThriftPlus plan.
On February 27, 1996, CSW sold 15,525,000 shares of CSW Common and
received net proceeds of approximately $397.8 million. These proceeds were used
to repay a portion of the indebtedness incurred by CSW under the CSW Credit
Agreement to fund the acquisition of SEEBOARD.
During 1996, CSW's PowerShare dividend reinvestment and stock purchase
plan was expanded to make it available to the residents of all fifty states and
the District of Columbia whereas it was previously available only to existing
CSW shareholders, employees, eligible retirees, utility customers and other
residents of the four states where the U.S. Electric Operating Companies
operate. For the expanded PowerShare plan, CSW registered five million shares of
new CSW Common with the SEC. CSW raised approximately $62 million, $57 million
and $50 million in new equity through the PowerShare plan in 1996, 1995 and
1994, respectively. CSW expects to use the proceeds from such sales to reduce
short-term and long-term debt and for other general corporate purposes.
CSW's ThriftPlus currently permits eligible employees to contribute a
portion of their annual compensation to the plan, subject to certain exceptions.
Funds contributed to the plan are invested by the plan trustee, at the
employee's direction, in any of five investment options, including an option
consisting of CSW Common. During 1996, the trustee for CSW's ThriftPlus plan
began to purchase CSW Common directly from CSW rather than from the open market
as historically had been done. Previously, CSW registered five million new
2-17
shares of CSW Common with the SEC for such use. During 1996, CSW raised
approximately $14 million in new equity as a result of such direct purchases by
the ThriftPlus plan trustee. CSW expects to use the proceeds from such sales to
reduce short-term and long-term debt and for other general corporate purposes.
SHORT-TERM FINANCING
The CSW System uses short-term debt to meet fluctuations in working
capital requirements and other interim capital needs. The U.S. Electric
Operating Companies, together with several other subsidiaries of CSW have: (i)
established a money pool to coordinate short-term borrowings and (ii) incurred
borrowings outside the money pool through CSW's issuance of commercial paper. As
of December 31, 1996, CSW had a revolving credit facility totaling $1.2 billion
to back up its commercial paper program.
SEEBOARD ACQUISITION FINANCING
CSW, indirectly through intermediate subsidiaries, acquired 100%
control of SEEBOARD during 1996 for an aggregate adjusted purchase price of
approximately $2.1 billion assuming average exchange rates during the purchase
period. As of December 31, 1996, CSW had contributed approximately $829 million
of the purchase price for the acquisition of SEEBOARD shares. Those funds, which
were initially obtained through borrowings under the CSW Credit Agreement, have
since been repaid by using the $398 million net proceeds from CSW's February
1996 common stock offering and $431 million of the proceeds from the sale of
Transok.
Additional acquisition funds were obtained from capital contributions
and loans made to CSW (UK) plc (which has been replaced by SEEBOARD Group plc)
by its sole shareholder, CSW Investments, which arranged the CSW Investments
Credit Facility for that purpose. During the second half of 1996, borrowings
under the CSW Investments Credit Facility were refinanced through several
different transactions. CSW Investments issued $200 million of unsecured notes
due 2001 and $200 million of unsecured notes due 2006, the proceeds of which
were swapped into British pounds through a cross-currency swap and used to repay
borrowings outstanding under the CSW Investments Credit Facility. CSW
Investments also issued (pound)100 million of unsecured Eurobonds due 2006 to
repay a portion of the CSW Investments Credit Facility. The remaining borrowing
outstanding under the CSW Investments Credit Facility were repaid with proceeds
from a SEEBOARD accounts receivable securitization, utilization of SEEBOARD
balance sheet cash and proceeds from a fixed rate loan due in 2003.
CSW ENERGY
In October 1996, CSW Energy issued $200 million, 6.875% Senior Notes
due 2001. CSW Energy intends to use the proceeds from the notes for the
acquisition, development and construction of electric generation assets in the
United States and to make affiliate loans to CSW International.
In addition to the amounts already expended for the development of
projects, CSW Energy has, subject to certain limitations in the case of EWGs and
foreign utility company investments, 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. See NOTE 3. COMMITMENTS AND CONTINGENT
LIABILITIES, for a discussion of CSW's investments and commitments in CSW Energy
projects at December 31, 1996.
CSW INTERNATIONAL
As discussed in CSW ENERGY, CSW Energy issued $200 million in Senior
Notes in October 1996. CSW Energy loaned to CSW International a portion of these
proceeds to acquire an interest in a Brazilian utility. It is anticipated that
CSW Energy will loan additional amounts to CSW International, the guarantor of
the Senior Notes, to develop, acquire or construct EWGs or foreign utility
company investments.
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
EWGs or foreign utility company investments. This represents a step-up in
previous authority under the Holding Company Act.
2-18
CSW CREDIT
CSW Credit purchases, without recourse, the accounts receivable of the
U.S. Electric Operating Companies and certain non-affiliated electric companies.
CSW Credit's capital structure contains greater leverage than that of the U.S.
Electric Operating Companies, consequently lowering CSW's cost of capital. CSW
Credit issues commercial paper, secured by the assignment of its receivables, to
meet its financing needs. CSW Credit maintains a secured revolving credit
agreement which aggregated $830 million at December 31, 1996 to back up its
commercial paper program. The sale of accounts receivable provides the U.S.
Electric Operating Companies with cash immediately, thereby reducing working
capital needs and revenue requirements.
RECENT DEVELOPMENTS AND TRENDS
COMPETITION AND INDUSTRY CHALLENGES
Competitive forces at work in the electric utility industry are
impacting the CSW U.S. Electric system and 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 level 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 cheaper
than electricity. As a whole, the U.S. Electric Operating Companies believe
that, overall, their prices for electricity and the quality and reliability of
their service currently place them 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).
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: (i) who will bear the costs of
prudent utility investments or past commitments incurred under traditional
cost-of-service regulation that will be uneconomic in a competitive environment,
sometimes referred to as stranded costs; (ii) whether all customers have access
to the benefits of competition; (iii) how, and by whom, the rules of competition
will be established; (iv) what the impact of deregulation will be on
conservation, environmental protection and other regulator-imposed programs; and
(v) 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 their competitive position and
the treatment of stranded costs. Although the U.S. Electric Operating Companies
believe they are in a position to compete effectively in a deregulated, more
competitive marketplace, if stranded costs are not recovered from customers,
then the U.S. Electric Operating Companies may be required by existing
accounting standards to recognize potentially significant losses from
unrecovered stranded costs, especially with respect to STP (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.
At the federal level, several bills have been introduced in Congress in
the early part of the 1997 legislative session, and recent reports indicate that
other bills are likely to be introduced in the near future, which provide for
restructuring and/or deregulating the U.S. electric utility industry. These
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bills will likely cover many different issues including repeal of the Holding
Company Act and PURPA, establishment of full retail customer choice,
disaggregation of electric utilities and the restructuring of the electric
utility industry. See HOLDING COMPANY ACT. States that have considered
deregulation have been moving increasingly toward requiring some form of retail
competition or retail wheeling. CSW and the U.S. Electric Operating Companies
cannot predict when and if they will be subject to one or more of these
legislative initiatives, nor can they predict the scope or effect of such
legislation on their results of operations or financial condition. For
additional information related to such initiatives, see INDUSTRY RESTRUCTURING
(OKLAHOMA, LOUISIANA AND TEXAS).
WHOLESALE ELECTRIC COMPETITION IN THE UNITED STATES
The Energy Policy Act, which was enacted in 1992, significantly alters
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 a new category of non-utility 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, qualifying facilities, EWGs and others for
sales of electric power. While CSW believes that the Energy Policy Act will
continue to make the wholesale markets more competitive, CSW is unable to
predict whether the Energy Policy Act will adversely impact the U.S. Electric
Operating Companies.
FERC ORDER 888
On April 24, 1996, the FERC issued Order 888 which is the final
comparable open access transmission rule. The provisions of FERC Order 888
provide for comparable transmission service between utilities and their
transmission customers by requiring utilities to take transmission service under
their open access tariffs for all of their new wholesale sales and purchases and
by requiring utilities to rely on the same information that their transmission
customers rely on to make wholesale purchases and sales. FERC Order 888
reaffirms the FERC's position that utilities are entitled to recover all
legitimate, prudent and verifiable stranded costs determined by a formula based
upon the revenues lost method through direct assignments charges to departing
customers.
FERC Order 888 requires holding companies to offer single system
transmission rates. However, the rule granted the U.S. Electric Operating
Companies an exemption permitting an opportunity to propose a solution that
provides comparability to all wholesale users. The final rule does suggest that
the terms and conditions for the CSW ERCOT companies (CPL and WTU) would be
permitted to differ from those offered by the CSW SPP companies (PSO and
SWEPCO). Transmitting utilities in the SPP are under the exclusive jurisdiction
of the FERC while most transmitting utilities in ERCOT are under the exclusive
jurisdiction of the Texas Commission. These two commissions have different
approaches to defining and implementing comparable open access transmission
service. CSW is the only holding company that owns operating companies in both
ERCOT and the SPP.
On November 1, 1996, the U.S. Electric Operating Companies filed a
system-wide tariff to comply with FERC Order 888. On December 31, 1996, the FERC
accepted for filing the system-wide tariff to become effective on January 1,
1997, subject to refund and to the issuance of further orders. CSW and the U.S.
Electric Operating Companies believe that their system-wide tariff complies with
the requirements of the FERC and the Texas Commission, but the tariff does not
offer a single system rate for transactions due to the different transmission
pricing approaches of the FERC and the Texas Commission. Reference is made to
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INDUSTRY RESTRUCTURING IN TEXAS for information related to the transmission
pricing approach rules that the Texas Commission adopted during 1996 (Project
No. 14045).
RETAIL ELECTRIC COMPETITION IN THE UNITED STATES
Increasing competition in the utility industry has resulted in
increasing pressure to stabilize or reduce rates. The retail regulatory
environment is beginning to shift from traditional rate base regulation to
incentive regulation. Incentive rate and performance-based plans encourage
efficiencies and increased productivity while permitting utilities to share in
the results. Retail wheeling, a major legislative initiative which would require
utilities to "wheel" or move power from third parties to their own retail
customers, is evolving gradually. Many states currently have introduced
legislation or are investigating the issue, and several states have already
passed legislation which mandates retail choice by a certain date.
CSW believes that retail competition would not be in the best interests
of CSW's and the U.S. Electric Operating Companies' customers and security
holders unless CSW and the U.S. Electric Operating Companies receive fair
recovery of the full amounts previously invested to finance power plants. These
investments, which were reasonably incurred, were made by the U.S. Electric
Operating Companies to meet their obligation to serve the public interest,
necessity and convenience. This obligation has existed for nearly a century and
remains in force under current law. CSW intends to strongly oppose attempts to
impose retail competition without just compensation for the risks and
investments CSW undertook to serve the public's demand for electricity. For
additional information related to retail wheeling in the United States, see
HOLDING COMPANY ACT and INDUSTRY RESTRUCTURING (OKLAHOMA, LOUISIANA AND TEXAS).
COMPETITION IN THE SUPPLY BUSINESS IN THE UNITED KINGDOM
SEEBOARD currently has the sole right to supply substantially all of
the consumers in its authorized area, except where demand is above 100 KW. As a
part of the restructuring of the electricity industry in the United Kingdom,
competition is being introduced into the market for electricity supply on a
phased basis. The threshold for competitive supply was reduced from 1 MW to 100
KW effective April 1, 1994. SEEBOARD, as well as other licensed suppliers
(second-tier license), are permitted to supply electricity to customers whose
peak demand exceeds 100 KW in the areas of other regional electricity companies.
All holders of a second-tier license, including SEEBOARD, who supply electricity
to non-franchise customers (i.e., demand of 100 KW or above) must pay charges to
the host regional electricity company for the use of its distribution network.
It is currently intended that, effective April 1, 1998, the regional electricity
companies' supply businesses, including SEEBOARD's, will no longer be protected
by a franchise. SEEBOARD has always been a strong supporter of extending
competition in electricity whenever feasible and practicable. To date, SEEBOARD
has established a profitable business in supplying customers outside of its
franchise area. While SEEBOARD is currently unable to predict the impact that
the transition in 1998 to full competition will have on its electricity supply
business, its primary objective is one of profit and not market share.
CSW RESTRUCTURING
In April 1996, CSW announced organizational and executive changes to
help prepare CSW for increased competition and unbundling of the electric
utility industry into generation, transmission, distribution and service
segments. As a result of these changes, in 1996 CSW functionally reorganized its
domestic utility operations into three organizational units which are centrally
managed from CSW Services.
CSW created a power generation business unit to provide energy
generation and production services. All phases of management of the U.S.
Electric Operating Companies' energy production activities have been
consolidated into the power generation business unit. These activities include
management of all generating facilities, including nuclear facilities, and fuel
procurement.
CSW created an energy delivery business unit to provide services for
the long-distance transmission and local distribution of electricity to retail
customers, including attendant customer services such as meter reading, billing
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and accounting. All phases of management of the U.S. Electric Operating
Companies' energy delivery activities have been consolidated into the energy
delivery business unit.
CSW created an energy services business unit to provide marketing
services, along with new energy efficiency products and services as they become
available, to existing and future customers of the U.S. Electric Operating
Companies. The energy services unit also manages CSW Communications and
EnerShop.
Functional unbundling of CSW's vertically integrated structure is
expected to provide a more competitive organizational structure for CSW. Some
employees have been reassigned from the U.S. Electric Operating Companies to CSW
Services to provide these centrally managed services.
Through December 31, 1996, CSW has incurred approximately $9.6 million
in connection with the implementation of the 1996 restructuring. CSW also has
reserved approximately $6.7 million for additional expenses associated with the
1996 restructuring, which is expected to be completed by early 1997.
INDUSTRY RESTRUCTURING IN OKLAHOMA
In June 1996, the Oklahoma Commission initiated a proceeding in which
it solicited public comment on various issues associated with the potential
restructuring of the Oklahoma electric utility industry. The Oklahoma Commission
requested comment on certain issues including the extent and timing of
restructuring, the unbundling of utility services, and the legislative and
regulatory requirement for restructuring. The Oklahoma Commission staff
conducted a series of informal public technical conferences and workshops over
the last half of 1996 to discuss these issues. After receiving a report from its
staff summarizing the comments provided in the restructuring proceeding, the
Oklahoma Commission took no immediate action but left the proceeding open at
this time to allow for the monitoring of other states' activities.
In February, 1997, a bill was introduced in the Oklahoma Senate which
would permit some form of retail competition by January 1, 1999, with retail
competition for all customers soon thereafter. The bill directs the Oklahoma
Commission to review the issue of and devise a mechanism for recovery of
prudently incurred, unmitigable and verified stranded costs and investments. The
bill leaves many details to be decided by the Oklahoma Commission and the
Oklahoma Tax Commission, but neither can issue any regulations without the prior
express authority of the legislature or the Joint Electric Utility Task Force, a
14-member panel with an equal number of members from each house of the Oklahoma
Legislature. CSW is unable to predict whether any retail competition legislation
will be enacted by the Oklahoma Legislature and, if enacted, what form such
legislation would take.
INDUSTRY RESTRUCTURING IN LOUISIANA
In October 1996, the Louisiana Commission requested comments on various
electric industry restructuring issues in a docket opened in 1995 to consider
aspects of competition in the provision of retail electric service.
Specifically, the Louisiana Commission requested input from interested parties
on its policy statement on the "principles to guide the investigation into
whether electric industry restructuring and retail competition are in the public
interest." SWEPCO filed comments on this matter in November 1996. The Louisiana
Commission has not taken further action in this matter at this time. CSW expects
that legislation regarding the restructuring of the Louisiana electric utility
industry will be introduced in the upcoming session of the Louisiana
legislature. CSW cannot predict whether any such legislation will be enacted
and, if enacted, what form such legislation would take.
INDUSTRY RESTRUCTURING IN ARKANSAS
To date, no legislation regarding the restructuring of the Arkansas
electric utility industry has been introduced in the Arkansas legislature.
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INDUSTRY RESTRUCTURING IN TEXAS
Amendments to PURA, the legal foundation of electric regulation in
Texas, became effective on September 1, 1995. Among other things, the amendments
deregulate the wholesale bulk power market in ERCOT, permit pricing flexibility
for utilities facing competitive challenges, provide for a market-driven
integrated resource planning process and mandate comparable open access
transmission service.
PURA also required that the Texas Commission adopt a rule on comparable
open transmission access by March 1, 1996. In conjunction with this rulemaking
proceeding (Project No. 14045), the chairman of the Texas Commission issued a
proposal on September 6, 1995, for the purpose of maximizing competition in the
ERCOT wholesale bulk power market. The proposal calls for the functional
unbundling of integrated utilities where distribution entities could purchase
their power requirements from any generator or set of generators in ERCOT. Those
generators which are currently regulated would be deregulated after provisions
are in place to recover stranded costs. The proposal was assigned a separate
proceeding (Project No. 15000) and after a series of workshops and technical
conferences conducted during 1996, the Texas Commission submitted a final Scope
of Competition report to the Texas Legislature in January 1997. The final report
contains numerous recommendations to the Texas Legislature including requests
for additional regulatory authority or clarification of existing authority
including, INTER ALIA, authority to certificate electric service resellers, the
authority to adopt consumer protection and universal service standards, the
authority to determine and allocate stranded costs to all customers, the
authority to promote unbundling, the authority to allow alternative forms of
regulation, increased authority to address mergers, authority to correct market
power abuses, authority over the ERCOT ISO and authority to permit alternative
methods for fuel cost recovery. In addition, the final report offers the Texas
Legislature four restructuring options. Option 1 maintains the regulatory status
quo; Option 2 would permit utilities to voluntarily offer retail access; Option
3 provides for full wholesale competition; and Option 4 provides for full retail
competition. The report's final recommendation is for the Texas Legislature to
direct the Texas Commission to prepare for full retail competition using a
careful and deliberate approach on a timetable to be established by the Texas
Legislature, but with no retail access before the year 2000. CSW cannot predict
the outcome of these proposals.
On February 7, 1996, the Texas Commission adopted a rule governing
transmission access and pricing (Project No. 14045). The pricing method adopted
by the Texas Commission is a hybrid combination of an ERCOT-wide postage stamp
rate covering 70% of total ERCOT transmission costs and a distance-sensitive
component referred to as a vector-absolute megawatt mile which recovers the
remaining 30% of ERCOT transmission costs. The open access tariffs filed with
the FERC on February 9, 1996 did not reflect Project No. 14045 pricing. However,
on November 1, 1996, CSW filed tariffs with the FERC in accordance with FERC
Order 888 that do conform to the Texas Commission's rule. See FERC ORDER 888 for
additional information regarding the transmission pricing rules prescribed by
FERC.
By statute the Texas Commission must submit a report to the 1997 Texas
Legislature on "methods or procedures for quantifying the magnitude of stranded
investment, procedures for allocating costs, and the acceptable methods of
recovering stranded costs." The Texas Commission initiated Project No. 15001 to
collect information to prepare the required report. In response to the Texas
Commission's order in this Project, CPL, SWEPCO, and WTU each filed information
on estimates of potential stranded costs. While the filings for CPL included
estimates of significant potential stranded costs, no significant potential
stranded costs were identified in the filings for SWEPCO or WTU. See NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS for a discussion of the potential impact
of potential stranded costs relating to CPL.
The Texas Commission's Project 15002, "Scope of Competition Report," is
a report that the Texas Commission is required to present to the Texas
Legislature in each odd-numbered year detailing the scope of competition in the
electric markets and the impact of competition and industry restructuring on
customers. In addition, the report is required to include the Texas Commission's
recommendations to the Texas Legislature for further legislation. In June 1996,
CPL, SWEPCO and WTU each filed information for the Texas Commission's report.
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In February 1997, a retail competition bill was introduced into the
Texas Legislature. As proposed, the bill would: (i) require utilities to file a
restructuring plan by January 1, 1998; (ii) require a 15 percent rate reduction
for all customers of investor-owned utilities effective September 1, 1997; (iii)
allow public schools and universities to seek alternative electric energy
suppliers by August 1, 1998; (iv) allow residential and other small customers to
seek alternative electric energy suppliers by January 1, 1999; and (v) allow
other retail customers to seek alternative electric energy suppliers by January
1, 2000. The proposed bill would also allow utilities to recover stranded costs,
but would require a utility to reduce uneconomic investments before recovering
any stranded assets. Investor owned utilities would be required to allocate the
burden of stranded cost recovery between shareholders and customers, requiring
such utilities to write-off some portion of their assets. CSW is unable to
predict whether any retail competition legislation will be enacted by the Texas
Legislature , and if enacted, the ultimate form such legislation would take.
EFFECT OF FEDERAL AND STATE RESTRUCTURING INITIATIVES ON CSW
CSW and the U.S. Electric Operating Companies cannot predict the form
or effect of any federal or state electric utility restructuring initiatives at
this time. Federal and/or state electric utility restructuring may cause
impairment of significant recorded assets, material reductions of profit
margins, and/or increased costs of capital (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). No
assurance can be made that such events would not have a material adverse effect
on CSW's or any U.S. Electric Operating Company's results of operations,
financial condition or competitive position.
INDEPENDENT SYSTEM OPERATOR PLAN
In June 1996, CSW, including CPL and WTU, and more than 20 other
parties, including other investor-owned utilities, municipal power companies,
electric cooperatives, independent power producers and power marketers, filed
plans to create an ISO to manage the ERCOT power grid. The filing marks a major
step towards implementing the Texas Commission's overall strategy to create the
competitive wholesale electric market that was mandated by the Texas Legislature
in 1995. The Texas Commission approved the ISO in August 1996. Such approval
made Texas the first state in the nation to implement a regional ISO and a
regional competitive wholesale bulk power market.
INTEGRATED RESOURCE PLAN
On January 31, 1997, CPL, WTU, and SWEPCO filed with the Texas
Commission a joint integrated resource plan outlining the companies' future
electric needs over a 10-year forecast horizon and the manner in which the
companies propose to meet those needs.
The filing indicates additional resources will be needed within the
next 10 years. It is anticipated that the initial needs will be met through a
mix of energy resource options including purchased power, generation, energy
efficiency programs and renewable energy resources. This integrated resource
plan is significant because this is the first time an electric utility has filed
such a plan under the provisions of PURA. In adopting this law, the Texas
Legislature required that some type of public participation be incorporated in
the planning process. Traditionally, these public participation activities would
involve surveys, focus groups or public meetings. CPL, WTU and SWEPCO chose
instead to use a public approach known as Deliberative Polling. Deliberative
Polling is designed for the company's customers to develop a truly informed,
deliberated opinion, as a way of bringing the customer into the electric utility
planning process.
Customers at all three polls overwhelmingly determined that a mix of
energy resource options was preferable as a means to accomplish several
objectives including low cost, reliability, maintenance of the environment and
further development of renewable sources. Because of the strong customer
interest evidenced in the Deliberative Polls, CPL, WTU, and SWEPCO have each
instituted targeted purchase goals for renewable energy resources and energy
efficiency programs, which, along with the wind resources already on the CSW
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U.S. Electric system, would constitute the largest renewable installation in
Texas and would be a significant contribution toward further development and
commercialization of the renewable energy industries. The willingness to pay
more per month for renewable resources varied considerably, with 80% of
customers willing to pay at least $1 more per month to those willing to pay up
to $10 more per month. As a result, the CSW companies are proposing a program of
"green power" choices. CPL, WTU and SWEPCO plan to file a green pricing tariff
in 1997 following additional customer consultation and research which will
provide a means for those customers who are interested in acquiring a greater
portion of their personal consumption from environmentally beneficial generation
to exercise that choice. The CSW companies have proposed a pilot program for the
installation of rooftop photovoltaic solar systems at schools. These
installations would provide a community focus and would contain educational
components to teach about renewable resources.
Action by the Texas Commission on this integrated resource plan filing
is expected by mid-1997.
HOLDING COMPANY ACT
The Holding Company Act generally has been construed to limit the
operations of a registered holding company to a single integrated public utility
system, plus such additional businesses as are functionally related to such
system. Among other things, the Holding Company Act requires CSW and its
subsidiaries to seek prior SEC approval before effecting mergers and
acquisitions or pursuing other types of non-utility initiatives. Such pervasive
regulation may impede or delay CSW's efforts to achieve its strategic and
operating objectives. Consequently, CSW continues to support efforts to repeal
or modify this legislation.
In 1995, the SEC issued a report to the United States Congress
advocating repeal of the Holding Company Act, either on a conditional and
transitional basis or immediate and outright repeal. The basis for the SEC's
recommendation for repeal is that the Holding Company Act is anachronistic and
duplicative of other federal and state regulatory regimes that have developed
over the past sixty years. Following the SEC's report, there were several bills
introduced in both the United States Senate and House of Representatives in 1996
which would have repealed the Holding Company Act on a conditional and
transitional basis and transferred its oversight functions to the FERC and the
states. Another bill was introduced into the United States House of
Representatives that, in addition to repealing the Holding Company Act, would
have repealed PURPA, which among other things, requires investor owned utilities
to purchase power at their avoided cost from qualifying facilities. Although
none of these bills was enacted into law, they may suggest the form of future
legislation.
Published reports name electric utility restructuring as one of the
foremost issues before the United States Congress in 1997. Statements made by
proponents of various proposed bills indicate that many of these bills will
address repeal of the Holding Company Act. In January 1997, a bill was
introduced in the United States Senate providing for comprehensive electric
utility industry restructuring and for retail choice by December 2003, repeal of
the Holding Company Act one year after the bill is enacted, as well as repeal of
the requirement that electric utilities purchase power at their avoided cost
from qualifying facilities under PURPA. Under this bill, many of the oversight
functions performed by the SEC under the Holding Company Act would be shifted to
the FERC and the states. In addition, a bill has been reintroduced in the United
States House of Representatives providing for choice of electricity suppliers at
the retail level by the year 2000. Under this bill, which is substantially
similar to the Senate bill, the application of the Holding Company Act to a
particular holding company system would be eliminated after each state served by
the electric utility companies in that system made a determination that retail
competition existed in that state. There have also been reports of other bills
that are likely to be introduced in 1997, many of which deal with retail choice
issues and/or repeal of the Holding Company Act and/or PURPA. Given this level
of activity, there is some probability that Congress will enact legislation in
1997 that amends or repeals various portions of the Holding Company Act and/or
PURPA. CSW is unable to predict the form or effects of any such potential
legislation at this time.
In February 1997, the SEC adopted Rule 58 allowing a holding company
registered under the Holding Company Act or any of its subsidiaries, to acquire,
without prior SEC approval, the securities of any energy-related company subject
to certain limits. Under the new rule, investment in energy-related company
securities without prior SEC approval is limited to the greater of (i) $50
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million and (ii) 15% of the consolidated capitalization of the registered
holding company as reported on its most recent Form 10-Q or Form 10-K as filed
with the SEC. Rule 58 does not exempt the acquisition by a registered holding
company of the securities of an electric utility company or a gas utility
company, which remains subject to the SEC's prior approval as does the issuance
of securities for the purpose of making such exempt investments.
REGULATORY ACCOUNTING
Consistent with industry practice and the provisions of SFAS No. 71,
which allows for the recognition and recovery of regulatory assets, the U.S.
Electric Operating Companies have recognized significant regulatory assets and
liabilities. Management believes that the U.S. Electric Operating Companies will
continue to meet the criteria for following SFAS No. 71. However, in the event
the U.S. Electric Operating Companies no longer meet the criteria for following
SFAS No. 71, a write-off of regulatory assets and liabilities would be required.
For additional information regarding regulatory accounting, reference is made to
NEW ACCOUNTING STANDARDS and NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
PSO UNION NEGOTIATIONS
Since July 1, 1996, PSO and its Local Union 1002 of the IBEW have been
engaged in contract renewal negotiations. The underlying agreement expired
September 30, 1996 and, to date, the parties have been unable to reach an
agreement. As a result, PSO implemented portions of its final proposal on
December 29, 1996 after declaring an impasse. The principal issue of
disagreement involves PSO's anticipated need for flexibility in a deregulated
environment. At this time, PSO cannot predict the outcome of this matter.
However, PSO is confident that, even in the event of a strike, its operations
would continue without a significant disruption.
CSW STRATEGIC RESPONSES
CSW and the U.S. Electric Operating Companies have from time to time
considered, and expect to consider in the future, various strategies designed to
enhance CSW's competitive position and to increase its ability to anticipate and
adapt to changes in the electric utility industry. These strategies may include
business combinations with other companies, internal restructurings involving
the complete or partial separation of CSW's generation, transmission and
distribution businesses, acquisitions or dispositions of assets or lines of
business, and additions to or reductions of franchised service territories. See
CSW RESTRUCTURING. CSW and the U.S. Electric Operating Companies may from time
to time engage in discussions, either internally or with third parties,
regarding one or more of these potential strategies. Those discussions may be
subject to confidentiality agreements and CSW's policy is generally not to
comment on such activities. No assurances can be given that any potential
transaction of the type described above may actually occur, or, if one does
occur, the ultimate effect thereof on CSW's or any U.S. Electric Operating
Company's results or operations, financial condition or competitive position
(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).
IMPACT OF COMPETITION
CSW is unable to predict the ultimate outcome or impact of competitive
forces on the electric utility industry in the United States, and in the United
Kingdom or on the CSW System. As the electricity markets become more
competitive, however, the principal factor determining success is likely to be
price, and to a lesser extent reliability, availability of capacity, and
customer service (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).
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RATES AND REGULATORY MATTERS
CPL RATE REVIEW DOCKET NO. 14965
On November 6, 1995, CPL filed with the Texas Commission a request to
increase its retail base rates by $71 million and reduce its annual retail fuel
factors by $17 million. The net effect of these proposals would result in an
increase of $54 million, or 4.6%, in total annual retail revenues based on a
test year ended June 30, 1995. CPL's filing also sought to reconcile $229
million of fuel costs incurred during the period July 1, 1994 through June 30,
1995. CPL's previous request to reconcile fuel costs from March 1, 1990 to June
30, 1994 in Docket No. 13650 was consolidated with the current rate review. If
the requested increase and other adjustments in rate structure are approved, CPL
will commit not to increase its base rates prior to January 1, 2001, subject to
certain force majeure events.
On April 30, 1996, CPL implemented new fuel factors that will lower
fuel costs to its retail customers by $25 million annually. The lower fuel
factors result primarily from the projected decline in CPL's fuel costs during
the twelve-month period following the implementation of the new factors. On May
9, 1996, CPL placed a $70 million base rate increase into effect under bond. The
bonded rates are subject to refund based on the final order of the Texas
Commission. When combined with the fuel factor reduction, the net result is an
increase in annual retail revenues of $45 million, or 3.8%.
On May 10, 1996, CPL and other parties to the fuel reconciliation phase
of the current rate review filed the CPL 1996 Fuel Agreement with the Texas
Commission that reconciles CPL's fuel costs through June 1995. A final order
implementing the settlement was issued on June 28, 1996, approving a one-time
fuel refund of $23 million that was refunded to customers in July 1996. As a
condition of the settlement, CPL agreed not to seek recovery of $6 million of
fuel and fuel-related costs incurred during the reconciliation period. The
additional amount of the refund resulted from an over-recovery of fuel costs
during the reconciliation period and did not have a material impact on CPL's
results of operations or financial condition.
In a preliminary order issued December 21, 1995, the Texas Commission
expanded the scope of the rate review to address certain competitive issues
facing the electric utility industry. CPL made a supplemental filing on April 1,
1996, addressing a recommended model for restructuring the electric industry
within ERCOT. In addition, the supplemental filing included: (i) estimates of
CPL's potential stranded costs based upon various possible structures of the
electric industry and under several energy price scenarios; and (ii) a
recommendation that the potential stranded costs not be quantified in rates
until any changes in the electricity market and structure of utilities in Texas
are known. In this supplemental filing, CPL estimated its potential stranded
costs could range from approximately zero to approximately $3.7 billion in a
worst-case scenario. The range is dependent upon a number of presently unknown
factors, including the extent to which CPL is compensated for its reasonable
costs and the extent and timing of any implementation of retail competition.
CPL has filed rebuttal testimony that challenges positions taken by the
Texas Commission staff and other parties intervening in this case. CPL's
testimony challenges the Texas Commission staff's proposals as unreasonable and
contrary to current law and regulatory policy. While the Texas Commission staff
reported the use of a "point estimate" of $850 million for potentially stranded
costs, their testimony actually describes their range of potential stranded
costs as very uncertain and having a range from $200 million to $2 billion. The
Texas Commission staff subsequently revised their "point estimate" to $1.069
billion and their range from $223 million to $2.9 billion. In addition, the
Texas Commission staff recommended (i) a nuclear performance standard that would
penalize CPL unless it operates its nuclear units better than 75 percent of the
U.S. nuclear industry; (ii) a fuel-recovery mechanism that is based on prices in
an undeveloped energy market; and (iii) a one-sided cap on CPL's earnings that
effectively prevents CPL from realizing its authorized level of earnings.
A proposal for decision was issued on January 21, 1997 by the ALJs
hearing the case. The proposal for decision recommends an increase in annual
revenues of $7.2 million, the net result of a recommended base rate reduction of
$5.2 million plus increased revenues collected through two surcharges. The $7.2
2-27
million revenue rate change is made up of the following components: (i) a $10.3
million reduction in KWH-related revenues; (ii) an increase of $5.1 million in
miscellaneous revenues (customer connect charges, insufficient check charges and
other fees); (iii) a $4.3 million annual surcharge applied over three years to
recover rate case expenses; and (iv) annual recovery of $8.1 million for
demand-side management expenditures through a separate surcharge.
A factor contributing significantly to the difference between the $71
million retail base rate increase originally requested by CPL and the ALJs'
proposal is the recommended reduction in CPL's return on equity from 12.25% to
10.9% resulting in a reduction of $31 million in CPL's requested base rate
increase.
The ALJs' decision also recommends no change in the method used by CPL
to recover the capitalized costs associated with CPL's 25.2% ownership interest
in STP. The ALJs have recommended that the Texas Commission reject CPL's request
to change the method of recovering STP deferred accounting costs from a mortgage
amortization methodology to a straight-line amortization methodology. Rejection
of this request would reduce CPL's request for rate relief by $14 million. The
ALJs also recommended that CPL's current depreciation rates be decreased by $8.8
million a year and that the Texas Commission deny CPL's request for a $3.6
million increase for its catastrophe reserve.
The proposal for decision also addressed the competitive issues raised
in the Texas Commission's preliminary order. The ALJs determined that, under
current law, the Texas Commission does not have authority to implement the
nuclear performance standard, fuel-recovery mechanism, or earnings cap proposed
by the Texas Commission staff. However, the ALJs determined that with
legislative authorization, it could be appropriate to implement a nuclear
performance standard and alternative fuel-recovery mechanism for CPL. The ALJs
also determined that under various structures of a future competitive electric
utility industry, CPL could have potentially stranded costs from $30 million to
$1.718 billion. The ALJs stated that CPL's potentially stranded costs will
depend on the structure of the industry in the future and that recovery of these
costs might not be required by law under certain industry structures.
A final order from the Texas Commission is expected in March 1997.
CPL's management cannot predict the ultimate outcome of CPL's rate case. If CPL
ultimately is unsuccessful in obtaining adequate rate relief, CPL and CSW could
experience a material adverse effect on their results of operations and
financial condition.
PSO RATE REVIEW
On July 19, 1996, the Oklahoma Commission staff filed an application
seeking a review of PSO's earnings and rate structure. The review is being
initiated to investigate the potential impact on PSO's rates from both the sale
of Transok and PSO's restructuring efforts as well as PSO's improved financial
results. Although rate reviews do not have specific time limitations, a schedule
has been established for PSO's response. In accordance with the established
schedule, PSO filed a package of financial information with the Oklahoma
Commission staff on November 1, 1996, and cost of service and rate design
testimony on January 10, 1997. A final order from the Oklahoma Commission is
expected in the fall of 1997. PSO's management cannot predict the ultimate
outcome of PSO's rate case, although management believes that the ultimate
resolution will not have a material adverse effect on PSO and CSW's consolidated
results of operations or financial condition. However, if PSO ultimately is
unsuccessful in reaffirming adequate rates, PSO and CSW could experience a
material adverse effect on their consolidated results of operations and
financial condition.
On January 14, 1997, the Oklahoma Commission approved a joint
settlement which provides that all bills rendered beginning with PSO's June 1997
billing cycle shall be considered interim rates subject to refund in the event
that the permanent final order grants less than the current revenue produced by
the existing rates.
OTHER
See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for information
regarding these and other regulatory matters.
2-28
MERGER AND ACQUISITION ACTIVITIES
SEEBOARD ACQUISITION
In November 1995, CSW announced its intention to commence the Tender
Offer in the United Kingdom to acquire all of the outstanding share capital of
SEEBOARD. SEEBOARD is one of the 12 regional electricity companies which came
into existence as a result of the restructuring and subsequent privatization of
the United Kingdom electricity industry in 1990. By April 1996, CSW, through
intermediate subsidiaries, had acquired control of 100% of SEEBOARD for an
aggregate adjusted purchase price of approximately $2.1 billion assuming average
exchange rates during the purchase period. See SEEBOARD ACQUISITION FINANCING
for additional information.
SEEBOARD'S RECENT OPERATING RESULTS
SEEBOARD's principal business is the distribution and supply of
electricity in Southeast England. SEEBOARD has its headquarters in Crawley, West
Sussex. It has a distribution territory that covers approximately 3,000 square
miles which extends from the outlying areas of London to the English Channel.
SEEBOARD serves approximately 2 million customers. Approximately 80% of
SEEBOARD's sales are to residential and commercial customers, while the
remaining 20% are primarily to industrial customers. SEEBOARD is also involved
in other business activities, including electrical contracting and retailing,
gas supply and electricity generation.
For the year ended December 31, 1996, SEEBOARD had electricity sales of
approximately 19.4 billion KWHs and net earnings of $208 million on revenues of
approximately $1.8 billion. For the year ended December 31, 1995 (unaudited),
SEEBOARD had electricity sales of approximately 18 billion KWHs and, excluding
exceptional items, net earnings of $118 million on revenues of approximately
$1.9 billion.
SEEBOARD's 1996 gross profit, (revenue less cost of sales), was higher
than the comparable period last year due primarily to an increase in sales
volume in the distribution business and a 3.3% increase in supply tariffs
charged to customers beginning in February 1996 to recover supply costs. The
increase in 1996 gross profit was offset in part by a 13% decrease in regulatory
allowed distribution revenue, effective April 1, 1996, following the completion
of a regulatory price review of SEEBOARD's distribution business and some loss
of volume to competition in SEEBOARD's supply business.
Other factors contributing to SEEBOARD's increase in 1996 earnings were
continued cost reduction programs, the first year of earnings contribution from
SEEBOARD's 37.5% interest in the 675 MW Medway Power Station, the recognition of
a benefit in 1996 of funds required to settle a liability for redundancy costs
and the absence in 1996 of restructuring costs incurred in 1995. Partially
offsetting the increase in 1996 earnings was the receipt in 1995 of dividends
from SEEBOARD's interest in the National Grid which did not repeat in 1996.
SEEBOARD's results for the calendar years ended December 31, 1996 and
1995 are not indicative of the results that will be experienced by SEEBOARD as a
subsidiary of CSW due, in part, to the debt incurred in connection with the
financing of the acquisition, and the purchase accounting adjustments and the
accounting adjustments made to adjust SEEBOARD's results for U.S. Generally
Accepted Accounting Principles.
SEEBOARD's 1996 earnings have been converted into U.S. dollar amounts
for illustrative purposes only at an exchange rate of (pound)1.00=$1.56, which
was the average rate of exchange for 1996. SEEBOARD's 1995 earnings have been
converted into U.S. dollar amounts for illustrative purposes only at an exchange
rate of (pound)1.00=$1.58, which was the prevailing rate of exchange at the
close of business on November 3, 1995, the business day prior to the
announcement of the CSW's Tender Offer to acquire SEEBOARD.
2-29
See NOTE 15. PRO FORMA INFORMATION for information required by the SEC
related to the pro forma impact on CSW of the SEEBOARD acquisition.
TERMINATION OF EL PASO MERGER
In May 1993, CSW entered into a Merger Agreement pursuant to which El
Paso would have emerged from bankruptcy as a wholly owned subsidiary of CSW. On
June 9, 1995, following CSW's notification that it was terminating the Merger
Agreement, El Paso filed a suit against CSW seeking a $25 million termination
fee from CSW, additional unspecified damages, punitive damages, interest as
permitted by law and certain other costs. On June 15, 1995, CSW filed suit
against El Paso seeking a $25 million termination fee from El Paso due to El
Paso's breach of the Merger Agreement, at least $3.6 million in rate case
expenses incurred by CSW on behalf of El Paso related to state regulatory merger
proceedings and a declaratory judgment that CSW properly terminated the Merger
Agreement. On June 14, 1996, CSW filed an amended complaint seeking a first
priority administrative expense claim of $50 million from El Paso based upon El
Paso's breach of the Merger Agreement.
The United States Bankruptcy Court for the Western District of Texas,
Austin Division, consolidated the El Paso suit and the CSW suit into one
adversary proceeding. CSW is the named plaintiff in the consolidated adversary
proceeding. The trial was completed on January 30, 1997 and a decision is
expected in the case in the first quarter of 1997.
Although CSW believes that it has substantial defenses to El Paso's
claims and intends to defend against El Paso's claims and pursue CSW's claims
vigorously, CSW cannot presently predict the outcome of the lawsuit. However, if
the lawsuit is decided adversely to CSW, it could have a material adverse effect
on CSW's consolidated results of operations and financial condition.
SALE OF TRANSOK
Transok is an intrastate natural gas gathering, transmission, marketing
and processing company. In January 1996, CSW announced it was exploring
strategic alternatives for its investment in Transok, including a possible sale.
On June 6, 1996, CSW sold Transok to Tejas for approximately $890 million,
consisting of $690 million in cash and $200 million in existing long-term debt
that remained with Transok after the sale. A portion of the cash proceeds was
used to repay the CSW Credit Agreement related to the SEEBOARD acquisition with
the remaining proceeds used to repay commercial paper borrowings.
CSW and PSO do not expect the sale of Transok to have an adverse impact
in its ability to secure natural gas in the future. Negotiations are currently
in progress with third party pipelines to provide additional pipeline
interconnections to other natural gas suppliers besides Transok.
SWEPCO CAJUN ASSET PURCHASE PROPOSAL
Cajun filed a petition for reorganization under Chapter 11 of the
United States Bankruptcy Code on December 21, 1994 and is currently operating
under the supervision of the United States Bankruptcy Court for the Middle
District of Louisiana.
On October 26, 1996, SWEPCO, together with Entergy Gulf States and the
Members Committee, which currently represents 8 of the 12 Louisiana member
distribution cooperatives that are served by Cajun, filed the Second Amended
SWEPCO Plan in the bankruptcy court. Under the Second Amended SWEPCO Plan, a
SWEPCO subsidiary or affiliate would acquire all of the non-nuclear assets of
Cajun, comprised of the Big Cajun I gas-fired plant, the Big Cajun II coal-fired
plant, and related non-nuclear assets, for approximately $780 million in cash,
up to an additional $20 million to pay certain other bankruptcy claims and
expenses and an additional $7 million to acquire claims of unsecured creditors.
In addition, the Second Amended SWEPCO Plan provides for SWEPCO and the Cajun
member cooperatives to enter into new 25-year power supply agreements which will
provide the Cajun member cooperatives with two wholesale rate options while
2-30
permitting the Cajun member cooperatives the flexibility to acquire power on the
open market when their requirements exceed mutually agreed upon levels of
generating capacity available from SWEPCO. In addition, the cooperatives could
elect, once every five years, to move from one option to the other. The Second
Amended SWEPCO Plan would settle all claims and litigation in the bankruptcy
case, including potentially protracted litigation over power supply contract
rights.
The Second Amended SWEPCO Plan amends the Original SWEPCO Plan filed on
April 19, 1996 (as amended by the First Amended SWEPCO Plan filed on September
30, 1996) by the Members Committee, SWEPCO and Entergy Gulf States in the
bankruptcy court. Under the Original SWEPCO Plan, SWEPCO had proposed to acquire
all of the non-nuclear assets of Cajun for approximately $405 million in cash.
In addition, under the Original SWEPCO Plan, the Cajun member cooperatives would
have made future payments with a net present value ranging from $497 million to
$567 million to the RUS of the federal government, Cajun's largest creditor, by
using a portion of the cooperatives' future income from their retail customers.
Two competing plans of reorganization for the non-nuclear assets of
Cajun have been filed with the bankruptcy court at about the same time as the
filing of the First Amended SWEPCO Plan, one of which offers a higher cash bid
price. Under one competing plan, Cajun's non-nuclear assets would be acquired by
Louisiana Generating LLC, which would be owned by affiliates of SEI Holding,
Inc., NRG Energy, Inc. and Zeigler Coal Holdings Company. Cajun's court
appointed trustee in bankruptcy is supporting this plan as well as RUS, Cajun's
largest creditor. In addition, Enron Capital & Trade Resources Corp. and the
Official Committee of Unsecured Creditors have jointly filed a competing plan of
reorganization.
Confirmation hearings in Cajun's bankruptcy case have been postponed
until March 10, 1997 because a bankruptcy court ruling on January 7, 1997
disqualified the law firm representing the Members Committee due to an
irreconcilable conflict between the firm's representation of both the Members
Committee and Southwest Louisiana Electric Membership Corporation. The
bankruptcy court postponed the confirmation hearings to allow the Members
Committee time to obtain new counsel. At a February 24, 1997 status conference,
the bankruptcy court extended the resumption of full confirmation hearings until
April 21, 1997.
Consummation of the Second Amended SWEPCO Plan is conditioned upon
confirmation by the bankruptcy court, and the receipt by SWEPCO and CSW of all
requisite state and federal regulatory approvals in addition to the receipt of
their corresponding board approvals. If the Second Amended SWEPCO Plan is
confirmed, CSW and SWEPCO expect initially to finance the $807 million required
to consummate the acquisition of Cajun's non-nuclear assets through a
combination of external borrowings and internally generated funds.
NEW 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 combine with the aforementioned industry
factors to cause CSW to pursue new initiatives. These new initiatives have taken
a variety of forms; however, they are all consistent with the overall plan for
CSW to develop a global energy business. 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
RECENT DEVELOPMENTS AND TRENDS.
2-31
CSW ENERGY
CSW Energy presently owns interests in five operating power projects
totaling 648 MW which are located in Colorado, Florida and Texas. Also, CSW
Energy has one 330 MW power plant under construction in Texas. In addition to
these projects, CSW Energy has another six projects totaling approximately 1,700
MW in various stages of development, mostly in affiliation with other
developers.
CSW INTERNATIONAL
CSW International was organized to pursue investment opportunities in
EWGs and foreign utility companies. CSW International currently holds
investments in the United Kingdom, Mexico and Brazil.
In July 1996, CSW International announced a joint venture with Alpek,
through a subsidiary, to build, own and operate a 109 MW, gas-fired cogeneration
project at Alpek's Petrocel industrial complex in Altamira, Tamaulipas, Mexico.
CSW International and Alpek each will have a 50% ownership in the project,
Enertek, which is expected to commence commercial operation in the first quarter
of 1998.
In December 1996, CSW International acquired a minority interest in a
Brazilian electric utility company which serves approximately 600,000 customers
in an area of approximately 118,000 square miles. CSW International continues to
seek to expand into other countries in Latin America, Europe, Australia and Asia
that meet its investment criteria.
CSW COMMUNICATIONS
CSW Communications was formed to provide communication services to the
U.S. Electric Operating Companies, non-affiliates and directly to retail
customers. CSW Communications will continue to market energy management and
utility management systems to other electric companies. The company will also
seek regulatory approval to provide similar services to CPL, PSO, SWEPCO and
WTU.
In January 1997, CSW and ICG Communications, Inc. announced a joint
venture limited partnership to market telecommunications services. The new
partnership, ChoiceCom, will be based in Austin, Texas and will develop and
market telecommunications services in the four-state region of Texas, Oklahoma,
Louisiana, and Arkansas. ChoiceCom initially plans to serve Austin and Corpus
Christi, Texas with local telephone, long distance and data services.
At the same time, ChoiceCom will seek to develop business opportunities
in other cities in the four-state region. In addition to offering local
exchange, long distance and data transmission services, ChoiceCom may expand CSW
Communications' existing city-to-city fiber network business depending on market
conditions. CSW Communications currently has franchises in Austin and Corpus
Christi, Texas to build fiber networks and provide telecommunications services.
ChoiceCom must obtain regulatory approvals and negotiate business
agreements with existing telecommunications providers before it can begin
offering telecommunications services in competition with established
telecommunications providers. ChoiceCom currently plans to begin offering
telecommunications services as soon as appropriate agreements and approvals have
been obtained.
ENERSHOP
EnerShop currently provides energy services to customers in Texas.
These are services 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 and equipment
procurement and construction, third party financing and equipment leasing,
savings and performance guarantees and performance monitoring. In 1996, EnerShop
secured several contracts and has bids outstanding for several additional
projects in 1997.
2-32
OTHER VENTURES
The CSW Services Business Ventures group pursues energy projects
related to the business activities of the U.S. Electric Operating Companies. One
project, Numanco, provides staffing services for electric utility power plants.
Projects related to energy management systems and electric substation automation
software are also being pursued.
SOUTH TEXAS PROJECT
CPL owns 25.2% of STP, a two-unit nuclear power plant which is located
near Bay City, Texas. HLP (the Project Manager of STP) owns 30.8%, San Antonio
owns 28.0%, and 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. The owners of STP
are in negotiations to form the South Texas Project Nuclear Operating Company
which would replace HLP as the operator and project manager of STP.
From February 1993 until May 1994, STP experienced an unscheduled
outage resulting from mechanical problems. The outage resulted in significant
rate and regulatory proceedings involving CPL, including a base rate case and
fuel reconciliation proceedings as previously discussed. Unit 1 restarted on
February 25, 1994 and reached 100% power on April 8, 1994 and Unit 2 resumed
operation on May 30, 1994 and reached 100% power on June 16, 1994. During the
last six months of 1994, the STP units operated at capacity factors of 98.6% for
Unit 1 and 99.2% for Unit 2. For a discussion of regulatory matters surrounding
the STP outage, see NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS.
STP Unit 1 was removed from service during 1996 for a scheduled
refueling outage which lasted 22 days. For the year 1996, Unit 1 and Unit 2
operated at net capacity factors of 93.1% and 95.2%, 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
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 anticipates 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. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and NOTE 3.
COMMITMENTS AND CONTINGENT LIABILITIES for additional discussion regarding
environmental matters.
2-33
NEW ACCOUNTING STANDARDS
SFAS NO. 121
CSW adopted SFAS No. 121 effective January 1, 1996. The statement
establishes a two-fold test for identification and quantification of an impaired
asset. The adoption of SFAS No. 121 did not have a significant impact on CSW's
consolidated results of operations or financial condition. Under the current
regulatory environment, CSW does not expect SFAS No. 121 to have a significant
impact on its consolidated results of operation or financial condition. However,
future developments in the electric industry and utility regulation could
jeopardize the full recovery of the carrying cost of certain investments.
Consequently, CSW is monitoring the changing conditions facing the electric
utility industry.
SFAS NO. 123
SFAS No. 123 provides that if stock is granted to an employee or a
non-employee in return for services provided to the company, that this stock
represents compensation to the recipient. It requires the calculation of a
compensation cost, but then allows the company to choose between making the
charge to net income or disclosing this information in its notes to its
financial statements. CSW has chosen to disclose the information in the Notes to
the Consolidated Financial Statements rather than making the charge to Net
Income. See NOTE 12. STOCK-BASED COMPENSATION PLANS for CSW's valuation of stock
options for 1996 and 1995. Under prior accounting rules, recognition of
compensation for the grant of stock options was not required if the stock price
at the time of the grant and the price at which the employee could purchase the
stock were the same.
SFAS NO. 125
SFAS No. 125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishment of liabilities using a
financial-components approach that focuses on control. An entity recognizes
assets it controls and derecognizes assets when control has been surrendered and
liabilities when they have been extinguished. A transfer of assets in which
control of the asset is surrendered is recorded as a sale. Control of an asset
is surrendered only when and if certain distinct conditions are met. Likewise, a
liability is only extinguished under certain distinct conditions. SFAS No. 125
is effective for transfers and servicing of financial assets occurring after
December 31, 1996, and cannot be applied prior to that date. Adoption of this
standard will not have a material adverse effect on CSW's consolidated results
of operations or financial condition.
SFAS NO. 128
On March 3, 1997, the FASB issued SFAS No. 128, effective for financial
statements for periods ending after December 15, 1997. SFAS No. 128 will
simplify the computation of earnings per share for many companies by eliminating
calculation provisions which were required by the prior earnings per share
standard, Accounting Principles Board Opinion No. 15. CSW believes that adoption
of SFAS No. 128 will not have a material effect on its calculation of earnings
per share.
2-34
CSW
Consolidated Statements of Income
Central and South West Corporation
- -----------------------------------------------------------------------------
For the Years Ended December 31,
--------------------------------
1996 1995 1994
------- ------ ------
($ in millions, except share amounts)
Operating Revenues
U.S. Electric $3,248 $2,883 $3,065
United Kingdom 1,848 208 --
Other diversified 59 52 40
------- ------ ------
5,155 3,143 3,105
------- ------ ------
Operating Expenses and Taxes
U.S. Electric fuel 1,151 1,004 1,113
U.S. Electric purchased power 77 41 48
United Kingdom cost of sales 1,331 158 --
Other operating 785 557 539
Maintenance 150 155 171
Depreciation and amortization 464 353 324
Taxes, other than income 178 162 176
Income taxes 224 92 179
------- ------ ------
4,360 2,522 2,550
------- ------ ------
Operating Income 795 621 555
------- ------ ------
Other Income and Deductions
Mirror CWIP liability amortization -- 41 68
U.S. Electric reserves for utility plant
development costs, net of tax benefit
of $33 (84) -- --
Other 23 58 41
------- ------ ------
(61) 99 109
------- ------ ------
Income Before Interest Charges 734 720 664
------- ------ ------
Interest Charges
Interest on long-term debt 325 223 203
Interest on short-term debt and other 94 101 74
------- ------ ------
419 324 277
------- ------ ------
Income from Continuing Operations 315 396 387
------- ------ ------
Discontinued Operations
Income from discontinued operations, net
of tax of $6 for 1996, $13 for 1995
and $10 for 1994 12 25 25
Gain on the sale of discontinued
operations, net of tax of $72 120 -- --
------- ------ ------
132 25 25
------- ------ ------
Net Income 447 421 412
Preferred stock dividends 18 19 18
======= ====== ======
Net Income for Common Stock $429 $402 $394
======= ====== ======
Average Common Shares Outstanding 207.5 191.7 189.3
Earnings per Share of Common Stock
from Continuing Operations $1.43 $1.97 $1.95
Earnings per Share of Common Stock
from Discontinued Operations 0.64 0.13 0.13
------- ------ ------
Earnings per Share of Common Stock $2.07 $2.10 $2.08
======= ====== ======
Dividends Paid per Share of Common Stock $1.74 $1.72 $1.70
======= ====== ======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
2-35
CSW
Consolidated Statements of Stockholders' Equity
Central and South West Corporation
- ------------------------------------------------------------------------------
For the Years Ended December 31,
--------------------------------
1996 1995 1994
------ ------ ------
(millions)
Common Stock at Beginning of Year $675 $667 $659
Sale of Common Stock 65 8 8
------ ------ ------
Common Stock at End of Year 740 675 667
------ ------ ------
Paid-in Capital at Beginning of Year 610 561 518
Sale of Common Stock 412 49 43
------ ------ ------
Paid-in Capital at End of Year 1,022 610 561
------ ------ ------
Retained Earnings at Beginning of Year 1,893 1,824 1,753
Net income for common stock 429 402 394
Deduct: Common stock dividends 358 329 322
Deduct: Preferred stock and other
adjustments 1 4 1
------ ------ ------
Retained Earnings at End of Year 1,963 1,893 1,824
------ ------ ------
Foreign Currency Translation and Other at
Beginning of Year -- -- --
Net Change 77 -- --
------ ------ ------
Foreign Currency Translation and Other at
End of Year 77 -- --
------ ------ ------
------ ------ ------
Total Stockholders' Equity $3,802 $3,178 $3,052
====== ====== ======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
2-36
CSW
Consolidated Balance Sheets
Central and South West Corporation
- ---------------------------------------------------------------------------
As of December 31,
-----------------
1996 1995
------- -------
(millions)
ASSETS
Fixed Assets
Electric
Production $5,830 $5,888
Transmission 1,538 1,484
Distribution 4,237 3,799
General 1,318 1,209
Construction work in progress 230 346
Nuclear fuel 184 165
------- -------
Total Electric 13,337 12,891
Gas -- 869
Other diversified 84 18
------- -------
13,421 13,778
Less - Accumulated depreciation
and amortization 4,940 4,761
------- -------
8,481 9,017
------- -------
Current Assets
Cash and temporary cash investments 254 401
National Grid assets held for sale -- 100
Accounts receivable 861 1,035
Materials and supplies, at average cost 185 188
Electric utility fuel inventory,
substantially at average cost 102 129
Under-recovered fuel costs 46 --
Prepayments and other 85 186
------- -------
1,533 2,039
------- -------
Deferred Charges and Other Assets
Deferred plant costs 509 514
Mirror CWIP asset 299 312
Other non-utility investments 347 296
Income tax related regulatory assets, net 236 253
Goodwill 1,525 1,074
Other 402 364
------- -------
3,318 2,813
------- -------
$13,332 $13,869
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
2-37
CSW
Consolidated Balance Sheets
Central and South West Corporation
- ---------------------------------------------------------------------------
As of December 31,
-----------------
1996 1995
------- -------
CAPITALIZATION AND LIABILITIES (millions)
Capitalization
Common stock: $3.50 par value
Authorized shares: 350.0 million shares
Issued and outstanding: 211.5 million shares
in 1996 and 192.9 million shares in 1995 $740 $675
Paid-in capital 1,022 610
Retained earnings 1,963 1,893
Foreign currency translation and other 77 --
------- -------
3,802 3,178
------- -------
Preferred stock
Not subject to mandatory redemption 292 292
Subject to mandatory redemption 33 34
Long-term debt 4,024 3,914
------- -------
Total Capitalization 8,151 7,418
------- -------
Minority Interest -- 202
------- -------
Current Liabilities
Long-term debt and preferred stock due
within twelve months 204 30
Short-term debt 364 692
Short-term debt - CSW Credit, Inc. 579 646
Loan notes 76 --
Accounts payable 630 595
Accrued taxes 324 228
Accrued interest 82 77
Provision for SEEBOARD acceptances -- 1,001
Over-recovered fuel costs -- 43
Other 166 113
------- -------
2,425 3,425
------- -------
Deferred Credits
Accumulated deferred income taxes 2,272 2,306
Investment tax credits 291 306
Other 193 212
------- -------
2,756 2,824
------- -------
$13,332 $13,869
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
2-38
CSW
Consolidated Statements of Cash Flows
Central and South West Corporation
- -----------------------------------------------------------------------------
For the Years Ended December 31,
-------------------------------
1996 1995 1994
------- ------ ------
(millions)
OPERATING ACTIVITIES
Net Income $447 $421 $412
Non-cash Items Included in Net Income
Depreciation and amortization 521 425 402
Deferred income taxes and investment
tax credits 62 (11) 87
Mirror CWIP liability amortization -- (41) (68)
Reserves for utility plant and other
project development costs 147 -- --
Gain on sale of subsidiary (192) -- --
Changes in Assets and Liabilities
Accounts receivable (86) (36) 29
Accounts payable 23 (32) (27)
Accrued taxes (14) 25 21
Fuel recovery (89) 76 16
Accrued restructuring charges -- (2) (57)
Other 56 (26) (51)
------- ------ ------
875 799 764
------- ------ ------
INVESTING ACTIVITIES
Construction expenditures (521) (474) (578)
Acquisitions expenditures (1,394) (421) (21)
CSW Energy/CSW International projects (124) 109 (115)
Sale of National Grid assets 99 -- --
Cash proceeds from sale of subsidiary 690 -- --
Other (36) (26) (2)
------- ------ ------
(1,286) (812) (716)
------- ------ ------
FINANCING ACTIVITIES
Common stock sold 477 57 50
Proceeds from issuance of long-term debt 437 456 199
SEEBOARD acquisition financing 350 731 --
Reacquisition/Maturity of long-term debt (239) (363) (31)
Redemption of preferred stock (1) (1) (33)
Other financing activities 67 -- --
Change in short-term debt (395) (226) 153
Payment of dividends (376) (348) (340)
------- ------ ------
320 306 (2)
------- ------ ------
Effect of exchange rate changes on cash
and cash equivalents (56) -- --
------- ------ ------
Net Change in Cash and Cash Equivalents (147) 293 46
Cash and Cash Equivalents at Beginning of Year 401 108 62
------- ------ ------
Cash and Cash Equivalents at End of Year $254 $401 $108
======= ====== ======
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $356 $301 $280
======= ====== ======
Income taxes paid $196 $77 $93
======= ====== ======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
2-39
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. CSW's four U.S. Electric Operating Companies
are also regulated by the SEC under the Holding Company Act.
The principal business of CSW's four 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 Commission, Louisiana Commission, Oklahoma Commission and Texas
Commission.
The principal business of CSW's United Kingdom electric operating
subsidiary, SEEBOARD, is the distribution and supply of electric power and
energy in Southeast England. SEEBOARD is subject to rate regulation by the DGES.
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; CSW
Communications pursues telecommunications projects; CSW Leasing has investments
in leveraged leases and EnerShop offers energy-management services.
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect 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
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 market
value which existed on the date of acquisition plus the original cost of
construction since the acquisition.
2-40
DEPRECIATION
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
------------------------------------------------------
1996 3.4% 2.9% 3.6% 3.2% 3.2%
1995 3.4% 2.9% 3.6% 3.2% 3.2%
1994 3.2% 3.0% 3.5% 3.2% 3.2%
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 pre-plant state.
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. The accrual for decommissioning costs is an annual level cost based on the
estimated future cost to decommission STP, including escalations for expected
inflation to the expected time of decommissioning, and is net of expected
earnings on the trust fund.
CPL's portion of the costs of decommissioning STP were estimated to be
$85 million in 1986 dollars based on a site specific study completed in 1986.
CPL is recovering these decommissioning costs through rates based on the service
life of STP at a rate of $4.2 million per year. The $4.2 million annual cost of
decommissioning is reflected on the income statement in other operating expense.
Decommissioning costs are paid to an irrevocable external trust and as such are
not reflected on CPL's balance sheet. At December 31, 1996, the trust balance
was $34.7 million.
In August 1995, CPL received a new decommissioning study updating the
cost estimates to decommission STP that indicated that CPL's share of such costs
would increase from $85 million, as stated in 1986 dollars, to $258 million, as
stated in 1995 dollars. The increase in costs occurred primarily as a result of
extended on-site storage of high level waste, much higher estimates of low-level
waste disposal costs and increased labor costs since the prior study. These
costs are expected to be incurred during the years 2027 through 2062. While this
is the best estimate available at this time, these costs may change between now
and when the funds are actually expended because of changes in the assumptions
used to derive the estimates, including the prices of the goods and services
required to accomplish the decommissioning. Additional studies will be completed
periodically to update this information.
Based on this projected cost to decommission STP, CPL estimates that
its annual funding level should increase to $8.2 million. CPL has requested this
amount as part of its cost of service in its current rate filing. Other parties
to the proceeding have filed annual projections ranging from $1.4 million to
$8.2 million. The presiding ALJs in CPL's rate case filed a proposal for
decision with the Texas Commission recommending a decommission annual funding of
$6 million. CPL expects to fund at the level ultimately ordered by the Texas
Commission although CPL cannot predict that level. Historically, the Texas
Commission has allowed full recovery of nuclear decommissioning costs. For
further information on CPL's current rate filing, see NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS.
The FASB is currently reviewing the utility industry's accounting
treatment of nuclear and certain other plant decommissioning costs. The FASB has
preliminarily concluded that decommissioning costs should be accounted for at
the present value as a liability, with a corresponding asset in utility plant,
rather than as a component of depreciation. An exposure draft regarding this
matter was issued in February 1996.
2-41
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 estimated unbilled revenues in
accordance with industry standards.
CPL, SWEPCO and WTU recover retail fuel costs in Texas as a fixed
component of base 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 consumed. PSO recovers fuel costs in
Oklahoma 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.
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 KWHs 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, as a wholly owned subsidiary of CSW, purchases, without
recourse, the billed and unbilled accounts receivable of the U.S. Electric
Operating Companies, certain non-affiliated companies and, prior to its sale in
June 1996, Transok.
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. 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 and the unrecovered asset balances are included in the table
below.
CSW CPL PSO SWEPCO WTU
---------------------------------------------
(millions) (thousands)
-----------------------------------
AS OF DECEMBER 31, 1996
Regulatory Assets
Deferred plant costs $509 $486,978 $-- $-- $22,365
Mirror CWIP asset 299 298,708 -- -- --
Income tax related regulatory
assets, net 236 335,226 -- -- --
Deferred restructuring and rate
case costs 46 30,965 -- -- 14,973
Deferred storm costs 2 -- 2,448 -- --
Demand side management costs 15 7,070 8,278 -- --
OPEBs 3 -- 3,325 -- --
Other 11 4,866 4,650 -- 367
---------------------------------------------
$1,121 $1,163,813 $18,701 $-- $37,705
Regulatory Liabilities
Income tax related regulatory
liabilities, net $-- $-- $46,007 $36,106 $16,918
2-42
CSW CPL PSO SWEPCO WTU
---------------------------------------------
(millions) (thousands)
-----------------------------------
AS OF DECEMBER 31, 1995
Regulatory Assets
Deferred plant costs $514 $488,047 $-- $-- $26,092
Mirror CWIP asset 312 311,804 -- -- --
Income tax related regulatory
assets, net 253 346,993 -- -- --
Deferred restructuring and rate
case costs 46 28,025 -- -- 17,577
Deferred storm costs 4 -- 3,623 -- --
Demand side management costs 14 7,465 6,419 -- --
OPEBs 7 -- 4,008 2,794 --
Other 11 5,384 4,798 -- 431
---------------------------------------------
$1,161 $1,187,718 $18,848 $2,794 $44,100
Regulatory Liabilities
Income tax related regulatory
liabilities, net $-- $-- $41,820 $37,363 $14,464
In accordance with orders of the Texas Commission, CPL and WTU deferred
carrying costs, as well as operating costs, depreciation and tax costs incurred
for STP and Oklaunion, respectively. These deferrals were for the period
beginning on the date when the plants began commercial operation until the date
the plants were included in rate base. CPL is amortizing and recovering these
deferred costs through rates over the life of the plant. WTU is amortizing and
recovering such costs over seven years. In accordance with Texas Commission
orders, CPL previously recorded a Mirror CWIP asset, which is being amortized
over the life of STP. For further information regarding the deferred plant costs
at CPL and WTU, reference is made to NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS.
SEEBOARD ACQUISITION
The acquisition of SEEBOARD was accounted for as a purchase
combination. An allocation of the purchase price has been performed and is
reflected in the consolidated financial statements. This included an allocation
of approximately $1.0 billion to goodwill at December 31, 1995. The goodwill is
being amortized on a straight-line basis over 40 years. The unamortized balance
of the SEEBOARD goodwill at December 31, 1996 was $1.5 billion including
goodwill not recorded at December 31, 1995 prior to completion of the SEEBOARD
purchase in April 1996. CSW evaluates whether circumstances have occurred that
indicate the remaining useful life of goodwill may warrant revision or that the
remaining balance of goodwill may not be recoverable.
NATIONAL GRID ASSETS
Pursuant to a December 11, 1995 distribution by SEEBOARD, CSW (UK), as
a shareholder of SEEBOARD, received approximately 32.5 million shares of
National Grid common stock. On February 2, 1996, all of the shares of National
Grid that CSW (UK) plc held were sold for approximately $99 million.
FOREIGN CURRENCY TRANSLATION
The financial statements of the CSW Investments Group, 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 balance sheet
accounts are translated at the exchange rate at the end of the period and all
income statement items are translated at the average exchange rate for the
applicable period. At December 31, 1996 the current exchange rate was
approximately (pound)1.00=$1.71, and the average exchange rate for the twelve
month period ended December 31, 1996 was approximately (pound)1.00=$1.56. All
resulting translation adjustments are recorded directly to Foreign currency
translation and other on CSW's consolidated balance sheets. Cash flow statement
items are translated at a combination of 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.
2-43
STATEMENTS OF CASH FLOWS
Cash equivalents are considered to be highly liquid debt instruments
purchased with a maturity of three months or less. Accordingly, temporary cash
investments are considered cash equivalents.
RECLASSIFICATION
Certain financial statement items for prior years have been
reclassified to conform to the 1996 presentation. See NOTE 14. TRANSOK
DISCONTINUED OPERATIONS for information related to the classification of Transok
activities.
2. LITIGATION AND REGULATORY PROCEEDINGS
TERMINATION OF EL PASO MERGER
In May 1993, CSW entered into a Merger Agreement pursuant to which El
Paso would have emerged from bankruptcy as a wholly owned subsidiary of CSW. On
June 9, 1995, following CSW's notification that it was terminating the Merger
Agreement, El Paso filed a suit against CSW seeking a $25 million termination
fee from CSW, additional unspecified damages, punitive damages, interest as
permitted by law and certain other costs. On June 15, 1995, CSW filed suit
against El Paso seeking a $25 million termination fee from El Paso due to El
Paso's breach of the Merger Agreement, at least $3.6 million in rate case
expenses incurred by CSW on behalf of El Paso related to state regulatory merger
proceedings and a declaratory judgment that CSW properly terminated the Merger
Agreement. On June 14, 1996, CSW filed an amended complaint seeking a first
priority administrative expense claim of $50 million from El Paso based upon El
Paso's breach of the Merger Agreement.
The United States Bankruptcy Court for the Western District of Texas,
Austin Division, consolidated the El Paso suit and the CSW suit into one
adversary proceeding. CSW is the named plaintiff in the consolidated adversary
proceeding. A two week non-jury trial of the case was completed on January 30,
1997, and a decision is expected in the case in the first quarter of 1997.
Although CSW believes that it has substantial defenses to El Paso's
claims and intends to defend against El Paso's claims and pursue CSW's claims
vigorously, CSW cannot presently predict the outcome of the lawsuit. However, if
the lawsuit is decided adversely to CSW, it could have a material adverse effect
on CSW's consolidated results of operations and financial condition.
CPL RATE REVIEW
On November 6, 1995, CPL filed with the Texas Commission a request to
increase its retail base rates by $71 million and reduce its annual retail fuel
factors by $17 million. The net effect of these proposals would result in an
increase of $54 million, or 4.6%, in total annual retail revenues based on a
test year ended June 30, 1995. CPL's filing also sought to reconcile $229
million of fuel costs incurred during the period July 1, 1994 through June 30,
1995. CPL's previous request to reconcile fuel costs from March 1, 1990 to June
30, 1994 in Docket No. 13650 was consolidated with the current rate review. If
the requested increase and other adjustments in rate structure are approved, CPL
will commit not to increase its base rates prior to January 1, 2001, subject to
certain force majeure events.
On April 30, 1996, CPL implemented new fuel factors that will lower
fuel costs to its retail customers by $25 million annually. The lower fuel
factors result primarily from the projected decline in CPL's fuel costs during
the twelve-month period following the implementation of the new factors. On May
9, 1996, CPL placed a $70 million base rate increase into effect under bond. The
bonded rates are subject to refund based on the final order of the Texas
Commission. When combined with the fuel factor reduction, the net result is an
increase in annual retail revenues of $45 million, or 3.8%.
2-44
On May 10, 1996, CPL and other parties to the fuel reconciliation phase
of the current rate review filed the CPL 1996 Fuel Agreement with the Texas
Commission that reconciles CPL's fuel costs through June 1995. A final order
implementing the settlement was issued on June 28, 1996, approving a one-time
fuel refund of $23 million that was refunded to customers in July 1996. As a
condition of the settlement, CPL agreed not to seek recovery of $6 million of
fuel and fuel-related costs incurred during the reconciliation period. The
additional amount of the refund resulted from an over-recovery of fuel costs
during the reconciliation period and did not have a material impact on CPL's
results of operations or financial condition.
In a preliminary order issued December 21, 1995, the Texas Commission
expanded the scope of the rate review to address certain competitive issues
facing the electric utility industry. CPL made a supplemental filing on April 1,
1996, addressing a recommended model for restructuring the electric industry
within ERCOT. In addition, the supplemental filing included: (i) estimates of
CPL's potential stranded costs based upon various possible structures of the
electric industry and under several energy price scenarios; and (ii) a
recommendation that the potential stranded costs not be quantified in rates
until any changes in the electricity market and structure of utilities in Texas
are known. In this supplemental filing, CPL estimated its potential stranded
costs could range from approximately zero to approximately $3.7 billion in a
worst-case scenario. The range is dependent upon a number of presently unknown
factors, including the extent to which CPL is compensated for its reasonable
costs and the extent and timing of any implementation of retail competition.
CPL has filed rebuttal testimony that challenges positions taken by the
Texas Commission staff and other parties intervening in this case. CPL's
testimony challenges the Texas Commission staff's proposals as unreasonable and
contrary to current law and regulatory policy. While the Texas Commission staff
reported the use of a "point estimate" of $850 million for potentially stranded
costs, their testimony actually describes their range of potential stranded
costs as very uncertain and having a range from $200 million to $2 billion. The
Texas Commission staff subsequently revised its "point estimate" to $1.069
billion and its range from $223 million to $2.9 billion. In addition, the Texas
Commission staff recommended: (i) a nuclear performance standard that would
penalize CPL unless it operates its nuclear units better than 75 percent of the
U.S. nuclear industry; (ii) a fuel-recovery mechanism that is based on prices in
an undeveloped energy market; and (iii) a one-sided cap on CPL's earnings that
effectively prevents CPL from realizing its authorized level of earnings.
A proposal for decision was issued on January 21, 1997 by the ALJs
hearing the case. The proposal for decision recommends an increase in annual
revenues of $7.2 million, the net result of a recommended base rate reduction of
$5.2 million plus increased revenues collected through two surcharges. The $7.2
million revenue rate change is made up of the following components: (i) a $10.3
million reduction in KWH-related revenues; (ii) an increase of $5.1 million in
miscellaneous revenues (customer connect charges, insufficient check charges and
other fees); (iii) a $4.3 million annual surcharge applied over three years to
recover rate case expenses; and (iv) annual recovery of $8.1 million for
demand-side management expenditures through a separate surcharge.
A factor contributing significantly to the difference between the $71
million retail base rate increase originally requested by CPL and the ALJs'
proposal is the recommended reduction in CPL's return on equity from 12.25% to
10.9% resulting in a reduction of $31 million in CPL's requested base rate
increase.
The ALJs' decision also recommends no change in the method used by CPL
to recover the capitalized costs associated with CPL's 25.2% ownership interest
in STP. The ALJs have recommended that the Texas Commission reject CPL's request
to change the method of recovering STP deferred accounting costs from a mortgage
amortization methodology to a straight-line amortization methodology. Rejection
of this request would reduce CPL's request for rate relief by $14 million. The
ALJs also recommended that CPL's current depreciation rates be decreased by $8.8
million a year and that the Texas Commission deny CPL's request for a $3.6
million increase for its catastrophe reserve.
The proposal for decision also addressed the competitive issues raised
in the Texas Commission's preliminary order. The ALJs determined that, under
2-45
current law, the Texas Commission does not have authority to implement the
nuclear performance standard, fuel-recovery mechanism, or earnings cap proposed
by the Texas Commission staff. However, the ALJs determined that with
legislative authorization, it could be appropriate to implement a nuclear
performance standard and alternative fuel-recovery mechanism for CPL. The ALJs
also determined that under various structures of a future competitive electric
utility industry, CPL could have potentially stranded costs from $30 million to
$1.718 billion. The ALJs stated that CPL's potentially stranded costs will
depend on the structure of the industry in the future and that recovery of these
costs might not be required by law under certain industry structures.
A final order from the Texas Commission is expected in March 1997.
CPL's management cannot predict the ultimate outcome of CPL's rate case. If CPL
ultimately is unsuccessful in obtaining adequate rate relief, CPL and CSW could
experience a material adverse effect on their results of operations and
financial condition.
CPL 1995 AGREEMENT
On April 5, 1995, CPL reached an agreement in principle with other
parties to pending regulatory proceedings involving base rate, fuel and prudence
issues relating to an outage experienced at STP during 1993 and 1994. On May 16,
1995, CPL filed the CPL 1995 Agreement with the Texas Commission. Pursuant to
the CPL 1995 Agreement, base rate refunds, fuel refunds and the reduction of
CPL's fuel factors were implemented during the summer of 1995. Under the CPL
1995 Agreement, CPL provided customers a one-time base rate refund of $50
million. In addition, CPL refunded approximately $30 million in over-recovered
fuel costs through April 1995. Furthermore, CPL did not charge customers for
$62.25 million in replacement power costs and related interest primarily
associated with the 1993-1994 STP outage. The CPL 1995 Agreement did not result
in any ongoing change in base rate levels and provided that there would be no
new rate review requests filed prior to September 28, 1995. CPL also reduced its
fuel factors, effective in July 1995, by approximately $55 million on an annual
basis due to projections of lower fuel costs. Hearings on the CPL 1995 Agreement
were held on July 19, 1995, and the final written Texas Commission order
approving the CPL 1995 Agreement was received on October 4, 1995. Details of the
items in the CPL 1995 Agreement and the total 1995 earnings impact for CPL,
including certain accounting provisions, are set forth in the following table.
Pre-tax After-tax
------------------------
(millions)
Base rate refund $(50.0) $(32.5)
Fuel disallowance (62.3) (40.5)
Wholesale fuel refund (3.2) (2.1)
Current flowback of excess deferred
federal income taxes 34.3 34.3
Capitalization of previously expensed
restructuring and rate case costs 27.6 17.9
Recognition of factoring income 16.1 10.5
Amortization, interest and other (6.6) (4.4)
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 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 Court
of Appeals to consider certain substantial evidence points of error not
previously decided by the Court of Appeals. On August 16, 1995, the Court of
Appeals rendered its opinion in the remand proceeding and affirmed the Texas
Commission's order in all respects.
2-46
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's 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,
CPL 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
and CPL could experience a material adverse effect on their respective results
of operations and financial condition. While CPL's 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 or CPL's results of operation or financial
condition.
CPL FUEL SURCHARGE
On January 3, 1997, CPL filed with the Texas Commission an Application
for Authority to Implement an increase in fuel factors of $34.4 million, or
15.4% on an annual basis. Additionally, CPL proposed to implement a surcharge of
$24.3 million, including accumulated interest, over a 12 month period. CPL
requested to implement the revised fuel factors by February 28, 1997, and to
commence the surcharge by April 30, 1997. On January 24, 1997, CPL filed revised
schedules reflecting a revised surcharge of $23.4 million, including accumulated
interest. On February 10, 1997, CPL filed a Stipulation with the Texas
Commission which would surcharge customers $23.4 million, including interest
over a period not to exceed twelve months and coordinate the surcharge with any
refund obligation in Docket No. 14965. Additionally, the proposed fuel factors
would be implemented in March 1997 resulting in an increase in fuel revenue of
approximately $29.4 million , or 13.2% on an annual basis. An order granting
interim approval of the stipulated fuel factors was issued February 20, 1997,
allowing a March 1997 implementation of the fuel factors.
CPL CIVIL PENALTIES
In October 1995, the NRC notified HLP of a Notice of Violation and
proposed penalties totaling $160,000 related to events that occurred at STP in
May 1992. The Notice of Violation and penalties reflect the NRC's belief that
certain STP employees were terminated as a result of raising safety concerns
with the NRC. HLP paid the penalties in 1996.
In September 1996, the NRC notified HLP of a Notice of Violation and
proposed penalties totaling $200,000 related to events that occurred at STP in
1991 and 1994. The Notice of Violation and penalties reflect the NRC's belief
that certain contractor employees working at STP were discriminated against by
their employers as a result of raising safety concerns with the NRC. HLP paid
the penalties in 1996.
CPL's share of these penalty payments is 25.2% reflecting its ownership
interest in STP.
CPL NUCLEAR INSURANCE CLAIMS
In 1994, CPL filed a claim under its NEIL I policy relating to the
1993-1994 outage at STP Units 1 and 2. NEIL formally denied CPL's claim on
November 21, 1995. On April 9, 1996, CPL filed an action in state district court
in Corpus Christi, Texas, against NEIL and Johnson & Higgins of Texas, Inc., the
former insurance broker for STP, seeking recovery under the policy and other
relief. NEIL responded by filing a suit against CPL on April 16, 1996, in the
United States District Court for the Southern District of New York seeking a
2-47
declaratory judgment to enforce an arbitration provision contained in the
policy. On May 24, 1996, the New York court ordered the dispute, including the
issue of whether the arbitration provision is enforceable, to arbitration and
stayed the Texas proceeding. NEIL also canceled CPL's current NEIL I policy
effective July 31, 1996. NEIL also filed a claim in arbitration seeking a
determination that NEIL properly terminated CPL's coverage and that CPL has
caused NEIL damages by opposing NEIL's attempt to compel arbitration and seeking
recovery of NEIL's attorneys' fees. On June 21, 1996, CPL filed a notice of
appeal of the New York court's order in the United States Court of Appeals for
the Second Circuit. Subsequently, CPL and NEIL agreed to dismiss all litigation
between them concerning CPL's claim for NEIL coverage. CPL and NEIL also agreed
to submit their disputes over coverage to a non-binding, neutral evaluation
process, although both CPL and NEIL have reserved the right to take their
dispute to binding arbitration. CPL and NEIL also agreed that CPL's NEIL I
policy would be reinstated. Evidentiary hearings were held by the neutral
evaluator in February 1997. A final oral argument is scheduled to be held before
the neutral evaluator on April 4, 1997. CPL intends to assert its rights to
recovery under the NEIL I policy vigorously, but cannot predict the ultimate
outcome of this matter. CPL's management believes that the resolution of this
matter will not have a material adverse effect on CSW's or CPL's results of
operations or financial condition.
CPL INDUSTRIAL ROAD AND INDUSTRIAL METALS SITE
Three suits naming CPL and others as defendants relating to a
third-party owned and operated site in Corpus Christi, Texas formerly used for
commercial reclamation of used electrical transformers, lead acid batteries and
other scrap metals, are currently pending in federal and state court in Corpus
Christi, Texas. Plaintiffs' complaints seek damages for alleged property damage
and health impairment as a result of operations on the site and cleanup
activities. Management cannot predict the outcome of these suits. However,
management believes that CPL has defenses to the plaintiffs' complaints and
intends to defend the suits vigorously. Management also believes that the
ultimate resolution of these matters will not have a material adverse effect on
CSW's or CPL's results of operations or financial condition.
PSO RATE REVIEW
On July 19, 1996, the Oklahoma Commission staff filed an application
seeking a review of PSO's earnings and rate structure. The review is being
initiated to investigate the potential impact on PSO's rates from both the sale
of Transok and PSO's restructuring efforts as well as PSO's improved financial
results. Although rate reviews do not have specific time limitations, a schedule
has been established for PSO's response. In accordance with the established
schedule, PSO filed a package of financial information with the Oklahoma
Commission staff on November 1, 1996, and cost of service and rate design
testimony on January 10, 1997. A final order from the Oklahoma Commission is
expected in the fall of 1997. PSO's management cannot predict the ultimate
outcome of PSO's rate case, although management believes that the ultimate
resolution will not have a material adverse effect on PSO's or CSW's
consolidated results of operations or financial condition. However, if PSO
ultimately is unsuccessful in reaffirming adequate rates, PSO and CSW could
experience a material adverse effect on their consolidated results of operations
and financial condition.
On January 14, 1997, the Oklahoma Commission approved a joint
settlement which provides that all bills rendered beginning with PSO's June 1997
billing cycle shall be considered interim rates subject to refund in the event
that the permanent final order grants less than the current revenue produced by
the existing rates.
PSO GAS TRANSPORTATION AND FUEL MANAGEMENT FEES
An order issued by the Oklahoma Commission in 1991 required that the
level of gas transportation and fuel management fees, paid to Transok by PSO,
permitted for recovery through the fuel adjustment clause be reviewed in PSO's
1993 rate proceeding. This portion of the 1993 rate review was subsequently
bifurcated. In March 1995, an order was issued by the Oklahoma Commission
approving an agreement which allows PSO to recover approximately $28.4 million
of transportation and fuel management fees in base rates using 1991 determinants
and approximately $1 million through the fuel adjustment clause. The agreement
also requires the phase-in of competitive bidding of natural gas transportation
requirements in excess of 165 Mmcf/d beginning in 1998.
2-48
PSO GAS PURCHASE CONTRACTS
PSO has been named defendant in complaints filed in federal and state
courts of Oklahoma and Texas in 1984 through 1996 by gas suppliers alleging
claims arising out of certain gas purchase contracts. The plaintiffs seek relief
through the filing dates as well as attorneys' fees. To date, complaints
representing approximately $11 million in claims were settled. Remaining
complaints currently total approximately $100,000 in claimed actual damages. The
settlements did not have a material effect on PSO's consolidated results of
operations or financial condition.
PSO BURLINGTON NORTHERN TRANSPORTATION CONTRACT
In June 1992, PSO filed suit in the United States District Court for
the Northern District of Oklahoma against Burlington Northern seeking
declaratory relief under a long-term contract for the transportation of coal. In
July 1992, Burlington Northern asserted counterclaims for unspecified damages
against PSO alleging that PSO breached the contract. In December 1993, PSO
amended its suit against Burlington Northern seeking damages and declaratory
relief under federal and state antitrust laws. In December 1995, PSO and
Burlington Northern reached a compromise settlement of all outstanding claims
and counterclaims, and the action was dismissed with prejudice. The settlement
did not have a material adverse effect on PSO's consolidated results of
operations or financial condition.
PSO BURLINGTON NORTHERN ARBITRATION
In May 1994, in an arbitration related to the Burlington Northern coal
transportation contract described above, an arbitration panel made an award in
favor of PSO concerning basic transportation rates under the coal transportation
contract and concerning the contract mechanism for adjustment for future
transportation rates. This arbitration award was then the subject of litigation
in the United States District Courts for the Northern Districts of Oklahoma and
Texas and the United States Court of Appeals for the Tenth Circuit. In December
1994, the United States District Court for the Northern District of Oklahoma
entered judgment for PSO confirming the arbitration award and granting PSO a
$16.4 million money judgment. In December 1995, this litigation was settled as
part of the compromise settlement of the related transportation contract
litigation described above. Under the settlement, that portion of the district
court's judgment granting PSO a $16.4 million money judgment was released and
satisfied of record, and that portion of the judgment confirming the arbitration
award as to basic transportation rates for the balance of the contract term and
the mechanism for adjustment of future transportation rates became final and is
in full force and effect.
PSO PCB CASES
PSO has been named a defendant in petitions filed in state court in
Oklahoma in February and August, 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. Each of the plaintiffs seeks actual and
punitive damages in excess of $10,000. As previously reported, other claims
arising from this incident have been settled and the suits dismissed. Management
believes that PSO has defenses to the remaining complaints and intends to defend
the suits vigorously. Moreover, management believes that the remaining claims
are covered by insurance. Management also believes that the ultimate resolution
of the remaining lawsuits will not have a material adverse effect on CSW's or
PSO's consolidated results of operations or financial condition.
PSO ASH CREEK COAL MINE RECLAMATION
In August 1994, PSO received approval from the Wyoming Department of
Environmental Quality to begin reclamation of a coal mine in Sheridan, Wyoming,
owned by Ash Creek, a wholly owned subsidiary of PSO. Ash Creek recorded a $3
million liability in 1993 for the estimated reclamation costs and subsequently
accrued an additional $500,000 in 1995. Actual reclamation work was completed in
August, 1996, at a total cost of $3.6 million. Surveillance monitoring will
continue for ten years after final reclamation. Management believes that
ultimate resolution of this matter will not have a material adverse effect on
CSW's or PSO's consolidated results of operations or financial condition.
2-49
PSO SAND SPRINGS/GRANDFIELD, OKLAHOMA SITES
In 1989, PSO investigated a Sand Springs, Oklahoma PCB storage facility
and found potential PCB contamination. A clean-up plan of the facility was
approved by the EPA and clean-up of the facility began in November 1994. In
October 1996, EPA filed a complaint against PSO alleging PSO failed to comply
with provisions of the Toxic Substances Control Act. The complaint has three
counts, two of which pertain to the Sand Springs facility and the third dealing
with a substation in Grandfield, Oklahoma. The EPA alleges improper disposal of
PCBs at the Sand Springs site due to the length of time between discovery of the
contamination and the actual clean-up at the site. The complaint at the
Grandfield site alleges failure to date PCB articles at the site. The total
proposed penalty for the three counts is $479,500 which has been accrued by PSO.
PSO has filed a response to the complaint and is currently awaiting an answer
from the EPA. Management cannot predict the outcome of this matter. However,
management believes that PSO has defenses to the EPA's claims and intends to
defend the matter vigorously. Management also believes that the ultimate
resolution of this matter will not have a material adverse effect on CSW's or
PSO's consolidated results of operations or financial condition.
SWEPCO FUEL FACTOR PROCEEDING
On October 31, 1996, SWEPCO filed with the Texas Commission an
Application for Authority to Implement an Interim Surcharge of Fuel Cost
Under-Recoveries. SWEPCO proposed to surcharge its customers approximately $10.2
million which included additional interest through the end of the surcharge
period.
On December 20, 1996, SWEPCO filed a motion for authorization to
withdraw its above referenced application and to carry over the under-recovered
balance to the fuel reconciliation proceeding SWEPCO is required to initiate by
June 30, 1997. On December 30, 1996, the Texas Commission issued an order
approving SWEPCO's motion for withdrawal. On December 31, 1996, SWEPCO had a
Texas jurisdictional under-recovered fuel balance of approximately $10.5
million, including accumulated interest.
SWEPCO BURLINGTON NORTHERN TRANSPORTATION CONTRACT
On January 20, 1995, a state district court in Bowie County, Texas,
entered judgment in favor of SWEPCO against Burlington Northern in a lawsuit
regarding rates charged under two rail transportation contracts for delivery of
coal to SWEPCO's Welsh and Flint Creek power plants. The court awarded SWEPCO
approximately $72 million covering damages for the period from April 27, 1989
through September 26, 1994, post-judgment interest and attorneys' fees and
granted certain declaratory relief requested by SWEPCO. Burlington Northern
appealed the state district court's judgment to the Texarkana, Texas Court of
Appeals, and on April 30, 1996, that court reversed the judgment of the state
district court. On October 14, 1996, SWEPCO filed an application with the
Supreme Court to grant a writ of error to review and reverse the judgment of the
Texarkana, Texas Court of Appeals. This application is now pending.
WTU FUEL SURCHARGE
On February 24, 1997, WTU filed with the Texas Commission an
Application for Authority to Implement an increase in fuel factors of $4.2
million, or 4.2% on an annual basis. Additionally, WTU proposed to implement a
surcharge of $13.3 million, including accumulated interest, over a twelve month
period. WTU requested to implement the revised fuel factors in conjunction with
the May 1997 billings, and to commence the surcharge in conjunction with the
June 1997 billings. An order in this proceeding is anticipated in early May
1997.
WTU 1995 STIPULATION AND AGREEMENT
WTU has been the subject of several pending regulatory matters,
including the following: (i) a retail rate proceeding and fuel reconciliation
before the Texas Commission in Docket No. 13369; (ii) Writ of Error to the
Supreme Court - review of WTU's 1987 Texas rate case in Docket No. 7510; and
2-50
(iii) the Texas Commission's proceeding on remand in Docket No. 13949 regarding
deferred accounting treatment for Oklaunion Power Station Unit No. 1 originally
authorized in the Texas Commission's Docket No. 7289.
On September 22, 1995, WTU, along with other major parties to the above
described matters, filed with the Texas Commission a joint stipulation and
agreement to resolve all of these matters. The WTU 1995 Stipulation and
Agreement is a unified package that included: (i) a retail base rate reduction
of approximately $13.5 million annually starting with WTU's October 1995 revenue
month billing cycle; (ii) a $21 million retail refund which was not attributed
to any specific cause but was inclusive of all claims related to the three above
described litigation and regulatory matters and included the effect of the rate
reduction to October 1, 1994; (iii) a reduction of fixed fuel factors by
approximately 2%; (iv) various rate and accounting treatments including a
reasonable return on equity for retail operations of 11.375%; and (v) a retail
base rate freeze until October 1, 1998, subject to certain force majeure
provisions.
On November 9, 1995, the Texas Commission rendered a final order that
implemented the joint stipulation and agreement, ending the rate proceeding and
fuel reconciliation in Docket No. 13369 and the remand, designated Docket No.
13949, to the Texas Commission by the Supreme Court for the deferred accounting
treatment of Oklaunion Power Station Unit No. 1 originally authorized by the
Texas Commission in Docket No. 7289. The final order also set into motion the
actions required to seek a remand of the appeal of Docket No. 7510 to the Texas
Commission to implement a final order consistent with the WTU 1995 Stipulation
and Agreement. On December 8, 1995, all parties to the appeals filed a joint
motion with the Supreme Court and, on December 22, 1995, the Supreme Court
approved the joint motion to withdraw and dismissed the case. The Court of
Appeals issued a mandate on April 15, 1996, directed to the Travis County
District Court, that permitted the case to be remanded back to the Texas
Commission. On May 23, 1996, the Texas Commission assigned it a new proceeding
for docketing purposes, Docket No. 15988. A prehearing on Docket No. 15988 was
held on June 24, 1996 where parties to Docket No. 15988 discussed with the ALJ a
joint motion filed with the ALJ by the parties on June 21, 1996 that proposed to
adopt a finding to implement the last outstanding element related to the WTU
1995 Stipulation and Agreement in Docket No. 13369, WTU's settled rate case. On
October 4, 1996, the ALJ issued a proposed order that is fully consistent with
the terms of the WTU 1995 Stipulation and Agreement. The Texas Commission
entered a final order in Docket No. 15988 approving this agreement on October
28, 1996.
The WTU 1995 Stipulation and Agreement is expected to impact WTU's
results of operations for the next several years. Details of the items with
significant earnings impact for 1995, including certain accounting treatments,
are set forth in the following table.
Pre-tax After-tax
------- ---------
(millions)
Refund to retail customers $(21.0) $(13.7)
Effect of retail rate reduction (2.4) (1.6)
Current flowback of property related excess
deferred federal income taxes 6.9 6.9
Five year flowback of non-property related
excess deferred federal income taxes 0.1 0.1
Capitalization and amortization of previously
expensed restructuring costs 12.7 8.2
Other amortization (0.2) (0.1)
Other one-time items 1.0 0.7
The WTU 1995 Stipulation and Agreement also eliminated several
significant risks that have been the subject of regulatory proceedings relating
to deferred accounting and rates and will enable WTU's rates to remain at
competitive levels for the foreseeable future.
2-51
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.
3. COMMITMENTS AND CONTINGENT LIABILITIES
CONSTRUCTION AND CAPITAL EXPENDITURES
It is estimated that CSW, including the U.S. Electric Operating
Companies, SEEBOARD and other diversified operations, will spend approximately
$539 million in capital expenditures (but excluding capital that may be required
for acquisitions) during 1997. Substantial commitments have been made in
connection with these programs.
CPL-$120 million PSO-$84 million SWEPCO-$118 million WTU-$33 million
FUEL 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, 1996, the
maximum amount SWEPCO would have to assume was $63.9 million. The maximum amount
may vary as the mining contractor's need for funds fluctuates. The contractor's
actual obligation outstanding at December 31, 1996 was $57.7 million.
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,
SWEPCO has agreed to provide bond guarantees on mine reclamation in the amount
of $70 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. The current 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 1996. 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 $8.72 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
$75.5 million per reactor, which may be adjusted for inflation, plus a five
percent charge for legal expenses, but not more than $10 million per reactor for
each nuclear incident in any one year. CPL and each of the other STP owners are
2-52
subject to such assessments, which CPL and other owners have agreed will be
allocated on the basis of their respective ownership interests in STP.
For purposes of these assessments, STP has two licensed reactors.
The owners of STP currently maintain on-site decontamination liability
and property damage insurance in the amount of $2.75 billion provided by ANI and
NEIL. Policies of insurance issued by ANI and 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 purchased, 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 21 consecutive weeks. In the event of an outage of STP Units 1 and
2 and the outage is the result of the same accident, such insurance will
reimburse CPL up to 80% of the single unit recovery. The maximum amount
recoverable for a single unit outage is $118.6 million for both Unit 1 and 2.
CPL is subject to an additional assessment up to $1.9 million for the current
policy year in the event that insured losses at a nuclear facility covered under
the NEIL I policy exceeds the accumulated funds available under the policy. CPL
renewed its current NEIL I Business Interruption and/or Extra Expense policy
September 15, 1996.
For further information relating to litigation associated with CPL
nuclear insurance claims, reference is made to NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS.
SWEPCO CAJUN ASSET PURCHASE PROPOSAL
Cajun filed a petition for reorganization under Chapter 11 of the
United States Bankruptcy Code on December 21, 1994 and is currently operating
under the supervision of the United States Bankruptcy Court for the Middle
District of Louisiana.
On October 26, 1996, SWEPCO, together with Entergy Gulf States and the
Members Committee, which currently represents 8 of the 12 Louisiana member
distribution cooperatives that are served by Cajun, filed the Second Amended
SWEPCO Plan in the bankruptcy court. Under the Second Amended SWEPCO Plan, a
SWEPCO subsidiary or affiliate would acquire all of the non-nuclear assets of
Cajun, comprised of the Big Cajun I gas-fired plant, the Big Cajun II coal-fired
plant, and related non-nuclear assets, for approximately $780 million in cash,
up to an additional $20 million to pay certain other bankruptcy claims and
expenses and an additional $7 million to acquire claims of unsecured creditors.
In addition, the Second Amended SWEPCO Plan provides for SWEPCO and the Cajun
member cooperatives to enter into new 25-year power supply agreements which will
provide the Cajun member cooperatives with two wholesale rate options while
permitting the Cajun member cooperatives the flexibility to acquire power on the
open market when their requirements exceed mutually agreed upon levels of
generating capacity available from SWEPCO. In addition, the cooperatives could
elect, once every five years, to move from one option to the other. The Second
Amended SWEPCO Plan would settle all claims and litigation in the bankruptcy
case, including potentially protracted litigation over power supply contract
rights.
The Second Amended SWEPCO Plan amends the Original SWEPCO Plan filed on
April 19, 1996 (as amended by the First Amended SWEPCO Plan filed on September
30, 1996) by the Members Committee, SWEPCO and Entergy Gulf States in the
bankruptcy court. Under the Original SWEPCO Plan, SWEPCO had proposed to acquire
all of the non-nuclear assets of Cajun for approximately $405 million in cash.
In addition, under the Original SWEPCO Plan, the Cajun member cooperatives would
have made future payments with a net present value ranging from $497 million to
$567 million to the RUS of the federal government, Cajun's largest creditor, by
using a portion of the cooperatives' future income from their retail customers.
2-53
Two competing plans of reorganization for the non-nuclear assets of
Cajun have been filed with the bankruptcy court at about the same time as the
filing of the First Amended SWEPCO Plan, one of which offers a higher cash bid
price. Under one competing plan, Cajun's non-nuclear assets would be acquired by
Louisiana Generating LLC, which would be owned by affiliates of SEI Holding,
Inc., NRG Energy, Inc. and Zeigler Coal Holdings Company. Cajun's court
appointed trustee in bankruptcy is supporting this plan as well as RUS, Cajun's
largest creditor. In addition, Enron Capital & Trade Resources Corp. and the
Official Committee of Unsecured Creditors have jointly filed a competing plan of
reorganization.
Confirmation hearings in Cajun's bankruptcy case have been postponed
until March 10, 1997 because a bankruptcy court ruling on January 7, 1997
disqualified the law firm representing the Members Committee due to an
irreconcilable conflict between the firm's representation of both the Members
Committee and Southwest Louisiana Electric Membership Corporation. The
bankruptcy court postponed the confirmation hearings to allow the Members
Committee time to obtain new counsel. At a February 24, 1997 status conference,
the bankruptcy court extended the resumption of full confirmation hearings until
April 21, 1997.
Consummation of the Second Amended SWEPCO Plan is conditioned upon
confirmation by the bankruptcy court, and the receipt by SWEPCO and CSW of all
requisite state and federal regulatory approvals in addition to the receipt of
their corresponding board approvals. If the Second Amended SWEPCO Plan is
confirmed, CSW and SWEPCO expect initially to finance the $807 million required
to consummate the acquisition of Cajun's non-nuclear assets through a
combination of external borrowings and internally generated funds.
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, 1996, leased assets
of $46 million, less accumulated amortization of $36.9 million, were included in
utility plant on the balance sheet and at December 31, 1995, leased assets were
$46 million, less accumulated amortization of $33.7 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, 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 on
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, whose ensuing
comments requested that a future residential exposure scenario be evaluated for
comparison with commercial and industrial exposure scenarios. However,
Mississippi Power and SWEPCO do not feel that cleanup to a residential scenario
is appropriate since this site has been industrial/commercial for more that 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 cleanup to
residential standards is not necessary.
The MDEQ has not agreed to a non-residential future land use scenario
as of this date and has requested further testing. Following the additional
testing and resolution of whether cleanup is necessary to meet a residential
usage scenario or if cleanup to a commercial/industrial scenario is appropriate,
a feasibility study will be conducted to more definitively evaluate remedial
strategies for the property. This will require public input prior to a final
decision being made.
A final range of cleanup costs has not been determined, but based on
preliminary estimates, SWEPCO has incurred to date approximately $200,000 for
its portion of the cleanup of this site and anticipates that an additional $2
million may be required. Accordingly, SWEPCO has accrued $2 million for the
cleanup.
2-54
CSW ENERGY LOANS AND COMMITMENTS
The following table summarizes loans made by CSW Energy and commitments
provided by CSW at December 31, 1996.
Letters of
Credit and
PROJECT Guarantees Loans
-----------------------------------------------------------
(millions)
Ft. Lupton $56.4 $--
Mulberry 15.7 --
Orange Cogen 1.7 --
Phillips Sweeny (1) 234.7 51.8
Various developmental projects 7.6 5.5
(1) CSW Energy has agreed to provide construction financing
for the project which began in September 1996. The
project costs (development, construction and financing
costs) are estimated at $190 million.
CSW INTERNATIONAL ENERTEK PROJECT
In July 1996, CSW International announced a joint venture with Alpek,
through a subsidiary, to build, own and operate a 109 MW, gas-fired cogeneration
project at Alpek's Petrocel industrial complex in Altamira, Tamaulipas, Mexico.
CSW International and Alpek each will have 50% ownership in the project,
Enertek, which will cost approximately $75 million. CSW International has agreed
to provide construction financing for the project of which $24 million had been
funded at December 31, 1996. CSW International has entered into a limited
guarantee agreement with the project's engineering, procurement and construction
contractor that provides the contractor a guarantee of up to $5 million. The
Enertek project is expected to commence commercial operations in the first
quarter of 1998.
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.
2-55
INCOME TAX EXPENSE CSW CPL PSO SWEPCO WTU
----------------------------------------------
(millions) (thousands)
------------------------------------
1996
INCLUDED IN OPERATING EXPENSES AND TAXES
Current (1) $118 $46,588 $26,152 $33,904 $6,953
Deferred (1) 120 57,416 14,190 10,696 9,706
Deferred ITC (2) (14) (5,553) (2,784) (4,730) (1,321)
-------------------------------------------
224 98,451 37,558 39,870 15,338
INCLUDED IN OTHER INCOME AND DEDUCTIONS
Current (1) 639 (895) (973) (406)
Deferred (39) (5,940) (15,518) (7,847) (3,988)
-------------------------------------------
(40) (5,301) (16,413) (8,820) (4,394)
INCOME TAXES FOR DISCONTINUED OPERATIONS
(includes $72 resulting from the gain
on the sale) 78 -- -- -- --
-------------------------------------------
$262 $93,150 $21,145 $31,050 $10,944
-------------------------------------------
1995
INCLUDED IN OPERATING EXPENSES AND TAXES
Current (1) $105 $51,626 $37,687 $41,852 $4,892
Deferred 1 (30,025) 2,704 6,287 1,971
Deferred ITC (2) (14) (5,789) (2,789) (4,786) (1,321)
-------------------------------------------
92 15,812 37,602 43,353 5,542
INCLUDED IN OTHER INCOME AND DEDUCTIONS
Current 2 129 (197) (721) 1,564
Deferred (4) -- -- -- --
-------------------------------------------
(2) 129 (197) (721) 1,564
INCOME TAXES FOR DISCONTINUED OPERATIONS 13 -- -- -- --
-------------------------------------------
$103 $15,941 $37,405 $42,632 $7,106
-------------------------------------------
1994
INCLUDED IN OPERATING EXPENSES AND
TAXES
Current $103 $54,486 $32,083 $24,333 $10,898
Deferred 90 26,659 7,844 22,248 8,377
Deferred ITC (2) (14) (5,789) (2,789) (4,278) (1,321)
-------------------------------------------
179 75,356 37,138 42,303 17,954
INCLUDED IN OTHER INCOME AND DEDUCTIONS
Current (13) (3,157) (4,129) (3,710) (2,998)
Deferred (5) -- (65) -- --
-------------------------------------------
(18) (3,157) (4,194) (3,710) (2,998)
INCOME TAXES FOR DISCONTINUED OPERATIONS 10 -- -- -- --
-------------------------------------------
$171 $72,199 $32,944 $38,593 $14,956
-------------------------------------------
(1) Approximately $49 million and $7 million of CSW's Current Income Tax
Expense was attributable to CSW Investments Group's operations and was
recognized as United Kingdom corporation tax expense for 1996 and
1995, respectively. In addition, approximately $19 million of CSW's
1996 Deferred Income Tax Expense was the result of CSW's foreign
investment in SEEBOARD.
(2) ITC deferred in prior years are included in income over the lives of
the related properties.
2-56
INCOME TAX RATE
RECONCILIATION CSW CPL PSO SWEPCO WTU
---------------------------------------------------------------------
($ in millions) ($ in thousands)
----------------------------------------------------------
1996
Income before taxes attributable to:
Domestic operations $562
Foreign operations 146
------
Income before taxes $708 $240,201 $52,622 $97,605 $27,515
Tax at U.S. statutory rate $248 35% $84,070 35% $18,418 35% $34,162 35% $9,630 35%
Differences
Amortization of ITC (14) (2) (5,553) (2) (2,784) (5) (4,730) (5) (1,321) (5)
Mirror CWIP 5 1 4,584 2 -- -- -- -- -- --
Non-deductible goodwill
amortization 13 2 -- -- -- -- -- -- -- --
Tax credit on foreign
operations dividend (18) (3) -- -- -- -- -- -- -- --
Prior period adjustments 10 1 5,127 2 201 -- 1,544 2 1,467 5
Other 18 3 4,922 2 5,310 10 74 -- 1,168 5
---------------------------------------------------------------------
$262 37% $93,150 39% $21,145 40% $31,050 32% $10,944 40%
---------------------------------------------------------------------
1995
Income before taxes attributable to:
Domestic operations $506
Foreign operations 13
------
Income before taxes $519 $222,388 $119,233 $159,675 $41,636
Tax at U.S. statutory rate $182 35% $77,836 35% $41,732 35% $55,886 35% $14,573 35%
Differences
Amortization of ITC (14) (3) (5,789) (3) (2,789) (2) (4,786) (3) (1,321) (3)
Mirror CWIP (11) (2) (10,843) (5) -- -- -- -- -- --
CPL 1995 Agreement (34) (7) (34,289)(15) -- -- -- -- -- --
WTU 1995 Stipulation and
Agreement (7) (1) -- -- -- -- -- -- (6,859)(16)
Prior period adjustments (22) (4) (13,462) (6) (2,949) (2) (2,783) (2) 953 2
Other 9 2 2,488 1 1,411 -- (5,685) (3) (240) (1)
---------------------------------------------------------------------
$103 20% $15,941 7% $37,405 31% $42,632 27% $7,106 17%
---------------------------------------------------------------------
1994
Income before taxes $583 $277,640 $101,263 $144,237 $52,323
Tax at U.S. statutory rate $204 35% $97,174 35% $35,442 35% $50,483 35% $18,313 35%
Differences
Amortization of ITC (14) (2) (5,789) (2) (2,789) (3) (4,277) (3) (1,321) (3)
Mirror CWIP (20) (4) (20,293) (7) -- -- -- -- -- --
Prior period adjustments (2) -- (1,955) (1) (1,272) (1) (2,588) (2) -- --
Other 3 -- 3,062 1 1,563 2 (5,025) (3) (2,036) (3)
---------------------------------------------------------------------
$171 29% $72,199 26% $32,944 33% $38,593 27% $14,956 29%
---------------------------------------------------------------------
57
DEFERRED INCOME TAXES (1) CSW CPL PSO SWEPCO WTU
--------------------------------------------------
(millions) (thousands)
----------------------------------------
1996
Deferred Income Tax Liabilities
Depreciable utility plant $1,867 $791,693 $275,938 $389,575 $135,215
Deferred plant costs 178 170,442 -- -- 7,237
Mirror CWIP asset 105 104,548 -- -- --
Income tax related regulatory assets 207 156,531 10,976 30,486 9,743
Other 307 72,326 35,626 38,875 26,055
--------------------------------------------------
2,664 1,295,540 322,540 458,936 178,250
Deferred Income Tax Assets
Income tax related regulatory liability (126) (39,202) (28,771) (42,533) (15,664)
Unamortized ITC (105) (51,517) (16,802) (26,394) (10,234)
Alternative minimum tax carryforward (83) (16,129) -- -- --
Other (99) (19,331) (28,518) (13,295) (9,285)
--------------------------------------------------
(413) (126,179) (74,091) (82,222) (35,183)
--------------------------------------------------
Net Accumulated Deferred Income Taxes $2,251 $1,169,361 $248,449 $376,714 $143,067
--------------------------------------------------
Net Accumulated Deferred Income Taxes
Noncurrent $2,272 $1,162,051 $251,007 $372,552 $144,146
Current (21) 7,310 (2,558) 4,162 (1,079)
--------------------------------------------------
$2,251 $1,169,361 $248,449 $376,714 $143,067
--------------------------------------------------
1995
Deferred Income Tax Liabilities
Depreciable utility plant $1,863 $769,888 $277,317 $388,394 $130,490
Deferred plant costs 180 170,816 -- -- 9,132
Mirror CWIP asset 109 109,132 -- -- --
Income tax related regulatory assets 220 163,014 14,481 32,462 10,557
Other 290 69,671 24,923 23,441 25,606
--------------------------------------------------
2,662 1,282,521 316,721 444,297 175,785
Deferred Income Tax Assets
Income tax related regulatory
liability (133) (41,567) (30,657) (44,914) (15,619)
Unamortized ITC (98) (53,460) (17,878) (15,868) (10,696)
Alternative minimum tax carryforward (96) (21,456) -- -- --
Other (129) (36,386) (14,222) (10,906) (9,668)
--------------------------------------------------
(456) (152,869) (62,757) (71,688) (35,983)
--------------------------------------------------
Net Accumulated Deferred Income Taxes $2,206 $1,129,652 $253,964 $372,609 $139,802
--------------------------------------------------
Net Accumulated Deferred Income Taxes
Noncurrent $2,306 $1,151,823 $264,353 $377,245 $145,130
Current (100) (22,171) (10,389) (4,636) (5,328)
--------------------------------------------------
$2,206 $1,129,652 $253,964 $372,609 $139,802
--------------------------------------------------
(1) In 1996, CSW generated $33 million of excess foreign tax credits
against which a full valuation allowance was established as of
December 31, 1996. Otherwise, as a result of a favorable earnings
history, CSW did not have any valuation allowances recorded against
any deferred tax assets at December 31, 1996 and 1995 other than
excess foreign tax credits.
5. BENEFIT PLANS
PENSION PLANS
CSW maintains a tax qualified, non-contributory defined benefit pension
plan covering substantially all CSW employees in the United States. Benefits are
based on employees' years of credited service, age at retirement, and final
average annual earnings with an offset for the participant's primary Social
Security benefit. The funding policy is based on actuarially determined
contributions, taking into account amounts which are deductible for income tax
purposes and minimum contributions required by ERISA. Pension plan assets
consist primarily of common stocks and short-term and intermediate-term fixed
income investments.
2-58
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.
Information about the two separate pension plans (the U.S. plan and the
Non-U.S. plan), including: (i) pension plan net periodic costs and
contributions; (ii) pension plan participation; (iii) a reconciliation of the
funded status of the pension plan to the amounts recognized on the balance
sheets; and (iv) assumptions used in accounting for the pension plan follow.
NET PERIODIC NON-
PENSION PLAN COSTS CSW U.S. U.S.
AND CONTRIBUTIONS PLANS PLAN PLAN CPL PSO SWEPCO WTU
-----------------------------------------------------------
(millions) (thousands)
-----------------------------------
1996
Net Periodic Pension Costs
Service cost $37 $23 $14 $5,367 $4,238 $4,891 $3,005
Interest cost on projected
benefit obligation 136 69 67 16,233 12,817 14,793 9,089
Actual return on plan assets (184) (110) (74) (26,033) (20,554) (23,723) (14,576)
Net amortization and deferral 27 27 -- 6,509 5,139 5,932 3,645
-----------------------------------------------------------
$16 $9 $7 $2,076 $1,640 $1,893 $1,163
-----------------------------------------------------------
Pension Plan Contributions $35 $28 $7 $6,622 $5,228 $6,034 $3,708
CSW CPL PSO SWEPCO WTU
-------------------------------------------
U.S. PLAN ONLY (millions) (thousands)
----------------------------------
1995
Net Periodic Pension Costs
Service cost $20 $4,699 $3,614 $4,220 $2,609
Interest cost on projected
benefit obligation 64 14,860 11,428 13,345 8,251
Actual return on plan assets (117) (27,137) (20,869) (24,370) (15,068)
Net amortization and deferral 44 10,136 7,795 9,102 5,628
-------------------------------------------
$11 $2,558 $1,968 $2,297 $1,420
-------------------------------------------
Pension Plan Contributions $29 $6,754 $5,195 $6,066 $3,751
U.S. PLAN ONLY
1994
Net Periodic Pension Costs
Service cost $22 $5,796 $5,181 $4,843 $3,082
Interest cost on projected
benefit obligation 62 15,989 14,292 13,361 8,501
Actual return on plan assets (4) (1,131) (1,011) (945) (601)
Net amortization and deferral (70) (17,972) (16,064) (15,018) (9,556)
-------------------------------------------
$10 $2,682 $2,398 $2,241 $1,426
-------------------------------------------
Pension Plan Contributions $28 $7,099 $6,345 $5,932 $3,744
2-59
APPROXIMATE NON-
NUMBER CSW U.S. U.S.
OF PARTICIPANTS IN PLANS PLAN PLAN. CPL PSO SWEPCO WTU
PLANS DURING 1996 -----------------------------------------------------
Active employees 10,900 7,900 3,000 1,900 1,500 1,700 1,100
Retirees 10,100 4,200 5,900 1,400 1,200 900 600
Terminated employees 6,200 1,400 4,800 400 400 200 200
RECONCILIATION OF FUNDED 1996 1995
STATUS OF PLAN TO 1996 1996 NON- U.S.
AMOUNTS RECOGNIZED ON CSW U.S. U.S. PLAN
THE CSW CONSOLIDATED PLANS PLAN PLAN ONLY
BALANCE SHEETS ---------------------------------
(millions)
Actuarial present value of
Accumulated benefit obligation
for service rendered to date $1,748 $781 $967 $745
Additional benefit for future
salary levels 200 141 59 140
---------------------- ------
Projected benefit obligation 1,948 922 1,026 885
Plan assets, at fair value 2,077 991 1,086 897
---------------------- ------
Plan assets in excess of the projected
benefit obligation 129 69 60 12
Unrecognized net loss 30 27 3 64
Unrecognized prior service cost (12) (7) (5) (8)
Unrecognized net obligation 16 12 4 14
---------------------- ------
Prepaid pension cost $163 $101 $62 $82
---------------------- ------
The vested portion of the accumulated benefit obligations for the
combined plans was $1,678 million at December 31, 1996 and $678 million for the
U.S. plan at December 31, 1995. The unrecognized net obligation for the U.S.
plan is being amortized over the average remaining service life of employees or
16 years. Prepaid pension cost is included in Deferred Charges and Other Assets
on the balance sheets. No reconciliation of the funding status of the plan for
CPL, PSO, SWEPCO or WTU is presented because the plan is administered for the
CSW System as a whole and such information is unavailable for the U.S. Electric
Operating Companies individually.
In addition to the amounts shown in the above table, CSW has a
non-qualified excess benefit 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. CSW's net periodic cost for this non-qualified plan
for the years ended December 31, 1996, 1995 and 1994 was $4.8 million, $2.4
million and $1.8 million, respectively.
ASSUMPTIONS USED IN Long-Term
ACCOUNTING FOR Discount Compensation Return on Plan
THE PENSION PLAN Rate Increase Assets
----------------------------------------
1996 U.S. Plan 8.00% 5.46% 9.50%
Non-U.S. Plan 7.75% 5.75% 8.25%
1995 U.S. Plan 8.00% 5.46% 9.50%
1994 U.S. Plan 8.25% 5.46% 9.50%
2-60
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (U.S. COMPANIES ONLY)
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 sixteen 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.
Information about the non-pension postretirement benefit plan,
including: (i) net periodic postretirement benefit costs; (ii) a reconciliation
of the funded status of the postretirement benefit plan to the amounts
recognized on the balance sheets; and (iii) assumptions used in accounting for
the postretirement benefit plan follow.
NET PERIODIC
POSTRETIREMENT CSW CPL PSO SWEPCO WTU
BENEFIT COSTS ----------------------------------------------------
(millions) (thousands)
------------------------------------------
1996
Service cost $8 $2,077 $1,705 $1,810 $1,111
Interest cost on APBO 19 5,887 5,018 4,321 2,602
Actual return on plan assets (7) (1,695) (2,236) (2,168) (766)
Amortization of transition obligation 9 2,900 2,528 1,967 1,225
Net amortization and deferral (2) (560) (250) (100) (261)
---------------------------------------------------
$27 $8,609 $6,765 $5,830 $3,911
---------------------------------------------------
1995
Service cost $8 $2,123 $1,986 $1,803 $1,113
Interest cost on APBO 18 5,929 5,175 4,299 2,561
Actual return on plan assets (8) (1,948) (2,597) (2,466) (870)
Amortization of transition obligation 9 2,900 2,528 1,967 1,225
Net amortization and deferral 2 238 631 679 96
---------------------------------------------------
$29 $9,242 $7,723 $6,282 $4,125
---------------------------------------------------
1994
Service cost $9 $2,435 $2,350 $1,965 $1,233
Interest cost on APBO 19 6,061 5,317 4,266 2,559
Actual return on plan assets (1) (285) (495) (464) (113)
Amortization of transition obligation 9 2,900 2,528 1,967 1,225
Net amortization and deferral (4) (913) (917) (765) (418)
---------------------------------------------------
$32 $10,198 $8,783 $6,969 $4,486
---------------------------------------------------
RECONCILIATION OF FUNDED
STATUS OF PLAN TO
AMOUNTS RECOGNIZED ON
THE BALANCE SHEETS CSW CPL PSO SWEPCO WTU
-------------------------------------------
(millions) (thousands)
---------------------------------
1996
APBO
Retirees $163 $54,158 $45,736 $36,013 $22,880
Other fully eligible participants 18 4,281 3,789 5,302 2,398
Other active participants 55 14,871 12,534 12,694 7,857
----------------------------------------
Total 236 73,310 62,059 54,009 33,135
Plan assets at fair value 123 34,566 33,748 30,028 15,806
----------------------------------------
APBO in excess of plan assets 113 38,744 28,311 23,981 17,329
Unrecognized transition obligation (144) (46,408) (40,456) (31,469) (19,597)
Unrecognized gain 32 8,723 11,569 7,527 2,662
----------------------------------------
Accrued/(Prepaid) Cost $1 $1,059 $(576) $39 $394
----------------------------------------
2-61
RECONCILIATION OF FUNDED
STATUS OF PLAN TO
AMOUNTS RECOGNIZED ON
THE BALANCE SHEETS CSW CPL PSO SWEPCO WTU
-------------------------------------------
(millions) (thousands)
---------------------------------
1995
APBO
Retirees $175 $58,337 $49,130 $38,762 $23,880
Other fully eligible participants 13 3,026 2,974 3,622 1,837
Other active participants 57 14,676 12,697 13,205 7,829
----------------------------------------
Total 245 76,039 64,801 55,589 33,546
Plan assets at fair value 100 27,997 27,904 24,424 12,708
----------------------------------------
APBO in excess of plan assets 145 48,042 36,897 31,165 20,838
Unrecognized transition obligation (153) (49,308) (42,984) (33,436) (20,822)
Unrecognized gain 8 2,325 5,511 2,310 378
----------------------------------------
Accrued/(Prepaid) Cost $-- $1,059 $(576) $39 $394
----------------------------------------
ASSUMPTIONS USED IN THE
ACCOUNTING FOR SFAS NO. Discount Return on Plan Tax Rate of
106 Rate Assets Taxable Trusts
-----------------------------------------------
1996 8.00% 9.50% 39.6%
1995 8.00% 9.50% 39.6%
1994 8.25% 9.50% 39.6%
Health care cost trend rates
1996 Average Rate of 9.0% grading down .75% per year to an
ultimate average rate of 5.25% in 2001.
1995 Average Rate of 10.25% grading down .75% per year to an
ultimate average rate of 5.75% in 2001.
Increasing the assumed health care cost trend rates by one percentage
point in each year would increase the APBO and the aggregate of the service and
interest costs components on net postretirement benefits by the amounts
presented in the following table.
CSW CPL PSO SWEPCO WTU
--------------------------------------
(millions)
APBO $24.4 $7.5 $6.1 $5.7 $3.4
Service and interest costs 3.4 1.0 0.8 0.8 0.5
HEALTH AND WELFARE PLANS
CSW provides medical, dental, group life insurance, dependent life
insurance, and accidental death and dismemberment insurance plans for
substantially all active CSW System employees in the United States. The total
contributions, recorded on a pay-as-you-go basis, for the years ended December
31, 1996, 1995 and 1994 are listed in the following table.
CSW CPL PSO SWEPCO WTU
--------------------------------------------
(millions)
1996 $28.4 $7.0 $5.5 $6.5 $4.0
1995 27.0 6.6 5.3 6.2 3.6
1994 17.0 4.6 3.6 4.1 2.7
Employer provided health care benefits are not common in the United
Kingdom due to the country's national health care system. Accordingly, SEEBOARD
does not provide health care benefits to the majority of its employees.
2-62
6. JOINTLY OWNED ELECTRIC UTILITY PLANT
The U.S. Electric Operating Companies are parties to various joint
ownership agreements with other non-affiliated entities. Such agreements provide
for the joint ownership and operation of generating stations and related
facilities, whereby each participant bears its share of the project costs. At
December 31, 1996, the U.S. Electric Operating Companies had undivided interests
in five such generating stations and related facilities as shown in the
following table.
CPL SWEPCO SWEPCO SWEPCO CSW(1)
STP FLINT CREEK PIRKEY DOLET HILLS OKLAUNION
NUCLEAR PLANT COAL PLANT LIGNITE PLANT LIGNITE PLANT COAL PLANT
-----------------------------------------------------------------
($ in millions)
Plant in service $2,333 $79 $435 $227 $397
Accumulated depreciation $503 $44 $162 $77 $113
Plant capacity-MW 2,501 480 650 650 676
Participation 25.2% 50.0% 85.9% 40.2% 78.1%
Share of capacity-MW 630 240 559 262 528
(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 $36 million, $80 million and $281 million, respectively,
at December 31, 1996. Accumulated depreciation was $10 million, $30
million and $73 million for CPL, PSO and WTU, respectively, at
December 31, 1996.
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 CSW's or any
of the U.S. Electric Operating Companies' liabilities unless the issues are
redeemed prior to their maturity dates.
CASH, TEMPORARY CASH INVESTMENTS, SPECIAL DEPOSITS, ACCOUNTS RECEIVABLE
AND SHORT-TERM DEBT
The fair value equals the carrying amount as stated on the balance
sheets because of the short maturity of those instruments.
LONG-TERM DEBT
The fair value of CSW's 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.
PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
The fair value of SWEPCO's preferred stock subject to mandatory
redemption is estimated based on quoted market prices for the same or similar
issues or on the current rates offered to CSW for preferred stock with the same
or similar remaining redemption provision.
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.
2-63
CARRYING VALUE AND
ESTIMATED FAIR CSW CPL PSO SWEPCO WTU
VALUE --------------------------------------------------
(millions) (thousands)
----------------------------------------
LONG-TERM DEBT
1996 carrying amount $4,024 $1,323,054 $420,301 $597,151 $275,070
fair value 4,065 1,346,306 420,863 605,853 275,355
1995 carrying amount 3,914 1,517,347 379,250 598,951 273,245
fair value 4,090 1,583,959 396,386 627,034 286,648
PREFERRED STOCK SUBJECT TO
MANDATORY REDEMPTION
1996 carrying amount 33 -- -- 32,464 --
fair value 34 -- -- 33,579 --
1995 carrying amount 34 -- -- 33,628 --
fair value 35 -- -- 34,648 --
LONG-TERM DEBT AND
PREFERRED STOCK DUE WITHIN
12 MONTHS
1996 carrying amount 204 200,000 -- 3,760 --
fair value 204 200,000 -- 3,760 --
1995 carrying amount 30 231 25,000 5,099 --
fair value 30 231 25,000 5,136 --
8. LONG-TERM DEBT
CSW'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 1996 1995
- ---------------------------------------------------------------
(millions)
Secured bonds
1997 2025 5.25% 7.75% $2,108 $2,308
Unsecured bonds
2001 2030 4.135% (1) 8.875% 1,384 754
Notes and Lease
Obligations
1997 2003 5.503% 9.75% 724 321
CSW Credit Agreement floating -- 731
Unamortized discount (12) (13)
Unamortized cost of
reacquired debt (180) (187)
------------------
$4,024 $3,914
------------------
(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 plant. The U.S. Electric
Operating Companies may offer additional FMBs, MTNs and other securities subject
to market conditions and other factors.
CPL
CPL's $40.9 million Series 1995, Guadalupe, PCRBs were issued with a
variable rate computed daily. The average interest rate for 1996 was 4.1%.
2-64
SWEPCO
SWEPCO's $50.0 million bank loan bears interest at a variable rate. The
weighted average interest rate for 1996 was 5.5%.
CSW's year end weighted average cost of long-term debt was 7.2% for
1996 and 1995, and 7.7% for 1994. 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 first mortgage bonds 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 bonds
also have sinking fund requirements. At December 31, 1996, 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.
Sinking Fund
Requirements CSW CPL PSO SWEPCO WTU
----------------------------------------------------------
(millions) (thousands)
---------------------------------
1997 $1 $640 $550 $145 $--
1998 1 360 550 145 --
1999 1 360 300 595 --
2000 1 360 300 595 --
2001 1 -- 300 595 --
Annual
Maturities CSW CPL PSO SWEPCO WTU
-------------------------------------------------------------
(millions) (thousands)
-------------------------------------
1997 $204 $200,640 $550 $2,560 $--
1998 31 28,360 550 2,374 --
1999 195 125,360 25,300 43,962 --
2000 258 100,360 20,300 97,826 40,000
2001 517 36,000 20,300 595 --
DIVIDENDS
The U.S. Electric Operating Companies' mortgage indentures, as amended
and supplemented, contain certain restrictions on the use of their retained
earnings for cash dividends on their common stock. These restrictions do not
limit the ability of CSW to pay dividends to its shareholders. At December 31,
1996, approximately $1.5 billion of the subsidiary companies' retained earnings
were available for payment of cash dividends by such subsidiaries to CSW. Of
this, the amounts attributable to the U.S. Electric Operating Companies were as
follows:
CPL-$770 million PSO-$146 million SWEPCO-$322 million WTU-$123 million
REACQUIRED LONG-TERM DEBT
During 1996, 1995 and 1994, the U.S. Electric Operating Companies
reacquired $205 million, $355 million and $27 million of long-term debt,
respectively, including reacquisition premiums, prior to maturity. The premiums
and related reacquisition costs and discounts are included in long-term debt on
the balance sheets and are being amortized over periods consistent with their
expected ratemaking treatment. The remaining amortization periods for such items
range from 1 to 31 years.
2-65
Reference is made to MD&A for further information related to long-term
debt, including new issues and reacquisitions of long-term debt during 1996 as
well as information related to the financing of the SEEBOARD acquisition.
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
Redemption
Dividend Rate December 31, Price
From - To 1996 1995 From - To
--------------------------------------------------
(millions)
Not subject to mandatory redemption
1,352,900 shares 4.00% - 8.72% $135 $135 $100.00 - $109.00
1,600,000 shares auction 160 160 100.00
Issuance expenses/premiums (3) (3)
---- ----
$292 $292
---- ----
Subject to mandatory redemption
340,000 shares 6.95% $34 $35
To be redeemed within one
year (1) (1)
---- ----
$33 $34
---- ----
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. Since 1994, when CPL, SWEPCO and WTU collectively
redeemed $33 million of preferred stock including redemption premiums and
sinking fund requirements, the only preferred stock redemptions have been for
SWEPCO's $1.2 million annual sinking fund requirement.
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 4.1%, 4.5% and 3.5% during 1996, 1995 and 1994, respectively.
SWEPCO
The minimum annual sinking fund requirement for SWEPCO's preferred
stock subject to mandatory redemption is $1.2 million for the years 1997 through
2001. This sinking fund retires 12,000 shares annually.
For additional information about the U.S. Electric Operating Companies'
preferred stock, see their STATEMENTS OF CAPITALIZATION in the FINANCIAL
STATEMENTS.
10. SHORT-TERM FINANCING
The CSW System uses short-term debt 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 through the
issuance of its commercial paper. As of December 31, 1996, CSW had revolving
credit facilities totaling $1.2 billion to back up its commercial paper program
which, at December 31, 1996, had $364 million outstanding. The maximum amount of
such commercial paper outstanding during the year, which had a weighted average
interest rate for the year of 5.6%, was $815 million during April 1996.
2-66
CSW Credit, which does not participate in the money pool, issues
commercial paper on a stand-alone basis that is secured by the assignment of its
receivables. CSW Credit maintains a secured revolving credit agreement which
aggregated $830 million to back up its commercial paper program which, at
December 31, 1996, had $579 million outstanding. The maximum amount of such
commercial paper outstanding during the year, which had a weighted average
interest rate for the year of 5.4%, was $878 million during August 1996.
11. COMMON STOCK
On February 27, 1996, CSW sold 15,525,000 shares of its CSW Common in
the 1996 Stock Offering and received net proceeds of approximately $398 million.
These proceeds were used to repay a portion of the indebtedness incurred by CSW
under the CSW Credit Agreement to fund the acquisition of SEEBOARD.
CSW maintains a long-term incentive plan pursuant to which CSW is
authorized to issue shares of restricted common stock, stock options and/or
stock appreciation rights to certain eligible employees. Under the long-term
incentive plan, approximately 3.8 million shares of CSW Common were available
for grant as of December 31, 1996 and approximately 1.3 million shares were
reserved for issuance upon exercise of options which were outstanding at
December 31, 1996. In January 1996, the compensation committee of the board of
directors of CSW authorized a restricted stock grant for the executive officers
of CSW. This special award was made to reward sustained, long-term corporate
performance, to encourage executive retention and to focus on the long-term
perspective. This grant vests in 25 percent increments in 1997, 1998, 1999 and
2000. Beginning in 1997, non-employee directors will receive an annual award of
600 phantom stock shares which vest upon termination as a director and are then
converted one for one into shares of CSW Common.
After receipt of an order from the SEC in March 1996, the PowerShare
plan is now available to CSW shareholders, employees, eligible retirees and
other residents of legal age in the fifty states of the United States and
District of Columbia. The SEC approval also allows CSW to issue and sell an
additional five million shares of CSW Common through the PowerShare plan. Plan
participants are able to make optional cash payments and reinvest all or any
portion of their dividends in additional CSW Common. Beginning in 1996, CSW is
able to raise new common stock equity through its ThriftPlus plan, whereby the
plan trustee purchases CSW Common directly from CSW instead of on the open
market. Information concerning new CSW Common equity related to these two plans
and stock options for 1996 and 1995 is presented in the table below. PowerShare
and ThriftPlus were the primary contributors in 1996 while PowerShare was the
main contributor in 1995. See MD&A-LIQUIDITY AND CAPITAL RESOURCES for
additional detail on these two plans.
1996 1995
-------------------------------------
Number of new shares issued (millions) 2.9 2.3
Range of stock price for new shares $24 3/8 - $28 7/8 $22 5/8 - $28 3/8
New common stock equity (millions) $79 $57
12. 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 from amounts reported.
2-67
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 the future years.
CSW may grant options for up to 4.0 million shares of CSW Common 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 2.1 million
shares through December 31, 1996.
A summary of the status of CSW's stock option plan at December 31, 1996
and 1995 and the changes during the years then ended is presented in the
following table.
1996 1995
----------------------------------------------------------
Shares Weighted Average Shares Weighted Average
(thousands) Exercise Price (thousands) Exercise Price
----------------------------------------------------------
Outstanding at beginning
of year 1,564 $26 1,616 $26
Granted 70 27 -- --
Exercised (147) 24 (23) 22
Canceled (75) 27 (29) 27
----- -----
Outstanding at end of
year 1,412 26 1,564 26
Exercisable at end of
year 1,004 n/a 828 n/a
Weighted average fair
value of options $2.66 - $2.82
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996: (i) risk-free interest rate of 6.4%; (ii)
expected dividend rate of 6.8%; (iii) and expected volatility of 17%. The
expected life of the options granted did not materially impact the values
produced.
13. BUSINESS SEGMENTS
CSW's business segments at December 31, 1996 included the U.S. Electric
Operations (CPL, PSO, SWEPCO, WTU) and the United Kingdom Electric Operations
(CSW Investments Group). The United Kingdom Electric Operations includes the
activities of SEEBOARD, as well as the purchase accounting adjustments and
financing activities included in the CSW Investments Group. See NOTE 1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES for a discussion of the accounting for the
SEEBOARD acquisition. Seven additional non-utility companies are included with
CSW in Corporate items and Other (CSW Energy, CSW International, CSW
Communications, CSW Credit, CSW Leasing, CSW Services and EnerShop). Gas
Operations (Transok) were sold on June 6, 1996. See NOTE 14. TRANSOK
DISCONTINUED OPERATIONS for additional information. CSW's business segment
information is presented in the following tables.
2-68
1996 1995 1994
--------------------------------
(millions)
OPERATING REVENUES
Electric Operations
United States $3,248 $2,883 $3,065
United Kingdom (1) 1,848 208 --
Corporate items and Other 59 52 40
-------- -------- --------
$5,155 $3,143 $3,105
-------- -------- --------
OPERATING INCOME
Electric Operations
United States $768 $719 $728
United Kingdom (1) 236 21 --
Corporate items and Other 15 (27) 6
-------- -------- --------
Operating income before taxes 1,019 713 734
Income taxes (224) (92) (179)
-------- -------- --------
$795 $621 $555
-------- -------- --------
DEPRECIATION AND AMORTIZATION
Electric Operations
United States $362 $335 $316
United Kingdom (1) 88 7 --
Corporate items and Other 14 11 8
-------- -------- --------
$464 $353 $324
-------- -------- --------
IDENTIFIABLE ASSETS
Electric Operations
United States $9,417 $9,201 $9,066
United Kingdom (1) 3,061 2,821 --
Corporate items and Other 854 1,081 1,276
-------- -------- --------
13,332 13,103 10,342
Gas Operations (Discontinued) -- 766 724
-------- -------- --------
$13,332 $13,869 $11,066
-------- -------- --------
CAPITAL EXPENDITURES AND
ACQUISITIONS
Electric Operations
United States $356 $398 $493
United Kingdom (1), (2) 1,543 731 --
Corporate items and Other (3) 109 19 114
-------- -------- --------
2,008 1,148 607
Gas Operations (Discontinued) 23 66 65
-------- -------- --------
$2,031 $1,214 $672
-------- -------- --------
(1) Represents equity method of accounting for November 1995
(27.6%) and full consolidation accounting for December 1995
(76.45%).
(2) Includes $1,394 million and $731 million in 1996 and 1995,
respectively, used to purchase SEEBOARD.
(3) Includes CSW Energy and CSW International equity investments.
2-69
14. TRANSOK DISCONTINUED OPERATIONS (UNAUDITED)
On June 6, 1996, CSW sold Transok to Tejas. Accordingly, the results of
operations for Transok have been reported as discontinued operations and prior
periods have been restated for consistency.
Transok is an intrastate natural gas gathering, transmission, marketing
and processing company that provides natural gas services to the U.S. Electric
Operating Companies, predominantly PSO, and to other gas customers throughout
the United States. Transok's natural gas facilities are located in Oklahoma,
Louisiana and Texas. After the sale, Transok has continued to supply gas to the
U.S. Electric Operating Companies.
CSW sold Transok to Tejas for approximately $890 million, consisting of
$690 million in cash and $200 million in existing long-term debt that remained
with Transok after the sale. A portion of the cash proceeds was used to repay
the CSW Credit Agreement and the remaining proceeds were used to repay
commercial paper borrowings. CSW recorded an after tax gain on the sale of
Transok of approximately $120 million in 1996. As a result of the gain, CSW
incurred a current tax liability of approximately $195 million. Approximately
two-thirds of the current tax liability results from taxes previously deferred
by Transok. The deferred taxes were generated primarily by the excess of
Transok's tax depreciation over its book depreciation.
Transok's operating results for 1996, 1995 and 1994 are summarized in
the following table (transactions with CSW have not been eliminated).
1996 1995 1994
------------------------
Total revenue $362 $721 $647
Operating income before income taxes 23 52 49
Earnings before income taxes 18 38 35
Income taxes (6) (13) (10)
----- ----- -----
Net income from discontinued operations $12 $25 $25
----- ----- -----
Since Transok was sold on June 6, 1996, the results of operations for
1996 do not reflect a full year's earnings from Transok. The net assets of
Transok included in CSW's Consolidated Balance Sheet at December 31, 1995, are
summarized in the following table.
December 31, 1995
-----------------
(millions)
Net gas fixed assets $632
Current assets 81
Deferred charges and other assets 52
Current liabilities (123)
Long-term debt (200)
Deferred credits and other liabilities (116)
-----
Net assets $326
-----
2-70
15. PRO FORMA INFORMATION (UNAUDITED)
CSW secured effective control of SEEBOARD in December 1995. The
unaudited pro forma information is presented in response to applicable
accounting rules relating to acquisition transactions. The pro forma information
gives effect to the acquisition of SEEBOARD accounted for under the purchase
method of accounting for the twelve months ended December 31, 1995 and the
twelve months ended December 31, 1994 as if the transaction had been consummated
at the beginning of the periods presented.
The unaudited pro forma information is based upon preliminary fair
value allocations related to the purchase of SEEBOARD. The allocations are
subject to revision after more detailed analyses, appraisals and evaluations are
completed. The unaudited pro forma information has been prepared in accordance
with United States generally accepted accounting principles. The pro forma
information in the following table is presented for illustrative purposes only
and is not necessarily indicative of the operating results that would have
occurred if the SEEBOARD acquisition had taken place at the beginning of the
period specified, nor is it necessarily indicative of future operating results.
The following pro forma information has been prepared reflecting the February
1996 issuance of CSW Common, and has been converted at an exchange rate of
(pound)1.00=$1.58 and (pound)1.00=$1.54 for the twelve months ended December 31,
1995 and 1994, respectively.
1995 1994
---------------------
(millions, except EPS)
Operating Revenues $5,404 $5,465
Operating Income 750 745
Net Income for Common Stock 445 431
EPS of Common Stock $2.15 $2.13
16. 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 1996 1995
- ---------------------------------------------------------------------------
(millions, except EPS)
March 31
Operating Revenues $1,215 $523
Operating Income 144 82
Income from Continuing Operations 47 39
Net Income for Common Stock 51 39
EPS of Common Stock from Continuing
Operations $0.22 $0.18
EPS of Common Stock $0.26 $0.20
June 30
Operating Revenues $1,267 $786
Operating Income 214 164
Income from Continuing Operations 15 104
Net Income for Common Stock 128 103
EPS of Common Stock from Continuing
Operations $0.05 (1) $0.52
EPS of Common Stock $0.61 $0.54
2-71
September 30
Operating Revenues $1,438 $948
Operating Income 284 259
Income from Continuing Operations 194 198
Net Income for Common Stock 190 199
EPS of Common Stock from Continuing
Operations $0.90 $1.01
EPS of Common Stock $0.90 $1.04
December 31
Operating Revenues $1,235 $886
Operating Income 153 116
Income from Continuing Operations 59 55
Net Income for Common Stock 60 61
EPS of Common Stock from Continuing
Operations $0.26 $0.26
EPS of Common Stock $0.28 $0.32
Total
Operating Revenues $5,155 $3,143
Operating Income 795 621
Income from Continuing Operations 315 396
Net Income for Common Stock 429 402
EPS of Common Stock from Continuing
Operations $1.43 (1) $1.97
EPS of Common Stock $2.07 (2) $2.10
(1) Earnings were significantly impacted by the establishment of reserves for
certain investments at the U.S. Electric Operating Companies and the
write-off of certain investments at CSW Energy.
(2) In 1996, CSW EPS of Common Stock for the year do not sum to the total of
the individual quarters' EPS of Common Stock due to different levels of
average shares outstanding for the different periods.
2-72
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, 1996 and 1995, and the related consolidated statements of
income, stockholders' equity and cash flows, for each of the three years ended
December 31, 1996. 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 Investments, which statements reflect total assets and total
revenues of 23 percent and 36 percent in 1996 and 20 percent and 6 percent in
1995, respectively, of the consolidated totals. Those statements were audited by
other auditors whose report has been furnished to us and our opinion, insofar as
it relates to the amounts included for those entities, is based solely on the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report 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, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years ended December 31, 1996, in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The supplemental Schedule II is
presented for purposes of complying with Securities and Exchange Commission's
rules and is not a required part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Dallas, Texas
February 28, 1997
2-73
AUDITOR'S REPORT TO THE MEMBERS OF CSW INVESTMENTS
We have audited the consolidated balance sheets of CSW Investments and
subsidiaries as of 31 December 1996 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 examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used in 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 Investments and
subsidiaries at 31 December 1996 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 1996 to the extent summarised in the notes to
the consolidated financial statements.
KPMG Audit Plc
Chartered Accountants London, England
Registered Auditor 22 January 1997
2-74
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, 1996.
E. R. Brooks Glenn D. Rosilier Lawrence B. Connors
Chairman, President and Senior Vice President and Controller
Chief Executive Officer Chief Financial Officer
2-75
CENTRAL POWER AND LIGHT
COMPANY
2-76
SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended
December 31 is provided to highlight significant trends in the financial
condition and results of operations for CPL. Certain financial statement items
for prior years have been reclassified to conform to the most recent period
presented.
---------------------------- --------------------------
1996 (1) 1995 1994 1993 (2) 1992
(thousands, except ratio data)
INCOME STATEMENT DATA
Revenues $1,300,688 $1,073,469 $1,217,979 $1,223,528 $1,113,423
Income before cumulative effect
of changes in accounting principles 147,051 206,447 205,439 145,130 218,511
Net income for common stock 133,488 191,978 191,635 158,422 202,441
BALANCE SHEET DATA
Assets 4,828,263 4,881,136 4,822,699 4,781,745 4,583,660
Long-term obligations (3) 1,323,054 1,517,347 1,466,393 1,384,820 1,376,280
Capitalization ratios
Common stock equity 47.8% 44.9% 45.5% 46.6% 46.9%
Preferred stock 8.3 7.8 7.9 8.9 9.1
Long-term debt 43.9 47.3 46.6 44.5 44.0
Ratio of earnings to fixed charges 2.86 2.63 3.24 2.69(4) 3.23
(SEC Method)
(1) Earnings in 1996 reflect a $15.6 million one-time charge, net of tax,
associated with certain investments for plant sites, engineering studies
and lignite reserves and the expiration in 1995 of Mirror CWIP liability
amortization income.
(2) Earnings in 1993 were significantly affected by restructuring charges, the
$27 million cumulative effect of changes in accounting principles and prior
year tax adjustments. CPL changed its method of accounting for unbilled
revenues in 1993. Pro forma amounts, assuming that the change in accounting
for unbilled revenues had been adopted retroactively, are not materially
different from amounts reported for prior years and therefore have not been
restated.
(3) Long-term obligations includes long-term debt and, for 1992 and 1993, also
preferred stock subject to mandatory redemption. (4) Ratio of earnings to
fixed charges for 1993 was calculated before cumulative effect of change
in accounting principles.
2-77
CENTRAL POWER AND LIGHT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to CPL's Financial Statements and related Notes to
Financial Statements and Selected Financial Data. The information contained
therein should be read in conjunction with, and is essential in understanding,
the following discussion and analysis.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995
OVERVIEW
Net income for common stock for 1996 decreased 30% to $133 million from
$192 million in 1995. The decrease was due primarily to the expiration of Mirror
CWIP liability amortization, the CPL 1996 Fuel Agreement, a charge in 1996
associated with certain investments for plant sites, engineering studies and
lignite reserves of approximately $15.6 million, net of taxes, and management's
expectation of the outcome of CPL's pending rate review . Partially offsetting
the decline was the absence of the net effect of the CPL 1995 Agreement. See
NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information.
ELECTRIC OPERATING REVENUES
Electric operating revenues were $1.3 billion in 1996, an increase of
21% when compared to 1995 revenues of $1.1 billion. The increase was due
primarily to a $96.6 million increase in fuel revenues resulting primarily from
higher average unit fuel costs and purchased power as discussed below. The
increase was also attributable to a one-time $50 million base rate refund and a
$62.3 million disallowance of under-recovered fuel costs in 1995 as a result of
the CPL 1995 Agreement. KWH sales increased 6% resulting primarily from
increased customer and favorable weather-related demand as well as residential
and commercial customer growth.
FUEL
Fuel expense increased $53.0 million, or 18%, during 1996 as compared
to 1995. The increase in fuel expense was due primarily to an 18% increase in
the average unit cost of fuel from $1.37 per MMbtu in 1995 to $1.62 per MMbtu in
1996. The fuel costs reflects an increase in the spot market price of natural
gas partially offset by a decrease in the delivered cost of coal and a one-time
$9.6 million reduction in fuel expense as a result of the CPL 1996 Fuel
Agreement.
PURCHASED POWER
Purchased power increased $39.9 million during 1996 when compared to
the prior year primarily as a result of increased economy energy purchases at a
higher cost per MWH. Also contributing to this increase were additional
cogeneration purchases in 1996.
OTHER OPERATING
Other operating expenses increased $22.5 million or 11% during 1996
when compared to 1995. This increase was due primarily to a $9.5 million
write-off associated with the cancellation of a transmission project, a $2.2
million write-off of demand side management assets as well as increased rate
case and decommissioning expenses, all associated with management's expectation
of the outcome of CPL's pending rate review. Also contributing to the increase
was the establishment of a regulatory asset for rate case costs previously
expensed and subsequent amortization of such regulatory asset pursuant to the
CPL 1995 Agreement. Further contributing to this increase were lower
employee-related costs in 1995.
2-78
RESTRUCTURING CHARGES
The overall increase of $25.4 million during 1996 when compared to 1995
was due primarily to the recognition of a $20.7 million regulatory asset
established in accordance with the CPL 1995 Agreement for previously recorded
restructuring charges. In 1996, the CSW System began implementation of
organizational and executive changes which are expected to be complete in early
1997. CPL recorded its $4.6 million portion of the estimated cost of the
restructuring during 1996.
MAINTENANCE
Maintenance expenses decreased $10.1 million or 16% during 1996 when
compared to 1995 due primarily lower production and distribution maintenance.
The decrease in production maintenance was the result of fewer scheduled steam
maintenance repair projects in 1996 as well as lower nuclear maintenance due to
fewer scheduled refueling outages in 1996. The decrease in distribution was due
primarily to lower tree trimming expenses in 1996.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $2.3 million, or 2%, during
1996 as compared to 1995 as a result of an increase in depreciable property and
the amortization of regulatory assets associated with the CPL 1995 Agreement.
Such increases were partially offset by a decrease in depreciation rates,
effective May 1996, in accordance with management's expectation of the outcome
of CPL's pending rate review.
TAXES, OTHER THAN INCOME
Taxes, other than income increased $8.1 million during 1996 as compared
to 1995 due primarily to lower 1995 ad valorem taxes resulting from revisions of
prior year estimates.
INCOME TAXES
Income taxes increased $82.6 million in 1996 as compared to 1995 due
primarily to the accelerated flowback in 1995 of $34.3 million of unprotected
excess deferred income taxes in accordance with the CPL 1995 Agreement. This
increase was also attributable to prior year tax adjustments, higher pre-tax
income, excluding the effects of the one-time charge, as discussed below, and
the permanent tax effect associated with the expiration of the Mirror CWIP
liability amortization, also discussed below.
OTHER INCOME AND DEDUCTIONS
Other income and deductions decreased $67.5 million in 1996 when
compared to 1995. Mirror CWIP liability amortization, which expired in 1995,
contributed $41.0 million to other income and deductions in 1995. Also, a
one-time charge in 1996 associated with certain investments for plant sites,
engineering studies and lignite reserves of approximately $15.6 million, net of
tax, contributed to this decline. Furthermore, other income and deductions
decreased in 1996 as a result of the recognition of previously deferred
factoring income in 1995 pursuant to the CPL 1995 Agreement.
INTEREST CHARGES
Interest on long-term debt decreased $5.8 million during 1996 when
compared to 1995 as a result of refinancing activity in 1995. Interest on
short-term debt and other decreased $1.4 million during 1996 when compared to
1995 primarily as a result of lower levels of short-term debt outstanding at
lower interest rates partially offset by an increase in the amortization of debt
issuance costs and AFUDC for borrowed funds.
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COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND 1994
OVERVIEW
Net income for common stock was unchanged in 1995 when compared to 1994
at $192 million, although CPL reported lower electric operating revenues, Mirror
CWIP liability amortization and higher interest charges offset by lower
operating expenses and taxes. Also impacting 1995 was the effect of the CPL 1995
Agreement.
ELECTRIC OPERATING REVENUES
Total revenues were $1.1 billion in 1995, a decrease of 12% when
compared to 1994 revenues of $1.2 billion. The decline was due primarily to a
one time $50 million base rate refund and a $62.3 million disallowance of
under-recovered fuel costs resulting from the CPL 1995 Agreement. Also
contributing to the decrease in revenues was a $66.6 million decrease in fuel
revenues resulting primarily from lower average unit fuel costs and purchased
power as discussed below and a wholesale fuel revenue refund. Partially
offsetting the decrease in fuel revenues was a $34.4 million increase in
non-fuel revenues resulting from a 6% increase in KWH sales. The increase in
sales was attributable to increased usage per customer, residential and
commercial customer growth and a new contract with an existing wholesale
customer.
FUEL
Fuel expense decreased $40.5 million, or 12%, during 1995 as compared
to 1994. The decrease in fuel expense was due primarily to a 22% decrease in the
average unit cost of fuel from $1.75 per MMbtu in 1994 to $1.37 per MMbtu in
1995. The decrease in the average unit cost of fuel resulted from the expiration
of higher priced gas contracts that were replaced with lower cost spot market
natural gas, the renegotiation of a coal contract and increased usage of lower
unit cost nuclear fuel. The decrease in the unit cost of fuel was partially
offset by a 13% increase in generation.
PURCHASED POWER
Purchased power decreased $22.7 million during 1995 when compared to
the prior year. The decrease was due primarily to increased generation at STP,
which replaced power that had been purchased during the first half of 1994 when
STP was out of service, and an unscheduled outage at a fossil-fueled generating
plant during the third quarter of 1994.
OTHER OPERATING
Other operating expenses decreased $15.8 million, or 7%, during 1995
when compared to 1994. The decrease was due primarily to a reduction in
employee-related costs.
RESTRUCTURING CHARGES
Restructuring charges decreased $20.8 million during 1995 when compared
to 1994. The decrease was due primarily to the recognition of a $20.7 million
regulatory asset established in accordance with the CPL 1995 Agreement for
previously recorded restructuring charges.
MAINTENANCE
Maintenance expense decreased $5.3 million in 1995 when compared to
1994 as a result of postponement of previously scheduled plant maintenance and
savings resulting from cost containment efforts.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $8.9 million, or 6%, during
1995 as compared to 1994 as a result of an increase in depreciable property and
the amortization of regulatory assets associated with the CPL 1995 Agreement.
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TAXES, OTHER THAN INCOME
Taxes, other than income decreased $14.5 million during 1995 as
compared to 1994 due primarily to lower ad valorem tax expense resulting from a
true-up of prior year estimates.
INCOME TAXES
Income taxes decreased $59.5 million in 1995 as compared to 1994 due
primarily to the reduction of $34.3 million of unprotected excess deferred
income taxes in accordance with the CPL 1995 Agreement, prior year tax
adjustments and lower pre-tax income.
OTHER INCOME AND DEDUCTIONS
Mirror CWIP liability amortization decreased $27.0 million in 1995 when
compared to 1994. In accordance with the original liability amortization
schedule agreed upon in the settlement of its rate cases in 1990 and 1991, CPL
amortized its Mirror CWIP liability in declining amounts over the years 1991
through 1995. Other income was higher in 1995 when compared to 1994 due
primarily to the recognition of factoring income pursuant to the CPL 1995
Agreement.
INTEREST CHARGES
Interest on long-term debt increased $4.8 million during 1995 as
compared to 1994 as a result of increased long-term debt outstanding. Interest
on short-term debt and other increased $7.6 million during 1995 when compared to
1994 as a result of higher levels of short-term debt outstanding at higher
interest rates and the recognition of interest expense associated with
over-recovered fuel.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
CPL's need for capital results primarily from its construction of
facilities to provide reliable electric service to its customers. Internally
generated funds should meet most of the capital requirements. However, if
internally generated funds are not sufficient, CPL's financial condition should
allow it access to the capital markets.
CONSTRUCTION EXPENDITURES
CPL maintains 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 CPL for the next three years are primarily
to improve and expand distribution facilities and will be funded primarily
through internally generated funds. These improvements will be required to meet
the anticipated needs of new customers and the growth in the requirements of
existing customers. Construction expenditures, including AFUDC, for CPL were
approximately $139 million in 1996, $155 million in 1995 and $179 million in
1994. CPL's estimated total construction expenditures, including AFUDC, for the
years 1997 through 1999 are presented in the following table (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).
CONSTRUCTION EXPENDITURES
1997 1998 1999 Total
-----------------------------
(millions)
Generation $ 19 $ 15 $ 14 $ 48
Transmission 9 11 19 39
Distribution 68 71 72 211
Fuel 13 19 25 57
Other 11 11 10 32
-----------------------------
$120 $127 $140 $387
-----------------------------
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The U.S. Electric Operating Companies plan to dismantle certain power
plant properties during late 1997 and 1998. Dismantling includes the removal,
disposal and/or salvage of retired equipment and ancillary buildings. None of
the units to be dismantled is included in CPL's 1996 aggregate capability. The
depreciation rates of the U.S. Electric Operating Companies include a component
for net removal cost and therefore are being recovered from customers currently
through rates. As a result, actual dismantling of these units will not have a
material impact on net income. Current estimates of capital resources that will
be required by the U.S. Electric Operating Companies to dismantle these units
range from $10 million to $15 million and CPL's share of such costs are not
reflected in the above construction numbers. It is anticipated that a request
for bids will be issued by mid 1997.
Although CPL does not believe that it will require substantial
additions of generating capacity over the next several years, the U.S. Electric
System's internal resource plan presently anticipates that any additional
capacity needs will come from a variety of sources including power purchases.
Therefore, during 1996, CPL recorded reserves and write-offs in the amount of
$15.6 million, net of tax, for certain investments in plant sites, engineering
studies and lignite reserves. Refer to INTEGRATED RESOURCE PLAN for additional
information regarding future capacity needs.
INFLATION
Annual inflation rates, as measured by the Consumer Price Index, have
averaged approximately 2.8% during the three years ended December 31, 1996. CPL
believes that inflation, at this level, does not materially affect its results
of operation or financial condition. 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.
LONG-TERM FINANCING
As of December 31, 1996, the capitalization ratios of CPL were 48%
common stock equity, 8% preferred stock and 44% long-term debt. CPL's embedded
cost of long-term debt was 6.9% at December 31, 1996. CPL continually monitors
the capital markets for opportunities to lower its cost of capital through
refinancing. CPL is committed to maintaining financial flexibility through a
strong capital structure and favorable securities ratings in order to access the
capital markets opportunistically or when required. See CSW's ITEM 7-MD&A for
CPL's securities' ratings.
In August 1996, $63.3 million of Red River, 6.0%, Series 1996 PCRBs
were issued for the benefit of CPL, PSO and WTU. The proceeds from this issuance
were used to refund the $63.3 million of Red River, 7 7/8% Series 1984 PCRBs.
CPL's portion of this issuance and refund was $6.3 million. In September 1996,
CPL issued $60.0 million of Matagorda, 6 1/8%, Series 1996 PCRBs. The proceeds
from this issuance were used to refund the $60.0 million of Matagorda, 7 7/8%
Series 1986 PCRBs.
SHELF REGISTRATION STATEMENTS
CPL has $60 million remaining for the issuance of FMBs, and $75 million
remaining for the issuance of preferred stock, under shelf registration
statements filed with the SEC in 1993 and 1994, respectively. Additionally, CPL
along with certain affiliated capital trusts has filed a shelf registration
statement with the SEC for the issuance of up to $150 million of preferred
securities and/or junior subordinated deferrable interest debentures. CPL may
offer additional securities subject to market conditions and other factors. The
proceeds of any such offerings will be used principally to redeem higher cost
FMBs and preferred stock in order to lower CPL's cost of capital.
SHORT-TERM FINANCING
CPL, together with other members of the CSW System, has established a
CSW System money pool to coordinate short-term borrowings. These loans are
unsecured demand obligations at rates approximating the CSW System's commercial
paper borrowing costs. At December 31, 1996, CPL's short-term borrowing limit
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from the money pool was approximately $269 million. During 1996, the annual
weighted average interest rate on CPL's borrowings was 5.6% and the average
amount of CPL's short-term borrowings outstanding was $99 million. The maximum
amount of CPL short-term borrowings outstanding during 1996 was $212 million,
which was the amount outstanding at March 1, 1996.
INTERNALLY GENERATED FUNDS
Internally generated funds consist of cash flows from operating
activities less common and preferred stock dividends. CPL uses short-term debt
to meet fluctuations in working capital requirements due to the seasonal nature
of energy sales. CPL anticipates that capital requirements for the period 1997
to 1999 will be met, in large part, from internal sources. CPL also anticipates
that some external financing will be required during the period, but the nature,
timing and extent have not yet been determined (The foregoing statement
constitutes a forward looking statement within the meaning of Section 21E of the
Exchange Act. Actual results may differ materially from such projected
information due to changes in the underlying assumptions. See FORWARD LOOKING
INFORMATION). Information concerning internally generated funds is presented in
the following table.
1996 1995 1994
----------------------------
($ in millions)
Internally Generated Funds $268 $100 $114
Construction Expenditures Provided
by Internally Generated Funds 196% 66% 65%
SALES OF ACCOUNTS RECEIVABLE
CPL sells its billed and unbilled accounts receivable, without
recourse, to CSW Credit. The sales provided CPL with cash immediately, thereby
reducing working capital needs and revenue requirements. The average and year
end amounts of accounts receivable sold were $123 million and $106 million,
respectively, in 1996, as compared to $109 million and $85 million,
respectively, in 1995.
RECENT DEVELOPMENTS AND TRENDS
COMPETITION AND INDUSTRY CHALLENGES
Competitive forces at work in the electric utility industry are
impacting CPL and 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 level in the future. As competition in the industry increases, CPL will
have the opportunity to seek new customers and at the same time be at risk of
losing customers to other competitors. Additionally, CPL will continue to
compete with suppliers of alternative forms of energy, such as natural gas, fuel
oil and coal, some of which may be cheaper than electricity. CPL believes that,
overall, its prices for electricity and the quality and reliability of its
service currently places CPL 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).
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: (i) who will bear the costs of
prudent utility investments or past commitments incurred under traditional
cost-of-service regulation that will be uneconomic in a competitive environment,
sometimes referred to as stranded costs; (ii) whether all customers have access
to the benefits of competition; (iii) how, and by whom, the rules of competition
will be established; (iv) what the impact of deregulation will be on
conservation, environmental protection and other regulator-imposed programs; and
(v) how transmission system reliability will be ensured. The degree of risk to
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CPL associated with various federal and state restructuring proposals aimed at
resolving any or all of these issues will vary depending on many factors,
including its competitive position and the treatment of stranded costs. Although
CPL believes it is in a position to compete effectively in a deregulated, more
competitive marketplace, if stranded costs are not recovered from customers,
then CPL may be required by existing accounting standards to recognize
potentially significant stranded investments losses, especially with respect to
STP (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.
At the federal level, several bills have been introduced in Congress in
the early part of the 1997 legislative session, and recent reports indicate that
other bills are likely to be introduced in the near future, which provide for
restructuring and/or deregulating the U.S. electric utility industry. These
bills will likely cover many different issues including repeal of the Holding
Company Act and PURPA, establishment of full retail customer choice,
disaggregation of electric utilities and the restructuring of the electric
utility industry. States that have considered deregulation have been moving
increasingly toward requiring some form of retail competition or retail
wheeling. CPL cannot predict when and if it will be subject to one or more of
these legislative initiatives, nor can CPL predict the scope or effect of such
legislation on their results of operations or financial condition. For
additional information related to such initiatives, see INDUSTRY RESTRUCTURING
IN Texas.
WHOLESALE ELECTRIC COMPETITION IN THE UNITED STATES
The Energy Policy Act, which was enacted in 1992, significantly alters
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 a new category of non-utility 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. CPL must
compete in the wholesale energy markets with other public utilities,
cogenerators, qualifying facilities, EWGs and others for sales of electric
power. While CPL believes that the Energy Policy Act will continue to make the
wholesale markets more competitive, CPL is unable to predict whether the Energy
Policy Act will adversely impact CPL.
FERC ORDER 888
On April 24, 1996, the FERC issued Order 888 which is the final
comparable open access transmission rule. The provisions of FERC Order 888
provide for comparable transmission service between utilities and their
transmission customers by requiring utilities to take transmission service under
their open access tariffs for all of their new wholesale sales and purchases and
by requiring utilities to rely on the same information that their transmission
customers rely on to make wholesale purchases and sales. FERC Order 888
reaffirms the FERC's position that utilities are entitled to recover all
legitimate, prudent and verifiable stranded costs determined by a formula based
upon the revenues lost method through direct assignments charges to departing
customers.
FERC Order 888 requires holding companies to offer single system
transmission rates. However, the rule granted the U.S. Electric Operating
Companies an exemption permitting an opportunity to propose a solution that
provides comparability to all wholesale users. The final rule does suggest that
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the terms and conditions for the CSW ERCOT companies (CPL and WTU) would be
permitted to differ from those offered by the CSW SPP companies (PSO and
SWEPCO). Transmitting utilities in the SPP are under the exclusive jurisdiction
of the FERC while most transmitting utilities in ERCOT are under the exclusive
jurisdiction of the Texas Commission. These two commissions have different
approaches to defining and implementing comparable open access transmission
service. CSW is the only holding company that owns operating companies in both
ERCOT and the SPP.
On November 1, 1996, the U.S. Electric Operating Companies filed a
system-wide tariff to comply with FERC Order 888. On December 31, 1996, the FERC
accepted for filing the system-wide tariff to become effective on January 1,
1997, subject to refund and to the issuance of further orders. CSW and the U.S.
Electric Operating Companies believe that their system-wide tariff complies with
the requirements of the FERC and the Texas Commission, but the tariff does not
offer a single system rate for transactions due to the different transmission
pricing approaches of the FERC and the Texas Commission. Reference is made to
INDUSTRY RESTRUCTURING IN TEXAS for information related to the transmission
pricing approach rules that the Texas Commission adopted during 1996 (Project
No. 14045).
RETAIL ELECTRIC COMPETITION IN THE UNITED STATES
Increasing competition in the utility industry has resulted in
increasing pressure to stabilize or reduce rates. The retail regulatory
environment is beginning to shift from traditional rate base regulation to
incentive regulation. Incentive rate and performance-based plans encourage
efficiencies and increased productivity while permitting utilities to share in
the results. Retail wheeling, a major legislative initiatives which would
require utilities to "wheel" or move power from third parties to their own
retail customers, is evolving gradually. Many states currently have introduced
legislation or are investigating the issue, and several states have already
passed legislation which mandates retail choice by a certain date.
CPL believes that retail competition would not be in the best interests
of CPL's customers and security holders unless CPL receives fair recovery of the
full amounts previously invested to finance power plants. These investments,
which were reasonably incurred, were made by CPL to meet its obligation to serve
the public interest, necessity and convenience. This obligation has existed for
nearly a century and remains in force under current law. CPL intends to strongly
oppose attempts to impose retail competition without just compensation for the
risks and investments CPL undertook to serve the public's demand for
electricity. For additional information related to retail wheeling, see INDUSTRY
RESTRUCTURING IN TEXAS.
CSW RESTRUCTURING
In April 1996, CSW announced organizational and executive changes to
help prepare CSW for increased competition and unbundling of the electric
utility industry into generation, transmission, distribution and service
segments. As a result of these changes, in 1996 CSW functionally reorganized its
domestic utility operations into three organizational units which are centrally
managed from CSW Services.
CSW created a power generation business unit to provide energy
generation and production services. All phases of management of the U.S.
Electric Operating Companies' energy production activities have been
consolidated into the power generation business unit. These activities include
management of all generating facilities, including nuclear facilities, and fuel
procurement.
CSW created an energy delivery business unit to provide services for
the long-distance transmission and local distribution of electricity to retail
customers, including attendant customer services such as meter reading, billing
and accounting. All phases of management of the U.S. Electric Operating
Companies' energy delivery activities have been consolidated into the energy
delivery business unit.
CSW created an energy services business unit to provide marketing
services, along with new energy efficiency products and services as they become
available, to existing and future customers of the U.S. Electric Operating
Companies. The energy services unit also manages CSW Communications and
EnerShop.
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Functional unbundling of CSW's vertically integrated structure is
expected to provide a more competitive organizational structure for CSW. Some
employees have been reassigned from the U.S. Electric Operating Companies to CSW
Services to provide these centrally managed services.
Through December 31, 1996, CPL has incurred $2.6 million in connection
with the implementation of the 1996 restructuring. Additionally, CPL has
reserved approximately $2.0 million for additional expenses associated with the
1996 restructuring, which is expected to be completed by early 1997.
INDUSTRY RESTRUCTURING IN TEXAS
Amendments to PURA, the legal foundation of electric regulation in
Texas, became effective on September 1, 1995. Among other things, the amendments
deregulate the wholesale bulk power market in ERCOT, permit pricing flexibility
for utilities facing competitive challenges, provide for a market-driven
integrated resource planning process and mandate comparable open access
transmission service.
PURA also required that the Texas Commission adopt a rule on comparable
open transmission access by March 1, 1996. In conjunction with this rulemaking
proceeding (Project No. 14045), the chairman of the Texas Commission issued a
proposal on September 6, 1995, for the purpose of maximizing competition in the
ERCOT wholesale bulk power market. The proposal calls for the functional
unbundling of integrated utilities where distribution entities could purchase
their power requirements from any generator or set of generators in ERCOT. Those
generators which are currently regulated would be deregulated after provisions
are in place to recover stranded costs. The proposal was assigned a separate
proceeding (Project No. 15000) and after a series of workshops and technical
conferences conducted during 1996, the Texas Commission submitted a final Scope
of Competition report to the Texas Legislature in January 1997. The final report
contains numerous recommendations to the Texas Legislature including requests
for additional regulatory authority or clarification of existing authority
including, INTER ALIA, authority to certificate electric service resellers, the
authority to adopt consumer protection and universal service standards, the
authority to determine and allocate stranded costs to all customers, the
authority to promote unbundling, the authority to allow alternative forms of
regulation, increased authority to address mergers, authority to correct market
power abuses, authority over the ERCOT ISO and authority to permit alternative
methods for fuel cost recovery. In addition, the final report offers the Texas
Legislature four restructuring options. Option 1 maintains the regulatory status
quo; Option 2 would permit utilities to voluntarily offer retail access; Option
3 provides for full wholesale competition; and Option 4 provides for full retail
competition. The report's final recommendation is for the Texas Legislature to
direct the Texas Commission to prepare for full retail competition using a
careful and deliberate approach on a timetable to be established by the Texas
Legislature, but with no retail access before the year 2000. CPL cannot predict
the outcome of these proposals.
On February 7, 1996, the Texas Commission adopted a rule governing
transmission access and pricing (Project No. 14045). The pricing method adopted
by the Texas Commission is a hybrid combination of an ERCOT-wide postage stamp
rate covering 70% of total ERCOT transmission costs and a distance-sensitive
component referred to as a vector-absolute megawatt mile which recovers the
remaining 30% of ERCOT transmission costs. The open access tariffs filed with
the FERC on February 9, 1996 did not reflect Project No. 14045 pricing. However,
on November 1, 1996, CSW filed tariffs with the FERC in accordance with FERC
Order 888 that do conform to the Texas Commission's rule. See FERC ORDER 888 for
additional information regarding the transmission pricing rules prescribed by
FERC.
By statute the Texas Commission must submit a report to the 1997 Texas
Legislature on "methods or procedures for quantifying the magnitude of stranded
investment, procedures for allocating costs, and the acceptable methods of
recovering stranded costs." The Texas Commission initiated Project No. 15001 to
collect information to prepare the required report. In response to the Texas
Commission's order in this Project, CPL filed information on estimates of
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potential stranded costs. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for
a discussion of the potential impact of potential stranded costs relating to
CPL.
The Texas Commission's Project 15002, "Scope of Competition Report," is
a report that the Texas Commission is required to present to the Texas
Legislature in each odd-numbered year detailing the scope of competition in the
electric markets and the impact of competition and industry restructuring on
customers. In addition, the report is required to include the Texas Commission's
recommendations to the Texas Legislature for further legislation. In June 1996,
CPL filed information for the Texas Commission's report.
In February 1997, a retail competition bill was introduced into the
Texas Legislature. As proposed, the bill would: (i) require utilities to file a
restructuring plan by January 1, 1998; (ii) require a 15 percent rate reduction
for all customers of investor-owned utilities effective September 1, 1997; (iii)
allow public schools and universities to seek alternative electric energy
suppliers by August 1, 1998; (iv) allow residential and other small customers to
seek alternative electric energy suppliers by January 1, 1999; and (v) allow
other retail customers to seek alternative electric energy suppliers by January
1, 2000. The proposed bill would also allow utilities to recover stranded costs,
but would require a utility to reduce uneconomic investments before recovering
any stranded assets. Investor owned utilities would be required to allocate the
burden of stranded cost recovery between shareholders and customers, requiring
such utilities to write-off some portion of their assets. CPL is unable to
predict whether any retail competition legislation will be enacted by the Texas
Legislature, and if enacted, the ultimate form such legislation would take.
EFFECT OF FEDERAL AND STATE RESTRUCTURING INITIATIVES ON CPL
CPL cannot predict the form or effect of any federal or state electric
utility restructuring initiatives at this time. Federal and/or state electric
utility restructuring may cause impairment of significant recorded assets,
material reductions of profit margins, and/or increased costs of capital. No
assurance can be made that such events would not have a material adverse effect
on CPL's results of operations, financial condition or competitive position.
INDEPENDENT SYSTEM OPERATOR PLAN
In June 1996, CSW, including CPL and WTU, and more than 20 other
parties, including other investor-owned utilities, municipal power companies,
electric cooperatives, independent power producers and power marketers, filed
plans to create an ISO to manage the ERCOT power grid. The filing marks a major
step towards implementing the Texas Commission's overall strategy to create the
competitive wholesale electric market that was mandated by the Texas Legislature
in 1995. The Texas Commission approved the ISO in August 1996. Such approval
made Texas the first state in the nation to implement a regional ISO and a
regional competitive wholesale bulk power market.
INTEGRATED RESOURCE PLAN
On January 31, 1997, CPL filed with the Texas Commission a joint
integrated resource plan outlining its future electric needs over a 10-year
forecast horizon and the manner in which its proposes to meet those needs.
The filing indicates additional resources will be needed within the
next 10 years. It is anticipated that the initial needs will be met through a
mix of energy resource options including purchased power, generation, energy
efficiency programs and renewable energy resources. This integrated resource
plan is significant because this is the first time an electric utility has filed
such a plan under the provisions of PURA. In adopting this law, the Texas
Legislature required that some type of public participation be incorporated in
the planning process. Traditionally, these public participation activities would
involve surveys, focus groups or public meetings. CPL chose instead to use a
public approach known as Deliberative Polling. Deliberative Polling is designed
for the company's customers to develop a truly informed, deliberated opinion, as
a way of bringing the customer into the electric utility planning process.
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Customers at the poll overwhelmingly determined that a mix of energy
resource options was preferable as a means to accomplish several objectives
including low cost, reliability, maintenance of the environment and further
development of renewable sources. Because of the strong customer interest
evidenced in the Deliberative Poll, CPL has instituted targeted purchase goals
for renewable energy resources and energy efficiency programs, which, along with
the wind resources already on the CSW U.S. Electric System, would constitute the
largest renewable installation in Texas and would be a significant contribution
toward further development and commercialization of the renewable energy
industries. The willingness to pay more per month for renewable resources varied
considerably, with 80% of customers willing to pay at least $1 more per month to
those willing to pay up to $10 more per month. As a result, CPL is proposing a
program of "green power" choices. CPL plans to file a green pricing tariff in
1997 following additional customer consultation and research which will provide
a means for those customers who are interested in acquiring a greater portion of
their personal consumption from environmentally beneficial generation to
exercise that choice. CPL has proposed a pilot program for the installation of
rooftop photovoltaic solar systems at schools. These installations will provide
a community focus and will contain educational components to teach about
renewable resources.
Action by the Texas Commission on this integrated resource plan filing
is expected by mid-1997.
REGULATORY ACCOUNTING
Consistent with industry practice and the provisions of SFAS No. 71,
which allows for the recognition and recovery of regulatory assets, CPL has
recognized significant regulatory assets and liabilities. Management believes
that CPL will continue to meet the criteria for following SFAS No. 71. However,
in the event CPL no longer meets the criteria for following SFAS No. 71, a
write-off of regulatory assets and liabilities would be required. For additional
information regarding regulatory accounting, reference is made to NEW ACCOUNTING
STANDARDS and NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
CPL STRATEGIC RESPONSES
CPL has from time to time considered, and expects to consider in the
future, various strategies designed to enhance CPL's competitive position and to
increase its ability to anticipate and adapt to changes in the electric utility
industry. These strategies may include business combinations with other
companies, internal restructurings involving the complete or partial separation
of CPL's generation, transmission and distribution businesses, acquisitions or
dispositions of assets or lines of business, and additions to or reductions of
franchised service territories. See CSW RESTRUCTURING. CPL may from time to time
engage in discussions, either internally or with third parties, regarding one or
more of these potential strategies. Those discussions may be subject to
confidentiality agreements and CPL's policy generally not to comment on such
activities. No assurances can be given as to whether any potential transaction
of the type described above may actually occur, or, if one or more does occur,
as to the ultimate effect thereof on CPL's results of operations, financial
condition or competitive position.
IMPACT OF COMPETITION
CPL is unable to predict the ultimate outcome or impact of competitive
forces on the electric utility industry. As the electricity markets become more
competitive, however, the principal factor determining success is likely to be
price, and to a lesser extent reliability, availability of capacity, and
customer service (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).
2-88
RATES AND REGULATORY MATTERS
CPL RATE REVIEW DOCKET NO. 14965
On November 6, 1995, CPL filed with the Texas Commission a request to
increase its retail base rates by $71 million and reduce its annual retail fuel
factors by $17 million. The net effect of these proposals would result in an
increase of $54 million, or 4.6%, in total annual retail revenues based on a
test year ended June 30, 1995. CPL's filing also sought to reconcile $229
million of fuel costs incurred during the period July 1, 1994 through June 30,
1995. CPL's previous request to reconcile fuel costs from March 1, 1990 to June
30, 1994 in Docket No. 13650 was consolidated with the current rate review. If
the requested increase and other adjustments in rate structure are approved, CPL
will commit not to increase its base rates prior to January 1, 2001, subject to
certain force majeure events.
On April 30, 1996, CPL implemented new fuel factors that will lower
fuel costs to its retail customers by $25 million annually. The lower fuel
factors result primarily from the projected decline in CPL's fuel costs during
the twelve-month period following the implementation of the new factors. On May
9, 1996, CPL placed a $70 million base rate increase into effect under bond. The
bonded rates are subject to refund based on the final order of the Texas
Commission. When combined with the fuel factor reduction, the net result is an
increase in annual retail revenues of $45 million, or 3.8%.
On May 10, 1996, CPL and other parties to the fuel reconciliation phase
of the current rate review filed the CPL 1996 Fuel Agreement with the Texas
Commission that reconciles CPL's fuel costs through June 1995. A final order
implementing the settlement was issued on June 28, 1996, approving a one-time
fuel refund of $23 million that was refunded to customers in July 1996. As a
condition of the settlement, CPL agreed not to seek recovery of $6 million of
fuel and fuel-related costs incurred during the reconciliation period. The
additional amount of the refund resulted from an over-recovery of fuel costs
during the reconciliation period and did not have a material impact on CPL's
results of operations or financial condition.
In a preliminary order issued December 21, 1995, the Texas Commission
expanded the scope of the rate review to address certain competitive issues
facing the electric utility industry. CPL made a supplemental filing on April 1,
1996, addressing a recommended model for restructuring the electric industry
within ERCOT. In addition, the supplemental filing included: (i) estimates of
CPL's potential stranded costs based upon various possible structures of the
electric industry and under several energy price scenarios; and (ii) a
recommendation that the potential stranded costs not be quantified in rates
until any changes in the electricity market and structure of utilities in Texas
are known. In this supplemental filing, CPL estimated its potential stranded
costs could range from approximately zero to approximately $3.7 billion in a
worst-case scenario. The range is dependent upon a number of presently unknown
factors, including the extent to which CPL is compensated for its reasonable
costs and the extent and timing of any implementation of retail competition.
CPL has filed rebuttal testimony that challenges positions taken by the
Texas Commission staff and other parties intervening in this case. CPL's
testimony challenges the Texas Commission staff's proposals as unreasonable and
contrary to current law and regulatory policy. While the Texas Commission staff
reported the use of a "point estimate" of $850 million for potentially stranded
costs, their testimony actually describes their range of potential stranded
costs as very uncertain and having a range from $200 million to $2 billion. The
Texas Commission staff subsequently revised their "point estimate" to $1.069
billion and their range from $223 million to $2.9 billion. In addition, the
Texas Commission staff recommended (i) a nuclear performance standard that would
penalize CPL unless it operates its nuclear units better than 75 percent of the
U.S. nuclear industry; (ii) a fuel-recovery mechanism that is based on prices in
an undeveloped energy market; and (iii) a one-sided cap on CPL's earnings that
effectively prevents CPL from realizing its authorized level of earnings.
A proposal for decision was issued on January 21, 1997 by the ALJs
hearing the case. The proposal for decision recommends an increase in annual
revenues of $7.2 million, the net result of a recommended base rate reduction of
$5.2 million plus increased revenues collected through two surcharges. The $7.2
2-89
million revenue rate change is made up of the following components: (i) a $10.3
million reduction in KWH-related revenues; (ii) an increase of $5.1 million in
miscellaneous revenues (customer connect charges, insufficient check charges and
other fees); (iii) a $4.3 million annual surcharge applied over three years to
recover rate case expenses; and (iv) annual recovery of $8.1 million for
demand-side management expenditures through a separate surcharge.
A factor contributing significantly to the difference between the $71
million retail base rate increase originally requested by CPL and the ALJs'
proposal is the recommended reduction in CPL's return on equity from 12.25% to
10.9% resulting in a reduction of $31 million in CPL's requested base rate
increase.
The ALJs' decision also recommends no change in the method used by CPL
to recover the capitalized costs associated with CPL's 25.2% ownership interest
in STP. The ALJs have recommended that the Texas Commission reject CPL's request
to change the method of recovering STP deferred accounting costs from a mortgage
amortization methodology to a straight-line amortization methodology. Rejection
of this request would reduce CPL's request for rate relief by $14 million. The
ALJs also recommended that CPL's current depreciation rates be decreased by $8.8
million a year and that the Texas Commission deny CPL's request for a $3.6
million increase for its catastrophe reserve.
The proposal for decision also addressed the competitive issues raised
in the Texas Commission's preliminary order. The ALJs determined that, under
current law, the Texas Commission does not have authority to implement the
nuclear performance standard, fuel-recovery mechanism, or earnings cap proposed
by the Texas Commission staff. However, the ALJs determined that with
legislative authorization, it could be appropriate to implement a nuclear
performance standard and alternative fuel-recovery mechanism for CPL. The ALJs
also determined that under various structures of a future competitive electric
utility industry, CPL could have potentially stranded costs from $30 million to
$1.718 billion. The ALJs stated that CPL's potentially stranded costs will
depend on the structure of the industry in the future and that recovery of these
costs might not be required by law under certain industry structures.
A final order from the Texas Commission is expected in March 1997.
CPL's management cannot predict the ultimate outcome of CPL's rate case. If CPL
ultimately is unsuccessful in obtaining adequate rate relief, CPL could
experience a material adverse effect on its results of operations and financial
condition.
CPL FUEL SURCHARGE
On January 3, 1997, CPL filed with the Texas Commission an Application
for Authority to Implement an increase in fuel factors of $34.4 million, or
15.4% on an annual basis. Additionally, CPL proposed to implement a surcharge of
$24.3 million, including accumulated interest, over a 12 month period. CPL
requested to implement the revised fuel factors by February 28, 1997, and to
commence the surcharge by April 30, 1997. On January 24, 1997, CPL filed revised
schedules reflecting a revised surcharge of $23.4 million, including accumulated
interest. On February 10, 1997, CPL filed a Stipulation with the Texas
Commission which would surcharge customers $23.4 million, including interest
over a period not to exceed twelve months and coordinate the surcharge with any
refund obligation in Docket No. 14695. Additionally, the proposed fuel factors
would be implemented in March 1997 resulting in an increase in fuel revenue of
approximately $29.4 million, or 13.2% on an annual basis. An order granting
interim approval of the stipulated fuel factors was issued February 20, 1997
allowing a March 1997 implementation of the fuel factors.
OTHER
See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for a discussion of
additional regulatory proceedings.
2-90
SOUTH TEXAS PROJECT
CPL owns 25.2% of STP, a two-unit nuclear power plant which is located
near Bay City, Texas. HLP, the Project Manager of STP, owns 30.8%, San Antonio
owns 28.0%, and 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. The owners of STP
are in negotiations to form the South Texas Project Nuclear Operating Company
which would replace HLP as the operator and project manager of STP.
From February 1993 until May 1994, STP experienced an unscheduled
outage resulting from mechanical problems. The outage resulted in significant
rate and regulatory proceedings involving CPL, including a base rate case and
fuel reconciliation proceedings as previously discussed. Unit 1 restarted on
February 25, 1994 and reached 100% power on April 8, 1994 and Unit 2 resumed
operation on May 30, 1994 and reached 100% power on June 16, 1994. During the
last six months of 1994, the STP units operated at capacity factors of 98.6% for
Unit 1 and 99.2% for Unit 2.
STP Unit 1 was removed from service during 1996 for a scheduled
refueling outage which lasted 22 days. For the year 1996, Unit 1 and Unit 2
operated at net capacity factors of 93.1% and 95.2%, 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 CPL, 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 one PRP can be
held responsible for the entire cost of a cleanup. Usually, however, cleanup
costs are allocated among PRPs.
CPL is subject to various pending claims alleging that it is a PRP
under federal or state remedial laws for investigating and cleaning up
contaminated property. CPL anticipates that resolution of these claims,
individually or in the aggregate, will not have a material adverse effect on
CPL'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 CPL, the estimated amount of costs allocated to CPL and the
participation of other parties. See ITEM 1-BUSINESS, NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for
additional discussion regarding environmental matters.
NEW ACCOUNTING STANDARDS
SFAS NO. 121
CPL adopted SFAS No. 121 effective January 1, 1996. The statement
establishes a two-fold test for identification and quantification of an impaired
asset. The adoption of SFAS No. 121 did not have a significant impact on CPL's
results of operations or financial condition. Under the current regulatory
environment, CPL does not expect SFAS No. 121 to have a significant impact on
2-91
its results of operation or financial condition. However, future developments in
the electric industry and utility regulation could jeopardize the full recovery
of the carrying cost of certain investments. Consequently, CPL is monitoring the
changing conditions facing the electric utility industry.
SFAS NO. 123
SFAS No. 123 provides that if stock is granted to an employee or a
non-employee in return for services provided to the company, that this stock
represents compensation to the recipient. It requires the calculation of a
compensation cost, but then allows the company to choose between making the
charge to net income or disclosing this information in its notes to its
financial statements. See NOTE 11. STOCK-BASED COMPENSATION PLANS. Under prior
accounting rules, recognition of compensation for the grant of stock options was
not required if the stock price at the time of the grant and the price at which
the employee could purchase the stock were the same.
SFAS NO. 125
SFAS No. 125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishment of liabilities using a
financial-components approach that focuses on control. An entity recognizes
assets it controls and derecognizes assets when control has been surrendered and
liabilities when they have been extinguished. A transfer of assets in which
control of the asset is surrendered is recorded as a sale. Control of an asset
is surrendered only when and if certain distinct conditions are met. Likewise, a
liability is only extinguished under certain distinct conditions. SFAS No. 125
is effective for transfers and servicing of financial assets occurring after
December 31, 1996, and cannot be applied prior to that date. Adoption of this
standard will not have a material effect on CPL's results of operations or
financial condition.
2-92
CPL
Statements of Income
Central Power and Light Company
- ------------------------------------------------------------------------------
For the Years Ended December 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
(thousands)
Electric Operating Revenues
Residential $528,916 $465,478 $474,480
Commercial 388,008 355,238 368,405
Industrial 308,186 256,223 271,738
Sales for resale 72,164 52,081 50,777
Other 3,414 (55,551) 52,579
----------- ----------- -----------
1,300,688 1,073,469 1,217,979
----------- ----------- -----------
Operating Expenses and Taxes
Fuel 340,962 287,979 328,460
Purchased power 59,562 19,632 42,342
Other operating 231,501 209,021 224,852
Restructuring charges 4,628 (20,793) 98
Maintenance 53,077 63,201 68,537
Depreciation and amortization 152,831 150,508 141,622
Taxes, other than income 74,029 65,925 80,461
Income taxes 98,451 15,812 75,356
----------- ----------- -----------
1,015,041 791,285 961,728
----------- ----------- -----------
Operating Income 285,647 282,184 256,251
----------- ----------- -----------
Other Income and Deductions
Allowance for equity funds used
during construction 427 442 1,215
Mirror CWIP liability amortization -- 41,000 68,000
Reserve for utility plant
development costs, net of tax
of $5,940 (15,569) -- --
Other 3,997 14,880 1,272
----------- ----------- -----------
(11,145) 56,322 70,487
----------- ----------- -----------
Income Before Interest Charges 274,502 338,506 326,738
----------- ----------- -----------
Interest Charges
Interest on long-term debt 110,375 116,205 111,408
Interest on short-term debt
and other 18,494 19,926 12,365
Allowance for borrowed funds
used during construction (1,418) (4,072) (2,474)
----------- ----------- -----------
127,451 132,059 121,299
----------- ----------- -----------
Net Income 147,051 206,447 205,439
Preferred stock dividends 13,563 14,469 13,804
=========== =========== ===========
Net Income for Common Stock $133,488 $191,978 $191,635
=========== =========== ===========
The accompanying notes to financial statements are an integral part
of these statements.
2-93
CPL
Statements of Retained Earnings
Central Power and Light Company
- -----------------------------------------------------------------------
For the Years Ended December 31,
------------------------------
1996 1995 1994
-------- -------- --------
(thousands)
Retained Earnings at Beginning of Year $863,444 $857,466 $850,307
Net income for common stock 133,488 191,978 191,635
Deduct: Common stock dividends 128,000 186,000 183,000
Preferred stock
redemption costs -- -- 1,476
-------- -------- --------
Retained Earnings at End of Year $868,932 $863,444 $857,466
======== ======== ========
The accompanying notes to financial statements are an integral part
of these statements.
2-94
CPL
Balance Sheets
Central Power and Light Company
- -----------------------------------------------------------------------
As of December 31,
-----------------------
1996 1995
---------- ----------
(thousands)
ASSETS
Electric Utility Plant
Production $3,102,929 $3,110,744
Transmission 505,801 486,090
Distribution 956,928 879,618
General 271,347 248,629
Construction work in progress 95,336 127,307
Nuclear fuel 184,229 165,087
---------- ----------
5,116,570 5,017,475
Less - Accumulated depreciation 1,697,552 1,547,530
---------- ----------
3,419,018 3,469,945
---------- ----------
Current Assets
Cash 3,299 2,883
Special deposits 113 797
Accounts receivable 53,038 45,186
Materials and supplies, at average cost 75,732 71,112
Fuel inventory, at average cost 15,461 26,472
Accumulated deferred income taxes -- 22,171
Under-recovered fuel costs 26,298 --
Prepayments 4,371 1,739
---------- ----------
178,312 170,360
---------- ----------
Deferred Charges and Other Assets
Deferred STP costs 486,978 488,047
Mirror CWIP asset 298,708 311,804
Income tax related regulatory assets, net 335,226 346,993
Other 110,021 93,987
---------- ----------
1,230,933 1,240,831
---------- ----------
$4,828,263 $4,881,136
========== ==========
The accompanying notes to financial statements are an integral part
of these statements.
2-95
CPL
Balance Sheets
Central Power and Light Company
- --------------------------------------------------------------------------
As of December 31,
-----------------------
1996 1995
---------- ----------
CAPITALIZATION AND LIABILITIES (thousands)
Capitalization
Common stock: $25 par value
Authorized shares: 12,000,000
Issued and outstanding shares: 6,755,535 $168,888 $168,888
Paid-in capital 405,000 405,000
Retained earnings 868,932 863,444
---------- ----------
Total Common Stock Equity 1,442,820 1,437,332
---------- ----------
Preferred stock 250,351 250,351
Long-term debt 1,323,054 1,517,347
---------- ----------
Total Capitalization 3,016,225 3,205,030
---------- ----------
Current Liabilities
Long-term debt due within twelve months 200,000 231
Advances from affiliates 52,525 176,334
Accounts payable 69,941 49,507
Accrued taxes 64,207 61,614
Accumulated deferred income taxes 7,310 --
Accrued interest 31,566 32,742
Over-recovered fuel costs -- 12,586
Refund due customers 43,266 --
Other 19,048 20,736
---------- ----------
487,863 353,750
---------- ----------
Deferred Credits
Accumulated deferred income taxes 1,162,051 1,151,823
Investment tax credits 147,191 152,744
Other 14,933 17,789
---------- ----------
1,324,175 1,322,356
---------- ----------
$4,828,263 $4,881,136
========== ==========
The accompanying notes to financial statements are an integral part
of these statements.
2-96
CPL
Statements of Cash Flows
Central Power and Light Company
- -------------------------------------------------------------------------------
For the Years Ended December 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(thousands)
OPERATING ACTIVITIES
Net Income $147,051 $206,447 $205,439
Non-cash Items Included in Net Income
Depreciation and amortization 178,271 173,711 170,971
Deferred income taxes and investment
tax credits 45,923 (35,815) 20,870
Mirror CWIP liability amortization -- (41,000) (68,000)
Restructuring charges 1,967 (240) 98
Establishment of regulatory assets -- (20,652) --
Refund due customers 43,266 -- --
Reserve for utility plant
development costs 21,374 -- --
Inventory reserve 717 -- --
Allowance for equity funds used
during construction (427) (442) (1,215)
Changes in Assets and Liabilities
Accounts receivable (7,852) (15,321) (6,015)
Fuel inventory 11,011 (3,556) (5,982)
Accounts payable 19,780 (35,101) (5,765)
Accrued taxes 2,593 2,228 25,617
Over- and under-recovered fuel costs (38,884) 66,712 (1,167)
Accrued restructuring charges -- (1,085) (20,245)
Other deferred credits (2,856) 2,022 1,444
Other (11,656) 1,910 (4,575)
--------- --------- ---------
410,278 299,818 311,475
--------- --------- ---------
INVESTING ACTIVITIES
Construction expenditures (136,901) (150,372) (174,993)
Allowance for borrowed funds used
during construction (1,418) (4,072) (2,474)
Other (1,839) -- --
--------- --------- ---------
(140,158) (154,444) (177,467)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 63,930 337,828 99,190
Retirement of long-term debt (231) -- (459)
Reacquisition of long-term debt (67,720) (295,938) (618)
Retirement of preferred stock -- -- (27,021)
Change in advances from affiliates (123,809) 15,014 (9,845)
Payment of dividends (141,874) (200,037) (197,048)
--------- --------- ---------
(269,704) (143,133) (135,801)
--------- --------- ---------
Net Change in Cash and Cash Equivalents 416 2,241 (1,793)
Cash and Cash Equivalents at Beginning of Year 2,883 642 2,435
--------- --------- ---------
Cash and Cash Equivalents at End of Year $3,299 $2,883 $642
========= ========= =========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $117,974 $115,845 $114,980
========= ========= =========
Income taxes paid $44,082 $37,151 $28,166
========= ========= =========
The accompanying notes to financial statements are an integral part
of these statements.
2-97
CPL
Statements of Capitalization
Central Power and Light Company
- -------------------------------------------------------------------------------
As of December 31,
------------------------------
1996 1995
---------- ----------
(thousands)
COMMON STOCK EQUITY $1,442,820 $1,437,332
---------- ----------
PREFERRED STOCK
Cumulative $100 Par Value, Authorized 3,035,000 shares
Number Current
of Shares Redemption
Series Outstanding Price
- --------------------------------------------------
Not Subject to Mandatory Redemption
4.00% 100,000 $105.75 10,000 10,000
4.20% 75,000 $103.75 7,500 7,500
7.12% 260,000 $101.00 26,000 26,000
8.72% 500,000 $100.00 50,000 50,000
Auction Money Market 750,000 $100.00 75,000 75,000
Auction Series A 425,000 $100.00 42,500 42,500
Auction Series B 425,000 $100.00 42,500 42,500
Issuance Expense (3,149) (3,149)
---------- ----------
250,351 250,351
---------- ----------
LONG-TERM DEBT
First Mortgage Bonds
Series J, 6 5/8%, due January 1, 1998 28,000 28,000
Series L, 7%, due February 1, 2001 36,000 36,000
Series T, 7 1/2%, due December 15, 2014*
(Matagorda) 111,700 111,700
Series AA, 7 1/2%, due March 1, 2020* (Matagorda) 50,000 50,000
Series BB, 6%, due October 1, 1997 200,000 200,000
Series CC, 7 1/4%, due October 1, 2004 100,000 100,000
Series DD, 7 1/8%, due December 1, 1999 25,000 25,000
Series EE, 7 1/2%, due December 1, 2002 115,000 115,000
Series FF, 6 7/8%, due February 1, 2003 50,000 50,000
Series GG, 7 1/8%, due February 1, 2008 75,000 75,000
Series HH, 6%, due April 1, 2000 100,000 100,000
Series II, 7 1/2%, due April 1, 2023 100,000 100,000
Series JJ, 7 1/2%, due May 1, 1999 100,000 100,000
Series KK, 6 5/8%, due July 1, 2005 200,000 200,000
Installment Sales Agreements - PCRBs
Series 1984, 7 7/8%, due September 15, 2014
(Red River) -- 6,330
Series 1986, 7 7/8%, due December 1, 2016
(Matagorda) -- 60,000
Series 1993, 6%, due July 1, 2028 (Matagorda) 120,265 120,265
Series 1995, 6.10%, due July 1, 2028 (Matagorda) 100,635 100,635
Series 1995, variable rate, due November 1, 2015
(Guadalupe) 40,890 40,890
Series 1996, 6 1/8%, due June 1, 2020 (Red River) 6,330 --
Series 1996,6 1/2%, due May 1, 2030 (Matagorda) 60,000 --
Notes Payable, 6 1/2%, due December 8, 1995 -- 231
Unamortized Discount (5,015) (6,115)
Unamortized Costs of Reacquired Debt (90,751) (95,358)
Amount to be Redeemed Within One Year (200,000) (231)
---------- ----------
1,323,054 1,517,347
---------- ----------
TOTAL CAPITALIZATION $3,016,225 $3,205,030
========== ==========
*Obligations incurred in connection with the sale by public
authorities of tax-exempt PCRBs.
The accompanying notes to financial statements are an integral part
of these statements.
2-98
CENTRAL POWER AND LIGHT COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See CSW's NOTE 1.
2. LITIGATION AND REGULATORY PROCEEDINGS
See CSW's NOTE 2.
3. COMMITMENTS AND CONTINGENT LIABILITIES
See CSW's NOTE 3.
4. INCOME TAXES
See CSW's NOTE 4.
5. BENEFIT PLANS
See CSW's NOTE 5.
6. JOINTLY OWNED ELECTRIC UTILITY PLANT
See CSW's NOTE 6.
7. FINANCIAL INSTRUMENTS
See CSW's NOTE 7.
8. LONG-TERM DEBT
See CSW's NOTE 8.
9. PREFERRED STOCK
See CSW's NOTE 9.
10. SHORT-TERM FINANCING
See CSW's NOTE 10.
11. STOCK BASED COMPENSATION PLANS
See CSW's NOTE 12.
2-99
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF CENTRAL POWER AND LIGHT COMPANY:
We have audited the accompanying balance sheets and statements of
capitalization of Central Power and Light Company (a Texas corporation and a
wholly owned subsidiary of Central and South West Corporation) as of December
31, 1996 and 1995, and the related statements of income, retained earnings and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of Central Power and Light
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Central Power and
Light Company as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental Schedule II and Exhibit
12 are presented for purposes of complying with Securities and Exchange
Commission's rules and are not a required part of the basic financial
statements. This schedule and exhibit have been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Dallas, Texas
February 28, 1997
2-100
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and
objectivity of the financial statements of Central Power and Light Company as
well as other information contained in this Annual Report. The 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 financial statements.
The financial statements have been audited by CPL's independent public
accountants who were given unrestricted access to all financial records and
related data, including minutes of all meetings of shareholders, the board of
directors and committees of the board. CPL believes that representations made to
the independent public accountants during its audit were valid and appropriate.
The report of independent public accountants is presented elsewhere in this
report.
CPL maintains a system of internal controls to provide reasonable
assurance that transactions are executed in accordance with management's
authorization, that the financial statements are prepared in accordance with
generally accepted accounting principles and that the assets of CPL 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 CPL 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 CPL,
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.
CPL believes 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, 1996.
M. Bruce Evans R. Russell Davis
President - CPL Controller - CPL
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PUBLIC SERVICE COMPANY
OF OKLAHOMA
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SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended
December 31 is provided to highlight significant trends in the financial
condition and results of operations for PSO. Certain financial statement items
for prior years have been reclassified to conform to the most recent period
presented.
-----------------------------------------------------
1996(1) 1995 1994 1993(2) 1992
(thousands, except ratio data)
INCOME STATEMENT DATA
Revenues $735,265 $690,823 $740,496 $707,536 $622,092
Income before cumulative effect of
changes in accounting principles 31,478 81,828 68,266 40,496 45,562
Net income for common stock 30,662 81,012 67,450 45,903 44,746
BALANCE SHEET DATA
Assets 1,431,597 1,480,816 1,465,114 1,420,379 1,351,201
Long-term obligations 420,301 379,250 402,752 401,255 408,731
Capitalization ratios
Common stock equity 52.3% 55.0% 52.2% 50.8% 50.0%
Preferred stock 2.2 2.2 2.2 2.3 2.3
Long-term debt 45.5 42.8 45.6 46.9 47.7
Ratio of earnings to fixed charges 2.45 4.32 4.03 2.78(3) 2.95
(SEC Method)
(1) Earnings in 1996 reflect a $35.7 million one-time charge, net of tax,
associated with certain investments for plant sites, engineering studies
and lignite reserves.
(2) Earnings in 1993 were significantly affected by restructuring charges, the
$6 million cumulative effect of changes in accounting principles and the
establishment of reserves for fuel and other properties. Pro forma amounts,
assuming that the change in accounting for unbilled revenues had been
adopted retroactively, are not materially different from amounts reported
for prior years and therefore have not been restated.
(3) Ratio of earnings to fixed charges for 1993 was calculated before
cumulative effect of changes in accounting principles.
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PUBLIC SERVICE COMPANY OF OKLAHOMA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to PSO's Consolidated Financial Statements and
related Notes to Consolidated Financial Statements and Selected Financial Data.
The information contained therein should be read in conjunction with, and is
essential to understanding, the following discussion and analysis.
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 AND 1995
OVERVIEW
Net income for common stock for 1996 was $30.7 million, a 62% decrease
from 1995 net income for common stock of $81 million. The decrease resulted
primarily from a one-time charge associated with certain investments for plant
sites, engineering studies and lignite reserves of approximately $35.7 million,
net of tax, and prior year tax adjustments recorded in 1995 offset in part by
increased non-fuel revenue.
ELECTRIC OPERATING REVENUES
Electric operating revenues increased 6% to $735.3 million during 1996
from $690.8 million during 1995. The increase was due primarily to increased
fuel revenues, as discussed below and a 6% increase in retail KWH sales
resulting from increased customer usage, as well as additional weather-related
demand.
FUEL
Fuel expense for 1996 was $290.4 million, a 6% increase compared to
$273.5 million during 1995. The increase was due primarily to an increase in
average unit fuel costs from $1.73 per MMbtu in 1995 to $2.04 per MMbtu in 1996.
The increase in average unit fuel costs is attributable to an increase in the
spot market price of natural gas brought about by strong demand offset in part
by a decline in the delivered cost of coal resulting from lower transportation
charges as well as purchases of lower priced spot market coal. Offsetting these
factors in part was an under-recovery of fuel costs in 1996 compared to an
over-recovery in 1995, as well as decreased KWH generation.
PURCHASED POWER
Purchased power expense increased approximately 75% to $41.2 million
for 1996 from $23.6 million for 1995. The increase was due primarily to
increases in purchases of economy energy at a higher cost per MWH.
OTHER OPERATING EXPENSES
Other operating expenses increased approximately 4% to $121.2 million
in 1996 from $116.2 million in 1995 due primarily to the 1996 restructuring
charges, increased employee-related expenses and increased outside services
expenses.
MAINTENANCE
Maintenance expenses increased 9% to $38.5 million in 1996 from $35.4
million in 1995. The increase was due primarily to a $3.2 million write-down of
production inventory in 1996.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased approximately $9.8
million during 1996 when compared to the prior year due to increases in
depreciable property and completion in 1995 of the amortization of previously
expensed inventory and supply items that were credited through amortization to
cost of service.
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INCOME TAXES
Income tax expense for 1996 compared to 1995 was affected by prior year
tax adjustments recorded in 1995 offset in part by lower pre-tax income,
excluding the effects of a one-time charge associated with certain investments
as discussed below.
OTHER INCOME AND DEDUCTIONS
Other income and deductions for 1996 decreased approximately $39
million when compared to 1995 as a result of a one-time charge associated with
certain investments for plant sites, engineering studies and lignite reserves of
$35.7 million, net of tax. Other income and deductions were also affected by the
$2.7 million gain on the sale of non-utility fiber optic telecommunication
property in the first quarter of 1995.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 AND 1994
OVERVIEW
Net income for common stock for 1995 was $81 million, representing a
20% increase from 1994 net income for common stock of $67.5 million. The
increase was due primarily to decreased operating and maintenance expenses and
the sale of a non-utility fiber optic telecommunication property during 1995.
ELECTRIC OPERATING REVENUES
Electric operating revenues decreased 7% to $690.8 million during 1995
from $740.5 million during 1994. The decrease in 1995 was due primarily to
decreased fuel recovery and a decrease in weather-related retail customer demand
partially offset by customer growth.
FUEL
Fuel expense was $273.5 million during 1995, which represented a 14%
decrease compared to $316.5 million during 1994. The decrease was primarily
attributable to a reduction in the over-recovery of fuel costs, as well as a
reduction in average fuel costs from $1.96 per MMbtu in 1994 to $1.73 per MMbtu
in 1995. The decrease in average unit fuel costs was attributable to the
settlement of certain coal transportation litigation and a reduction in the spot
market price of natural gas. The decrease was partially offset by a 3% increase
in KWH generation.
PURCHASED POWER
Purchased power expenses decreased approximately 32% to $23.6 million
for 1995 from $34.9 million in 1994. The decrease is due primarily to reduced
purchases of economy energy.
OTHER OPERATING EXPENSES
Other operating expenses decreased 3% to $116.7 million during 1995
from $120.2 million during 1994. The decrease was due primarily to a net
decrease in customer-related expenses, decreased distribution meter expenses and
the realization of savings from cost containment efforts. The decrease was
offset in part by increases in employee-related costs and additional
transmission expenses associated with the completion and placement in service of
a new HVdc tie in 1995.
MAINTENANCE
Maintenance expenses in 1995 decreased 21% to $35.4 million from $44.9
million in 1994 as a result of the 1994 write-off of certain deferred expenses
associated with the Tulsa Power Station. Also contributing to the decrease was
the realization of savings from cost containment efforts.
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DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $4.6 million or 7% in
1995 when compared to 1994 due primarily to increases in depreciable property.
INCOME TAXES
Income tax expense in 1995 was affected by higher pre-tax income,
offset by prior year tax adjustments.
OTHER INCOME AND DEDUCTIONS
Other income and deductions increased $1.5 million for 1995 when
compared to 1994 primarily as a result of a $2.7 million gain on the sale of
non-utility fiber optic telecommunication property, offset in part by parent
company tax benefits.
INTEREST CHARGES
Interest on short-term debt and other for 1995 increased 65% to $6.4
million from $3.8 million in 1994. The increase was due primarily to higher
levels of short-term debt outstanding at higher interest rates.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
PSO's need for capital results primarily from the construction of
facilities to provide reliable electric service to its customers. Accordingly,
internally generated funds should meet most of the capital requirements.
However, if internally generated funds are not sufficient, PSO's financial
condition should allow it access to the capital markets.
CONSTRUCTION EXPENDITURES
PSO maintains 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 PSO for the next three years are primarily
to improve and expand distribution facilities and will be funded primarily
through internally generated funds. These improvements will be required to meet
the anticipated needs of new customers and the growth in the requirements of
existing customers. Construction expenditures, including AFUDC, for PSO were
approximately $85 million in 1996, $102 million in 1995 and $131 million in
1994. PSO's estimated total construction expenditures, including AFUDC, for the
years 1997 through 1999 are presented in the following table (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).
CONSTRUCTION EXPENDITURES
1997 1998 1999 Total
--------------------------------
(millions)
Generation $14 $11 $12 $ 37
Transmission 4 6 5 15
Distribution 53 55 56 164
Other 13 15 12 40
-------------------------------
$84 $87 $85 $256
-------------------------------
The U.S. Electric Operating Companies plan to dismantle certain power
plant properties during late 1997 and 1998. Dismantling includes the removal,
disposal and/or salvage of retired equipment and ancillary buildings. Of the
units anticipated to be dismantled, only one unit currently in storage (85 MW),
is included in PSO's 1996 aggregate capability. The depreciation rates of the
U.S. Electric Operating Companies include a component for net removal cost and
therefore are being recovered from customers currently through rates. As a
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result, actual dismantling of these units will not have a material impact on net
income. Current estimates of capital resources that will be required by the U.S.
Electric Operating Companies to dismantle these units range from $10 million to
$15 million and PSO's share of such costs are not reflected in the above
construction numbers. It is anticipated that a request for bids will be issued
by mid 1997.
Although PSO does not believe that it will require substantial
additions of generating capacity over the next several years, the U.S. Electric
System's internal resource plan presently anticipates that any additional
capacity needs will come from a variety of sources including power purchases.
Therefore, during 1996, PSO recorded reserves and write-offs in the amount of
$35.7 million, net of tax, for certain investments in plant sites, engineering
studies and lignite reserves.
INFLATION
Annual inflation rates, as measured by the national Consumer Price
Index, have averaged approximately 2.8% during the three years ended December
31, 1996. PSO believes that inflation, at this level, does not materially affect
its consolidated results of operations or financial condition. 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.
LONG-TERM FINANCING
As of December 31, 1996, the capitalization ratios of PSO were 52%
common stock equity, 2% preferred stock and 46% long-term debt. PSO's embedded
cost of long-term debt was 7.0% at December 31, 1996. PSO continually monitors
the capital markets for opportunities to lower its cost of capital through
refinancing. PSO is committed to maintaining financial flexibility through a
strong capital structure and favorable securities ratings in order to access the
capital markets opportunistically or when required. See CSW's ITEM 7-MD&A for
PSO's securities' ratings.
In August 1996, $63.3 million of Red River, 6.0% Series 1996 PCRBs were
issued for the benefit of CPL, PSO and WTU. The proceeds from this issuance were
used to refund the $63.3 million of Red River, 7 7/8%, Series 1984 PCRBs. PSO's
portion of this issuance was $12.7 million.
SHELF REGISTRATION STATEMENT
In February 1996, PSO filed a shelf registration statement with the SEC
for the sale of up to $75 million of Senior Notes. In March and April of 1996,
PSO issued $30 million and $10 million of MTNs, respectively, at varying
interest rates and maturity dates and therefore has $35 million available for
future issuance. The proceeds were used to repay a portion of PSO's short-term
borrowing and to reimburse PSO's treasury for the maturity of $25 million
aggregate principal amount of FMBs in March, 1996. Additionally, PSO along with
certain affiliated capital trusts has filed a shelf registration statement with
the SEC for the issuance of up to $75 million of preferred securities and/or
junior subordinated deferrable interest debentures. PSO may offer additional
securities from time to time subject to market conditions and other factors. The
proceeds of any such offering will be used principally to redeem FMBs, preferred
stock, repay short-term debt or provide working capital.
SHORT-TERM FINANCING
PSO, together with other members of the CSW System, has established a
CSW System money pool to coordinate short-term borrowings. These loans are
unsecured demand obligations at rates approximating the CSW System's commercial
paper borrowing costs. At December 31, 1996, PSO's short-term borrowing limit
from the money pool was approximately $95 million. During 1996, the annual
weighted average interest rate on PSO's borrowings was 5.6% and the average
amount of PSO's short-term borrowings outstanding was $52 million. The maximum
amount of PSO's short-term borrowings outstanding during 1996 was $93 million,
which was the amount outstanding at May 1, 1996.
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INTERNALLY GENERATED FUNDS
Internally generated funds consist of cash flows from operating
activities less common and preferred stock dividends. PSO utilizes short-term
debt to meet fluctuations in working capital requirements due to the seasonal
nature of energy sales. PSO anticipates that capital requirements for the period
1997 to 1999 will be met, in large part, from internal sources. PSO also
anticipates that some external financing will be required during the period, but
the nature, timing and extent have not yet been determined (The foregoing
statement constitutes a forward looking statement within the meaning of Section
21E of the Exchange Act. Actual results may differ materially from such
projected information due to changes in the underlying assumptions. See FORWARD
LOOKING INFORMATION). Information concerning internally generated funds is
presented in the following table.
1996 1995 1994
------------------------
($ in millions)
Internally Generated Funds $107 $88 $110
Construction Expenditures Provided
by Internally Generated Funds 128% 89% 86%
SALES OF ACCOUNTS RECEIVABLE
PSO sells its billed and unbilled accounts receivable, without
recourse, to CSW Credit. The sales provide PSO with cash immediately, thereby
reducing working capital needs and revenue requirements. The average and year
end amounts of accounts receivable sold were $87 million and $75 million,
respectively, in 1996, as compared to $80 million and $71 million, respectively,
in 1995.
RECENT DEVELOPMENTS AND TRENDS
COMPETITION AND INDUSTRY CHALLENGES
Competitive forces at work in the electric utility industry are
impacting PSO and 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 level in the future. As competition in the industry increases, PSO will
have the opportunity to seek new customers and at the same time be at risk of
losing customers to other competitors. Additionally, PSO will continue to
compete with suppliers of alternative forms of energy, such as natural gas, fuel
oil and coal, some of which may be cheaper than electricity. PSO believes that,
overall, its prices for electricity and the quality and reliability of its
service currently places PSO 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).
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: (i) who will bear the costs of
prudent utility investments or past commitments incurred under traditional
cost-of-service regulation that will be uneconomic in a competitive environment,
sometimes referred to as stranded costs; (ii) whether all customers have access
to the benefits of competition; (iii) how, and by whom, the rules of competition
will be established; (iv) what the impact of deregulation will be on
conservation, environmental protection and other regulator-imposed programs; and
(v) how transmission system reliability will be ensured. The degree of risk to
PSO associated with various federal and state restructuring proposals aimed at
resolving any or all of these issues will vary depending on many factors,
including its competitive position and the treatment of stranded costs. Although
PSO believes it is in a position to compete effectively in a deregulated, more
competitive marketplace, if stranded costs are not recovered from customers,
then PSO may be required by existing accounting standards to recognize
potentially significant stranded investments losses (The foregoing statement
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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.
At the federal level, several bills have been introduced in Congress in
the early part of the 1997 legislative session, and recent reports indicate that
other bills are likely to be introduced in the near future, which provide for
restructuring and/or deregulating the U.S. electric utility industry. These
bills will likely cover many different issues including repeal of the Holding
Company Act and PURPA, establishment of full retail customer choice,
disaggregation of electric utilities and the restructuring of the electric
utility industry. States that have considered deregulation have been moving
increasingly toward requiring some form of retail competition or retail
wheeling. PSO cannot predict when and if it will be subject to one or more of
these legislative initiatives, nor can it predict the scope or effect of such
legislation on its consolidated results of operations or financial condition.
For additional information related to such initiatives, see INDUSTRY
RESTRUCTURING IN OKLAHOMA.
WHOLESALE ELECTRIC COMPETITION IN THE UNITED STATES
The Energy Policy Act, which was enacted in 1992, significantly alters
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 a new category of non-utility 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. PSO must
compete in the wholesale energy markets with other public utilities,
cogenerators, qualifying facilities, EWGs and others for sales of electric
power. While PSO believes that the Energy Policy Act will continue to make the
wholesale markets more competitive, PSO is unable to predict whether the Energy
Policy Act will adversely impact PSO.
FERC ORDER 888
On April 24, 1996, the FERC issued Order 888 which is the final
comparable open access transmission rule. The provisions of FERC Order 888
provide for comparable transmission service between utilities and their
transmission customers by requiring utilities to take transmission service under
their open access tariffs for all of their new wholesale sales and purchases and
by requiring utilities to rely on the same information that their transmission
customers rely on to make wholesale purchases and sales. FERC Order 888
reaffirms the FERC's position that utilities are entitled to recover all
legitimate, prudent and verifiable stranded costs determined by a formula based
upon the revenues lost method through direct assignments charges to departing
customers.
FERC Order 888 requires holding companies to offer single system
transmission rates. However, the rule granted the U.S. Electric Operating
Companies an exemption permitting an opportunity to propose a solution that
provides comparability to all wholesale users. The final rule does suggest that
the terms and conditions for the CSW ERCOT companies (CPL and WTU) would be
permitted to differ from those offered by the CSW SPP companies (PSO and
SWEPCO). Transmitting utilities in the SPP are under the exclusive jurisdiction
of the FERC while most transmitting utilities in ERCOT are under the exclusive
jurisdiction of the Texas Commission. These two commissions have different
approaches to defining and implementing comparable open access transmission
service. CSW is the only holding company that owns operating companies in both
ERCOT and the SPP.
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On November 1, 1996, the U.S. Electric Operating Companies filed a
system-wide tariff to comply with FERC Order 888. On December 31, 1996, the FERC
accepted for filing the system-wide tariff to become effective on January 1,
1997, subject to refund and to the issuance of further orders. CSW and the U.S.
Electric Operating Companies believe that their system-wide tariff complies with
the requirements of the FERC and the Texas Commission, but the tariff does not
offer a single system rate for transactions due to the different transmission
pricing approaches of the FERC and the Texas Commission.
RETAIL ELECTRIC COMPETITION IN THE UNITED STATES
Increasing competition in the utility industry has resulted in
increasing pressure to stabilize or reduce rates. The retail regulatory
environment is beginning to shift from traditional rate base regulation to
incentive regulation. Incentive rate and performance-based plans encourage
efficiencies and increased productivity while permitting utilities to share in
the results. Retail wheeling, a major legislative initiatives which would
require utilities to "wheel" or move power from third parties to their own
retail customers, is evolving gradually. Many states currently have introduced
legislation or are investigating the issue, and several states have already
passed legislation which mandates retail choice by a certain date.
PSO believes that retail competition would not be in the best interests
of PSO's customers and security holders unless PSO receives fair recovery of the
full amounts previously invested to finance power plants. These investments,
which were reasonably incurred, were made by PSO to meet its obligation to serve
the public interest, necessity and convenience. This obligation has existed for
nearly a century and remains in force under current law. PSO intends to strongly
oppose attempts to impose retail competition without just compensation for the
risks and investments PSO undertook to serve the public's demand for
electricity. For additional information related to retail wheeling, see INDUSTRY
RESTRUCTURING IN OKLAHOMA.
CSW RESTRUCTURING
In April 1996, CSW announced organizational and executive changes to
help prepare CSW for increased competition and unbundling of the electric
utility industry into generation, transmission, distribution and service
segments. As a result of these changes, in 1996 CSW functionally reorganized its
domestic utility operations into three organizational units which are centrally
managed from CSW Services.
CSW created a power generation business unit to provide energy
generation and production services. All phases of management of the U.S.
Electric Operating Companies' energy production activities have been
consolidated into the power generation business unit. These activities include
management of all generating facilities, including nuclear facilities, and fuel
procurement.
CSW created an energy delivery business unit to provide services for
the long-distance transmission and local distribution of electricity to retail
customers, including attendant customer services such as meter reading, billing
and accounting. All phases of management of the U.S. Electric Operating
Companies' energy delivery activities have been consolidated into the energy
delivery business unit.
CSW created an energy services business unit to provide marketing
services, along with new energy efficiency products and services as they become
available, to existing and future customers of the U.S. Electric Operating
Companies. The energy services unit also manages CSW Communications and
EnerShop.
Functional unbundling of CSW's vertically integrated structure is
expected to provide a more competitive organizational structure for CSW. Some
employees have been reassigned from the U.S. Electric Operating Companies to CSW
Services to provide these centrally managed services.
Through December 31, 1996, PSO has incurred $0.9 million in connection
with the implementation of the 1996 restructuring. Additionally, PSO has
reserved approximately $1.3 million for additional expenses associated with the
1996 restructuring, which is expected to be completed by early 1997.
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INDUSTRY RESTRUCTURING IN OKLAHOMA
In June 1996, the Oklahoma Commission initiated a proceeding in which
it solicited public comment on various issues associated with the potential
restructuring of the Oklahoma electric utility industry. The Oklahoma Commission
requested comment on certain issues including the extent and timing of
restructuring, the unbundling of utility services, and the legislative and
regulatory requirement for restructuring. The Oklahoma Commission staff
conducted a series of informal public technical conferences and workshops over
the last half of 1996 to discuss these issues. After receiving a report from its
staff summarizing the comments provided in the restructuring proceeding, the
Oklahoma Commission took no immediate action but left the proceeding open at
this time to allow for the monitoring of other states' activities.
In February, 1997, a bill was introduced in the Oklahoma Senate which
would permit some form of retail competition by January 1, 1999, with retail
competition for all customers soon thereafter. The bill directs the Oklahoma
Commission to review the issue of and devise a mechanism for recovery of
prudently incurred, unmitigable and verified stranded costs and investments. The
bill leaves many details to be decided by the Oklahoma Commission and the
Oklahoma Tax Commission, but neither can issue any regulations without the prior
express authority of the legislature or the Joint Electric Utility Task Force, a
14-member panel with an equal number of members from each house of the Oklahoma
Legislature. CSW is unable to predict whether any retail competition legislation
will be enacted by the Oklahoma Legislature and, if enacted, what form such
legislation would take.
EFFECT OF FEDERAL AND STATE RESTRUCTURING INITIATIVES ON PSO
PSO cannot predict the form or effect of any federal or state electric
utility restructuring initiatives at this time. Federal and/or state electric
utility restructuring may cause impairment of significant recorded assets,
material reductions of profit margins, and/or increased costs of capital. No
assurance can be made that such events would not have a material adverse effect
on PSO's consolidated results of operations, financial condition or competitive
position.
PSO UNION NEGOTIATIONS
Since July 1, 1996, PSO and its Local Union 1002 of the IBEW have been
engaged in contract renewal negotiations. The underlying agreement expired
September 30, 1996 and, to date, the parties have been unable to reach an
agreement. As a result, PSO implemented portions of its final proposal on
December 29, 1996 after declaring an impasse. The principal issue of
disagreement involves PSO's anticipated need for flexibility in a deregulated
environment. At this time, PSO cannot predict the outcome of this matter.
However, PSO is confident that, even in the event of a strike, its operations
would continue without a significant disruption.
REGULATORY ACCOUNTING
Consistent with industry practice and the provisions of SFAS No. 71,
which allows for the recognition and recovery of regulatory assets, PSO has
recognized significant regulatory assets and liabilities. Management believes
that PSO will continue to meet the criteria for following SFAS No. 71. However,
in the event PSO no longer meets the criteria for following SFAS No. 71, a
write-off of regulatory assets and liabilities would be required. For additional
information regarding regulatory accounting, reference is made to NEW ACCOUNTING
STANDARDS and NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
PSO STRATEGIC RESPONSES
PSO has from time to time considered, and expects to consider in the
future, various strategies designed to enhance PSO's competitive position and to
increase its ability to anticipate and adapt to changes in the electric utility
industry. These strategies may include business combinations with other
companies, internal restructurings involving the complete or partial separation
of PSO's generation, transmission and distribution businesses, acquisitions or
dispositions of assets or lines of business, and additions to or reductions of
franchised service territories. See CSW RESTRUCTURING. PSO may from time to time
engage in discussions, either internally or with third parties, regarding one or
2-111
more of these potential strategies. Those discussions may be subject to
confidentiality agreements and PSO's policy generally not to comment on such
activities. No assurances can be given as to whether any potential transaction
of the type described above may actually occur, or, if one or more does occur,
as to the ultimate effect thereof on PSO's consolidated results or operations,
financial condition or competitive position.
IMPACT OF COMPETITION
PSO is unable to predict the ultimate outcome or impact of competitive
forces on the electric utility industry. As the electricity markets become more
competitive, however, the principal factor determining success is likely to be
price, and to a lesser extent reliability, availability of capacity, and
customer service (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).
RATES AND REGULATORY MATTERS
PSO RATE REVIEW
On July 19, 1996, the Oklahoma Commission staff filed an application
seeking a review of PSO's earnings and rate structure. The review is being
initiated to investigate the potential impact on PSO's rates from both the sale
of Transok and PSO's restructuring efforts as well as PSO's improved financial
results. Although rate reviews do not have specific time limitations, a schedule
has been established for PSO's response. In accordance with the established
schedule, PSO filed a package of financial information with the Oklahoma
Commission staff on November 1, 1996, and cost of service and rate design
testimony on January 10, 1997. A final order from the Oklahoma Commission is
expected in the fall of 1997. PSO's management cannot predict the ultimate
outcome of PSO's rate case, although management believes that the ultimate
resolution will not have a material adverse effect on PSO's consolidated results
of operations or financial condition. However, if PSO ultimately is unsuccessful
in reaffirming adequate rates, PSO could experience a material adverse effect on
its consolidated results of operations and financial condition.
On January 14, 1997, the Oklahoma Commission approved a joint
settlement which provides that all bills rendered beginning with PSO's June 1997
billing cycle shall be considered interim rates subject to refund with interest
in the event that the permanent final order grants less than the current revenue
produces by the existing rates.
ENVIRONMENTAL MATTERS
The operations of PSO, 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 one PRP can be
held responsible for the entire cost of a cleanup. Usually, however, cleanup
costs are allocated among PRPs.
PSO is subject to various pending claims alleging that it is a PRP
under federal or state remedial laws for investigating and cleaning up
contaminated property. PSO anticipates that resolution of these claims,
individually or in the aggregate, will not have a material adverse effect on
PSO's consolidated 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 PSO, the estimated amount of costs allocated to
2-112
PSO and the participation of other parties. See ITEM 1-BUSINESS and NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS for additional discussion regarding
environmental matters.
NEW ACCOUNTING STANDARDS
SFAS NO. 121
PSO adopted SFAS No. 121 effective January 1, 1996. The statement
establishes a two-fold test for identification and quantification of an impaired
asset. The adoption of SFAS No. 121 did not have a significant impact on PSO's
consolidated results of operations or financial condition. Under the current
regulatory environment, PSO does not expect SFAS No. 121 to have a significant
impact on its consolidated results of operation or financial condition. However,
future developments in the electric industry and utility regulation could
jeopardize the full recovery of the carrying cost of certain investments.
Consequently, PSO is monitoring the changing conditions facing the electric
utility industry.
SFAS NO. 123
SFAS No. 123 provides that if stock is granted to an employee or a
non-employee in return for services provided to the company, that this stock
represents compensation to the recipient. It requires the calculation of a
compensation cost, but then allows the company to choose between making the
charge to net income or disclosing this information in its notes to its
financial statements. See NOTE 11. STOCK-BASED COMPENSATION PLANS. Under prior
accounting rules, recognition of compensation for the grant of stock options was
not required if the stock price at the time of the grant and the price at which
the employee could purchase the stock were the same.
SFAS NO. 125
SFAS No. 125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishment of liabilities using a
financial-components approach that focuses on control. An entity recognizes
assets it controls and derecognizes assets when control has been surrendered and
liabilities when they have been extinguished. A transfer of assets in which
control of the asset is surrendered is recorded as a sale. Control of an asset
is surrendered only when and if certain distinct conditions are met. Likewise, a
liability is only extinguished under certain distinct conditions. SFAS No. 125
is effective for transfers and servicing of financial assets occurring after
December 31, 1996, and cannot be applied prior to that date. Adoption of this
standard will not have a material effect on PSO's consolidated results of
operations or financial condition.
2-113
PSO
Consolidated Statements of Income
Public Service Company of Oklahoma
- -------------------------------------------------------------------------------
For the Years Ended December 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
(thousands)
Electric Operating Revenues
Residential $299,550 $280,127 $296,159
Commercial 221,985 210,875 227,488
Industrial 157,509 147,811 165,200
Sales for resale 39,285 34,273 35,458
Other 16,936 17,737 16,191
--------- --------- ---------
735,265 690,823 740,496
--------- --------- ---------
Operating Expenses and Taxes
Fuel 290,408 273,533 316,470
Purchased power 41,194 23,584 34,906
Other operating 121,235 116,175 120,024
Maintenance 38,469 35,356 44,847
Depreciation and amortization 77,470 67,657 63,096
Taxes, other than income 27,194 25,147 25,757
Income taxes 37,558 37,602 37,138
--------- --------- ---------
633,528 579,054 642,238
--------- --------- ---------
Operating Income 101,737 111,769 98,258
--------- --------- ---------
Other Income and Deductions
Allowance for equity funds used
during construction 292 1,270 1,094
Reserve for utility plant development
costs, net of tax of $15,401 (35,708) -- --
Other (95) 2,274 933
--------- --------- ---------
(35,511) 3,544 2,027
--------- --------- ---------
Income Before Interest Charges 66,226 115,313 100,285
--------- --------- ---------
Interest Charges
Interest on long-term debt 30,555 29,594 29,594
Interest on short-term debt
and other 5,623 6,355 3,844
Allowance for borrowed funds
used during construction (1,430) (2,464) (1,419)
--------- --------- ---------
34,748 33,485 32,019
--------- --------- ---------
Net Income 31,478 81,828 68,266
Preferred stock dividends 816 816 816
--------- --------- ---------
Net Income for Common Stock $30,662 $81,012 $67,450
========= ========= =========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
2-114
PSO
Consolidated Statements of Retained Earnings
Public Service Company of Oklahoma
- ----------------------------------------------------------------------------
For the Years Ended December 31,
-------------------------------
1996 1995 1994
-------- -------- --------
(thousands)
Retained Earnings at Beginning of Year $150,281 $124,269 $97,819
Net income for common stock 30,662 81,012 67,450
Deduct: Common stock dividends 35,000 55,000 41,000
-------- -------- --------
Retained Earnings at End of Year $145,943 $150,281 $124,269
======== ======== ========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
2-115
Consolidated Balance Sheets
Public Service Company of Oklahoma
- --------------------------------------------------------------------------
As of December 31,
----------------------
1996 1995
---------- ----------
(thousands)
ASSETS
Electric Utility Plant
Production $902,813 $939,106
Transmission 368,280 363,692
Distribution 773,590 712,483
General 186,252 182,705
Construction work in progress 59,241 56,576
---------- ----------
2,290,176 2,254,562
Less - Accumulated depreciation 987,283 924,186
---------- ----------
1,302,893 1,330,376
---------- ----------
Current Assets
Cash 1,479 744
Accounts receivable 11,069 17,957
Materials and supplies, at average cost 34,542 41,179
Fuel inventory, at LIFO cost 14,061 15,765
Accumulated deferred income taxes 2,558 10,389
Prepayments 2,991 2,450
---------- ----------
66,700 88,484
---------- ----------
Deferred Charges and Other Assets 62,004 61,956
---------- ----------
$1,431,597 $1,480,816
========== ==========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
2-116
PSO
Consolidated Balance Sheets
Public Service Company of Oklahoma
- -------------------------------------------------------------------------------
As of December 31,
-----------------------
1996 1995
---------- ----------
CAPITALIZATION AND LIABILITIES (thousands)
Capitalization
Common stock: $15 par value
Authorized shares: 11,000,000 shares
Issued 10,482,000 shares and
outstanding 9,013,000 shares $157,230 $157,230
Paid-in capital 180,000 180,000
Retained earnings 145,943 150,281
---------- ----------
Total Common Stock Equity 483,173 487,511
---------- ----------
Preferred stock 19,826 19,826
Long-term debt 420,301 379,250
---------- ----------
Total Capitalization 923,300 886,587
---------- ----------
Current Liabilities
Long-term debt due within 12 months -- 25,000
Advances from affiliates 42,867 70,510
Payables to affiliates 27,425 40,463
Accounts payable 47,604 23,094
Payables to customers 14,329 32,517
Accrued taxes 12,306 27,014
Accrued interest 9,193 9,025
Other 7,421 8,589
---------- ----------
161,145 236,212
---------- ----------
Deferred Credits
Accumulated deferred income taxes 251,007 264,353
Investment tax credits 43,438 46,222
Income tax related regulatory liabilities, net 46,007 41,820
Other 6,700 5,622
---------- ----------
347,152 358,017
---------- ----------
$1,431,597 $1,480,816
========== ==========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
2-117
PSO
Consolidated Statements of Cash Flows
Public Service Company of Oklahoma
- -----------------------------------------------------------------------------
For the Years Ended December 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(thousands)
OPERATING ACTIVITIES
Net Income $31,478 $81,828 $68,266
Non-cash Items Included in Net Income
Depreciation and amortization 83,424 73,218 67,452
Restructuring charges 1,305 (400) (197)
Deferred income taxes and investment
tax credits (4,112) (85) 4,990
Allowance for equity funds used
during construction (292) (1,270) (1,094)
Reserve for utility plant
development costs 50,854 -- --
Inventory reserve 3,150 -- --
Changes in Assets and Liabilities
Accounts receivable 6,888 3,574 15,081
Other investments and property (6,264) 2,196 (1,761)
Accounts payable (5,878) (22,970) 26,894
Accrued taxes (14,708) 9,658 2,165
Accrued restructuring charges -- (646) (15,626)
Other deferred credits 1,078 (3,193) (17,153)
Other (4,305) 1,978 2,784
--------- --------- ---------
142,618 143,888 151,801
--------- --------- ---------
INVESTING ACTIVITIES
Construction expenditures (83,509) (98,415) (128,625)
Allowance for borrowed funds used
during construction (1,430) (2,464) (1,419)
Other (7,166) (7,251) (335)
--------- --------- ---------
(92,105) (108,130) (130,379)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 51,744 -- --
Retirement of long-term debt (25,000) -- --
Reacquisition of long-term debt (13,040) -- --
Change in advances from affiliates (27,643) 15,350 23,416
Payment of dividends (35,839) (55,817) (41,814)
--------- --------- ---------
(49,778) (40,467) (18,398)
--------- --------- ---------
Net Change in Cash and Cash Equivalents 735 (4,709) 3,024
Cash and Cash Equivalents at Beginning
of Year 744 5,453 2,429
--------- --------- ---------
Cash and Cash Equivalents at End of Year $1,479 $744 $5,453
========= ========= =========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $32,488 $31,285 $31,459
========= ========= =========
Income taxes paid $30,353 $27,651 $28,910
========= ========= =========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
2-118
PSO
Consolidated Statements of Capitalization
Public Service Company of Oklahoma
- ------------------------------------------------------------------------------
As of December 31,
--------------------
1996 1995
-------- --------
(thousands)
COMMON STOCK EQUITY $483,173 $487,511
-------- --------
PREFERRED STOCK
(Cumulative $100 Par Value, Authorized 700,000
shares, redeemable at the option of PSO
upon 30 days notice)
Number Current
of Shares Redemption
Series Outstanding Price
- --------------------------------------------------
4.00% 97,900 $105.75 9,790 9,790
4.24% 100,000 $103.19 10,000 10,000
Premium 36 36
-------- --------
19,826 19,826
-------- --------
LONG-TERM DEBT
First Mortgage Bonds
Series J, 5 1/4%, due March 1, 1996 -- 25,000
Series K, 7 1/4%, due January 1, 1999 25,000 25,000
Series L, 7 3/8%, due March 1, 2002 30,000 30,000
Series S, 7 1/4%, due July 1, 2003 65,000 65,000
Series T, 7 3/8%, due December 1, 2004 50,000 50,000
Series U, 6 1/4%, due April 1, 2003 35,000 35,000
Series V, 7 3/8%, due April 1, 2023 100,000 100,000
Series W, 6 1/2%, due June 1, 2005 50,000 50,000
Medium-term Notes, 5.89%-6.43%, due
December 15, 2000-March 1, 2001 40,000 --
Installment sales agreement - PCRBs
Series A, 5.9%, due December 1, 2007 (OEFA) 34,700 34,700
Series 1984, 7 7/8%, due September 15, 2014
(Red River) -- 12,660
Series 1996, 6.0%, due June 1, 2020 (Red River) 12,660 --
Unamortized discount (3,991) (4,415)
Unamortized costs of reacquired debt (18,068) (18,695)
Amount to be redeemed within one year -- (25,000)
-------- --------
420,301 379,250
-------- --------
TOTAL CAPITALIZATION $923,300 $886,587
======== ========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
2-119
PUBLIC SERVICE COMPANY OF OKLAHOMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See CSW's NOTE 1.
2. LITIGATION AND REGULATORY PROCEEDINGS
See CSW's NOTE 2.
3. COMMITMENTS AND CONTINGENT LIABILITIES
See CSW's NOTE 3.
4. INCOME TAXES
See CSW's NOTE 4.
5. BENEFIT PLANS
See CSW's NOTE 5.
6. JOINTLY OWNED ELECTRIC UTILITY PLANT
See CSW's NOTE 6.
7. FINANCIAL INSTRUMENTS
See CSW's NOTE 7.
8. LONG-TERM DEBT
See CSW's NOTE 8.
9. PREFERRED STOCK
See CSW's NOTE 9.
10. SHORT-TERM FINANCING
See CSW's NOTE 10.
11. STOCK BASED COMPENSATION PLANS
See CSW's NOTE 12.
2-120
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF PUBLIC SERVICE COMPANY OF
OKLAHOMA:
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of Public Service Company of Oklahoma
(an Oklahoma corporation and a wholly owned subsidiary of Central and South West
Corporation) and subsidiary company, as of December 31, 1996 and 1995, and the
related consolidated statements of income, retained earnings and cash flows, for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of Public Service Company of Oklahoma's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Public Service
Company of Oklahoma and subsidiary company as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental Schedule II and Exhibit
12 are presented for purposes of complying with Securities and Exchange
Commission's rules and are not a required part of the basic financial
statements. This schedule and exhibit have been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Dallas, Texas
February 28, 1997
2-121
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and
objectivity of the consolidated financial statements of Public Service Company
of Oklahoma and its subsidiary company 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 PSO's
independent public accountants who were given unrestricted access to all
financial records and related data, including minutes of all meetings of
shareholders, the board of directors and committees of the board. PSO and its
subsidiary believe that representations made to the independent public
accountants during their audit were valid and appropriate. The report of
independent public accountants is presented elsewhere in this report.
PSO, together with its subsidiary company, 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 the companies 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 PSO
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 PSO or its
subsidiary, 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.
PSO and its subsidiary 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, 1996.
T. D. Churchwell R. Russell Davis
President - PSO Controller - PSO
2-122
SOUTHWESTERN ELECTRIC
POWER COMPANY
2-123
SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended
December 31 is provided to highlight significant trends in the financial
condition and results of operations for SWEPCO. Certain financial statement
items for prior years have been reclassified to conform to the most recent
period presented.
-----------------------------------------------------
1996(1) 1995 1994 1993(2) 1992
(thousands, except ratio data)
INCOME STATEMENT DATA
Revenues $920,786 $836,705 $825,296 $837,192 $778,303
Income before cumulative effect
of changes in accounting principles 66,556 117,114 105,712 78,471 94,883
Net income for common stock 63,503 113,870 102,351 78,514 91,438
BALANCE SHEET DATA
Assets 2,099,156 2,116,719 2,079,207 1,968,285 1,927,320
Long-term obligations (3) 629,615 632,579 630,661 638,093 570,088
Capitalization ratios
Common stock equity 52.1% 51.3% 51.2% 49.7% 52.5%
Preferred stock 3.6 3.7 3.8 4.0 4.3
Long-term debt 44.3 45.0 45.0 46.3 43.2
Ratio of earnings to fixed charges 2.81 3.80 3.70 3.27 (4) 3.39
(SEC Method)
(1) Earnings in 1996 reflect a $21.8 million one-time charge, net of tax,
associated with certain investments for plant sites, engineering studies
and lignite reserves.
(2) Earnings in 1993 were significantly affected by restructuring charges, the
$3 million cumulative effect of changes in accounting principles and the
establishment of reserves for fuel properties. Pro forma amounts, assuming
that the change in accounting for unbilled revenues had been adopted
retroactively, are not materially different from amounts reported for prior
years and therefore have not been restated.
(3) Long-term obligations includes long-term debt and preferred stock subject
to mandatory redemption.
(4) Ratio of earnings to fixed charges for 1993 was calculated before
cumulative effect of change in accounting principles.
2-124
SOUTHWESTERN ELECTRIC POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to SWEPCO's Financial Statements and related Notes to
Financial Statements and Selected Financial Data. The information contained
therein should be read in conjunction with, and is essential in understanding,
the following discussion and analysis.
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 AND 1995
OVERVIEW
Net income for common stock decreased 44% during 1996 to approximately
$63.5 million from approximately $113.9 million in 1995. The decrease resulted
primarily from increased other operating expenses and a one-time charge
associated with certain investments for plant sites, engineering studies and
lignite reserves of approximately $21.8 million, net of tax. Increased
depreciation and amortization also contributed to the decrease in net income for
common stock.
ELECTRIC OPERATING REVENUES
Total electric operating revenues increased approximately $84.1
million, or 10%, to $920.8 million in 1996 due primarily to a $61 million
increase in fuel revenues and a $22 million increase in non-fuel revenues. The
increase in fuel revenues was due to higher average unit fuel cost as discussed
below. The increase in non-fuel revenues was primary due to a 3% increase in
retail KWH sales resulting from increased customer demand.
FUEL
Fuel expense increased 22% to $388.5 million in 1996 when compared to
1995, due primarily to a 10% increase in generation and an increase in the
average unit cost of fuel from $1.61 per MMbtu in 1995 to $1.76 per MMbtu in
1996. The increase in the average unit cost of fuel is attributable to an
increase in the spot market price of natural gas offset in part by a decline in
the delivered cost of coal resulting from lower transportation charges as well
as purchases of lower priced spot market coal.
PURCHASED POWER
Purchased power expense increased approximately $8.1 million, or 42%,
during 1996 when compared to 1995 due primarily to an increase in economy energy
purchases at higher cost per MWH.
OTHER OPERATING
Other operating expenses increased approximately $20.3 million, or 17%,
during 1996 when compared to 1995. The increase is due primarily to $4.6 million
in restructuring charges, an increase in outside services employed and a $3.0
million increase in factoring costs. The increase in factoring costs resulted
from an increase in accounts receivable factored and the correction in 1995 of
an error relating to a prior year, partially offset by a decrease in the average
interest rate associated with factored receivables. Also contributing to the
increase in other operating expenses was the write-off of $3.6 million in
deferred SFAS 106 costs which SWEPCO began deferring in 1993 pursuant to an
order issued by the Arkansas Commission. The order allowed deferral of the
difference between OPEB costs recorded under SFAS 106 and OPEB costs paid to
retirees for up to five years. The order requires such deferrals to be expensed
if at the end of five years amortization of such deferrals is not included in
rates.
2-125
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased approximately $8.3 million, or
10%, during 1996 when compared to 1995 due primarily to increases in depreciable
plant and the completion in 1995 of the amortization of previously expensed
inventory and supply items that were credited through amortization to cost of
service.
TAXES, OTHER THAN INCOME
Taxes, other than income, increased approximately $5.2 million, or 12%,
during 1996 when compared to 1995 due primarily to an increase in ad valorem
taxes and state franchise taxes. The higher ad valorem taxes resulted primarily
from a higher state assessed value in Louisiana and the addition of an HVdc tie
in Texas. The state franchise taxes increased due mainly to higher federal
taxable income associated with Texas franchise tax.
INCOME TAXES
Income tax expense decreased approximately $3.5 million in 1996 due
primarily to lower pre-tax income partially offset by prior year tax adjustments
recorded in 1995.
OTHER INCOME AND DEDUCTIONS
Other income and deductions decreased $25.6 million during 1996 when
compared to 1995 due primarily to a one-time charge associated with certain
investments for plant sites, engineering studies and lignite reserves of
approximately $21.8 million, net of tax.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 AND 1994
OVERVIEW
Net income for common stock increased 11% during 1995 to approximately
$113.9 million from approximately $102.4 million in 1994 due primarily to an
increase in non-fuel revenue. The increase in non-fuel revenue was attributable
to a 4% increase in KWH sales from weather-related demand and customer growth.
ELECTRIC OPERATING REVENUES
Total electric operating revenues increased $11.4 million, or 1%, to
$836.7 million during 1995 due primarily to a $28.3 million increase in non-fuel
revenues. The increase in non-fuel revenues was attributable to a 4% increase in
retail KWH sales resulting from weather-related demand and customer growth. The
increase in non-fuel revenues was offset in part by a $14.8 million decrease in
fuel revenues due to lower average fuel costs as discussed below.
FUEL
Fuel expense was $318.5 million in 1995, a decrease of 5% when compared
to 1994 fuel expense of $336.4 million. The decrease in fuel expense was due
primarily to an 8% decrease in the average unit cost of fuel from $1.75 per
MMbtu in 1994 to $1.61 per MMbtu in 1995, which was offset in part by a 3%
increase in generation. The decrease in the per unit cost of fuel resulted from
a decrease in the spot market price of natural gas.
PURCHASED POWER
Purchased power expense decreased approximately $1.2 million, or 6%,
during 1995 when compared to 1994 due primarily to a 36% decrease in purchases,
partially offset by a firm contract for additional operating reserves and on
peak capacity.
2-126
OTHER OPERATING
Other operating expenses increased approximately $6.9 million, or 6%,
during 1995 when compared to 1994. The increase was due primarily to an increase
in transmission expenses associated with the completion and placement in service
of a new HVdc tie in 1995 and an increase in employee-related costs.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $3.4 million or 4% during 1995
when compared to 1994 due primarily to increases in depreciable plant.
TAXES, OTHER THAN INCOME
Taxes, other than income, increased approximately $1.6 million, or 4%,
during 1995 when compared to 1994 due primarily to an increase in ad valorem
taxes.
INCOME TAXES
Income tax expense decreased approximately $1.0 million in 1995 due
primarily to prior year tax adjustments partially offset by higher pre-tax
income.
ALLOWANCE FOR EQUITY AND BORROWED FUNDS USED DURING CONSTRUCTION
AFUDC increased approximately $3.2 million during 1995 when compared to
the prior year due primarily to increased CWIP balances accruing AFUDC. Also
contributing to the increase in 1995 was a prior period adjustment.
INTEREST ON SHORT-TERM DEBT AND OTHER
Interest expense on short-term debt and other increased approximately
$3.1 million, or 41%, during 1995 when compared to 1994 due primarily to higher
levels of short-term debt outstanding at higher short-term interest rates.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
SWEPCO's need for capital results primarily from its construction of
facilities to provide reliable electric service to its customers. Accordingly,
internally generated funds should meet most of the capital requirements.
However, if internally generated funds are not sufficient, SWEPCO's financial
condition should allow it access to the capital markets.
CONSTRUCTION EXPENDITURES
SWEPCO maintains 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 SWEPCO for the next three years
are primarily to improve and expand distribution facilities and will be funded
primarily through internally generated funds. These improvements will be
required to meet the anticipated needs of new customers and the growth in the
requirements of existing customers. Construction expenditures, including AFUDC,
for SWEPCO were approximately $95 million in 1996, $115 million in 1995 and $153
million in 1994. SWEPCO's estimated total construction expenditures, including
AFUDC, for the years 1997 through 1999 are presented in the following table (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).
2-127
CONSTRUCTION EXPENDITURES
1997 1998 1999 Total
---------------------------------
(millions)
Generation $38 $17 $18 $73
Transmission 23 29 34 86
Distribution 41 42 43 126
Other 16 14 12 42
---------------------------------
$118 $102 $107 $327
---------------------------------
The U.S. Electric Operating Companies plan to dismantle certain power
plant properties during late 1997 and 1998. Dismantling includes the removal,
disposal and/or salvage of retired equipment and ancillary buildings. None of
the units to be dismantled is included in SWEPCO's 1996 aggregate capability.
The depreciation rates of the U.S. Electric Operating Companies include a
component for net removal cost and therefore are being recovered from customers
currently through rates. As a result, actual dismantling of these units will not
have a material impact on net income. Current estimates of capital resources
that will be required by the U.S. Electric Operating Companies to dismantle
these units range from $10 million to $15 million and SWEPCO's share of such
costs are not reflected in the above construction numbers. It is anticipated
that a request for bids will be issued by mid 1997.
Although SWEPCO does not believe that it will require substantial
additions of generating capacity over the next several years, the U.S. Electric
System's internal resource plan presently anticipates that any additional
capacity needs will come from a variety of sources, including power purchases.
Therefore, during 1996, SWEPCO recorded reserves and write-offs in the amount
$21.8 million, net of tax, for certain investments in plant sites, engineering
studies and lignite reserves. Refer to INTEGRATED RESOURCE PLAN for additional
information regarding future capacity needs.
INFLATION
Annual inflation rates, as measured by the national Consumer Price
Index, have averaged approximately 2.8% for the three-year period ending
December 31, 1996. SWEPCO believes that inflation at this level does not
materially affect its results of operations or financial condition. 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.
LONG-TERM FINANCING
As of December 31, 1996, the capitalization ratios of SWEPCO were 52%
common stock equity, 4% preferred stock and 44% long-term debt. SWEPCO's
embedded cost of long-term debt was 6.7% at December 31, 1996. SWEPCO
continually monitors the capital markets for opportunities to lower its cost of
capital through refinancing. SWEPCO is committed to maintaining financial
flexibility through a strong capital structure and favorable securities ratings
in order to access the capital markets opportunistically or when required. See
CSW's ITEM 7-MD&A for SWEPCO's securities' ratings.
In July 1996, $81.7 million of Sabine, 6.10%, Series 1996 PCRBs were
issued for the benefit of SWEPCO. The proceeds from this issuance were used to
refund the $81.7 million Sabine, 8.20%, Series 1986 PCRBs.
SHELF REGISTRATION STATEMENT
SWEPCO, along with certain affiliated capital trusts has filed a shelf
registration statement with the SEC for the issuance of up to $110 million of
preferred securities and/or junior subordinated deferrable interest debentures.
SWEPCO may offer such securities subject to market conditions and other factors.
The proceeds of any such offering will be used principally to redeem FMBs,
preferred stock, repay short-term debt or provide working capital.
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SHORT-TERM FINANCING
SWEPCO, together with other members of CSW System, has established a
CSW System money pool to coordinate short-term borrowings. These loans are
unsecured demand obligations at rates approximating the CSW System's commercial
paper borrowing costs. At December 31, 1996 SWEPCO's short-term borrowing limit
from the money pool was approximately $134 million. During 1996, the annual
weighted average interest rate on SWEPCO's borrowings was 5.6% and the average
amount of SWEPCO short-term borrowings outstanding was $90 million. The maximum
amount of SWEPCO short-term borrowings outstanding during 1996 was $133 million,
which was the amount outstanding at April 3, 1996.
INTERNALLY GENERATED FUNDS
Internally generated funds consist of cash flows from operating
activities less common and preferred stock dividends. SWEPCO utilizes short-term
debt to meet fluctuations in working capital requirements due to the seasonal
nature of energy sales. SWEPCO anticipates that capital requirements for the
period 1997 to 1999 will be met, in large part, from internal sources. SWEPCO
also anticipates that some external financing will be required during the
period, however the nature, timing and extent have not yet been determined (The
foregoing statement constitutes a forward looking statement within the meaning
of Section 21E of the Exchange Act. Actual results may differ materially from
such projected information due to changes in the underlying assumptions. See
FORWARD LOOKING INFORMATION). Information concerning internally generated funds
is presented in the following table.
1996 1995 1994
----------------------
($ in millions)
Internally Generated Funds $153 $100 $105
Construction Expenditures Provided
by Internally Generated Funds 165% 96% 71%
SALES OF ACCOUNTS RECEIVABLE
SWEPCO sells its billed and unbilled accounts receivable, without
recourse, to CSW Credit. The sales provide SWEPCO with cash immediately, thereby
reducing working capital needs and revenue requirements. The average and year
end amounts of accounts receivable sold were $93 million and $87 million,
respectively, in 1996, as compared to $84 million and $72 million, respectively,
in 1995.
RECENT DEVELOPMENTS AND TRENDS
COMPETITION AND INDUSTRY CHALLENGES
Competitive forces at work in the electric utility industry are
impacting SWEPCO and 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 level in the future. As competition in the industry increases, SWEPCO
will have the opportunity to seek new customers and at the same time be at risk
of losing customers to other competitors. Additionally, SWEPCO will continue to
compete with suppliers of alternative forms of energy, such as natural gas, fuel
oil and coal, some of which may be cheaper than electricity. SWEPCO believes
that, overall, its prices for electricity and the quality and reliability of its
service currently place SWEPCO 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).
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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: (i) who will bear the costs of
prudent utility investments or past commitments incurred under traditional
cost-of-service regulation that will be uneconomic in a competitive environment,
sometimes referred to as stranded costs; (ii) whether all customers have access
to the benefits of competition; (iii) how, and by whom, the rules of competition
will be established; (iv) what the impact of deregulation will be on
conservation, environmental protection and other regulator-imposed programs; and
(v) how transmission system reliability will be ensured. The degree of risk to
SWEPCO associated with various federal and state restructuring proposals aimed
at resolving any or all of these issues will vary depending on many factors,
including its competitive position and the treatment of stranded costs. Although
SWEPCO believes it is in a position to compete effectively in a deregulated,
more competitive marketplace, if stranded costs are not recovered from
customers, then SWEPCO may be required by existing accounting standards to
recognize potentially significant stranded investments losses (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.
At the federal level, several bills have been introduced in Congress in
the early part of the 1997 legislative session, and recent reports indicate that
other bills are likely to be introduced in the near future, which provide for
restructuring and/or deregulating the U.S. electric utility industry. These
bills will likely cover many different issues including repeal of the Holding
Company Act and PURPA, establishment of full retail customer choice,
disaggregation of electric utilities and the restructuring of the electric
utility industry. States that have considered deregulation have been moving
increasingly toward requiring some form of retail competition or retail
wheeling. SWEPCO cannot predict when and if it will be subject to one or more of
these legislative initiatives, nor can it predict the scope or effect of such
legislation on its results of operations or financial condition. For additional
information related to such initiatives, see INDUSTRY RESTRUCTURING (ARKANSAS,
LOUISIANA AND TEXAS).
WHOLESALE ELECTRIC COMPETITION IN THE UNITED STATES
The Energy Policy Act, which was enacted in 1992, significantly alters
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 a new category of non-utility 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. SWEPCO must
compete in the wholesale energy markets with other public utilities,
cogenerators, qualifying facilities, EWGs and others for sales of electric
power. While SWEPCO believes that the Energy Policy Act will continue to make
the wholesale markets more competitive, SWEPCO is unable to predict whether the
Energy Policy Act will adversely impact SWEPCO.
FERC ORDER 888
On April 24, 1996, the FERC issued Order 888 which is the final
comparable open access transmission rule. The provisions of FERC Order 888
provide for comparable transmission service between utilities and their
transmission customers by requiring utilities to take transmission service under
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their open access tariffs for all of their new wholesale sales and purchases and
by requiring utilities to rely on the same information that their transmission
customers rely on to make wholesale purchases and sales. FERC Order 888
reaffirms the FERC's position that utilities are entitled to recover all
legitimate, prudent and verifiable stranded costs determined by a formula based
upon the revenues lost method through direct assignments charges to departing
customers.
FERC Order 888 requires holding companies to offer single system
transmission rates. However, the rule granted the U.S. Electric Operating
Companies an exemption permitting an opportunity to propose a solution that
provides comparability to all wholesale users. The final rule does suggest that
the terms and conditions for the CSW ERCOT companies (CPL and WTU) would be
permitted to differ from those offered by the CSW SPP companies (PSO and
SWEPCO). Transmitting utilities in the SPP are under the exclusive jurisdiction
of the FERC while most transmitting utilities in ERCOT are under the exclusive
jurisdiction of the Texas Commission. These two commissions have different
approaches to defining and implementing comparable open access transmission
service. CSW is the only holding company that owns operating companies in both
ERCOT and the SPP.
On November 1, 1996, the U.S. Electric Operating Companies filed a
system-wide tariff to comply with FERC Order 888. On December 31, 1996, the FERC
accepted for filing the system-wide tariff to become effective on January 1,
1997, subject to refund and to the issuance of further orders. CSW and the U.S.
Electric Operating Companies believe that their system-wide tariff complies with
the requirements of the FERC and the Texas Commission, but the tariff does not
offer a single system rate for transactions due to the different transmission
pricing approaches of the FERC and the Texas Commission.
RETAIL ELECTRIC COMPETITION IN THE UNITED STATES
Increasing competition in the utility industry has resulted in
increasing pressure to stabilize or reduce rates. The retail regulatory
environment is beginning to shift from traditional rate base regulation to
incentive regulation. Incentive rate and performance-based plans encourage
efficiencies and increased productivity while permitting utilities to share in
the results. Retail wheeling, a major legislative initiatives which would
require utilities to "wheel" or move power from third parties to their own
retail customers, is evolving gradually. Many states currently have introduced
legislation or are investigating the issue, and several states have already
passed legislation which mandates retail choice by a certain date.
SWEPCO believes that retail competition would not be in the best
interests of SWEPCO's customers and security holders unless SWEPCO receives fair
recovery of the full amounts previously invested to finance power plants. These
investments, which were reasonably incurred, were made by SWEPCO to meet its
obligation to serve the public interest, necessity and convenience. This
obligation has existed for nearly a century and remains in force under current
law. SWEPCO intends to strongly oppose attempts to impose retail competition
without just compensation for the risks and investments SWEPCO undertook to
serve the public's demand for electricity. For additional information related to
retail wheeling, see INDUSTRY RESTRUCTURING (ARKANSAS, LOUISIANA AND TEXAS).
CSW RESTRUCTURING
In April 1996, CSW announced organizational and executive changes to
help prepare CSW for increased competition and unbundling of the electric
utility industry into generation, transmission, distribution and service
segments. As a result of these changes, in 1996 CSW functionally reorganized its
domestic utility operations into three organizational units which are centrally
managed from CSW Services.
CSW created a power generation business unit to provide energy
generation and production services. All phases of management of the U.S.
Electric Operating Companies' energy production activities have been
consolidated into the power generation business unit. These activities include
management of all generating facilities, including nuclear facilities, and fuel
procurement.
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CSW created an energy delivery business unit to provide services for
the long-distance transmission and local distribution of electricity to retail
customers, including attendant customer services such as meter reading, billing
and accounting. All phases of management of the U.S. Electric Operating
Companies' energy delivery activities have been consolidated into the energy
delivery business unit.
CSW created an energy services business unit to provide marketing
services, along with new energy efficiency products and services as they become
available, to existing and future customers of the U.S. Electric Operating
Companies. The energy services unit also manages CSW Communications and
EnerShop.
Functional unbundling of CSW's vertically integrated structure is
expected to provide a more competitive organizational structure for CSW. Some
employees have been reassigned from the U.S. Electric Operating Companies to CSW
Services to provide these centrally managed services.
Through December 31, 1996, SWEPCO has incurred $2.0 million in
connection with the implementation of the 1996 restructuring. Additionally,
SWEPCO has reserved approximately $2.7 million for additional expenses
associated with the 1996 restructuring, which is expected to be completed by
early 1997.
INDUSTRY RESTRUCTURING IN LOUISIANA
In October 1996, the Louisiana Commission requested comments on various
electric industry restructuring issues in a docket opened in 1995 to consider
aspects of competition in the provision of retail electric service.
Specifically, the Louisiana Commission requested input from interested parties
on its policy statement on the "principles to guide the investigation into
whether electric industry restructuring and retail competition are in the public
interest." SWEPCO filed comments on this matter in November 1996. The Louisiana
Commission has not taken further action in this matter at this time. SWEPCO
expects that legislation regarding the restructuring of the Louisiana electric
utility industry will be introduced in the upcoming session of the Louisiana
legislature. SWEPCO cannot predict whether any such legislation will be enacted
and, if enacted, what form such legislation would take.
INDUSTRY RESTRUCTURING IN ARKANSAS
To date, no legislation regarding the restructuring of the Arkansas
electric utility industry has been introducted in the Arkansas legislature.
INDUSTRY RESTRUCTURING IN TEXAS
Amendments to PURA, the legal foundation of electric regulation in
Texas, became effective on September 1, 1995. Among other things, the amendments
deregulate the wholesale bulk power market in ERCOT, permit pricing flexibility
for utilities facing competitive challenges, provide for a market-driven
integrated resource planning process and mandate comparable open access
transmission service. In addition, one effect of the amendments is the
deregulation of the wholesale bulk power market in ERCOT. However, SWEPCO, as a
member of SPP rather than ERCOT, will not be directly impacted.
After a series of workshops and technical conferences conducted during
1996, the Texas Commission submitted a final Scope of Competition report to the
Texas Legislature in January 1997. The final report contains numerous
recommendations to the Texas Legislature including requests for additional
regulatory authority or clarification of existing authority including, INTER
ALIA, authority to certificate electric service resellers, the authority to
adopt consumer protection and universal service standards, the authority to
determine and allocate stranded costs to all customers, the authority to promote
unbundling, the authority to allow alternative forms of regulation, increased
authority to address mergers, authority to correct market power abuses,
authority over the ERCOT ISO and authority to permit alternative methods for
fuel cost recovery. In addition, the final report offers the Texas Legislature
four restructuring options. Option 1 maintains the regulatory status quo; Option
2 would permit utilities to voluntarily offer retail access; Option 3 provides
for full wholesale competition; and Option 4 provides for full retail
competition. The report's final recommendation is for the Texas Legislature to
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direct the Texas Commission to prepare for full retail competition using a
careful and deliberate approach on a timetable to be established by the Texas
Legislature, but with no retail access before the year 2000. SWEPCO cannot
predict the outcome of these proposals.
By statute the Texas Commission must submit a report to the 1997 Texas
Legislature on "methods or procedures for quantifying the magnitude of stranded
investment, procedures for allocating costs, and the acceptable methods of
recovering stranded costs." The Texas Commission initiated Project No. 15001 to
collect information to prepare the required report. In response to the Texas
Commission's order in this Project, SWEPCO filed information on estimates of
potential stranded costs.
The Texas Commission's Project 15002, "Scope of Competition Report," is
a report that the Texas Commission is required to present to the Texas
Legislature in each odd-numbered year detailing the scope of competition in the
electric markets and the impact of competition and industry restructuring on
customers. In addition, the report is required to include the Texas Commission's
recommendations to the Texas Legislature for further legislation. In June 1996,
SWEPCO filed information for the Texas Commission's report.
In February 1997, a retail competition bill was introduced into the
Texas Legislature. As proposed, the bill would: (i) require utilities to file a
restructuring plan by January 1, 1998; (ii) require a 15 percent rate reduction
for all customers of investor-owned utilities effective September 1, 1997; (iii)
allow public schools and universities to seek alternative electric energy
suppliers by August 1, 1998; (iv) allow residential and other small customers to
seek alternative electric energy suppliers by January 1, 1999; and (v) allow
other retail customers to seek alternative electric energy suppliers by January
1, 2000. The proposed bill would also allow utilities to recover stranded costs,
but would require a utility to reduce uneconomic investments before recovering
any stranded assets. Investor owned utilities would be required to allocate the
burden of stranded cost recovery between shareholders and customers, requiring
such utilities to write-off some portion of their assets. SWEPCO is unable to
predict whether any retail competition legislation will be enacted by the Texas
Legislature , and if enacted, the ultimate form such legislation would take.
EFFECT OF FEDERAL AND STATE RESTRUCTURING INITIATIVES ON SWEPCO
SWEPCO cannot predict the form or effect of any federal or state
electric utility restructuring initiatives at this time. Federal and/or state
electric utility restructuring may cause impairment of significant recorded
assets, material reductions of profit margins, and/or increased costs of
capital. No assurance can be made that such events would not have a material
adverse effect on SWEPCO's results of operations, financial condition or
competitive position.
INTEGRATED RESOURCE PLAN
On January 31, 1997, SWEPCO filed with the Texas Commission a joint
integrated resource plan outlining its future electric needs over a 10-year
forecast horizon and the manner in which it proposes to meet those needs.
The filing indicates additional resources will be needed within the
next 10 years. It is anticipated that the initial needs will be met through a
mix of energy resource options including purchased power, generation, energy
efficiency programs and renewable energy resources.
This integrated resource plan is significant because this is the first
time an electric utility has filed such a plan under the provisions of PURA. In
adopting this law, the Texas Legislature required that some type of public
participation be incorporated in the planning process. Traditionally, these
public participation activities would involve surveys, focus groups or public
meetings. SWEPCO chose instead to use a public approach known as Deliberative
Polling. Deliberative Polling is designed for the company's customers to develop
a truly informed, deliberated opinion, as a way of bringing the customer into
the electric utility planning process.
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Customers at the poll overwhelmingly determined that a mix of energy
resource options was preferable as a means to accomplish several objectives
including low cost, reliability, maintenance of the environment and further
development of renewable sources. Because of the strong customer interest
evidenced in the Deliberative Polls, SWEPCO has instituted targeted purchase
goals for renewable energy resources and energy efficiency programs, which,
along with the wind resources already on the CSW U.S. Electric System, would
constitute the largest renewable installation in Texas and would be a
significant contribution toward further development and commercialization of the
renewable energy industries. The willingness to pay more per month for renewable
resources varied considerably, with 80% of customers willing to pay at least $1
more per month to those willing to pay up to $10 more per month. As a result,
SWEPCO is proposing a program of "green power" choices. SWEPCO plans to file a
green pricing tariff in 1997 following additional customer consultation and
research which will provide a means for those customers who are interested in
acquiring a greater portion of their personal consumption from environmentally
beneficial generation to exercise that choice. SWEPCO has proposed a pilot
program for the installation of rooftop photovoltaic solar systems at schools.
These installations will provide a community focus and will contain educational
components to teach about renewable resources.
Action by the Texas Commission on this integrated resource plan filing
is expected by mid-1997.
REGULATORY ACCOUNTING
Consistent with industry practice and the provisions of SFAS No. 71,
which allows for the recognition and recovery of regulatory assets, SWEPCO has
recognized significant regulatory assets and liabilities. Management believes
that SWEPCO will continue to meet the criteria for following SFAS No. 71.
However, in the event SWEPCO no longer meets the criteria for following SFAS
No. 71, a write-off of regulatory assets and liabilities would be required.
For additional information regarding regulatory accounting, No. 71 reference is
made to NEW ACCOUNTING STANDARDS and NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES.
SWEPCO STRATEGIC RESPONSES
SWEPCO has from time to time considered, and expects to consider in the
future, various strategies designed to enhance SWEPCO's competitive position and
to increase its ability to anticipate and adapt to changes in the electric
utility industry. These strategies may include business combinations with other
companies, internal restructurings involving the complete or partial separation
of SWEPCO's generation, transmission and distribution businesses, acquisitions
or dispositions of assets or lines of business, and additions to or reductions
of franchised service territories. See CSW RESTRUCTURING. SWEPCO may from time
to time engage in discussions, either internally or with third parties,
regarding one or more of these potential strategies. Those discussions may be
subject to confidentiality agreements and SWEPCO's policy generally not to
comment on such activities. No assurances can be given as to whether any
potential transaction of the type described above may actually occur, or, if one
or more does occur, as to the ultimate effect thereof on SWEPCO's results or
operations, financial condition or competitive position.
IMPACT OF COMPETITION
SWEPCO is unable to predict the ultimate outcome or impact of
competitive forces on the electric utility industry. As the electricity markets
become more competitive, however, the principal factor determining success is
likely to be price, and to a lesser extent reliability, availability of
capacity, and customer service (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).
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RATE AND REGULATORY PROCEEDING
SWEPCO FUEL FACTOR PROCEEDING
On October 31, 1996, SWEPCO filed with the Texas Commission an
Application for Authority to Implement an Interim Surcharge of Fuel Cost
Under-Recoveries. SWEPCO proposed to surcharge its customers approximately $10.2
million which included additional interest through the end of the surcharge
period.
On December 20, 1996, SWEPCO filed a motion for authorization to
withdraw its above referenced application and to carry over the under-recovered
balance to the fuel reconciliation proceeding SWEPCO is required to initiate by
June 30, 1997. On December 30, 1996, the Texas Commission issued an order
approving SWEPCO's motion for withdrawal. On December 31, 1996, SWEPCO had a
Texas jurisdictional under-recovered fuel balance of approximately $10.5
million, including accumulated interest.
SWEPCO BURLINGTON NORTHERN TRANSPORTATION CONTRACT
On January 20, 1995, a state district court in Bowie County, Texas,
entered judgment in favor of SWEPCO against Burlington Northern in a lawsuit
regarding rates charged under two rail transportation contracts for delivery of
coal to SWEPCO's Welsh and Flint Creek power plants. The court awarded SWEPCO
approximately $72 million covering damages for the period from April 27, 1989
through September 26, 1994, post-judgment interest and attorneys' fees and
granted certain declaratory relief requested by SWEPCO. Burlington Northern
appealed the state district court's judgment to the Texarkana, Texas Court of
Appeals, and on April 30, 1996, that court reversed the judgment of the state
district court. On October 14, 1996, SWEPCO filed an application with the
Supreme Court to grant a writ of error to review and reverse the judgment of the
Texarkana, Texas Court of Appeals. This application is now pending.
MERGER AND ACQUISITION ACTIVITY
SWEPCO CAJUN ASSET PURCHASE PROPOSAL
Cajun filed a petition for reorganization under Chapter 11 of the
United States Bankruptcy Code on December 21, 1994 and is currently operating
under the supervision of the United States Bankruptcy Court for the Middle
District of Louisiana.
On October 26, 1996, SWEPCO, together with Entergy Gulf States and the
Members Committee, which currently represents 8 of the 12 Louisiana member
distribution cooperatives that are served by Cajun, filed the Second Amended
SWEPCO Plan in the bankruptcy court. Under the Second Amended SWEPCO Plan, a
SWEPCO subsidiary or affiliate would acquire all of the non-nuclear assets of
Cajun, comprised of the Big Cajun I gas-fired plant, the Big Cajun II coal-fired
plant, and related non-nuclear assets, for approximately $780 million in cash,
up to an additional $20 million to pay certain other bankruptcy claims and
expenses and an additional $7 million to acquire claims of unsecured creditors.
In addition, the Second Amended SWEPCO Plan provides for SWEPCO and the Cajun
member cooperatives to enter into new 25-year power supply agreements with two
wholesale rate options while permitting the Cajun member cooperatives the
flexibility to acquire power on the open market when their requirements exceed
mutually agreed upon levels of generating capacity available from SWEPCO. In
addition, the cooperatives could elect, once every five years, to move from one
option to the other. The Second Amended SWEPCO Plan would settle all claims and
litigation in the bankruptcy case, including potentially protracted litigation
over power supply contract rights.
The Second Amended SWEPCO Plan amends the Original SWEPCO Plan filed on
April 19, 1996 (as amended by the First Amended SWEPCO Plan filed on September
30, 1996) by the Members Committee, SWEPCO and Entergy Gulf States in the
bankruptcy court. Under the Original SWEPCO Plan, SWEPCO had proposed to acquire
all of the non-nuclear assets of Cajun for approximately $405 million in cash.
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In addition, under the Original SWEPCO Plan, the Cajun member cooperatives would
have made future payments with a net present value ranging from $497 million to
$567 million to the RUS of the federal government, Cajun's largest creditor, by
using a portion of the cooperatives' future income from their retail customers.
Two competing plans of reorganization for the non-nuclear assets of
Cajun have been filed with the bankruptcy court at about the same time as the
filing of the First Amended SWEPCO Plan, one of which offers a higher cash bid
price. Under one competing plan, Cajun's non-nuclear assets would be acquired by
Louisiana Generating LLC, which would be owned by affiliates of SEI Holding,
Inc., NRG Energy, Inc. and Zeigler Coal Holdings Company. Cajun's court
appointed trustee in bankruptcy is supporting this plan as well as RUS, Cajun's
largest creditor. In addition, Enron Capital & Trade Resources Corp. and the
Official Committee of Unsecured Creditors have jointly filed a competing plan of
reorganization.
Confirmation hearings in Cajun's bankruptcy case have been postponed
until March 10, 1997 because a Bankruptcy Court ruling on January 7, 1997
disqualified the law firm representing the Members Committee due to an
irreconcilable conflict between the firm's representation of both the Members
Committee and Southwest Louisiana Electric Membership Corporation. The
bankruptcy court postponed the confirmation hearings to allow the Members
Committee time to obtain new counsel. At a February 24, 1997 status conference,
the bankruptcy court extended the resumption of full confirmation hearings until
April 21, 1997.
Consummation of the Second Amended SWEPCO Plan is conditioned upon
confirmation by the bankruptcy court, and the receipt by SWEPCO and CSW of all
requisite state and federal regulatory approvals in addition to the receipt of
their corresponding board approvals. If the Second Amended SWEPCO Plan is
confirmed, CSW and SWEPCO expect initially to finance the $807 million required
to consummate the acquisition of Cajun's non-nuclear assets through a
combination of external borrowings and internally generated funds.
ENVIRONMENTAL MATTERS
The operations of SWEPCO, 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
one PRP can be held responsible for the entire cost of a cleanup. Usually,
however, cleanup costs are allocated among PRPs.
SWEPCO is subject to various pending claims alleging that it is a PRP
under federal or state remedial laws for investigating and cleaning up
contaminated property. SWEPCO anticipates that resolution of these claims,
individually or in the aggregate, will not have a material adverse effect on
SWEPCO'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 SWEPCO, the estimated amount of costs allocated to SWEPCO and the
participation of other parties. See ITEM 1-BUSINESS and NOTE 3. COMMITMENTS AND
CONTINGENT LIABILITIES for additional discussion regarding environmental
matters.
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NEW ACCOUNTING STANDARDS
SFAS NO. 121
SWEPCO adopted SFAS No. 121 effective January 1, 1996. The statement
establishes a two-fold test for identification and quantification of an impaired
asset. The adoption of SFAS No. 121 did not have a significant impact on
SWEPCO's results of operations or financial condition. Under the current
regulatory environment, SWEPCO does not expect SFAS No. 121 to have a
significant impact on its results of operation or financial condition. However,
future developments in the electric industry and utility regulation could
jeopardize the full recovery of the carrying cost of certain investments.
Consequently, SWEPCO is monitoring the changing conditions facing the electric
utility industry.
SFAS NO. 123
SFAS No. 123 provides that if stock is granted to an employee or a
non-employee in return for services provided to the company, that this stock
represents compensation to the recipient. It requires the calculation of a
compensation cost, but then allows the company to choose between making the
charge to net income or disclosing this information in its notes to its
financial statements. See NOTE 11. STOCK-BASED COMPENSATION PLANS. Under prior
accounting rules, recognition of compensation for the grant of stock options was
not required if the stock price at the time of the grant and the price at which
the employee could purchase the stock were the same.
SFAS NO. 125
SFAS No. 125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishment of liabilities using a
financial-components approach that focuses on control. An entity recognizes
assets it controls and derecognizes assets when control has been surrendered and
liabilities when they have been extinguished. A transfer of assets in which
control of the asset is surrendered is recorded as a sale. Control of an asset
is surrendered only when and if certain distinct conditions are met. Likewise, a
liability is only extinguished under certain distinct conditions. SFAS No. 125
is effective for transfers and servicing of financial assets occurring after
December 31, 1996, and cannot be applied prior to that date. Adoption of this
standard will not have a material effect on SWEPCO's results of operations or
financial condition.
2-137
SWEPCO
Statements of Income
Southwestern Electric Power Company
- -------------------------------------------------------------------------------
For the Years Ended December 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
(thousands)
Electric Operating Revenues
Residential $290,020 $278,319 $266,620
Commercial 189,954 177,135 173,718
Industrial 262,878 246,182 243,518
Sales for resale 134,836 94,638 102,723
Other 43,098 40,431 38,717
--------- --------- ---------
920,786 836,705 825,296
--------- --------- ---------
Operating Expenses and Taxes
Fuel 388,450 318,506 336,389
Purchased power 27,160 19,077 20,244
Other operating 141,542 121,248 114,299
Maintenance 43,742 43,320 42,782
Depreciation and amortization 91,566 83,272 79,845
Taxes, other than income 50,373 45,153 43,512
Income taxes 39,870 43,353 42,303
--------- --------- ---------
782,703 673,929 679,374
--------- --------- ---------
Operating Income 138,083 162,776 145,922
--------- --------- ---------
Other Income and Deductions
Reserve for utility plant development
costs, net of tax of $7,885 (21,815) -- --
Allowance for equity funds used
during construction 325 4,290 3,579
Other 312 178 4,656
--------- --------- ---------
(21,178) 4,468 8,235
--------- --------- ---------
Income Before Interest Charges 116,905 167,244 154,157
--------- --------- ---------
Interest Charges
Interest on long-term debt 44,066 44,468 43,395
Interest on short-term debt
and other 8,381 10,706 7,568
Allowance for borrowed funds used
during construction (2,098) (5,044) (2,518)
--------- --------- ---------
50,349 50,130 48,445
--------- --------- ---------
Net Income 66,556 117,114 105,712
Preferred stock dividends 3,053 3,244 3,361
--------- --------- ---------
Net Income for Common Stock $63,503 $113,870 $102,351
========= ========= =========
The accompanying notes to financial statements are an integral part
of these statements.
2-138
SWEPCO
Statements of Retained Earnings
Southwestern Electric Power Company
- -------------------------------------------------------------------------
For the Years Ended December 31,
--------------------------------
1996 1995 1994
--------- -------- --------
(thousands)
Retained Earnings at Beginning of Year $302,334 $297,462 $265,071
Net income for common stock 63,503 113,870 102,351
Gain/(loss) on reacquisition of
preferred stock (36) 2 40
Deduct: Common stock dividends 44,000 109,000 70,000
--------- -------- --------
Retained Earnings at End of Year $321,801 $302,334 $297,462
========= ======== ========
The accompanying notes to financial statements are an integral part
of these statements.
2-139
SWEPCO
Balance Sheets
Southwestern Electric Power Company
- --------------------------------------------------------------------------
As of December 31,
-----------------------
1996 1995
---------- ----------
(thousands)
ASSETS
Electric Utility Plant
Production $1,407,134 $1,410,546
Transmission 463,425 435,362
Distribution 844,503 789,884
General 283,878 231,276
Construction work in progress 45,374 128,963
---------- ----------
3,044,314 2,996,031
Less - Accumulated depreciation 1,192,356 1,116,375
---------- ----------
1,851,958 1,879,656
---------- ----------
Current Assets
Cash and temporary cash investments 1,879 1,702
Accounts receivable 68,140 54,628
Materials and supplies, at average cost 29,265 30,097
Fuel inventory, at average cost 55,775 73,276
Accumulated deferred income taxes -- 4,636
Under-recovered fuel costs 9,120 --
Prepayments and other 13,499 14,109
---------- ----------
177,678 178,448
---------- ----------
Deferred Charges and Other Assets 69,520 58,615
---------- ----------
$2,099,156 $2,116,719
========== ==========
The accompanying notes to financial statements are an integral part
of these statements.
2-140
SWEPCO
Balance Sheets
Southwestern Electric Power Company
- --------------------------------------------------------------------------
As of December 31,
-----------------------
1996 1995
---------- ----------
CAPITALIZATION AND LIABILITIES (thousands)
Capitalization
Common stock: $18 par value
Authorized: 7,600,000 shares
Issued and outstanding: 7,536,640 shares $135,660 $135,660
Paid-in capital 245,000 245,000
Retained earnings 321,801 302,334
---------- ----------
Total Common Stock Equity 702,461 682,994
---------- ----------
Preferred stock
Not subject to mandatory redemption 16,032 16,032
Subject to mandatory redemption 32,464 33,628
Long-term debt 597,151 598,951
---------- ----------
Total Capitalization 1,348,108 1,331,605
---------- ----------
Current Liabilities
Long-term debt and preferred stock due
within twelve months 3,760 5,099
Advances from affiliates 57,495 101,228
Accounts payable 48,826 34,717
Payables to affiliates 68,708 52,474
Over-recovered fuel cost -- 8,923
Customer deposits 10,497 11,027
Accrued taxes 25,241 25,268
Accumulated deferred income taxes 4,162 --
Accrued interest 14,782 17,894
Other 27,449 30,525
---------- ----------
260,920 287,155
---------- ----------
Deferred Credits
Accumulated deferred income taxes 372,552 377,245
Investment tax credits 71,507 76,237
Income tax related regulatory
liabilities, net 36,106 37,363
Other 9,963 7,114
---------- ----------
490,128 497,959
---------- ----------
$2,099,156 $2,116,719
========== ==========
The accompanying notes to financial statements are an integral part
of these statements.
2-141
SWEPCO
Statements of Cash Flows
Southwestern Electric Power Company
- ------------------------------------------------------------------------------
For the Years Ended December 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(thousands)
OPERATING ACTIVITIES
Net Income $66,556 $117,114 $105,712
Non-cash Items Included in Net Income
Depreciation and amortization 101,204 93,624 89,646
Restructuring charges 2,652 (582) (4,978)
Deferred income taxes and investment
tax credits (1,881) 1,501 17,970
Allowance for equity funds used
during construction (325) (4,290) (3,579)
Reserve for utility plant development
costs 29,590 -- --
Inventory reserve 1,632 -- --
Changes in Assets and Liabilities
Accounts receivable (13,512) (284) (29,981)
Fuel inventory 17,501 (11,575) (12,214)
Accounts payable 12,253 (3,303) (4)
Payables to affiliates 16,234 11,735 44,172
Accrued taxes (27) (17,844) (14,845)
Accrued restructuring charges -- (1,110) (11,694)
Over- and under-recovered fuel costs (18,043) (3,277) 9,842
Other deferred credits 2,849 (4,521) (1,662)
Other (16,758) 636 (10,264)
--------- --------- ---------
199,925 213,512 178,121
--------- --------- ---------
INVESTING ACTIVITIES
Construction expenditures (92,737) (105,193) (146,865)
Allowance for borrowed funds used
during construction (2,098) (5,044) (2,518)
Sale of electric utility plant and other (5,412) (4,393) (4,980)
--------- --------- ---------
(100,247) (114,630) (154,363)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from sale of long-term debt 79,346 -- --
Reacquisition of long-term debt (83,334) -- (5,475)
Redemption of preferred stock (1,236) (1,198) (1,160)
Retirement of long-term debt (3,901) (3,600) (3,213)
Change in advances from affiliates (43,734) 19,360 54,004
Payment of dividends (46,642) (113,038) (73,341)
--------- --------- ---------
(99,501) (98,476) (29,185)
--------- --------- ---------
Net Change in Cash and Cash Equivalents 177 406 (5,427)
Cash and Cash Equivalents at Beginning of Year 1,702 1,296 6,723
--------- --------- ---------
Cash and Cash Equivalents at End of Year $1,879 $1,702 $1,296
========= ========= =========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $53,231 $46,243 $45,260
========= ========= =========
Income taxes paid $35,549 $28,079 $36,632
========= ========= =========
The accompanying notes to financial statements are an integral part
of these statements.
2-142
SWEPCO
Statements of Capitalization
Southwestern Electric Power Company
- -------------------------------------------------------------------------------
As of December 31,
----------------------
1996 1995
---------- ----------
(thousands)
COMMON STOCK EQUITY $702,461 $682,994
---------- ----------
PREFERRED STOCK
Cumulative $100 Par Value, Authorized 1,860,000 shares
Number Current
of Shares Redemption
Series Outstanding Price
- --------------------------------------------------
Not Subject to Mandatory Redemption
5.00% 75,000 $109.00 7,500 7,500
4.65% 25,000 $102.75 2,500 2,500
4.28% 60,000 $103.90 6,000 6,000
Premium 32 32
---------- ----------
16,032 16,032
---------- ----------
Subject to Mandatory Redemption
6.95% 340,000 $104.64 34,000 35,200
Issuance Expense (336) (372)
Amount to be redeemed within one year (1,200) (1,200)
---------- ----------
32,464 33,628
---------- ----------
LONG-TERM DEBT
First Mortgage Bonds
Series V, 7 3/4%, due June 1, 2004 40,000 40,000
Series W, 6 1/8%, due September 1, 1999 40,000 40,000
Series X, 7%, due September 1, 2007 90,000 90,000
Series Y, 6 5/8%, due February 1, 2003 55,000 55,000
Series Z, 7 1/4%, due July 1, 2023 45,000 45,000
Series AA, 5 1/4%, due April 1, 2000 45,000 45,000
Series BB, 6 7/8%, due October 1, 2025 80,000 80,000
1976 Series A, 6.20%, due November 1, 2006*
(Siloam Springs) 6,375 6,520
1976 Series B, 6.20%, due November 1, 2006*
(Siloam Springs) 1,000 1,000
Installment Sales Agreements - PCRBs
1978 Series A, 6%, due January 1, 2008
(Titus County) 14,420 14,420
Series 1986, 8.2%, due July 1, 2014 (Sabine) -- 81,700
1991 Series A, 8.2%, due August 1, 2011
(Titus County) 17,125 17,125
1991 Series B, 6.9%, due November 1, 2004
(Titus County) 12,290 12,290
Series 1992, 7.6%, due January 1, 2019 (DeSoto) 53,500 53,500
Series 1996, 6.1%, due April 1, 2018 (Sabine) 81,700 --
Bank Loan, Variable Rate, due June 15, 2000 50,000 50,000
Railcar lease obligations 10,242 13,996
Unamortized discount and premium 903 373
Unamortized costs of reacquired debt (42,844) (43,074)
Amount to be redeemed within one year (2,560) (3,899)
---------- ----------
597,151 598,951
---------- ----------
TOTAL CAPITALIZATION $1,348,108 $1,331,605
========== ==========
*Obligations incurred in connection with the sale by
public authorities of tax-exempt PCRBs.
The accompanying notes to financial statements are an integral part
of these statements.
2-143
SOUTHWESTERN ELECTRIC POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See CSW's NOTE 1.
2. LITIGATION AND REGULATORY PROCEEDINGS
See CSW's NOTE 2.
3. COMMITMENTS AND CONTINGENT LIABILITIES
See CSW's NOTE 3.
4. INCOME TAXES
See CSW's NOTE 4.
5. BENEFIT PLANS
See CSW's NOTE 5.
6. JOINTLY OWNED ELECTRIC UTILITY PLANT
See CSW's NOTE 6.
7. FINANCIAL INSTRUMENTS
See CSW's NOTE 7.
8. LONG-TERM DEBT
See CSW's NOTE 8.
9. PREFERRED STOCK
See CSW's NOTE 9.
10. SHORT-TERM FINANCING
See CSW's NOTE 10.
11. STOCK BASED COMPENSATION PLANS
See CSW's NOTE 12.
2-144
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF SOUTHWESTERN ELECTRIC POWER
COMPANY:
We have audited the accompanying balance sheets and statements of
capitalization of Southwestern Electric Power Company (a Delaware corporation
and a wholly owned subsidiary of Central and South West Corporation) as of
December 31, 1996 and 1995, and the related statements of income, retained
earnings and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of Southwestern
Electric Power Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Southwestern
Electric Power Company as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental Schedule II and Exhibit
12 are presented for purposes of complying with Securities and Exchange
Commission's rules and are not a required part of the basic financial
statements. This schedule and exhibit have been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Dallas, Texas
February 28, 1997
2-145
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and
objectivity of the financial statements of Southwestern Electric Power Company
as well as other information contained in this Annual Report. The 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 financial statements.
The financial statements have been audited by SWEPCO's independent
public accountants who were given unrestricted access to all financial records
and related data, including minutes of all meetings of shareholders, the board
of directors and committees of the board. SWEPCO believes that representations
made to the independent public accountants during its audit were valid and
appropriate. The report of independent public accountants is presented elsewhere
in this report.
SWEPCO maintains a system of internal controls to provide reasonable
assurance that transactions are executed in accordance with management's
authorization, that the financial statements are prepared in accordance with
generally accepted accounting principles and that the assets of the companies
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 SWEPCO 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 SWEPCO
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.
SWEPCO believes 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, 1996.
Michael D. Smith R. Russell Davis
President - SWEPCO Controller - SWEPCO
2-146
WEST TEXAS UTILITIES COMPANY
2-147
SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended
December 31 is provided to highlight significant trends in the financial
condition and results of operations for WTU. Certain financial statement items
for prior years have been reclassified to conform to the most recent period
presented.
------------------------------------------------
1996 (1) 1995 1994 1993 (2) 1992
(thousands, except ratio data)
INCOME STATEMENT DATA
Revenues $377,057 $319,835 $342,991 $345,445 $315,370
Income before cumulative effect
of changes in accounting
principles 16,571 34,530 37,366 26,517 35,007
Net income for common stock 16,307 34,266 36,914 29,329 33,556
BALANCE SHEET DATA
Assets 810,379 815,614 771,977 754,443 744,829
Long-term obligations (3) 275,070 273,245 210,047 176,882 221,147
Capitalization Ratios
Common stock equity 48.2% 48.7% 55.7% 59.2% 54.0%
Preferred stock 1.2 1.2 1.3 1.4 3.2
Long-term debt 50.6 50.1 43.0 39.4 42.8
Ratio of earnings to fixed charges 2.05 2.63 3.37 2.79 (4) 3.22
(SEC Method)
(1) Earnings in 1996 reflect a $10.9 million one-time charge, net of tax,
associated with certain investments for plant sites, engineering studies
and lignite reserves.
(2) Earnings in 1993 were significantly affected by restructuring charges and
the $4 million cumulative effect of changes in accounting principles. Pro
forma amounts, assuming that the change in accounting for unbilled revenues
had been adopted retroactively, are not materially different from amounts
reported for prior years and therefore have not been restated.
(3) Long-term obligations includes long-term debt and, for 1991, also preferred
stock subject to mandatory redemption.
(4) Ratio of earnings to fixed charges for 1993 was calculated before
cumulative effect of change in accounting principles.
2-148
WEST TEXAS UTILITIES COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to WTU's Financial Statements and related Notes to
Financial Statements and Selected Financial Data. The information contained
therein should be read in conjunction with, and is essential to understanding,
the following discussion and analysis.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
OVERVIEW
Net income for common stock was $16 million in 1996, which represents a
52% decrease when compared to 1995. The decrease resulted primarily from a
one-time charge associated with certain investments for plant sites, engineering
studies and lignite reserves of approximately $10.9 million, net of tax. Also
contributing to the decrease were increased other operating expenses,
restructuring charges, and increased depreciation and amortization. Partially
offsetting the decrease in net income for common stock was an increase in
non-fuel revenues. Although the initial after-tax effect of the WTU 1995
Stipulation and Agreement, recorded in the third quarter of 1995, had an
immaterial effect on net income for common stock, it did have an impact on other
income statement items as discussed below. See NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS for additional information.
ELECTRIC OPERATING REVENUES
Electric operating revenues increased approximately $57.2 million in
1996 when compared to the prior year. The increase was attributable primarily to
an increase in fuel revenues as well as a one-time $21 million base rate refund
made pursuant to the WTU 1995 Stipulation and Agreement. Also contributing to
the variance was a $14.3 million increase in non-fuel revenues resulting from a
5% increase in KWH sales due to additional weather-related demand as well as
increased customer demand. Partially offsetting this increase in non-fuel
revenues was a $6.0 million reduction reflecting the lower rates implemented in
accordance with the WTU 1995 Stipulation and Agreement.
FUEL
Fuel expenses were $132.0 million in 1996, which represented an
increase of 7% when compared to 1995 fuel expenses of $123.7 million. The
increase was primarily attributable to a 10% increase in average unit fuel costs
from $1.83 per MMbtu in 1995 to $2.02 per MMbtu in 1996 due largely to higher
spot gas market prices. The increase was partially offset by lower coal costs
resulting from resolution of coal transportation litigation as well as purchases
of lower priced spot market coal.
PURCHASED POWER EXPENSES
Purchased power expenses increased approximately $20.8 million during
1996 when compared with 1995, primarily as a result of increased economy energy
purchases at a higher cost per MWH.
OTHER OPERATING
Other operating expenses increased approximately $3.3 million during
1996 when compared to 1995. The increase was primarily due to increased expenses
associated with regulatory activity, increased employee-related expenses,
increased expenses associated with accounts receivable factoring due to higher
revenues, and the amortization of a regulatory asset for rate case expenses in
accordance with the WTU 1995 Stipulation and Agreement.
2-149
RESTRUCTURING
As previously discussed, during 1996, the CSW System began
implementation of organizational and executive changes. Although implementation
will not be complete until early 1997, WTU recorded its portion of the estimated
cost of the implementation, $1.8 million, during 1996. In 1995, WTU established
a $13.2 million regulatory asset for previously expensed restructuring costs in
accordance with the WTU 1995 Stipulation and Agreement.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased approximately $6.5
million during 1996 when compared to the prior year due primarily to the
accelerated amortization of Oklaunion deferred costs and amortization of a
regulatory asset for restructuring costs, both in accordance with the WTU 1995
Stipulation and Agreement. Also contributing to the increase were additions to
depreciable property.
INCOME TAXES
Income taxes increased approximately $9.8 million when compared with
1995 due primarily to a reduction of $6.9 million of deferred income taxes in
accordance with the WTU 1995 Stipulation and Agreement recorded in 1995 and
prior year tax adjustments recorded in 1996.
OTHER INCOME AND DEDUCTIONS
Other income decreased approximately $9.8 million in 1996 due primarily
to a one-time charge associated with certain investments for plant sites,
engineering studies and lignite reserves of approximately $10.9 million, net of
tax.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
OVERVIEW
Net income for common stock was $34 million in 1995, which represented
a 7% decrease when compared to 1994. The decrease was due primarily to increased
depreciation, a prior year tax adjustment, and an increase in interest charges
on long-term debt. These effects were partially offset by decreases in other
operating, maintenance, and federal income tax expenses.
ELECTRIC OPERATING REVENUES
Electric operating revenues decreased approximately $23.2 million 1995
when compared to the prior year. The decrease was attributable primarily to a
one-time $21 million base rate refund and reductions in retail base rates made
pursuant to the WTU 1995 Stipulation and Agreement. Also contributing to the
decline in revenues were decreases in transmission equalization revenues and
other miscellaneous non-KWH related revenues. These decreases were partially
offset by increases in sales to a major new wholesale customer.
FUEL
Fuel expenses were $123.7 million in 1995, which represented a decrease
of 6% when compared to 1994 fuel expenses of $131.3 million. The decrease was
primarily attributable to a 3% decrease in average unit fuel costs from $1.88
per MMbtu in 1994 to $1.83 per MMbtu in 1995 due largely to lower spot gas
market prices brought about by weak demand and excess gas storage. Also
contributing to the decreased fuel expense was increased plant efficiencies in
1995 which resulted in less fuel required per KWH generated.
PURCHASED POWER EXPENSES
Purchased power expenses increased approximately $5.9 million during
1995 when compared with 1994, primarily due to additional energy purchases made
to serve the increased load resulting from the addition of a wholesale customer
and increased economy purchases.
2-150
OTHER OPERATING
Other operating expenses decreased approximately $2.6 million during
1995 when compared to 1994. The decrease was primarily due to the realization of
savings resulting from cost containment efforts and decreased environmental
expenditures. Partially offsetting these decreases were increases in
transmission expenses associated with the completion and placement in service of
a new HVdc tie in 1995, increased employee-related costs and increased
telecommunications expenses.
RESTRUCTURING
Restructuring charges of $15.2 million in 1993, were subsequently
decreased $2 million in 1994 and $0.4 million in 1995. The recording of a $13.2
million regulatory asset during 1995 in accordance with the WTU 1995 Stipulation
and Agreement for previously recorded costs associated with the restructuring
reduced 1995 restructuring costs.
MAINTENANCE
Maintenance expense in 1995 decreased from 1994 by approximately $1
million or 7% due primarily to decreased production maintenance resulting from
non-recurring plant overhauls in 1994 and savings resulting from cost
containment efforts.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses increased approximately $1.7
million during 1995 when compared to the prior year due primarily to increases
in depreciable property.
INCOME TAXES
Income taxes decreased approximately $12.4 million or 69% in 1995 when
compared with 1994 due primarily to a reduction of $6.9 million of deferred
income taxes in accordance with the WTU 1995 Stipulation and Agreement and lower
pre-tax income.
OTHER INCOME AND DEDUCTIONS
Other income decreased approximately $4.7 million in 1995 due primarily
to an adjustment for parent company tax benefits.
INTEREST ON LONG-TERM DEBT
Interest on long-term debt increased approximately $2.9 million in 1995
when compared to the prior year as a result of higher levels of long-term debt
outstanding.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
WTU's need for capital results primarily from the construction of
facilities to provide reliable electric service to its customers. Accordingly,
internally generated funds should meet most of the capital requirements.
However, if internally generated funds are not sufficient, WTU's financial
condition and credit rating should allow it access to the capital markets.
CONSTRUCTION EXPENDITURES
WTU maintains 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 WTU for the next three years are primarily
to improve and expand distribution facilities and will be funded primarily
through internally generated funds. These improvements will be required to meet
the anticipated needs of new customers and the growth in the requirements of
existing customers. Construction expenditures, including AFUDC, for WTU were
approximately $44 million in 1996, $45 million in 1995, and $42 million in 1994.
WTU's estimated total construction expenditures, including AFUDC, for the years
1997 through 1999 are presented in the following table (The foregoing statement
2-151
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).
CONSTRUCTION EXPENDITURES
1997 1998 1999 Total
----------------------------------
(millions)
Generation $3 $3 $3 $9
Transmission 6 14 10 30
Distribution 19 19 20 58
Other 5 5 5 15
----------------------------------
$33 $41 $38 $112
----------------------------------
The U.S. Electric Operating Companies plan to dismantle certain power
plant properties during late 1997 and 1998. Dismantling includes the removal,
disposal and/or salvage of retired equipment and ancillary buildings. None of
the units to be dismantled is included in WTU's 1996 aggregate capability. The
depreciation rates of the U.S. Electric Operating Companies include a component
for net removal cost and therefore are being recovered from customers currently
through rates. As a result, actual dismantling of these units will not have a
material impact on net income. Current estimates of capital resources that will
be required by the U.S. Electric Operating Companies to dismantle these units
range from $10 million to $15 million and WTU's share of such costs are not
reflected in the above construction numbers. It is anticipated that a request
for bids will be issued by mid 1997.
Although WTU does not believe that it will require substantial
additions of generating capacity over the next several years, the U.S. Electric
System's internal resource plan presently anticipates any additional capacity
needs will come from a variety of sources, including power purchases. Therefore,
during 1996, WTU recorded reserves and write-offs in the amount of $10.9
million, net of tax, for certain investments in plant sites, engineering studies
and lignite reserves. Refer to INTEGRATED RESOURCE PLAN for additional
information regarding future capacity needs.
INFLATION
Annual inflation rates, as measured by the national Consumer Price
Index, have averaged approximately 2.8% for the three-year period ending
December 31, 1996. WTU believes that inflation, at this level, does not
materially affect its results of operations or financial condition. 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.
LONG-TERM FINANCING
As of December 31, 1996, the capitalization ratios of WTU were 48%
common stock equity, 1% preferred stock and 51% long-term debt. WTU's embedded
cost of long-term debt was 6.71% at December 31, 1996. WTU is committed to
maintaining financial flexibility through a strong capital structure and
favorable securities ratings in order to access the capital markets
opportunistically or when required. See CSW's ITEM 7-MD&A for WTU's securities'
ratings.
In August 1996, $63.3 million of Red River, 6.0%, Series 1996 PCRBs
were issued for the benefit of CPL, PSO and WTU. The proceeds from this issuance
were used to refund the $63.3 million of Red River, 7 7/8%, Series 1984 PCRBs.
WTU's portion of this issuance was $44.3 million.
SHORT-TERM FINANCING
WTU, together with other members of the CSW System, has established a
CSW System money pool to coordinate short-term borrowings. These loans are
unsecured demand obligations at rates approximating the CSW System's commercial
paper borrowing costs. At December 31, 1996 WTU's short-term borrowing limit
from the money pool was approximately $57 million. During 1996, the annual
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weighted average interest rate on WTU borrowings was 5.6% and the average amount
of WTU short-term borrowings outstanding was $15 million. The maximum amount of
WTU short-term borrowings outstanding during 1996 was $44 million, which was the
amount outstanding at April 2, 1996.
INTERNALLY GENERATED FUNDS
Internally generated funds consist of cash flows from operating
activities less common and preferred stock dividends. WTU uses short-term debt
to meet fluctuations in working capital requirements due to the seasonal nature
of energy sales. During 1993 and 1994, WTU experienced several non-recurring
transactions that resulted in negative internally generated funds in 1994,
including the refinancing of Series G and Series H FMBs with Series S FMBs which
occurred between December 1993 and February 1994. This refinancing caused an
abnormally high accounts payable balance to affiliates at December 31, 1993
which was subsequently reduced by the issuance of Series S FMBs in February
1994, resulting in the appearance of a large out flow of cash from operating
funds. WTU anticipates that capital requirements for the period 1997 to 1999 may
be met, in large part, from internal sources. WTU also expects that some
external financings will be required during the period, but the nature, timing
and extent have not yet been determined (The foregoing statement constitutes a
forward looking statement within the meaning of Section 21E of the Exchange Act.
Actual results may differ materially from such projected information due to
changes in the underlying assumptions. See FORWARD LOOKING INFORMATION).
Information concerning internally generated funds is presented in the following
table.
1996 1995 1994
-----------------------
($ in millions)
Internally Generated Funds $52 $12 ($4)
Construction Expenditures Provided
by Internally Generated Funds 121% 27% --
SALES OF ACCOUNTS RECEIVABLE
WTU sells its billed and unbilled accounts receivable, without
recourse, to CSW Credit. The sales provide WTU with cash immediately, thereby
reducing working capital needs and revenue requirements. The average and year
end amounts of accounts receivable sold were $36 million and $37 million,
respectively, in 1996, as compared to $33 million and $28 million, respectively,
in 1995.
RECENT DEVELOPMENTS AND TRENDS
COMPETITION AND INDUSTRY CHALLENGES
Competitive forces at work in the electric utility industry are
impacting WTU and 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 level in the future. As competition in the industry increases, WTU will
have the opportunity to seek new customers and at the same time be at risk of
losing customers to other competitors. Additionally, WTU will continue to
compete with suppliers of alternative forms of energy, such as natural gas, fuel
oil and coal, some of which may be cheaper than electricity. WTU believes that,
overall, its prices for electricity and the quality and reliability of its
service currently places WTU 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).
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: (i) who will bear the costs of
prudent utility investments or past commitments incurred under traditional
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cost-of-service regulation that will be uneconomic in a competitive environment,
sometimes referred to as stranded costs; (ii) whether all customers have access
to the benefits of competition; (iii) how, and by whom, the rules of competition
will be established; (iv) what the impact of deregulation will be on
conservation, environmental protection and other regulator-imposed programs; and
(v) how transmission system reliability will be ensured. The degree of risk to
WTU associated with various federal and state restructuring proposals aimed at
resolving any or all of these issues will vary depending on many factors,
including their competitive position and the treatment of stranded costs.
Although WTU believes it is in a position to compete effectively in a
deregulated, more competitive marketplace, if stranded costs are not recovered
from customers, then WTU may be required by existing accounting standards to
recognize potentially significant stranded investments losses (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.
At the federal level, several bills have been introduced in Congress in
the early part of the 1997 legislative session, and recent reports indicate that
other bills are likely to be introduced in the near future, which provide for
restructuring and/or deregulating the U.S. electric utility industry. These
bills will likely cover many different issues including repeal of the Holding
Company Act and PURPA, establishment of full retail customer choice,
disaggregation of electric utilities and the restructuring of the electric
utility industry. States that have considered deregulation have been moving
increasingly toward requiring some form of retail competition or retail
wheeling. WTU cannot predict when and if it will be subject to one or more of
these legislative initiatives, nor can it predict the scope or effect of such
legislation on its results of operations or financial condition. For additional
information related to such initiatives, see INDUSTRY RESTRUCTURING IN TEXAS.
WHOLESALE ELECTRIC COMPETITION IN THE UNITED STATES
The Energy Policy Act, which was enacted in 1992, significantly alters
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 a new category of non-utility 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. WTU must
compete in the wholesale energy markets with other public utilities,
cogenerators, qualifying facilities, EWGs and others for sales of electric
power. While WTU believes that the Energy Policy Act will continue to make the
wholesale markets more competitive, WTU is unable to predict whether the Energy
Policy Act will adversely impact WTU.
FERC ORDER 888
On April 24, 1996, the FERC issued Order 888 which is the final
comparable open access transmission rule. The provisions of FERC Order 888
provide for comparable transmission service between utilities and their
transmission customers by requiring utilities to take transmission service under
their open access tariffs for all of their new wholesale sales and purchases and
by requiring utilities to rely on the same information that their transmission
customers rely on to make wholesale purchases and sales. FERC Order 888
reaffirms the FERC's position that utilities are entitled to recover all
legitimate, prudent and verifiable stranded costs determined by a formula based
upon the revenues lost method through direct assignments charges to departing
customers.
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FERC Order 888 requires holding companies to offer single system
transmission rates. However, the rule granted the U.S. Electric Operating
Companies an exemption permitting an opportunity to propose a solution that
provides comparability to all wholesale users. The final rule does suggest that
the terms and conditions for the CSW ERCOT companies (CPL and WTU) would be
permitted to differ from those offered by the CSW SPP companies (PSO and
SWEPCO). Transmitting utilities in the SPP are under the exclusive jurisdiction
of the FERC while most transmitting utilities in ERCOT are under the exclusive
jurisdiction of the Texas Commission. These two commissions have different
approaches to defining and implementing comparable open access transmission
service. CSW is the only holding company that owns operating companies in both
ERCOT and the SPP.
On November 1, 1996, the U.S. Electric Operating Companies filed a
system-wide tariff to comply with FERC Order 888. On December 31, 1996, the FERC
accepted for filing the system-wide tariff to become effective on January 1,
1997, subject to refund and to the issuance of further orders. CSW and the U.S.
Electric Operating Companies believe that their system-wide tariff complies with
the requirements of the FERC and the Texas Commission, but the tariff does not
offer a single system rate for transactions due to the different transmission
pricing approaches of the FERC and the Texas Commission. Reference is made to
INDUSTRY RESTRUCTURING IN TEXAS for information related to the transmission
pricing approach rules that the Texas Commission adopted during 1996 (Project
No. 14045).
RETAIL ELECTRIC COMPETITION IN THE UNITED STATES
Increasing competition in the utility industry has resulted in
increasing pressure to stabilize or reduce rates. The retail regulatory
environment is beginning to shift from traditional rate base regulation to
incentive regulation. Incentive rate and performance-based plans encourage
efficiencies and increased productivity while permitting utilities to share in
the results. Retail wheeling, a major legislative initiatives which would
require utilities to "wheel" or move power from third parties to their own
retail customers, is evolving gradually. Many states currently have introduced
legislation or are investigating the issue, and several states have already
passed legislation which mandates retail choice by a certain date.
WTU believes that retail competition would not be in the best interests
of WTU's customers and security holders unless WTU receives fair recovery of the
full amounts previously invested to finance power plants. These investments,
which were reasonably incurred, were made by WTU to meet its obligation to serve
the public interest, necessity and convenience. This obligation has existed for
nearly a century and remains in force under current law. WTU intends to strongly
oppose attempts to impose retail competition without just compensation for the
risks and investments WTU undertook to serve the public's demand for
electricity. For additional information related to retail wheeling, see INDUSTRY
RESTRUCTURING IN TEXAS.
CSW RESTRUCTURING
In April 1996, CSW announced organizational and executive changes to
help prepare CSW for increased competition and unbundling of the electric
utility industry into generation, transmission, distribution and service
segments. As a result of these changes, in 1996 CSW functionally reorganized its
domestic utility operations into three organizational units which are centrally
managed from CSW Services.
CSW created a power generation business unit to provide energy
generation and production services. All phases of management of the U.S.
Electric Operating Companies' energy production activities have been
consolidated into the power generation business unit. These activities include
management of all generating facilities, including nuclear facilities, and fuel
procurement.
CSW created an energy delivery business unit to provide services for
the long-distance transmission and local distribution of electricity to retail
customers, including attendant customer services such as meter reading, billing
and accounting. All phases of management of the U.S. Electric Operating
Companies' energy delivery activities have been consolidated into the energy
delivery business unit.
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CSW created an energy services business unit to provide marketing
services, along with new energy efficiency products and services as they become
available, to existing and future customers of the U.S. Electric Operating
Companies. The energy services unit also manages CSW Communications and
EnerShop.
Functional unbundling of CSW's vertically integrated structure is
expected to provide a more competitive organizational structure for CSW. Some
employees have been reassigned from the U.S. Electric Operating Companies to CSW
Services to provide these centrally managed services.
Through December 31, 1996, WTU has incurred $1.0 million in connection
with the implementation of the 1996 restructuring. Additionally, WTU has
reserved approximately $0.8 million for additional expenses associated with the
1996 restructuring, which is expected to be completed by early 1997.
INDUSTRY RESTRUCTURING IN TEXAS
Amendments to PURA, the legal foundation of electric regulation in
Texas, became effective on September 1, 1995. Among other things, the amendments
deregulate the wholesale bulk power market in ERCOT, permit pricing flexibility
for utilities facing competitive challenges, provide for a market-driven
integrated resource planning process and mandate comparable open access
transmission service.
PURA also required that the Texas Commission adopt a rule on comparable
open transmission access by March 1, 1996. In conjunction with this rulemaking
proceeding (Project No. 14045), the chairman of the Texas Commission issued a
proposal on September 6, 1995, for the purpose of maximizing competition in the
ERCOT wholesale bulk power market. The proposal calls for the functional
unbundling of integrated utilities where distribution entities could purchase
their power requirements from any generator or set of generators in ERCOT. Those
generators which are currently regulated would be deregulated after provisions
are in place to recover stranded costs. The proposal was assigned a separate
proceeding (Project No. 15000) and after a series of workshops and technical
conferences conducted during 1996, the Texas Commission submitted a final Scope
of Competition report to the Texas Legislature in January 1997. The final report
contains numerous recommendations to the Texas Legislature including requests
for additional regulatory authority or clarification of existing authority
including, INTER ALIA, authority to certificate electric service resellers, the
authority to adopt consumer protection and universal service standards, the
authority to determine and allocate stranded costs to all customers, the
authority to promote unbundling, the authority to allow alternative forms of
regulation, increased authority to address mergers, authority to correct market
power abuses, authority over the ERCOT ISO and authority to permit alternative
methods for fuel cost recovery. In addition, the final report offers the Texas
Legislature four restructuring options. Option 1 maintains the regulatory status
quo; Option 2 would permit utilities to voluntarily offer retail access; Option
3 provides for full wholesale competition; and Option 4 provides for full retail
competition. The report's final recommendation is for the Texas Legislature to
direct the Texas Commission to prepare for full retail competition using a
careful and deliberate approach on a timetable to be established by the Texas
Legislature, but with no retail access before the year 2000. WTU cannot predict
the outcome of these proposals.
On February 7, 1996, the Texas Commission adopted a rule governing
transmission access and pricing (Project No. 14045). The pricing method adopted
by the Texas Commission is a hybrid combination of an ERCOT-wide postage stamp
rate covering 70% of total ERCOT transmission costs and a distance-sensitive
component referred to as a vector-absolute megawatt mile which recovers the
remaining 30% of ERCOT transmission costs. The open access tariffs filed with
the FERC on February 9, 1996 did not reflect Project No. 14045 pricing. However,
on November 1, 1996, WTU filed tariffs with the FERC in accordance with FERC
Order 888 that do conform to the Texas Commission's rule. See FERC ORDER 888 for
additional information regarding the transmission pricing rules prescribed by
FERC.
By statute the Texas Commission must submit a report to the 1997 Texas
Legislature on "methods or procedures for quantifying the magnitude of stranded
investment, procedures for allocating costs, and the acceptable methods of
recovering stranded costs." The Texas Commission initiated Project No. 15001 to
collect information to prepare the required report. In response to the Texas
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Commission's order in this Project, WTU filed information on estimates of
potential stranded costs.
The Texas Commission's Project 15002, "Scope of Competition Report," is
a report that the Texas Commission is required to present to the Texas
Legislature in each odd-numbered year detailing the scope of competition in the
electric markets and the impact of competition and industry restructuring on
customers. In addition, the report is required to include the Texas Commission's
recommendations to the Texas Legislature for further legislation. In June 1996,
WTU filed information for the Texas Commission's report.
In February 1997, a retail competition bill was introduced into the
Texas Legislature. As proposed, the bill would (i) require utilities to file a
restructuring plan by January 1, 1998; (ii) require a 15 percent rate reduction
for all customers of investor-owned utilities effective September 1, 1997; (iii)
allow public schools and universities to seek alternative electric energy
suppliers by August 1, 1998; (iv) allow residential and other small customers to
seek alternative electric energy suppliers by January 1, 1999; and (v) allow
other retail customers to seek alternative electric energy suppliers by January
1, 2000. The proposed bill would also allow utilities to recover stranded costs,
but would require a utility to reduce uneconomic investments before recovering
any stranded assets. Investor owned utilities would be required to allocate the
burden of stranded cost recovery between shareholders and customers, requiring
such utilities to write-off some portion of their assets. WTU is unable to
predict whether any retail competition legislation will be enacted by the Texas
Legislature, and if enacted, the ultimate form such legislation would take.
EFFECT OF FEDERAL AND STATE RESTRUCTURING INITIATIVES ON WTU
WTU cannot predict the form or effect of any federal or state electric
utility restructuring initiatives at this time. Federal and/or state electric
utility restructuring may cause impairment of significant recorded assets,
material reductions of profit margins, and/or increased costs of capital. No
assurance can be made that such events would not have a material adverse effect
on WTU's results of operations, financial condition or competitive position.
INDEPENDENT SYSTEM OPERATOR PLAN
In June 1996, CSW, including CPL and WTU, and more than 20 other
parties, including other investor-owned utilities, municipal power companies,
electric cooperatives, independent power producers and power marketers, filed
plans to create an ISO to manage the ERCOT power grid. The filing marks a major
step towards implementing the Texas Commission's overall strategy to create the
competitive wholesale electric market that was mandated by the Texas Legislature
in 1995. The Texas Commission approved the ISO in August 1996. Such approval
made Texas the first state in the nation to implement a regional ISO and a
regional competitive wholesale bulk power market.
INTEGRATED RESOURCE PLAN
On January 31, 1997, WTU filed with the Texas Commission a joint
integrated resource plan outlining its future electric needs over a 10-year
forecast horizon and the manner in which it proposes to meet those needs.
The filing indicates additional resources will be needed within the
next 10 years. It is anticipated that the initial needs will be met through a
mix of energy resource options including purchased power, generation, energy
efficiency programs and renewable energy resources. This integrated resource
plan is significant because this is the first time an electric utility has filed
such a plan under the provisions of PURA. In adopting this law, the Texas
Legislature required that some type of public participation be incorporated in
the planning process. Traditionally, these public participation activities would
involve surveys, focus groups or public meetings. WTU chose instead to use a
public approach known as Deliberative Polling. Deliberative Polling is designed
for the company's customers to develop a truly informed, deliberated opinion, as
a way of bringing the customer into the electric utility planning process.
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Customers at the poll overwhelmingly determined that a mix of energy
resource options was preferable as a means to accomplish several objectives
including low cost, reliability, maintenance of the environment and further
development of renewable sources. Because of the strong customer interest
evidenced in the Deliberative Polls, WTU has instituted targeted purchase goals
for renewable energy resources and energy efficiency programs, which, along with
the wind resources already on the CSW U.S. Electric System, would constitute the
largest renewable installation in Texas and would be a significant contribution
toward further development and commercialization of the renewable energy
industries. The willingness to pay more per month for renewable resources varied
considerably, with 80% of customers willing to pay at least $1 more per month to
those willing to pay up to $10 more per month. As a result, WTU is proposing a
program of "green power" choices. WTU plans to file a green pricing tariff in
1997 following additional customer consultation and research which will provide
a means for those customers who are interested in acquiring a greater portion of
their personal consumption from environmentally beneficial generation to
exercise that choice. WTU has propsed a pilot program for the installation of
rooftop photovoltaic solar systems at schools. These installations will provide
a community focus and will contain educational components to teach about
renewable resources.
Action by the Texas Commission on this integrated resource plan filing
is expected by mid-1997.
REGULATORY ACCOUNTING
Consistent with industry practice and the provisions of SFAS No. 71,
which allows for the recognition and recovery of regulatory assets, WTU has
recognized significant regulatory assets and liabilities. Management believes
that WTU will continue to meet the criteria for following SFAS No. 71. However,
in the event WTU no longer meets the criteria for following SFAS No. 71, a
write-off of regulatory assets and liabilities would be required. For additional
information regarding regulatory accounting, reference is made to NEW ACCOUNTING
STANDARDS and NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
WTU STRATEGIC RESPONSES
WTU has from time to time considered, and expect to consider in the
future, various strategies designed to enhance WTU's competitive position and to
increase its ability to anticipate and adapt to changes in the electric utility
industry. These strategies may include business combinations with other
companies, internal restructurings involving the complete or partial separation
of WTU's generation, transmission and distribution businesses, acquisitions or
dispositions of assets or lines of business, and additions to or reductions of
franchised service territories. See CSW RESTRUCTURING. WTU may from time to time
engage in discussions, either internally or with third parties, regarding one or
more of these potential strategies. Those discussions may be subject to
confidentiality agreements and WTU's policy generally not to comment on such
activities. No assurances can be given as to whether any potential transaction
of the type described above may actually occur, or, if one or more does occur,
as to the ultimate effect thereof on WTU's results or operations, financial
condition or competitive position.
IMPACT OF COMPETITION
WTU is unable to predict the ultimate outcome or impact of competitive
forces on the electric utility industry. As the electricity markets become more
competitive, however, the principal factor determining success is likely to be
price, and to a lesser extent reliability, availability of capacity, and
customer service (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).
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RATES AND REGULATORY MATTERS
WTU STIPULATION AND AGREEMENT
On September 22, 1995, WTU filed a joint stipulation and agreement (the
WTU 1995 Stipulation and Agreement) with other parties to pending regulatory
proceedings involving a retail rate review and fuel reconciliation, deferred
accounting treatment for Oklaunion Power Station Unit No. 1, and other
regulatory matters. Pursuant to the WTU 1995 Stipulation and Agreement, a retail
base rate reduction of approximately $13.5 million annually starting with WTU's
October 1995 revenue month billing cycle was implemented, along with a $21
million retail refund which was not attributed to any specific cause but was
inclusive of all claims related to the regulatory matters in question and
included the effect of the rate reduction to October 1, 1994. Also implemented
were a reduction of fixed fuel factors by approximately 2%, various rate and
accounting treatments including a reasonable return on equity for retail
operations of 11.375%, and a retail base rate freeze until October 1, 1998,
subject to certain force majeure provisions. On November 9, 1995, the Texas
Commission rendered a final order that implemented the WTU 1995 Stipulation and
Agreement. This final order set into motion the actions required to seek a
remand of the appeal of Docket No. 7510 to the Texas Commission to implement a
final order consistent with the WTU 1995 Stipulation and Agreement. In December,
1995, all parties to the appeal filed a joint motion with the Supreme Court, and
the Supreme Court approved the joint motion to withdraw and dismissed the case.
The Court of Appeals issued a mandate in April, 1996, directed to the Travis
County District Court, that permitted the case to be remanded back to the Texas
Commission for hearings. On October 28, 1996, the Texas Commission entered a
final order related to the appeal of Docket No. 7510 that was fully consistent
with the terms of the WTU 1995 Stipulation and Agreement. See NOTE 2. LITIGATION
AND REGULATORY PROCEEDINGS.
WTU FUEL SURCHARGE
On February 24, 1997, WTU filed with the Texas Commission an
Application for Authority to Implement an increase in fuel factors of $4.2
million, or 4.2% on an annual basis. Additionally, WTU proposed to implement a
surcharge of $13.3 million, including accumulated interest, over a twelve month
period. WTU requested to implement the revised fuel factors in conjunction with
the May 1997 billings, and to commence the surcharge in conjunction with the
June 1997 billings. An order in this proceeding is anticipated in early May
1997.
ENVIRONMENTAL MATTERS
The operations of WTU, 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 one PRP can be
held responsible for the entire cost of a cleanup. Usually, however, cleanup
costs are allocated among PRPs.
WTU is subject to various pending claims alleging that it is a PRP
under federal or state remedial laws for investigating and cleaning up
contaminated property. WTU anticipates that resolution of these claims,
individually or in the aggregate, will not have a material adverse effect on its
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 WTU, the estimated amount of costs allocated to WTU and the
participation of other parties.
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NEW ACCOUNTING STANDARDS
SFAS NO. 121
WTU adopted SFAS No. 121 effective January 1, 1996. The statement
establishes a two-fold test for identification and quantification of an impaired
asset. The adoption of SFAS No. 121 did not have a significant impact on WTU's
results of operations or financial condition. Under the current regulatory
environment, WTU does not expect SFAS No. 121 to have a significant impact on
its results of operation or financial condition. However, future developments in
the electric industry and utility regulation could jeopardize the full recovery
of the carrying cost of certain investments. Consequently, WTU is monitoring the
changing conditions facing the electric utility industry.
SFAS NO. 123
SFAS No. 123 provides that if stock is granted to an employee or a
non-employee in return for services provided to the company, that this stock
represents compensation to the recipient. It requires the calculation of a
compensation cost, but then allows the company to choose between making the
charge to net income or disclosing this information in its notes to its
financial statements. See NOTE 11. STOCK-BASED COMPENSATION PLANS. Under prior
accounting rules, recognition of compensation for the grant of stock options was
not required if the stock price at the time of the grant and the price at which
the employee could purchase the stock were the same.
SFAS NO. 125
SFAS No. 125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishment of liabilities using a
financial-components approach that focuses on control. An entity recognizes
assets it controls and derecognizes assets when control has been surrendered and
liabilities when they have been extinguished. A transfer of assets in which
control of the asset is surrendered is recorded as a sale. Control of an asset
is surrendered only when and if certain distinct conditions are met. Likewise, a
liability is only extinguished under certain distinct conditions. SFAS No. 125
is effective for transfers and servicing of financial assets occurring after
December 31, 1996, and cannot be applied prior to that date. Adoption of this
standard will not have a material effect on WTU's results of operations or
financial condition.
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WTU
Statements of Income
West Texas Utilities Company
- -------------------------------------------------------------------------------
For the Years Ended December 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
(thousands)
Electric Operating Revenues
Residential $124,214 $114,269 $118,525
Commercial 72,422 66,363 66,483
Industrial 52,375 51,443 52,626
Sales for resale 88,921 73,905 67,076
Other 39,125 13,855 38,281
--------- --------- ---------
377,057 319,835 342,991
--------- --------- ---------
Operating Expenses and Taxes
Fuel 132,034 123,723 131,258
Purchased power 31,803 10,998 5,144
Other operating 67,060 63,727 66,290
Restructuring charges 1,809 (13,582) (2,037)
Maintenance 14,122 13,931 14,978
Depreciation and amortization 39,755 33,290 31,569
Taxes, other than income 23,402 22,720 23,072
Income taxes 15,338 5,542 17,954
--------- --------- ---------
325,323 260,349 288,228
--------- --------- ---------
Operating Income 51,734 59,486 54,763
--------- --------- ---------
Other Income and Deductions
Reserve for utility plant development
costs, net of tax of $4,003 (10,946) -- --
Allowance for equity funds used
during construction 423 378 150
Other 601 (463) 4,210
--------- --------- ---------
(9,922) (85) 4,360
--------- --------- ---------
Income Before Interest Charges 41,812 59,401 59,123
--------- --------- ---------
Interest Charges
Interest on long-term debt 21,169 21,413 18,547
Interest on short-term debt and other 4,925 4,111 3,534
Allowance for borrowed funds used
during construction (853) (653) (324)
--------- --------- ---------
25,241 24,871 21,757
--------- --------- ---------
Net Income 16,571 34,530 37,366
Preferred stock dividends 264 264 452
--------- --------- ---------
Net Income for Common Stock $16,307 $34,266 $36,914
========= ========= =========
The accompanying notes to financial statements are an integral part
of these statements.
2-161
WTU
Statements of Retained Earnings
West Texas Utilities Company
- -----------------------------------------------------------------------------
For the Years Ended December 31,
-------------------------------
1996 1995 1994
-------- -------- --------
(thousands)
Retained Earnings at Beginning of Year $125,770 $132,504 $126,642
Net income for common stock 16,307 34,266 36,914
Deduct: Common stock dividends 19,000 41,000 31,000
Preferred stock redemption costs -- -- 52
-------- -------- --------
Retained Earnings at End of Year $123,077 $125,770 $132,504
======== ======== ========
The accompanying notes to financial statements are an integral part
of these statements.
2-162
WTU
Balance Sheets
West Texas Utilities Company
- --------------------------------------------------------------------------
As of December 31,
-----------------------
1996 1995
---------- ----------
(thousands)
ASSETS
Electric Utility Plant
Production $417,467 $427,547
Transmission 200,688 199,055
Distribution 347,328 326,337
General 92,622 84,326
Construction work in progress 30,036 32,686
---------- ----------
1,088,141 1,069,951
Less - Accumulated depreciation 414,777 389,379
---------- ----------
673,364 680,572
---------- ----------
Current Assets
Cash 664 717
Accounts receivable 24,123 28,923
Materials and supplies, at average cost 15,966 16,660
Fuel inventory, at average cost 8,140 8,281
Coal inventory, at LIFO cost 8,534 5,545
Accumulated deferred income taxes 1,079 5,328
Under-recovered fuel costs 7,857 --
Prepayments and other 2,435 1,042
---------- ----------
68,798 66,496
---------- ----------
Deferred Charges and Other Assets
Deferred Oklaunion costs 22,365 26,092
Restructuring costs 10,854 12,741
Other 34,998 29,713
---------- ----------
68,217 68,546
---------- ----------
$810,379 $815,614
========== ==========
The accompanying notes to financial statements are an integral part
of these statements.
2-163
Balance Sheets
West Texas Utilities Company
- ------------------------------------------------------------------------
As of December 31,
-------------------
1996 1995
-------- --------
CAPITALIZATION AND LIABILITIES (thousands)
Capitalization
Common stock: $25 par value
Authorized: 7,800,000 shares
Issued and outstanding: 5,488,560 shares $137,214 $137,214
Paid-in capital 2,236 2,236
Retained earnings 123,077 125,770
-------- --------
Total Common Stock Equity 262,527 265,220
-------- --------
Preferred stock
Not subject to mandatory redemption 6,291 6,291
Long-term debt 275,070 273,245
-------- --------
Total Capitalization 543,888 544,756
-------- --------
Current Liabilities
Advances from affiliates 14,833 19,820
Payables to affiliates 13,578 8,244
Accounts payable 19,669 20,611
Accrued taxes 13,463 13,182
Accrued interest 5,403 6,081
Over-recovered fuel costs -- 4,060
Refund due customers 1 1,812
Other 4,123 3,121
-------- --------
71,070 76,931
-------- --------
Deferred Credits
Accumulated deferred income taxes 144,146 145,130
Investment tax credits 29,239 30,561
Income tax related regulatory liabilities, net 16,918 14,464
Other 5,118 3,772
-------- --------
195,421 193,927
-------- --------
$810,379 $815,614
======== ========
The accompanying notes to financial statements are an integral part
of these statements.
2-164
Statements of Cash Flows
West Texas Utilities Company
- -------------------------------------------------------------------------------
For the Years Ended December 31,
-------------------------------
1996 1995 1994
-------- -------- --------
(thousands)
OPERATING ACTIVITIES
Net Income $16,571 $34,530 $37,366
Non-cash Items Included in Net Income
Depreciation and amortization 41,342 34,382 33,362
Restructuring charges 792 (367) (2,037)
Deferred income taxes and investment
tax credits 4,397 650 7,056
Regulatory asset established for
previously incurred restructuring
charges -- (13,213) --
Allowance for equity funds used
during construction (423) (378) (150)
Reserve for utility plant
development costs 14,905 -- --
Inventory reserve 809 -- --
Other 821 -- --
Changes in Assets and Liabilities
Accounts receivable 4,800 (5,758) 1,332
Fuel inventory (2,848) 1,845 (1,010)
Accounts payable 584 (4,922) 7,558
Payables to associates 5,334 3,697 (36,564)
Accrued taxes 281 5,730 (7,168)
Accrued restructuring charges -- (204) (8,918)
Over- and under-recovered fuel costs (11,917) 2,474 1,512
Refunds due customers (1,811) 1,812 --
Other deferred credits (5,482) (1,039) 1,053
Other 2,608 (5,899) (5,388)
-------- -------- --------
70,763 53,340 28,004
-------- -------- --------
INVESTING ACTIVITIES
Construction expenditures (42,453) (44,076) (41,504)
Allowance for borrowed funds used
during construction (853) (653) (324)
Other (942) (1,864) (1,315)
-------- -------- --------
(44,248) (46,593) (43,143)
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 43,256 118,376 39,354
Reacquisition of long-term debt (45,639) (59,082) (20,731)
Redemption of preferred stock -- -- (4,700)
Payment of dividends (19,198) (41,330) (31,520)
Change in advances from affiliates (4,987) (26,495) 34,531
-------- -------- --------
(26,568) (8,531) 16,934
-------- -------- --------
Net Change in Cash and Cash Equivalents (53) (1,784) 1,795
Cash and Cash Equivalents at Beginning of Year 717 2,501 706
-------- -------- --------
Cash and Cash Equivalents at End of Year $664 $717 $2,501
======== ======== ========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $20,248 $20,496 $18,128
======== ======== ========
Income taxes paid $6,295 $8,399 $12,720
======== ======== ========
The accompanying notes to financial statements are an integral part
of these statements.
2-165
WTU
Statements of Capitalization
West Texas Utilities Company
- -------------------------------------------------------------------------------
As of December 31,
---------------------
1996 1995
-------- --------
(thousands)
COMMON STOCK EQUITY $262,527 $265,220
-------- --------
PREFERRED STOCK
Cumulative $100 Par Value, Authorized 810,000 shares
Number Current
of Shares Redemption
Series Outstanding Price
- -----------------------------------------------------
Not Subject to Mandatory Redemption
4.40% 60,000 $107.00 6,000 6,000
Premium 291 291
-------- --------
6,291 6,291
-------- --------
LONG-TERM DEBT
First Mortgage Bonds
Series P, 7 3/4%, due June 1, 2007 25,000 25,000
Series Q, 6 7/8%, due October 1, 2002 35,000 35,000
Series R, 7%, due October 1, 2004 40,000 40,000
Series S, 6 1/8%, due February 1, 2004 40,000 40,000
Series T, 7 1/2%, due April 1, 2000 40,000 40,000
Series U, 6 3/8%, due October 1, 2005 80,000 80,000
Installment Sales Agreements - PCRBs
Series 1984, 7 7/8%, due September 15, 2014
(Red River) -- 44,310
Series 1996, 6%, due June 1, 2020 (Red River) 44,310 --
Unamortized discount (1,128) (1,607)
Unamortized costs of reacquired debt (28,112) (29,458)
-------- --------
275,070 273,245
-------- --------
TOTAL CAPITALIZATION $543,888 $544,756
======== ========
The accompanying notes to financial statements are an integral part
of these statements.
2-166
WEST TEXAS UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See CSW's NOTE 1.
2. LITIGATION AND REGULATORY PROCEEDINGS
See CSW's NOTE 2.
3. COMMITMENTS AND CONTINGENT LIABILITIES
See CSW's NOTE 3.
4. INCOME TAXES
See CSW's NOTE 4.
5. BENEFIT PLANS
See CSW's NOTE 5.
6. JOINTLY OWNED ELECTRIC UTILITY PLANT
See CSW's NOTE 6.
7. FINANCIAL INSTRUMENTS
See CSW's NOTE 7.
8. LONG-TERM DEBT
See CSW's NOTE 8.
9. PREFERRED STOCK
See CSW's NOTE 9.
10. SHORT-TERM FINANCING
See CSW's NOTE 10.
11. STOCK BASED COMPENSATION PLANS
See CSW's NOTE 12.
2-167
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF WEST TEXAS UTILITIES COMPANY:
We have audited the accompanying balance sheets and statements of
capitalization of West Texas Utilities Company (a Texas corporation and a wholly
owned subsidiary of Central and South West Corporation) as of December 31, 1996
and 1995, and the related statements of income, retained earnings and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of West Texas Utilities Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of West Texas Utilities
Company as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental Schedule II and Exhibit
12 are presented for purposes of complying with Securities and Exchange
Commission's rules and are not a required part of the basic financial
statements. This schedule and exhibit have been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
Arthur Andersen LLP
Dallas, Texas
February 28, 1997
2-168
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and
objectivity of the financial statements of West Texas Utilities Company as well
as other information contained in this Annual Report. The 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 financial statements.
The financial statements have been audited by WTU's independent public
accountants who were given unrestricted access to all financial records and
related data, including minutes of all meetings of shareholders, the board of
directors and committees of the board. WTU believes that representations made to
the independent public accountants during their audit were valid and
appropriate. The report of independent public accountants is presented elsewhere
in this report.
WTU maintains a system of internal controls to provide reasonable
assurance that transactions are executed in accordance with management's
authorization, that the financial statements are prepared in accordance with
generally accepted accounting principles and that the assets of the companies
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 WTU 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 WTU,
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.
WTU believes 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, 1996.
Floyd W. Nickerson R. Russell Davis
President - WTU Controller - WTU
2-169
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
CSW None.
CPL None.
PSO None.
SWEPCO None.
WTU None.
3-1
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANTS.
CSW has filed with the SEC its Notice of Annual Meeting of Stockholders
and Proxy Statement relating to its 1997 Annual Meeting of Stockholders. The
information required by ITEM 10, other than with respect to certain information
regarding the executive officers of CSW which is included in ITEM 1-BUSINESS, is
hereby incorporated by reference herein from pages 3-5 and 8 of such Proxy
Statement.
(A) Directors of each of the U.S. Electric Operating Companies,
together with certain information with respect to each of them, are listed
below.
Name, Age, Principal Year
Occupation, Business Experience First Became
and Other Directorships Director
CPL
JOHN F. BRIMBERRY AGE - 64 1995
President of Professional Insurance Agents, Inc., Victoria, Texas.
E. R. BROOKS AGE - 59 1991
Chairman, President and CEO of CSW since 1991. Director of CSW and
each of its subsidiaries. President of CSW from 1990 to 1991.
Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor
University Medical Center, Dallas, Texas and Hardin-Simmons
University, Abilene, Texas.
M. BRUCE EVANS AGE - 41 1996
President of CPL since 1996. President of Operation Services at
CSW from 1993 to 1996. Vice President of Business Improvement at
CSW from 1990 to 1993.
GLENN FILES AGE - 49 1996
Executive Vice President of CSW since 1996. President and CEO of
WTU from 1992 to 1996. Executive Vice President of WTU from 1991
to 1992. Vice President of Marketing and Business Development at
CPL from 1990 to 1991.
RUBEN M. GARCIA AGE - 65 1981
President or principal of several firms engaged primarily in
construction and land development in the Laredo, Texas area.
ROBERT A. McALLEN AGE - 62 1983
Robert A. McAllen, Insurance Agency, Weslaco, Texas.
PETE MORALES, JR. AGE - 56 1990
President of Morales Feed Lots, Inc., Devine, Texas.
3-2
Name, Age, Principal Year
Occupation, Business Experience First Became
and Other Directorships Director
S. LOYD NEAL, JR. AGE - 59 1990
President of Hilb, Rogal and Hamilton Company of Corpus Christi,
an insurance agency, Corpus Christi, Texas. Director of Bay Area
Medical Center, Corpus Christi, Texas.
H. LEE RICHARDS AGE - 63 1987
Chairman of the Board of Hygeia Dairy Company, Harlingen, Texas.
J. GONZALO SANDOVAL AGE - 48 1992
General Manager of CPL since 1996. Vice President, Operations
and Engineering of CPL from 1993 to 1996. Vice President, Regional
Operations of CPL from 1992 to 1993. Vice President, Corporate
Services of CPL from 1991 to 1992.
GERALD E. VAUGHN AGE - 54 1993
Vice President, Nuclear of CSW Services since 1994. Vice
President, Nuclear Affairs of CPL from 1993 to 1994. Vice
President for Shearon Harris Nuclear Plant from 1992 to 1993 and
Vice President, Nuclear Services of Carolina Power and Light
Company, Raleigh, North Carolina from 1990 to 1992.
Each of the directors and executive officers of CPL is elected to hold
office until the first meeting of CPL's Board of Directors after the 1997 Annual
Meeting of Stockholders. CPL's 1997 Annual Meeting of Stockholders is presently
scheduled to be held on April 10, 1997. All outside directors have engaged in
their principal occupations listed above for a period of more than five years,
unless otherwise indicated.
PSO
E. R. BROOKS AGE - 59 1991
Chairman, President and CEO of CSW since 1991. Director of CSW and
each of its subsidiaries. President of CSW from 1990 to 1991.
Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor
University Medical Center, Dallas, Texas and Hardin-Simmons
University, Abilene, Texas.
T. D. CHURCHWELL AGE - 52 1996
President of PSO since 1996. Executive Vice President, Operations
and Engineering of WTU from 1995 to 1996. Executive Vice President
of WTU from 1993 to 1995. Vice President, Corporate Services of CSW
Services from 1991 to 1993.
HARRY A. CLARKE AGE - 68 1972
General Partner and President of HAC Investments, Afton, Oklahoma.
GLENN FILES AGE - 49 1996
Executive Vice President of CSW since 1996. President and CEO of
WTU from 1992 to 1996. Executive Vice President of WTU from 1991
to 1992. Vice President of Marketing and Business Development at
CPL from 1990 to 1991.
3-3
Name, Age, Principal Year
Occupation, Business Experience First Became
and Other Directorships Director
PAUL K. LACKEY, JR. AGE - 53 1992
Secretary of Health and Human Services, Executive Director of the
Office of Juvenile Affairs, State of Oklahoma, since 1995.
Consultant, Flint Industries, Inc., a construction, electronics
manufacturing, and environmental services company, Tulsa, Oklahoma
during a portion of 1995. President, Flint Industries, Inc., from
1986 to 1995. Advisory Director of Bank IV-Tulsa, Tulsa, Oklahoma.
PAULA MARSHALL-CHAPMAN AGE - 43 1991
Chief Executive Officer of Bama Companies, a baked goods produce
company, Tulsa, Oklahoma.
WILLIAM R. McKAMEY AGE - 50 1993
General Manager of PSO since 1996. Vice President, Marketing and
Business Development of PSO from 1993 to 1996. Director of
Marketing and Business Development of CSW from 1992 to 1993.
Director of Marketing of SWEPCO from 1990 to 1992.
DR. ROBERT B. TAYLOR, JR. AGE - 68 1975
Dentist, Okmulgee, Oklahoma.
Each of the directors and executive officers of PSO is elected to hold
office until the first meeting of PSO's Board of Directors after the 1997 Annual
Meeting of Stockholders. PSO's 1996 Annual Meeting of Stockholders is presently
scheduled to be held on April 15, 1997. All outside directors have engaged in
their principal occupations listed above for a period of more than five years,
unless otherwise indicated.
SWEPCO
E. R. BROOKS AGE - 59 1991
Chairman, President and CEO of CSW since 1991. Director of CSW
and each of its subsidiaries. President of CSW from 1990 to 1991.
Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor
University Medical Center, Dallas, Texas and Hardin-Simmons
University, Abilene, Texas.
JAMES E. DAVISON AGE - 59 1993
CEO of Paul M. Davison Petroleum Products. President and CEO of
Davison Transport, Inc. and Davison Terminal Services, Inc. All
of the above entities are located in Ruston, Louisiana.
GLENN FILES AGE - 49 1996
Executive Vice President of CSW since 1996. President and CEO of
WTU from 1992 to 1996. Executive Vice President of WTU from 1991
to 1992. Vice President of Marketing and Business Development at
CPL from 1990 to 1991.
3-4
Name, Age, Principal Year
Occupation, Business Experience First Became
and Other Directorships Director
DR. FREDERICK E. JOYCE AGE - 62 1990
President of Chappell-Joyce Pathology Association, P.A., Texarkana,
Texas. President of Doctors Diagnostic Laboratory, Inc., Texarkana,
Texas. Director of State First National Bank and State First
Financial Corporation, Texarkana, Arkansas. Director of First
Commercial Corporation, Little Rock, Arkansas.
JOHN M. LEWIS AGE - 57 1997
President of The Bank of Fayetteville, Fayetteville, Arkansas.
KAREN C. MARTIN AGE - 36 1996
General Manager of SWEPCO since 1996. Director of Regulatory
Services at CSW from 1995 to 1996. Administrative Director of the
El Paso Transition Team at CSW from 1993 to 1995. Director of
Audits at SWEPCO from 1992 to 1993 and Manager of Audits at SWEPCO
from 1991 to 1992.
WILLIAM C. PEATROSS AGE - 53 1990
President of Caddo Abstract and Title Co., Inc., Director of
Commercial National Bank. Both entities are located in Shreveport,
Louisiana.
MAXINE P. SARPY AGE - 57 1996
Registered Nurse, Medical Clinic Office Manager, Joseph Sarpy Jr.
M.D. Vice President of the Caddo-Bossier Port Commission,
Treasurer of the Association for Community Training and State
President of the Auxiliary to the Louisiana Medical Association,
Board Member of the National Conference of Christians and Jews.
All of the above entities are located in Shreveport, Louisiana.
Vice President of the Southern University Foundation Board, Baton
Rouge, Louisiana.
MICHAEL D. SMITH AGE - 45 1996
President of SWEPCO since 1996. Vice President of Mergers and
Acquisitions at CSW from 1995 to 1996. Vice President of CSW
Corporate Services from 1993 to 1995. Controller of CSW from 1990
to 1993.
Each of the directors and executive officers of SWEPCO is elected to
hold office until the first meeting of SWEPCO's Board of Directors after the
1997 Annual Meeting of Stockholders. SWEPCO's 1997 Annual Meeting of
Stockholders is presently scheduled to be held on April 23, 1997. All outside
directors have engaged in their principal occupations listed above for a period
of more than five years, unless otherwise indicated.
WTU
RICHARD F. BACON AGE - 69 1980
Retired President and CEO of Merchants, Inc. Companies, a freight
common carrier, Abilene, Texas.
3-5
Name, Age, Principal Year
Occupation, Business Experience First Became
and Other Directorships Director
E. R. BROOKS AGE - 59 1991
Chairman, President and CEO of CSW since 1991. Director of CSW
and each of its subsidiaries. President of CSW from 1990 to 1991.
Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor
University Medical Center, Dallas, Texas and Hardin-Simmons
University, Abilene, Texas.
PAUL J. BROWER AGE - 48 1991
General Manager of WTU since 1996. Vice President, Marketing and
Business Development of WTU from 1991 to 1996.
GLENN FILES AGE - 49 1996
Executive Vice President of CSW since 1996. President and CEO of
WTU from 1992 to 1996. Executive Vice President of WTU from 1991
to 1992. Vice President of Marketing and Business Development at
CPL from 1990 to 1991.
TOMMY MORRIS AGE - 62 1976
President of The Tommy Morris Agency an independent insurance and
investment agency, Abilene, Texas. Trustee of Abilene Christian
University, Abilene, Texas.
FLOYD W. NICKERSON AGE - 39 1996
President of WTU since 1996. Vice President of Corporate Services
for CSW Energy from 1995 to 1996. Vice President of Corporate
Services for Transok from 1992 to 1995. Manager of Business
Operations of WTU from 1991 to 1992.
DIAN G. OWEN AGE - 57 1994
Chairman of Owen Healthcare, Inc., hospital services, Abilene,
Texas. Director of First Financial Bankshares Inc., and First
National Bank of Abilene, Abilene, Texas.
JAMES M. PARKER AGE - 66 1987
President and CEO of J. M. Parker and Associates, Inc., an
investment company, Abilene, Texas. Director of First Financial
Bankshares, Inc. and First National Bank of Abilene, Abilene,
Texas.
TED STEANS AGE - 46 1997
Plant Manager, Ethicon San Angelo, suture manufacturing company,
division of Johnson & Johnson. Director of Texas Commerce Bank,
San Angelo, Texas.
F. L. STEPHENS AGE - 59 1980
Chairman and CEO of Town & Country Food Stores, Inc., San Angelo,
Texas. Director of Norwest Texas, Lubbock, Texas.
Each of the directors and executive officers of WTU is elected to hold
office until the first meeting of WTU's Board of Directors after the 1997 Annual
Meeting of Stockholders. WTU's 1997 Annual Meeting of Stockholders is presently
scheduled to be held on April 22, 1996. All outside directors have engaged in
their principal occupations listed above for a period of more than five years,
unless otherwise indicated.
3-6
(B) The following is a list of officers who are not directors of the
registrants, together with certain information with respect to each of them:
Year First
Name, Age, Principal Elected to
Occupation, Business Experience Present Position
U.S. ELECTRIC OPERATING COMPANIES
WENDY G. HARGUS AGE - 39 1996
Treasurer of CSW, CPL, PSO, SWEPCO, WTU and CSW Services since
1996. Controller of CSW from 1993 to 1996. Director of Strategic
Planning during a portion of 1993 at CSW and Director of Investor
Relations at CSW from 1990 to 1993.
R. RUSSELL DAVIS AGE - 40 1994
Controller of CPL, WTU, SWEPCO and CSW Services since 1994.
Controller of PSO since 1993. Assistant Controller of CSW from
1992 to 1993. Assistant Controller of CSW Services from 1991 to
1992.
CPL
BRENDA I. SNIDER AGE - 43 1996
Secretary of CPL since 1996. Manager of Planning and Analysis at
CPL since 1996. Senior Financial Consultant at CPL from 1994 to
1996. Internal Business Consultant of Business Development at CPL
from 1991 to 1994. Manager of Internal Audits at CPL from 1990
to 1991.
PSO
BETSY J. POWERS AGE - 61 1989
Secretary of PSO since 1989.
SWEPCO
MARILYN S. KIRKLAND AGE - 49 1995
Secretary of SWEPCO since 1995. Senior executive secretary to
the president since 1992. Previously a human resource
representative at SWEPCO.
WTU
MARTHA MURRAY AGE - 51 1992
Secretary of WTU since 1992. Previously a senior secretary at WTU.
SECTION 16(A) COMPLIANCE
Directors, officers and greater than ten percent beneficial owners are
required under Section 16(a) to report initial ownership of registered
securities at the time such reporting requirement becomes applicable. Based on a
review of Section 16(a) reports received and written representations from
certain reporting persons, the U.S. Electric Operating Companies believe that
none of their respective directors or executive officers own any U.S. Electric
Operating Company preferred stock. However, because of personnel changes in
connection with the functional reorganization of the CSW System in 1996, and a
misunderstanding of the Section 16 rules, there was a temporary lapse in Section
16 recordkeeping at the U.S. Electric Operating Company level. As a result, the
following persons were delinquent in filing an initial Form 3 with respect to
their ownership of U.S. Electric Operating Company preferred stock.
CPL: Russell Davis, Glenn Files and Wendy Hargus
3-7
PSO: T.D. Churchwell
SWEPCO: E.R. Brooks, Russell Davis, Glenn Files, Wendy Hargus, Karen Martin
and Mike Smith
WTU: Richard Bacon, E.R. Brooks, Paul Brower, Russell Davis, Glenn Files,
Wendy Hargus, Tommy Morris, Floyd Nickerson, Dian Owen, James Parker,
Ted Steans and F.L. Stephens
All such Form 3s either have been or are in the process of being filed.
ITEM 11. EXECUTIVE COMPENSATION.
CASH AND OTHER FORMS OF COMPENSATION
CSW
Information required by ITEM 11 with respect to CSW is hereby
incorporated by reference herein from pages 22-25 of CSW's Proxy Statement.
The following table sets forth the aggregate cash and other
compensation for services rendered for the fiscal years of 1996, 1995 and 1994
paid or awarded by each registrant to the CEO and each of the four most highly
compensated Executive Officers, other than the CEO, whose salary and bonus
exceeds $100,000, and up to two additional individuals, if any, not holding an
executive officer position as of year-end but who held such a position at any
time during the year, and whose compensation for the year would have placed them
among the four most highly compensated executive officers.
Because of the functional restructuring CSW undertook during 1996,
certain of the Executive Officers of the U.S. Electric Operating Companies,
Messrs. Files, Bremer, Zemanek and Verret, are not actual employed by any of the
U.S. Electric Operating Companies. Instead, they are employed by CSW and manage
CSW business units and perform policy-making functions that are integral to the
U.S. Electric Operating Companies. Therefore, these individuals are included in
the Summary Compensation Table due to the functional perspective regarding the
management of the companies. For additional information regarding the
restructuring, see PART II-MD&A.
U.S. ELECTRIC OPERATING COMPANIES
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
CSW
Other CSW Securities
Annual Restricted Underlying All Other
Compen- Stock Options/ LTIP Compen-
Name and Salary Bonus sation Award(s) SARs Payouts sation
Principal Position at Registrant Year ($) ($)(1) ($)(2) ($) (1)(3) (#) ($) ($) (4)
- ----------------------------------------------------------------------------------------------------------------------
Glenn Files, President of CSW 1996 331,135 44,860 66,415 153,750 -- -- 23,992
Electric business unit (2,5) 1995 266,223 85,048 19,144 -- -- -- 23,117
1994 246,699 50,000 10,032 -- 13,758 -- 6,750
Richard H. Bremer, President 1996 305,910 144,404 73,711 153,750 -- -- 21,742
of CSW Energy Services 1995 298,372 89,358 14,691 -- -- -- 21,706
business unit (2,5) 1994 277,359 50,000 13,978 -- 15,901 -- 22,235
Robert L. Zemanek, President 1996 283,250 176,863 6,500 153,750 -- -- 23,992
of CSW Energy Delivery 1995 276,270 91,436 9,192 -- -- -- 23,117
business unit (5) 1994 262,962 -- 2,981 -- 14,792 -- 17,472
Richard Verret, President 1996 236,154 84,788 6,055 89,688 -- -- 7,590
of CSW Power Generation
business unit (5)
3-8
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
CSW
Other CSW Securities
Annual Restricted Underlying All Other
Compen- Stock Options/ LTIP Compen-
Name and Salary Bonus sation Award(s) SARs Payouts sation
Principal Position at Registrant Year ($) ($)(1) ($)(2) ($) (1)(3) (#) ($) ($) (4)
- ----------------------------------------------------------------------------------------------------------------------
M. Bruce Evans, 1996 208,000 91,376 70,783 89,688 -- -- 4,500
President of CPL (2,5)
Robert R. Carey, Former 1996 138,955 159,312 6,290 153,750 -- -- 1,445,588
President and CEO of CPL 1995 306,415 44,679 9,414 -- -- -- 23,117
(4,5) 1994 293,344 -- 516 -- 15,901 -- 23,763
T. D. Churchwell, 1996 192,500 24,097 79,730 38,438 -- -- 5,340
President of PSO (2,5) 1995 180,400 40,388 9,206 -- -- -- 4,500
1994 163,329 -- 180,191 -- 6,133 -- 4,500
Michael D. Smith, 1996 184,269 64,050 115,322 38,438 -- -- 5,340
President of SWEPCO (2,5)
Floyd W. Nickerson, 1996 147,692 36,384 69,665 38,438 -- -- 5,270
President of WTU (2,5)
(1) Amounts in this column are paid or awarded in a calendar year for
performance in a preceding year.
(2) The following are the perquisites and other personal benefits required to
be identified in respect of each Named Executive Officer.
1996 Relocation Reimbursements
--------------------------------------------------------------
Glenn Files $25,662
Richard H. Bremer 34,117
M. Bruce Evans 32,537
T.D. Churchwell 38,955
Michael D. Smith 63,818
Floyd W. Nickerson 37,416
In 1994, Mr. Churchwell was reimbursed $21,052 for relocation expenses and
$73,490 for loss on the sale of his home due to structural problems.
(3) Grants of restricted stock are administered by the Executive Compensation
Committee of CSW's Board of Directors, which has the authority to determine
the individuals to whom and the terms upon which restricted stock grants,
including the number of underlying shares, shall be made. The awards
reflected in this column all have four-year vesting periods with 20% of the
stock vesting on the first, second and third anniversary dates of the award
and 40% vesting on the fourth such anniversary date. Upon vesting, shares
of CSW Common are re-issued without restrictions. The individuals receive
dividends and may vote shares of restricted stock, even before they are
vested. The amount reported in the table represents the market value of the
shares at the date of grant. As of the end of 1996, the aggregate
restricted stock holdings of each of the Named Executive Officers are
presented in the following table.
3-9
Name Restricted Stock Held Market Value at
at December 31, 1996 December 31, 1996
------------------------------------------------------------------------
Glenn Files 6,333 $162,283
Richard H. Bremer 6,485 166,178
Robert L. Zemanek 6,324 162,053
Richard Verret 3,619 92,737
M. Bruce Evans 3,574 91,584
Robert R. Carey -- --
T. D. Churchwell 1,608 41,205
Michael D. Smith 1,631 41,794
Floyd W. Nickerson 1,515 38,822
(4) Amounts shown in this column consist of: (i) the annual employer matching
payments to CSW's Thrift Plus Plan, (ii) premiums paid per participant for
personal liability insurance and (iii) average amounts of premiums paid per
participant under CSW's memorial gift program. Under this program, for
certain executive officers, directors and retired directors from the CSW
System, CSW will make a donation in the participant's name for up to three
charitable organizations of an aggregate of $500,000, payable by CSW upon
such person's death. CSW maintains corporate-owned life insurance policies
to fund the program. The annual premiums paid by CSW are based on pooled
risks and averaged $16,402 per participant for 1996, $16,367 for 1995 and
$17,013 for 1994. During 1996, Messrs. Bremer, Carey, Files and Zemanek
participated. During 1995, Messrs. Bremer, Carey, Files and Zemanek
participated. During 1994, Messrs. Carey and Bremer participated. Messrs.
Files and Zemanek also participated in the plan in 1994, but coverage was
provided by CSW. In 1996, a package valued at $1,422,933 was paid to Mr.
Carey upon his retirement.
(5) System Affiliations.
Messrs. Files, Bremer, Zemanek and Verret assumed policy making functions
for each of the U.S. Electric Operating Companies in 1996. Mr. Files
assumed the position of Executive Vice President of the U.S. Electric
Operating Companies in April of 1996. Mr. Bremer assumed the position of
President of CSW Energy Services in May of 1996, Mr. Zemanek assumed the
position of President of CSW Energy Delivery in May of 1996, while Mr.
Verret assumed the position of President of CSW Power Generation in May of
1996.
Messrs. Evans, Smith and Nickerson assumed policy-making positions at the
U.S. Electric Operating Companies during April and May of 1996. Prior to
that they, and Mr. Verret, were not in positions requiring their inclusion
in the Summary Compensation Table. Mr. Evans transferred from CSW Services
to assume the position of President of CPL upon the retirement of Mr.
Carey. Mr. Smith transferred from CSW Services to assume the position of
President of SWEPCO. Mr. Nickerson transferred from CSW Energy to assume
the position of President of WTU. Mr. Churchwell transferred from WTU,
were he was a policy-making executive officer, to assume the position of
President of PSO in May 1996.
Messrs. Verret, Evans, Smith and Nickerson received no compensation from
any of the U.S. Electric Operating Companies in 1995 and 1994.
OPTION/SAR GRANTS
No stock options or stock appreciation rights were granted in 1996 to
the Named Executive Officers herein. The stock option plans are administered by
the Executive Compensation Committee of the CSW Board of Directors, which has
the authority to determine the individuals to whom and the terms upon which
option and SAR grants shall be made.
3-10
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
Information regarding option/SAR exercises during 1996 and unexercised
options/SARs at December 31, 1996 for the Named Executive Officers is presented
in the following table.
Number of CSW Securities
Underlying Unexercised Value of
Value Options/SARs at Year-End In-the-MoneyOptions/SARs
Name Shares Acquired Realized (#) Exercisable/ at Year-End ($) Exercisable/
on Exercise (#) ($) Unexercisable/ Unexercisable (1)
- -------------------------------------------------------------------------------------------------------------
Glenn Files -- -- 19,067/4,586 --/3,724
Richard H. Bremer -- -- 23,031/5,301 --/4,304
Robert L. Zemanek -- -- 20,499/4,931 --/4,004
Richard Verret -- -- 10,028/3,397 --/2,758
M. Bruce Evans 3,397 12,100 5,532/3,396 --/2,758
Robert R. Carey -- -- 24,531/5,301 --/4,304
T. D. Churchwell -- -- 7,223/2,045 --/1,661
Michael D. Smith -- -- 6,231/1,548 --/1,257
Floyd W. Nickerson -- -- 3,956/911 --/740
(1) Calculated based upon the difference between the closing price of CSW
Common on the New York Stock Exchange on December 31, 1996 ($25.625 per
share) and the exercise price per share of the outstanding options (ranging
from $16.25 to $29.625 per share).
LONG-TERM INCENTIVE PLAN-AWARDS IN LAST FISCAL YEAR
Information concerning awards made to the Named Executive Officers
during 1996 under the LTIP is set forth in the following table.
Performance or Estimated Future Payouts under
Number of CSW Other Period Non-Stock Price Based Plans
Shares, Units or Until Maturation Threshold Target Maximum
Name Other Rights (#) or Payout ($) ($) ($)
- ----------------------------------------------------------------------------------------------
Glenn Files -- 2 years -- 126,723 190,085
Richard H. Bremer -- 2 years -- 146,437 219,656
Robert L. Zemanek -- 2 years -- 136,223 204,335
Richard Verret -- 2 years -- 90,667 136,001
M. Bruce Evans -- 2 years -- 90,667 136,001
Robert R. Carey -- 2 years -- 146,437 219,656
T. D. Churchwell -- 2 years -- 63,258 94,887
Michael D. Smith -- 2 years -- 54,740 82,110
Floyd W. Nickerson -- 2 years -- 47,369 71,054
Payouts of these awards are contingent upon CSW achieving a specified
level of total stockholder return relative to a peer group of utility companies
for a three-year period, or cycle, and exceeding a certain defined minimum
threshold. If the Named Executive Officer's employment is terminated during the
performance period for any reason other than death, total and permanent
disability or retirement, then the award is canceled. The LTIP contains a
provision accelerating awards upon a change in control of CSW. Except as
otherwise provided in the next sentence, if a change in control of CSW occurs,
all options and SARs become fully exercisable and all restrictions, terms and
conditions applicable to all restricted stock are deemed lapsed and satisfied
and all performance-based awards are deemed to have been fully earned, as of the
date of the change in control. Awards which have been outstanding for less than
six months prior to the date the change in control occurs are not subject to
such earn-out or acceleration upon the occurrence of a change of control. The
LTIP also contains provisions designed to prevent circumvention of the above
acceleration provisions through coerced termination of an employee prior to a
change in control.
3-11
RETIREMENT PLAN
PENSION PLAN TABLE
ANNUAL BENEFITS AFTER
SPECIFIED YEARS OF CREDITED SERVICE
Average
Compensation 15 20 25 30 or more
-----------------------------------------------------------------------
$100,000 $ 25,050 $ 33,333 $ 41,667 $ 50,000
150,000 37,575 50,000 62,500 75,000
200,000 50,100 66,667 83,333 100,000
250,000 62,625 83,333 104,167 125,000
300,000 75,150 100,000 125,000 150,000
350,000 87,675 116,667 145,833 175,000
450,000 112,725 150,000 187,500 225,000
550,000 137,775 183,333 229,167 275,000
650,000 162,825 216,667 270,833 325,000
750,000 187,875 250,000 312,500 375,000
Executive officers are eligible to participate in the tax-qualified CSW
Pension Plan like other employees of the registrants. Certain executive
officers, including the Named Executive Officers, are also eligible to
participate in the SERP, a non-qualified ERISA excess benefit plan. Such pension
benefits depend upon years of credited service, age at retirement and amount of
covered compensation earned by a participant. The annual normal retirement
benefits payable under the pension and the SERP are based on 1.67 percent of
"Average Compensation" times the number of years of credited service (reduced by
(i) no more than 50 percent of a participant's age 62 or later Social Security
benefit and (ii) certain other offset benefits).
"Average Compensation" is the covered compensation for the plans and
equals the average annual compensation, reported as salary in the Summary
Compensation Table, during the 36 consecutive months of highest pay during the
120 months prior to retirement. The combined benefit levels in the table above,
which include both the pension and SERP benefits, are based on retirement at age
65, the years of credited service shown, continued existence of the plans
without substantial change and payment in the form of a single life annuity.
Respective years of credited service and ages, as of December 31, 1996,
for the Named Executive Officers are presented in the following table.
Named Executive Officer Years of Credited Service Age
------------------------------------------------------------
Glenn Files 25 49
Richard H. Bremer 19 48
Robert L. Zemanek 24 47
Richard Verret 24 50
M. Bruce Evans 17 41
T. D. Churchwell 18 52
Michael D. Smith 6 45
Floyd W. Nickerson 17 39
MEETINGS AND COMPENSATION
Those directors who are not also officers of CPL, PSO, SWEPCO and WTU
receive annual directors' fees and a fee of $300 plus expenses for each board or
committee meeting attended, as described below. They are also eligible to
participate in a deferred compensation plan. Under this plan such directors may
elect to defer payment of annual directors' and meeting fees until they retire
from the board or as they otherwise direct. The number of board meetings and
annual directors' fees are presented in the following table.
3-12
CPL PSO SWEPCO WTU
----------------------------------------
Number of regular board meetings 4 4 4 5
Annual directors' fees $6,000 $6,000 $6,600 $6,000
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No person serving during 1996 as a member of the Executive Compensation
Committee of the Board of Directors of CSW served as an officer or employee of
any registrant during or prior to 1996. No person serving during 1996 as an
executive officer of the U.S. Electric Operating Companies serves or has served
on the compensation committee or as a director of another company whose
executive officers serve or has served as a member of the Executive Compensation
Committee of CSW or as a director of one of the U.S. Electric Operating
Companies.
The registrants have entered into change in control agreements with the
individuals named in the Summary Compensation Table. The purpose of the
agreements is to assure the objective judgment, and to retain the loyalties of
these key individuals in the event CSW is faced with a potential change in
control. The change in control agreements entitle such individuals, in the event
any such individual is terminated by registrants within three years after the
change in control (and prior to the expiration of the agreements), to receive a
lump sum payment equal to four times base salary plus target bonus, enhanced
non-qualified retirement benefits, continued health and other welfare benefits
for up to three years, and various other non-qualified benefits. The individuals
will also be eligible for an additional payment, if necessary, to make them
whole for an excise tax on excess payments imposed.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.
CSW
The information required by ITEM 12 is incorporated by reference herein
from page 5-6 of CSW's Proxy Statement.
U.S. ELECTRIC OPERATING COMPANIES
All of the outstanding shares of common stock of each of the U.S.
Electric Operating Companies, presented in the following table, is owned
beneficially and of record by CSW, 1616 Woodall Rodgers Freeway, Dallas, Texas
75202-1234.
Company Shares Par Value
----------------------------------------------------------------
CPL 6,755,535 $25 par value
PSO 9,013,000 $15 par value
SWEPCO 7,536,640 $18 par value
WTU 5,488,560 $25 par value
SECURITY OWNERSHIP OF MANAGEMENT
The following tables show securities beneficially owned as of December
31, 1996, by each director, the CEO and the four other most highly compensated
executive officers, and as a group, all directors and Executive Officers of each
of the U.S. Electric Operating Companies. Share amounts shown in this table
include options exercisable within 60 days after year-end, restricted stock,
shares of CSW Common credited to CSW Thrift Plus accounts and all other shares
of CSW Common beneficially owned by the listed persons.
3-13
Each of the U.S. Electric Operating Companies has one or more series of
preferred stock outstanding. As of December 31, 1996, none of the individuals
listed in the following tables owned any shares of preferred stock of any U.S.
Electric Operating Company.
CPL'S BENEFICIAL OWNERSHIP AS OF DECEMBER 31, 1996
CSW Common
Underlying
Immediately
CSW Restricted Exercisable
Name Common (1) Stock (2)(3) Options (3)
- --------------------------------------------------------------------
John F. Brimberry 360 -- --
E. R. Brooks 113,690 17,074 54,315
M. Bruce Evans 13,223 3,574 8,928
Glenn Files 33,723 6,333 19,067
Ruben M. Garcia -- -- --
Robert A. McAllen 1,500 -- --
Pete Morales, Jr. -- -- --
S. Loyd Neal, Jr. 1,197 -- --
H. Lee Richards 1,400 -- --
J. Gonzalo Sandoval 14,011 1,605 5,592
Gerald E. Vaughn 3,162 1,500 --
All of the above and other
officers as a group 203,602 30,086 107,133
(1) Beneficial ownership percentages are all less than one
percent and therefore are omitted.
(2) These individuals currently have voting power, but not
investment power, with respect to these shares.
(3) These shares are included in the CSW Common column.
PSO'S BENEFICIAL OWNERSHIP AS OF DECEMBER 31, 1996
CSW Common
Underlying
Immediately
CSW Restricted Exercisable
Name Common (1) Stock (2)(3) Options (3)
- --------------------------------------------------------------------
E. R. Brooks 113,690 17,074 54,315
T. D. Churchwell 10,672 1,608 7,223
Harry A. Clarke -- -- --
Glenn Files 33,723 6,333 19,067
Paul K. Lackey, Jr. -- -- --
Paula Marshall-Chapman -- -- --
William R. McKamey 11,490 1,500 1,986
Dr. Robert B. Taylor, Jr. -- -- --
All of the above and other
officers as a group 177,464 26,515 85,034
(1) Beneficial ownership percentages are all less than one
percent and therefore are omitted.
(2) These individuals currently have voting power, but not
investment power, with respect to these shares.
(3) These shares are included in the CSW Common column.
3-14
SWEPCO'S BENEFICIAL OWNERSHIP AS OF DECEMBER 31, 1996
CSW Common
Underlying
Immediately
CSW Restricted Exercisable
Name Common (1) Stock (2)(3) Options (3)
- --------------------------------------------------------------------
E. R. Brooks 113,690 17,074 54,315
James E. Davison -- -- --
Glenn Files 33,723 6,333 19,067
Dr. Frederick E. Joyce -- -- --
Karen C. Martin 3,395 -- 1,625
William C. Peatross -- -- --
Maxine P. Sarpy 100 -- --
Michael D. Smith 8,533 1,631 6,231
All of the above and other
officers as a group 159,975 25,038 81,238
(1) Beneficial ownership percentages are all less than one
percent and therefore are omitted.
(2) These individuals currently have voting power, but not
investment power, with respect to these shares.
(3) These shares are included in the CSW Common column.
WTU's BENEFICIAL OWNERSHIP AS OF DECEMBER 31, 1996
CSW Common
Underlying
Immediately
CSW Restricted Exercisable
Name Common (1) Stock (2)(3) Options (3)
- --------------------------------------------------------------------
Richard F. Bacon 2,568 -- --
E. R. Brooks 113,690 17,074 54,315
Paul J. Brower 9,419 1,596 5,805
Glenn Files 33,723 6,333 19,067
Tommy Morris 2,000 -- --
Floyd W. Nickerson 6,814 1,515 3,956
Dian G. Owen 100 -- --
James M. Parker 5,000 -- --
Ted Steans -- -- --
F. L. Stephens 2,800 -- --
All of the above and other
officers as a group 178,576 26,518 83,143
(1) Beneficial ownership percentages are all less than one
percent and therefore are omitted.
(2) These individuals currently have voting power, but not
investment power, with respect to these shares.
(3) These shares are included in the CSW Common column.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS.
CSW
The information required by ITEM 13 is incorporated herein by reference
from page 7 of CSW's Proxy Statement.
U.S. ELECTRIC OPERATING COMPANIES
None.
4-1
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K.
(A) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT ON THIS FORM
10-K.
(1) FINANCIAL STATEMENTS.
Reports of Independent Public Accountants on the financial statements
for CSW and subsidiary companies, CPL, PSO, SWEPCO and WTU are listed
under ITEM 8 herein.
The financial statements filed as a part of this report for CSW and
subsidiary companies, CPL, PSO, SWEPCO and WTU are listed under ITEM 8
herein.
(2) FINANCIAL STATEMENT SCHEDULES.
Report of Independent Public Accountants as to Schedules for CSW, CPL,
PSO, SWEPCO and WTU are included in the Report of Independent Public
Accountants for each registrant.
Financial Statement Schedules for CSW, CPL, PSO, SWEPCO and WTU are
listed in (D) INDEX TO THE FINANCIAL STATEMENT SCHEDULES below.
(3) EXHIBITS.
Exhibits for CSW, CPL, PSO, SWEPCO and WTU are listed in (C) INDEX TO
EXHIBITS below.
(B) REPORTS ON FORM 8-K.
CSW, CPL AND SWEPCO
No reports were filed on Form 8-K during the quarter ended December 31,
1996. A Form 8-K, dated January 7, 1997, was filed reporting Item 5.
Other Events and Item 7. Exhibits, reporting CSW's common stock
dividend, CPL's rate review, Cajun asset purchase proposal, El Paso
merger litigation and a CSW Communications telecommunications
partnership.
PSO AND WTU
No reports were filed on Form 8-K during the quarter ended December 31,
1996.
4-2
CSW
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
10, 1997. The signature of the undersigned registrant shall be deemed to relate
only to matters having reference to such registrant and any subsidiaries
thereof.
CENTRAL AND SOUTH WEST CORPORATION
By: Lawrence B. Connors
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 10, 1997. The signature
of each of the undersigned shall be deemed to relate only to matters having
reference to the above named registrant and any subsidiaries thereof.
SIGNATURE TITLE
E. R. Brooks President and CEO and Director
(Principal Executive Officer)
Glenn D. Rosilier Chief Financial Officer
(Principal Financial Officer)
Lawrence B. Connors Controller
(Principal Accounting Officer)
*Glenn Biggs Director
*Molly Shi Boren Director
*Donald M. Carlton Director
*T. J. Ellis Director
*Glenn Files Executive Vice President and Director
*Joe H. Foy Director
*Dr. Robert W. Lawless Director
*James L. Powell Director
*T. V. Shockley, III Executive Vice President and Director
*J. C. Templeton Director
*Lloyd D. Ward Director
*Lawrence B. Connors, by signing his name hereto, does sign this document on
behalf of the persons indicated above pursuant to a power of attorney duly
executed by each such person.
*By: Lawrence B. Connors
Attorney-in-Fact
4-3
CPL
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
10, 1997. The signature of the undersigned registrant shall be deemed to relate
only to matters having reference to such registrant.
CENTRAL POWER AND LIGHT COMPANY
By: R. Russell Davis
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 10, 1997. The signature
of each of the undersigned shall be deemed to relate only to matters having
reference to the above named registrant.
SIGNATURE TITLE
M. Bruce Evans President and Director
(Principal Executive Officer)
R. Russell Davis Controller
(Principal Accounting and Financial Officer)
*John F. Brimberry Director
*E. R. Brooks Director
*Glenn Files Director
*Ruben M. Garcia Director
*Robert A. McAllen Director
*Pete Morales, Jr. Director
*S. Loyd Neal, Jr. Director
*H. Lee Richards Director
*J. Gonzalo Sandoval General Manager and Director
*Gerald E. Vaughn Director
*R. Russell Davis, by signing his name hereto, does sign this document on behalf
of the persons indicated above pursuant to a power of attorney duly executed by
each such person.
*By: R. Russell Davis
Attorney-in-Fact
4-4
PSO
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
10, 1997. The signature of the undersigned registrant shall be deemed to relate
only to matters having reference to such registrant.
PUBLIC SERVICE COMPANY OF OKLAHOMA
By: R. Russell Davis
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 10, 1997. The signature
of each of the undersigned shall be deemed to relate only to matters having
reference to the above named registrant.
SIGNATURE TITLE
T. D. Churchwell President and Director
(Principal Executive Officer)
R. Russell Davis Controller
(Principal Accounting and Financial Officer)
*E. R. Brooks Director
*Harry A. Clarke Director
*Glenn Files Director
*Paul K. Lackey, Jr. Director
*Paula Marshall-Chapman Director
*William R. McKamey General Manager and Director
*Dr. Robert B. Taylor, Jr. Director
*R. Russell Davis, by signing his name hereto, does sign this document on behalf
of the persons indicated above pursuant to a power of attorney duly executed by
each such person.
*By: R. Russell Davis
Attorney-in-Fact
4-5
SWEPCO
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
10, 1997. The signature of the undersigned registrant shall be deemed to relate
only to matters having reference to such registrant.
SOUTHWESTERN ELECTRIC POWER COMPANY
By: R. Russell Davis
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 10, 1997. The signature
of each of the undersigned shall be deemed to relate only to matters having
reference to the above named registrant.
SIGNATURE TITLE
Michael D. Smith President and Director
(Principal Executive Officer)
R. Russell Davis Controller
(Principal Accounting and Financial Officer)
*E. R. Brooks Director
*James E. Davison Director
*Glenn Files Director
*Dr. Frederick E. Joyce Director
*John M. Lewis Director
*Karen C. Martin General Manager and Director
*William C. Peatross Director
*Maxine P. Sarpy Director
*R. Russell Davis, by signing his name hereto, does sign this document on behalf
of the persons indicated above pursuant to a power of attorney duly executed by
each such person.
*By: R. Russell Davis
Attorney-in-Fact
4-6
WTU
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
10, 1997. The signature of the undersigned registrant shall be deemed to relate
only to matters having reference to such registrant.
WEST TEXAS UTILITIES COMPANY
By: R. Russell Davis
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 10, 1997. The signature
of each of the undersigned shall be deemed to relate only to matters having
reference to the above named registrant.
SIGNATURE TITLE
Floyd W. Nickerson President and Director
(Principal Executive Officer)
R. Russell Davis Controller
(Principal Accounting and Financial Officer)
*Richard F. Bacon Director
*E. R. Brooks Director
*Paul J. Brower General Manager and Director
*Glenn Files Director
*Tommy Morris Director
*Dian G. Owen Director
*James M. Parker Director
*Ted Steans Director
*F. L. Stephens Director
*R. Russell Davis, by signing his name hereto, does sign this document on behalf
of the persons indicated above pursuant to a power of attorney duly executed by
each such person.
*By: R. Russell Davis
Attorney-in-Fact
4-7
(C) INDEX TO EXHIBITS.
The following exhibits indicated by an asterisk (*) preceding the
exhibit number are filed herewith. The balance of the exhibits have heretofore
been filed with the SEC, respectively, as the exhibits and in the file numbers
indicated and are incorporated herein by reference. The exhibits marked with a
plus (+) are management contracts or compensatory plans or arrangements required
to be filed herewith and required to be identified as such by ITEM 14. of Form
10-K. Reference is made to a duplicate list of exhibits being filed as a part of
this Form 10-K, which list, prepared in accordance with Item 102 of Regulation
S-T of the SEC, immediately precedes the exhibits being filed with this Form
10-K.
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION.
CSW
1 Agreement and Plan of Merger Among El Paso Electric Company,
Central and South West Corporation and CSW Sub, Inc. Dated as
of May 3, 1993 as Amended May 18, 1993 (incorporated herein by
reference to Exhibit 2.1 to CSW's Form 8-K dated December 29,
1993, File No. 1-1443).
2 Second Amendment Dated as of August 26, 1993 to Agreement and
Plan of Merger Among El Paso Electric Company, Central and
South West Corporation and CSW Sub, Inc. Dated as of May 3,
1993 as amended on May 18, 1993 (incorporated herein by
reference to Exhibit 2.2 to CSW's Form 8-K dated December 29,
1993, File No. 1-1443).
3 Third Amendment Dated as of December 1, 1993 to Agreement and
Plan of Merger Among El Paso Electric Company, Central and
South West Corporation and CSW Sub, Inc. Dated as of May 3,
1993 as amended on May 18, 1993 and August 26, 1993
(incorporated herein by reference to Exhibit 2.3 to CSW's Form
8-K dated December 29, 1993, File No. 1-1443).
4 Modified Third Amended Plan of Reorganization of El Paso
Electric Company Providing for the Acquisition of El Paso
Electric Company by Central and South West Corporation as
corrected December 6, 1993, and confirmed by the Bankruptcy
Court (incorporated herein by reference to Exhibit 2.4 to CSW's
Form 8-K dated December 29, 1993, File No. 1-1443).
5 Order and Judgment Confirming El Paso Electric Company's Third
Amended Plan of Reorganization, as Modified, Under Chapter 11
of the United States Bankruptcy Code and Granting Related
Relief (incorporated herein by reference to Exhibit 2.5 to
CSW's Form 8-K dated December 29, 1993, File No. 1-1443).
CSW AND SWEPCO
6 Plan of Reorganization for Cajun Electric Power Cooperative,
Inc. Submitted Jointly by The Members Committee, SWEPCO and
Gulf States Utilities Company (incorporated herein by reference
to CSW and SWEPCO's Form 8-K dated April 19, 1996).
7 Amended Plan of Reorganization for Cajun Electric Power
Cooperative, Inc. Submitted Jointly by The Members Committee,
SWEPCO and Entergy Gulf States, Inc. (incorporated herein by
reference to CSW and SWEPCO's Form 8-K dated September 30,
1996).
(3) ARTICLES OF INCORPORATION AND BY-LAWS.
CSW
1 Certificate of Amendment to Second Restated Certificate of
Incorporation of CSW (incorporated herein by reference to Item
10, Exhibit B-1.2 to the 1993 CSW annual report on Form U5S).
2 Bylaws of CSW, as amended (incorporated herein by reference to
Exhibit 3 (b) to CSW's 1990 Form 10-K, File No. 1-1443).
4-8
CPL
1 Restated Articles of Incorporation, as amended, of CPL
(incorporated herein by reference to Exhibit 4(a) to CPL's
Registration Statement No. 33-4897, Exhibits 5 and 7 to Form
U-1, File No. 70-7171, Exhibits 5, 8.1, 8.2 and 19 to Form U-1,
File No. 70-7472 and CPL's Form 10-Q for the quarterly period
ended September 30, 1992, ITEM 6, Exhibit 1).
2 Bylaws of CPL, as amended (incorporated herein by reference to
Exhibit 3.1 to CPL's Form 10-Q dated September 30, 1996, File
No. 0-346).
PSO
1 Restated Certificate of Incorporation of PSO (incorporated
herein by reference to Exhibit 3 to PSO's 1987 Form 10-K, File
No. 0-343).
2 Bylaws of PSO, as amended (incorporated herein by reference to
Exhibit 3.2 to PSO's Form 10-Q dated September 30, 1996, File
No. 0-343).
SWEPCO
1 Restated Certificate of Incorporation, as amended, of SWEPCO
(incorporated herein by reference to Exhibit 3 to SWEPCO's 1980
Form 10-K, File No. 1-3146, Exhibit 2 to Form U-1 File No.
70-6819, Exhibit 3 to Form U-1, File No. 70-6924 and Exhibit 4
to Form U-1 File No. 70-7360).
2 Bylaws of SWEPCO, as amended (incorporated herein by reference
to Exhibit 3.3 to SWEPCO's Form 10-Q dated September 30, 1996,
File No. 1-3146).
WTU
1 Restated Articles of Incorporation, as amended, of WTU
(incorporated herein by reference to Exhibit 3(e) 1 to WTU's
1994 Form 10-K, File No. 0-340).
2 Bylaws of WTU, as amended (incorporated herein by reference to
Exhibit 3.4 to WTU's Form 10-Q dated September 30, 1996, File
No. 0-340).
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDER, INCLUDING
INDENTURES.
CPL
Indenture of Mortgage or Deed of Trust dated November 1, 1943,
executed by CPL to The First National Bank of Chicago and
Robert L. Grinnell, as Trustee, as amended through October 1,
1977 (incorporated herein by reference to Exhibit 5.01 in File
No. 2-60712), and the Supplemental Indentures of CPL dated
September 1, 1978 (incorporated herein by reference to Exhibit
2.02 in File No. 2-62271) and December 15, 1984, July 1, 1985,
May 1, 1986 and November 1, 1987 (incorporated herein by
reference to Exhibit 17 to Form U-1, File No. 70-7003, Exhibit
4 (b) in File No. 2-98944, Exhibit 4 to Form U-1, File No.
70-7236 and Exhibit 4 to Form U-1, File No. 70-7249) and June
1, 1988, December 1, 1989, March 1, 1990, October 1, 1992,
December 1, 1992, February 1, 1993, April 1, 1993, May 1, 1994
and July 1, 1995 (incorporated herein by reference to Exhibit 2
to Form U-1, File No. 70-7520, Exhibit 3 to Form U-1, File No.
70-7721, Exhibit 10 to Form U-1, File No. 70-7725 and Exhibit
10 (a), 10 (b), 10 (c), 10 (d), 10(e) and 10(f), respectively,
to Form U-1, File No. 70-8053).
PSO
1 Indenture dated July 1, 1945, as amended, of PSO (incorporated
herein by reference to Exhibit 5.03 in Registration No.
2-60712), the Supplemental Indenture of PSO dated June 1, 1979
(incorporated herein by reference to Exhibit 2.02 in
Registration No. 2-64432), the Supplemental Indenture of PSO
dated December 1, 1979 (incorporated herein by reference to
Exhibit 2.02 in Registration No. 2-65871), the Supplemental
Indenture of PSO dated March 1, 1983 (incorporated herein by
reference to Exhibit 2 to Form U-1, File No. 70-6822), the
Supplemental Indenture of PSO dated May 1, 1986 (incorporated
herein by reference to Exhibit 3 to Form U-1, File No.
70-7234), the Supplemental Indenture of PSO dated July 1, 1992
4-9
(incorporated herein by reference to Exhibit 4 (b) to Form S-3,
File No. 33-48650), the Supplemental Indenture of PSO dated
December 1, 1992 (incorporated herein by reference to Exhibit 4
(c) to Form S-3, File No. 33-49143), the Supplemental Indenture
of PSO dated April 1, 1993 (incorporated herein by reference to
Exhibit 4 (b) to Form S-3, File No. 33-49575), Supplemental
Indenture of PSO dated June 1, 1993 (incorporated herein by
reference to Exhibit 4 (b) to PSO's 1993 Form 10-K, File No.
0-343) and Supplemental Indenture dated as of February 1, 1996
(incorporated herein by reference to Exhibit 4.03 to PSO's Form
8-K dated March 4, 1996, File No. 0-343).
2 Indenture dated as of February 1, 1996 of PSO (incorporated
herein by reference to Exhibit 4.01 to PSO's Form 8-K dated
March 4, 1996, File No. 0-343) and First Supplemental Indenture
dated as of February 1, 1996 of PSO (incorporated herein by
reference to Exhibit 4.02 to PSO's Form 8-K dated March 4,
1996, File No. 0-343).
SWEPCO
Indenture dated February 1, 1940, as amended through November
1, 1976, of SWEPCO (incorporated herein by reference to Exhibit
5.04 in Registration No. 2-60712), the Supplemental Indenture
dated August 1, 1978 incorporated herein by reference to
Exhibit 2.02 in Registration No. 2-61943), the Supplemental
Indenture dated January 1, 1980 (incorporated herein by
reference to Exhibit 2.02 in Registration No. 2-66033), the
Supplemental Indenture dated April 1, 1981 (incorporated herein
by reference to Exhibit 2.02 in Registration No. 2-71126), the
Supplemental Indenture dated May 1, 1982 (incorporated herein
by reference to Exhibit 2.02 in Registration No. 2-77165), the
Supplemental Indenture dated August 1, 1985 (incorporated
herein by reference to Exhibit 4 to Form U-1, File No.
70-7121), the Supplemental Indenture dated May 1, 1986
(incorporated herein by reference to Exhibit 3 to Form U-1 File
No. 70-7233), the Supplemental Indenture dated November 1, 1989
(incorporated herein by reference to Exhibit 3 to Form U-1,
File No. 70-7676), the Supplemental Indenture dated June 1,
1992 (incorporated herein by reference to Exhibit 10 to Form
U-1, File No. 70-7934), the Supplemental Indenture dated
September 1, 1992 (incorporated herein by reference to Exhibit
10 (b) to Form U-1, File No. 72-8041), the Supplemental
Indenture dated July 1, 1993 (incorporated herein by reference
to Exhibit 10 (c) to Form U-1, File No. 70-8041) and the
Supplemental Indenture dated October 1, 1993 (incorporated
herein by reference to Exhibit 10 (a) to Form U-1, File No.
70-8239).
WTU
Indenture dated August 1, 1943, as amended through July
1, 1973 (incorporated herein by reference to Exhibit 5.05 in
File No. 2-60712), Supplemental Indenture dated May 1, 1979
(incorporated herein by reference to Exhibit No. 2.02 in File
No. 2-63931), Supplemental Indenture dated November 15, 1981
(incorporated herein by reference to Exhibit No. 4.02 in File
No. 2-74408), Supplemental Indenture dated November 1, 1983
(incorporated herein by reference to Exhibit 12 to Form U-1,
File No. 70-6820), Supplemental Indenture dated April 15, 1985
(incorporated herein by reference to Amended Exhibit 13 to Form
U-1, File No. 70-6925), Supplemental Indenture dated August 1,
1985 (incorporated herein by reference to Exhibit 4 (b) in File
No. 2-98843), Supplemental Indenture dated May 1, 1986
(incorporated herein by reference to Exhibit 4 to Form U-1,
File No. 70-7237), Supplemental Indenture dated December 1,
1989 (incorporated herein by reference to Exhibit 3 to Form
U-1, in File No. 70-7719), Supplemental Indenture dated June 1,
1992 (incorporated herein by reference to Exhibit 10 to Form
U-1, File No. 70-7936), Supplemental Indenture dated October 1,
1992 (incorporated herein by reference to Exhibit 10 to Form
U-1, File No. 70-8057), Supplemental Indenture dated February
1, 1994 (incorporated herein by reference to Exhibit 10-Form
U-1, File No. 70-8265), Supplemental Indenture dated March 1,
1995 (incorporated herein by reference to Exhibit 10(b) to Form
U-1, File No. 70-8057) and Supplemental Indenture dated October
1, 1995 (incorporated herein by reference to Exhibit 10(c) to
Form U-1, File No. 70-8057).
4-10
(10) MATERIAL CONTRACTS.
CSW
+ 1 Restricted Stock Plan for Central and South West Corporation
(incorporated herein by reference to Exhibit 10(a) to CSW's
1990 Form 10-K, File No. 1-1443).
+ 2 Central and South West System Special Executive Retirement
Plan (incorporated herein by reference to Exhibit 10(b) to
CSW's 1990 Form 10-K, File No. 1-1443).
+ 3 Executive Incentive Compensation Plan for Central and South
West System (incorporated herein by reference to Exhibit 10(c)
to the Corporation's 1990 Form 10-K, File No. 1-1443).
4 Central and South West Corporation Stock Option Plan
(incorporated herein by reference to Exhibit 10(d) to the
Corporation's 1990 Form 10-K, File No. 1-1443).
5 Central and South West Corporation Deferred Compensation Plan
for Directors (incorporated herein by reference to Exhibit
10(e) to the Corporation's 1990 Form 10-K, File No. 1-1443).
+ 6 Central and South West Corporation 1992 Long-Term Incentive
Plan (incorporated herein by reference to Appendix A to the
Central and South West Corporation Notice of 1992 Annual
Meeting of Shareholders and Proxy Statement).
7 Amended and Restated Credit Agreement dated as of January 18,
1996 among Central and South West Corporation and the banks
listed therein.
8 Facility Agreement dated as of November 6, 1995 among CSW
Investments, CSW (UK) plc and the banks listed therein.
9 Agreement of Merger between Central and South West Corporation
and Tejas Gas Corporation relating to Transok, Inc.
(incorporated herein by reference to Exhibit 10 to CSW's Form
10-Q dated March 31, 1996, File No. 1-1443).
(12) STATEMENTS RE COMPUTATION OF RATIOS.
CPL, PSO, SWEPCO AND WTU
* 1 CPL's Statement re computation of Ratio of Earnings to Fixed
Charges for the five years ended December 31, 1996.
* 2 PSO's Statement re computation of Ratio of Earnings to Fixed
Charges for the five years ended December 31, 1996.
* 3 SWEPCO's Statement re computation of Ratio of Earnings to
Fixed Charges for the five years ended December 31, 1996.
* 4 WTU's Statement re computation of Ratio of Earnings to Fixed
Charges for the five years ended December 31, 1996.
* (21) SUBSIDIARIES OF THE REGISTRANT (CSW).
(23) CONSENT OF EXPERTS AND COUNSEL.
CSW, CPL, PSO AND SWEPCO
* 1 CSW's Consent of Auditors.
* 2 CSW's Consent of Auditors.
* 3 CPL's Consent of Auditors.
* 4 PSO's Consent of Auditors.
* 5 SWEPCO's Consent of Auditors.
4-11
(24) POWER OF ATTORNEY.
CSW
* 1 Power of Attorney.
* 2 Power of Attorney.
* 3 Power of Attorney.
* 4 Power of Attorney.
CPL
* 5 Power of Attorney.
* 6 Power of Attorney.
* 7 Power of Attorney.
PSO
* 8 Power of Attorney.
* 9 Power of Attorney.
* 10 Power of Attorney.
SWEPCO
* 11 Power of Attorney.
* 12 Power of Attorney.
* 13 Power of Attorney.
WTU
* 14 Power of Attorney.
* 15 Power of Attorney.
* 16 Power of Attorney.
(27) FINANCIAL DATA SCHEDULES.
PSO
* 1 PSO's Financial Data Schedule
4-12
(D) INDEX TO FINANCIAL STATEMENT SCHEDULES.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS.
CSW, CPL, PSO, SWEPCO AND WTU
1 CSW's Schedule II - Valuation and Qualifying Accounts
2 CPL's Schedule II - Valuation and Qualifying Accounts
3 PSO's Schedule II - Valuation and Qualifying Accounts
4 SWEPCO's Schedule II - Valuation and Qualifying Accounts
5 WTU's Schedule II - Valuation and Qualifying Accounts
OTHER SCHEDULES.
All other exhibits and schedules are omitted because of the absence of
the conditions under which they are required or because the required
information is included in the financial statements or related notes to
financial statements.
4-13
SCHEDULE II-1
Central and South West Corporation and Subsidiary Companies
Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------
Additions
---------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Year Expenses Accounts Deductions of Year
- --------------------------------------------------------------------------------
(millions)
1996
Utility Plant
Development Costs $-- $117 $-- $(43) $74
SCHEDULE II-2
Central Power and Light Company
Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------
Additions
---------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Year Expenses Accounts Deductions of Year
- --------------------------------------------------------------------------------
(thousands)
1996
Utility Plant
Development Costs $-- $21,509 $-- $(11,346) $10,163
SCHEDULE II-3
Public Service Company of Oklahoma
Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------
Additions
---------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Year Expenses Accounts Deductions of Year
- --------------------------------------------------------------------------------
(thousands)
1996
Utility Plant
Development Costs $-- $51,109 $-- $(13,482) $37,627
4-14
SCHEDULE II-4
Southwestern Electric Power Company
Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------
Additions
---------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Year Expenses Accounts Deductions of Year
- --------------------------------------------------------------------------------
(thousands)
1996
Utility Plant
Development Costs $-- $29,700 $-- $(13,496) $16,204
SCHEDULE II-5
West Texas Utilities Company
Valuation and Qualifying Accounts
Column A Column B Column C Column D Column E
- --------------------------------------------------------------------------------
Additions
---------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other at End
Description of Year Expenses Accounts Deductions of Year
- --------------------------------------------------------------------------------
(thousands)
1996
Utility Plant
Development Costs $-- $14,949 $-- $(4,257) $10,692