UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) COMBINED QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____TO_____
COMMISSION 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
INDICATE BY CHECK MARK WHETHER THE REGISTRANTS (1) HAVE FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANTS WERE REQUIRED TO FILE SUCH REPORTS), AND (2) HAVE BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
Common Stock Outstanding at November 7, 1997 Shares
Central and South West Corporation 212,235,320
Central Power and Light Company 6,755,535
Public Service Company of Oklahoma 9,013,000
Southwestern Electric Power Company 7,536,640
West Texas Utilities Company 5,488,560
This Combined Form 10-Q 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.
2
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 1997
PAGE
GLOSSARY OF TERMS.............................................................3
FORWARD LOOKING INFORMATION...................................................4
PART I. FINANCIAL INFORMATION................................................5
ITEM 1. FINANCIAL STATEMENTS..............................................5
Central And South West Corporation And Subsidiary Companies............10
Central Power And Light Company........................................14
Public Service Company Of Oklahoma.....................................22
Southwestern Electric Power Company....................................29
West Texas Utilities Company...........................................36
Notes To Financial Statements..........................................44
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................56
PART II - OTHER INFORMATION..................................................67
ITEM 1. LEGAL PROCEEDINGS................................................67
ITEM 5. OTHER INFORMATION................................................68
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................70
SIGNATURES...................................................................71
3
GLOSSARY OF TERMS
The following abbreviations or acronyms used in this text are defined below:
ABBREVIATION OR ACRONYM DEFINITION
ANI....................................American Nuclear Insurance
Burlington Northern....................Burlington Northern Railroad Company
Cajun..................................Cajun Electric Power Cooperative, Inc.
CLECO..................................Central Louisiana Electric Company, Inc.
Committee of Certain Members...........The members committee of Cajun, which
currently represents 7 of the 11
Louisiana member distribution
cooperatives that are served by Cajun
Court of Appeals.......................Court of Appeals, Third District of
Texas, Austin, Texas
CPL....................................Central Power and Light Company, Corpus
Christi, Texas
CPL 1997 Final Order...................Final orders received from the Texas
Commission in CPL's rate case Docket No.
14965, including both the order received
on September 10, 1997 and the revised
order received on October 16, 1997
CPL 1996 Fuel Agreement................Fuel settlement agreement entered into by
CPL and other parties in March 1996
CPL 1997 Original Rate Order...........Final order issued on March 31, 1997 by
the Texas Commission in CPL's rate case
Docket No. 14965
CSW....................................Central and South West Corporation,
Dallas, Texas
CSW Credit.............................CSW Credit, Inc., Dallas, Texas
CSW Energy.............................CSW Energy, Inc., Dallas, Texas
CSW ESI................................CSW Energy Services, Inc., Dallas, Texas
CSW International......................CSW International, Inc., Dallas, Texas
CSW PMI................................CSW Power Marketing, Inc., Dallas, Texas
CSW Services...........................Central and South West Services, Inc.,
Dallas, Texas and Tulsa, Oklahoma
CSW System.............................CSW and its subsidiaries
CWIP...................................Construction work in progress
DGES...................................Director General Electricity Supply
DHMV...................................Dolet Hills Mining Venture
ECOM...................................Excess cost over market
El Paso................................El Paso Electric Company
El Paso Merger.........................The proposed merger whereby El Paso would
have become a wholly-owned subsidiary of
CSW
Entergy Texas..........................Entergy Texas Utilities Company
EPA....................................Environmental Protection Agency
ERCOT..................................Electric Reliability Council of Texas
Exchange Act...........................Securities Exchange Act of 1934, as
amended
FERC...................................Federal Energy Regulatory Commission
HL&P...................................Houston Lighting & Power Company
Holding Company Act....................Public Utility Holding Company Act of
1935, as amended
ITC....................................Investment tax credit
LIFO...................................Last-in First-out (inventory accounting
method)
MD&A...................................Management's Discussion and Analysis of
Financial Condition and Results of
Operations
MDEQ...................................Mississippi Department of Environmental
Quality
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 (British thermal unit)
MWH....................................Megawatt-hour
National Grid..........................National Grid Group plc
NEIL...................................Nuclear Electric Insurance Limited
OCC Staff..............................Staff of the Oklahoma Commission
Oklahoma Commission....................Corporation Commission of the State of
Oklahoma
4
GLOSSARY OF TERMS (CONTINUED)
ABBREVIATION OR ACRONYM DEFINITION
Oklaunion..............................Oklaunion Power Station
PCB....................................Polychlorinated biphenyl
PRP....................................Potentially responsible party
PSO....................................Public Service Company of Oklahoma,
Tulsa, Oklahoma
PSO 1997 Rate Settlement Agreement.....Joint stipulation agreement reached by
PSO and other parties to settle PSO's
current rate inquiry
Registrant(s)..........................CSW, CPL, PSO, SWEPCO and WTU
Rights Plan............................Stockholder Rights Agreement between CSW
and CSW Services, as Rights Agent
RUS....................................Rural Utilities Service of the federal
government
SEC....................................United States Securities and Exchange
Commission
SEEBOARD...............................SEEBOARD plc., Crawley, West Sussex,
United Kingdom
SEEBOARD U.S.A.........................CSW's investment in SEEBOARD consolidated
and converted to U.S. Generally Accepted
Accounting Principles
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. 87............................Employers' Accounting for Pensions
STP....................................South Texas Project nuclear electric
generating station, jointly owned by CPL,
HL&P, City of Austin, and City of San
Antonio
STPNOC.................................South Texas Project Nuclear Operating
Company, a non-profit Texas corporation,
jointly owned by CPL, HL&P, City of
Austin, and City of San Antonio
Subsidiary obligated, mandatorily
redeemable, trust preferred
securities.........................Collective term for securities issued by
business trusts of CPL, PSO and SWEPCO
SWEPCO.................................Southwestern Electric Power Company,
Shreveport, Louisiana
SWEPCO Plan............................The plan of reorganization for Cajun
filed by the Committee of Certain
Members, SWEPCO and Entergy Texas on
October 26, 1996 with the U.S. Bankruptcy
Court for the Middle District of
Louisiana
Texas Commission.......................Public Utility Commission of Texas
Transok................................Transok, Inc. and subsidiaries, a former
wholly-owned subsidiary of CSW
U.S. Electric(s) or U.S. Electric
Operating Companies................CPL, PSO, SWEPCO and WTU
Vale...................................Empresa De Electrcidade Vale
Paranapanema S/A
WTU....................................West Texas Utilities Company, Abilene,
Texas
FORWARD LOOKING INFORMATION
This report made by CSW and its subsidiaries contains 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, their 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, but are not limited to: 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.
4
CSW
CENTRAL AND SOUTH WEST CORPORATION
AND SUBSIDIARY COMPANIES
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
6
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ----------------
1997 1996 1997 1996
------- ------ ------ ------
(millions, except per share amounts)
OPERATING REVENUES
U.S. Electric $1,054 $1,028 $2,562 $2,555
United Kingdom 401 391 1,324 1,322
Other diversified 22 19 53 43
------- ------ ------ ------
1,477 1,438 3,939 3,920
OPERATING EXPENSES AND TAXES
U.S. Electric fuel 370 347 892 885
U.S. Electric purchased power 18 20 61 60
United Kingdom cost of sales 276 274 927 961
Operating and maintenance 254 232 769 670
Provision for CPL 1997 Final Order 3 -- 18 --
El Paso Merger litigation -- -- 35 --
Depreciation and amortization 121 122 360 356
Taxes, other than income 49 49 143 138
Income taxes 83 110 135 208
------- ------ ------ ------
1,174 1,154 3,340 3,278
------- ------ ------ ------
OPERATING INCOME 303 284 599 642
------- ------ ------ ------
OTHER INCOME AND DEDUCTIONS
U.S. Electric reserves for utility
plant development costs, net of
income tax benefit of $1 for 1997
and $33 for 1996 -- -- (2) (84)
Other 10 11 29 15
------- ------ ------ ------
10 11 27 (69)
------- ------ ------ ------
INCOME BEFORE INTEREST CHARGES 313 295 626 573
------- ------ ------ ------
INTEREST AND OTHER CHARGES
Interest on long-term debt 84 80 251 240
Distributions on Subsidiary
obligated, mandatorily redeemable,
trust preferred securities 7 -- 11 --
Interest on short-term debt and
other 23 21 59 76
------- ------ ------ ------
114 101 321 316
------- ------ ------ ------
INCOME FROM CONTINUING OPERATIONS 199 194 305 257
DISCONTINUED OPERATIONS
Income, net of income tax of $6 -- -- -- 12
Gain on the sale, net of income tax
of $71 -- -- -- 113
------- ------ ------ ------
-- -- -- 125
------- ------ ------ ------
INCOME BEFORE EXTRAORDINARY ITEM 199 194 305 382
EXTRAORDINARY ITEM-United Kingdom windfall
profits tax (176) -- (176) --
------- ------ ------ ------
NET INCOME 23 194 129 382
Less: Preferred stock dividends 3 4 10 13
Gain on reacquired preferred stock -- -- 10 --
------- ------ ------ ------
NET INCOME FOR COMMON STOCK $ 20 $ 190 $ 129 $ 369
======= ====== ====== ======
Average Common Shares Outstanding 212.2 210.3 212.1 206.3
Earnings per Share of Common Stock from
Continuing Operations 0.93 0.90 1.44 1.18
Earnings per Share of Common Stock from
Discontinued Operations -- -- -- 0.61
------- ------ ------ ------
Earnings per Share of Common Stock before
Extraordinary Item 0.93 0.90 1.44 1.79
Loss per Share of Common Stock from
Extraordinary Item (0.83) -- (0.83) --
------- ------ ------ ------
Earnings per Share of Common Stock $0.10 $0.90 $0.61 $1.79
======= ====== ====== ======
Dividends Paid per Share of Common Stock $0.435 $0.435 $1.305 $1.305
======= ====== ====== ======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
7
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(unaudited) (audited)
------------- ------------
(millions)
ASSETS
FIXED ASSETS
Electric
Production $ 5,825 $ 5,830
Transmission 1,561 1,538
Distribution 4,352 4,237
General 1,358 1,318
Construction work in progress 169 230
Nuclear fuel 195 184
------- -------
Total Electric 13,460 13,337
Other diversified 191 84
------- -------
13,651 13,421
Less - Accumulated depreciation and amortization 5,117 4,940
------- -------
8,534 8,481
------- -------
CURRENT ASSETS
Cash and temporary cash investments 390 254
Accounts receivable 1,208 837
Materials and supplies, at average cost 176 185
Electric utility fuel inventory 71 102
Under-recovered fuel costs 99 46
Prepayments and other 58 85
------- -------
2,002 1,509
------- -------
DEFERRED CHARGES AND OTHER ASSETS
Deferred plant costs 505 509
Mirror CWIP asset 289 299
Other non-utility investments 441 371
Income tax related regulatory assets, net 248 236
Goodwill 1,405 1,525
Other 379 402
------- -------
3,267 3,342
------- -------
$13,803 $13,332
======= =======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
8
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(unaudited) (audited)
-------------- -------------
(millions)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock equity
Common stock: $3.50 par value
Authorized: 350.0 million shares
Issued and outstanding: 212.2 million
shares in 1997 and 211.5 million
shares in 1996 $ 743 $ 740
Paid-in capital 1,039 1,022
Retained earnings 1,815 1,963
Foreign currency translation adjustment
and other 33 77
------- -------
3,630 3,802
Preferred stock
Not subject to mandatory redemption 176 292
Subject to mandatory redemption 26 33
Subsidiary obligated, mandatorily redeemable,
trust preferred securities 323 --
Long-term debt 3,933 4,024
------- -------
8,088 8,151
------- -------
CURRENT LIABILITIES
Long-term debt and preferred stock due
within twelve months 204 204
Short-term debt 439 364
Short-term debt - CSW Credit, Inc. 849 579
Loan notes 65 76
Accounts payable 510 630
Accrued taxes 447 324
Accrued interest 129 82
Other 303 166
------- -------
2,946 2,425
------- -------
DEFERRED CREDITS
Accumulated deferred income taxes 2,235 2,272
Investment tax credits 282 291
Other 252 193
------- -------
2,769 2,756
------- -------
$13,803 $13,332
======= =======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
9
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30, September 30,
-----------------------------
1997 1996
-------- ---------
OPERATING ACTIVITIES (millions)
Net Income $ 129 $ 382
Non-cash Items Included in Net Income
Depreciation and amortization 385 403
Deferred income taxes and investment
tax credits (11) 17
Utility plant and other development costs 1 141
Provision for CPL 1997 Final Order 18 --
Gain on sale of subsidiary -- (184)
Refund due customers - PSO 29
Changes in Assets and Liabilities
Accounts receivable (383) (177)
Fuel recovery (23) --
Accounts payable 5 (92)
Accrued taxes 125 109
Other 134 (122)
------- -------
409 477
------- -------
INVESTING ACTIVITIES
Construction expenditures (345) (343)
Acquisition expenditures -- (1,391)
CSW Energy/CSW International projects (187) (52)
Sale of National Grid assets -- 99
Cash proceeds from sale of subsidiary -- 690
Other -- (5)
------- -------
(532) (1,002)
------- -------
FINANCING ACTIVITIES
Common stock sold 20 451
Proceeds from issuance of long-term debt -- 238
SEEBOARD acquisition financing -- 517
Reacquisition and retirement of long-term
debt (52) (238)
Reacquisition and retirement of preferred
stock (114) --
Proceeds from issuance of Subsidiary
obligated, mandatorily redeemable,
trust preferred securities 323 --
Other financing activities 34 --
Change in short-term debt 345 (151)
Payment of dividends (290) (279)
------- -------
266 538
------- -------
Effect of exchange rate changes on cash and
cash equivalents (7) 8
Net change in cash and cash equivalents 136 21
Cash and cash equivalents - beginning of period 254 401
------- -------
Cash and cash equivalents - end of period $ 390 $ 422
======= =======
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized
(includes distributions on trust preferred
securities) $ 282 $ 261
======= =======
Income taxes paid $ 247 $ 139
======= =======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
10
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
Set forth below is information concerning the consolidated results of
operations of CSW for the three and nine month periods ended September 30, 1997
and September 30, 1996. For information concerning the results of operations for
each of the U.S. Electric Operating Companies, see the discussions under the
heading RESULTS OF OPERATIONS following the financial statements of each of the
U.S. Electric Operating Companies.
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996
Net income for common stock decreased to $20 million in the third
quarter of 1997 from $190 million in 1996 due primarily to the accrual of the
one-time United Kingdom windfall profits tax of (pound)109.5 million at SEEBOARD
(or $176 million when converted at (pound)1.00=$1.61). Also contributing to the
decrease in earnings was the $16 million effect of the PSO 1997 Rate Settlement
Agreement. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and NOTE 9.
EXTRAORDINARY ITEM for additional information on the PSO 1997 Rate Settlement
Agreement and the windfall profits tax, respectively. Higher interest and other
charges also contributed to the decline in earnings due primarily to the
distributions on newly issued trust preferred securities. Partially offsetting
these reductions in earnings was an adjustment to deferred tax balances of $15
million resulting from a 2% reduction in the United Kingdom Corporation Tax
rate. Increased MWH sales resulting from customer growth and usage at the U.S.
Electric Operating Companies also served to offset the decline in earnings by
approximately $10 million.
In the third quarter of 1997, the U.S. Electric Operating Companies and
SEEBOARD U.S.A. contributed the following percentages to CSW's results of
operations.
Corporate
U.S. SEEBOARD Total Items and
Electric U.S.A. Electric Other Total
---------------------------------------------------
Operating Revenues 72% 27% 99% 1% 100%
Operating Income 78% 18% 96% 4% 100%
Net Income for CSW Common
before Extraordinary Item 91% 13% 104% (4)% 100%
U.S. Electric revenues increased $26 million, or 3%, in the third
quarter of 1997 compared to the same period a year ago due to several factors.
Higher MWH sales resulting from customer growth and usage at the U.S. Electric
Operating Companies increased U.S. Electric revenues by $15 million and the new
transmission access revenues at CPL and WTU increased U.S. Electric revenues by
$17 million. The impact on net income of the transmission access revenues was
almost entirely offset by a corresponding amount of transmission access expense.
Also contributing to the increase in U.S. Electric revenues were higher fuel
revenue of $19 million, as it relates to fuel expense discussed below. Partially
offsetting these increases in U.S. Electric revenues was a $26 million revenue
reduction resulting from the PSO 1997 Rate Settlement Agreement. Also partially
offsetting the increase was a revenue reduction of $2 million due to milder
weather in the third quarter of 1997. See NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS for additional information on the PSO 1997 Rate Settlement
Agreement. United Kingdom revenues increased $10 million, or 3%, in the third
quarter of 1997 compared to the third quarter of 1996 due primarily to the
effect of the exchange rate movement between the British pound and the U.S.
dollar, partially offset by a reduction in the fossil fuel levy collected on
behalf of the United Kingdom Government. Other diversified revenues increased $3
11
million, or 16%, in the third quarter of 1997 compared to the same period last
year due primarily to increased revenues from CSW Credit and CSW International,
partially offset by lower revenues from CSW Energy.
U.S. Electric fuel expense increased $23 million to $370 million in the
third quarter of 1997 compared to the third quarter of 1996 due in part to a 5%
increase in generation to meet customer demand. Also contributing to the higher
fuel expense was an increase in the average cost of fuel to $1.87 per MMbtu from
$1.77 per MMbtu, reflecting higher spot market natural gas prices.
Operating and maintenance expense increased $22 million to $254 million
in the third quarter of 1997 compared to the same period last year due primarily
to $16 million in new transmission access expense recorded at CPL and WTU
related to FERC Order No. 888 and the Texas Commission rules regarding
transmission access and pricing. The third quarter effect of the CPL 1997 Final
Order further increased operating and maintenance expense by approximately $6
million. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional
information on the CPL 1997 Final Order. Also contributing to the increase was
higher operating and maintenance expense at SEEBOARD U.S.A. due primarily to the
change in the exchange rate. Income tax expense decreased $27 million to $83
million in the third quarter of 1997 due primarily to lower pre-tax income and a
$15 million adjustment to deferred income tax balances resulting from a 2%
reduction in the United Kingdom Corporation Tax rate.
Long-term interest expense increased $4 million, or 5%, in the third
quarter of 1997 due primarily to the addition in 1997 of interest expense
resulting from a fourth quarter 1996 debt issuance by CSW Energy. Distributions
on newly-issued Subsidiary obligated, mandatorily redeemable, trust preferred
securities increased interest and other charges by $7 million in the third
quarter of 1997, the net income effect of which was partially offset by lower
dividend requirements resulting from the related preferred stock reacquisitions
at the U.S. Electric Operating Companies. See NOTE 6. LONG-TERM FINANCING for
additional information on the new securities.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net income for common stock decreased to $129 million in the first nine
months of 1997 from $369 million in the same period of 1996 due primarily to the
accrual of the one-time United Kingdom windfall profits tax of (pound)109.5
million at SEEBOARD (or $176 million when converted at (pound)1.00=$1.61). The
impact of CSW's final settlement of litigation with El Paso of $23 million,
after tax, contributed to the decline in earnings as well. Also contributing to
the decrease in earnings was the approximately $17 million effect of the PSO
1997 Rate Settlement Agreement and the $40 million effect of the CPL 1997 Final
Order. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional
information on CSW's final settlement of litigation with El Paso, the PSO 1997
Rate Settlement Agreement and the CPL 1997 Final Order. See NOTE 9.
EXTRAORDINARY ITEM for additional information on the windfall profits tax.
Partially offsetting the lower earnings was the gain of approximately $10
million on the reacquisition of a portion of the U.S. Electric Operating
Companies' preferred stock and also an adjustment to deferred tax balances of
$15 million resulting from a 2% reduction in the United Kingdom Corporation Tax
rate. Further offsetting the decline in earnings was an increase in non-fuel
electric revenues discussed below.
In addition, several items that occurred in the first nine months of
1996 were not present in the comparable period in 1997. Prior to the June 6,
1996 sale of Transok, CSW realized $12 million of earnings from Transok's
12
operations and as a result of the sale, CSW also recorded an after-tax gain of
approximately $113 million in June 1996. However, the U.S. Electric Operating
Companies and CSW Energy recorded reserves and write-offs totaling $102 million,
after-tax, for certain investments and contingencies in the second quarter of
1996 which decreased earnings. See NOTE 8. DISCONTINUED OPERATIONS for
additional information concerning the effects of the sale of Transok.
In the first nine months of 1997, the U.S. Electric Operating Companies
and SEEBOARD U.S.A. contributed the following percentages to CSW's results of
operations.
Corporate
U.S. SEEBOARD Total Items and
Electric U.S.A. Electric Other Total
---------------------------------------------------
Operating Revenues 65% 34% 99% 1% 100%
Operating Income 76% 24% 100% -- 100%
Net Income for CSW Common
before Extraordinary Item 94% 22% 116% (16)% 100%
U.S. Electric revenues increased $7 million in the first nine months of
1997 compared to the same period a year ago due primarily to increased MWH sales
resulting from customer growth and usage of $25 million and new transmission
access revenues at CPL and WTU of $49 million in accordance with FERC Order No.
888 and the Texas Commission's rule regarding transmission access and pricing.
The impact on net income of the transmission revenues was almost entirely offset
by a corresponding amount of transmission expense. Revenues increased due in
part to the absence in 1997 of the $14 million revenue decrease in 1996 from the
CPL 1996 Fuel Agreement. Partially offsetting the revenue increase was a
decrease in weather related demand of $44 million due to mild weather in the
first nine months of 1997. Further offsetting the increase in U.S. Electric
revenues was the revenue decrease from both the CPL 1997 Final Order of $31
million and the PSO 1997 Rate Settlement Agreement of $29 million. See NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS for additional information on the PSO 1997
Rate Settlement Agreement and the CPL 1997 Final Order. Other diversified
revenues increased $10 million, or 23%, in the first nine months of 1997
compared to the first nine months of 1996 due primarily to increased revenues
from CSW International and CSW Credit.
U.S. Electric fuel expense increased $7 million to $892 million in the
first nine months of 1997 compared to the same period last year due in part to
an increase in natural gas fuel costs to $2.54 per MMbtu from $2.30 per MMbtu.
Also contributing to the increase was the absence in 1997 of a one-time
reduction to fuel expense of approximately $9 million in the first quarter of
1996 related to the CPL 1996 Fuel Agreement. Partially offsetting these
increases in fuel expense was the effect of lower cost coal. United Kingdom cost
of sales decreased approximately $34 million to $927 million in the first nine
months of 1997 compared to the same period a year ago due primarily to a
reduction in the fossil fuel levy collected on behalf of the United Kingdom
government, which was partially offset by the effect of the exchange rate
movement between the British pound and the U.S. dollar.
Operating and maintenance expense increased $99 million to $769 million
in the first nine months of 1997 compared to the same period last year due in
part to the absence in 1997 of a $27 million pension adjustment recorded in the
second quarter of 1996 at SEEBOARD which decreased pension expense. The effect
of the exchange rate movement between the British pound and U.S. dollar also
contributed to the increase in operating and maintenance expense of SEEBOARD
U.S.A. In addition, approximately $47 million in new transmission access expense
was recorded at CPL and WTU in the first nine months of 1997 related to FERC
Order No. 888 and the Texas Commission rules regarding transmission access and
pricing. Also contributing to the increase in operating and maintenance expense
was the $28 million impact of the CPL 1997 Final Order. See NOTE 2. LITIGATION
13
AND REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final
Order. CSW also recorded $7 million of additional charges in 1997 associated
with the true-up of restructuring costs that nearly offset the cost increases
that were originally estimated and accrued in 1996. Partially offsetting the
increase in operating and maintenance expense were reduced pension expenses in
1997 resulting from changes made to the pension plan for CSW's domestic
employees. See NOTE 7. PENSION PLAN AMENDMENT for additional information related
to the changes in the pension plan. Income tax expense decreased $73 million to
$135 million in the first nine months of 1997 due primarily to lower pre-tax
income and a $15 million adjustment to deferred income tax balances resulting
from a 2% reduction in the United Kingdom Corporation Tax rate.
CPL recorded a $41 million reserve in the first quarter of 1997 related
to the CPL 1997 Original Rate Order issued by the Texas Commission. In the
second quarter of 1997, CPL reclassified into specific accounts most of the
effects of the reserve recorded in the first quarter to reflect the effects of
both the CPL 1997 Original Rate Order and the Texas Commission's June 20, 1997
modifications to the CPL 1997 Original Rate Order into specific accounts.
Approximately $18 million remains as the provision for CPL 1997 Final Order. See
NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information.
Other income and deductions increased to $27 million in the first nine
months of 1997 from a loss of $69 million in the same period in 1996 due
primarily to the absence in 1997 of reserves for certain investments and
contingencies recorded in the second quarter of 1996 of approximately $84
million, after tax, at the U.S. Electric Operating Companies and $18 million at
CSW Energy. Long-term interest expense increased $11 million, or 5%, in the
first nine months of 1997 due primarily to interest expense resulting from a
fourth quarter 1996 debt issuance by CSW Energy. Short-term and other interest
expense decreased $17 million to $59 million in the first nine months of 1997
when compared to the same period a year ago due primarily to lower levels of
short-term borrowings. Distributions on newly-issued Subsidiary obligated,
mandatorily redeemable, trust preferred securities increased interest and other
charges by $11 million in the first nine months of 1997, the net income effect
of which was partially offset by lower dividend requirements resulting from the
related preferred stock reacquisitions at the U.S. Electric Operating Companies.
See NOTE 6. LONG-TERM FINANCING for additional information on the new
securities.
14
CPL
CENTRAL POWER AND LIGHT COMPANY
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
15
CENTRAL POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------------
1997 1996 1997 1996
--------- --------- ----------- -----------
(thousands)
ELECTRIC OPERATING REVENUES $444,964 $410,899 $1,060,746 $1,026,352
OPERATING EXPENSES AND TAXES
Fuel 129,296 101,994 291,492 256,489
Purchased power 11,705 19,293 39,856 48,593
Other operating 66,489 56,480 212,413 166,242
Provision for CPL 1997 Final
Order 3,122 -- 18,160 --
Maintenance 16,985 11,080 46,418 40,190
Depreciation and amortization 39,349 43,907 117,256 126,044
Taxes, other than income 20,455 22,699 61,383 62,040
Income taxes 45,753 42,774 66,524 85,805
--------- --------- ----------- -----------
333,154 298,227 853,502 785,403
--------- --------- ----------- -----------
OPERATING INCOME 111,810 112,672 207,244 240,949
--------- --------- ----------- -----------
OTHER INCOME AND DEDUCTIONS
Reserve for utility plant
development costs, net of
tax benefit of $779 for
1997 and $5,893 for 1996 -- -- (1,282) (15,481)
Allowance for equity funds
used during construction 849 100 1,622 100
Other 2,555 1,398 5,339 4,608
--------- --------- ----------- -----------
3,404 1,498 5,679 (10,773)
--------- --------- ----------- -----------
INCOME BEFORE INTEREST CHARGES 115,214 114,170 212,923 230,176
--------- --------- ----------- -----------
INTEREST AND OTHER CHARGES
Interest on long-term debt 26,864 28,407 80,982 83,072
Interest on short-term debt
and other 3,783 3,355 11,994 14,485
Distributions on CPL obligated,
mandatorily redeemable, trust
preferred securities 2,985 -- 4,533 --
Allowance for borrowed funds
used during construction (644) (194) (1,770) (1,410)
--------- --------- ----------- -----------
32,988 31,568 95,739 96,147
--------- --------- ----------- -----------
NET INCOME 82,226 82,602 117,184 134,029
Less: Preferred stock
dividends 2,039 3,386 7,649 10,183
Gain on reacquired preferred
stock (284) -- 2,422 --
--------- --------- ----------- -----------
NET INCOME FOR COMMON STOCK $79,903 $79,216 $111,957 $123,846
========= ========= =========== ===========
The accompanying notes to consolidated financial statements as they relate
to CPL are an integral part of these statements.
16
CENTRAL POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(unaudited) (audited)
---------- ----------
ASSETS (thousands)
ELECTRIC UTILITY PLANT
Production $3,109,241 $3,102,929
Transmission 512,958 505,801
Distribution 1,002,532 956,928
General 281,264 271,347
Construction work in progress 88,469 95,336
Nuclear fuel 194,864 184,229
---------- ----------
5,189,328 5,116,570
Less - Accumulated depreciation and amortization 1,796,886 1,697,552
---------- ----------
3,392,442 3,419,018
---------- ----------
CURRENT ASSETS
Cash and temporary cash investments 106,232 3,299
Advances to affiliates 24,350 --
Accounts receivable 65,528 53,038
Materials and supplies, at average cost 70,681 75,732
Fuel inventory 13,748 15,461
Under-recovered fuel costs 54,175 26,298
Prepayments and other 3,910 4,484
---------- ----------
338,624 178,312
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred STP costs 485,192 486,978
Mirror CWIP asset 288,870 298,708
Income tax related regulatory assets, net 325,878 335,226
Other 103,603 110,021
---------- ----------
1,203,543 1,230,933
---------- ----------
$4,934,609 $4,828,263
========== ==========
The accompanying notes to consolidated financial statements as they relate
to CPL are an integral part of these statements.
17
CENTRAL POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(unaudited) (audited)
---------- ----------
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 871,890 868,932
---------- ----------
1,445,778 1,442,820
Preferred stock 163,204 250,351
CPL obligated, mandatorily redeemable,
trust preferred securities 144,706 --
Long-term debt 1,328,848 1,323,054
---------- ----------
3,082,536 3,016,225
---------- ----------
CURRENT LIABILITIES
Long-term debt due within twelve months 200,000 200,000
Advances from affiliates -- 52,525
Payables to affiliates 8,510 23,995
Accounts payable 77,319 45,946
Accrued taxes 78,918 64,207
Accrued interest 34,939 31,566
Refund due customers 106,131 43,266
Provision for CPL 1997 Final Order 18,160 --
Accumulated deferred income taxes 17,384 7,310
Other 17,163 19,048
---------- ----------
558,524 487,863
---------- ----------
DEFERRED CREDITS
Accumulated deferred income taxes 1,134,917 1,162,051
Investment tax credits 143,673 147,191
Other 14,959 14,933
---------- ----------
1,293,549 1,324,175
---------- ----------
$4,934,609 $4,828,263
========== ==========
The accompanying notes to consolidated financial statements as they relate
to CPL are an integral part of these statements.
18
CENTRAL POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
----------------------
1997 1996
--------- ---------
OPERATING ACTIVITIES (thousands)
Net Income $117,184 $134,029
Non-cash Items Included in Net Income
Depreciation and amortization 133,610 144,374
Deferred income taxes and
investment tax credits (11,230) 15,964
Provision for CPL 1997 Final Order 18,160 --
Utility plant development costs 2,061 21,374
Inventory reserve -- 487
Changes in Assets and Liabilities
Accounts receivable (12,490) 8,885
Fuel inventory 1,713 10,340
Materials and supplies 5,051 (4,744)
Accrued interest 3,373 2,977
Accounts payable 15,535 (172)
Accrued taxes 14,711 37,237
Under-recovered fuel costs (27,877) (35,313)
Refund due customers 62,865 --
Other 11,073 (5,036)
--------- ---------
333,739 330,402
--------- ---------
INVESTING ACTIVITIES
Construction expenditures (101,164) (82,245)
Other 6,870 1,005
--------- ---------
(94,294) (81,240)
--------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 63,967
Reacquisition and retirement of
long-term debt -- (6,371)
Special deposits for reacquisitions
of long-term debt -- (60,000)
Redemption of preferred stock (84,725) --
Proceeds from issuance of CPL obligated,
mandatorily redeemable, trust
preferred securities 144,706 --
Change in advances from affiliates (52,525) (118,279)
Payment of dividends (119,577) (125,416)
Other (41) --
--------- ---------
(112,162) (246,099)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 127,283 3,063
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,299 2,883
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $130,582 $5,946
========= =========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on trust preferred securities) $82,716 $85,876
========= =========
Income taxes paid $61,510 $26,721
========= =========
The accompanying notes to consolidated financial statements as they relate
to CPL are an integral part of these statements.
19
CENTRAL POWER AND LIGHT COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996
Net income for common stock increased $0.7 million, or 1%, from $79.2
million in the third quarter of 1996 to $79.9 million in the third quarter of
1997. Although net income for common stock was relatively stable for the two
periods, the following components fluctuated as described below.
Total electric operating revenues increased $34.1 million, or 8%, in
the third quarter of 1997 compared to the third quarter of 1996 primarily due to
increased fuel related revenue as a result of higher fuel costs, as discussed
below. Also contributing to the increase were $11.9 million of transmission
revenues as a result of the January 1997 implementation of open access tariffs
in accordance with FERC Order No. 888 and the Texas Commission rules regarding
transmission access and pricing. The impact on net income of the increase in
transmission access revenues was almost entirely offset by a corresponding
increase in transmission expense.
Fuel expense increased $27.3 million, or 27%, in the third quarter of
1997 compared with the third quarter of 1996 primarily as a result of an
increase in the average unit cost of fuel from $1.68 per MMbtu in the third
quarter of 1996 to $1.90 per MMbtu in the third quarter of 1997. This increase
resulted primarily from higher spot market prices for natural gas during the
third quarter of 1997. Purchased power expense decreased 39% from $19.3 million
in the third quarter of 1996 to $11.7 million in the third quarter of 1997 due
primarily to a reduction in economy energy purchases.
Other operating expense increased 18% to $66.5 million in the third
quarter of 1997 compared to the third quarter of 1996 due to higher nuclear
operations expense, an increase in transmission operations expenses as a result
of the January 1997 implementation of open access tariffs in accordance with
FERC Order No. 888 and the Texas Commission rules regarding transmission access
and pricing, as well as the write-off of rate case and demand side management
expenditures resulting from the CPL 1997 Final Order. These increases also were
partially offset by decreased property insurance expense and decreased pension
expense. See NOTE 7. PENSION PLAN AMENDMENT for additional information related
to changes in the pension plan. Maintenance expenses increased to $17.0 million
in the third quarter of 1997 from $11.1 million in the third quarter of 1996 due
primarily to increased steam and nuclear production expense.
Depreciation and amortization expenses decreased $4.6 million, or 10%,
compared to the third quarter of 1996 due to the implementation in 1997 of lower
depreciation rates in accordance with an administrative law judge's report
issued in the current CPL rate case. Income taxes increased approximately $3.0
million to $45.8 million in the third quarter of 1997 compared to the third
quarter of 1996 resulting from higher pre-tax income.
Other income and deductions increased $1.9 million due primarily to
increased interest income from a higher level of short-term investments.
Interest and other charges increased $1.4 million or 4% in the 3rd
quarter of 1997 when compared to the same period in 1996 due primarily to the
distributions on newly-issued CPL obligated, mandatorily redeemable, trust
preferred securities partially offset by a decrease in long-term debt expense
due to refinancing activities in 1996. Preferred stock dividends decreased $1.3
20
million in the third quarter of 1997 when compared to the same period in 1996 as
a result of the reacquisition of certain CPL preferred stock.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net income for common stock decreased $11.8 million, or 10%, from
$123.8 million for the first nine months of 1996 to $112.0 million for the first
nine months of 1997. The major reason for the decrease was the impact of the CPL
1997 Final Order, which decreased earnings by approximately $40 million. This
decrease was partially offset by an increase in other income and deductions due
to the absence in 1997 of a one-time charge associated with certain investments
for plant sites, engineering studies and lignite reserves of $15.5 million, net
of tax, recorded in the second quarter of 1996. See NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS for more information related to the CPL 1997 Final Order.
Total electric operating revenues increased $34.4 million or 3% in the
first nine months of 1997 when compared to the first nine months of 1996 due
primarily to higher retail MWH sales resulting from increased customers and
demand as well as higher fuel related revenue due to higher fuel costs, as
discussed below. Other factors that contributed to the increase included a $35.5
million increase in transmission revenues as a result of the January 1997
implementation of open access tariffs in accordance with FERC Order No. 888 and
the Texas Commission rules regarding transmission access and pricing offset by a
decrease related to provisions for refunds in 1997 and 1996 associated with the
CPL rate case. The impact on net income of the increase in transmission access
revenues was almost entirely offset by a corresponding increase in transmission
expense.
Fuel expense increased $35.0 million as a result of an increase in the
average unit cost of fuel from $1.54 per MMbtu in the first nine months of 1996
to $1.76 per MMbtu in the first nine months of 1997. This increase resulted
primarily from higher spot market prices for natural gas. Also contributing to
this increase was the absence in 1997 of a one-time $8.8 million reduction in
fuel expense recorded in the first quarter of 1996 in accordance with the CPL
1996 Fuel Agreement. Purchased power expense decreased 18% from $48.6 million
for the first nine months of 1996 to $39.9 million in the first nine months of
1997 due primarily to decreased economy energy purchases.
Other operating expense increased 28% to $212.4 million in the first
nine months of 1997 due primarily to an increase in transmission operations
expenses as a result of the January 1997 implementation of open access tariffs
in accordance with FERC Order No. 888 and the Texas Commission rules regarding
transmission access and pricing and the write-off of previously deferred rate
case expenses in accordance with the settlement in principle of the rate case
expense phase of CPL's Rate Review Docket 14965. These increases were offset in
part by reductions in pension expense and other employee related expenses. See
NOTE 7. PENSION PLAN AMENDMENT for additional information related to changes in
the pension plan. Maintenance expense increased $6.2 million or 15% in the first
nine months of 1997 as compared to 1996 due primarily to higher steam and
nuclear production and distribution overhead line expenses in 1997.
CPL recorded a $40.9 million reserve in the first quarter of 1997
related to the CPL 1997 Original Rate Order issued by the Texas Commission. In
the second quarter of 1997, CPL reclassified into specific accounts most of the
effects of the reserve recorded in the first quarter to reflect the effects of
both the CPL 1997 Original Rate Order and the Texas Commission's June 20, 1997
modifications to the CPL 1997 Original Rate Order into specific accounts.
Approximately $18 million remains as the provision for CPL 1997 Final Order. See
21
NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information.
Depreciation and amortization expenses decreased $8.8 million compared
to the first nine months of 1996 due to the implementation in 1997 of lower
depreciation rates in accordance with an administrative law judge's report
issued in connection with the current CPL rate case. Income taxes decreased
$19.3 million in the first nine months of 1997 compared with the first nine
months of 1996 resulting primarily from the income tax effect of the CPL 1997
Final Order.
Other income and deductions increased $16.5 million from a loss of
$10.8 million in 1996 to $5.7 million in 1997 due primarily to the absence in
1997 of the one-time charge associated with certain investments for plant sites,
engineering studies and lignite reserves of approximately $15.5 million, net of
tax, recorded in the second quarter of 1996. Also contributing to this increase
was additional interest income in 1997 due primarily to a higher level of
short-term investments.
Interest and other charges decreased $0.4 million in the first nine
months of 1997 when compared to the same period in 1996 due primarily to a
decrease in short-term debt expense resulting from the repayment of short-term
debt outstanding as well as a decrease in long-term debt expense due to
refinancing activities in 1996. Partially offsetting this decrease were the
distributions on newly-issued CPL obligated, mandatorily redeemable, trust
preferred securities of $4.5 million. Preferred stock dividends decreased $2.5
million in the first nine months of 1997 as compared to the same period in 1996
as a result of the reacquisition of certain CPL preferred stock outstanding. CPL
also recognized a $2.4 million gain associated with the reacquisition in 1997.
22
PSO
PUBLIC SERVICE COMPANY OF OKLAHOMA
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
23
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(thousands)
ELECTRIC OPERATING REVENUES $222,235 $250,015 $544,092 $579,021
OPERATING EXPENSES AND TAXES
Fuel 89,577 93,670 211,385 224,914
Purchased power 9,979 10,012 34,419 28,451
Other operating 28,707 30,818 86,782 88,340
Maintenance 7,732 8,777 23,088 26,487
Depreciation and amortization 20,412 19,559 60,229 57,990
Taxes, other than income 6,953 6,461 21,357 19,870
Income taxes 18,738 27,172 28,406 39,069
--------- --------- --------- ---------
182,098 196,469 465,666 485,121
--------- --------- --------- ---------
OPERATING INCOME 40,137 53,546 78,426 93,900
--------- --------- --------- ---------
OTHER INCOME AND DEDUCTIONS
Allowance for equity funds
used during construction 395 -- 652 --
Reserve for utility plant
development costs, net of
tax benefit of $48 for 1997
and $15,302 for 1996 -- -- (75) (35,552)
Other 307 38 992 237
--------- --------- --------- ---------
702 38 1,569 (35,315)
--------- --------- --------- ---------
INCOME BEFORE INTEREST CHARGES 40,839 53,584 79,995 58,585
--------- --------- --------- ---------
INTEREST AND OTHER CHARGES
Interest on long-term debt 7,618 7,821 22,855 22,936
Interest on short-term debt
and other 683 1,130 3,349 4,452
Distributions on PSO obligated,
mandatorily redeemable, trust
preferred securities 1,499 -- 2,467 --
Allowance for borrowed funds used
during construction (221) (376) (1,141) (1,075)
--------- --------- --------- ---------
9,579 8,575 27,530 26,313
--------- --------- --------- ---------
NET INCOME 31,260 45,009 52,465 32,272
Less: Preferred stock dividends 53 204 310 612
Gain on reacquired preferred stock (217) -- 4,227 --
--------- --------- --------- ---------
NET INCOME FOR COMMON STOCK $30,990 $44,805 $56,382 $31,660
========= ========= ========= =========
The accompanying notes to consolidated financial statements as they relate
to PSO are an integral part of these statements.
24
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(unaudited) (audited)
---------- ----------
ASSETS (thousands)
ELECTRIC UTILITY PLANT
Production $907,468 $902,813
Transmission 372,572 368,280
Distribution 811,163 773,590
General 205,701 186,252
Construction work in progress 32,077 59,241
---------- ----------
2,328,981 2,290,176
Less - Accumulated depreciation and amortization 1,030,610 987,283
---------- ----------
1,298,371 1,302,893
---------- ----------
CURRENT ASSETS
Cash and temporary cash investments 40,261 1,479
Advances to affiliates 8,321 --
Accounts receivable 27,119 11,069
Materials and supplies, at average cost 33,361 34,542
Fuel inventory 14,434 14,061
Accumulated deferred income taxes -- 2,558
Prepayments and other 430 2,991
---------- ----------
123,926 66,700
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS 71,257 62,004
---------- ----------
$1,493,554 $1,431,597
========== ==========
The accompanying notes to consolidated financial statements as they relate
to PSO are an integral part of these statements.
25
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(unaudited) (audited)
----------- ----------
CAPITALIZATION AND LIABILITIES (thousands)
CAPITALIZATION
Common stock: $15 par value
Authorized shares: 11,000,000
Issued shares: 10,482,000
Outstanding shares: 9,013,000 $157,230 $157,230
Paid-in capital 180,000 180,000
Retained earnings 162,325 145,943
----------- ----------
499,555 483,173
Preferred stock 5,287 19,826
PSO obligated, mandatorily redeemable,
trust preferred securities 72,506 --
Long-term debt 421,442 420,301
----------- ----------
998,790 923,300
----------- ----------
CURRENT LIABILITIES
Advances from affiliates -- 42,867
Payables to affiliates 12,087 27,425
Accounts payable 43,910 47,604
Payables to customers 16,464 14,329
Accrued taxes 38,947 12,306
Accrued interest 10,936 9,193
Refund due customers 29,000 --
Accumulated deferred income taxes 685 --
Other 7,495 7,421
----------- ----------
159,524 161,145
----------- ----------
DEFERRED CREDITS
Accumulated deferred income taxes 242,136 251,007
Investment tax credits 42,000 43,438
Income tax related regulatory liabilities, net 43,259 46,007
Other 7,845 6,700
----------- ----------
335,240 347,152
----------- ----------
$1,493,554 $1,431,597
=========== ==========
The accompanying notes to consolidated financial statements as they relate
to PSO are an integral part of these statements.
26
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
---------------------
1997 1996
--------- ---------
OPERATING ACTIVITIES (thousands)
Net Income $52,465 $32,272
Non-cash Items Included in Net Income
Depreciation and amortization 64,417 62,457
Deferred income taxes and investment tax credits (9,814) (10,338)
Utility plant development costs 75 50,854
Inventory reserve -- 3,945
Refund due customers 29,000 --
Changes in Assets and Liabilities
Accounts receivable (16,050) (8,766)
Accounts payable (17,439) (19,769)
Accrued taxes 26,641 17,375
Other (473) (3,151)
--------- ---------
128,822 124,879
--------- ---------
INVESTING ACTIVITIES
Construction expenditures (55,851) (56,830)
Other (4,734) (5,430)
--------- ---------
(60,585) (62,260)
--------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 51,785
Retirement of long-term debt -- (25,000)
Reacquisition of long-term debt -- (13,040)
Reacquisition of preferred stock (10,312) --
Proceeds from issuance of PSO obligated, mandatorily
redeemable, trust preferred securities 72,506 --
Change in advances from affiliates (42,867) (40,725)
Payment of dividends (40,461) (35,636)
--------- ---------
(21,134) (62,616)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 47,103 3
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,479 744
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $48,582 $747
========= =========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on trust preferred securities) $24,501 $22,686
========= =========
Income taxes paid $22,095 $20,142
========= =========
The accompanying notes to consolidated financial statements as they relate
to PSO are an integral part of these statements.
27
PUBLIC SERVICE COMPANY OF OKLAHOMA
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996
Net income for common stock decreased $13.8 million in the third
quarter of 1997 to $31.0 million compared to $44.8 million in the third quarter
of 1996. The decrease resulted primarily from the impact of the PSO 1997 Rate
Settlement Agreement in September 1997. See NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS for additional information related to the PSO 1997 Rate Settlement
Agreement.
Electric operating revenues were $222.2 million in the third quarter of
1997, an 11% decrease from the third quarter of 1996. The decrease was due
primarily to an additional $25.9 million added to the provision for rate refund
to fully reflect the PSO 1997 Rate Settlement Agreement as well as a decrease in
fuel related revenues of $4.6 million.
Fuel expense decreased $4.1 million, or 4%, for the third quarter of
1997 compared to the third quarter of 1996 due primarily to an increase in
under-recovered fuel costs partially offset by a 3% increase in generation. The
average unit cost of fuel remained relatively stable in 1997 when compared to
the same period of 1996.
Other operating expenses decreased $2.1 million in the third quarter of
1997 to $28.7 million compared to $30.8 million in the third quarter of 1996 due
primarily to a true-up for a reduction of depreciation rates associated with the
PSO 1997 Rate Settlement Agreement, the final classification of which is pending
approval from the FERC, as well as lower pension expense. Partially offsetting
the decrease was the write-off of rate case related expenses associated with the
aforementioned agreement. See NOTE 7. PENSION PLAN AMENDMENT for additional
information related to changes in the pension plan. Maintenance expense
decreased 12% to $7.7 million in the third quarter of 1997 from $8.8 million in
the third quarter of 1996 due to the timing of maintenance projects.
Depreciation and amortization expense increased 4% to $20.4 million in
the third quarter of 1997 from $19.6 million in the third quarter of 1996
primarily as a result of increased depreciable property and software
amortization. Income taxes decreased to $18.7 million in the third quarter of
1997 compared to $27.2 million in the same period of 1996 due primarily to lower
taxable income in 1997.
Interest and other charges increased $1.0 million or 12% in the third
quarter of 1997 when compared to the same period in 1996 due primarily to the
distributions on newly issued PSO obligated, mandatorily redeemable, trust
preferred securities partially offset by a decrease in short-term interest
expense as a result of the repayment of short-term debt in 1997.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net income for common stock increased to $56.4 million in the first
nine months of 1997 from $31.7 million in the same period of 1996. The increase
resulted primarily from the absence in 1997 of a one-time charge for certain
investments for plant sites, engineering studies and lignite reserves of
approximately $35.6 million, net of tax, recorded in 1996 partially offset by
the impact of recording the effects of the PSO 1997 Rate Settlement Agreement in
28
September 1997. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional
information related to the PSO 1997 Rate Settlement Agreement.
Electric operating revenues were $544.1 million for the first nine
months of 1997, a 6% decrease from $579.0 million for the same period in 1996.
The decrease was due primarily to the establishment of a $29.0 million provision
for rate refund related to the PSO 1997 Rate Settlement Agreement as well as a
decline in residential MWH sales of 4% due to mild weather.
Fuel expense decreased $13.5 million for the first nine months of 1997
compared to the first nine months of 1996 due primarily to a decrease in the
average unit cost of fuel from $2.04 per MMbtu in the first nine months of 1996
to $1.95 per MMbtu for the same period in 1997. The decline in the average unit
cost of fuel was due primarily to utilizing lower cost coal in place of higher
cost spot market natural gas. Additionally, a 7% decrease in generation
primarily attributable to lower residential MWH sales also contributed to this
decrease. Partially offsetting the decrease in fuel expense was a decline in
under-recovered fuel costs in 1997 when compared to 1996. Purchased power
expenses increased 21% to $34.4 million for the first nine months of 1997 from
$28.5 million in the same period of 1996 as a result of increased purchases of
economy energy.
Other operating expenses were $86.8 million during the first nine
months of 1997, a 2% decrease from $88.3 million during the same period in 1996
due primarily to a true-up for a reduction of depreciation rates associated with
the PSO 1997 Rate Settlement Agreement, the final classification of which is
pending approval from the FERC, as well as lower pension expense. Partially
offsetting the decrease was the write-off of rate case related expenses
associated with the aforementioned agreement. See NOTE 7. PENSION PLAN AMENDMENT
for additional information related to changes in the pension plan. Maintenance
expense decreased 13% to $23.1 million in the first nine months of 1997 from
$26.5 million in the first nine months of 1996 primarily as a result of the 1996
write-down of production inventory. Depreciation and amortization expense
increased 4% to $60.2 million in 1997 from $58.0 million in 1996 as a result of
an increase in depreciable property. Taxes, other than income were $21.4 million
in 1997, a 7% increase from $19.9 million in 1996 as a result of higher ad
valorem tax expense in 1997. Operating income taxes were $28.4 million in the
first nine months of 1997 compared to $39.1 million in the same period of 1996
due primarily to lower taxable operating income in 1997.
Other income and deductions increased $36.9 million in the first nine
months of 1997 compared to the same period in 1996 primarily as a result of the
absence in 1997 of a one-time charge for certain investments for plant sites,
engineering studies and lignite reserves of approximately $35.6 million, net of
tax, recorded in the second quarter of 1996.
Interest and other charges increased $1.2 million or 5% in the first
nine months of 1997 when compared to the same period in 1996 due primarily to
the distributions on newly-issued PSO obligated, mandatorily redeemable, trust
preferred securities partially offset by a decrease in short-term interest
expense as a result of the repayment of short-term debt in 1997. PSO recognized
a $4.2 million gain associated with the reacquisition of certain PSO preferred
stock.
29
SWEPCO
SOUTHWESTERN ELECTRIC POWER COMPANY
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
30
SOUTHWESTERN ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(thousands)
ELECTRIC OPERATING REVENUES $291,539 $278,227 $722,146 $715,671
OPERATING EXPENSES AND TAXES
Fuel 116,294 116,612 294,876 301,530
Purchased power 7,456 4,845 17,895 20,943
Other operating 35,318 35,887 101,074 99,360
Maintenance 9,984 10,406 31,424 31,444
Depreciation and amortization 24,138 23,010 71,166 67,949
Taxes, other than income 14,339 12,746 40,432 36,158
Income taxes 22,561 20,904 39,399 38,100
--------- --------- --------- ---------
230,090 224,410 596,266 595,484
--------- --------- --------- ---------
OPERATING INCOME 61,449 53,817 125,880 120,187
--------- --------- --------- ---------
OTHER INCOME AND DEDUCTIONS
Reserve for utility plant
development costs, net of
tax benefit of $260 for
1997 and $7,847 for 1996 -- -- (483) (21,743)
Allowance for equity funds
used during construction 413 (1) 589 325
Other 1,890 12 2,754 937
--------- --------- --------- ---------
2,303 11 2,860 (20,481)
--------- --------- --------- ---------
INCOME BEFORE INTEREST CHARGES 63,752 53,828 128,740 99,706
--------- --------- --------- ---------
INTEREST AND OTHER CHARGES
Interest on long-term debt 9,811 11,542 30,631 33,537
Distributions on SWEPCO
obligated, mandatorily
redeemable, trust preferred
securities 2,167 -- 3,565 --
Interest on short-term debt
and other 1,028 2,055 4,619 7,012
Allowance for borrowed funds
used during construction (202) (465) (944) (1,691)
--------- --------- --------- ---------
12,804 13,132 37,871 38,858
--------- --------- --------- ---------
NET INCOME 50,948 40,696 90,869 60,848
Less: Preferred stock dividends 589 758 1,922 2,295
Gain on reacquired preferred stock (528) -- 1,652 --
--------- --------- --------- ---------
NET INCOME FOR COMMON STOCK $49,831 $39,938 $90,599 $58,553
========= ========= ========= =========
The accompanying notes to consolidated financial statements as they relate
to SWEPCO are an integral part of these statements.
31
SOUTHWESTERN ELECTRIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(unaudited) (audited)
---------- ----------
ASSETS (thousands)
ELECTRIC UTILITY PLANT
Production $1,390,255 $1,407,134
Transmission 467,569 463,425
Distribution 859,367 844,503
General 310,101 283,878
Construction work in progress 34,769 45,374
---------- ----------
3,062,061 3,044,314
Less - Accumulated depreciation 1,209,277 1,192,356
---------- ----------
1,852,784 1,851,958
---------- ----------
CURRENT ASSETS
Cash and temporary cash investments 26,592 1,879
Advances to affiliates 5,023 --
Accounts receivable 50,994 68,140
Materials and supplies, at average cost 25,402 29,265
Fuel inventory 28,774 55,775
Under-recovered fuel costs 18,982 9,120
Prepayments and other 15,975 13,499
---------- ----------
171,742 177,678
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS 85,355 69,520
---------- ----------
$2,109,881 $2,099,156
========== ==========
The accompanying notes to consolidated financial statements as they relate
to SWEPCO are an integral part of these statements.
32
SOUTHWESTERN ELECTRIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(unaudited) (audited)
---------- ----------
CAPITALIZATION AND LIABILITIES (thousands)
CAPITALIZATION
Common stock: $18 par value
Authorized shares: 7,600,000
Issued and outstanding shares: 7,536,640 $ 135,660 $ 135,660
Paid-in capital 245,000 245,000
Retained earnings 349,394 321,801
---------- ----------
730,054 702,461
Preferred stock
Not subject to mandatory redemption 4,709 16,032
Subject to mandatory redemption 25,930 32,464
SWEPCO obligated, mandatorily redeemable,
trust preferred securities 106,245 --
Long-term debt 547,152 597,151
---------- ----------
1,414,090 1,348,108
---------- ----------
CURRENT LIABILITIES
Long-term debt and preferred stock due within
twelve months 3,732 3,760
Advances from affiliates -- 57,495
Accounts payable 58,449 48,826
Payable to affiliates 60,292 68,708
Customer deposits 11,995 10,497
Accrued taxes 41,729 25,241
Accumulated deferred income taxes 7,726 4,162
Accrued interest 12,256 14,782
Other 12,298 27,449
---------- ----------
208,477 260,920
---------- ----------
DEFERRED CREDITS
Accumulated deferred income taxes 392,635 372,552
Investment tax credits 68,010 71,507
Income tax related regulatory liabilities, net 17,912 36,106
Other 8,757 9,963
---------- ----------
487,314 490,128
---------- ----------
$2,109,881 $2,099,156
========== ==========
The accompanying notes to consolidated financial statements as they relate
to SWEPCO are an integral part of these statements.
33
SOUTHWESTERN ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
----------------------
1997 1996
--------- ---------
OPERATING ACTIVITIES (thousands)
Net Income $90,869 $60,848
Non-cash Items Included in Net Income
Depreciation and amortization 74,775 75,686
Deferred income taxes and investment
tax credits 1,956 (2,417)
Utility plant development costs 743 29,590
Inventory reserve -- 1,130
Changes in Assets and Liabilities
Accounts receivable 17,146 (5,680)
Fuel inventory 27,001 9,125
Deferred charges and other assets (15,835) (24,628)
Accounts payable 10,126 8,935
Payable to affiliates (8,416) 653
Accrued taxes 16,488 17,007
Accrued interest (2,526) (5,931)
Fuel recovery (9,862) (19,000)
Other (11,599) (1,991)
--------- ---------
190,866 143,327
--------- ---------
INVESTING ACTIVITIES
Construction expenditures (73,268) (67,837)
Other (2,990) (5,901)
--------- ---------
(76,258) (73,738)
--------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 79,273
Reacquisition of long-term debt -- (83,334)
Retirement of long-term debt (52,278) (3,561)
Redemption of preferred stock (16,210) (1,200)
Proceeds from issuance of SWEPCO
obligated, mandatorily redeemable,
trust preferred securities 106,245 --
Change in advances from affiliates (57,495) (22,747)
Payment of dividends (65,134) (37,865)
--------- ---------
(84,872) (69,434)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 29,736 155
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,879 1,702
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $31,615 $1,857
========= =========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on trust preferred securities) $39,119 $43,686
========= =========
Income taxes paid $33,507 $25,736
========= =========
The accompanying notes to consolidated financial statements as they relate
to SWEPCO are an integral part of these statements.
34
SOUTHWESTERN ELECTRIC POWER COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996
Net income for common stock increased $9.9 million to $49.8 million in
the third quarter of 1997 from $39.9 million in the third quarter of 1996. The
increase resulted primarily from increased MWH sales and the gain on the sale of
lignite properties in the third quarter of 1997.
Electric operating revenues increased $13.3 million to $291.5 million
for the third quarter of 1997 from $278.2 million for the third quarter of 1996.
The increase was attributable to a $9.2 million increase in retail non-fuel
revenue resulting from a 5% increase in retail MWH sales attributable to
weather-related demand and customer growth, an increase in non-fuel wholesale
sales of $3.6 million and a $0.5 million increase in fuel-related revenue.
Fuel and purchased power expense increased in the third quarter of 1997
compared to the third quarter of 1996. Fuel expense decreased $0.3 million,
resulting from an under-recovery of fuel costs in the third quarter of 1997
compared to an over-recovery of fuel costs in the third quarter of 1996, offset
in part by increases in average unit fuel costs and increased generation in
1997. Average unit fuel costs increased from $1.66 per MMbtu in 1996 to $1.70
per MMbtu in 1997 due to an increase in the spot market price of natural gas
offset in part by lower coal transportation charges as well as purchases of
lower priced spot market coal. MWH generation increased 5% during the third
quarter of 1997. Purchased power expenses increased $2.6 million in the third
quarter of 1997 compared to the third quarter of 1996 as a result of an increase
in economy energy purchases.
Depreciation and amortization expenses increased $1.1 million or 5% in
the third quarter of 1997 compared to the same period of 1996 due primarily to
increased depreciable plant. Taxes, other than income increased $1.6 million, or
12%, as a result of increased ad valorem taxes due to higher assessed values.
Income taxes increased $1.7 million due primarily to higher taxable income.
Other income and deductions increased $2.3 million for the third
quarter of 1997 compared to the same period of 1996 due primarily to the $1.1
million, net of tax, gain on the sale of lignite properties recorded in the
third quarter of 1997.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net income for common stock increased $32.0 million to $90.6 million
for the first nine months of 1997 compared to $58.6 million for the same period
of 1996. The increase resulted primarily from the absence in 1997 of a one-time
charge associated with certain investments for plant sites, engineering studies
and lignite reserves of approximately $21.7 million, net of tax, recorded in the
second quarter of 1996, increased electric operating revenues and the gain on
reacquisition of preferred stock of $1.7 million recorded during 1997.
Electric operating revenues increased $6.5 million to $722.1 million
for the first nine months of 1997 from $715.7 million for the same period in
1996. The increase was due primarily to an increase in non-fuel revenue of $16.5
35
million, including $9.1 million in non-fuel wholesale sales, offset in part by a
$10.0 million decrease in fuel revenue.
Fuel and purchased power expense decreased for the first nine months of
1997 compared to the same period of 1996. Fuel expense decreased $6.7 million,
or 2%, due primarily to a decrease in average unit fuel costs from $1.77 per
MMbtu in 1996 to $1.69 per MMbtu in 1997 which resulted from lower coal
transportation charges as well as purchases of lower priced spot market coal. A
decrease in natural gas generation because of its relative higher cost per MMbtu
also contributed to the lower fuel expense for the first nine months of 1997.
Purchased power expenses decreased $3.1 million, or 15%, for the first nine
months of 1997 compared to the same period in 1996 as a result of a decrease in
economy energy purchases.
Other operating expenses increased $1.7 million to $101.1 million for
the first nine months of 1997 compared to the same period in 1996. The increase
was attributable to increased transmission access expenses and increased
customer assistance expenses, offset in part by decreased pension expenses. See
NOTE 7. PENSION PLAN AMENDMENT for additional information related to changes in
the pension plan. Depreciation and amortization expenses increased $3.2 million,
or 5%, due primarily to increased depreciable plant. Taxes, other than income
increased $4.3 million to $40.4 million as a result of increased ad valorem
taxes due to higher assessed values. Income taxes increased $1.3 million due
primarily to higher taxable income.
Other income and deductions increased $23.3 million for the first nine
months of 1997 compared to the same period of 1996 due primarily to a one-time
charge associated with certain investments for plant sites, engineering studies
and lignite reserves of approximately $21.7 million, net of tax, recorded in the
second quarter of 1996, offset in part by the $1.1 million, net of tax, gain on
the sale of lignite properties recorded in the third quarter of 1997.
Interest and other charges decreased $1.0 million in the first nine
months of 1997 when compared to the same period of 1996 due primarily to a
decrease in short-term debt interest expense of $2.4 million resulting from the
repayment of short-term debt outstanding as well as a decrease in long-term debt
interest expense of $2.9 million due to retirement of long-term debt in 1997.
Partially offsetting these decreases were the distributions on newly-issued
SWEPCO obligated, mandatorily redeemable, trust preferred securities of $3.6
million. SWEPCO also recognized a $1.7 million gain associated with the
reacquisition of preferred stock in 1997.
36
WTU
WEST TEXAS UTILITIES COMPANY
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
37
WEST TEXAS UTILITIES COMPANY
STATEMENTS OF INCOME
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(thousands)
ELECTRIC OPERATING REVENUES $124,984 $113,314 $308,867 $295,690
OPERATING EXPENSES AND TAXES
Fuel 34,450 35,177 94,361 102,982
Purchased power 16,559 8,918 34,984 21,442
Other operating 20,920 16,133 64,038 50,835
Maintenance 3,239 3,007 10,393 10,698
Depreciation and amortization 10,741 10,081 31,067 29,591
Taxes, other than income 6,347 5,940 18,148 17,121
Income taxes 9,139 9,367 12,425 14,402
--------- --------- --------- ---------
101,395 88,623 265,416 247,071
--------- --------- --------- ---------
OPERATING INCOME 23,589 24,691 43,451 48,619
--------- --------- --------- ---------
OTHER INCOME AND DEDUCTIONS
Reserve for utility plant
development costs, net of
tax benefit of $20 for 1997
and $3,988 for 1996 -- -- (38) (10,917)
Allowance for equity funds used
during construction 26 64 125 232
Other 150 140 587 629
--------- --------- --------- ---------
176 204 674 (10,056)
--------- --------- --------- ---------
INCOME BEFORE INTEREST CHARGES 23,765 24,895 44,125 38,563
--------- --------- --------- ---------
INTEREST AND OTHER CHARGES
Interest on long-term debt 5,088 5,815 15,264 16,407
Interest on short-term
debt and other 1,127 1,043 3,911 3,788
Allowance for borrowed
funds used during
construction (132) (183) (599) (687)
--------- --------- --------- ---------
6,083 6,675 18,576 19,508
--------- --------- --------- ---------
NET INCOME 17,682 18,220 25,549 19,055
Less: Preferred stock dividends 26 66 118 198
Gain on reacquired preferred stock (101) -- 1,082 --
--------- --------- --------- ---------
NET INCOME FOR COMMON STOCK $17,555 $18,154 $26,513 $18,857
========= ========= ========= =========
The accompanying notes to financial statements as they relate
to WTU are an integral part of these statements.
38
WEST TEXAS UTILITIES COMPANY
BALANCE SHEETS
September 30, December 31,
1997 1996
(unaudited) (audited)
---------- ----------
ASSETS (thousands)
ELECTRIC UTILITY PLANT
Production $418,036 $417,467
Transmission 207,631 200,688
Distribution 360,378 347,328
General 100,543 92,622
Construction work in progress 13,761 30,036
---------- ----------
1,100,349 1,088,141
Less - Accumulated depreciation
and amortization 432,981 414,777
---------- ----------
667,368 673,364
---------- ----------
CURRENT ASSETS
Cash 1,497 664
Accounts receivable 30,864 24,123
Materials and supplies, at average cost 15,249 15,966
Fuel inventory 14,736 16,674
Accumulated deferred income taxes -- 1,079
Under-recovered fuel costs 14,438 7,857
Prepayments and other 2,014 2,435
---------- ----------
78,798 68,798
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred Oklaunion costs 19,569 22,365
Restructuring related regulatory assets 9,438 10,854
Other 41,068 34,998
---------- ----------
70,075 68,217
---------- ----------
$816,241 $810,379
========== ==========
The accompanying notes to financial statements as they relate
to WTU are an integral part of these statements.
39
WEST TEXAS UTILITIES COMPANY
BALANCE SHEETS
September 30, December 31,
1997 1996
(unaudited) (audited)
-------- --------
CAPITALIZATION AND LIABILITIES (thousands)
CAPITALIZATION
Common stock: $25 par value
Authorized shares: 7,800,000
Issued and outstanding shares: 5,488,560 $137,214 $137,214
Paid-in capital 2,236 2,236
Retained earnings 131,589 123,077
-------- --------
271,039 262,527
Preferred stock 2,483 6,291
Long-term debt 277,748 275,070
-------- --------
551,270 543,888
-------- --------
CURRENT LIABILITIES
Advances from affiliates 3,330 14,833
Payables to affiliates 11,584 13,578
Accounts payable 20,005 19,669
Accrued taxes 13,566 13,463
Accrued interest 8,682 5,403
Accumulated deferred income taxes 3,137 --
Other 3,524 4,124
-------- --------
63,828 71,070
-------- --------
DEFERRED CREDITS
Accumulated deferred income taxes 144,660 144,146
Investment tax credits 28,249 29,239
Income tax related regulatory liabilities, net 16,255 16,918
Other 11,979 5,118
-------- --------
201,143 195,421
-------- --------
$816,241 $810,379
======== ========
The accompanying notes to financial statements as they relate
to WTU are an integral part of these statements.
40
WEST TEXAS UTILITIES COMPANY
STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
------------------
1997 1996
-------- --------
OPERATING ACTIVITIES (thousands)
Net Income $25,549 $19,055
Non-cash Items Included in Net Income
Depreciation and amortization 32,286 30,816
Deferred income taxes and investment tax credits 3,077 (930)
Utility plant development costs 58 14,905
Inventory reserve -- 1,103
Changes in Assets and Liabilities
Accounts receivable (6,741) 7,960
Accounts payable (1,163) (2,456)
Accrued taxes 103 5,117
Fuel recovery (6,581) (7,961)
Other 9,090 (1,165)
-------- --------
55,678 66,444
-------- --------
INVESTING ACTIVITIES
Construction expenditures (21,448) (28,243)
Other (1,008) (1,290)
-------- --------
(22,456) (29,533)
-------- --------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 43,368
Reaquisition of long-term debt -- (45,639)
Redemption of preferred stock (2,727) --
Change in advances from affiliates (11,503) (15,668)
Payment of dividends (18,159) (19,132)
-------- --------
(32,389) (37,071)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 833 (160)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 664 717
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $1,497 $557
======== ========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $11,773 $11,563
======== ========
Income taxes paid $9,407 $5,384
======== ========
The accompanying notes to financial statements as they relate
to WTU are an integral part of these statements.
41
WEST TEXAS UTILITIES COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996
Net income for common stock decreased $0.6 million to $17.6 million for
the third quarter of 1997 from net income of $18.2 million in the third quarter
of 1996. Operating revenues increased for the period, but this increase was
offset by an increase in other operating expenses, as discussed below.
Electric operating revenues increased $11.7 million, or 10%, in the
third quarter of 1997 compared to the third quarter of 1996 due primarily to a
4% increase in MWH sales. Also contributing to the increase was approximately
$4.9 million in transmission revenues as a result of the January 1997
implementation of open access tariffs in accordance with FERC Order No. 888 and
the Texas Commission rules regarding transmission access and pricing. The impact
on net income of the transmission revenues was almost entirely offset by a
corresponding increase in transmission expense.
Fuel expense decreased $0.7 million in the third quarter of 1997 when
compared to the same period of 1996. The decrease was due primarily to a 6%
decrease in MWH generation and an increase in economy energy purchases, offset
in part by an increase in average unit fuel costs. Average unit fuel costs
increased from $2.23 per MMbtu in 1996 to $2.42 per MMbtu in the same period of
1997 due to an increase in the spot market price of natural gas. Purchased power
expense increased $7.6 million, or 86%, to $16.6 million in the third quarter of
1997 when compared to the third quarter of 1996 due primarily to the Oklaunion
power plant being out of service for several days as well as increased economy
energy purchases due to higher spot market natural gas prices.
Other operating expenses increased approximately $4.8 million, or 30%,
for the third quarter of 1997 compared to the third quarter of 1996. The
increase was due primarily to a $4.2 million increase in transmission expenses
as a result of the January 1997 implementation of open access tariffs in
accordance with FERC Order No. 888 and the Texas Commission rules regarding
transmission access and pricing.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
For the first nine months of 1997, net income for common stock
increased to $26.5 million from $18.9 million in 1996. The increase resulted
primarily from the absence in 1997 of a one-time charge incurred in 1996
associated with certain investments for plant sites, engineering studies and
lignite reserves of approximately $10.9 million, net of tax, and the gain on
reacquisition of preferred stock of $1.1 million recognized in 1997.
Electric operating revenues increased approximately $13.2 million, or
4%, in the first nine months of 1997 compared to 1996. The increase was due
primarily to $13.9 million in additional transmission revenues as a result of
the January 1997 implementation of open access tariffs in accordance with FERC
Order No. 888 and the Texas Commission rules regarding transmission access and
pricing. The impact on net income of the transmission revenues was largely
offset by a corresponding $12.5 million increase in transmission expense related
to these tariffs and rules. Also contributing to the increase was $2.5 million
in additional fuel revenues due to higher purchased power expenses as discussed
below.
42
Fuel expense decreased $8.6 million, or 8%, for the first nine months
of 1997 compared to 1996 due primarily to lower-priced spot coal and a 20%
decrease in natural gas generation. Purchased power expenses increased
approximately $13.5 million for the first nine months of 1997 as compared to
1996, primarily as a result of additional economy purchases at a higher cost per
MWH.
Other operating expenses increased approximately $13.2 million for the
first nine months of 1997 compared to 1996 due primarily to a $12.5 million
increase in transmission expenses as a result of the January 1997 implementation
of open access tariffs in accordance with FERC Order No. 888 and the Texas
Commission rules regarding transmission access and pricing. Partially offsetting
the increase in other operating expenses was a decrease in pension expense. See
NOTE 7. PENSION PLAN AMENDMENT for additional information related to changes in
the pension plan. Income taxes decreased $2.0 million in the first nine months
of 1997 compared to the same period a year ago due primarily to lower taxable
income in 1997.
Other income and deductions increased $10.7 million for the first nine
months of 1997 compared with 1996 as a result of the absence in 1997 of a
one-time charge incurred in 1996 associated with certain investments for plant
sites, engineering studies and lignite reserves of approximately $10.9 million,
net of tax.
43
INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS
BY REGISTRANT
NOTE 1. PRINCIPLES OF PREPARATION CSW, CPL, PSO, SWEPCO, WTU
NOTE 2. LITIGATION AND REGULATORY CSW, CPL, PSO, SWEPCO, WTU
PROCEEDINGS
NOTE 3. COMMITMENTS AND CONTINGENT
LIABILITIES CSW, CPL, SWEPCO
NOTE 4. COMMON STOCK AND DIVIDENDS CSW, CPL, PSO, SWEPCO, WTU
NOTE 5. INCOME TAXES CSW, CPL, PSO, SWEPCO, WTU
NOTE 6. LONG-TERM FINANCING CSW, CPL, PSO, SWEPCO, WTU
NOTE 7. PENSION PLAN AMENDMENT CSW, CPL, PSO, SWEPCO, WTU
NOTE 8. DISCONTINUED OPERATIONS CSW
NOTE 9. EXTRAORDINARY ITEM CSW
44
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. PRINCIPLES OF PREPARATION
The condensed financial statements of the Registrants included herein
have been prepared by each Registrant pursuant to the rules and regulations of
the SEC. Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
each Registrant believes that the disclosures are adequate to make the
information presented not misleading. These condensed financial statements
should be read in conjunction with the financial statements and the notes
thereto included in the Registrants' Combined Annual Report on Form 10-K for the
year ended December 31, 1996 and the Registrants' Combined Quarterly Reports on
Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997.
The unaudited financial information furnished herewith reflects all
adjustments which are, in the opinion of management of such Registrant,
necessary for a fair statement of the results of operations for the interim
periods. Information for quarterly periods is affected by seasonal variations in
sales, rate changes, timing of fuel expense recovery and other factors.
The financial statements of SEEBOARD and its related entities have been
translated from British pounds to U.S. dollars in accordance with SFAS No. 52.
SFAS No. 52 requires the translation of income statement items at average rates
and balance sheet accounts at current rates. All resulting translation
adjustments are recorded directly to Foreign currency translation adjustment on
CSW's consolidated balance sheets.
Effective January 1, 1997, CPL and WTU began utilizing the LIFO method
for the valuation of all fossil fuel inventories. Previously, CPL had used the
weighted average cost method and WTU had used the LIFO method for coal and the
weighted average cost method for other fuel inventories. PSO utilizes the LIFO
method. SWEPCO continues to utilize the weighted average cost method pending
approval of the Arkansas Public Service Commission to utilize the LIFO method.
The change in accounting did not affect the results of operations due to the
regulatory treatment of such costs.
Cash equivalents are considered to be highly liquid debt instruments
purchased with a maturity of three months or less. Accordingly, temporary cash
investments and advances to affiliates are considered cash equivalents.
Certain financial statement items for prior years have been
reclassified to conform to the 1997 presentation.
2. LITIGATION AND REGULATORY PROCEEDINGS
See the Registrants' Combined Annual Report on Form 10-K for the year
ended December 31, 1996 and the Registrants' Combined Quarterly Reports on Form
10-Q for the periods ended March 31, 1997 and June 30, 1997 for additional
discussion of litigation and regulatory proceedings. Reference is also made to
NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES, MD&A - RATES AND REGULATORY
MATTERS, CPL RATE REVIEW - DOCKET NO. 14965 and PSO 1997 RATE SETTLEMENT
45
AGREEMENT and also to PART II - OTHER INFORMATION, ITEM 1. for additional
discussion of litigation and regulatory matters.
SETTLEMENT OF LITIGATION RELATED TO 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.
In June 1995, following its notification that CSW was terminating the Merger
Agreement, El Paso filed suit against CSW seeking a $25 million termination fee
from CSW, unspecified damages for various contract and tort claims, punitive
damages, interest as permitted by law and certain other costs. Subsequently, CSW
filed suit against El Paso seeking a $25 million termination fee from El Paso
based on El Paso's alleged 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. In June 1996, CSW filed an amended complaint
seeking a first priority administrative expense claim of $50 million from El
Paso based upon El Paso's alleged 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 and the trial was completed on January 30, 1997. On April
11, 1997, the court issued an interim order in which it ruled that CSW owed El
Paso a $25 million termination fee pursuant to the terms of the Merger
Agreement. The court reserved judgment on CSW's liability for interim interest
on the termination fee.
In July 1997, CSW and El Paso reached a settlement agreement that
resolved all of the pending litigation resulting from the termination of the
proposed merger. Under the terms of the settlement agreement, CSW and El Paso
agreed to dismiss all pending claims in the litigation and give a mutual release
from any potential claims related to the Merger Agreement or the pending
litigation, and CSW paid $35 million to El Paso, various of its creditor groups
under its plan of reorganization, and its attorneys. CSW recorded a charge of
$25 million in the first quarter of 1997 following the court's interim order and
recorded an additional charge of $10 million in the second quarter of 1997 to
fully recognize the $35 million settlement amount. The bankruptcy court vacated
the interim order and approved the settlement agreement.
CPL RATE REVIEW - DOCKET NO. 14965
As previously reported, in November 1995, CPL filed with the Texas
Commission a request to increase its retail base rates by $71 million, and in
May 1996, CPL placed a $70 million base rate increase into effect under bond,
subject to refund based on the receipt of a final order of the Texas Commission.
On March 31, 1997, the Texas Commission issued the CPL 1997 Original Rate Order
in CPL's Rate Review, Docket No. 14965. Thereafter, CPL filed a motion for
rehearing which requested the reconsideration of numerous provisions of the
order. Motions for rehearing were also filed by other parties to the rate
proceeding. In response to the motions for rehearing, in June 1997, the Texas
Commission made several modifications to the CPL 1997 Original Rate Order and
also agreed to rehear on remand several other issues. CPL restored its rates in
July 1997, with two exceptions, to levels existing prior to the May 1996
implementation of bonded rates. On August 21, 1997, after reconsidering the
issues on remand, the Texas Commission voted to issue a revised final order and
on September 10, 1997, CPL received the CPL 1997 Final Order. CPL filed its
second motion for rehearing on September 30, 1997. The second motion for
rehearing again requested reconsideration of numerous issues in the rate case.
On October 16, 1997 the Texas Commission issued its second revised final order.
This order lowers the annual retail base rates of CPL by approximately $19
million, or 2.5%, from CPL's rate level existing prior to May 1996. The Texas
Commission also included a "Glide Path" rate methodology in the CPL 1997 Final
46
Order pursuant to which CPL's annual rates will be reduced by an additional $13
million in mid-1998 and another $13 million in mid-1999.
The CPL 1997 Original Rate Order established a separate docket, Docket
No. 17280, to consider the recoverability of $20 million of rate case expenses
incurred in the current rate case and in two prior dockets. CPL reached a
settlement with all parties to resolve Docket No. 17280 which provides for CPL
to recover $14 million out of the total $20 million of rate case expenses
originally requested. Approximately $8 million of the rate case expenses will be
recovered as an offset to the refund in the rate case, and the remaining $6
million of expenses will be surcharged to customers over three years. CPL
expensed the $6 million in foregone rate case expenses during the first quarter
of 1997.
As previously stated, CPL implemented bonded rates subject to refund in
May 1996. On July 17, 1997, CPL restored its rates, with two exceptions, to
levels existing prior to the implementation of the bonded rates. The two
exceptions are for industrial interruptible rates and customer service charges
for which the Texas Commission approved the increases requested by CPL. On
October 31, 1997, CPL filed with the Texas Commission a proposed methodology for
issuing an interim $41.5 million refund to customers in December 1997. A second
refund, currently estimated at $29.2 million, is proposed for March 1998.
Because of the existence of several different components that are all
incorporated into the December 1997 refund to be made to customers, a breakdown
of the December 1997 refund, as well as the estimated March 1998 refund as
currently proposed by CPL, is shown here (in millions).
December 1997
Base rate refund (with interest) $78.4
Surcharge for rate case expenses (13.3)
Surcharge for fuel cost under-recovery (23.6)
-------
Net refund to customers $41.5
-------
March 1998 (estimated)
Amount collected from customers under bond $62.7
Anticipated surcharge for fuel cost under-recovery (33.5)
-------
Net refund to customers $29.2
-------
The following table details the financial impact of the CPL 1997 Final
Order as compared to the rates existing prior to CPL placing bonded rates into
effect. Although the entire impact has been recorded in CPL's 1997 results of
operations, the breakdown between the retroactive impact as it relates to 1996
and for the nine months ended September 30, 1997 is as follows.
1996 1997 Only
Retroactive Impact
Impact To 9/30/97
------------------------
(millions)
Decrease in revenue $(15.8) $(15.1)
-------- --------
Items included in decrease in
revenue with an offsetting
effect on expense:
Accelerated recovery of STP (ECOM) 13.3 15.0
Change in depreciation (4.6) (5.5)
Decommissioning 1.9 3.2
Other -- 5.3
-------- --------
10.6 18.0
-------- --------
Change in current year income
before tax (26.4) (33.1)
Federal income taxes 8.7 10.9
-------- --------
Impact on net income - all recorded
in 1997 $(17.7) $(22.2)
-------- --------
47
CPL will likely appeal the CPL 1997 Final Order to the Texas State
District Court by the end of 1997 to challenge the resolution of several issues
in the rate case after the rehearing process has concluded. The primary issues
include: (i) the classification of $800 million of invested capital in STP as
ECOM which was also assigned a lower return on equity than non-ECOM property,
(ii) the Texas Commission's use of the "Glide Path" rate reduction methodology
to be applied to rates in mid-1998 and mid-1999, and (iii) the $18 million of
disallowed affiliate transactions from CSW Services. Management is unable to
predict how the final resolution of these issues will ultimately affect CSW's
and CPL's results of operations and financial condition.
See MD&A - RATES AND REGULATORY MATTERS, CPL RATE REVIEW - DOCKET NO.
14965 for additional discussion of the CPL 1997 Final Order, including the
estimated ongoing financial impact of the final order and information regarding
the difference between the rates originally requested by CPL and those ordered
by the Texas Commission.
CPL FUEL PROCEEDING
As previously reported, 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. In addition, CPL proposed to implement a
fuel surcharge of $23.4 million, including accumulated interest, over a twelve
month period. On February 10, 1997, CPL filed a stipulation with the Texas
Commission which would surcharge customers the $23.4 million and would
coordinate the surcharge with any refund in CPL's current rate case as described
in CPL RATE REVIEW - DOCKET NO. 14965. In the stipulation, CPL's fuel factors
were increased approximately $29.4 million, or 13.2%, on an annual basis. The
Texas Commission's interim approval of the stipulated fuel factors permitted a
March 1997 implementation of the fuel factors. The CPL 1997 Original Rate Order
confirmed the stipulated fuel factors.
PSO 1997 RATE SETTLEMENT AGREEMENT
On October 15, 1997, PSO reached a stipulated agreement with parties to
settle the rate inquiry that was pending before the Oklahoma Commission and on
October 23, 1997, a final order approving the settlement was issued by the
Oklahoma Commission. The PSO 1997 Rate Settlement Agreement calls for PSO to
lower its retail base rates beginning with the December 1997 billing cycle by
approximately $35.9 million annually, or a 5.3 percent decrease below the
current level of retail rates. Part of the rate reduction includes a reduction
in annual depreciation expense of approximately $10.9 million. In addition, the
PSO 1997 Rate Settlement Agreement will result in PSO making a one-time $29
million refund to customers, which is expected to be made to customers in
December 1997.
Through the third quarter of 1997, PSO has recorded the estimated
financial impact of the PSO 1997 Rate Settlement Agreement, including
recognition of the full $29 million refund obligation. The PSO 1997 Rate
Settlement Agreement also provides that PSO completely eliminate or amortize
before its next rate filing approximately $41 million in certain deferred
assets, approximately $26 million of which had been expensed in 1996. Included
in the remaining $15 million of deferred assets are approximately $9 million of
costs incurred for customer energy management incentive programs. PSO is
continuing to analyze the implications of the PSO 1997 Rate Settlement
Agreement. For additional discussion of the PSO rate proceeding, including the
estimated financial impact of the PSO 1997 Rate Settlement Agreement, see MD&A -
RATES AND REGULATORY MATTERS, PSO 1997 RATE SETTLEMENT AGREEMENT.
SWEPCO FUEL PROCEEDING
In April 1997, SWEPCO filed with the Texas Commission an application
concerning fuel cost under-recoveries and a possible fuel surcharge which
included a motion to either abate the requested interim surcharge and
48
consolidate the surcharge with a filed fuel reconciliation as discussed below,
or alternatively, implement an interim surcharge in the months of July 1997
through June 1998. The Texas Commission's Office of Policy Development, on
behalf of the Texas Commission, approved such consolidation. In addition, the
Texas Commission has waived the requirement for SWEPCO to file biannual
surcharge requests while this proceeding is pending, and has deferred the
implementation of any surcharge and interest until after final disposition.
In May 1997, SWEPCO filed with the Texas Commission an application to
reconcile fuel costs and implement a 12 month surcharge of fuel cost
under-recoveries. Because of the uncertainty as to when a surcharge may
commence, SWEPCO did not establish a proposed surcharge period or a total
surcharge amount which would reflect interest through the entire surcharge
period in its filing. In its filing, SWEPCO indicated that it had an
under-recovered Texas jurisdictional fuel cost balance of approximately $16.8
million, including interest, through December 1996. Included in the $16.8
million balance are fuel related litigation expenses of $5.0 million and an
interest return of $2.0 million on the unamortized balance of a fuel contract
termination payment.
In November 1997, SWEPCO and the other parties to the above
consolidated proceedings before the Texas Commission agreed to a settlement in
principle except for one issue which will be decided by the Texas Commission.
The settlement in principle is subject to the development of a comprehensive
settlement agreement and approval by the Texas Commission. Of the $16.8 million
in under-recovered fuel costs as of December 31, 1996, the settlement in
principle would result in a decrease of the under-recovered fuel costs, and the
resulting surcharge recovery, by approximately $6.0 million. This disallowance
will not result in an increase to fuel expense since the $5.0 million of
litigation expense and the interest return of $2.0 million included in the
requested surcharge amount were previously expensed. The settlement in principle
also finds SWEPCO's fuel and fuel-related expenses attributable to the
reconciliation period reasonable and necessary and would allow them to be
reconciled as eligible fuel. In addition, the settlement in principle finds
SWEPCO's actions in litigating and renegotiating certain fuel and fuel-related
contracts, together with the prices, terms and condition of the renegotiated
contracts, to be prudent. The $6.0 million reduction is not associated with any
particular activity or issue within the fuel proceedings. SWEPCO cannot state
with certainty that a comprehensive settlement agreement will be completed or
that approval will be granted by the Texas Commission.
WTU FUEL PROCEEDING
As previously reported, in February 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 fuel surcharge of $13.3 million, including accumulated interest,
over a twelve month period to collect its under-recovered fuel costs. WTU
requested authority to implement the revised fuel factors with its May 1997
billings and to commence the surcharge with its June 1997 billings. On April 14,
1997, an agreement in principle was reached among the parties to settle this
docket. Under the proposed settlement, WTU agreed not to increase the fuel
factors and to implement the $13.3 million surcharge over the period June 1997
through February 1999. The Texas Commission approved this settlement in May
1997.
CPL INDUSTRIAL ROAD AND INDUSTRIAL METALS SITE
As previously reported, 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, were pending in federal and state court
in Corpus Christi, Texas. The plaintiffs' complaints sought damages for alleged
property damage and health impairment as a result of operations on the site and
49
cleanup activities. During 1997, CPL settled these suits with no material
adverse effect on CPL's results of operation or financial condition.
PSO SAND SPRINGS/GRANDFIELD, OKLAHOMA SITES
As previously reported, in 1989, PSO found some PCB contamination in a
Sand Springs, Oklahoma PCB storage facility. The EPA-approved cleanup began in
1994. In 1996, the EPA filed a complaint against PSO alleging that 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 of
which 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 alleges failure to date PCB articles at the site. The
total proposed penalty for the three counts, which has been accrued by PSO, was
$479,000. PSO settled two of the three complaints for a total amount of $7,000.
However, PSO has been unable to resolve the third count. A hearing before an EPA
administrative law judge to hear PSO's response on the single remaining count
has been scheduled for January 1998, and PSO intends to vigorously defend itself
against the allegations the EPA has asserted. Although PSO is unable to predict
the outcome of this matter, PSO believes that the resolution of this matter will
not have a material adverse effect on PSO's results of operation or financial
condition.
3. COMMITMENTS AND CONTINGENT LIABILITIES
CPL DEFERRED ACCOUNTING
By orders issued in 1989 and 1990, the Texas Commission authorized CPL
to defer certain STP Unit 1 and Unit 2 costs incurred between the commercial
operation dates of those units and the effective date of rates reflecting the
operation of those units. Upon appeal of the 1989 CPL order, and a related order
involving another utility, the Supreme Court of Texas in 1994 sustained deferred
accounting as an appropriate mechanism for the Texas Commission to use in
preserving the financial integrity of CPL, but remanded CPL's case to the 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.
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
opinion of the Supreme Court of Texas on 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 to be 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, then 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 CPL
50
will receive approval of its deferred accounting amounts or 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 operations or financial
condition.
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 Nuclear Regulatory
Commission 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 subject to such assessments, which CPL and the other
owners have agreed will be allocated on the basis of their respective ownership
interests in STP. CPL has a 25.2% ownership interest 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 a 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 Units 1 and 2. CPL is subject to
an additional assessment of up to $1.8 million for the current policy year in
the event insured losses at a nuclear facility covered under the NEIL I policy
exceed the accumulated funds available under the policy.
SWEPCO BILOXI, MISSISSIPPI MANUFACTURED GAS PLANT SITE
As previously reported, SWEPCO was notified by Mississippi Power in
1994 that it may be a PRP at a MGP site in Biloxi, Mississippi, which was
formerly owned and operated by a predecessor of SWEPCO. Since then, SWEPCO has
worked with Mississippi Power on both the investigation of the extent of
contamination on the site as well as 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, and the MDEQ requested that a future residential exposure
scenario be evaluated for comparison with commercial and industrial exposure
scenarios. However, Mississippi Power and SWEPCO do not believe that cleanup to
a residential scenario is appropriate since this site has been
industrial/commercial for more than 100 years, and Mississippi Power plans to
51
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
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. The feasibility study process will require public input prior to a
final decision being made.
At the present time, SWEPCO has not had any further substantive
discussions with MDEQ regarding the ultimate resolution of this issue.
Therefore, a final range of cleanup costs is not determinable at this time.
Based on its preliminary estimates, SWEPCO has incurred approximately $200,000
to date 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 of the site.
SWEPCO VODA PETROLEUM SUPERFUND SITE
As previously reported, in April 1996, SWEPCO received correspondence
from the EPA notifying SWEPCO that it is a PRP to a cleanup action planned for
the Voda Petroleum Superfund Site located in Clarksville, Texas. 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 option for over 30 PRPs to conduct the cleanup in lieu of EPA
conducting the cleanup is under consideration. Any SWEPCO liability associated
with this project is not expected to have a material adverse effect on its
results of operations or financial condition.
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 September 30, 1997, the
maximum amount SWEPCO would have to assume was $60.3 million. The maximum amount
may vary as the mining contractor's need for funds fluctuates. The contractor's
actual obligation outstanding as of September 30, 1997 was $55.6 million.
SWEPCO SOUTH HALLSVILLE LIGNITE MINE
As part of the process to receive renewal of a Texas Railroad
Commission permit for lignite mining at the South Hallsville lignite mine and
expansion into the Marshall South Lignite Project area, SWEPCO has agreed to
provide guarantees of mine reclamation in the amount of $85 million. Since
SWEPCO uses self-bonding, the guarantee provides for SWEPCO to commit to use its
resources to complete the reclamation in the event the work is not completed by
the third party miner. The current cost to reclaim the mine is estimated to be
approximately $36 million.
4. COMMON STOCK AND DIVIDENDS
CSW's earnings per share of common stock are computed by dividing net
income for common stock by the average number of common shares outstanding for
the respective periods. CSW's dividends per common share reflect per share
amounts paid for each of the periods. See MD&A - LIQUIDITY AND CAPITAL
RESOURCES, CAPITAL STRUCTURE for information related to CSW's common stock.
52
At September 30, 1997, approximately $1.4 billion of CSW's subsidiary
companies' retained earnings were available for payment of cash dividends by
such subsidiaries to CSW. The mortgage indentures, as amended and supplemented,
at CPL and PSO contain certain restrictions on the use of their retained
earnings for cash dividends on their common stock. These restrictions do not
currently limit the ability of CSW to pay dividends to its shareholders. The
amounts of retained earnings available for dividends attributable to each the
U.S. Electric Operating Companies at September 30, 1997 is as follows.
CPL - $768 million PSO - $162 million SWEPCO - $349 million
WTU - $132 million
5. INCOME TAXES
The following tables provide a reconciliation of the differences
between total income tax expense (income taxes included in Operating Expenses
and Taxes as well as Other Income and Deductions) at the federal statutory tax
rate and the effective tax rate for the Registrants.
CSW CPL PSO SWEPCO WTU
--------------------------------------------
(millions) (thousands)
-----------------------------------
QUARTER ENDED SEPTEMBER 30, 1997
Income before taxes and extraordinary
item attributable to:
Domestic operations $269
Foreign operations 15
----
Income before taxes $284 $127,785 $49,597 $73,521 $26,620
Tax at U.S. statutory rate $99 $44,725 $17,359 $25,732 $9,317
Differences
Amortization of ITC (2) (622) (46) (1,165) (330)
Non-deductible goodwill
amortization 3 -- -- -- --
United Kingdom deferred
income tax adjustment (15) -- -- -- --
Prior period adjustments -- -- -- 150 --
Other (2) 1,455 865 (2,144) (46)
-----------------------------------------
Tax expense $83 $45,558 $18,178 $22,573 $8,941
-----------------------------------------
Effective tax rate 29% 36% 37% 31% 34%
QUARTER ENDED SEPTEMBER 30, 1996
Income before taxes attributable to:
Domestic operations $280
Foreign operations 22
---
Income before taxes $302 $125,507 $72,022 $61,634 $27,473
Tax at U.S. statutory rate $106 $43,927 $25,208 $21,572 $9,616
Differences
Amortization of ITC (4) (1,447) (696) (1,182) (330)
Non-deductible goodwill
amortization 3 -- -- -- --
Prior period adjustments (3) (3,000) -- -- --
Other 6 3,425 2,501 548 (33)
-----------------------------------------
Tax expense $108 $42,905 $27,013 $20,938 $9,253
-----------------------------------------
Effective tax rate 36% 34% 38% 34% 34%
53
CSW CPL PSO SWEPCO WTU
--------------------------------------------
(millions) (thousands)
-----------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1997
Income before taxes and extraordinary
item attributable to:
Domestic operations $363
Foreign operations 74
---
Income before taxes $437 $180,921 $79,826 $129,107 $37,598
Tax at U.S. statutory rate $153 $63,322 $27,939 $45,187 $13,159
Differences
Amortization of ITC (9) (3,517) (1,438) (3,497) (991)
Non-deductible goodwill
amortization 9 -- -- -- --
United Kingdom deferred
income tax adjustment (15) -- -- -- --
Prior period adjustments (2) (1,720) (261) 102 (123)
Other (4) 5,651 1,121 (3,555) 7
-----------------------------------------
Tax expense $132 $63,736 $27,361 $38,237 $12,052
-----------------------------------------
Effective tax rate 30% 35% 34% 30% 32%
NINE MONTHS ENDED SEPTEMBER 30, 1996
Income before taxes attributable to:
Domestic operations $532
Foreign operations 94
---
Income before taxes $626 $212,202 $55,064 $89,925 $29,089
Tax at U.S. statutory rate $219 $74,271 $19,272 $31,474 $10,181
Differences
Amortization of ITC (11) (4,342) (2,088) (3,547) (991)
Non-deductible goodwill
amortization 9 -- -- -- --
State Income Taxes from
the Sale of Transok 7 -- -- -- --
Permanent effect of reserves
for property development
costs 9 1,390 4,382 2,330 977
Prior period adjustments -- 198 549 269 143
Other 11 6,657 677 (1,414) (276)
-----------------------------------------
Tax expense $244 $78,174 $22,792 $29,112 $10,034
-----------------------------------------
Effective tax rate 39% 37% 41% 32% 34%
6. LONG-TERM FINANCING
The following trust preferred securities issued by the wholly-owned
statutory business trusts of CPL, PSO and SWEPCO were outstanding at September
30, 1997. They are classified on the balance sheets as Subsidiary obligated,
mandatorily redeemable, trust preferred securities.
Amount Description of Underlying
Business Trust Security Units (millions) Debentures of Registrant
- --------------------------------------------------------------------------------
CPL Capital I 8.00%, Series A 6,000,000 $150 CPL, $154.6 million,
8.00%, Series A
PSO Capital I 8.00%, Series A 3,000,000 75 PSO, $77.3 million,
8.00%, Series A
SWEPCO Capital I 7.875%, Series A 4,400,000 110 SWEPCO, $113.4 million,
7.875%, Series A
---------- ----
13,400,000 $335
---------- ----
Each of the business trusts will be treated as a subsidiary of its
parent company. The only assets of the business trusts are the subordinated
54
debentures issued by their parent company as specified above. In addition to the
obligations under their subordinated debentures, each of the parent companies
has also agreed to a security obligation which represents a full and
unconditional guarantee of its capital trust's obligation.
Through the third quarter of 1997, each of the U.S. Electric Operating
Companies had reacquired a significant portion of its outstanding preferred
stock. As a result of differences between the coupon rates on the reacquired
securities and prevailing market rates, CSW realized an overall gain of
approximately $10 million on the transactions. This gain is shown separately, as
Gain on reacquired preferred stock, on the statements of income. The following
table shows the results of the tender offers of the U.S. Electric Operating
Companies' preferred stock.
Shares Shares
Reacquired Remaining
------------ -------------
CPL
Series 4.00% 57,952 42,048
Series 4.20% 57,524 17,476
Series 7.12% 260,000 --
Series 8.72% 500,000 --
PSO
Series 4.00% 53,260 44,640
Series 4.24% 91,931 8,069
SWEPCO
Series 4.28% 52,614 7,386
Series 4.65% 23,092 1,908
Series 5.00% 37,240 37,760
Series 6.95% 65,990 274,010
WTU
Series 4.40% 36,323 23,677
7. PENSION PLAN AMENDMENT
CSW maintains a tax qualified, non-contributory defined benefit pension
plan covering substantially all CSW employees in the United States. The CSW
board of directors approved an amendment, effective July 1, 1997, which converts
the existing pension plan into a cash balance pension plan. The purpose of the
plan change is to continue to provide retirement income benefits which are
competitive both within the utility industry as well as with other companies
within the United States.
As the plan sponsor, CSW will continue to reflect the costs of the
pension plan according to the provisions of SFAS No. 87 and allocate such costs
to each of the participating employers. As a result of the July 1, 1997
amendment, preliminary estimates indicate that CSW will realize a savings in
1997 of approximately $20 million in pension expense and will also realize
significant ongoing reductions in operating and maintenance expense because of
the change. The change to the pension plan was applied retroactively to the
beginning of 1997, so these savings are being recognized evenly throughout 1997
with a portion being capitalized. The projected amounts of savings attributable
to the U.S. Electric Operating Companies for 1997 are as follows.
CPL - $5.0 million PSO - $3.9 million SWEPCO - $4.5 million WTU - $2.7 million
55
8. DISCONTINUED OPERATIONS
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 Gas Corporation. Accordingly, the results of operations for Transok
have been reported as discontinued operations and no assets or liabilities
related to Transok are contained in CSW's Consolidated Balance Sheets. Since
Transok was sold in June 1996, CSW's results of operations do not reflect any
earnings from Transok for either the three or nine month periods ended September
30, 1997, nor do they reflect any earnings for the three month period ended
September 30, 1996. Operating results of Transok that are included in CSW's
Statements of Income for the nine month period ended September 30, 1996 are
summarized in the following table (in millions, transactions with CSW affiliates
have not been eliminated).
Total revenue $362
Operating income before income taxes 23
Earnings before income taxes 18
Income taxes (6)
-------------
Net income from discontinued operations $12
-------------
9. EXTRAORDINARY ITEM
In the general election held in the United Kingdom on May 1, 1997, the
United Kingdom's Labour Party won control of the government with a considerable
majority. Prior to the general election, the Labour Party had announced that, if
elected, it would impose a windfall profits tax on certain industries in the
United Kingdom, including the privatized utilities, to fund a variety of social
improvement programs. On July 2, 1997, the one-time windfall profits tax was
introduced in the Labour Party's Budget and the legislation enacting the tax
subsequently was passed during the third quarter of 1997. Accordingly, during
the third quarter of 1997, SEEBOARD U.S.A. accrued, as an extraordinary item,
(pound)109.5 million (or $176 million when converted at (pound)1.00=$1.61) for a
one-time, windfall profits tax enacted by the United Kingdom government.
The windfall profits tax is payable in two equal installments, due
December 1, 1997 and December 1, 1998. The tax was charged at a rate of 23% on
the difference between nine times the average profits after tax for the four
years following flotation in 1990, and SEEBOARD's market capitalization
calculated as the number of shares issued at flotation multiplied by the
flotation price per share.
As enacted, the windfall profits tax is not tax deductible for United
Kingdom purposes. To date, no United States income tax benefit has been
recognized due to the uncertainty as to the impact on the use of foreign tax
credits. CSW continues to analyze the potential United States income tax benefit
from the use of foreign tax credits.
56
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Registrants' Combined Annual
Report on Form 10-K for the year ended December 31, 1996 and the Registrants'
Combined Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997
and June 30, 1997. Reference is also made to each Registrant's unaudited
Financial Statements and related Notes to Financial Statements included herein.
The information included therein should be read in conjunction with, and is
essential in understanding, the following discussion and analysis.
RESULTS OF OPERATIONS
Reference is made to ITEM 1. FINANCIAL STATEMENTS for each of the
Registrants' RESULTS OF OPERATIONS for the three and nine month periods ended
September 30, 1997.
FACTORS IMPACTING CSW'S 1997 ANNUAL EARNINGS
CSW expects its 1997 net income for common stock to be substantially
lower than it has been in the past. Several factors discussed in this Combined
Form 10-Q have had a material adverse effect on CSW's 1997 results of
operations. These factors include the windfall profits tax in the United
Kingdom, the settlement of litigation related to the termination of the El Paso
Merger, the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. The
windfall profits tax and the charge for the settlement with El Paso are one-time
events. However, the new rates at both CPL and PSO will have an ongoing impact
on CSW's consolidated results of operations compared to prior periods. The
estimated after-tax impact of these items for 1997 compared to 1996 on a net
income for common stock basis is shown in the following table.
Estimated
Factors Impacting 1997 Earnings Impact
-------------------------------------------------- -----------
(millions)
United Kingdom windfall profits tax $176
Settlement of El Paso litigation 23
CPL 1997 Final Order (1996 effect) 18
CPL 1997 Final Order (1997 effect) 30
PSO 1997 Rate Settlement Agreement 17
-----------
Total estimated 1997 impact $264
1996 Net Income for Common Stock $429
Percentage of prior year 62%
This table is intended to highlight several items that will have a
material adverse impact on CSW's 1997 results of operations. For additional
information about these matters, see NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS, NOTE 9. EXTRAORDINARY ITEM and RATES AND REGULATORY MATTERS.
The foregoing discussion of FACTORS IMPACTING CSW'S 1997 ANNUAL
EARNINGS constitutes forward looking information within the meaning of Section
21E of the Exchange Act. Actual results may differ materially from such
projected information. See FORWARD LOOKING INFORMATION.
57
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW OF CSW OPERATING, INVESTING AND FINANCING ACTIVITIES
Net cash flows from operating activities decreased to $409 million for
the nine months ended September 1997 from $477 million for the comparable period
in 1996. The decrease was attributable to increased factored accounts receivable
purchases at CSW Credit, federal and state income tax payments for the gain on
CSW's 1996 sale of Transok which totaled approximately $122 million (after being
offset in part by the utilization of Alternative Minimum Tax credits that CSW
had previously generated), and a $35 million payment related to the settlement
of litigation between CSW and El Paso.
Although construction expenditures remained comparable for the first
nine months of 1997 compared to the same period in 1996, overall net cash
outflows from investing activities decreased substantially for several reasons.
There were no acquisition expenditures during 1997 while SEEBOARD acquisition
expenditures were made during 1996. In addition, during 1996, the National Grid
shares were sold in conjunction with SEEBOARD acquisition activities and CSW
also received cash proceeds of $690 million on the 1996 sale of Transok. CSW
Energy obtained permanent external financing during March 1997 for the Orange
Cogeneration project and subsequently reduced its equity investment in the
project. For additional information related to this transaction, see LONG-TERM
FINANCING. During the first quarter of 1997, CSW Energy made its final purchase
agreement payment on the Ft. Lupton cogeneration project. In addition, because
construction of CSW Energy's Sweeny project began in mid-1996, the $102 million
in construction expenditures incurred during 1997 were much larger than
expenditures incurred during the comparable period in 1996. Likewise, CSW
International continued to provide the construction financing for its Enertek
project throughout 1997. Construction on this project, located in Altamira,
Mexico, began during the third quarter of 1996.
Net cash inflows from financing activities decreased substantially
during the first nine months of 1997 compared to same period in 1996. During
1996, CSW incurred substantial amounts of debt to finance the acquisition of
SEEBOARD. In addition, during 1996, CSW sold approximately 15.5 million shares
of common stock and received net proceeds of approximately $398 million in a
primary public offering. The proceeds were subsequently used to repay a portion
of the debt incurred in connection with the SEEBOARD acquisition. In addition,
in April 1997, CSW made changes in its common stock plans and stopped issuing
original shares through these plans. However, partially offsetting these
activities, business trusts of CPL, PSO and SWEPCO received cash proceeds of
approximately $323 million on the issuance of trust preferred securities during
1997. A portion of these proceeds was used to redeem preferred stock of these
companies. See CAPITAL STRUCTURE and NOTE 6. LONG TERM FINANCING for additional
information related to these matters.
CONSTRUCTION EXPENDITURES
CSW's construction expenditures, including allowance for funds used
during construction, totaled $352 million for the nine months ended September
30, 1997. Such expenditures for the U.S. Electric Operating Companies totaled
$105 million, $58 million, $75 million and $22 million, for CPL, PSO, SWEPCO and
WTU, respectively. Construction expenditures at the U.S. Electric Operating
Companies were primarily for improvements to existing production, transmission
and distribution facilities. The improvements are required to meet the needs of
new customers and to satisfy the changing requirements of existing customers.
CSW anticipates that all funds required for construction for the remainder of
the year will be provided from internal sources.
58
CAPITAL STRUCTURE
The CSW System is committed to maintaining financial flexibility by
having a strong capital structure and favorable securities ratings which help to
assure future access to capital markets when required. At September 30, 1997,
the capitalization ratios of each of the Registrants is presented in the
following table.
Trust
Common Preferred Preferred Long
Stock Equity Stock Securities (1) Term Debt Total
-------------- ------------ --------------- ------------ ---------
CSW 45% 2% 4% 49% 100%
CPL 47% 5% 5% 43% 100%
PSO 50% 1% 7% 42% 100%
SWEPCO 51% 2% 8% 39% 100%
WTU 49% 1% --% 50% 100%
(1) classified on the balance sheets as Subsidiary (CPL, PSO, SWEPCO)
obligated, mandatorily redeemable, trust preferred securities
CSW can issue common stock, either through open market purchases or
original issue shares, through a long-term incentive plan, the PowerShare
Dividend Reinvestment and Stock Purchase Plan and the ThriftPlus plan. Following
the issuance of the CPL 1997 Original Rate Order and the decline in the market
price of CSW's common stock, which CSW believes is attributable in part to the
CPL 1997 Original Rate Order, the determination was made that it was appropriate
for CSW to begin funding these plans through open market purchases, effective
April 1, 1997.
The CSW System uses short-term debt to meet fluctuations in working
capital requirements and other interim capital needs. CSW has established a
system money pool to coordinate short-term borrowings for certain of its
subsidiaries, primarily the U.S. Electric Operating Companies. In addition, CSW
also incurs borrowings for other subsidiaries that are not included in the money
pool. As of September 30, 1997, CSW had revolving credit facilities totaling
$800 million to back up its commercial paper program.
CSW has recently made several finance-related filings with the SEC
under the Holding Company Act which, if approved, are expected to increase CSW's
financial flexibility and to permit CSW to respond promptly to competitive
pressures and take advantage of favorable market conditions. In the first of
these filings, CSW has requested authority to repurchase up to ten percent of
its outstanding common stock as of June 30, 1997, from its stock and employee
benefit plans (pursuant to the terms and conditions of such plans) from time to
time through December 31, 2002, and to utilize its short-term borrowing program,
including funds borrowed through its commercial paper program, to finance its
repurchase in the open market of up to twenty percent of its outstanding common
stock as of June 30, 1997. No decision regarding this application has been made
by the SEC. Although such authority would increase CSW's flexibility to adjust
its capital structure, CSW currently has no plans to repurchase any of its
common stock.
The second filing requests authority through December 31, 2002 for CSW,
the U.S. Electric Operating Companies and CSW Services to finance ongoing
business, repay short-term debt and finance the potential repurchase of
outstanding securities. CSW has requested authority to issue common stock, while
the U.S. Electric Operating Companies and CSW Services have requested authority
to issue common stock, preferred stock and debt. Such authority would give CSW
the flexibility to take advantage of favorable market conditions for routine
financings. The SEC has not yet issued an order with respect to this
59
application. The third filing requests an increase in the authorized short-term
borrowing limitation of CSW and certain of its subsidiaries. The SEC has not
issued an order with respect to this application.
OTHER FINANCING ISSUES
Several legal and regulatory developments, which have been disclosed
elsewhere in this Combined Form 10-Q, will require cash payments by CSW's
subsidiaries through December 1998. The PSO Rate Settlement Agreement requires
PSO to refund $29 million to customers in December 1997. The windfall profits
tax, enacted by the United Kingdom government, is payable by SEEBOARD in two
equal installments of approximately (pound)55 million each (or $88 million when
converted at (pound)1.00=$1.61), due December 1, 1997 and December 1, 1998.
Based upon the CPL 1997 Final Order, CPL filed with the Texas Commission a
proposed methodology for issuing an interim $41.5 million refund to customers in
December 1997. A second refund, currently estimated at $29.2 million, is
proposed in March 1998. In addition, on October 1, 1997, CPL retired at maturity
$200 million of its Series BB, 6% first mortgage bonds. A combination of cash
from operations and short-term debt are expected to be used to fund these cash
requirements. CSW may also consider other options to meet these cash needs.
RATES AND REGULATORY MATTERS
CPL RATE REVIEW - DOCKET NO. 14965
As previously reported, in November 1995, CPL filed with the Texas
Commission a request to increase its retail base rates by $71 million, and in
May 1996, CPL placed a $70 million base rate increase into effect under bond,
subject to refund based on the receipt of the CPL 1997 Original Rate Order of
the Texas Commission. On March 31, 1997, the Texas Commission issued a rate
order in CPL's Rate Review, Docket No. 14965. Thereafter, CPL filed a motion for
rehearing which requested the reconsideration of numerous provisions of the
order. Motions for rehearing were also filed by other parties to the rate
proceeding. In response to the motions for rehearing, in June 1997, the Texas
Commission made several modifications to the CPL 1997 Original Rate Order and
also agreed to rehear on remand several other issues. CPL restored its rates in
July 1997, with two exceptions, to levels existing prior to the May 1996
implementation of bonded rates. On August 21, 1997, after reconsidering the
issues on remand, the Texas Commission voted to issue a revised final order and
on September 10, 1997, CPL received the CPL 1997 Final Order. CPL filed its
second motion for rehearing on September 30, 1997. The second motion for
rehearing again requested reconsideration of numerous issues in the rate case.
On October 16, 1997 the Texas Commission issued its second revised final order.
This order lowers the annual retail base rates of CPL by approximately $19
million, or 2.5%, from CPL's rate level existing prior to May 1996. The Texas
Commission also included a "Glide Path" rate methodology in the CPL 1997 Final
Order pursuant to which CPL's annual rates will be reduced by an additional $13
million in mid-1998 and another $13 million in mid-1999.
There are numerous contributing factors to the difference between the
$71 million retail base rate increase originally requested by CPL and the $19
million retail base rate reduction included in the CPL 1997 Final Order. The CPL
1997 Final Order decreased CPL's requested return on equity of 12.25% on its
retail rate base to a 10.9% return on equity for all non-ECOM invested capital,
which results in an approximate $30 million decrease in CPL's rate request. The
CPL 1997 Final Order provides for the disallowance of approximately $18 million
of affiliate transactions. In addition, the CPL 1997 Final Order denied CPL's
request to use straight line amortization for CPL's deferred accounting costs.
Instead, the CPL 1997 Final Order requires CPL to continue to use the mortgage
amortization method to amortize its deferred accounting costs, resulting in a
reduction of $14 million from CPL's rate request. The CPL 1997 Final Order also
decreases other depreciation by $17.4 million from CPL's rate request.
60
Another major provision of the CPL 1997 Final Order was the Texas
Commission's categorization of $800 million of CPL's investment in STP,
including Mirror CWIP and deferred accounting, as ECOM. The term ECOM has been
used to refer to the amount of costs that potentially would become "stranded" if
retail competition were mandated and prices were set in the market, rather than
the price being determined by current regulatory standards of reasonable and
necessary cost of providing service. The CPL 1997 Final Order reduced CPL's
equity return on the ECOM portion of CPL's investment in STP to 7.96%, compared
to the 10.9% return on common equity approved for all other invested capital,
resulting in a $15.9 million decrease in CPL's rate request. At the same time,
the CPL 1997 Final Order accelerated the recovery of the $800 million designated
as ECOM to 20 years from the remaining 32-year life of STP.
The following table contains details of the estimate of the financial
impact of the CPL 1997 Final Order.
1997 1998 1999
----------------------------------
(millions)
Decrease in revenue $(20.9) $(28.7) $(41.9)
------- ------- -------
Items included in decrease in revenue with
an offsetting effect on expense:
Accelerated recovery of STP (ECOM) 40.0 40.0 40.0
Change in depreciation (27.3) (27.3) (27.3)
Decommissioning 4.3 4.3 4.3
Other 6.6 4.5 4.5
------- ------- -------
23.6 21.5 21.5
------- ------- -------
Change in current year income before tax (44.5) (50.2) (63.4)
Federal income taxes 14.7 16.8 21.2
------- ------- -------
Current year impact on net income (29.8) (33.4) (42.2)
1996 effect (17.7) -- --
------- ------- -------
Estimated impact on net income $(47.5) $(33.4) $(42.2)
------- ------- -------
CPL will likely appeal the CPL 1997 Final Order to the Texas State
District Court by the end of 1997 to challenge the resolution of several issues
in the rate case after the rehearing process has concluded. The primary issues
include: (i) the classification of $800 million of invested capital in STP as
ECOM which was also assigned a lower return on equity than non-ECOM property,
(ii) the Texas Commission's use of the "Glide Path" rate reduction methodology
to be applied to rates in mid-1998 and mid-1999, and (iii) the $18 million of
disallowed affiliate transactions from CSW Services. Management is unable to
predict how the final resolution of these issues will ultimately affect CSW's
and CPL's results of operations and financial condition.
CPL currently accounts for the economic effects of regulation in
accordance with SFAS No. 71. Pursuant to the provisions of SFAS No. 71, CPL had
recorded approximately $1.2 billion of regulatory related assets at December 31,
1996. The application of SFAS No. 71 is conditioned upon CPL's rates being set
based on the cost of providing service. In the event management concludes that
as a result of changes in regulation, legislation, the competitive environment,
or other factors, including the CPL 1997 Final Order, CPL no longer meets the
criteria for following SFAS No. 71, a write-off of regulatory assets would be
required. In addition, CPL would be required to determine any impairment to
carrying costs of plant investments. If CPL no longer met the criteria for
following SFAS No. 71 and a write-off of regulatory assets was required, CPL and
CSW could experience, depending on the timing and amount of any write-off, a
material adverse effect on their results of operations and financial condition.
61
The foregoing discussion of CPL RATE REVIEW - DOCKET NO. 14965
constitutes forward looking information within the meaning of Section 21E of the
Exchange Act. Actual results may differ materially from such projected
information. See FORWARD LOOKING INFORMATION.
PSO 1997 RATE SETTLEMENT AGREEMENT
On October 15, 1997, PSO reached a stipulated agreement with parties to
settle the rate inquiry that was pending before the Oklahoma Commission and on
October 23, 1997, a final order approving the agreement was issued by the
Oklahoma Commission. The PSO 1997 Rate Settlement Agreement calls for PSO to
lower its retail base rates beginning with the December 1997 billing cycle by
approximately $35.9 million annually, or a 5.3 percent decrease below the
current level of retail rates. Part of the rate reduction includes a reduction
in annual depreciation expense of approximately $10.9 million. In addition, the
PSO 1997 Rate Settlement Agreement will result in PSO making a one-time $29
million refund to customers. Through the third quarter of 1997, PSO has recorded
the estimated financial impact of the PSO 1997 Rate Settlement Agreement,
including recognition of the full $29 million refund obligation.
The refund is expected to be made to customers in December 1997.
As previously reported, in July 1996, the OCC Staff filed an
application seeking a review of PSO's earnings. In accordance with the
established schedule, PSO subsequently filed financial data, cost of service and
rate design testimony supporting both its current rates and an increase in
annual depreciation expense of $26 million. In July 1997, the OCC Staff and
other intervenors to the proceeding filed their revenue requirements testimony.
In its filing, the OCC Staff recommended a rate reduction of $76.8 million for
PSO. Although the OCC Staff's recommended rate reduction included a $109 million
rate base reduction and a specific percentage return on capital, these issues
were not specifically addressed in the PSO 1997 Rate Settlement Agreement.
The PSO 1997 Rate Settlement Agreement also provides that PSO
completely eliminate or amortize before its next rate filing approximately $41
million in certain deferred assets, approximately $26 million of which had been
expensed in 1996. Included in the remaining $15 million of deferred assets are
approximately $9 million of costs incurred for customer energy management
incentive programs. PSO is continuing to analyze the implications of the PSO
1997 Rate Settlement Agreement. The following table is management's estimate of
the financial impact of the PSO 1997 Rate Settlement Agreement on PSO's 1997
results of operations and also its ongoing annual impact on net income in
successive years.
Ongoing
1997 Annual
Impact Impact
----------- --- -----------
(millions)
Change in revenues $(31.5) $(35.9)
----------- -----------
Changes in expenses (offsetting
impact included in revenues)
Depreciation (6.3) (10.9)
Rate case deferred costs 2.2 --
Income tax (10.2) (8.8)
----------- -----------
(14.3) (19.7)
----------- -----------
Estimated impact on net income $(17.2) $(16.2)
----------- -----------
The PSO 1997 Rate Settlement Agreement resulted in an adverse effect on
PSO's results of operations for 1997 that will have a continuing impact because
of the rate decrease, but importantly, it also reduced significant risks for PSO
related to this regulatory proceeding and will enable PSO's rates to remain
competitive for the foreseeable future.
62
The foregoing discussion of PSO 1997 RATE SETTLEMENT AGREEMENT
constitutes forward looking information within the meaning of Section 21E of the
Exchange Act. Actual results may differ materially from such projected
information. See FORWARD LOOKING INFORMATION.
SEEBOARD RECENT REGULATORY ACTIONS
Following the opening of the United Kingdom domestic and small business
electricity market to competition, from April 1998, these customers will be able
to choose the supplier from which they purchase electricity. SEEBOARD will
compete for customers in its own area as well as throughout the rest of the
United Kingdom. The DGES has allowed most of the system development costs
associated with the introduction of competition to be recovered by the regional
electricity companies through a charge to all customers over the next five
years. The DGES has also announced price restraints which set a maximum amount
that existing electricity supply companies can charge their domestic and small
business customers over the first two years following the introduction of
competition, taking into account his view of future electricity purchase costs.
For SEEBOARD, this proposal reduces prices in real terms by 6% for the
regulatory period ending March 31, 1999 and a further 3% for the following
regulatory period ending March 31, 2000.
OTHER
Reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for
information regarding fuel proceedings at CPL, SWEPCO and WTU.
STRATEGIC INITIATIVES
A vital part of CSW's future business strategy involves initiatives
that are complementary to but outside of the traditional United States electric
utility industry. This is due in large measure to the well-documented
fundamental changes currently impacting the electric utility industry. CSW has
undertaken several such initiatives in the past, and will continue to pursue
them in the future provided they are consistent with the overall vision for the
company which is articulated as "CSW is an innovative leader in the global
energy and related services markets." Several initiatives have recently been
undertaken in support of this vision.
In June 1997, the FERC approved the request of CSW PMI to sell power
and energy at market-based rates, rather than prices based on cost-of-service,
in the wholesale electricity market. Although CSW PMI is subject to the
jurisdiction of the FERC, it will not be subject to rate jurisdiction of any
state utility commissions. CSW has also made an equity investment in a firm that
provides technical consulting services to both the nuclear industry and to
governmental agencies associated with the energy industry. In addition, CSW has
formed CSW ESI, a company that will spearhead CSW's competitive efforts in the
retail electricity markets of states outside of CSW's historical service
territories. CSW ESI will not only attempt to secure electricity supply business
in the markets which soon will have retail competition, but will also permit CSW
to extend its business reach and name recognition beyond CSW's traditional
customer base.
CSW International acquired a minority interest in Vale, a Brazilian
electric utility company, for an initial investment of approximately $40 million
in December 1996. In October 1997, CSW International made an additional equity
investment of approximately $40 million in Vale. The $80 million used to make
both equity investments was funded through loans to CSW International by CSW
Energy. CSW Energy obtained the funds from its $200 million Senior Note issuance
in October 1996.
63
In October 1997, SEEBOARD, through CSW International, announced a joint
venture to develop a new electricity generating station in southeast England.
The South Coast Power joint venture between Scottish Power and SEEBOARD is
currently finalizing proposals for the new 500 megawatt combined cycle gas
turbine power station. The development cost of the project is expected to total
approximately $340 million. South Coast Power already holds governmental permits
to build and operate a station on the site, but because of technological
advances since the permits were initially obtained, certain modifications must
be made to the permits to reflect the current construction plans. Financing
plans for South Coast Power are scheduled to be completed in the first quarter
of 1998.
RECENT DEVELOPMENTS
FERC ORDER NO. 888/TEXAS COMMISSION ERCOT TRANSMISSION RULES
As previously reported, the FERC issued Order No. 888, which is the
final comparable open access transmission service rule, in 1996. The provisions
of FERC Order No. 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.
In addition, the Texas Commission adopted a rule governing transmission
access and pricing for ERCOT in 1996. 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 which
recovers the remaining 30% of ERCOT's transmission costs. CPL and WTU began
recording transmission revenues and expenses in accordance with the Texas
Commission's rule on January 1, 1997.
FERC Order No. 888 requires holding companies to offer single system
transmission rates. However, because the transmission rates of PSO and SWEPCO
are under the exclusive jurisdiction of the FERC while the transmission rates of
CPL and WTU are under the exclusive jurisdiction of the Texas Commission and the
two commissions have different approaches to defining and implementing
comparable open access transmission service, Order No. 888 granted the U.S.
Electric Operating Companies an exemption permitting them an opportunity to
propose a solution that provides comparability to all wholesale users. On
November 1, 1996, the U.S. Electric Operating Companies filed a system-wide
tariff to comply with Order No. 888 and, on December 31, 1996, the FERC accepted
for filing the system-wide tariff which became 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 both the FERC and the Texas Commission although the tariff
does not offer a single system rate.
INDUSTRY RESTRUCTURING INITIATIVES
As previously reported, several initiatives regarding restructuring the
electric utility industry have recently been undertaken in the four states in
which the U.S. Electric Operating Companies operate. Such actions have taken
various forms, including proposed legislation. Legislation was enacted in
Oklahoma that provides for retail competition by July 2002. However, legislative
activities in Texas, Louisiana and Arkansas stopped short of any such definitive
action.
In April 1997, the Oklahoma Legislature enacted legislation dealing
with industry restructuring in Oklahoma, which provides for retail competition
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by July 1, 2002. The legislation directs the Oklahoma Commission to study all
relevant issues relating to restructuring and develop a framework for a
restructured industry. The legislation divides the study of restructuring issues
by the Oklahoma Commission into four parts: (i) independent system operator
issues; (ii) technical issues; (iii) financial issues; and (iv) consumer issues.
At the end of each of these studies, the Oklahoma Commission must provide
reports along with legislative recommendations. The legislation directs the
Oklahoma Tax Commission to study the impact of electric utility restructuring on
state tax revenues and the existing tax structure, consider the establishment of
a uniform consumption tax, and report to the Oklahoma Legislature by December
31, 1998. The legislation prohibits the establishment of retail competition
until a uniform tax policy is established. The legislation also creates a Joint
Electric Utility Task Force, a 14-member panel composed of an equal number of
representatives from the Oklahoma House of Representatives and the Oklahoma
Senate. The duties of this task force include the oversight and direction of the
studies by the Oklahoma Commission and the Oklahoma Tax Commission. Management
is unable to predict the outcome of these studies or their ultimate impact on
the results of operations and financial condition of CSW and PSO.
In March 1997, the Arkansas Legislature passed a resolution directing
interim legislative committees to study competition in the electric power
industry in Arkansas. The study began in October 1997. Although several bills
addressing industry restructuring and retail competition were introduced in the
recent sessions of the Texas and Louisiana legislatures, no such legislation was
adopted. The Louisiana Senate did adopt a resolution creating a special
committee to assess the impact of retail competition on the state of Louisiana.
The committee is scheduled to issue a report before the next regular session of
the Louisiana Legislature. Management cannot predict the outcome of the studies
in Arkansas and Louisiana or their ultimate impact on the results of operations
and financial condition of CSW and SWEPCO.
CLEAN AIR ENVIRONMENTAL ISSUES
The EPA recently promulgated revised, more stringent ambient air
quality standards for ozone and particulates. While these standards do not
mandate emission levels for facilities such as electricity generating power
plants, they may result in more areas being designated as non-attainment for
these two pollutants. States will be required to develop strategies to achieve
compliance in these areas, strategies that may include lower emission levels for
electricity generating power plants, possibly including facilities within the
CSW System. The impact, if any, on CSW or the U.S. Electric Operating Companies
cannot yet be determined and might be ten years from the present, but the impact
could ultimately be significant.
International negotiations continue over the issue of global warming.
If a treaty emerges that is signed by the United States and is ratified by the
United States Congress which places limitations or roll backs of any greenhouse
gas emissions from electricity generating power plants, CSW and the U.S.
Electric Operating Companies could be significantly affected, though the
magnitude and timing of the effect is indeterminable at this point.
MERGER AND ACQUISITION ACTIVITIES
SWEPCO CAJUN ASSET PURCHASE PROPOSAL
As previously reported, 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. In October 1996, SWEPCO, together with
Entergy Texas and the Committee of Certain Members, which currently consists of
seven of the twelve distribution cooperatives served by Cajun, filed the SWEPCO
Plan in the bankruptcy court. In April 1997, the Committee of Certain Members as
well as another cooperative signed term sheets that support the SWEPCO Plan. In
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signing the term sheets, the Committee of Certain Members agreed to support the
SWEPCO Plan throughout the confirmation process, and if the SWEPCO Plan is
confirmed, to sign power supply agreements that meet the conditions of the term
sheets.
Under the SWEPCO Plan, which amended other plans filed earlier in 1996,
a SWEPCO subsidiary or affiliate would acquire all of the non-nuclear assets of
Cajun for approximately $780 million in cash and up to an additional $20 million
to pay certain other bankruptcy claims and expenses. SWEPCO would acquire claims
of unsecured creditors of up to $7 million. In addition, the SWEPCO Plan
provides for 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. The cooperatives could also
elect, once every five years, to move from one rate option to the other. The
SWEPCO Plan would settle power supply contract claims and related litigation in
the bankruptcy case. The term sheets signed by the eight cooperatives contain
the major provisions of the SWEPCO Plan.
Two competing plans of reorganization for Cajun have also been filed
with the bankruptcy court, each with different rate paths, asset purchase
proposals and other provisions. One of the competing plans has the support of
both the bankruptcy court-appointed trustee and Cajun's largest creditor, the
RUS. This plan also has the support of the three cooperatives not currently
supporting the SWEPCO Plan, although the support is based upon signed memoranda
of understanding which allow the cooperatives to support other competing
parties. In September 1997, SWEPCO reached a contingent settlement in principle
with the RUS whereby the RUS would support SWEPCO if certain contingencies are
met. SWEPCO is currently pursuing certain aspects of this settlement while also
evaluating other conditions of the settlement. However, SWEPCO is currently
unable to predict whether settlement with the RUS will ultimately be achieved.
Confirmation hearings in Cajun's bankruptcy case are now scheduled
through January 1998. Consummation of the SWEPCO Plan is conditioned upon
confirmation by the bankruptcy court, the receipt by SWEPCO and CSW of all
requisite state and federal regulatory approvals and receipt of their
corresponding board approvals. If the SWEPCO Plan is confirmed, CSW and SWEPCO
expect to utilize a combination of external borrowings and internally generated
funds to initially finance the acquisition of Cajun's non-nuclear assets.
The foregoing discussion of SWEPCO CAJUN ASSET PURCHASE PROPOSAL
constitutes forward looking information within the meaning of Section 21E of the
Exchange Act. Actual results may differ materially from such projected
information. See FORWARD LOOKING INFORMATION.
TERMINATION OF EL PASO MERGER
Reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS.
RISK MANAGEMENT
In October 1997, CSW's board of directors adopted a risk management
resolution authorizing CSW to engage in currency, interest rate and energy spot
and forward transactions and related derivative transactions on behalf of the
corporation with foreign and domestic parties as deemed appropriate by executive
officers of CSW. The risk management program is necessary to meet the growing
demands of CSW's customers for competitive prices and price stability, to enable
66
CSW to compete in a deregulated power industry, to manage the risks associated
with domestic and foreign investments and to take advantage of strategic
investment opportunities.
The U.S. Electric Operating Companies experience commodity price
exposures related to the purchase of fuel supplies for the generation of
electricity and for the purchase of power and energy from other generation
sources. Contracts that provide for the future delivery of these commodities can
be considered forward contracts which contain pricing and/or volume terms
designed to stabilize the cost of the commodity. Consequently, the U.S. Electric
Operating Companies manage their price exposure for the benefit of customers by
balancing their commodity purchases through a combination of long-term and
short-term (spot-market) agreements. In addition, CSW has been exposed to
currency and interest rate risks which reflect the changing exchange rate that
exists between the U.S. dollar and the British pound since its purchase of
SEEBOARD in 1995. CSW has utilized certain risk management tools to manage
adverse changes in exchange rates and to facilitate financing transactions
resulting from CSW's acquisition of SEEBOARD.
67
PART II - OTHER INFORMATION
For background and earlier developments relating to PART II
information, reference is made to the Registrants' Combined Annual Report on
Form 10-K for the year ended December 31, 1996 and Combined Quarterly Reports on
Form 10-Q for the quarters ended March 31, 1997 and June 30, 1997.
ITEM 1. LEGAL PROCEEDINGS
CPL MUNICIPAL FRANCHISE FEE LITIGATION
As previously reported, in May 1996, the city of San Juan, Texas filed
a class action in Hidalgo County, Texas District Court on behalf of all cities
served by CPL based upon CPL's alleged underpayment of municipal franchise fees.
The city of San Juan asserts various contract and tort claims against CPL as
well as certain audit rights. The suit seeks unspecified damages and attorneys'
fees. CPL filed a counterclaim for any overpayment of franchise fees it may have
made as well as its attorneys' fees. CPL also filed a motion to transfer venue
to Nueces County, Texas, and a plea to the jurisdiction and pleas in abatement
asserting that the Texas Commission has primary jurisdiction over the claims
filed by the city of San Juan. In January, 1997, CPL filed an original petition
at the Texas Commission requesting the Texas Commission to declare its
jurisdiction over CPL's collection and payment of municipal franchise fees.
In April 1997, the Texas Commission issued a declaratory order in which
it declined to assert jurisdiction over the claims of the city of San Juan. CPL
appealed the Texas Commission's decision to the Travis County, Texas District
Court. After the Texas Commission's order, the Hidalgo County court overruled
CPL's plea to the jurisdiction and plea in abatement. In July 1997, the Hidalgo
County court entered an order certifying the case as a class action. CPL
appealed this order to the Corpus Christi Court of Appeals. In May 1996 and
December 1996, respectively, the cities of Pharr, Texas and San Benito, Texas
filed individual suits making claims identical to those claimed by the city of
San Juan.
Although CPL believes that it has substantial defenses to the cities'
claims and intends to defend itself against the cities' claims and pursue its
counterclaims vigorously, CPL cannot predict the outcome of these lawsuits.
SWEPCO BURLINGTON NORTHERN TRANSPORTATION CONTRACT
In January 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 stations. The court awarded SWEPCO
approximately $72 million that would inure to the benefit of customers, if
collected, representing damages for the period from April 27, 1989 through
September 26, 1994, as well as 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, in April 1996, that court reversed the judgment of the state
district court. In October 1996, SWEPCO filed an application with the Supreme
Court of Texas to grant a writ of error to review and reverse the judgment of
the Texarkana, Texas Court of Appeals. In June 1997, the Supreme Court of Texas
granted SWEPCO's application for writ of error. Oral argument was held before
the Supreme Court of Texas in October 1997, and the matter is now pending.
68
SWEPCO LIGNITE MINING AGREEMENT LITIGATION
SWEPCO and CLECO are each a 50% owner of Dolet Hills Power Station Unit
1 and jointly own lignite reserves in the Dolet Hills area of northwestern
Louisiana. In 1982 the SWEPCO and CLECO entered into a lignite mining agreement
with the DHMV, a partnership for the mining and delivery of lignite from a
portion of these reserves.
On April 15, 1997, SWEPCO and CLECO filed suit against DHMV and its
partners in the United States District Court for the Western District of
Louisiana seeking to enforce various obligations of DHMV to SWEPCO and CLECO
under the lignite mining agreement, including provisions relating to the quality
of the delivered lignite, pricing, and mine reclamation practices. On June 15,
1997, DHMV filed an answer denying the allegations in the suit and filed a
counterclaim asserting various contract-related claims against SWEPCO and CLECO.
SWEPCO and CLECO have denied the allegations in the counterclaims.
SWEPCO intends to vigorously prosecute the claims against DHMV and
defend against the counterclaims which DHMV has asserted. Although SWEPCO cannot
predict the ultimate outcome of this matter, management believes that the
resolution of this matter will not have a material adverse effect on SWEPCO's
results of operations or financial condition.
OTHER LEGAL CLAIMS AND PROCEEDINGS
The CSW System is party to various other legal claims and proceedings
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. See PART I - NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES.
ITEM 5. OTHER INFORMATION
ADOPTION OF RIGHTS PLAN
In September 1997, CSW's board of directors adopted a Rights Plan,
which is subject to SEC approval under the Holding Company Act. An application
to the SEC requesting approval of the Rights Plan was filed on September 29,
1997. The Rights Plan was adopted as part of the fiduciary responsibility of
CSW's board of directors, and was not adopted because of any takeover offer or
threat. The Rights Plan is intended to assure fair and equal treatment for all
of CSW's stockholders in the event of a hostile takeover attempt and to
encourage a potential acquirer to negotiate with CSW's board of directors before
attempting a takeover so as to assure a fair price for all stockholders.
Following SEC approval of the Rights Plan, CSW will make a dividend
distribution of one right for each outstanding share of its common stock, as of
a record date to be determined by its board of directors. CSW stockholders are
not required to take any action to receive their rights distribution. Prior to
the date upon which the rights become exercisable under the Rights Plan, CSW's
outstanding stock certificates will represent both the shares of common stock
and the rights, and the rights will trade only together with the shares.
Upon a "triggering event" under the Rights Plan, which would occur ten
days after a person or group acquires or announces a tender or exchange offer to
acquire fifteen percent or more of CSW's outstanding common stock, the rights
69
will become exercisable and will trade independently of CSW's common stock.
After a person or group acquires fifteen percent or more of CSW's outstanding
common stock, each right, except those held by such acquiring person or group,
whose rights would become void, will entitle the holder to purchase, at the
exercise price, additional CSW common shares having a current market value of
two times the exercise price. If CSW is acquired in a merger or other business
combination, each right will entitle the holder to purchase, at the exercise
price, common stock of the acquiror having a current market value of two times
the exercise price. In either case, after a triggering event occurs but before
an acquiring person becomes the owner of at least fifty percent of CSW's
outstanding common stock, CSW's board of directors may direct the exchange of
one share of CSW's common stock for each right then outstanding and not
exercised.
CSW's board of directors may redeem the rights for a price of one cent
per right prior to the earlier of the rights becoming exercisable or the
expiration of the Rights Plan. The rights will expire in ten years from the
effective date unless they are earlier redeemed or exchanged by CSW. CSW will
mail additional information to its stockholders as of the record date for
distribution of the rights, which is expected to be the tenth day following
approval of the Rights Plan by the SEC.
NEW MANAGEMENT OF STP
In September 1997, STPNOC was formed to begin the transition from HL&P
as the STP Project Manager to an independent STP operator. Each of the four STP
co-owners will be represented on the STPNOC board of directors. The CPL
representative has been elected as the initial chairman of the board of
directors. CPL believes the formation of STPNOC is in the best interest of CPL
and of each of the other STP co-owners.
The establishment of the independent operating company provides the
following advantages: (i) allows the management and work force to focus
exclusively on the safe, reliable and efficient operation of the STP units; (ii)
removes most of the possibility of disputes between the four owners over the
operation of the facility; (iii) removes dissension over the potential liability
of HL&P who was acting as the project manager; and (iv) allows the management of
the facility to tailor a total compensation package for the STP work force which
best suits that work force and its needs. In addition, the formation and
operation of STPNOC is expected to result in a decrease in costs allocable to
CPL related to its investment in STP.
On October 1, 1997, all HL&P employees assigned to STP were transferred
from HL&P to STPNOC. HL&P will be removed as the STP Project Manager on
completion of various transition agreements, including an amended participation
agreement. The replacement of HL&P as STP Project Manager with STPNOC is
anticipated to be completed before the end of 1997.
SALE OF CSW ENERGY SWEENY OWNERSHIP INTEREST
In August 1997, an affiliate of CSW Energy sold 50% of its 100%
interest in the Sweeny Cogeneration project. The sale of the ownership interest
was necessary for the Sweeny Cogeneration project to maintain its qualifying
facility status under the Public Utility Regulatory Policy Act of 1978. CSW
Energy provided the $56.5 million non-recourse financing for the sale which is
expected to be repaid from project distributions or proceeds from sale, as
defined in the sales agreements. Construction on the 330 megawatt electricity
generating facility is estimated to be completed in early 1998 with a commercial
operation date soon thereafter. CSW Energy did not recognize a gain or loss on
this transaction.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
(3) ARTICLES OF INCORPORATION AND BY-LAWS OF CSW ESI
1 Certificate of Incorporation, filed herewith.
2 Bylaws, filed herewith.
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
1 CSW Shareholder Rights Plan adopted September 27, 1997, filed
herewith.
(12) COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
CPL - (Exhibit 12.1), filed herewith.
PSO - (Exhibit 12.2), filed herewith.
SWEPCO - (Exhibit 12.3), filed herewith.
WTU - (Exhibit 12.4), filed herewith.
(27) FINANCIAL DATA SCHEDULES
CPL - (Exhibit 27.1), filed herewith.
(B) REPORTS FILED ON FORM 8-K:
CSW
ITEM 5. OTHER EVENTS, dated July 2, 1997, reporting information
related to the United Kingdom Windfall Profits Tax.
ITEM 5. OTHER EVENTS, dated July 16, 1997, reporting the settlement
of litigation related to the termination of the proposed El Paso
Merger.
ITEM 5.OTHER EVENTS, and ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS,
dated September 27, 1997, reporting CSW's adoption of the Rights
Plan.
CSW AND CPL
ITEM 5. OTHER EVENTS, dated September 10, 1997, providing certain
information related to CPL's rate review.
CSW AND PSO
ITEM 5. OTHER EVENTS, dated July 17, 1997, reporting information
related to PSO's rate review.
ITEM 5. OTHER EVENTS, dated October 15, 1997, reporting the PSO 1997
Rate Settlement Agreement.
SWEPCO, WTU
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
each Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
Registrant shall be deemed to relate only to matters having reference to such
Registrant or its subsidiaries.
CENTRAL AND SOUTH WEST CORPORATION
Date: November 13, 1997 /S/ LAWRENCE B. CONNORS
--------------------------
Lawrence B. Connors
Controller and Chief Accounting Officer
(Principal Accounting Officer)
CENTRAL POWER AND LIGHT COMPANY
PUBLIC SERVICE COMPANY OF OKLAHOMA
SOUTHWESTERN ELECTRIC POWER COMPANY
WEST TEXAS UTILITIES COMPANY
Date: November 13, 1997 /S/ R. RUSSELL DAVIS
-----------------------
R. Russell Davis
Controller and Chief Accounting Officer
(Principal Accounting Officer)