UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of Each Exchange
Registrant Title of Each Class on Which Registered
Central and South West Common Stock, New York Stock Exchange, Inc.
Corporation $3.50 Par Value Chicago Stock Exchange, Inc.
CPL Capital I 8.00% Cumulative Quarterly New York Stock Exchange,
Income Preferred Inc.
Securities, Series A,
Liquidation Preference $25
per Preferred Security
PSO Capital I 8.00% Trust Originated New York Stock Exchange,
Preferred Securities Series Inc.
A, Liquidation Preference
$25 per Preferred Security
SWEPCO Capital I 7.875% Trust Preferred New York Stock Exchange,
Securities, Series A, Inc.
Liquidation amount $25 per
Preferred Security
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Registrant Title of Each Class
Central Power and Light Cumulative Preferred Stock, $100 Par Value
Company
Public Service Company of Cumulative Preferred Stock, $100 Par Value
Oklahoma
Southwestern Electric Cumulative Preferred Stock, $100 Par Value
Power Company
West Texas Utilities Cumulative Preferred Stock, $100 Par Value
Company $100 Par Value
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) have been subject to such filing
requirements for the past 90 days. Yes _x_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K:
Central and South West Corporation [ ]
Central Power and Light Company [ x ]
Public Service Company of Oklahoma [ x ]
Southwestern Electric Power Company [ x ]
West Texas Utilities Company [ x ]
Aggregate market value of the Common Stock of Central and South West
Corporation at March 6, 1998 held by non-affiliates was approximately $5.7
billion. Number of shares of Common Stock outstanding at March 6,
1998:212,271,060. Central and South West Corporation is the sole holder of the
common stock of Central Power and Light Company, Public Service Company of
Oklahoma, Southwestern Electric Power Company and West Texas Utilities Company.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Notice of Annual Meeting and Joint Proxy Statement of
Central and South West Corporation and American Electric Power Company, Inc. are
hereby incorporated by reference into Part III hereof.
This Combined Form 10-K is separately filed by Central and South West
Corporation, Central Power and Light Company, Public Service Company of
Oklahoma, Southwestern Electric Power Company and West Texas Utilities Company.
Information contained herein relating to any individual Registrant is filed by
such Registrant on its own behalf. Each Registrant makes no representation as to
information relating to the other Registrants.
TABLE OF CONTENTS
GLOSSARY OF TERMS................................................ii
FORWARD LOOKING INFORMATION......................................v
PART I
ITEM 1.BUSINESS................................................1
ITEM 2.PROPERTIES..............................................27
ITEM 3.LEGAL PROCEEDINGS.......................................28
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....29
PART II
ITEM 5.MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.....................................2-1
ITEM 6.SELECTED FINANCIAL DATA.................................2-2
Central and South West Corporation
Central Power and Light Company
Public Service Company of Oklahoma
Southwestern Electric Power Company
West Texas Utilities Company
ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.....................2-2
Central and South West Corporation
Central Power and Light Company
Public Service Company of Oklahoma
Southwestern Electric Power Company
West Texas Utilities Company
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............2-2
Central and South West Corporation
Central Power and Light Company
Public Service Company of Oklahoma
Southwestern Electric Power Company
West Texas Utilities Company
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.....................2-133
PART III
ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS....3-1
ITEM 11.EXECUTIVE COMPENSATION.................................3-7
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.............................................3-13
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........3-15
PART IV
ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.............................................4-1
i
GLOSSARY OF TERMS
The following abbreviations or acronyms used in this Form 10-K are defined
below:
Abbreviation or Acronym Definition
ACSI.......................American Customer Satisfaction Index(TM) (Survey
conducted by the University of Michigan Business
School and the American Society of Quality Control)
AEP........................American Electric Power Company, Inc.
AEP Merger.................Proposed Merger between AEP and CSW where CSW would
become a wholly owned subsidiary of AEP
APBO.......................Accumulated Postretirement Benefit Obligation
AFUDC......................Allowance for funds used during construction
Alpek......................Alpek S.A. de C.V.
ANI........................American Nuclear Insurance
Arkansas Commission........Arkansas Public Service Commission
Btu........................British thermal unit
Burlington Northern........Burlington Northern Railroad Company
C3 Communications..........C3 Communications, Inc., Austin, Texas (formerly CSW
Communications, Inc.)
CAAA.......................Clean Air Act/Clean Air Act Amendments
Cajun......................Cajun Electric Power Cooperative, Inc.
CEO........................Chief Executive Officer
CERCLA.....................Comprehensive Environmental Response, Compensation
and Liability Act of 1980
ChoiceCom..................CSW/ICG ChoiceCom, L.P., a joint venture between C3
Communications and ICG Communications, Inc.
CLECO......................Central Louisiana Electric Company, Inc.
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 1997 Original Rate
Order....................Final order issued on March 31, 1997 by the Texas
Commission in CPL's rate case Docket No. 14965
CPL 1995 Agreement........Settlement agreement filed by CPL with the Texas
Commission to settle certain CPL regulatory matters
CPL 1996 Fuel Agreement....Fuel settlement agreement entered into by CPL and
other parties
CSW........................Central and South West Corporation, Dallas, Texas
CSW Common.................CSW common stock, $3.50 par value per share
CSW Credit.................CSW Credit, Inc., Dallas, Texas
CSW Energy.................CSW Energy, Inc., Dallas, Texas
CSW Energy Services........CSW Energy Services, Inc., Dallas, Texas
CSW International..........CSW International, Inc., Dallas, Texas
CSW Investments............CSW Investments, an unlimited company organized in
the United Kingdom through which CSW International
owns SEEBOARD
CSW Leasing................CSW Leasing, Inc., Dallas, Texas
CSW Power Marketing........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
CSW UK Finance Company.....CSW Finco, an unlimited company organized in the
United Kingdom through which CSW International owns
CSW Investments
CSW U.S. Electric System...CSW and the U.S. Electric Operating Companies
CWIP.......................Construction work in progress
DeSoto.....................Parish of DeSoto, State of Louisiana pollution
control revenue bond issuing authority
DGES.......................Director General Electricity Supply
DHMV.......................Dolet Hills Mining Venture
DOE........................United States Department of Energy
ECOM.......................Excess cost over market
El Paso....................El Paso Electric Company
El Paso Merger Agreement...Agreement and Plan of Merger between El Paso and CSW,
dated as of May 3, 1993, as amended
EMF........................Electric and magnetic fields
Energy Policy Act..........National Energy Policy Act of 1992
EnerShop...................EnerShopSM Inc., Dallas, Texas
Entergy Texas..............Entergy Texas Utilities Company
EPA........................United States Environmental Protection Agency
ii
GLOSSARY OF TERMS (continued)
The following abbreviations or acronyms used in this Form 10-K are defined
below:
Abbreviation or Acronym Definition
EPS........................Earnings per share of common stock
ERCOT......................Electric Reliability Council of Texas
ERISA......................Employee Retirement Income Security Act of 1974, as
amended
Exchange Act...............Securities Exchange Act of 1934, as amended
EWG........................Exempt Wholesale Generator
FASB.......................Financial Accounting Standards Board
FCC........................Federal Communications Commission
FERC.......................Federal Energy Regulatory Commission
FMB........................First mortgage bond
FUCO.......................Foreign utility company as defined by the Holding
Company Act
Guadalupe..................Guadalupe-Blanco River Authority pollution control
revenue bond issuing authority
HL&P.......................Houston Lighting & Power Company
Holding Company Act........Public Utility Holding Company Act of 1935, a
amended
HVdc.......................High-voltage direct-current
IPP........................Independent power producer
IBEW.......................International Brotherhood of Electrical Workers
ISO........................Independent system operator
ITC........................Investment tax credit
Joint Proxy Statement......The Notice of Annual Meeting and Joint Proxy
Statement of American Electric Power Company, Inc.
and Central and South West Corporation
KW.........................Kilowatt
KWH........................Kilowatt-hour
LIFO.......................Last-in first-out (inventory accounting method)
Louisiana Commission.......Louisiana Public Service Commission
LTIP.......................Long-Term Incentive Plan
Matagorda..................Matagorda County Navigation District Number One
(Texas) pollution control revenue bond issuing
authority
Mcfs.......................Thousand cubic feet of gas
MD&A.......................Management's Discussion and Analysis of Financial
Condition and Results of Operations
MDEQ.......................Mississippi Department of Environmental Quality
MGP........................Manufactured gas plant or coal gasification plant
Mirror CWIP................Mirror construction work in progress
Mississippi Power..........Mississippi Power Company
MMbtu......................Million Btu
MW.........................Megawatt
MWH........................Megawatt-hour
National Grid..............National Grid Group plc
NEIL.......................Nuclear Electric Insurance Limited
NRC........................Nuclear Regulatory Commission
OASIS......................Open access same time information system
OEFA.......................Oklahoma Environmental Finance Authority pollution
control revenue bond issuing authority
Oklahoma Commission........Corporation Commission of the State of Oklahoma
Oklaunion..................Oklaunion Power Station Unit No. 1
OPEB.......................Other postretirement benefits (other than pension)
PCB........................Polychlorinated biphenyl
PCRB.......................Pollution Control Revenue Bond
PowerShare.................CSW's PowerShareSM Dividend Reinvestment and Stock
Purchase Plan
PRP........................Potentially responsible party
PSO........................Public Service Company of Oklahoma, Tulsa, Oklahoma
PSO 1997 Rate Settlement
Agreement................Joint stipulation agreement reached by PSO and other
parties to settle PSO's rate inquiry
PURA.......................Public Utility Regulatory Act of Texas, as amended
PURPA......................Public Utility Regulatory Policies Act of 1978
QF.........................Qualifying Facility as defined in PURPA
RCRA.......................Federal Resource Conservation and Recovery Act of
1976
Red River..................Red River Authority of Texas pollution control
revenue bond issuing authority
Registrant(s)..............CSW, CPL, PSO, SWEPCO and WTU
RESCTA.....................Rural Electric Supplier Certified Territory Act
iii
GLOSSARY OF TERMS (continued)
The following abbreviations or acronyms used in this Form 10-K are defined
below:
Abbreviation or Acronym Definition
Retirement Plan............CSW's tax-qualified Cash Balance Retirement Plan
Rights Plan................Stockholders Rights Agreement between CSW and CSW
Services, as Rights Agent
RUS........................Rural Utilities Service of the federal government
Sabine.....................Sabine River Authority of Texas pollution control
revenue bond issuing authority
Siloam Springs.............City of Siloam Springs, Arkansas pollution control
revenue bond issuing authority
SAR........................Stock Appreciation Right
SEC........................United States Securities and Exchange Commission
SEEBOARD...................SEEBOARD plc., Crawley, West Sussex, United Kingdom
SEEBOARD U.S.A.............CSW's investment in SEEBOARD consolidated and
converted to U.S. Generally Accepted Accounting
Principles
SERP.......................Special Executive Retirement Plan
SFAS.......................Statement of Financial Accounting Standards
SFAS No. 52................Foreign Currency Translation
SFAS No. 71................Accounting for the Effects of Certain Types of
Regulation
SFAS No. 87................Employers' Accounting for Pensions
SFAS No. 106...............Employers' Accounting for Postemployment Benefits
SFAS No. 115...............Accounting for Certain Investments in Debt and Equity
Securities
SFAS No. 123...............Accounting for Stock-Based Compensation
SFAS No. 125...............Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities
SFAS No. 128...............Earnings Per Share
SFAS No. 130...............Reporting Comprehensive Income
SFAS No. 131...............Disclosure about Segments of an Enterprise and
Related Information
SPP........................Southwest Power Pool
STB........................Surface Transportation Board of the United States
Department of Transportation
STP........................South Texas Project nuclear electric generating
station
STPNOC.....................STP Nuclear Operating Company, a non-profit Texas
corporation, jointly owned by CPL, HL&P, City of
Austin, and City of San Antonio
SWEPCO.....................Southwestern Electric Power Company, Shreveport,
Louisiana
SWEPCO Plan................The amended plan of reorganization for Cajun filed by
the Members Committee and SWEPCO on January 15, 1998
with the U.S. Bankruptcy Court for the Middle
District of Louisiana
Tejas......................Tejas Gas Corporation
Texas Commission...........Public Utility Commission of Texas
ThriftPlus.................CSW's employee thrift plan
Titus County...............Titus County Fresh Water Supply District No. 1
pollution control revenue bond issuing authority
Transok....................Transok, Inc. and subsidiaries, Tulsa, Oklahoma
Trust Preferred
Securities...............Collective term for securities issued by business
trusts of CPL, PSO and SWEPCO classified on the
balance sheet as "Certain Subsidiary (or
CPL/PSO/SWEPCO)-obligated, mandatorily redeemable
preferred securities of subsidiary trusts holding
solely Junior Subordinated Debentures of such
Subsidiaries (or CPL/PSO/SWEPCO)"
Union Pacific..............Union Pacific Railroad Company
U.S. Electric or U.S.
Electric Operating
Companies................CPL, PSO, SWEPCO and WTU
Vale.......................Empresa De Electricidade Vale Paranapanema S/A
WTU........................West Texas Utilities Company, Abilene, Texas
WTU 1995 Stipulation and
Agreement................Stipulation and Agreement to settle certain WTU
regulatory matters
iv
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.;
the impact of the AEP Merger or other merger and acquisition activity; federal
and state regulatory developments and changes in law which may have a
substantial adverse impact on the value of CSW System assets; 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.
v
PART I
ITEM 1. BUSINESS.
CSW, incorporated under the laws of Delaware in 1925, is a Dallas-based
public utility holding company registered under the Holding Company Act. CSW
owns all of the outstanding shares of common stock of the U.S. Electric
Operating Companies, CSW Services, CSW Credit, CSW Energy, CSW International, C3
Communications, EnerShop and CSW Energy Services and indirectly owns all of the
outstanding share capital of SEEBOARD. In addition, CSW owns 80% of the
outstanding shares of common stock of CSW Leasing. In 1997, the U.S. Electric
Operating Companies, SEEBOARD U.S.A. and CSW's other subsidiaries contributed
the following percentages to aggregate operating revenues, operating income and
income before extraordinary item.
SEEBOARD Total
CPL PSO SWEPCO WTU U.S.A. Electric Other Total
----------------------------------------------------------
Operating Revenues 26 13 17 8 35 99 1 100%
Operating Income 35 11 13 12 30 101 (1) 100%
Income before
Extraordinary Item 37 15 28 7 36 123 (23) 100%
The relative contributions of the U.S. Electric Operating Companies and
SEEBOARD U.S.A. to the aggregate operating revenues, operating income and net
income before extraordinary item differ from year to year due to variations in
weather, fuel costs reflected in charges to customers, timing and amount of rate
changes and other factors, including changes in business conditions and the
results of non-utility businesses. Sales of electricity by the U.S. Electric
Operating Companies tend to increase during warmer summer months and, to a
lesser extent, cooler winter months, because of higher demand for power. The
sale of electricity by SEEBOARD tends to increase during colder winter months
because of a higher demand for power. For additional detail related to CSW's
reportable business segments, see ITEM 8-NOTE 14. BUSINESS SEGMENTS and for
financial results showing CSW's seasonality, see ITEM 8-NOTE 19. QUARTERLY
INFORMATION.
The CSW System is subject to the jurisdiction of the SEC under the Holding
Company Act with respect to the issuance, acquisition and sale of securities,
the acquisition and sale of utility assets or any interest in any business and
accounting practices, including certain affiliate transactions, and other
matters. See RATES AND REGULATION below, and ITEM 7. MD&A for additional
information regarding the Holding Company Act.
PROPOSED AEP MERGER
On December 22, 1997, CSW and AEP announced that their boards of directors
had approved a definitive merger agreement for a tax-free, stock-for-stock
transaction creating a company with a total market capitalization of
approximately $28.1 billion ($16.5 billion in equity; $11.6 billion in debt and
preferred stock). CSW expects the combination to be accounted for as a pooling
of interests. The transaction must satisfy many conditions, some of which may
not be waived by the parties. There can be no assurance that the AEP Merger will
be consummated.
1
This combination is expected to create one of the nation's preeminent
diversified electric utilities serving more than 4.6 million customers in 11
states and approximately 4 million customers outside the United States. Both
companies have low-cost generation and offer their customers in every state
prices below the national average. Over the last two years, both CSW and AEP
have ranked among the top five electric utilities in customer satisfaction in
the ACSI.
Under the merger agreement, each common share of CSW will be converted
into 0.6 shares of AEP common stock. Based upon AEP's closing price immediately
prior to the merger announcement, this represented a premium of 20% over the CSW
closing price. AEP will issue approximately $6.6 billion in stock to CSW
stockholders to complete the transaction. CSW stockholders will own
approximately 40% of the combined company. Both companies anticipate continuing
their current dividend policies until the close of the transaction.
Under the merger agreement, there will be no changes required with respect
to the public debt issues, the outstanding preferred stock or the Trust
Preferred Securities of CSW or its subsidiaries.
The companies anticipate savings related to the merger of approximately $2
billion over a 10-year period from the elimination of duplication in corporate
and administrative programs, greater efficiencies in operations and business
processes, increased purchasing efficiencies, and the combination of the two
workforces. At the same time, the companies will continue their commitment to
high quality, reliable service. Job reductions related to the merger are
expected to be approximately 1,050 out of a total domestic workforce of
approximately 25,000. The combined company will use a combination of growth,
reduced hiring and attrition to minimize the need for employee separations.
Organizational and staffing recommendations will be made by transition teams of
employees from both companies.
The electric systems of AEP and CSW will operate on an integrated and
coordinated basis as required by the Holding Company Act. Any fuel savings
resulting from the coordinated operation of the combined company will be passed
on to customers.
The merger agreement contains covenants and agreements that restrict the
manner in which the parties may operate their respective businesses until the
time of closing of the merger. In particular, without the prior written consent
of AEP, CSW may not engage in a number of activities that could affect its
sources and uses of funds. Pending closing of the merger, CSW's and its
subsidiaries' strategic investment activity, capital expenditures and non-fuel
operating and maintenance expenditures are restricted to specific agreed upon
projects or agreed upon amounts. In addition, prior to consummation of the
merger CSW and its subsidiaries are restricted from (i) issuing shares of common
stock other than pursuant to employee benefit plans, (ii) issuing shares of
preferred stock or similar securities other than to refinance existing
obligations or funds permitted capital expenditures and (iii) incurring
indebtedness other than pursuant to existing facilities, in the ordinary course
of business or to fund permitted projects or capital expenditures. These
restrictions are not expected to limit the ability of CSW and its subsidiaries
to make investments and expenditures in amounts previously budgeted.
The merger is conditioned, among other things, upon the approval of CSW
stockholders and several state and federal regulatory agencies. AEP shareholders
must authorize additional common stock and approve a new common stock issuance
to be used in the exchange for CSW common stock. The companies anticipate that
regulatory approvals can be obtained in 12 to 18 months from the date of
announcement. However, there can be no assurance that the AEP Merger will be
consummated, and if it is, the timing of such consummation or the effect of any
regulatory condition that may be imposed on such consummation.
See ITEM 7. MD&A and ITEM 8-NOTE 16. PROPOSED AEP MERGER.
2
U.S. ELECTRIC OPERATING COMPANIES
The U.S. Electric Operating Companies are public utility companies engaged
in generating, purchasing, transmitting, distributing and selling electricity.
The U.S. Electric Operating Companies serve approximately 1.7 million customers
in one of the largest combined service territories in the United States covering
approximately 152,000 square miles in portions of Texas, Oklahoma, Louisiana and
Arkansas. The customer base includes a mix of residential, commercial and
diversified industrial customers. CPL and WTU operate in portions of south and
central west Texas, respectively. PSO operates in portions of eastern and
southwestern Oklahoma, and SWEPCO operates in portions of northeastern Texas,
northwestern Louisiana and western Arkansas. Information concerning each of the
U.S. Electric Operating Companies for 1997 is presented in the following table.
Estimated
Service Average Rural
State and Estimated Territory Number of Electric
Registrant Year of Population (sq. Retail Municipal Cooperatives
Incorporation Served miles) Customers Customers Served
- --------------------------------------------------------------------------------
CPL Texas - 1945 1,778,000 44,000 627,900 1 4
PSO Oklahoma - 1913 1,100,000 30,000 481,400 2 2
SWEPCO Delaware - 1912 943,000 25,000 415,900 3 8
WTU Texas - 1927 393,000 53,000 186,700 3 13
The largest cities in CPL's service territory are Corpus Christi, Laredo
and McAllen. The economic base of CPL's service territory includes
manufacturing, mining, agricultural, transportation and public utilities
sectors. Major activities in these sectors include oil and gas extraction, food
processing, apparel, metal refining, chemical and petroleum refining, plastics
and machinery equipment. Contracts with substantially all large industrial
customers provide for both demand and energy charges. Demand charges continue
under such contracts even during periods of reduced industrial activity, thus
mitigating the effect of reduced activity on operating income.
The largest cities in PSO's service territory are Tulsa, Lawton and
Bartlesville. The economic base of PSO's service territory includes petroleum
products, manufacturing and agriculture. The principal industries in the
territory include natural gas and oil production, oil refining, steel
processing, aircraft maintenance, paper manufacturing and timber products,
glass, chemicals, cement, plastics, aerospace, telecommunications and rubber
goods.
The largest cities in SWEPCO's service territory are Shreveport/Bossier
City, Longview and Texarkana. The economic base of SWEPCO's service territory
includes mining, manufacturing, chemical products, petroleum products,
agriculture and tourism. The principal industries in the territory include
natural gas and oil production, petroleum refining, manufacturing of pulp and
paper, chemicals, food processing and metal refining. The territory also has
several military installations, colleges and universities.
The largest cities in WTU's service territory are Abilene and San Angelo.
The economic base of WTU's service territory includes agricultural businesses,
such as the production of cattle, sheep, goats, cotton, wool, mohair and feed
crops. Significant gains have been made in economic diversification through
value added processing of these products. The natural resources of the territory
include oil, natural gas, sulfur, gypsum and ceramic clays. Important
manufacturing and processing plants served by WTU produce cotton seed products,
oil products, electronic equipment, precision and consumer metal products, meat
products, gypsum products and carbon fiber products. The territory also has
several military installations and state correctional institutions.
3
The CSW U.S. Electric System operates on an interstate basis to facilitate
exchanges of power. PSO and WTU are interconnected through the 200 MW North HVdc
transmission interconnection located at Vernon, Texas. SWEPCO and CPL are
interconnected through the 600 MW East HVdc transmission interconnection located
at Pittsburg, Texas.
CPL and WTU are members of ERCOT which operate in Texas. Other ERCOT
members include Texas Utilities Electric Company, HL&P, Texas Municipal Power
Agency, Texas Municipal Power Pool, Lower Colorado River Authority, the
municipal systems of San Antonio, Austin and Brownsville, the South Texas and
Medina Electric Cooperatives, and several other interconnected systems and
cooperatives. PSO and SWEPCO are members of the SPP, which includes 18
investor-owned utilities, 11 municipalities, 11 cooperatives, 3 state and 1
federal agency as well as IPPs and power marketers operating in the states of
Arkansas, Kansas, Louisiana, Oklahoma and parts of Mississippi, Missouri, New
Mexico and Texas. ERCOT members interchange power and energy with one another on
a firm, economy and emergency basis, as do the members of the SPP.
CSW Services performs, at cost, various accounting, engineering, tax,
legal, financial, electronic data processing, centralized economic dispatching
of electric power and other services for the CSW System, primarily for the U.S.
Electric Operating Companies. During 1996, CSW functionally reorganized its
domestic utility operations into three organizational units including power
generation, energy delivery and energy services, which are centrally managed by
CSW Services. The functional unbundling of CSW's vertically integrated structure
was undertaken to provide a more competitive organizational structure for CSW.
Certain employees moved from the U.S. Electric Operating Companies to CSW
Services in connection with this functional reorganization.
SEEBOARD
SEEBOARD is one of the 12 regional electricity companies formed as a
result of the restructuring and subsequent privatization of the United Kingdom
electricity industry in 1990. CSW acquired indirect control of SEEBOARD in April
1996. SEEBOARD's principal regulated businesses are the distribution and supply
of electricity. In addition SEEBOARD is engaged in other businesses, including
gas supply, electricity generation, electrical contracting and retailing.
SEEBOARD's service area covers approximately 3,000 square miles in
Southeast England. The service area extends from the outlying areas of London to
the English Channel, and includes large towns such as Kingston-upon-Thames,
Croydon, Crawley, Maidstone, Ashford and Brighton, as well as substantial rural
areas. The area has a population of approximately 4.6 million people with
significant portions of the area, such as south London, having a high population
density. Over the past 25 years, the services sector of the area's economy has
grown in importance, while the industrial sector has declined. Considerable
commercial development has occurred in a number of towns in the area over the
last ten years, in particular in the areas around Gatwick Airport and the
English Channel ports.
OTHER CSW BUSINESS OPERATIONS
CSW continually seeks opportunities to expand its non-utility business in
areas related to energy and energy services. This expansion frequently occurs
through strategic domestic and international acquisitions, through marketing
4
initiatives inside and outside of the service territories of the U.S. Electric
Operating Companies and through new business investments. Acquisitions of any
new assets, or development of any new business opportunities, must meet defined
criteria, including the potential to lower CSW System costs, increase long-term
efficiency and competitiveness, and provide an acceptable return on investment
to CSW.
CSW Energy develops, owns and operates independent power and cogeneration
facilities within the United States. Currently, CSW Energy has ownership
interests in six electricity generating projects and other projects in various
stages of development. CSW International engages in international activities,
including developing, acquiring, financing and owning EWGs and FUCOs, either
alone or with partners.
C3 Communications was the first Holding Company Act registrant affiliate
communications company to be granted exempt telecommunications company status.
C3 Communications has two main lines of business. C3 Communications' Utility
Automation Division specializes in providing automated meter reading and related
services to investor owned, municipal, and cooperative electric utilities. C3
Communications offers systems to aggregate meter data from a variety of
technologies and vendor products which span multiple communication mode
infrastructures including broadband, wireless network, power line carrier and
telephony-based systems. In January 1997, ChoiceCom was formed to offer local
telephone service, long distance, and data communications services to customers
in the four-state region where CSW operates, with an emphasis on the business
customer market. During its first year, ChoiceCom established operations in
Texas and plans to expand to the other three states under a five year business
plan.
EnerShop provides energy services to commercial, industrial, institutional
and governmental customers in Texas. These services help reduce customers'
operating costs through increased energy efficiencies and improved equipment
operations. EnerShop utilizes the skills of local trade allies in offering
services that include facility analysis; project management; engineering design,
equipment procurement and construction; and performance monitoring.
CSW Energy Services will spearhead CSW's competitive efforts in the retail
electricity markets of states outside of CSW's historical service territories.
CSW Energy Services will not only attempt to secure electricity supply business
in states which soon will permit retail competition, but will also extend CSW's
business reach and name recognition beyond CSW's traditional customer base. In
March 1998 CSW Energy Services signed its first major supply contract in
California.
CSW Credit was originally formed to purchase, without recourse, accounts
receivable from the U.S. Electric Operating Companies to reduce working capital
requirements. In addition, because CSW Credit's capital structure is more
leveraged than that of the U.S. Electric Operating Companies, CSW's overall cost
of capital is lower. Subsequent to its formation, CSW Credit's business has
expanded to include the purchase, without recourse, of accounts receivable from
certain non-affiliated parties subject to limitations imposed by the SEC under
the Holding Company Act. CSW Leasing has investments in leveraged leases.
COMPETITION AND INDUSTRY CHALLENGES
Competitive forces at work in the electric utility industry are affecting
the CSW System and electric utilities generally. Current legislative and
regulatory initiatives are likely to result in even greater competition in both
the wholesale and retail markets in the future. As competition in the industry
increases, the U.S. Electric Operating Companies will have the opportunity to
5
seek new customers and at the same time be at risk of losing customers to other
competitors. Additionally, the U.S. Electric Operating Companies will continue
to compete with suppliers of alternative forms of energy, such as natural gas,
fuel oil and coal, some of which may be cheaper than electricity. As a whole,
the U.S. Electric Operating Companies believe that their prices for electricity
and the quality and reliability of their service currently place them in a
position to compete effectively in the marketplace. In light of these changes,
CSW continues to seek opportunities to expand its business operations that are
not regulated by state utility commissions (The foregoing statement constitutes
a forward looking statement within the meaning of Section 21E of the Exchange
Act. Actual results may differ materially from such projected information due to
changes in the underlying assumptions. See FORWARD LOOKING INFORMATION).
To address the anticipated changes in the electric utility industry and
to properly align its business operations with its non-regulated activities, CSW
has functionally reorganized its business operations into six distinct lines of
business. These business lines fall into both the regulated and non-regulated
categories. In addition, given the expected deregulation of the utility
industry, certain aspects of the business lines will eventually cease to be
regulated. Consequently, CSW's operating structure is designed to accommodate
both the current business environment as well as the future. The six business
lines are: (i) electricity generation; (ii) energy delivery; (iii) energy
services; (iv) international energy operations; (v) energy trading; and (vi)
telecommunications.
For additional information regarding competition and industry challenges,
including legislative initiatives at both the state and federal level, see ITEM
7. MD&A.
RATES AND REGULATION
The CSW System is subject to the jurisdiction of the SEC under the Holding
Company Act with respect to the issuance of securities, certain acquisition and
divestiture activities, certain affiliate transactions and other matters. The
Holding Company Act generally limits the operations of a registered holding
company to that of a single integrated public utility system, plus such
additional businesses as are functionally related to such system. The U.S.
Electric Operating Companies have been classified as public utilities under the
Federal Power Act. Accordingly, the FERC has jurisdiction, in certain respects,
over their electric utility facilities and operations, wholesale rates, and
certain other matters. The U.S. Electric Operating Companies are subject to the
jurisdiction of various state commissions as to retail rates, accounting
matters, standards of service and, in some cases, issuances of securities,
certification of facilities and extensions or divisions of service territories.
Franchises
The U.S. Electric Operating Companies hold franchises to provide electric
service in various municipalities within their service areas. These franchises
have varying provisions and expiration dates including, in some cases,
termination and buy-out provisions. CSW considers the U.S. Electric Operating
Companies' franchises to be adequate for the conduct of their business.
Texas Rates - CPL, SWEPCO and WTU
The Texas Commission has original jurisdiction over retail rates in the
unincorporated areas of Texas. The governing bodies of incorporated
municipalities have original jurisdiction over rates within their incorporated
limits. Municipalities may elect, and some have elected, to surrender this
original jurisdiction to the Texas Commission. The Texas Commission has
appellate jurisdiction over rates set by incorporated municipalities.
6
In Texas, electric service areas are approved by the Texas Commission. A
given tract in a utility's overall service area may be certificated to one
utility, to one of several competing electric cooperatives or investor owned
utilities, to one of the competing municipal electric systems, or it may be
certificated to two or more of these entities. The Texas Commission has changed
these certificated areas only slightly since 1976.
Oklahoma Rates - PSO
PSO is subject to the jurisdiction of the Oklahoma Commission with respect
to retail prices. Pursuant to authority granted under RESCTA, the Oklahoma
Commission established service territorial boundary maps in all unincorporated
areas for all regulated retail electric suppliers serving Oklahoma. In
accordance with RESCTA, a retail electric supplier may not extend retail
electric service into the certified territory of another supplier, except to
serve its own facilities or to serve a new customer with an initial full load of
1,000 KW or more. RESCTA provides that when any territory certified to a retail
electric supplier or suppliers is annexed and becomes part of an incorporated
city or town, the certification becomes null and void. However, once established
in the annexed territory, a supplier may generally continue to serve within the
annexed area.
Arkansas and Louisiana Rates - SWEPCO
SWEPCO is subject to the jurisdiction of the Arkansas Commission and
Louisiana Commission with respect to retail rates, as well as the Texas
Commission as described above.
SEEBOARD Rates/Franchise
The distribution and supply businesses of SEEBOARD are principally
regulated by the Electricity Act of 1989 and by the conditions contained in
SEEBOARD's public electricity supply license. The public electricity supply
license generally continues until at least 2025, although it may be revoked upon
25 years prior notice after 2000. In addition, the public electricity supply
license may be revoked by the United Kingdom's Secretary of State in certain
specified circumstances. At the end of 1997, SEEBOARD had the sole right to
supply substantially all of the consumers in its authorized area, except where
demand exceeds 100 KW. However, beginning September 1, 1998, on a phased-in
basis, the regional electricity companies' supply businesses, including
SEEBOARD's, will no longer be protected by a franchise. The original April 1,
1998 start up date to full competition was delayed due to information technology
issues.
Most of the income of the distribution business is regulated by a formula
set by the DGES based upon, among other factors, the United Kingdom Retail Price
Index. The formula generally sets a cap on the average price per unit of
electricity distributed, with allowed annual increases based upon changes in the
United Kingdom Retail Price Index plus a percentage factor set from time to time
by the DGES. The DGES is not scheduled to review the allowed distribution
charges for the regional electricity companies, including SEEBOARD, until 2000,
although the DGES may reopen the review before such time under certain
circumstances.
The prices charged by SEEBOARD in its franchise supply business are also
determined from a formula set from time to time by the DGES. The formula
generally provides for the pass through to customers of certain costs incurred
by SEEBOARD in supplying the electricity, which includes electricity purchase
costs, transmission charges, and distribution costs, together with an allowed
margin as determined by the DGES. All holders of a second-tier license,
including SEEBOARD, who supply electricity to non-franchise customers (i.e.,
demand of 100 KW or above) must pay charges to the host regional electricity
company for the use of its distribution network.
7
Nuclear Regulation - CPL
Ownership of an interest in a nuclear generating unit exposes CPL and,
indirectly, CSW to regulation not common to a fossil fuel generating unit. Under
the Atomic Energy Act of 1954 and the Energy Reorganization Act of 1974,
operation of nuclear plants is intensively regulated by the NRC, which has broad
power to impose licensing and safety-related requirements. Along with other
federal and state agencies, the NRC also has extensive regulations pertaining to
the environmental aspects of nuclear reactors. The NRC has the authority to
impose fines and/or shut down a unit until compliance is achieved, depending
upon its assessment of the severity of the situation. For additional information
regarding STP, see ITEM 7. MD&A.
Environmental Regulation
For a discussion of regulation by the various environmental agencies that
applies to the CSW System, see ENVIRONMENTAL MATTERS below.
FUEL RECOVERY
The recovery of fuel costs from retail customers by the U.S. Electric
Operating Companies is subject to regulation by the state utility commissions in
the states in which they operate. All of the U.S. Electric Operating Companies'
contracts with their wholesale customers contain FERC approved fuel-adjustment
provisions for recovery of fuel costs.
Texas Fuel Recovery - CPL, SWEPCO and WTU
Electric utilities in Texas, including CPL, SWEPCO and WTU, are not
allowed to make automatic adjustments to recover changes in fuel costs from
retail customers. A utility is allowed to recover its known or reasonably
predictable fuel costs through a fixed fuel factor. The Texas Commission
established procedures whereby each utility under its jurisdiction may petition
to revise its fuel factor every six months according to a specified schedule.
Fuel factors may also be revised in the case of emergencies or in a general rate
proceeding. Fuel factors are in the nature of temporary rates and the utility's
collection of revenues by such factors is subject to adjustment at the time of a
fuel reconciliation. Under these procedures, at its semi-annual adjustment date,
a utility is required to petition the Texas Commission for a surcharge or to
make a refund when it has materially under- or over-collected its fuel costs and
projects that it will continue to materially under- or over-collect. Material
under- or over-collections including interest are defined as variances of four
percent or more of the most recent Texas Commission adopted annual estimated
fuel cost for the utility. A utility does not have to revise its fuel factor
when requesting a surcharge or refund. An interim emergency fuel factor order
must be issued by the Texas Commission within 30 days after such petition is
filed by the utility. Final reconciliation of fuel costs is made through a
reconciliation proceeding, which may contain a maximum of three years and a
minimum of one year of reconcilable data, and must be filed with the Texas
Commission no later than six months after the end of the period to be
reconciled. In addition, a utility must include a reconciliation of fuel costs
in any general rate proceeding regardless of the time since its last fuel
reconciliation proceeding. Any fuel costs that are determined to be unreasonable
in a reconciliation proceeding are not recoverable from retail customers.
Oklahoma Fuel Recovery - PSO
In general, MWH sales to PSO's retail customers are made at rates which
include a service level fuel cost adjustment factor reflecting the difference
between projected fuel and purchased power costs and the fuel rate embedded in
PSO's base rates. The factors are determined semi-annually and are based upon
projected fuel, natural gas transportation, and purchased power costs. Any
difference between projected and actual costs is included in the fuel recovery
calculation for future periods. Oklahoma law requires that an examination of
8
PSO's retail fuel cost adjustment factor be performed annually by the Oklahoma
Commission which approves the utility's embedded fuel rate per KWH.
Arkansas and Louisiana Fuel Recovery - SWEPCO
SWEPCO's retail rates currently in effect in Louisiana are adjusted based
on SWEPCO's cost of fuel in accordance with a fuel cost adjustment which is
applied to each billing month based on the second previous month's average cost
of fuel. Provision for any over- or under-recovery of fuel costs is allowed
under an automatic fuel clause. Under SWEPCO's fuel adjustment rider currently
in effect in Arkansas, the fuel cost adjustment is applied to each billing month
on a basis which permits SWEPCO to recover the level of fuel cost experienced
two months earlier. SWEPCO's fuel recovery mechanisms are subject to the
jurisdiction of the Arkansas Commission and the Louisiana Commission.
Recoverability of Fuel Costs
Under current regulation, the U.S. Electric Operating Companies recover
all their material fuel costs from their customers. The inability of any U.S.
Electric Operating Company to recover its fuel costs under the procedures
described above could have a material adverse effect on such company's results
of operations and financial condition.
See ITEM 7. MD&A and ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS
for further information with respect to regulatory, rate and fuel proceedings.
FUEL SUPPLY AND PURCHASED POWER
The U.S. Electric Operating Companies' present net dependable summer
rating power generation capabilities and the type of fuel used are set forth in
ITEM 2. PROPERTIES. Information concerning energy sources and cost data for the
years 1995 through 1997 is presented in the following tables. In addition,
detailed fuel cost and consumption information for 1997 is also presented.
1997 1996 1995
--------------------
CSW
Source of Energy (based on MW)
Natural Gas 36% 36% 43%
Coal 41 39 33
Lignite 9 9 9
Nuclear 7 8 7
Other -- 1 --
--------------------
Total Generated 93 93 92
Purchased Power 7 7 8
--------------------
Total 100% 100% 100%
--------------------
Fuel cost data
Average Btu per net KWH 10,405 10,440 10,299
Cost per MMBtu $1.83 $1.81 $1.58
Cost per KWH generated 1.90 1.89 1.63
cents cents cents
Cost, including purchased power, as a
percentage of revenue 38.1% 37.4% 35.0%
9
1997 1996 1995
--------------------
CPL
Source of Energy (based on MW)
Natural Gas 50% 42% 51%
Coal 18 22 20
Nuclear 22 22 23
--------------------
Total Generated 90 86 94
Purchased Power 10 14 6
--------------------
Total 100% 100% 100%
--------------------
Fuel cost data
Average Btu per net KWH 10,386 10,391 10,175
Cost per MMBtu $1.83 $1.62 $1.37
Cost per KWH generated 1.90 1.68 1.39
cents cents cents
Cost, including purchased power, as a
percentage of revenue 32.9% 30.8% 28.7%
PSO
Source of Energy (based on MW)
Natural Gas 39% 43% 56%
Coal 48 46 37
--------------------
Total Generated 87 89 93
Purchased Power 13 11 7
--------------------
Total 100% 100% 100%
--------------------
Fuel cost data
Average Btu per net KWH 10,264 10,225 10,151
Cost per MMBtu $1.98 $2.04 $1.73
Cost per KWH generated 2.03 2.09 1.75
cents cents cents
Cost, including purchased power, as a
percentage of revenue 46.4% 45.1% 43.0%
SWEPCO
Source of Energy (based on MW)
Natural Gas 12% 15% 18%
Coal 52 45 45
Lignite 26 26 27
Other -- 4 --
--------------------
Total Generated 90 90 90
Purchased Power 10 10 10
--------------------
Total 100% 100% 100%
--------------------
Fuel cost data
Average Btu per net KWH 10,554 10,606 10,531
Cost per MMBtu $1.69 $1.76 $1.61
Cost per KWH generated 1.79 1.87 1.70
cents cents cents
Cost, including purchased power, as a
percentage of revenue 43.4% 45.1% 40.3%
10
1997 1996 1995
--------------------
WTU
Source of Energy (based on MW)
Natural Gas 37% 46% 58%
Coal 36 35 32
--------------------
Total Generated 73 81 90
Purchased Power 27 19 10
--------------------
Total 100% 100% 100%
--------------------
Fuel cost data
Average Btu per net KWH 10,275 10,568 10,370
Cost per MMBtu $1.98 $2.01 $1.83
Cost per KWH generated 2.03 2.12 1.90
cents cents cents
Cost, including purchased power, as a
percentage of revenue 42.6% 43.5% 42.1%
1997
Fuel Type Cost 1997 Consumption
per MMbtu (millions)
- ------------------------------------------------
MMbtus Mcfs Tons
CSW
Natural gas $2.67 254 249
Coal 1.45 280 16
Lignite 1.19 65 5
Nuclear 0.51 52
Composite 1.83
CPL
Natural gas $2.53 124 121
Coal 1.38 41 2
Nuclear 0.51 52
Composite 1.83
PSO
Natural gas $2.89 67 65
Coal 1.22 81 4
Composite 1.98
SWEPCO
Natural gas $2.65 32 32
Coal 1.69 129 8
Lignite 1.19 65 5
Composite 1.69
WTU
Natural gas $2.81 31 31
Coal 1.09 29 2
Composite 1.98
Natural Gas
The U.S. Electric Operating Companies purchase their natural gas from a
number of suppliers operating in and around their service territories. In 1997,
approximately 36% of the U.S. Electric Operating Companies' total natural gas
purchases were made under long-term contracts and approximately 64% came from
short-term contracts and spot market purchases.
11
CPL
CPL's eight gas-fired electric generating plants are supplied by a
portfolio of long-term and short-term natural gas purchase agreements through
multiple natural gas pipeline systems. Approximately 48% of CPL's total natural
gas requirements in 1997 were purchased under long-term arrangements
representing both purchase obligations and discretionary purchases. The balance
of CPL's natural gas requirements was acquired under short-term arrangements
from the spot market.
PSO
PSO's six gas-fired electric generating plants are supplied by a portfolio
of long-term and short-term natural gas purchase agreements. In 1997,
approximately 37% of PSO's natural gas requirements were provided under firm
contracts with the remaining requirements acquired from the spot market. In
order to comply with an Oklahoma Commission order issued in 1991, PSO has
contracted with two pipeline suppliers to connect to four of the natural
gas-fired generating units. Duke Energy Field Services, Inc. is now connected to
Riverside Power Station, and ONEOK Gas Marketing Company is connected to
Riverside Power Station, Northeastern Power Station, Southwestern Power Station
and Tulsa Power Station. Transok, a former affiliate, is still connected to all
six plants. These additional connections will give PSO greater access to
competitive supplies.
SWEPCO
SWEPCO purchased approximately 97% of its natural gas requirements in 1997
pursuant to spot purchase contracts. Since SWEPCO's five gas-fired electric
generating plants are used primarily for peaking requirements, a majority of
SWEPCO's natural gas requirements will continue to be purchased on the spot
market and will be subject to market conditions.
WTU
WTU purchases its natural gas requirements from numerous suppliers. The
long-term purchase contract with Lone Star Gas Company was renegotiated into a
long-term transportation agreement with Lone Star Pipeline Company during the
latter part of 1997. This new agreement will allow WTU to buy natural gas from
alternative suppliers. In 1997, WTU purchased approximately 22% of its natural
gas requirements under firm contracts with Lone Star Gas Company, and the
remaining 78% was purchased from a number of suppliers on the spot market.
Coal and Lignite
The U.S. Electric Operating Companies purchase coal from a number of
suppliers. In 1997, the U.S. Electric Operating Companies purchased
approximately 86% of their total coal purchases under long-term contracts with
the balance procured on the spot market. The coal for the CSW U.S. Electric
System plants comes primarily from Wyoming and Colorado mines which are located
between 1,000 and 1,700 rail miles from the generating plants.
Oklaunion - CPL, PSO and WTU
The jointly-owned Oklaunion plant purchases coal under a coal supply
contract with Caballo Coal Company which accounts for approximately 68% of the
total 1997 Oklaunion coal requirements for WTU, 68% for CPL and 69% for PSO with
the balance procured on the spot market. As of December 31, 1997, CPL's share of
the year-end 1997 coal inventory at Oklaunion was approximately 22,000 tons,
representing a 29-day supply. PSO's share was approximately 41,000 tons,
representing a 27-day supply. WTU's share was approximately 178,000 tons,
representing a 33-day supply.
12
Burlington Northern supplies railcars to Oklaunion for the transportation
of coal pursuant to a tariff filed with the Interstate Commerce Commission,
whose authority in the matter was transferred to the STB effective January 1,
1996. In a decision issued May 3, 1996, the STB declared the rate set forth in
Burlington Northern's tariff of $19.36 per ton to be unreasonably high and
imposed a maximum rate of $13.68 per ton. On July 2, 1996, Burlington Northern
established the new rate for the transportation of coal to Oklaunion. Burlington
Northern appealed the May 3, 1996 decision and a related June 25, 1996 decision
to the U.S. Court of Appeals for the District of Columbia Circuit. On May 23,
1997, the STB decisions were upheld. Subsequently, on October 24, 1997, the STB
ordered Burlington Northern to pay reparations, including interest, to WTU on or
before November 24, 1997. On November 24, 1997, Burlington Northern paid WTU
approximately $12.4 million. WTU's share of this amount was $7 million; PSO's
share was $1.9 million; CPL's share was approximately $1 million, and the
outside participants' share was $2.5 million. WTU, CPL and PSO each credited its
respective fuel expense in November 1997 for the refund amounts.
Coleto Creek - CPL
CPL has a long-term coal supply agreement with Colowyo Coal Company
covering approximately 25% of the coal requirements of its Coleto Creek plant.
During 1997, this agreement was suspended and replaced with an agreement
pursuant to which both coal and coal transportation, using CPL-owned railcars,
were provided by Colowyo Coal Company, which, in turn, entered into
transportation agreements with Southern Pacific Transportation Company.
Approximately 83% of Coleto Creek's deliveries were furnished under this
agreement. The balance of the plant's coal deliveries resulted from spot
purchases of Powder River Basin coal that was delivered under spot rail
transportation agreements. Additionally, approximately 26,000 tons of coal were
purchased from a supplier in Columbia and transported via ship to the Port of
Corpus Christi where it was then transferred by train to the plant. At December
31, 1997, CPL had approximately 144,000 tons of coal in inventory at Coleto
Creek, representing a 21-day supply.
During 1998, CPL intends to purchase Powder River Basin coal on the spot
market for approximately 50% of the Coleto Creek plant requirements and will
transport such coal pursuant to a rail transportation agreement with Union
Pacific. The remainder of CPL's coal will be purchased from the Colowyo Coal
Company. This coal will also be transported by Union Pacific. As a result of the
recent merger between Union Pacific and the Southern Pacific Transportation
Company, Union Pacific is currently the only rail carrier with access to the
Coleto Creek Plant. In 1994, CPL instituted a proceeding at the Interstate
Commerce Commission requesting a reasonable rate for the 16 miles transported
from Victoria, Texas to Coleto Creek. Southern Pacific Transportation Company
moved to dismiss the complaint and, in a decision issued December 31, 1996, the
STB granted the motion. CPL has appealed this decision to the U.S. Court of
Appeals for the Eighth Circuit.
Northeastern Station - PSO
PSO has a contract with Kerr-McGee Coal Corporation, which substantially
covers the coal supply for PSO's Northeastern Station coal units through at
least 2004. Coal delivery is by unit trains from mines located in the Gillette,
Wyoming vicinity, a distance of about 1,100 rail miles from Northeastern
Station. PSO owns sufficient railcars for operation of six unit trains. Coal is
transported to Northeastern Station pursuant to a long-term contract with
Burlington Northern. The plant is also equipped to accept deliveries from Union
Pacific. At December 31, 1997, PSO had approximately 269,000 tons of coal in
inventory at Northeastern Station representing a 22-day supply.
Welsh and Flint Creek - SWEPCO
The long-term coal supply for SWEPCO's Welsh plant and its 50% owned Flint
Creek plant is provided under a contract with Cyprus/Amax. Coal under this
contract is mined near Gillette, Wyoming, a distance of about 1,500 and 1,100
13
miles, respectively, from the Welsh and Flint Creek plants. Coal is delivered to
the plants under rail transportation contracts with Burlington Northern and the
Kansas City Southern Railroad Company having expiration dates ranging between
1997 and 2007. SWEPCO owns or leases under long-term leases sufficient railcars
and spares for operation of fifteen unit trains. SWEPCO has supplemented its
railcar fleet from time to time with short-term leases. At December 31, 1997,
SWEPCO had coal inventories of approximately 502,000 tons at Welsh representing
a 25-day supply and approximately 179,000 tons at Flint Creek representing a
24-day supply. See ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and NOTE
3. COMMITMENTS AND CONTINGENT LIABILITIES for additional information.
Pirkey and Dolet Hills - SWEPCO
SWEPCO has acquired lignite leases covering an aggregate of about 27,000
acres near the Henry W. Pirkey power plant. Sabine Mining Company is the
contract miner of these reserves. At December 31, 1997, approximately 231,000
tons of lignite were in SWEPCO's inventory at the Pirkey plant representing a
19-day supply. Another 25,000 acres are jointly leased in equal portions by
SWEPCO and CLECO in the Dolet Hills area of Louisiana near Dolet Hills Power
Plant. The DHMV is the contract miner for these reserves. At December 31, 1997,
SWEPCO had 161,000 tons of lignite in inventory at the Dolet Hills plant
representing a 28-day supply. In the opinion of the management of SWEPCO, the
acreage under lease in these areas contains sufficient reserves to cover the
anticipated lignite requirements for the estimated useful lives of the
lignite-fired plants.
Nuclear Fuel - CPL
The supply of fuel for STP involves a complex process. This process
includes the acquisition of uranium concentrate, the conversion of uranium
concentrate to uranium hexafluoride, the enrichment of uranium hexafluoride into
the isotope U235, the fabrication of the enriched uranium into fuel rods and
incorporation of fuel rods into fuel assemblies. The fuel assemblies are the
final product loaded into the reactor core. The time associated with this
process requires that fuel decisions be made years in advance of the actual need
to refuel the reactor. Fuel requirements for STP are being handled by the
STPNOC.
Outages are necessary approximately every 18 months for refueling. Because
STP's fuel costs are significantly lower than any of the other CPL units, CPL's
average fuel costs are expected to be higher whenever an STP unit is down for
refueling or maintenance.
CPL and the other STP participants have entered into contracts with
suppliers for 100% of the uranium concentrate sufficient for the operation of
both STP units through April 2001, with additional flexible contracts to provide
69% of the uranium concentrate needed for STP through 2002. In addition, CPL and
the other STP participants have entered into contracts with suppliers for 100%
of the nuclear fuel conversion service sufficient for the operation of both STP
units through November 1998, with additional flexible contracts to provide at
least 50% of the conversion service needed for STP through 2002. Enrichment
contracts were secured for a 30-year period from the initial operation of each
unit. The STP participants have canceled the enrichment requirements for the
period from October 2000 to September 2007 under a ten-year no-cost termination
provision of the enrichment contracts. The STP participants believe that other,
lower cost options will be available in the future. CPL and the other STP
participants have entered into additional flexible contracts to provide
enrichment service from October 2000 to December 2004. Also, nuclear fuel
fabrication services have been contracted for operation through 2005 for Unit 1
and 2006 for Unit 2. Although CPL and the other STP owners cannot predict the
availability of uranium and related services, CPL and the other STP owners do
not currently expect to have difficulty obtaining uranium and related services
required for the remaining years of STP operation.
14
The Energy Policy Act has provisions for the recovery of a portion of the
costs associated with the decommissioning and decontamination of the gaseous
diffusion plants used in the enrichment process. These costs are being recovered
on the basis of enrichment services purchased by utilities from the DOE prior to
October of 1992. The total annual assessment for all domestic utilities is
limited to $150 million per federal fiscal year and assessable until October
2007. The STP assessment will be approximately $2.0 million each year with CPL's
share being 25.2% of the annual STP assessment.
The Nuclear Waste Policy Act of 1982, as amended, requires the DOE to
develop a permanent high level waste disposal facility for the storage of spent
nuclear fuel by 1998. The DOE last estimated that the permanent facility will be
available in 2010. The DOE will take possession of all spent fuel generated at
STP as a result of a contract CPL and other STP participants have entered into
with the DOE. STP has on-site storage facilities with the capability to store
all the spent nuclear fuel generated by the STP units over their lives.
Therefore, the DOE delay in providing the disposal facility will not impact the
operation of the STP units. Under provisions of the Nuclear Waste Policy Act of
1992, a one-mill per KWH assessment on electricity generated and sold from
nuclear reactors funds the DOE waste disposal program.
Risks of substantial liability could arise from the operation of STP and
from the use, handling, disposal and possible radioactive emissions associated
with nuclear fuel. While CPL carries insurance, the availability, amount and
coverage thereof is limited and may become more limited in the future. The
available insurance may not cover all types or amounts of loss or expense which
may be experienced in connection with the ownership of STP. See ITEM 8-NOTE 3.
COMMITMENTS AND CONTINGENT LIABILITIES for information relating to nuclear
insurance.
Governmental Regulation
The price and availability of each of the foregoing fuel types are
significantly affected by governmental regulation. Any inability in the future
to obtain adequate fuel supplies or adoption of additional regulatory measures
restricting the use of such fuels for the generation of electricity might affect
the CSW U.S. Electric System's ability to economically meet the needs of its
customers and could require the U.S. Electric Operating Companies to supplement
or replace, prior to normal retirement, existing generating capability with
units using other fuels. This would be impossible to accomplish quickly, would
require substantial additional expenditures for construction and could have a
significant adverse effect on CSW's and/or the U.S. Electric Operating
Companies' financial condition and results of operations.
The Registrants are unable to predict the future cost of fuel (The
foregoing statements constitute forward looking statements within the meaning of
Section 21E of the Exchange Act. Actual results may differ materially from such
projected information due to changes in the underlying assumptions. See FORWARD
LOOKING INFORMATION). See ITEM 7. MD&A and ITEM 8-NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS for additional information concerning fuel costs.
Power Purchases and Sales
The U.S. Electric Operating Companies serve various municipalities,
electric cooperatives and public power authorities. The U.S. Electric Operating
Companies exchange power with various neighboring electric systems and engage in
electric interchanges with each other. In addition, they contract with certain
suppliers including power marketers and independent power producers for the
purchase or sale of capacity, firm energy, responsive reserves and other
wholesale services.
15
CPL - Magic Valley Electric Cooperative
CPL's largest wholesale customer, Magic Valley Electric Cooperative, is
currently served under an agreement that requires a five year notice of
termination. During 1996, the cooperative exercised such notice of termination.
Magic Valley Electric Cooperative's contract will expire July 23, 2001. During
1997, Magic Valley Electric Cooperative purchased 755 million KWHs from CPL
which represents 43% of CPL's sales for resale but only 3% of CPL's total sales.
WTU - Weatherford and Hearne
WTU began wholesale service to a new customer, the City of Weatherford,
Texas, in January 1997. Service to the City of Weatherford for its load of
approximately 55 MW will continue through the year 2001. WTU will begin
wholesale service to a new customer, the City of Hearne, Texas, in April 1998.
Service to the City of Hearne for its load of approximately 12 MW will continue
through March 2003.
ENVIRONMENTAL MATTERS
The CSW System is subject to regulation with respect to air and water
quality, solid waste standards and other environmental matters by various
governmental authorities. These authorities have continuing jurisdiction in most
cases to require modifications in facilities and operations. Any such changes in
environmental statutes or regulations could require substantial additional
expenditures to modify the CSW System's facilities and operations and could have
a material adverse effect on CSW and each of the U.S. Electric Operating
Companies' results of operations and financial condition. Violations of
environmental statutes or regulations can result in fines and other costs.
Air Quality
Air quality standards and emission limitations are subject to the
jurisdiction of state regulatory authorities in each state in which the CSW
System operates, with oversight by the EPA. In accordance with regulations of
these state authorities, permits are required for all generating units on which
construction is commenced or which are substantially modified after the
effective date of the applicable regulations.
In 1990, the U.S. Congress amended the Clean Air Act. CAAA places
restrictions on the emission of sulfur dioxide from gas-, coal- and
lignite-fired generating plants. Beginning in the year 2000, the U.S. Electric
Operating Companies will be required to hold allowances in order to emit sulfur
dioxide. The EPA issues allowances to owners of existing generating units based
on historical operating conditions. Based on the CSW U.S. Electric System
facilities plan, CSW believes that the U.S. Electric Operating Companies'
allowances are adequate to meet their needs at least through 2008. Public and
private markets are developing for trading of excess allowances.
As a result of requirements imposed by the CAAA, CSW spent approximately
$16 million over the three year period from 1995 to 1997 for annual testing of,
software modifications to, and maintenance of continuous emission monitoring
equipment. Approximately $0.6 million of this amount was spent in 1997.
Similarly, the expenditures for each of the U.S. Electric Operating Companies
are presented in the following table.
16
CPL PSO SWEPCO WTU
-------------------------------
(thousands)
Total expenditures (1995-1997) $530 $310 $469 $295
Expenditures in 1997 194 100 166 102
The CAAA also directed the EPA to issue regulations governing nitrogen
oxide emissions and requiring government studies to determine what controls, if
any, should be imposed on utilities to control toxic air emissions. The acid
rain rules have not been released. Accordingly, the impact on CSW and the U.S.
Electric Operating Companies cannot be determined at this time.
Under the Acid Rain Title IV rules of the CAAA for nitrogen oxide control
for coal units, the U.S. Electric Operating Companies have elected alternate
standards for their units under an optional provision regarding emission limits.
This will eliminate any capital expenses through 2007, if the alternate
standards are met. Approximately $150,000 was expended in 1997 towards
optimizing nitrogen oxide emissions at the coal units to safeguard against
exceeding those limits.
There is a legislative initiative in Texas to have older units, which
were grandfathered under the CAAA, operate under permits and reduce emissions.
Based upon reduction levels being discussed, the U.S. Electric Operating
Companies' cost could be approximately $131 million. The time frame has not been
established for these controls. The issue will be considered in the 1999 Texas
legislative session.
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, but the impact could be significant.
At the Kyoto Conference on Global Warming held in December 1997, U.S.
representatives agreed to a treaty which could require new limitations on
"greenhouse gases" from power plants. CSW and the U.S. Electric Operating
companies could be affected if this treaty is approved by Congress in its
present form. The impact, if any, on CSW or the U.S. Electric Operating
Companies cannot yet be determined, but the impact could be significant.
Water Quality
Water quality is subject to the jurisdiction of each of the state
regulatory authorities in which the U.S. Electric Operating Companies operate as
well as the EPA. These authorities have jurisdiction over all wastewater
discharges into state waters, establish water quality standards and issue waste
control permits covering discharges which might affect the quality of state
waters. The EPA has jurisdiction over point source discharges through the
National Pollutant Discharge Elimination System provisions of the Clean Water
Act.
RCRA and CERCLA
The RCRA and the Arkansas, Louisiana, Oklahoma and Texas solid waste rules
provide for comprehensive control of all solid wastes from generation to final
disposal. The appropriate state regulatory authorities in the states in which
the U.S. Electric Operating Companies operate have received authorization from
the EPA to administer the RCRA solid waste control program for their respective
states.
17
The operations of the U.S. Electric Operating Companies, like those of
other utility systems, generally involve the use and disposal of substances
subject to environmental laws. CERCLA, the federal "Superfund" law, addresses
the cleanup of sites contaminated by hazardous substances. Superfund requires
that PRPs fund remedial actions regardless of fault or the legality of past
disposal activities. PRPs include owners and operators of contaminated sites and
transporters and/or generators of hazardous substances. Many states have similar
laws. Theoretically, any one PRP can be held responsible for the entire cost of
a cleanup. Typically, however, cleanup costs are allocated among PRPs.
CSW's subsidiaries incur significant costs for the handling,
transportation, storage and disposal of hazardous and non-hazardous waste
materials. Unit costs for waste classified as hazardous exceed by a substantial
margin unit costs for waste classified as non-hazardous.
The U.S. Electric Operating Companies, like other electric utilities,
produce combustion and other generation by-products, such as ash, sludge, slag,
low-level radioactive waste and spent nuclear fuel. The U.S. Electric Operating
Companies own distribution poles treated with creosote or other substances. The
EPA currently exempts coal combustion by-products from regulation as hazardous
wastes. Distribution poles treated with creosote or other substances are not
expected to exhibit characteristics that would cause them to be hazardous waste.
In connection with their operations, the U.S. Electric Operating Companies also
have used asbestos, PCBs and materials classified as hazardous waste. If
additional by-products or other materials generated or used by companies in the
CSW U.S. Electric System were reclassified as hazardous wastes, or other new
laws or regulations concerning hazardous wastes were put into effect, CSW System
disposal and remedial costs could increase materially. The EPA is expected to
issue new regulations stating whether certain other materials will be classified
as hazardous.
SEEBOARD
SEEBOARD's operations are subject to regulation with respect to water
quality standards and other environmental matters by various authorities within
the United Kingdom. Under certain circumstances, these authorities may require
modifications to SEEBOARD's facilities and operations or impose fines and other
costs for violations of applicable statutes and regulations. From time to time
SEEBOARD is made aware of various environmental issues or is named as a party to
various legal claims, actions, complaints or other proceedings related to
environmental matters. Management does not expect disposition of any such
pending environmental proceedings to have a material adverse effect on CSW's
consolidated results of operations or financial condition.
PSO Sand Springs/Grandfield, Oklahoma Sites
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 was accrued by PSO in 1996, was
$479,000. PSO settled all claims in the suit in March, 1998. The settlement did
not have a material adverse effect on CSW's or PSO's results of operations or
financial condition.
PSO Compass Industries Superfund Site
PSO has received notice from the EPA that it is a PRP under CERCLA and may
be required to share in the reimbursement of cleanup costs for the Compass
Industries Superfund site which has been remediated. PSO has been named
18
defendant in a lawsuit filed in Federal District Court in Tulsa, Oklahoma on
August 29, 1994, for reimbursement of the cleanup costs. PSO's degree of
responsibility, if any, is believed to be insignificant, and management expects
that PSO will have an opportunity to pay its share of costs and remove itself
from the case. Accordingly, in 1995, PSO accrued $100,000 for this matter.
On March 19, 1996, a district judge ruled in favor of the defendants and
determined that the plaintiffs do not have a cause of action under CERCLA. The
plaintiffs may have a claim to funds expended after August 29, 1991. This
greatly reduces PSO's exposure since most of the remediation was completed prior
to this date. In October, 1996, the plaintiffs appealed this ruling, and PSO is
awaiting the outcome of this matter.
SWEPCO Biloxi, Mississippi MGP Site
SWEPCO was notified by Mississippi Power in 1994 that it may be a PRP at a
MGP site in Biloxi, Mississippi, which was formerly owned and operated by a
predecessor of SWEPCO. Since then, SWEPCO has worked with Mississippi Power on
both the investigation of the extent of contamination on the site as well as 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 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 must meet a residential usage scenario or a
commercial/industrial scenario, 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 yet determinable. SWEPCO has
incurred approximately $200,000 to date for its portion of the cleanup of this
site, and based on its preliminary estimates, anticipates that an additional $2
million may be incurred. Accordingly, SWEPCO has accrued $2 million for the
cleanup of the site.
SWEPCO Voda Petroleum Superfund Site
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 the 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.
EMFs
Research is ongoing whether exposure to EMFs may result in adverse health
effects. Although earlier studies suggested a correlation between EMFs and some
types of effects, the research to date has not established a cause-and-effect
19
relationship between EMFs and adverse health effects from electric lines.
Recently, more comprehensive studies have failed to show any correlation. CSW
cannot predict the impact on CSW or the electric utility industry if further
investigations or proceedings were to establish that the present electricity
delivery system is contributing to increased risk or incidence of health
problems.
Other Environmental Matters
From time to time the Registrants are made aware of various other
environmental issues or are named as parties to various other legal claims,
actions, complaints or other proceedings related to environmental matters.
Management does not expect disposition of any such pending environmental
proceedings to have a material adverse effect on CSW's or any of the U.S.
Electric Operating Companies' results of operations or financial condition.
See ITEM 7. MD&A, ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS
and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES, for additional
information relating to environmental matters.
20
OPERATING INFORMATION - U.S. ELECTRIC OPERATING COMPANIES
CSW
(excludes SEEBOARD)
1997 1996 1995
------------------------
Kilowatt-hour sales (millions)
Residential 17,995 17,883 16,872
Commercial 14,546 14,256 13,755
Industrial 21,087 20,266 19,321
Other retail 1,705 1,592 1,518
------------------------
Sales to retail customers 55,333 53,997 51,466
Sales for resale 7,824 8,428 8,468
------------------------
Total 63,157 62,425 59,934
------------------------
Average number of electric customers (thousands)
Residential 1,462 1,443 1,425
Commercial 214 210 206
Industrial 23 24 24
Other 13 13 13
-----------------------
Total 1,712 1,690 1,668
-----------------------
Revenue per KWH (cents)
Residential 6.96 6.95 6.75
Commercial 6.13 6.12 5.89
Industrial 3.85 3.85 3.63
Sales for Resale 3.11 3.03 2.65
Peak Load and Capability
Net system capability (MW) (1) 14,290 14,377 14,168
Maximum coincident system demand (MW) 13,105 12,613 12,314
Percentage increase in peak demand
over prior period 3.9% 2.4% 7.7%
Generation at time of peak (MW) 12,817 11,625 12,053
Percent of peak demand generated 97.8% 92.2% 97.9%
Net purchases at time of peak (MW) 288 988 261
Percent of net purchases at time of peak 2.2% 7.8% 2.1%
Date of maximum coincidentsystem demand July 28 July 22 July 28
The preceding table sets forth (i) the net system capability, including the net
amounts of contracted purchases and contracted sales, at the time of peak
demand, (ii) the maximum coincident system demand on a one-hour integrated
basis, exclusive of sales to other electric utilities and (iii) the respective
amounts and percentages of peak demand generated and net purchases and sales.
(1)Does not include 310 MW of system capability in storage and 156 MW of system
capability in 1997 as described in ITEM 2. PROPERTIES, 358 MW of system
capability in storage in 1996, 392 MW of system capability in storage in 1995
and 54 MW of SWEPCO capability in 1995 that was not available at the peak due
to fuel procurement issues.
21
CPL
1997 1996 1995
------------------------
Kilowatt-hour sales (millions)
Residential 6,771 6,680 6,223
Commercial 4,846 4,773 4,656
Industrial 7,999 7,610 7,250
Other retail 486 499 465
------------------------
Sales to retail customers 20,102 19,562 18,594
Sales for resale 1,737 2,029 1,680
------------------------
Total 21,839 21,591 20,274
------------------------
Average number of electric customers
Residential 538,700 536,500 526,900
Commercial 79,700 78,900 77,700
Industrial 5,600 5,700 5,700
Other 3,900 3,900 3,600
------------------------
Total 627,900 625,000 613,900
------------------------
Revenue per KWH (cents)
Residential 7.99 7.92 7.48
Commercial 8.26 8.13 7.63
Industrial 4.13 4.05 3.53
Sales for resale 4.06 3.56 3.10
Peak Load and Capability
Net system capability (MW) (1) 4,319 4,380 4,200
Maximum coincident system demand (MW) 4,232 4,046 3,862
Percentage increase in peak demand
over prior period 4.6% 4.8% 3.5%
Generation at time of peak (MW) 4,227 3,484 3,846
Percent of peak demand generated 99.9% 86.1% 99.6%
Net purchases at time of peak (MW) 5 562 16
Percent of net purchases at time of peak 0.1% 13.9% 0.4%
Date of maximum coincident system demand August 20 August 13 July 26
The preceding table sets forth (i) the net system capability, including the net
amounts of contracted purchases and contracted sales, at the time of peak
demand, (ii) the maximum coincident system demand on a one-hour integrated
basis, exclusive of sales to other electric utilities and (iii) the respective
amounts and percentages of peak demand generated and net purchases and sales.
(1)Does not include 60 MW of system capability in storage in 1997 as described
in ITEM 2. PROPERTIES, 108 MW of system capability in storage in 1996 and 142
MW of system capability in storage in 1995.
22
PSO
1997 1996 1995
------------------------
Kilowatt-hour sales (millions)
Residential 5,054 5,098 4,753
Commercial 4,698 4,621 4,427
Industrial 4,714 4,581 4,307
Other retail 192 81 80
------------------------
Sales to retail customers 14,658 14,381 13,567
Sales for resale 958 1,487 1,617
------------------------
Total 15,616 15,868 15,184
------------------------
Average number of electric customers
Residential 419,600 414,800 411,000
Commercial 55,300 54,400 53,800
Industrial 5,100 5,200 5,200
Other 1,400 1,400 1,400
------------------------
Total 481,400 475,800 471,400
------------------------
Revenue per KWH (cents)
Residential 5.88 5.89 5.89
Commercial 4.82 4.80 4.76
Industrial 3.44 3.45 3.43
Sales for Resale 3.23 2.64 2.12
Peak Load and Capability
Net system capability (MW) (1) 3,882 3,848 3,759
Maximum coincident system demand (MW) 3,474 3,360 3,292
Percentage increase in peak demand
over prior period 3.4% 2.1% 3.9%
Generation at time of peak (MW) 3,376 3,009 3,025
Percent of peak demand generated 97.2% 89.6% 91.9%
Net purchases at time of peak (MW) 98 351 267
Percent of net purchases at time of peak 2.8% 10.4% 8.1%
Date of maximum coincident system demand July 28 August 7 August 28
The preceding table sets forth (i) the net system capability, including the net
amounts of contracted purchases and contracted sales, at the time of peak
demand, (ii) the maximum coincident system demand on a one-hour integrated
basis, exclusive of sales to other electric utilities and (iii) the respective
amounts and percentages of peak demand generated and net purchases and sales.
(1)Does not include 250 MW of system capability in storage in 1997 as described
in ITEM 2. PROPERTIES, and 250 MW of system capability in storage in 1996 and
1995.
23
SWEPCO
1997 1996 1995
------------------------
Kilowatt-hour sales (millions)
Residential 4,549 4,487 4,406
Commercial 3,780 3,658 3,521
Industrial 6,968 6,833 6,531
Other retail 445 432 424
------------------------
Sales to retail customers 15,742 15,410 14,882
Sales for resale 6,791 6,395 5,002
------------------------
Total 22,533 21,805 19,884
------------------------
Average number of electric customers
Residential 356,600 353,200 349,000
Commercial 50,800 49,600 48,600
Industrial 5,800 5,900 5,800
Other 2,700 2,600 2,600
------------------------
Total 415,900 411,300 406,000
------------------------
Revenue per KWH (cents)
Residential 6.37 6.46 6.32
Commercial 5.08 5.19 5.03
Industrial 3.78 3.85 3.77
Sales for Resale 2.16 2.11 1.89
Peak Load and Capability
Net system capability (MW) (1) 4,636 4,554 4,783
Maximum coincident system demand (MW) 4,157 4,018 3,932
Percentage increase in peak demand
over prior period 3.5% 2.2% 11.5%
Generation at time of peak (MW) 3,839 3,608 4,022
Percent of peak demand generated 92.4% 89.8% 102.3%
Net purchases at time of peak (MW) 318 410 (90)
Percent of net purchases at time of peak 7.6% 10.2% (2.3)%
Date of maximum coincident system demand July 28 July 22 July 28
The preceding table sets forth (i) the net system capability, including the net
amounts of contracted purchases and contracted sales, at the time of peak
demand, (ii) the maximum coincident system demand on a one-hour integrated
basis, exclusive of sales to other electric utilities and (iii) the respective
amounts and percentages of peak demand generated and net purchases and sales.
(1)Does not include 54 MW of system capability in storage in 1995 that was not
available at the peak due to fuel procurement issues.
24
WTU
1997 1996 1995
------------------------
Kilowatt-hour sales (millions)
Residential 1,622 1,620 1,490
Commercial 1,223 1,203 1,152
Industrial 1,406 1,241 1,233
Other retail 580 581 549
------------------------
Sales to retail customers 4,831 4,645 4,424
Sales for resale 2,504 2,411 2,268
------------------------
Total 7,335 7,056 6,692
------------------------
Average number of electric customers
Residential 146,900 146,500 145,700
Commercial 27,800 27,600 27,000
Industrial 6,000 6,300 7,400
Other 6,000 5,700 5,600
------------------------
Total 186,700 186,100 185,700
------------------------
Revenue per KWH (cents)
Residential 7.68 7.67 7.67
Commercial 5.99 6.02 5.76
Industrial 4.05 4.22 4.17
Sales for Resale 3.55 3.69 3.26
Peak Load and Capability
Net system capability (MW) (1) 1,453 1,595 1,426
Maximum coincident system demand (MW) 1,481 1,433 1,435
Percentage increase (decrease) in peak
demand over prior period 3.3% (0.1)% 13.7%
Generation at time of peak (MW) 865 1,048 1,167
Percent of peak demand generated 58.4% 73.1% 81.3%
Net purchases at time of peak (MW) 616 385 268
Percent of net purchases at time of peak 41.6% 26.9% 18.7%
Date of maximum coincident system demand September 17 July 8 July 28
The preceding table sets forth (i) the net system capability, including the net
amounts of contracted purchases and contracted sales, at the time of peak
demand, (ii) the maximum coincident system demand on a one-hour integrated
basis, exclusive of sales to other electric utilities and (iii) the respective
amounts and percentages of peak demand generated and net purchases and sales.
(1) Does not include 156 MW of system capability for 1997 as described in
ITEM 2. PROPERTIES.
25
EMPLOYEES AND EXECUTIVE OFFICERS
The number of employees in the CSW System at December 31, 1997 is
presented in the table below. Of the employees listed below, 565 of the
positions at PSO and 805 of the positions at SWEPCO are covered under collective
bargaining agreements with the IBEW. In addition, 2,456 employees at SEEBOARD
are covered by collective agreements with several different unions. These unions
include the Amalgamated Electrical and Engineering Union, GMB, EMA, Unison and
the Transport and General Workers Union. For information related to ongoing
union negotiations at PSO, reference is made to ITEM 7. MD&A.
CSW SYSTEM EMPLOYEES
CPL 1,668
PSO 1,273
SWEPCO 1,529
WTU 907
SEEBOARD 4,161
CSW Services 1,553
Other Non-Regulated Businesses 324
------
11,415
------
EXECUTIVE OFFICERS Age at
March 1, Present Position
1998
- -------------------------------------------------------------------------------
E. R. Brooks 60 Chairman, CEO and Director
T. V. Shockley, III 52 President, Chief Operating Officer and Director
Glenn Files 50 Senior Vice President, Electric Operations
Ferd. C. Meyer, Jr. 57 Executive Vice President and General Counsel
Glenn D. Rosilier 50 Executive Vice President and Chief Financial
Officer
Thomas M. Hagan 53 Senior Vice President, External Affairs
Venita McCellon-Allen 38 Senior Vice President, Customer Relations and
Corporate Development and Assistant Corporate
Secretary
Kenneth C. Raney 46 Vice President, Associate General Counsel and
Corporate Secretary
Wendy G. Hargus 40 Treasurer
Lawrence B. Connors 46 Controller
The information in the foregoing table is included in Part I pursuant to
Regulation S-K, Item 401(b), Instruction 3. Each of the executive officers of
CSW is elected to hold office until the first meeting of CSW's Board of
Directors after the next annual meeting of stockholders. CSW's next annual
meeting of stockholders is scheduled to be held May 28, 1998. Each of the
executive officers listed in the table above has been employed by CSW or an
affiliate of CSW in an executive or managerial capacity for at least the last
five years.
26
ITEM 2. PROPERTIES.
U.S. ELECTRIC OPERATING COMPANIES
The total capabilities (MW, net dependable summer rating) of the U.S.
Electric Operating Companies, which owned the following electric generating
units or portions thereof in the case of jointly owned facilities, as of
December 31, 1997 are shown in the following table. These properties are all
located in either Arkansas, Louisiana, Oklahoma or Texas.
Natural Lignite Nuclear Other Total
Company Stations Gas MW Coal MW MW MW MW (a) MW (b)
- ---------------------------------------------------------------------
CPL 12 3,056 685 630 6 4,377(c)
PSO 8 2,629 1,006 25 3,660(c)
SWEPCO 9 1,784 1,848 842 4,474
WTU 11 847 370 11 1,228(c)
--------------------------------------------------------
CSW 40 8,316 3,909 842 630 42 13,739
--------------------------------------------------------
(a) Some plants have the capability of burning oil in combination with gas. Use
of oil in facilities primarily designed to burn gas results in increased
maintenance expense and a slight reduction in capability. PSO and WTU have
25 MW and 11 MW, respectively, of facilities primarily designed to burn oil.
(b) Data reflects only the U.S. Electric Operating Companies' portion of plants
which are jointly owned with non-affiliates. For additional information
concerning jointly owned facilities see ITEM 8-NOTE 6.
JOINTLY OWNED ELECTRIC UTILITY PLANT.
(c) Excludes 310 MW from units in storage, consisting of 60 MW at Victoria for
CPL and 250 MW at Tulsa for PSO of which 125 MW will be available in March
1998. Excludes 117 MW at Paint Creek and 39 MW at Rio Pecos for WTU which
will be available in June 1998.
All of the generating facilities described above are located on land owned
by the U.S. Electric Operating Companies or, in the case of jointly owned
facilities, jointly with other participants. The U.S. Electric Operating
Companies' electric transmission and distribution facilities are mostly located
over or under highways, streets and other public places or property owned by
others, for which permits, grants, easements or licenses (which the U.S.
Electric Operating Companies believe to be satisfactory, but without examination
of underlying land titles) have been obtained. The principal plants and
properties of the U.S. Electric Operating Companies are subject to the liens of
the first mortgage indentures under which the U.S. Electric Operating Companies'
FMBs are issued.
OTHER PROPERTIES
In addition to the generating facilities described above, CSW has
ownership interests in other electrical generating facilities, both foreign and
domestic. Information concerning these facilities is listed below.
27
Capacity Capacity Ownership
Company Location Total Committed Interest Status
-------------------------------------------------------
Operating Facilities -
United States
Brush II CSW Energy Colorado 68 68 47% QF
Ft. Lupton CSW Energy Colorado 272 272 50% QF
Mulberry CSW Energy Florida 120 110 50% QF
Orange Cogen CSW Energy Florida 103 97 50% QF
Newgulf CSW Energy Texas 85 n/a 100% IPP
Sweeny CSW Energy Texas 330 90 50% QF
------------
978 637
------------
Operating Facilities - International
Medway CSW International United Kingdom 675 675 37.5% n/a
Enertek CSW International Mexico 109 109 50% FUCO
------------
784 784
------------
CAPITAL EXPENDITURES
The CSW System, including the U.S. Electric Operating Companies, maintains
a continuing construction program, the nature and extent of which is based upon
current and estimated demands upon the system. In addition, the CSW System
requires capital to invest in new enterprises, either through equity investments
or loans to projects, when deemed appropriate. See ITEM 7. MD&A for detailed
information related to historical and projected capital expenditures.
ITEM 3. LEGAL PROCEEDINGS.
The Registrants are parties to various legal claims, actions and
complaints arising in the normal course of business which are not described
herein. Management does not expect disposition of these matters to have a
material adverse effect on any of the Registrants' results of operations or
financial condition. See ITEM 1. BUSINESS, ITEM 7. MD&A and ITEM 8-NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS for information relating to pending legal,
environmental and regulatory proceedings.
28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
CSW None.
CPL None.
PSO None.
SWEPCO None.
WTU None.
29
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
CSW COMMON STOCK INFORMATION
1997 1996
Market Price Dividends Market Price Dividends
High Low Paid High Low Paid
------- ------ ---------- ------- ------- ----------
First Quarter $25 3/4 $21 1/4 43.5(cent) $28 1/2 $26 3/8 43.5(cent)
Second Quarter 22 1/8 18 1/4 43.5 28 7/8 26 1/2 43.5
Third Quarter 22 7/16 19 3/4 43.5 28 1/2 25 3/4 43.5
Fourth Quarter 27 5/16 20 5/8 43.5 28 25 1/2 43.5
CSW's common stock is traded under the ticker symbol CSR and listed on
the New York Stock Exchange, Inc. and Chicago Stock Exchange, Inc. Market prices
were obtained from the composite listing of all closing prices on CSW Common
trades as reported on Bloomberg Financial Commodities News.
In January 1998, CSW's board of directors elected to maintain the
quarterly dividend, payable on February 27, 1998, to stockholders of record on
February 9, 1998, unchanged at $0.435 per share, or an indicated rate of $1.74
per year.
CSW plans to continue to pay dividends on its common stock until the
closing of the AEP Merger at approximately the same times and at rates per share
as was paid during 1997, subject to continuing evaluation of CSW's financial
condition and earnings by the CSW board of directors. Traditionally, the CSW
board of directors has declared dividends to be payable on the last business day
of February, May, August, and November.
There were approximately 65,000 record holders of CSW's common stock as
of March 6, 1998. See NOTE 12. COMMON STOCK for information on CSW Common.
CPL, PSO, SWEPCO AND WTU COMMON STOCK INFORMATION
All of the outstanding shares of common stock of the U.S. Electric
Operating Companies are owned by CSW. Consequently, there is no market for their
common stock. Cash dividends declared and paid to CSW on their common stock for
1997 and 1996 are presented in the following table.
CPL PSO SWEPCO WTU
-------- ------- -------- -------
(thousands)
1997 $157,000 $59,000 $90,000 $26,000
1996 $128,000 $35,000 $44,000 $19,000
During 1997, the common stock dividends paid to CSW by the U.S.
Electric Operating Companies were higher than 1996 because of increased earnings
available for common in 1997 at the U.S. Electric Operating Companies. This
resulted primarily from charges associated with certain investments for plant
sites, engineering studies and lignite reserves of the U.S. Electric Operating
Companies during 1996. For information related to restrictions on the ability of
the U.S. Electric Operating Companies to pay dividends to CSW, see NOTE 8.
LONG-TERM DEBT.
CSW
2-1
Reference is made to the page numbers noted in the table below for the locations
of the following items:
ITEM 6. SELECTED FINANCIAL DATA.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page Number
CSW CPL PSO SWEPCO WTU
----- ----- ----- ------ -----
SELECTED FINANCIAL DATA 2-4 2-81 2-95 2-108 2-121
MD&A (1) 2-5 2-5 2-5 2-5 2-5
RESULTS OF OPERATIONS 2-29 2-82 2-96 2-109 2-122
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 2-35 2-85 2-98 2-111 2-124
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 2-76 2-92 2-105 2-118 2-131
REPORT OF MANAGEMENT 2-79 2-93 2-106 2-119 2-132
(1) In 1997 CSW combined the MD&A sections of the Registrants except for the
Results of Operations which are located at the page numbers indicated in
the table above.
CSW
2-2
CENTRAL AND SOUTH WEST
CORPORATION
CSW
2-3
SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended
December 31 is provided to highlight significant trends in the financial
condition and results of operations for CSW. CSW recorded the United Kingdom
windfall profits tax in the third quarter of 1997 as an extraordinary item. CSW
sold Transok in 1996. Accounting rules require the classification of both the
sale and the actual operating results prior to such sale as discontinued
operations. In addition to the Transok reclassifications, certain other
financial statement items for prior years have been reclassified to conform to
the 1997 presentation.
1997(1) 1996(2) 1995 1994 1993(3)
-------- ------- ------ ------- -------
(millions, except per share and ratio data)
INCOME STATEMENT DATA
Revenues $5,268 $5,155 $3,143 $3,105 $3,084
Income from continuing operations 329 297 377 369 247
Income before extraordinary item and
cumulative effect of changes in
accounting principles 329 429 402 394 260
Net income for common stock 153 429 402 394 308
EPS of common stock from continuing
operations $1.55 $1.43 $1.97 $1.95 $1.32
EPS of common stock $0.72 $2.07 $2.10 $2.08 $1.63
Dividends paid per share of common
stock $1.74 $1.74 $1.72 $1.70 $1.62
Average common shares outstanding 212.1 207.5 191.7 189.3 188.4
BALANCE SHEET DATA
Assets $13,451 $13,332 $13,869 $11,066 $10,604
Long-term obligations (4) 4,259 4,057 3,948 2,975 2,807
Capitalization ratios
Common stock equity 45% 47% 43% 48% 49%
Preferred stock 2 4 4 5 6
Certain Subsidiary-obligated,
mandatorily redeemable
preferred securities of
subsidiary trusts holding
solely Junior Subordinated
Debentures of such Subsidiaries 4 -- -- -- --
Long-term debt 49 49 53 47 45
(1) Earnings in 1997 decreased significantly due primarily to the accrual of
the United Kingdom Windfall Profits Tax. Also contributing to the decline
in earnings was the effect of both the CPL 1997 Final Order and the PSO
1997 Rate Settlement Agreement. Further reducing earnings in 1997 was the
settlement of litigation with El Paso and the write-offs associated with
other assets including certain regulatory assets, capitalized demand side
management energy efficiency assets and obsolete inventory.
(2) Revenues in 1996 increased significantly due to the acquisition of
SEEBOARD. Earnings in 1996 were significantly impacted by the charges
associated with certain investments for plant sites, engineering studies
and lignite reserves at the U.S. Electric Operating Companies, the
write-off of certain investments at CSW Energy and the gain realized on the
sale of Transok.
(3) Earnings in 1993 were significantly impacted by restructuring charges, the
$46 million cumulative effect of changes in accounting principles, the
establishment of reserves for fuel and other properties and prior year tax
adjustments.
(4) Long-term obligations includes long-term debt, Trust Preferred Securities
and preferred stock subject to mandatory redemption.
CSW
2-4
REGISTRANTS' COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND CENTRAL AND SOUTH WEST CORPORATION'S
RESULTS OF OPERATIONS
Reference is made to CSW's Consolidated Financial Statements and
related Notes to Consolidated Financial Statements and Selected Financial Data.
The information contained therein should be read in conjunction with, and is
essential in understanding, the following discussion and analysis. The RESULTS
OF OPERATIONS of CSW and the U.S. Electric Operating Companies precede their
financial statements.
OVERVIEW
The electric utility industry is changing rapidly as it is becoming
more competitive. In anticipation of increasing competition and fundamental
changes in the industry, CSW's management is implementing a strategic plan
designed to help position CSW to be competitive in this rapidly changing
environment and is developing an emerging global energy business.
CSW has undertaken key initiatives in the implementation of this
overall strategy and is determining new directions for the corporation's future.
One of these new directions is the proposed merger between AEP and CSW that was
announced in December 1997. CSW would become a subsidiary of AEP in the proposed
merger. The proposed merger would join two companies which are low cost
providers of electricity and would achieve greater economies of scale than
either company could achieve on its own. In 1997, CSW International doubled its
investment in a Brazilian electric distribution utility and made other
investments in Latin America. CSW continues to pursue the acquisition of the
non-nuclear generating assets of Cajun, a Louisiana member electric cooperative.
C3 Communications' joint venture limited partnership, ChoiceCom, has entered the
local telephone markets in the Texas cities of Austin, Corpus Christi and San
Antonio and plans to enter the markets of Dallas and Houston offering a variety
of telecommunications services. These events are discussed below and elsewhere
in this report.
CSW believes that, compared to other electric utilities, the CSW System
is well positioned to capitalize on the opportunities and challenges of an
increasingly deregulated and competitive market for the generation, transmission
and distribution of electricity (The foregoing statement constitutes a forward
looking statement within the meaning of Section 21E of the Exchange Act. Actual
results may differ materially from such projected information due to changes in
the underlying assumptions. See FORWARD LOOKING INFORMATION). The CSW System
benefits from economies of scale by virtue of its size and is a reliable and
relatively low-cost provider of electric power. Specifically, CSW seeks
competitive advantages through its diverse and stable customer base, competitive
prices for electricity, diversified fuel mix, extensive transmission
interconnections, diversity of regulation and financial flexibility. See RECENT
DEVELOPMENTS AND TRENDS for additional information.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW OF OPERATING, INVESTING AND FINANCING ACTIVITIES
Net cash provided by operating activities decreased $149 million during
1997 compared to 1996. The decrease was primarily attributable to the December
1997 payment of $88 million on the first installment of the windfall profits tax
imposed on SEEBOARD in the United Kingdom. In addition, 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
CSW
2-5
payment related to the settlement of litigation between CSW and El Paso all
contributed to the decrease. Offsetting part of the decrease, the U.S. Electric
Operating Companies realized greater fuel recovery during 1997 compared to 1996.
Net cash used in investing activities was $904 million in 1997 compared
to $1.3 billion in 1996. There were no acquisition expenditures during 1997
while $1.4 billion in SEEBOARD acquisition expenditures were made during 1996.
However, during 1996, CSW received $690 million in cash on the sale of Transok
and $99 million on the sale of the National Grid shares. During 1997, while
CSW's total construction expenditures decreased $14 million compared to 1996, a
combined total of approximately $294 million was invested by CSW Energy and CSW
International in 1997 on several projects compared to $124 million in 1996. In
addition, during 1997, CSW Energy made its final payment on the Ft. Lupton
cogeneration project which was more than offset by the reduction of CSW Energy's
equity investment in the Orange cogeneration project when permanent external
financing was obtained on the project.
Net cash flows from financing activities decreased substantially during
1997 compared to 1996. During 1996, CSW incurred substantial debt to finance the
acquisition of SEEBOARD. In addition, CSW sold approximately 15.5 million shares
of common stock and received net proceeds of approximately $398 million in a
primary public offering in 1996, the proceeds of which were subsequently used to
repay a portion of the debt incurred in connection with the SEEBOARD
acquisition. CSW Energy also issued $200 million in Senior Notes during 1996.
During 1997, CSW made changes in its common stock plans and stopped issuing
original shares through these plans. Consequently, $20 million in new common
stock was issued pursuant to these plans in 1997 compared to $79 million in
1996. CPL's $200 million Series BB, 6% FMBs also matured in 1997. However,
offsetting a portion of the decrease, the business trusts of CPL, PSO and SWEPCO
received cash proceeds of approximately $323 million from the issuance of Trust
Preferred Securities during 1997. These proceeds were used primarily to redeem
preferred stock and repay short-term debt of the companies.
The non-cash impacts of exchange rate differences on the translation of
foreign currency denominated assets and liabilities were recorded on a separate
line on the cash flow statement in accordance with accounting guidelines.
INTERNALLY GENERATED FUNDS
Internally generated funds, which consist of cash flows from operating
activities less common and preferred stock dividends, should meet most of the
capital requirements of the CSW System. However, CSW's strategic initiatives,
including expanding CSW's core electric utility and non-utility businesses
through acquisitions or otherwise, may require additional capital from external
sources. For a description of certain restrictions on CSW's ability to raise
capital from external sources, see PROPOSED AEP MERGER. Productive investment of
net funds from operations in excess of capital expenditures and dividend
payments is necessary to enhance the long-term value of CSW for its investors.
CSW is continually evaluating the best use of these funds. CSW's internally
generated funds totaled $343 million, $499 million and $451 million for 1997,
1996 and 1995, respectively. Internally generated funds for the U.S. Electric
Operating Companies are detailed in the following table.
CSW
2-6
1997 1996 1995
------------------------
CPL ($ - millions)
Internally Generated Funds $172 $268 $100
Construction Expenditures Provided
by Internally Generated Funds 136% 196% 66%
PSO
Internally Generated Funds $62 $107 $88
Construction Expenditures Provided
by Internally Generated Funds 78% 128% 89%
SWEPCO
Internally Generated Funds $108 $153 $100
Construction Expenditures Provided
by Internally Generated Funds 100% 165% 96%
WTU
Internally Generated Funds $69 $52 $12
Construction Expenditures Provided
by Internally Generated Funds 217% 121% 27%
CAPITAL EXPENDITURES
The CSW System's need for capital results primarily from its
construction of facilities to provide reliable electric service to its
customers, and the historical capital requirements of the CSW System have been
primarily for the construction of electric utility plant. However, current
projected capital expenditures are expected to be primarily for existing
distribution systems and for various non-utility investments. The U.S. Electric
Operating Companies maintain a continuing construction program, the nature and
extent of which is based upon current and estimated future demands upon the
system. Planned construction expenditures for the U.S. Electric Operating
Companies for the next three years are primarily to improve and expand
distribution facilities and will be funded primarily through internally
generated funds. These improvements will be required to meet the anticipated
needs of new customers and the growth in the requirements of existing customers.
CSW regularly evaluates its capital spending policies and generally
seeks to fund only those projects and investments that management believes will
offer satisfactory returns in the current environment. Consistent with this
strategy, the CSW System is likely to continue to make additional investments in
energy-related and non-utility businesses and will continue to search for
electric utility companies or other electric utility properties to acquire.
Primary sources of capital for these expenditures are long-term debt, trust
preferred securities and preferred stock issued by the U.S. Electric Operating
Companies, long-term and short-term debt issued by CSW, as well as internally
generated funds. Historically, the issuance of common stock by CSW has also been
a source of capital. CSW Energy and CSW International typically use various
forms of non-recourse project financing to provide a portion of the capital
required for their respective projects as well as utilizing long-term debt for
other investments. Although CSW and each of the U.S. Electric Operating
Companies expect to fund the majority of their respective capital expenditures
for their existing utility systems through internally generated funds, for any
significant investment or acquisition, additional funds from the capital markets
may be required. For a description of certain restrictions on CSW's ability to
raise capital from external sources, including through the issuance of common
stock, see PROPOSED AEP MERGER.
The historical and estimated capital expenditures for the CSW System,
including the U.S. Electric Operating Companies, SEEBOARD and other diversified
operations are shown in the CAPITAL EXPENDITURES table. The amounts include
construction expenditures for the U.S. Electric Operating Companies and, for
SEEBOARD and CSW's other diversified operations, construction expenditures and
net equity investments. It does not include the $2.1 billion used to acquire
SEEBOARD during 1995 and 1996. The majority of the capital expenditures for the
U.S. Electric Operating Companies for 1995 through 1997 were spent on
distribution facilities. It is anticipated that the majority of the estimated
capital expenditures for 1998 through 2000 will be for distribution facilities
as well. For a description of certain restrictions on CSW's ability to make
capital expenditures, including through the issuance of common stock, see
PROPOSED AEP MERGER (The table and statements below contain forward looking
information within the meaning of Section 21E of the Exchange Act. Actual
CSW
2-7
results may differ materially from such projected information due to changes in
the underlying assumptions. See FORWARD LOOKING INFORMATION).
CAPITAL EXPENDITURES
Estimated expenditures
1995 1996 1997 1998 1999 2000
-------------------- --------------------
(millions including AFUDC)
CSW $495 $644 $760 $569 $586 $595
CPL 155 139 130 129 157 136
PSO 102 85 82 71 75 89
SWEPCO 115 95 110 95 116 122
WTU 45 44 33 36 42 47
Estimated capital expenditures for 1998 - 2000 do not include expenditures for
acquisition-type investments
Although CSW does not believe that the U.S. Electric Operating
Companies will require substantial additions of generating capacity over the
next several years, the U.S. Electric system's internal resource plan presently
anticipates that any additional capacity needs will come from a variety of
sources including power purchases. Refer to INTEGRATED RESOURCE PLAN for
additional information regarding the U.S. Electric System's capacity needs.
INFLATION
Annual inflation rates, as measured by the U.S. Consumer Price Index,
have averaged approximately 2.4% during the three years ended December 31, 1997.
CSW believes that inflation, at this level, does not materially affect CSW's
results of operations or financial position. However, under existing regulatory
practice, only the historical cost of plant is recoverable from customers. As a
result, cash flows designed to provide recovery of historical plant costs may
not be adequate to replace plant in future years.
FINANCIAL STRUCTURE, SHELF REGISTRATIONS AND CREDIT RATINGS
As of December 31, 1997, the capitalization ratios of CSW were 45%
common stock equity, 2% preferred stock, 4% Trust Preferred Securities and 49%
long-term debt. CSW is committed to maintaining financial flexibility through a
strong capital structure and favorable securities ratings in order to access
capital markets opportunistically or when required. CSW continually monitors the
capital markets for opportunities to lower its cost of capital through
refinancing activities. The estimated embedded cost of long-term debt for CSW
and the U.S. Electric Operating Companies is shown below.
CSW 7.2%
CPL 6.8
PSO 6.9
SWEPCO 6.8
WTU 6.7
CSW can issue common stock, either through the purchase and reissuance
of shares from the open market or original issue shares, to fund its LTIP, stock
option plan, PowerShare plan and ThriftPlus plan. Following the issuance of the
CPL 1997 Original Rate Order and the decline in the market price of CSW Common,
which CSW believes was 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. Prior to
that time, CSW had issued $20 million in new common stock in 1997. CPL has shelf
registration statements on file for the issuance of up to $60 million of FMBs
and up to $75 million of preferred stock, and PSO has a shelf registration
statement on file for the issuance of up to $35 million of Senior Notes. For a
description of certain restrictions on CSW's ability to raise capital from
external sources, see PROPOSED AEP MERGER.
CSW
2-8
The current securities ratings for each of the Registrants is presented
in the following table, including the securities rating on the Trust Preferred
Securities issued by CPL Capital I, PSO Capital I and SWEPCO Capital I.
Duff & Standard
Moody's Phelps & Poor's
----------------------------------
CPL
First mortgage bonds A3 A A
Senior unsecured Baa1 A- A-
Preferred stock baa1 BBB+ A-
Trust preferred (CPL Capital I) baa1 BBB+ A-
Junior subordinated deferrable
interest debentures Baa2 -- --
PSO
First mortgage bonds A1 AA- AA-
Senior unsecured A2 A+ A
Preferred stock a3 A+ A
Trust preferred (PSO Capital I) a2 A+ A
Junior subordinated deferrable
interest debentures A3 -- --
SWEPCO
First mortgage bonds Aa3 AA AA-
Senior unsecured A1 AA- A
Preferred stock a1 AA- A
Trust preferred (SWEPCO Capital I) aa3 AA- A
Junior subordinated deferrable
interest debentures A2 -- --
WTU
First mortgage bonds A2 A+ A
Senior unsecured A3 -- A-
Preferred stock a3 A A-
CSW
Commercial paper P-2 D-2 A-2
These securities ratings may be revised or withdrawn at any time, and each
rating should be evaluated independently of any other rating.
LONG-TERM FINANCING
On April 24, 1997, PSO's business trust, PSO Capital I, sold to
underwriters in a negotiated offering $75 million, 8.00% Series A, Trust
Originated Preferred Securities due April 30, 2037. The proceeds from the sale
of these securities were used by PSO to repay short-term debt, to reimburse
PSO's treasury for the cost of reacquiring approximately $14.5 million of 4.00%
Series and 4.24% Series preferred stock, to provide working capital and for
other general corporate purposes. Settlement of the transaction occurred on May
2, 1997. PSO Capital I is treated as a subsidiary of PSO whose only assets are
the approximately $77.3 million principal subordinated debentures issued by PSO.
In addition to PSO's obligation under the subordinated debentures, PSO has also
agreed to a security obligation which represents a full and unconditional
guarantee of PSO Capital I's trust obligations.
On April 30, 1997, SWEPCO's business trust, SWEPCO Capital I, sold to
underwriters in a negotiated offering $110 million, 7.875% Series A, Trust
Preferred Securities due April 30, 2037. The proceeds from the sale of these
securities were used by SWEPCO to repay short-term debt, to reimburse SWEPCO's
treasury for the cost of reacquiring approximately $15.5 million of 4.28%
Series, 4.65% Series, 5.00% Series and 6.95% Series preferred stock, to provide
working capital and for other general corporate purposes. Settlement of the
transaction occurred on May 8, 1997. SWEPCO Capital I is treated as a subsidiary
of SWEPCO whose only assets are the approximately $113.4 million principal
subordinated debentures issued by SWEPCO. In addition to SWEPCO's obligation
CSW
2-9
under the subordinated debentures, SWEPCO has also agreed to a security
obligation which represents a full and unconditional guarantee of SWEPCO Capital
I's trust obligations.
On May 8, 1997, CPL's business trust, CPL Capital I, sold to
underwriters in a negotiated offering $150 million, 8.00% Series A, Cumulative
Quarterly Income Preferred Securities due April 30, 2037. The proceeds from the
sale of these securities were used by CPL to repay short-term debt, to reimburse
CPL's treasury for the cost of reacquiring approximately $87.5 million of 4.00%
Series, 4.20% Series, 7.12% Series and 8.72% Series preferred stock, to provide
working capital and for other general corporate purposes. Settlement of the
transaction occurred on May 14, 1997. CPL Capital I is treated as a subsidiary
of CPL whose only assets are the approximately $154.6 million principal
subordinated debentures issued by CPL. In addition to CPL's obligation under the
subordinated debentures, CPL has also agreed to a security obligation which
represents a full and unconditional guarantee of CPL Capital I's trust
obligations.
In March 1997, an affiliate of Orange Cogeneration Limited Partnership,
an entity that is 50% indirectly owned by CSW Energy and accounted for by the
equity method of accounting, issued $110 million, 8.175% Senior Secured Bonds,
due 2022. The bonds are unconditionally guaranteed by Orange Cogeneration
Limited Partnership. Concurrently, $53.2 million was distributed to CSW Energy
representing its equity investment in the Orange Cogeneration project.
SHORT-TERM FINANCING AND ACCOUNTS RECEIVABLE FACTORING
The CSW System uses short-term debt, primarily commercial paper, to
meet fluctuations in working capital requirements and other interim capital
needs. CSW has established a system money pool to coordinate short-term
borrowings for certain of its subsidiaries, primarily the U.S. Electric
Operating Companies. In addition, CSW also incurs borrowings for other
subsidiaries that are not included in the money pool. As of December 31, 1997,
CSW had a revolving credit facility totaling $1.4 billion to back up its
commercial paper program. At December 31, 1997 CSW had $721 million outstanding
in short-term borrowings. The maximum amount of short-term borrowings
outstanding during the year, which had a weighted average interest yield for the
year of 5.8%, was $725 million during December 1997. Information concerning
short-term borrowings for each of the U.S. Electric Operating Companies is
presented in the following table.
Maximum
Borrowing Amount Date of Maximum
Limit Borrowed Borrowed
-------------- -------------- -----------------
($ - millions)
CPL $300 $149 December 30, 1997
PSO 125 89 February 4, 1997
SWEPCO 150 83 April 23, 1997
WTU 65 44 April 11, 1997
CSW Credit purchases, without recourse, the accounts receivable of the
U.S. Electric Operating Companies and certain non-affiliated electric companies.
The sale of accounts receivable provides the U.S. Electric Operating Companies
with cash immediately, thereby reducing working capital needs and revenue
requirements. In addition, CSW Credit's capital structure contains greater
leverage than that of the U.S. Electric Operating Companies, so CSW's cost of
capital is lowered. CSW Credit issues commercial paper to meet its financing
needs. At December 31, 1997, CSW Credit had a $900 million revolving credit
agreement, secured by the assignment of its receivables, to back up its
commercial paper program, which had $637 million outstanding. The maximum amount
of such commercial paper outstanding during the year, which had a weighted
average interest yield of 5.6%, was $890 million during September 1997. The
average and year end amounts of accounts receivable sold during 1997 by the U.S.
Electric Operating Companies to CSW Credit are shown in the following table.
CSW
2-10
1997 1997
Average End of Year
------------ ------------
(millions)
CPL $115 $65
PSO 82 62
SWEPCO 109 77
WTU 38 59
CSW has recently made several finance-related filings with the SEC
under the Holding Company Act which, if approved, would increase CSW's financial
flexibility. In the first filing, CSW 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. Such authority would increase CSW's
flexibility to adjust its capital structure. 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 issued
an order on December 30, 1997 granting the requested authority. The third filing
requests an increase in the authorized short-term borrowing capacity for CSW and
certain of its subsidiaries. The SEC has not issued an order with respect to
this application. For a description of certain restrictions on CSW's ability to
repurchase common stock and to raise capital from external sources, see PROPOSED
AEP MERGER.
CSW ENERGY AND CSW INTERNATIONAL
In October 1996, CSW Energy issued $200 million, 6.875% Senior Notes
due 2001. The proceeds from the notes were for the acquisition, development and
construction of electric generation assets in the United States and to make
affiliate loans to CSW International.
CSW Energy has authority from the SEC to expend up to $250 million for
general development activities related to qualifying facilities and independent
power facilities. CSW Energy may seek specific authority to spend additional
amounts on certain projects subject to limitations contained in the AEP merger
agreement. See NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES, for a discussion
of CSW's investments and commitments in CSW Energy projects at December 31,
1997.
In January 1997, CSW received authority from the SEC under the Holding
Company Act to spend an amount up to 100% of consolidated retained earnings on
EWG or FUCO investments. This represents an increase in authority previously
granted under the Holding Company Act. However, the amount of any such
expenditures is subject to the terms of the AEP merger agreement. As of December
31, 1997, CSW had invested an amount equal to 49% of consolidated retained
earnings, as defined by rule 53 of the Holding Company Act, on EWG and FUCO
investments. For a description of certain restrictions on the ability of CSW and
its subsidiaries to make capital expenditures in respect of qualifying
facilities and independent power facilities and to make EWG and FUCO
investments, see PROPOSED AEP MERGER.
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RECENT DEVELOPMENTS AND TRENDS
CSW STRATEGIC RESPONSES
CSW and the U.S. Electric Operating Companies have, from time to time
considered, and expect to consider in the future, various strategies designed to
enhance CSW's competitive position and to increase its ability to anticipate and
adapt to changes in the electric utility industry. These strategies may include
business combinations with other companies, internal restructurings involving
the complete or partial separation of CSW's generation, transmission and
distribution businesses, acquisitions or dispositions of assets or lines of
business, and additions to or reductions of franchised service territories. CSW
and the U.S. Electric Operating Companies may from time to time engage in
discussions, either internally or with third parties, regarding one or more of
these potential strategies. Those discussions may be subject to confidentiality
agreements and CSW's policy is generally not to comment on such activities. No
assurances can be given that any potential transaction of the type described
above may actually occur, or, if one does occur, the ultimate effect thereof on
CSW's or any U.S. Electric Operating Company's results or operations, financial
condition or competitive position (The foregoing statement constitutes a forward
looking statement within the meaning of Section 21E of the Exchange Act. Actual
results may differ materially from such projected information due to changes in
the underlying assumptions. See FORWARD LOOKING INFORMATION).
AEP MERGER
In December 1997, AEP and CSW announced that their boards of directors
approved a definitive merger agreement. If the merger is completed, the combined
company will be a diversified electric utility serving more than 4.6 million
customers in 11 states and approximately 4 million customers outside the United
States. On January 19, 1998, CSW announced a corporate realignment to more
effectively position itself for competition and to better align itself with AEP
related to the proposed merger of the two companies. The transaction must
receive regulatory approval from federal and state authorities and must satisfy
a number of other conditions, some of which, such as CSW and AEP shareholder
approval, may not be waived by the parties. There can be no assurance that the
AEP Merger will be consummated, and if it is, the timing of such consummation or
the effect of any regulatory conditions that may be imposed on such
consummation. See PROPOSED AEP MERGER.
COMPETITION AND INDUSTRY CHALLENGES
Competitive forces at work in the electric utility industry are
impacting the CSW System and electric utilities generally. Increased competition
facing electric utilities is driven by complex economic, political and
technological factors. These factors have resulted in legislative and regulatory
initiatives that are likely to result in even greater competition at both the
wholesale and retail levels in the future. As competition in the industry
increases, the U.S. Electric Operating Companies will have the opportunity to
seek new customers and at the same time be at risk of losing customers to other
competitors. Additionally, the U.S. Electric Operating Companies will continue
to compete with suppliers of alternative forms of energy, such as natural gas,
fuel oil and coal, some of which may be cheaper than electricity. In the United
Kingdom, the franchised electricity supply business is scheduled to open to full
competition on a phased-in basis on September 1, 1998. As a result, SEEBOARD
will be able to seek customers while risking the loss of existing customers to
other competitors. As a whole, the CSW U.S. Electric System believes that,
overall, its prices for electricity and the quality and reliability of its
service currently place it in a position to compete effectively in the energy
marketplace (The foregoing statement constitutes a forward looking statement
within the meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information due to changes in the underlying
assumptions. See FORWARD LOOKING INFORMATION). See RATES AND REGULATORY MATTERS
for a discussion of several current issues impacting the CSW System.
Electric industry restructuring and the development of competition in
the generation and sale of electric power requires resolution of several
important issues, including, but not limited to: (i) who will bear the costs of
prudent utility investments or past commitments incurred under traditional
cost-of-service regulation that will be uneconomic in a competitive environment,
sometimes referred to as stranded costs; (ii) whether all customers have access
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to the benefits of competition; (iii) how, and by whom, the rules of competition
will be established; (iv) what the impact of deregulation will be on
conservation, environmental protection and other regulator-imposed programs; and
(v) how transmission system reliability will be ensured. The degree of risk to
CSW and the U.S. Electric Operating Companies associated with various federal
and state restructuring proposals aimed at resolving any or all of these issues
will vary depending on many factors, including the proposals' competitive
position and treatment of stranded utility investment resulting from such
requirements. Although the U.S. Electric Operating Companies believe they are in
a position to compete effectively in a deregulated, more competitive
marketplace, if stranded costs are not recovered from customers, then the U.S.
Electric Operating Companies may be required by existing accounting standards to
recognize potentially significant losses from unrecovered stranded costs,
especially with respect to STP (The foregoing statement constitutes a forward
looking statement within the meaning of Section 21E of the Exchange Act. Actual
results may differ materially from such projected information due to changes in
the underlying assumptions. See FORWARD LOOKING INFORMATION). See REGULATORY
ACCOUNTING for additional information.
At the federal level, several bills were introduced in Congress during
the 1997 legislative session which provided for restructuring and/or
deregulating the electric utility industry. However, no such bills were enacted
into law. In 1998, the United States Senate has progressed further in its
consideration of comprehensive energy restructuring legislation than the United
States House of Representatives. However, in the United States Senate,
differences must be resolved between those who favor legislation to repeal the
Holding Company Act and those who support repeal only in the context of
comprehensive legislation. Prospects for repeal of the Holding Company Act in
1998 are unclear.
While a majority of the states, including the four states in which the
U.S. Electric Operating Companies operate, have considered deregulation that
requires some form of retail competition, several states have enacted actual
legislation mandating retail competition including Oklahoma in which PSO
operates. CSW and the U.S. Electric Operating Companies cannot predict when and
if they will be subject to one or more of these legislative initiatives, nor can
they predict the scope or effect of such legislation on their results of
operations or financial condition. For additional information related to such
state initiatives, see INDUSTRY RESTRUCTURING INITIATIVES IN TEXAS, LOUISIANA,
OKLAHOMA AND ARKANSAS.
WHOLESALE ELECTRIC COMPETITION IN THE UNITED STATES
The Energy Policy Act, which was enacted in 1992, significantly altered
the way in which electric utilities compete. The Energy Policy Act created
exemptions from regulation under the Holding Company Act and permits utilities,
including registered utility holding companies and non-utility companies, to own
EWGs. EWGs are a relatively new category of non-utility wholesale power
producers that are free from most federal and state regulation, including
restrictions under the Holding Company Act. These provisions enable broader
participation in wholesale power markets by reducing regulatory hurdles to such
participation. The Energy Policy Act also allows the FERC, on a case-by-case
basis and with certain restrictions, to order wholesale transmission access and
to order electric utilities to enlarge their transmission systems. A FERC order
requiring a transmitting utility to provide wholesale transmission service must
include provisions generally that permit the utility to recover from the FERC
applicant all of the costs incurred in connection with the transmission services
and any enlargement of the transmission system and associated services.
Wholesale energy markets, including the market for wholesale electric power,
have been increasingly competitive since enactment of the Energy Policy Act. The
U.S. Electric Operating Companies must compete in the wholesale energy markets
with other public utilities, cogenerators, qualifying facilities, EWGs and
others for sales of electric power. While CSW believes that the Energy Policy
Act will continue to make the wholesale markets more competitive, CSW is unable
to predict whether the Energy Policy Act will adversely impact the U.S. Electric
Operating Companies.
FERC ORDERS 888 AND 889
The FERC issued Order No. 888 in 1996, which is the final comparable
open access transmission service rule. The provisions of FERC Order No. 888
provide for comparable transmission service between utilities and their
transmission customers by requiring utilities to take transmission service under
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their open access tariffs for wholesale sales and purchases and by requiring
utilities to rely on the same transmission information that their transmission
customers rely on to make wholesale purchases and sales.
In addition, the Texas Commission adopted 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. The transmission rates of the U. S. Electric Operating
Companies are under the exclusive jurisdiction of the FERC while the
transmission rates of most of the transmitting utilities in ERCOT are under the
exclusive jurisdiction of the Texas Commission. Because 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.
On December 10, 1997 the FERC issued an order regarding the U. S.
Electric Operating Companies' proposed system-wide tariff filed on November 1,
1996. The FERC's order accepted the proposed tariff subject to several
modifications, including revisions to provide for system-wide transmission
service under a single system rate. The U. S. Electric Operating Companies filed
the required compliance tariff on February 9, 1998 and are waiting for FERC's
acceptance of the revised tariff.
In 1996, the FERC issued Order No. 889 requiring transmitting utilities
to establish and operate an OASIS for the dissemination of information regarding
available transfer capability for their respective transmission systems. The
OASIS is an on-line information system that provides the same information about
the utility's transmission system to all transmission customers. The U.S.
Electric Operating Companies utilize, and participate in the OASIS systems for
ERCOT and SPP. Order No. 889 also created standards of conduct requiring
utilities to conduct any wholesale power sales business separately from their
transmission operations. The standards of conduct are designed to ensure that
utilities and their affiliates, as sellers of power, do not have preferential
access to information about wholesale transmission prices and availability.
RETAIL ELECTRIC COMPETITION IN THE UNITED STATES
Increased competition in the utility industry has resulted in increased
pressure to stabilize or reduce rates. The retail regulatory environment is
beginning to shift from traditional rate base regulation to incentive
regulation. Incentive rate and performance-based plans encourage efficiencies
and increased productivity while permitting utilities to share in the results.
Retail wheeling, a major legislative initiative which would require utilities to
"wheel" or move power from third parties to their own retail customers, is
evolving gradually. Most states either have introduced legislation or are
investigating the issue, and several states have already passed legislation
which mandates retail choice by a certain date.
CSW believes that retail competition would not be in the best interests
of CSW's and the U.S. Electric Operating Companies' security holders unless CSW
and the U.S. Electric Operating Companies receive fair recovery of the full
amounts previously invested to finance power plants. These investments, which
were reasonably incurred, were made by the U.S. Electric Operating Companies to
meet their obligation to serve the public interest, necessity and convenience.
This obligation has existed for nearly a century and remains in force under
current law. CSW intends to strongly oppose attempts to impose retail
competition without just compensation for the risks and investments CSW
undertook to serve the public's demand for electricity. For additional
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information related to retail wheeling in the United States, see HOLDING COMPANY
ACT AND LEGISLATIVE UPDATE and INDUSTRY RESTRUCTURING INITIATIVES IN TEXAS,
LOUISIANA, OKLAHOMA AND ARKANSAS.
INDUSTRY RESTRUCTURING INITIATIVES IN TEXAS, LOUISIANA, OKLAHOMA AND
ARKANSAS
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. Legislation was enacted in Oklahoma while
legislative activity 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
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, and the committees will
continue to hold hearings throughout 1998. Also, the Arkansas Commission has
initiated a series of generic restructuring dockets. The Arkansas Commission
will provide a report to the Arkansas Legislature by October 1998. In Louisiana,
a special legislative committee created by the Louisiana Senate is studying 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. The Louisiana Commission has also opened a proceeding to study
restructuring and retail competition. In Texas, the Texas Lieutenant Governor
appointed a Senate interim committee to study retail competition and
restructuring. The committee is holding a series of hearings and is scheduled to
issue a report by September 1998. Management cannot predict the outcome of the
studies in Arkansas, Louisiana and Texas or their ultimate impact on the results
of operations and financial condition of CSW, CPL, SWEPCO and WTU.
INDUSTRY RESTRUCTURING IN TEXAS
Amendments to PURA, the legal foundation of electric regulation in
Texas, became effective on September 1, 1995. Among other things, the amendments
deregulate the wholesale bulk power market in ERCOT, permit pricing flexibility
for utilities facing competitive challenges, provide for a market-driven
integrated resource planning process and mandate comparable open access
transmission service.
PURA also required that the Texas Commission adopt a rule on comparable
open transmission access by March 1, 1996. In conjunction with this rulemaking
proceeding (Project No. 14045), the chairman of the Texas Commission issued a
proposal on September 6, 1995, for the purpose of maximizing competition in the
ERCOT wholesale bulk power market. The proposal calls for the functional
unbundling of integrated utilities where distribution entities could purchase
their power requirements from any generator or set of generators in ERCOT. Those
generators which are currently regulated would be deregulated after provisions
are in place to recover stranded costs. The proposal was assigned a separate
proceeding (Project No. 15000), and after a series of workshops and technical
conferences conducted during 1996, the Texas Commission submitted a final Scope
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of Competition report to the Texas Legislature in January 1997. The final report
contains numerous recommendations to the Texas Legislature including requests
for additional regulatory authority or clarification of existing authority
including to certificate electric service resellers, the authority to adopt
consumer protection and universal service standards, the authority to determine
and allocate stranded costs to all customers, the authority to promote
unbundling, the authority to allow alternative forms of regulation, increased
authority to address mergers, authority to correct market power abuses,
authority over the ERCOT ISO and authority to permit alternative methods for
fuel cost recovery. In addition, the final report offers the Texas Legislature
four restructuring options. Option 1 maintains the regulatory status quo; Option
2 would permit utilities to voluntarily offer retail access; Option 3 would
provide for full wholesale competition; and Option 4 would provide for full
retail competition. The report's final recommendation is for the Texas
Legislature to direct the Texas Commission to prepare for full retail
competition using a careful and deliberate approach on a timetable to be
established by the Texas Legislature, but with no retail access before the year
2000. The Texas legislature considered but did not pass any of these proposals
in the 1997 legislative session.
On February 7, 1996, the Texas Commission adopted a rule governing
transmission access and pricing (Project No. 14045). The pricing method adopted
by the Texas Commission is a hybrid combination of an ERCOT-wide postage stamp
rate covering 70% of total ERCOT transmission costs and a distance-sensitive
component referred to as a vector-absolute megawatt mile which recovers the
remaining 30% of ERCOT transmission costs. The open access tariffs filed with
the FERC on February 9, 1996 did not reflect Project No. 14045 pricing. However,
on November 1, 1996, CSW filed tariffs with the FERC in accordance with FERC
Order 888 that conform to the Texas Commission's rule. See FERC ORDERS 888 AND
889 for additional information regarding the transmission pricing rules
prescribed by FERC.
By statute the Texas Commission was required to submit a report to the
1997 Texas Legislature on "methods or procedures for quantifying the magnitude
of stranded investment, procedures for allocating costs, and the acceptable
methods of recovering stranded costs." The Texas Commission initiated Project
No. 15001 to collect information to prepare the required report. In response to
the Texas Commission's order in Project 15001, CPL, SWEPCO, and WTU each filed
information on estimates of potential stranded costs. While the filings for CPL
included estimates of significant potential stranded costs, no significant
potential stranded costs were identified in the filings for SWEPCO or WTU. In
January 1998, the Texas Commission requested updated information on CPL's
stranded costs for a report that the Texas Commission is preparing for the
Senate interim committee on restructuring. See NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS for a discussion of the potential impact of potential stranded costs
relating to CPL.
The Texas Commission's Project 15002, "Scope of Competition Report," is
a report that the Texas Commission is required to present to the Texas
Legislature in each odd-numbered year detailing the scope of competition in the
electric markets and the impact of competition and industry restructuring on
customers. In addition, the report is required to include the Texas Commission's
recommendations to the Texas Legislature for further legislation. In June 1996,
CPL, SWEPCO and WTU each filed information for the Texas Commission's report.
TEXAS INDEPENDENT SYSTEM OPERATOR PLAN
In June 1996, CSW, including CPL and WTU, and more than 20 other
parties, including other investor-owned utilities, municipal power companies,
electric cooperatives, independent power producers and power marketers, filed
plans to create an ISO to manage the ERCOT power grid. The filing marks a major
step towards implementing the Texas Commission's overall strategy to create the
competitive wholesale electric market that was mandated by the Texas Legislature
in 1995. The Texas Commission approved the ISO in August 1996. Such approval
made Texas the first state in the nation to adopt a plan for a regional ISO and
a regional competitive wholesale bulk power market.
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INTEGRATED RESOURCE PLAN
In January 1997, CPL, WTU, and SWEPCO filed with the Texas Commission a
joint integrated resource plan outlining the companies' future electric needs
over a 10-year forecast horizon and the manner in which the companies propose to
meet those needs. In July 1997 the Texas Commission issued an Interim Order on
the Preliminary Plan which adopted a settlement agreement that had been reached
with all the parties in the case. The Interim Order approved the load forecast
and individual resource needs for each of the companies, as well as the request
for proposal documents to be used to procure future resource needs. The Interim
Order also approved the targeted purchase goal amounts for renewable and energy
efficiency programs, which will result in renewable and energy efficiency
programs being included in the companies' resource mix. The targeted purchase
goals were developed in response to customer input obtained through the
deliberative polling process conducted at each operating company in the summer
of 1996. A separate phase of the Integrated Resource Plan was created to address
the value of interruptible resources at CPL. That phase is expected to be
completed in March 1998. The Interim Order also required that a green pricing
tariff be filed which would allow customers who are interested in acquiring a
greater portion of their personal consumption from environmentally beneficial
generation to exercise that choice. A green pricing tariff was approved for use
in San Angelo, Texas in October 1996. A system-wide filing is expected in
mid-1998.
HOLDING COMPANY ACT AND LEGISLATIVE UPDATE
The Holding Company Act generally has been construed to limit the
operations of a registered holding company to a single integrated public utility
system, plus such additional businesses as are functionally related to such
system. Among other things, the Holding Company Act requires CSW and its
subsidiaries to seek prior SEC approval before effecting mergers and
acquisitions or pursuing other types of non-utility initiatives. Such pervasive
regulation may impede or delay CSW's efforts to achieve its strategic and
operating objectives. Consequently, CSW continues to support efforts to repeal
or modify this legislation.
In 1995, the SEC issued a report to the United States Congress
advocating repeal of the Holding Company Act, either on a conditional and
transitional basis or immediate and outright repeal. The basis for the SEC's
recommendation for repeal is that the Holding Company Act is anachronistic and
duplicative of other federal and state regulatory regimes that have developed
over the past sixty years. Following the SEC's report, there were several bills
introduced in both the United States Senate and House of Representatives in 1996
which would have repealed the Holding Company Act on a conditional and
transitional basis and transferred its oversight functions to the FERC and the
states. Another bill was introduced into the United States House of
Representatives that, in addition to repealing the Holding Company Act, would
have repealed PURPA, which among other things, requires investor owned utilities
to purchase power at their avoided cost from qualifying facilities. Although
none of these bills were enacted into law, they may suggest the form of future
legislation.
In January 1997, a bill was introduced in the United States Senate
providing for comprehensive electric utility industry restructuring and for
retail choice by December 2003, repeal of the Holding Company Act one year after
the bill is enacted, as well as repeal of the requirement that electric
utilities purchase power at their avoided cost from qualifying facilities under
PURPA. Under this bill, many of the oversight functions performed by the SEC
under the Holding Company Act would be shifted to the FERC and the states. In
addition, a bill was reintroduced in the United States House of Representatives
providing for choice of electricity suppliers at the retail level by the year
2000. Under this bill, which is substantially similar to the United States
Senate bill, the application of the Holding Company Act to a particular holding
company system would be eliminated after each state served by the electric
utility companies in that system made a determination that retail competition
existed in that state. No legislation was enacted in 1997.
In February 1997, the SEC adopted Rule 58 allowing a holding company
registered under the Holding Company Act or any of its subsidiaries, to acquire,
without prior SEC approval, the securities of any energy-related company subject
to certain limits. Under the new rule, investment in energy-related company
securities without prior SEC approval is limited to the greater of (i) $50
million and (ii) 15% of the consolidated capitalization of the registered
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holding company as reported on its most recent Form 10-Q or Form 10-K as filed
with the SEC. Rule 58 does not exempt the acquisition by a registered holding
company of the securities of an electric utility company or a gas utility
company, which remains subject to the SEC's prior approval as does the issuance
of securities for the purpose of making such exempt investments.
In 1998, the United States Senate has progressed further in its
consideration of comprehensive energy restructuring legislation than the United
States House of Representatives. However, in the United States Senate,
differences must be resolved between those who favor legislation to repeal the
Holding Company Act and those who support repeal only in the context of
comprehensive legislation. Prospects for repeal of the Holding Company Act in
1998 are unclear.
REGULATORY ACCOUNTING
Consistent with industry practice and the provisions of SFAS No. 71,
which allows for the recognition and recovery of regulatory assets, the U.S.
Electric Operating Companies have recognized significant regulatory assets and
liabilities. Management believes that the U.S. Electric Operating Companies
currently meet the criteria for following SFAS No. 71. However, in the event the
U.S. Electric Operating Companies or some portion of their business no longer
meets the criteria for following SFAS No. 71 due to deregulation or for other
reasons, a write-off of regulatory assets and liabilities would be required,
absent a means of recovering such assets or settling such liabilities in a
continuing regulated segment of the business. For additional information
regarding regulatory accounting, reference is made to NEW ACCOUNTING STANDARDS
and NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
PSO UNION NEGOTIATIONS
As previously reported, PSO and its Local Union 1002 of the IBEW have
been engaged in contract renewal negotiations. The underlying agreement expired
in September 1996 and, to date, the parties have been unable to reach an
agreement. In December 1996, PSO implemented portions of its final proposal
after declaring an impasse. The principal issue of disagreement involves PSO's
need for flexibility in a deregulated environment.
In April 1997, Oklahoma's governor signed into law an electric industry
restructuring bill. The new law mandates the implementation of retail
competition to begin on July 1, 2002. PSO believes that the new law also broke
the impasse in the contract negotiations and has resumed negotiations with the
union. At this time, PSO cannot predict the outcome of this matter. However, PSO
believes that, even in the event of a strike, its operations would continue
without a significant disruption and that a strike would not have a material
adverse effect on its results of operations or financial condition (The
foregoing statement constitutes a forward looking statement within the meaning
of Section 21E of the Exchange Act. Actual results may differ materially from
such projected information due to changes in the underlying assumptions. See
FORWARD LOOKING INFORMATION).
IMPACT OF COMPETITION AND INDUSTRY RESTRUCTURING INITIATIVES
CSW is unable to predict the ultimate outcome or impact of competitive
forces on the electric utility industry in the United States, and in the United
Kingdom or on the CSW System. As the electricity markets become more
competitive, however, the principal factor determining success is likely to be
price, and to a lesser extent reliability, availability of capacity, and
customer service. CSW and the U.S. Electric Operating Companies cannot predict
the form or effect of any federal or state electric utility restructuring
initiatives at this time. Federal and/or state electric utility restructuring
may cause impairment of significant recorded assets, material reductions of
profit margins, and/or increased costs of capital. No assurance can be made that
such events would not have a material adverse effect on CSW's or any U.S.
Electric Operating Company's results of operations, financial condition or
competitive position. (The foregoing statement constitutes a forward looking
statement within the meaning of Section 21E of the Exchange Act. Actual results
may differ materially from such projected information due to changes in the
underlying assumptions. See FORWARD LOOKING INFORMATION).
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RATES AND REGULATORY MATTERS
CPL RATE REVIEW - DOCKET NO. 14965
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 a revised 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 the CPL 1997 Final Order. The CPL 1997 Final 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 a $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
decreased depreciation by $17.4 million from CPL's rate request.
Another major provision of the CPL 1997 Final Order was the Texas
Commission's categorization of $800 million of CPL's investment in STP 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.
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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 $(24.2) $(28.7) $(41.9)
Items included in decrease in revenue
with an offsetting effect on expense:
Recovery of STP (ECOM) 20.0 20.0 20.0
Change in depreciation (11.3) (11.3) (11.3)
Decommissioning 4.3 4.3 4.3
Other 6.8 2.1 2.1
------ ------ ------
19.8 15.1 15.1
------ ------ ------
Change in current year income before tax (44.0) (43.8) (57.0)
Federal income taxes 14.8 14.8 19.3
------ ------ ------
Current year impact on net income (29.2) (29.0) (37.7)
------ ------ ------
1996 effect (18.9) -- --
------ ------ ------
Estimated impact on net income $(48.1) $(29.0) $(37.7)
------ ------ ------
CPL appealed the CPL 1997 Final Order to the State District Court of
Travis County to challenge the resolution of several issues in the rate case.
The primary issues include: (i) the classification of $800 million of invested
capital in STP as ECOM which was also assigned a lower return on equity than
non-ECOM property, (ii) the Texas Commission's use of the "Glide Path" rate
reduction methodology to be applied to rates in mid-1998 and mid-1999, and (iii)
the $18 million of disallowed affiliate transactions from CSW Services. As part
of the appeal, CPL seeks a temporary injunction to prohibit the Texas Commission
from implementing the "Glide Path" rate reduction methodology, currently
scheduled to begin in May 1998. A hearing has been set for the temporary
injunction on April 3, 1998. 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 $1.3 billion of regulatory-related assets at December 31,
1997. 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 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.
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. See NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final Order.
PSO 1997 RATE SETTLEMENT AGREEMENT
In July 1996, the Oklahoma Commission 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 Oklahoma Commission staff and other
intervenors to the proceeding filed their revenue requirements testimony. In its
filing, the Oklahoma Commission staff recommended a rate reduction of $76.8
million for PSO.
On October 15, 1997, PSO reached a stipulated agreement with parties to
settle the rate inquiry that was pending before the Oklahoma Commission. On
October 23, 1997, the Oklahoma Commission issued a final order approving the
agreement. The following table represents the financial impact of the PSO 1997
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Rate Settlement Agreement on PSO's 1997 results of operations and also an
estimate of its ongoing annual impact on net income in successive years.
Ongoing
1997 Annual
Impact Impact
-------------------
(millions)
Decrease in revenue
Refund to customers $(29.0) $--
Change in rates (2.5) (35.9)
----- -----
(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)
----- -----
(17.2) (16.2)
Write-off of deferred assets, net of tax (10.2) --
----- -----
$(27.4) $(16.2)
----- -----
The PSO 1997 Rate Settlement Agreement resulted in a material adverse
effect on PSO's results of operations for 1997 that will have a continuing
material adverse effect on its results of operations because of the rate
decrease. However, 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.
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. See NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS for additional information on the PSO 1997 Rate
Settlement Agreement.
SWEPCO LOUISIANA RATE REVIEW
In December 1997, the Louisiana Commission announced it would review
SWEPCO's rates and service. In 1993, the Louisiana Commission issued an order
initiating a review of the rates of all investor-owned utilities in the state.
Since that time, each of the other investor-owned utilities in Louisiana have
been reviewed. SWEPCO's last rate activity was an $8.2 million rate decrease,
initiated by SWEPCO and approved for its small and large industrial customers in
January 1988. Prior to that, SWEPCO's last rate increase was in 1985.
The Louisiana Commission has requested bids from consultants to perform
a review of SWEPCO's rates and charges and to review SWEPCO's quality of
service. The Louisiana Commission plans to select consultants during the second
quarter of 1998 and a timeline for the review will be determined shortly
thereafter. Management cannot predict the outcome of this review.
SEEBOARD RECENT REGULATORY ACTIONS
Following the phased-in opening of the United Kingdom domestic and
small business electricity market to competition in September 1998, customers
will be able to choose their electricity supplier. SEEBOARD will compete for
customers in its own area as well as throughout the rest of the United Kingdom.
The DGES has allowed some 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 its view of future electricity purchase costs. For SEEBOARD,
this proposal reduces prices in real terms by 6% for the regulatory year ending
March 31, 1999 and a further 3% for the following regulatory year ending March
31, 2000.
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OTHER
Reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for
information regarding fuel proceedings at CPL, SWEPCO and WTU.
PROPOSED AEP MERGER
On December 22, 1997, CSW and AEP announced that their boards of
directors had approved a definitive merger agreement for a tax-free,
stock-for-stock transaction creating a company with a total market
capitalization of approximately $28.1 billion ($16.5 billion in equity; $11.6
billion in debt and preferred stock). CSW expects the combination to be
accounted for as a pooling of interests. The transaction must satisfy many
conditions, some of which may not be waived by the parties. There can be no
assurance that the AEP Merger will be consummated.
This combination is expected to create one of the nation's preeminent
diversified electric utilities serving more than 4.6 million customers in 11
states and approximately 4 million customers outside the United States. Both
companies have low-cost generation and offer their customers in every state
prices below the national average. Over the last two years, both CSW and AEP
have ranked among the top five electric utilities in customer satisfaction in
the ACSI.
Under the merger agreement, each common share of CSW will be converted
into 0.6 shares of AEP common stock. Based upon AEP's closing price immediately
prior to the merger announcement, this represented a premium of 20% over the CSW
closing price. AEP will issue approximately $6.6 billion in stock to CSW
stockholders to complete the transaction. CSW stockholders will own
approximately 40% of the combined company. Both companies anticipate continuing
their current dividend policies until the close of the transaction.
Under the merger agreement, there will be no changes required with
respect to the public debt issues, the outstanding preferred stock or the Trust
Preferred Securities of CSW or its subsidiaries.
The companies anticipate net savings related to the merger of
approximately $2 billion over a 10-year period from the elimination of
duplication in corporate and administrative programs, greater efficiencies in
operations and business processes, increased purchasing efficiencies, and the
combination of the two workforces. At the same time, the companies will continue
their commitment to high quality, reliable service. Job reductions related to
the merger are expected to be approximately 1,050 out of a total domestic
workforce of approximately 25,000. The combined company will use a combination
of growth, reduced hiring and attrition to minimize the need for employee
separations. Organizational and staffing recommendations will be made by
transition teams of employees from both companies.
The electric systems of AEP and CSW will operate on an integrated and
coordinated basis as required by the Holding Company Act. Any fuel savings
resulting from the coordinated operation of the combined company will be passed
on to customers.
The merger agreement contains covenants and agreements that restrict
the manner in which the parties may operate their respective businesses until
the time of closing of the merger. In particular, without the prior written
consent of AEP, CSW may not engage in a number of activities that could affect
its sources and uses of funds. Pending closing of the merger, CSW's and its
subsidiaries' strategic investment activity, capital expenditures and non-fuel
operating and maintenance expenditures are restricted to specific agreed upon
projects or agreed upon amounts. In addition, prior to consummation of the
merger CSW and its subsidiaries are restricted from (i) issuing shares of common
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2-22
stock other than pursuant to employee benefit plans, (ii) issuing shares of
preferred stock or similar securities other than to refinance existing
obligations or to fund permitted investment or capital expenditures and (iii)
incurring indebtedness other than pursuant to existing credit facilities, in the
ordinary course of business or to fund permitted projects or capital
expenditures. These restrictions are not expected to limit the ability of CSW
and its subsidiaries to make investments and expenditures in amounts previously
budgeted.
The merger is conditioned, among other things, upon the approval of CSW
stockholders and several state and federal regulatory agencies. AEP shareholders
must authorize additional common stock and approve a new common stock issuance
to be used in the exchange for CSW common stock. The companies anticipate that
regulatory approvals can be obtained in 12 to 18 months from the date of
announcement. See NOTE 16. PROPOSED AEP MERGER.
OTHER MERGER AND ACQUISITION ACTIVITIES
SETTLEMENT OF LITIGATION RELATED TO TERMINATION OF EL PASO MERGER
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 El Paso 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. See NOTE 2. LITIGATION
AND REGULATORY PROCEEDINGS.
SWEPCO CAJUN ASSET PURCHASE PROPOSAL
On March 18, 1998, SWEPCO, together with the Cajun Members Committee,
which currently represents 7 of the 12 Louisiana member distribution
cooperatives that are served by Cajun, filed the SWEPCO Plan in the bankruptcy
court. Under the SWEPCO Plan, a SWEPCO affiliate or subsidiary would acquire all
of the non-nuclear assets of Cajun, comprised of the two-unit Big Cajun I
natural gas-fired plant, the three-unit Big Cajun II coal-fired plant, and
related non-nuclear assets, for $940.5 million in cash, subject to adjustment
pursuant to terms of the asset purchase agreement proposed as part of the SWEPCO
Plan. The SWEPCO Plan incorporates the terms of a settlement between the RUS,
the Cajun Members Committee, Claiborne Electric Cooperative, Inc. and SWEPCO.
The SWEPCO Plan filed March 18, 1998 replaces plans filed previously by
SWEPCO on January 15, 1998, October 26, 1996, September 30, 1996 and April 19,
1996. Two competing plans of reorganization for the non-nuclear assets of Cajun
have been filed with the bankruptcy court, each with different purchase prices,
rate paths and other provisions. Confirmation hearings in Cajun's bankruptcy
case are now scheduled through April 1998. Consummation of the SWEPCO Plan is
conditioned upon confirmation by the bankruptcy court, and the receipt by SWEPCO
and CSW of all requisite state and federal regulatory approvals in addition to
their board approvals. If the SWEPCO Plan is confirmed, the $940.5 million
required to consummate the acquisition of Cajun's non-nuclear assets is expected
to be financed through a combination of external borrowings and internally
generated funds with approximately 70% of the external borrowings funded with
non-recourse debt. There can be no assurance that the SWEPCO Plan will be
confirmed by the bankruptcy court or, if it is confirmed, that it will be
approved by federal and state regulators. For additional information regarding
the SWEPCO Cajun asset purchase proposal see NOTE 3. COMMITMENTS AND CONTINGENT
LIABILITIES.
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2-23
OTHER INITIATIVES
As described in OVERVIEW, a vital part of CSW's future strategy
involves initiatives that are outside of the traditional United States electric
utility industry due to increasing competition and fundamental changes in this
industry. In addition, lower anticipated growth rates in CSW's core United
States electric utility business combined with the aforementioned industry
factors have resulted in CSW pursuing other initiatives. These initiatives have
taken a variety of forms; however, they are all consistent with the overall plan
for CSW to develop a global energy business. CSW has restrictions on the amounts
it may spend under the AEP merger agreement. While CSW believes that such
initiatives are necessary to maintain its competitiveness and to supplement its
growth in the future, the Holding Company Act may impede or delay its ability to
successfully pursue such initiatives (The foregoing statement constitutes a
forward looking statement within the meaning of Section 21E of the Exchange Act.
Actual results may differ materially from such projected information due to
changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). See
RECENT DEVELOPMENTS AND TRENDS.
CSW ENERGY AND CSW INTERNATIONAL
CSW Energy presently owns interests in six operating power projects
totaling 978 MW which are located in Colorado, Florida and Texas. In addition to
these projects, CSW Energy has other projects in various stages of development.
In August 1997, an affiliate of CSW Energy sold 50% of its 100% interest in the
Sweeny Cogeneration project. 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 of the
330 MW electricity generating facility was completed in early 1998 with a
commercial operation date of February 1, 1998. CSW Energy did not recognize a
gain or loss on this transaction.
CSW International was organized to pursue investment opportunities in
EWGs and FUCOs. CSW International currently holds investments in the United
Kingdom, Mexico and Latin America. 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 1997, CSW
International made additional equity investments of approximately $150 million
in Latin America. The $190 million used to make the 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. CSW
International continues to seek to expand into other countries in Latin America,
Europe, and Asia that meet its investment criteria and the investment criteria
contained in the AEP merger agreement.
C3 COMMUNICATIONS
C3 Communications has two active business units; its Utility Automation
Division and a telecommunications partnership, ChoiceCom.
C3 Communications' Utility Automation Division performs consulting,
implementation and integration of utility meter automation products and services
for traditional utility companies and, as competition markets open, in states
like California, for energy service providers. C3 Communications offers clients
innovative meter-based competitive data services including automated meter
reading; hourly, daily and monthly delivery of consumption data; advanced load
profiling data; aggregation reports for customers with multiple accounts and
operational services like outage and tamper detection and real-time-pricing and
time-of use data.
ChoiceCom offers telecommunications services including local telephone
service, long distance and long-haul data transmission services. ChoiceCom began
offering local telephone service in August, 1997, in Austin, Corpus Christi and
San Antonio, Texas with an emphasis on the business customer. ChoiceCom also
installed state-of-the-art Lucent 5ESS(R) switches in those three cities. In
January 1998, ChoiceCom began offering telephone service in Dallas and Houston
with plans to install Lucent 5ESS(R) switches in both cities by the end of the
year. With the addition of Dallas and Houston, ChoiceCom's expected 5-year
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2-24
capital budget has increased to $210 million from $104 million. The partnership
has grown to about 150 employees during its first year of operation.
In November 1997, the parties amended the ChoiceCom Limited Partnership
Agreement to provide that CSW hold 100% of the economic interest in ChoiceCom
and 60% of the voting interest. ICG Communications, Inc. holds the remaining 40%
voting interest in ChoiceCom, and has an option to acquire a 50% economic
interest in ChoiceCom. In the event that its option terminates without being
exercised, ICG Communications, Inc. will be bound by a non-compete agreement in
CSW's service territory.
ENERSHOP
EnerShop currently provides energy services to customers in Texas which
help reduce customers' operating costs through increased energy efficiencies and
improved equipment operations. EnerShop utilizes the skills of local trade
allies in offering services that include energy and facility analysis; project
management; engineering design, equipment procurement and construction; and
performance monitoring.
OTHER VENTURES
CSW Energy Services will spearhead CSW's competitive efforts in the
retail electricity markets of states outside of CSW's historical service
territories. CSW Energy Services will seek to secure electricity supply business
in the markets which soon will have retail competition, and will enable CSW to
extend its business reach and name recognition beyond CSW's traditional customer
base. In March 1998, CSW Energy Services signed its first major supply contract
in California. The CSW Services Business Ventures group pursues energy projects
related to the business activities of the U.S. Electric Operating Companies.
Projects for these groups include staffing services for electric utility nuclear
power plants, energy management systems, electric substation automation software
and electric vehicles. In June 1997, the FERC approved the request of CSW Power
Marketing to sell power and energy at market-based rates in the wholesale
market. CSW has temporarily suspended this initiative in light of the AEP Merger
since AEP is already pursuing this initiative.
SOUTH TEXAS PROJECT
CPL owns 25.2% of STP, a two-unit nuclear power plant which is located
near Bay City, Texas. HL&P owns 30.8%, San Antonio owns 28.0%, and Austin owns
16.0% of STP. STP Unit 1 was placed in service in August 1988, and STP Unit 2
was placed in service in June 1989.
STP Unit 1 and Unit 2 were removed from service during 1997 for
scheduled refueling outages which lasted 24 days and 18 days, respectively. For
the year 1997, Unit 1 and Unit 2 operated at net capacity factors of 90.1% and
91.0%, respectively.
In September 1997, STPNOC was formed to replace HL&P as the STP Project
Manager. Each of the four STP co-owners are represented on the STPNOC board of
directors. The CPL representative has been elected as the initial chairman of
the board of directors. On October 1, 1997, all HL&P employees assigned to STP
were transferred from HL&P to STPNOC. On November 17, 1997, HL&P was removed as
STP Project Manager, and STPNOC became the operator of the plant. CPL believes
the formation of STPNOC is in the best interest of CPL.
The establishment of STPNOC 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 concerning 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
CSW
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expected to result in a decrease in costs allocable to CPL related to its
investment in STP (The foregoing statement constitutes a forward looking
statement within the meaning of Section 21E of the Exchange Act. Actual results
may differ materially from such projected information due to changes in the
underlying assumptions. See FORWARD LOOKING INFORMATION).
For additional information regarding STP and the accounting for the
decommissioning of STP, see NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS.
ENVIRONMENTAL MATTERS
The operations of the CSW System, like those of other utility systems,
generally involve the use and disposal of substances subject to environmental
laws. CERCLA, the federal "Superfund" law, addresses the cleanup of sites
contaminated by hazardous substances. Superfund requires that PRPs fund remedial
actions regardless of fault or the legality of past disposal activities. PRPs
include owners and operators of contaminated sites and transporters and/or
generators of hazardous substances. Many states have similar laws. Legally, any
one PRP can be held responsible for the entire cost of a cleanup. Usually,
however, cleanup costs are allocated among PRPs.
The U.S. Electric Operating Companies are subject to various pending
claims alleging that they are PRPs under federal or state remedial laws for
investigating and cleaning up contaminated property. CSW believes that
resolution of these claims, individually or in the aggregate, will not have a
material adverse effect on CSW's or any U.S. Electric Operating Company's
results of operations or financial condition. Although the reasons for this
expectation differ from site to site, factors that are the basis for the
expectation for specific sites include the volume and/or type of waste allegedly
contributed by the U.S. Electric Operating Company, the estimated amount of
costs allocated to the U.S. Electric Operating Company and the participation of
other parties (The foregoing statements constitute forward looking statements
within the meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information due to changes in the underlying
assumptions. See FORWARD LOOKING INFORMATION). See NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for
additional discussion regarding environmental matters.
The EPA recently promulgated revised, more stringent ambient air
quality standards for ozone and particulates. While these standards do not
mandate emission 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, but the impact could be significant.
At the Kyoto Conference on Global Warming held in December 1997, U.S.
representatives agreed to a treaty which could require new limitations on
"greenhouse gases" from power plants. CSW and the U.S. Electric Operating
companies could be affected if this treaty is approved by the United States
Congress in its present form. The impact, if any, on CSW or the U.S. Electric
Operating Companies cannot yet be determined, but the impact could be
significant.
CSW
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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 CSW
with foreign and domestic parties as deemed appropriate by executive officers of
CSW. The risk management program is necessary to meet the growing demands of
CSW's customers for competitive prices and price stability, to enable CSW to
compete in a deregulated power industry, to manage the risks associated with
domestic and foreign investments and to take advantage of strategic investment
opportunities.
The U.S. Electric Operating Companies experience commodity price
exposures related to the purchase of fuel supplies for the generation of
electricity and for the purchase of power and energy from other generation
sources. Contracts that provide for the future delivery of these commodities can
be considered forward contracts which contain pricing and/or volume terms
designed to stabilize the cost of the commodity. Consequently, the U.S. Electric
Operating 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, SEEBOARD has entered into
contracts for differences to reduce exposure to fluctuations in the price of
electricity purchased from the United Kingdom's electricity power pool. This
pool was established at privatization of the United Kingdom's electric industry
for the bulk trading of electricity between generators and suppliers. At
December 31, 1997, the gross value of such contracts for differences amounted to
not more than 80% of any year's expected power purchases.
CSW has, at times, been exposed to currency and interest rate risks
which reflect the floating exchange rate that exists between the U.S. dollar and
the British pound 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.
At the end of 1997, CSW had positions in two cross currency swap contracts. The
following table presents information relating to these contracts. The market
value represents the foreign exchange/interest rate terms inherent in the cross
currency swaps at current market pricing. CSW expects to hold these contracts to
maturity. At current exchange rates, this liability is included in long-term
debt on the balance sheet at a carrying value of approximately $425 million.
Expected Expected Cash
Cash Inflows Outflows
Contract Maturity (Maturity Value) (Market Value)
Date
- ------------------------------------------------------------------------
Cross currency swap August 1, 2001 $200 million $216.5 million
Cross currency swap August 1, 2006 $200 million $226.8 million
OTHER MATTERS
YEAR 2000
In 1996, a system-wide program to prepare CSW's computer systems and
applications for the year 2000 was initiated. CSW expects to incur internal
staff costs as well as consulting and other expenses related to infrastructure
and facilities enhancements necessary to prepare the systems for the year 2000.
Testing and conversion is expected to cost between $20 million and $21 million
over the next two years including both domestic and foreign operations. A
significant portion of these costs is likely to be covered through the
redeployment of existing resources. The major applications which pose the
greatest risk for CSW if implementation is not successful are the transmission
and distribution automation system; the time in use, demand and recorder
metering system for commercial and industrial customers; and the power billing
system. The potential problems related to these systems are electric service
interruptions to customers, interrupted revenue data gathering and poor customer
relations resulting from delayed billing, respectively. Costs related to the
year 2000 program will be expensed as incurred.
CSW
2-27
ADOPTION OF RIGHTS PLAN
In September 1997, CSW's board of directors adopted a Rights Plan,
subject to SEC approval under the Holding Company Act. SEC approval was received
in December 1997, and on December 22, 1997, CSW executed the Rights Plan which
had been modified to permit the AEP Merger. The Rights Plan was initially
adopted and ultimately executed as part of the fiduciary responsibility of CSW's
board of directors and was not adopted because of any takeover offer or threat.
The intent of the Rights Plan is 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 to assure a fair price for all stockholders.
On January 6, 1998, CSW made a dividend distribution of one right for
each outstanding share of its common stock. Each right initially entitles the
holder to buy one-tenth of one share of CSW Common for $50. 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.
Under the Rights Plan, a "triggering event" 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. Upon such a
"triggering event," the rights would become exercisable and 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), entitles the holder
to purchase, at the exercise price, CSW common shares having a current market
value of two times the exercise price. If CSW was acquired in a merger or other
business combination, each right would entitle the holder to purchase, at the
exercise price, common stock of the acquirer 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. The Rights Plan exempts the AEP Merger transaction. Therefore,
neither the execution of the AEP merger agreement nor consummation of the AEP
Merger caused, or will cause a "triggering event" or the rights to become
exercisable. See PROPOSED AEP MERGER for additional information on the proposed
merger.
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 ten years from the
effective date unless they are earlier redeemed or exchanged by CSW.
NEW ACCOUNTING STANDARDS
SFAS NO. 125
SFAS No. 125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishment of liabilities using a
financial-components approach that focuses on control. An entity recognizes
assets it controls and derecognizes assets when control has been surrendered and
liabilities when they have been extinguished. A transfer of assets in which
control of the asset is surrendered is recorded as a sale. Control of an asset
is surrendered only when and if certain conditions are met. Likewise, a
liability is only extinguished under certain distinct conditions. The
Registrants adopted SFAS No. 125 effective January 1, 1997. Adoption of this
standard has not had a material adverse effect on the Registrants' results of
operations or financial condition.
CSW
2-28
SFAS NO. 128
On March 3, 1997, the FASB issued SFAS No. 128, effective for financial
statements for periods ending after December 15, 1997. SFAS No. 128 will
simplify the computation of earnings per share for many companies by eliminating
calculation provisions which were required by the prior earnings per share
standard, Accounting Principles Board Opinion No. 15. CSW adopted SFAS No. 128
effective December 31, 1997. Adoption of SFAS No. 128 did not have a material
effect on its calculation of earnings per share.
SFAS NO. 130
This statement is effective for fiscal years beginning after December
15, 1997. The statement adds the requirement to present comprehensive income and
all of its components (revenues, expenses, gains and losses) in a full set of
financial statements, and this new statement must be displayed with the same
prominence given other financial statements. Comprehensive income is defined as
the change in equity (net assets) of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. Though effective at the
beginning of 1998, comprehensive income is not required to be disclosed in
interim statements in the year adopted. CSW will adopt this statement beginning
with 1998 year-end financial statements.
SFAS NO. 131
This statement is effective for fiscal years beginning after December
15, 1997, and requires that certain information about operating segments be
presented in complete sets of financial statements. It also requires the
presentation of information regarding products and services, geographic areas in
which the entity operates, and concentrations of major customers.
The objective of this statement is to provide information about the
different types of business activities in which an entity engages and the
different economic environments in which it operates to help users of financial
statements better understand an entity's performance and prospects for future
cash flows and make more informed judgments about the enterprise as a whole.
An operating segment is a component of an enterprise that earns
revenues and incurs expenses, whose results are regularly reviewed by the chief
decision maker, and for which discrete financial information is available.
Separate information is required to be presented for any segment that is 10
percent or more of reported income, profit or loss, or assets of the combined
entity. CSW will adopt this statement beginning with 1998 year-end financial
statements.
CENTRAL AND SOUTH WEST CORPORATION'S RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
CSW's earnings decreased to $153 million in 1997 from $429 million in
1996. CSW's return on average common stock equity was 4.2% in 1997 compared to
12.1% in 1996. The primary reason for the lower earnings and return on average
common stock equity was the accrual of the one-time United Kingdom windfall
profits tax. The impact of CSW's final settlement of litigation with El Paso
contributed to the decline in earnings as well. Also contributing to the
decrease in earnings was the effect of both the PSO 1997 Rate Settlement
Agreement and the CPL 1997 Final Order. See NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS for additional information on CSW's final settlement of litigation
with El Paso, the CPL 1997 Final Order and the PSO 1997 Rate Settlement
Agreement. See NOTE 17. EXTRAORDINARY ITEM for additional information on the
windfall profits tax. Further reducing earnings for 1997 were certain asset
write-offs predominately at the U.S. Electric Operating Companies. Partially
offsetting the lower earnings was the gain on the reacquisition of a portion of
the U.S. Electric Operating Companies' preferred stock and an adjustment to
CSW
2-29
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. Significant items impacting 1997
earnings are listed below (in millions).
Earnings
Impact
-------------
United Kingdom Windfall Profits Tax $(176)
CPL 1997 Final Order (48)
Asset Write-offs and Reserves (48)
PSO 1997 Rate Settlement Agreement (27)
Settlement of Litigation with El Paso (23)
Gain on the Reacquisition of Preferred Stock 10
United Kingdom Deferred Tax Adjustment 15
In addition, several items that occurred in 1996 were not present in
1997. Prior to the sale of Transok in 1996, CSW realized $12 million of earnings
from Transok's operations. As a result of the sale, CSW also recorded an
after-tax gain of approximately $120 million in 1996. However, the U.S. Electric
Operating Companies and CSW Energy recorded charges totaling $102 million,
after-tax, for certain investments in the second quarter of 1996 which decreased
earnings. See NOTE 14. DISCONTINUED OPERATIONS for additional information
concerning the effects of the sale of Transok.
Operating revenues increased $113 million in 1997 compared to 1996.
The revenue variances are shown in the following table.
1997 REVENUE VARIANCES
INCREASE (DECREASE) FROM PRIOR YEAR, MILLIONS
U.S. Electric
CPL and WTU Transmission Revenues $56
KWH Sales, Growth and Usage 41
Fuel Revenue 23
CPL 1996 Fuel Agreement 18
Sales for Resale 12
CPL 1997 Final Order (45)
KWH Sales, Weather-Related (37)
PSO 1997 Rate Settlement Agreement (32)
Other Electric 37
----
73
United Kingdom 22
Other Diversified 18
----
$113
----
U.S. Electric revenues increased $73 million, or 2%, in 1997 compared
to 1996. Retail MWH sales increased 2.5% with increases in all customer classes.
U.S. Electric revenues increased primarily due to higher MWH sales resulting
from increased customer usage and new transmission access revenues at CPL and
WTU in accordance with FERC Order No. 888 and the Texas Commission's rule
regarding transmission access and pricing. The new transmission revenues had no
material effect on earnings because they were almost completely offset by a
corresponding amount of transmission expense. Revenues increased due in part to
the absence in 1997 of the revenue decrease in 1996 from the CPL 1996 Fuel
Agreement. An increase in fuel revenues, as discussed in fuel expense below,
also contributed to the higher revenues. Partially offsetting the revenue
increase was a decrease in weather-related demand due to milder 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 and the PSO
1997 Rate Settlement Agreement. See NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO
1997 Rate Settlement Agreement. United Kingdom revenues increased $22 million,
CSW
2-30
or 1%, in 1997 compared to 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.
Other diversified revenues increased $18 million, or 31%, in 1997 compared to
1996 due primarily to increased revenues from CSW International, C3
Communications, CSW Credit and EnerShop.
During 1997 and 1996 the U.S. Electric Operating Companies generated
93% of their electric energy requirements. U.S. Electric fuel expense increased
$26 million to $1.3 billion in 1997 compared to 1996 due primarily to an
increase in natural gas fuel costs to $2.67 per MMbtu from $2.50 per MMbtu. Also
contributing to the increase was the absence in 1997 of a one-time reduction to
fuel expense of approximately $9 million recorded 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 $40 million to $1.3 billion in 1997 compared to 1996 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.
Other operating expense increased $196 million to $981 million in 1997
compared to 1996 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 other operating
expense of SEEBOARD U.S.A. In addition, approximately $56 million in new
transmission access expense was recorded at CPL and WTU in 1997 related to FERC
Order No. 888 and the Texas Commission rules regarding transmission access and
pricing. Also increasing other operating expense were asset write-offs of
approximately $57 million including certain regulatory assets, capitalized
demand side management assets and obsolete inventories. In addition, the
settlement of litigation with El Paso increased other operating expense $35
million. Further contributing to the increase in other operating expense was the
$12 million impact of the CPL 1997 Final Order and the $4 million impact of the
PSO 1997 Rate Settlement Agreement. See NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO
1997 Rate Settlement Agreement. Partially offsetting these increases were the
absence in 1997 of expenses recorded in 1996 related to inventory write-offs of
$10 million and CPL rate case adjustments of $15 million. Further offsetting the
increases were charges in 1996 associated with restructuring costs. Also
partially offsetting the increase in other operating expense was reduced pension
expense in 1997 resulting from changes made to the pension plan for CSW's
domestic employees. See NOTE 5. BENEFIT PLANS for additional information related
to the changes in the pension plan.
Depreciation and amortization expense increased $33 million, or 7%, in
1997 due primarily to the implementation of depreciation and amortization in
accordance with the CPL 1997 Final Order. As a result of that order, the
increase in depreciation due to the accelerated recovery of ECOM property was
offset in part by the implementation of lower depreciation rates. Taxes other
than income increased $17 million, or 10%, in 1997 compared to 1996 due
primarily to higher property taxes at CPL and the absence in 1997 of a CPL Texas
franchise tax refund and true-up in 1996. Income tax expense decreased $73
million to $151 million in 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.
Other income and deductions increased to a gain of $32 million in
1997 from a loss of $61 million in 1996 due primarily to the absence in 1997 of
charges for certain investments 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 $8 million,
or 2%, in 1997 due primarily to interest expense resulting from a fourth quarter
1996 debt issuance by CSW Energy. Short-term and other interest expense
decreased $8 million to $86 million in 1997 when compared to 1996 due primarily
to lower levels of short-term borrowings. Distributions on newly-issued Trust
Preferred Securities increased interest and other charges by $17 million in
1997, which was partially offset by lower dividend requirements resulting from
CSW
2-31
the related preferred stock reacquisitions at the U.S. Electric Operating
Companies. See NOTE 10. TRUST PREFERRED SECURITIES for additional information on
the new securities.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995
CSW's earnings increased to $429 million in 1996 compared to $402
million in 1995. Although earnings increased, earnings per share decreased from
$2.10 in 1995 to $2.07 in 1996 due to the issuance of additional shares of
common stock during 1996. The return on average common stock equity was 12.1% in
1996 compared to 13.1% in 1995. U.S. Electric operations contributed
approximately 57% of total earnings in 1996 and approximately 105% of total
earnings in 1995. The lower percent for U.S. Electric operations is mostly
attributed to the gain on the sale of Transok, higher earnings from SEEBOARD
U.S.A. and the recording of charges at each of the U.S. Electric Operating
Companies for certain investments. SEEBOARD U.S.A. contributed 24% of total
earnings in 1996 as compared to 2% in 1995, reflecting a full year of earnings
in 1996 compared to only a partial quarter in 1995.
Earnings increased in 1996 compared to 1995 due primarily to the gain
from the sale of Transok, the additional earnings from SEEBOARD U.S.A., the
absence of charges in 1996 related to the termination of the proposed El Paso
Merger in June 1995 and the effect of the CPL 1995 Agreement. Also contributing
to the increase were higher non-fuel electric revenues resulting from increased
usage, customer growth and weather-related demand. Partially offsetting these
increases in earnings were the recording of charges by the U.S. Electric
Operating Companies in June 1996 associated with certain investments, write-offs
of certain equity investments and other project development costs for CSW
Energy, restructuring charges, the effect of the CPL 1996 Fuel Agreement, the
asset reserves for the pending CPL rate case and the absence in 1996 of
favorable tax adjustments made in 1995. Additional information related to the
reserves recorded in June 1996 is discussed below. For further discussion of
CPL's regulatory activities, see NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS.
Increased depreciation and amortization, increased other operating expense,
increased interest expense and the loss of Mirror CWIP earnings also reduced the
increase in earnings. Significant items impacting 1996 earnings are listed
below (in millions).
Earnings
Impact
------------
Gain on the Sale of Transok $120
Charges for Certain Investments (104)
CPL Pending Rate Case Write-offs (8)
CPL 1996 Fuel Agreement (7)
CSW
2-32
Revenues increased approximately $2.0 billion or 64% in 1996 when
compared to 1995. The revenue variances are shown in the following table.
1996 REVENUE VARIANCES
INCREASE (DECREASE) FROM PRIOR YEAR, MILLIONS
U.S. Electric
Fuel Revenues $181
CPL 1995 Agreement 112
KWH Sales, Growth and Usage 83
KWH Sales, Weather-Related 21
WTU 1995 Stipulation and Agreement 21
Other Electric (35)
CPL 1996 Fuel Agreement (18)
------
365
United Kingdom 1,640
Other Diversified 7
------
$2,012
------
U.S. Electric revenues increased $365 million or 13% in 1996 compared
to 1995. Total U.S. Electric KWH sales increased 4.2%, with increases in sales
among all retail customer classes. Customer growth, increased usage and
weather-related demand contributed to the increased revenues along with higher
fuel revenues as discussed below. Also contributing to the increase was the
absence in 1996 of reserves for refunds recorded in 1995 in accordance with the
CPL 1995 Agreement and the WTU 1995 Stipulation and Agreement. KWH sales to
retail customers increased in 1996 as a result of customer growth, increased
customer usage and weather-related demand.
CSW's operating revenues also include approximately $1.8 billion from a
full year of revenues from SEEBOARD U.S.A. for 1996 compared to $208 million of
revenues for a partial quarter of operations in 1995. Other diversified revenues
increased 13% to $59 million in 1996 as compared to $52 million in 1995 due
primarily to increased revenues from CSW Energy projects, increased factoring
revenues at CSW Credit and new revenues from C3 Communications and EnerShop.
During 1996 and 1995 the U.S. Electric Operating Companies generated
93% and 95%, respectively, of their electric energy requirements. U.S. Electric
fuel expense increased 15% to approximately $1.1 billion in 1996 at the U.S.
Electric Operating Companies due primarily to an increase in the average unit
cost of fuel to $1.81 per MMbtu in 1996 from $1.58 per MMbtu in 1995, reflecting
higher natural gas prices. Partially offsetting this increase was a reduction in
the delivered cost of coal at the U.S. Electric Operating Companies resulting
from lower coal transportation costs and lower spot market coal prices. U.S.
Electric purchased power increased $36 million to $77 million in 1996 due
primarily to increased economy energy purchases at a higher cost per MWH. CSW's
operating expenses include $1.3 billion for cost of sales from a full year of
United Kingdom operations in 1996 compared to $158 million recorded in United
Kingdom cost of sales for a partial quarter of operations in 1995.
Other operating expenses in 1996 increased $228 million, or 41%, from
1995 due primarily to the addition in 1996 of a full year of operating expenses
from SEEBOARD U.S.A. as well as the absence in 1996 of reduced expenses in 1995
related to $28 million of regulatory assets established for previously expensed
restructuring charges and the reversal of rate case costs pursuant to the CPL
1995 Agreement. Also contributing to the increase was the recognition in 1995 of
a $13 million regulatory asset for previously recorded restructuring charges in
accordance with the WTU 1995 Stipulation and Agreement. Another factor
contributing to increased other operating expense was a CSW restructuring charge
recorded in 1996. A $42 million reserve for deferred merger and acquisition
costs was recorded in 1995 from the terminated El Paso merger. Maintenance
expense decreased $5 million to $150 million in 1996 from $155 million in 1995
due primarily to a $10 million decrease in maintenance expense at CPL resulting
from lower production and distribution maintenance costs. Partially offsetting
CSW
2-33
this decrease was a $7 million increase in maintenance due to a write-down of
production inventory at the U.S. Electric Operating Companies in 1996.
Depreciation and amortization increased 31% to $464 million in 1996
from $353 million in 1995 due primarily to the addition of depreciable fixed
assets and the goodwill amortization related to the purchase of SEEBOARD, as
well as increases in depreciable fixed assets at the U.S. Electric Operating
Companies. Also contributing to the increase were the amortization of the
regulatory assets established in 1995 associated with the CPL 1995 Agreement and
the WTU 1995 Stipulation and Agreement along with accelerated amortization of
deferred Oklaunion plant costs in accordance with the WTU 1995 Stipulation and
Agreement.
Taxes, other than income increased 10% to $178 million in 1996 from
$162 million in 1995. The increase was due primarily to lower 1995 ad valorem
taxes resulting from revisions of prior year estimates recorded in 1995. Also
contributing to the increase were higher ad valorem and state franchise taxes at
SWEPCO in 1996. The higher ad valorem taxes resulted primarily from a higher
state assessed value in Louisiana and the addition of the HVdc tie in Texas. The
state franchise taxes increased due mainly to higher federal taxable income
associated with Texas franchise tax. Income taxes increased $132 million to $224
million during 1996 compared to 1995. During 1995, income taxes were lower
primarily due to adjustments relating to prior year taxes, as well as the tax
effect from both the CPL 1995 Agreement and the WTU 1995 Stipulation and
Agreement. Income taxes of $46 million were recorded for SEEBOARD U.S.A. from a
full year of operations in 1996 compared to $6 million for a partial quarter of
operations in 1995.
Other income and deductions decreased $160 million in 1996 when
compared to 1995 due primarily to charges recorded in June 1996 associated with
certain investments for plant sites, engineering studies and lignite reserves
for the U.S. Electric Operating Companies. See the table below for additional
detail on these charges. Other income and deductions was also lower as a result
of certain write-offs recorded by CSW Energy. In addition, CPL's Mirror CWIP
liability, which has now been fully amortized, contributed $41 million to income
in 1995.
Pre-tax effect Income tax Net income
on income benefit effect
--------------------------------------
(thousands)
CPL $(21,509) $5,940 $(15,569)
PSO (51,109) 15,401 (35,708)
SWEPCO (29,700) 7,885 (21,815)
WTU (14,949) 4,003 (10,946)
-------------------------------------
$(117,267) $33,229 $(84,038)
-------------------------------------
Interest on long-term debt increased $102 million or 46% during 1996
compared to 1995 due to higher levels of long-term debt outstanding related to
the SEEBOARD acquisition. CSW's 1996 embedded cost of long-term debt was
unchanged from 1995 at 7.2%. Interest on short-term debt decreased $7 million or
7% in 1996 compared to 1995 due to lower interest rates and lower levels of
short-term debt outstanding. CSW used a portion of the proceeds from the sale of
Transok to reduce short-term debt.
The $120 million gain on the sale of Transok as well as Transok's 1996
operations are shown separately in discontinued operations. Transok's earnings
for the first five months of 1996 were $12 million compared to $25 million from
a full year of operations for 1995. See NOTE 15. TRANSOK DISCONTINUED OPERATIONS
for information, including comparative statements of income, related to the sale
of Transok.
CSW
2-34
CSW
CONSOLIDATED STATEMENTS OF INCOME
CENTRAL AND SOUTH WEST CORPORATION
- ------------------------------------------------------------------------
For the Years Ended December 31,
----------------------------
1997 1996 1995
------- ------- ------
($ in millions, except share amounts)
Operating Revenues
U.S. Electric $3,321 $3,248 $2,883
United Kingdom 1,870 1,848 208
Other diversified 77 59 52
------- ------- ------
5,268 5,155 3,143
------- ------- ------
Operating Expenses and Taxes
U.S. Electric fuel 1,177 1,151 1,004
U.S. Electric purchased power 89 77 41
United Kingdom cost of sales 1,291 1,331 158
Other operating 981 785 557
Maintenance 152 150 155
Depreciation and amortization 497 464 353
Taxes, other than income 195 178 162
Income taxes 151 224 92
------- ------- ------
4,533 4,360 2,522
------- ------- ------
Operating Income 735 795 621
------- ------- ------
Other Income and Deductions
Mirror CWIP liability amortization -- -- 41
U.S. Electric charges for investments
and plant development costs (3) (117) --
Other 29 16 56
Non-operating income taxes 6 40 2
------- ------- ------
32 (61) 99
------- ------- ------
Income Before Interest and Other Charges 767 734 720
------- ------- ------
Interest and Other Charges
Interest on long-term debt 333 325 223
Distributions on Trust Preferred
Securities 17 -- --
Interest on short-term debt and other 86 94 101
Preferred dividend requirements
of subsidiaries 12 18 19
Gain on reacquired preferred stock (10) -- --
------- ------- ------
438 437 343
------- ------- ------
Income from Continuing Operations 329 297 377
------- ------- ------
Discontinued Operations
Income from discontinued operations,
net of tax of $6 for 1996 and $13
for 1995 -- 12 25
Gain on the sale of discontinued
operations, net of tax of $72 -- 120 --
------- ------- ------
-- 132 25
------- ------- ------
Income Before Extraordinary Item 329 429 402
Extraordinary Item - United Kingdom
windfall profits tax (176) -- --
------- ------- ------
Net Income for Common Stock $153 $429 $402
======= ======= ======
Average Common Shares Outstanding 212.1 207.5 191.7
Basic and Diluted EPS from Continuing
Operations $1.55 $1.43 $1.97
Basic and Diluted EPS from Discontinued
Operations -- 0.64 0.13
------- ------- ------
Basic and Diluted EPS before
Extraordinary Item 1.55 2.07 2.10
Basic and Diluted EPS from
Extraordinary Item (0.83) -- --
------- ------- ------
Basic and Diluted EPS $0.72 $2.07 $2.10
======= ======= ======
Dividends Paid per Share of Common Stock $1.74 $1.74 $1.72
======= ======= ======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
CSW
2-35
CSW
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CENTRAL AND SOUTH WEST CORPORATION
- ---------------------------------------------------------------------------
For the Years Ended December 31,
--------------------------
1997 1996 1995
------- ------ ------
(millions)
Common Stock at Beginning of Year $740 $675 $667
Sale of Common Stock 3 65 8
------- ------ ------
Common Stock at End of Year 743 740 675
------- ------ ------
Paid-in Capital at Beginning of Year 1,022 610 561
Sale of Common Stock 17 412 49
------- ------ ------
Paid-in Capital at End of Year 1,039 1,022 610
------- ------ ------
Retained Earnings at Beginning of Year 1,963 1,893 1,824
Net income for common stock 153 429 402
Deduct: Common stock dividends 369 358 329
Deduct: Other 1 1 4
------- ------ ------
Retained Earnings at End of Year 1,746 1,963 1,893
------- ------ ------
Foreign Currency Translation and Other
at Beginning of Year 77 -- --
Net Change (49) 77 --
------- ------ ------
Foreign Currency Translation and Other
at End of Year 28 77 --
------- ------ ------
------- ------ ------
Total Stockholders' Equity $3,556 $3,802 $3,178
======= ====== ======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
CSW
2-36
CSW
CONSOLIDATED BALANCE SHEETS
CENTRAL AND SOUTH WEST CORPORATION
- ---------------------------------------------------------------------------
As of December 31,
-----------------
1997 1996
------- -------
(millions)
ASSETS
Fixed Assets
Electric
Production $5,824 $5,830
Transmission 1,558 1,538
Distribution 4,453 4,237
General 1,381 1,318
Construction work in progress 184 230
Nuclear fuel 196 184
------- -------
13,596 13,337
Other diversified 250 84
------- -------
13,846 13,421
Less - Accumulated depreciation and amortization 5,218 4,940
------- -------
8,628 8,481
------- -------
Current Assets
Cash and temporary cash investments 75 254
Accounts receivable 916 837
Materials and supplies, at average cost 172 185
Electric utility fuel inventory 65 102
Under-recovered fuel costs 84 46
Prepayments and other 78 85
------- -------
1,390 1,509
------- -------
Deferred Charges and Other Assets
Deferred plant costs 503 509
Mirror CWIP asset 285 299
Other non-utility investments 448 371
Securities available for sale 103 --
Income tax related regulatory assets, net 329 236
Goodwill 1,428 1,525
Other 337 402
------- -------
3,433 3,342
------- -------
$13,451 $13,332
======= =======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
CSW
2-37
CSW
CONSOLIDATED BALANCE SHEETS
CENTRAL AND SOUTH WEST CORPORATION
- ----------------------------------------------------------------------
As of December 31,
----------------------
1997 1996
-------- --------
CAPITALIZATION AND LIABILITIES (millions)
Capitalization
Common stock: $3.50 par value
Authorized shares:
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 1,746 1,963
Foreign currency translation and other 28 77
-------- --------
3,556 45% 3,802 47%
-------- --- --------- ---
Preferred Stock
Not subject to mandatory redemption 176 292
Subject to mandatory redemption 26 33
-------- ---------
202 2% 325 4%
Certain Subsidiary-obligated,
mandatorily redeemable preferred
securities of subsidiary trusts
holding solely Junior Subordinated
Debentures of such Subsidiaries 335 4% -- --%
Long-term debt 3,898 49% 4,024 49%
-------- --- --------- ---
Total Capitalization 7,991 100% 8,151 100%
-------- --- --------- ---
Current Liabilities
Long-term debt and preferred stock
due within twelve months 32 204
Short-term debt 721 364
Short-term debt - CSW Credit, Inc. 636 579
Loan notes 56 76
Accounts payable 558 630
Accrued taxes 171 324
Accrued interest 87 82
Other 238 166
-------- --------
2,499 2,425
-------- --------
Deferred Credits
Accumulated deferred income taxes 2,432 2,272
Investment tax credits 278 291
Other 251 193
-------- --------
2,961 2,756
-------- --------
$ 13,451 $ 13,332
======== ========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
CSW
2-38
CSW
CONSOLIDATED STATEMENTS OF CASH FLOWS
CENTRAL AND SOUTH WEST CORPORATION
- -----------------------------------------------------------------------------
For the Years Ended December 31,
----------------------------
1997 1996 1995
------- ------- ------
(millions)
OPERATING ACTIVITIES
Net income for common stock $153 $429 $402
Non-cash Items and Adjustments
Depreciation and amortization 529 521 425
Deferred income taxes and
investment tax credits 110 62 (11)
Preferred stock dividends 12 18 19
Gain on reacquired preferred stock (10) -- --
Mirror CWIP liability amortization -- -- (41)
Charges for investments and assets 53 147 --
Gain on sale of subsidiary -- (192) --
Changes in Assets and Liabilities
Accounts receivable (140) (86) (36)
Accounts payable 45 23 (32)
Accrued taxes (153) (14) 25
Fuel recovery (37) (89) 76
Other 164 56 (28)
------- ------- -----
726 875 799
------- ------- -----
INVESTING ACTIVITIES
Construction expenditures (507) (521) (474)
Acquisitions expenditures -- (1,394) (421)
CSW Energy/CSW International projects (382) (124) 109
Sale of National Grid assets -- 99 --
Cash proceeds from sale of subsidiary -- 690 --
Other (15) (36) (26)
------- ------- -----
(904) (1,286) (812)
------- ------- -----
FINANCING ACTIVITIES
Common stock sold 20 477 57
Proceeds from issuance of long-term debt -- 437 456
SEEBOARD acquisition financing -- 350 731
Reacquisition/Maturity of long-term debt (253) (239) (363)
Redemption of preferred stock (114) (1) (1)
Trust Preferred Securites Sold 323 -- --
Other financing activities (3) 67 --
Change in short-term debt 414 (395) (226)
Payment of dividends (383) (376) (348)
------- ------- -----
4 320 306
------- ------- -----
Effect of exchange rate changes on cash and
cash equivalents (5) (56) --
------- ------- -----
Net Change in Cash and Cash Equivalents (179) (147) 293
Cash and Cash Equivalents at Beginning of Year 254 401 108
======= ======= =====
Cash and Cash Equivalents at End of Year $75 $254 $401
======= ======= =====
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $396 $356 $301
======= ======= =====
Income taxes paid $301 $196 $77
======= ======= =====
The accompanying notes to consolidated financial statements are an
integral part of these statements.
CSW
2-39
CENTRAL AND SOUTH WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
CSW is a registered holding company under the Holding Company Act
subject to regulation by the SEC. CSW's U.S. Electric Operating Companies are
also regulated by the SEC under the Holding Company Act.
The principal business of CSW's U.S. Electric Operating Companies is
the generation, transmission, and distribution of electric power and energy.
These companies are subject to regulation by the FERC under the Federal Power
Act and follow the Uniform System of Accounts prescribed by the FERC. They are
subject to further regulation with regard to rates and other matters by state
regulatory commissions as follows: CPL and WTU are subject to the Texas
Commission; PSO is subject to the Oklahoma Commission; and SWEPCO is subject to
the Arkansas Commission, Louisiana Commission, Oklahoma Commission and Texas
Commission.
The principal business of CSW's United Kingdom electric operating
subsidiary, SEEBOARD, is the distribution and supply of electric power and
energy in Southeast England. SEEBOARD is subject to rate regulation by the DGES.
In addition to electric utility operations, CSW has subsidiaries
involved in a variety of business activities. CSW Energy and CSW International
pursue cogeneration and other energy-related ventures; CSW Credit factors the
accounts receivable of affiliated and non-affiliated companies; C3
Communications pursues telecommunications projects; CSW Leasing has investments
in leveraged leases; EnerShop offers energy-management services and CSW Energy
Services will pursue retail energy markets outside of CSW's traditional service
territory.
The more significant accounting policies of the CSW System are
summarized below.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of CSW and
its subsidiary companies. The consolidated financial statements for CPL, PSO and
SWEPCO include their respective capital trusts.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities along
with disclosure of contingent liabilities at the date of financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FIXED ASSETS AND DEPRECIATION
U.S. Electric fixed assets are stated at the original cost of
construction, which includes the cost of contracted services, direct labor,
materials, overhead items and allowances for borrowed and equity funds used
during construction. SEEBOARD's fixed assets are stated at their original fair
market value which existed on the date of acquisition plus the original cost of
property acquired or constructed since the acquisition, less disposals.
Provisions for depreciation of plant are computed using the
straight-line method, generally at individual rates applied to the various
classes of depreciable property. The annual average consolidated composite rates
of the Registrants are presented in the following table.
CSW
2-40
CSW CPL PSO SWEPCO WTU
----- ------- ------- ---------- -------
1997 3.4% 3.0% 3.3% 3.2% 3.3%
1996 3.4% 2.9% 3.6% 3.2% 3.2%
1995 3.4% 2.9% 3.6% 3.2% 3.2%
CPL NUCLEAR DECOMMISSIONING OF STP
At the end of STP's service life, decommissioning is expected to be
accomplished using the decontamination method, which is one of the techniques
acceptable to the NRC. Using this method, the decontamination activities occur
as soon as possible after the end of plant operations. Contaminated equipment is
cleaned and removed to a permanent disposal location, and the site is generally
returned to its pre-plant state.
CPL's decommissioning costs are accrued and funded to an external trust
over the expected service life of the STP units. The existing NRC operating
licenses will allow the operation of STP Unit 1 until 2027 and Unit 2 until
2028. The accrual for decommissioning costs is an annual level cost based on the
estimated future cost to decommission STP, including escalations for expected
inflation to the expected time of decommissioning, and is net of expected
earnings on the trust fund.
CPL's portion of the costs of decommissioning STP were estimated to be
$258 million in 1995 dollars based on a site specific study completed in 1995.
CPL is recovering these decommissioning costs through rates based on the service
life of STP at a rate of $8.2 million per year. The $8.2 million annual cost of
decommissioning is reflected on the income statement in other operating expense.
Due to the fact that the funds are deposited with a trustee under the terms of
an irrevocable trust and because of the ongoing nature of the FASB project, as
described below, CPL believes it inappropriate to reflect the trust assets on
its financial statements. At December 31, 1997, the trust balance was $45.7
million.
The FASB is currently reviewing the utility industry's accounting
treatment of nuclear and certain other plant decommissioning costs. An exposure
draft regarding this matter was issued in February 1996. In November 1997 the
FASB abandoned all previous decisions on the scope of this project and began a
new project related to decommissioning and other environmental remediation
costs. It is not known at this time when any new pronouncement would result from
this project.
ELECTRIC REVENUES AND FUEL
The U.S. Electric Operating Companies record revenues based upon
cycle-billings. Electric service provided subsequent to billing dates through
the end of each calendar month are accrued for by estimating unbilled revenues
in accordance with industry standards.
CPL, SWEPCO and WTU recover retail fuel costs in Texas as a fixed
component of base rates whereby over-recoveries of fuel are payable to customers
and under-recoveries may be billed to customers after Texas Commission approval.
The cost of fuel is charged to expense as incurred, with resulting fuel
over-recoveries and under-recoveries recorded as regulatory assets and
liabilities. PSO recovers fuel costs in Oklahoma and SWEPCO recovers fuel costs
in Arkansas and Louisiana through automatic fuel recovery mechanisms. The
application of these mechanisms varies by jurisdiction. See ITEM 1.
BUSINESS-FUEL RECOVERY and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS, for
further information about fuel recovery.
CPL, PSO and WTU recover fuel costs applicable to wholesale customers,
which are regulated by the FERC, through an automatic fuel adjustment clause.
SWEPCO recovers fuel costs applicable to wholesale customers through formula
rates.
CPL amortizes direct nuclear fuel costs to fuel expense on the basis of
a ratio of the estimated energy used in the core to the energy expected to be
derived from such fuel assembly over its life in the core. In addition to fuel
CSW
2-41
amortization, CPL also records nuclear fuel expense as a result of other items,
including spent fuel disposal fees assessed on the basis of net MWHs sold from
STP and DOE special assessment fees for decontamination and decommissioning of
the enrichment facilities on the basis of prior usage of enrichment services.
ACCOUNTS RECEIVABLE
CSW Credit, as a wholly owned subsidiary of CSW, purchases, without
recourse, the billed and unbilled accounts receivable of the U.S. Electric
Operating Companies, certain non-affiliated public utility companies and, prior
to its sale by CSW in June 1996, Transok.
REGULATORY ASSETS AND LIABILITIES
For their regulated activities, the U.S. Electric Operating Companies
follow SFAS No. 71, which defines the criteria for establishing regulatory
assets and regulatory liabilities. Regulatory assets represent probable future
revenue to the company associated with certain costs which will be recovered
from customers through the ratemaking process. Regulatory liabilities represent
probable future refunds to customers. The regulatory assets are currently being
recovered in rates or are probable of being recovered in rates. The unamortized
asset balances are included in the table below.
CSW CPL PSO SWEPCO WTU
--------------------------------------------------------------
(millions) (thousands)
----------------------------------------------------
AS OF DECEMBER 31, 1997
Regulatory Assets
Deferred plant costs $503 $484,277 $ -- $ -- $18,637 (3)
Mirror CWIP asset 285 285,431 -- -- --
Income tax related
regulatory assets, net 329 390,149 -- -- --
Deferred restructuring and rate
case costs 36 24,049 (1) -- -- 12,369 (3)
Demand side management costs 10 9,669 -- -- --
OPEBs 3 -- 2,829 -- --
Under-recovered fuel costs 84 43,229 15,365 (2) 13,013 11,968
Loss on reacquired debt 166 84,070 16,882 39,873 24,710
Fuel settlement 16 -- -- 15,710 (5) --
Other 8 3,669 377 2,140 2,787
----------------------------------------------------------
$1,440 $1,324,543 $35,453 $70,736 $70,471
Regulatory Liabilities
Refunds due customers $64 $63,713 $ -- $ -- $366
Income tax related regulatory
liabilities, net -- -- 41,793 10,072 9,482
Other 1 1,205 -- -- --
----------------------------------------------------------
$65 $64,918 $41,793 $10,072 $9,848
----------------------------------------------------------
CSW
2-42
CSW CPL PSO SWEPCO WTU
-------------------------------------------------------
(millions) (thousands)
---------------------------------------------
AS OF DECEMBER 31, 1996
Regulatory Assets
Deferred plant costs $509 $486,978 $ -- $ -- $22,365 (3)
Mirror CWIP asset 299 298,708 -- -- --
Income tax related regulatory
assets, net 236 335,226 -- -- --
Deferred restructuring and rate
case costs 46 30,965 (1) -- -- 14,973 (3)
Deferred storm costs 2 -- 2,448 (4) -- --
Demand side management costs 15 7,070 8,278 -- --
OPEBs 3 -- 3,325 -- --
Under-recovered fuel costs 47 26,298 2,651 (2) 9,120 8,961
Loss on reacquired debt 180 90,751 18,068 42,844 28,116
Fuel settlement 17 -- -- 17,414 (5)
Other 13 3,453 4,997 1,326 1,576
----------------------------------------------------
$1,367 $1,279,449 $39,767 $70,704 $75,991
Regulatory Liabilities
Refunds due customers $43 $43,266 $ -- $ -- $2
Income tax related regulatory
liabilities, net -- -- 46,007 36,106 16,918
Other 2 1,339 -- -- --
----------------------------------------------------
$45 $44,605 $46,007 $36,106 $16,920
----------------------------------------------------
(1) Earning no return, amortized by the end of 2000
(2) Earning no return, amortized over 12 month period, recalculated
semiannually
(3) Earning no return, amortized through 2002
(4) Earning no return, amortized by the end of 1997
(5) Earning no return, amortized by the end of 2006
In accordance with orders of the Texas Commission, CPL and WTU deferred
carrying costs, as well as operating costs, depreciation and tax costs incurred
for STP and Oklaunion, respectively. These deferrals were for the period
beginning on the date when the plants began commercial operation until the date
the plants were included in rate base. CPL is amortizing and recovering these
deferred costs through rates over the life of the plant. WTU began amortizing
and recovering such costs over a seven year period beginning January 1, 1996. In
accordance with Texas Commission orders, CPL previously recorded a Mirror CWIP
asset, which is being amortized over the life of STP. For further information
regarding the deferred plant costs at CPL and WTU, reference is made to NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS. For additional information regarding
regulatory accounting, reference is made to NEW ACCOUNTING STANDARDS and
MD&A-RECENT DEVELOPMENTS AND TRENDS, REGULATORY ACCOUNTING.
SEEBOARD ACQUISITION
The acquisition of SEEBOARD was accounted for as a purchase
combination. An allocation of the purchase price has been performed and is
reflected in the consolidated financial statements. The goodwill is being
amortized on a straight-line basis over 40 years. The unamortized balance of the
SEEBOARD goodwill at December 31, 1997 was $1.4 billion. CSW continually
evaluates whether circumstances have occurred that indicate the remaining useful
life of goodwill may warrant revision or that the remaining balance of goodwill
may not be recoverable.
NATIONAL GRID ASSETS
Pursuant to a December 11, 1995 distribution by SEEBOARD, CSW (UK) plc,
as a shareholder of SEEBOARD, received approximately 32.5 million shares of
National Grid common stock. On February 2, 1996, all of these shares were sold
for approximately $99 million.
CSW
2-43
FOREIGN CURRENCY TRANSLATION
The financial statements of SEEBOARD U.S.A., which are included in
CSW's consolidated financial statements, have been translated from British
pounds to U.S. dollars in accordance with SFAS No. 52. All balance sheet
accounts are translated at the exchange rate at the end of the period and all
income statement items are translated at the average exchange rate for the
applicable period. At December 31, 1997 the current exchange rate was
approximately (pound)1.00=$1.65, and the average exchange rate for the twelve
month period ended December 31, 1997 was approximately (pound)1.00=$1.58. At
December 31, 1996 the current exchange rate was approximately (pound)1.00=$1.71,
and the average exchange rate for the twelve month period ended December 31,
1996 was approximately (pound)1.00=$1.56. The average exchange rate for the
twelve month period ended December 31, 1995 was approximately (pound)1.00=$1.58.
All resulting translation adjustments are recorded directly to Foreign currency
translation and other on CSW's Consolidated Balance Sheets. Cash flow statement
items are translated at a combination of average, historical and current
exchange rates. The non-cash impact of the changes in exchange rates on cash and
cash equivalents, resulting from the translation of items at the different
exchange rates, is shown on CSW's Consolidated Statements of Cash Flows in
Effect of exchange rate changes on cash and cash equivalents.
STATEMENTS OF CASH FLOWS
Cash equivalents are considered to be highly liquid instruments with a
maturity of three months or less. Accordingly, temporary cash investments, which
for CSW subsidiaries includes receivables from affiliates, are considered cash
equivalents.
RISK MANAGEMENT
CSW has been exposed to currency and interest rate risks which reflect
the floating exchange rate that exists between the U.S. dollar and the British
pound since its purchase of SEEBOARD in 1995. CSW has utilized certain risk
management tools, including cross currency swaps, foreign currency futures and
foreign currency options, to manage adverse changes in exchange rates and to
facilitate financing transactions resulting from CSW's acquisition of SEEBOARD.
SEEBOARD has entered into contracts for differences to reduce exposure
to fluctuations in the price of electricity purchased from the United Kingdom's
electricity power pool. This pool was established at privatization of the United
Kingdom's electric industry for the bulk trading of electricity between
generators and suppliers.
CSW accounts for these transactions as hedge transactions and any gains
or losses associated with the risk management tools are recognized in the
financial statements at the time the hedge transactions are settled. CSW
believes its credit risk in these contracts is negligible. See MD&A, RISK
MANAGEMENT and NOTE 7. FINANCIAL INSTRUMENTS for additional information.
SECURITIES AVAILABLE FOR SALE
CSW accounts for its investments in equity securities in accordance
with SFAS No. 115. The investments have been designated as available for sale,
and as a result are stated at fair value. Unrealized holding gains and losses,
net of related taxes, are included within Foreign currency translation and other
on CSW's Consolidated Balance Sheets. Information related to these Securities
available for sale as of December 31, 1997 is presented in the following table.
Original Unrealized Holding Gains/
Cost (Losses) Fair Value
-------------------------------------------------
(millions)
Securities available for sale $110 $5 $(12) $103
CSW
2-44
ACCOUNTING CHANGE
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 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.
RECLASSIFICATION
Certain financial statement items for prior years have been
reclassified to conform to the 1997 presentation. See NOTE 15. TRANSOK
DISCONTINUED OPERATIONS for information related to the classification of Transok
activities.
2. LITIGATION AND REGULATORY PROCEEDINGS
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 El Paso
Merger Agreement, El Paso filed suit against CSW seeking a $25 million
termination fee from CSW, as well as, unspecified damages for various contract
and tort claims. Subsequently, CSW filed suit against El Paso seeking a $25
million termination fee from El Paso and recovery of certain rate case expenses
incurred by CSW on behalf of El Paso.
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. On April 11, 1997, the court issued an interim order in
which it ruled that CSW owed El Paso a $25 million termination fee and reserved
judgment on certain disputed interest.
In July 1997, CSW and El Paso reached a settlement agreement that
resolved all of the pending litigation. Under the terms of the settlement
agreement, CSW and El Paso dismissed all pending claims in the 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.
LITIGATION RELATED TO THE RIGHTS PLAN AND AEP MERGER
Two lawsuits have been filed in Delaware state court seeking to enjoin
the AEP Merger. CSW and each of its directors have been named as defendants in
both cases. The first suit alleges that the Rights Plan, approved by the CSW
Board of Directors on September 27, 1997 and which became effective after SEC
approval under the Holding Company Act on December 19, 1997, constitutes a
"poison pill" precluding acquisition offers and resulting in a heightened
fiduciary duty on the part of the CSW Board of Directors to pursue an
auction-type sales process to obtain the best value for CSW stockholders. The
second suit alleges that the AEP Merger is unfair to CSW stockholders in that it
does not recognize the underlying intrinsic value of CSW's assets and its future
profitability. The second suit also seeks an auction-type sale process. CSW
believes that both suits are without merit and intends to defend them
vigorously.
CPL RATE REVIEW - DOCKET NO. 14965
In November 1995, CPL filed with the Texas Commission a request to
increase its retail base rates by $71 million, 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
CSW
2-45
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 a revised 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 the CPL 1997 Final Order. The CPL 1997 Final 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.
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.
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 refund to
customers in December 1997. A second refund was made in March 1998. The
different components that were all incorporated into the December 1997 refund
made to customers, a breakdown of the December 1997 refund, as well as the March
1998 refund, including interest, is shown below (millions).
December 1997
Amount collected from customers under bond $81.7
Surcharge for rate case expenses (13.3)
Surcharge for fuel cost under-recovery (23.6)
------
Net refund to customers $44.8
------
March 1998 (estimated)
Remaining refund available $59.0
Surcharge for fuel cost under-recovery (34.3)
------
Net refund to customers $24.7
------
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 financial impact on its results of operations for 1996 and for
the year 1997 is shown below.
CSW
2-46
1996
Retroactive 1997 Only
Impact Impact
----------- ---------
(millions)
Decrease in revenue $(20.7) $(24.2)
----------- ---------
Items included in decrease in revenue with
offsetting effect on expense:
Accelerated recovery of STP (ECOM) 13.3 20.0
Change in depreciation (7.5) (11.3)
Decommissioning 1.9 4.3
Other -- 6.8
----------- ---------
7.7 19.8
----------- ---------
Change in current year income before tax (28.4) (44.0)
Federal income taxes 9.5 14.8
----------- ---------
Impact on net income - all recorded in 1997 $(18.9) $(29.2)
----------- ---------
CPL appealed the CPL 1997 Final Order to the State District Court of
Travis County to challenge the resolution of several issues in the rate case.
The primary issues include: (i) the classification of $800 million of invested
capital in STP as ECOM which was also assigned a lower return on equity than
non-ECOM property, (ii) the Texas Commission's use of the "Glide Path" rate
reduction methodology to be applied to rates in mid-1998 and mid-1999, and (iii)
the $18 million of disallowed affiliate transactions from CSW Services. As part
of the appeal, CPL seeks a temporary injunction to prohibit the Texas Commission
from implementing the "Glide Path" rate reduction methodology, currently
scheduled to begin in May 1998. A hearing has been set for the temporary
injunction on April 3, 1998. 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 1995 AGREEMENT
On April 5, 1995, CPL reached an agreement in principle with other
parties to pending regulatory proceedings involving base rate, fuel and prudence
issues relating to an outage experienced at STP during 1993 and 1994. Under the
CPL 1995 Agreement, CPL provided customers a one-time base rate refund of $50
million. In addition, CPL refunded approximately $30 million in over-recovered
fuel costs through April 1995. Furthermore, CPL did not charge customers for
$62.25 million in replacement power costs and related interest primarily
associated with the 1993-1994 STP outage. The CPL 1995 Agreement did not result
in any ongoing change in base rate levels and provided that there would be no
new rate review requests filed prior to September 28, 1995. CPL also reduced its
fuel factors, effective in July 1995, by approximately $55 million on an annual
basis due to projections of lower fuel costs. The Texas Commission approved the
CPL 1995 Agreement on October 4, 1995. Details of the items in the CPL 1995
Agreement and the total 1995 earnings impact for CPL, including certain
accounting provisions, are set forth in the following table.
CSW
2-47
Pre-tax After-tax
-------------------
(millions)
Base rate refund $(50.0) $(32.5)
Fuel disallowance (62.3) (40.5)
Wholesale fuel refund (3.2) (2.1)
Current flowback of excess deferred
federal income taxes 34.3 34.3
Capitalization of previously expensed
restructuring and rate case costs 27.6 17.9
Recognition of factoring income 16.1 10.5
Amortization, interest and other (6.6) (4.4)
CPL DEFERRED ACCOUNTING
By orders issued in 1989 and 1990, the Texas Commission authorized CPL
to defer certain STP Unit 1 and Unit 2 costs incurred between the commercial
operation dates of those units and the effective date of rates reflecting the
operation of those units. Upon appeal of the 1989 CPL order, and a related order
involving another utility, the Supreme Court 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
Supreme Court of Texas' opinion in the appeal of the deferred accounting
authorization case suggests that the appropriateness of including deferred
accounting costs in rates charged to customers is dependent on a finding in the
first case in which the deferred STP costs are recovered through rates that the
deferral was actually necessary to preserve the utility's financial integrity.
If in the appeals of the October 1990 and December 1990 rate orders, the courts
decide that subsequent review under the financial integrity standard is required
and was not made in those orders, such rate orders would be remanded to the
Texas Commission for the purpose of entering findings applying the financial
integrity standard. Pending the ultimate resolution of CPL's deferred accounting
issues, CPL is unable to predict how its deferred accounting orders will
ultimately be resolved by the Texas Commission.
If CPL's deferred accounting matters are not favorably resolved, CSW
and CPL could experience a material adverse effect on their respective results
of operations and financial condition. While CPL's management is unable to
predict the ultimate outcome of these matters, management believes either that
CPL will receive approval of its deferred accounting amounts or that CPL will be
successful in renegotiation of its rate orders, so that there will be no
material adverse effect on CSW's or CPL's results of operation or financial
condition.
CPL FUEL PROCEEDING
In January 1998, CPL filed a request with the Texas Commission to
recover approximately $41.4 million in uncollected fuel and purchased power
costs and related interest from its retail customers and to increase the fuel
factors used to recover fuel costs incurred to provide service in the future.
The fuel surcharge will be subtracted from the remaining refund totaling
approximately $59.0 million that was ordered by the Texas Commission in CPL's
recent general rate case, Docket No. 14965. This net refund is being issued as a
one-time adjustment to customers' March 1998 bills. In the same filing with the
Texas Commission, CPL also requested permission to increase its fixed fuel
factors by approximately $23.4 million effective with March 1998 bills. The
primary cause of CPL's current fuel cost under-recovery and the need to increase
its current fuel factors is the unanticipated increase in the price of natural
gas.
CSW
2-48
In February 1998, stipulations were reached on both the fuel factor and
surcharge. The fuel factor increase is being reduced to $15.4 million, and the
fuel surcharge including interest is being reduced to $34.3 million. The
reductions are not a disallowance and will be considered as part of CPL's fuel
reconciliation filing to be made in December 1998.
CPL NUCLEAR INSURANCE CLAIMS
In 1994, CPL filed a claim under its NEIL I policy relating to the
1993-1994 outage at STP Units 1 and 2. NEIL denied CPL's claim in 1995. CPL
filed an action in April 1996 against both NEIL and Johnson & Higgins of Texas,
Inc., the former insurance broker for STP, seeking recovery under the policy and
other relief. Subsequently, CPL and NEIL agreed to dismiss all litigation
between them concerning CPL's claim for NEIL coverage, and they agreed to submit
their disputes over coverage to a non-binding, neutral evaluation process.
Hearings were held by the neutral evaluator in February 1997 and April 1997. On
April 22, 1997, the neutral evaluator made the recommendation that CPL's claim
was not covered by its NEIL I policy. CPL abided by this recommendation.
CPL INDUSTRIAL ROAD AND INDUSTRIAL METALS SITE
Three suits naming CPL and others as defendants relating to a
third-party owned and operated site in Corpus Christi, Texas formerly used for
commercial reclamation of used electrical transformers, lead acid batteries and
other scrap metals, 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 cleanup activities.
During 1997, these suits were settled with no material adverse effect on CSW's
or CPL's results of operation or financial condition.
CPL MUNICIPAL FRANCHISE FEE LITIGATION
In May 1996, the city of San Juan, Texas filed a purported 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
plaintiff's petition 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. In
May 1996 and December 1996, respectively, the cities of Pharr, Texas and San
Benito, Texas filed individual suits making claims virtually identical to those
claimed by the city of San Juan. 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 February 1998,
the court of appeals' affirmed the trial court's order certifying the class. CPL
appealed the court of appeals ruling to the Texas Supreme Court.
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.
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2-49
CPL AND WTU TEXAS UTILITIES COMPLAINT (DOCKET NO. 17285)
A Proposal for Decision was received in February 1998 in a joint
CPL/WTU complaint at the Texas Commission that since January 1, 1997, Texas
Utilities was effectively double charging for transmission service within the
Electric Reliability Council of Texas. The Proposal recommends approval of a
CPL/WTU proposed offset of $15.5 million annually of payments to Texas Utilities
under FERC-approved transmission service agreements against amounts that CPL and
WTU would otherwise owe Texas Utilities pursuant to Texas Commission rules for
transmission service in ERCOT. The Texas Commission will consider the Proposal
in April 1998.
PSO RATE REVIEW
In July 1996, the Oklahoma Commission 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 Oklahoma Commission staff and other
intervenors to the proceeding filed their revenue requirements testimony. In its
filing, the Oklahoma Commission staff recommended a rate reduction of $76.8
million for PSO.
On October 15, 1997, PSO reached a stipulated agreement with parties to
settle the rate inquiry that was pending before the Oklahoma Commission. On
October 23, 1997, the Oklahoma Commission issued a final order approving the
agreement. 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 resulted in PSO making a one-time $29 million
refund to customers in December 1997.
The PSO 1997 Rate Settlement Agreement also calls for PSO to eliminate
or amortize before its next rate filing approximately $41 million in certain
deferred assets, approximately $26 million of which had been expensed in 1996.
The remaining $15 million of deferred assets, which included approximately $9
million of costs incurred for customer energy management incentive programs,
were written off in 1997. The following table represents the financial impact of
the PSO 1997 Rate Settlement Agreement on PSO's 1997 results of operations.
1997
Impact
------
(millions)
Decrease in revenue
Refund to customers $(29.0)
Change in rates (2.5)
------
(31.5)
------
Changes in expenses (offsetting impact
included in revenues)
Depreciation (6.3)
Rate case deferred costs 2.2
Income tax (10.2)
------
(14.3)
------
(17.2)
Write-off of deferred assets, net of tax (10.2)
------
$(27.4)
------
The PSO 1997 Rate Settlement Agreement resulted in a material adverse
effect on PSO's results of operations for 1997 that will have a continuing
impact because of the rate decrease. However, it reduced significant risks for
PSO related to this regulatory proceeding and should allow PSO's rates to remain
competitive for the foreseeable future.
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2-50
See MD&A - RATES AND REGULATORY MATTERS, PSO 1997 RATE SETTLEMENT
AGREEMENT for additional discussion of the PSO 1997 Rate Settlement Agreement,
including the estimated ongoing financial impact of the agreement.
PSO PCB CASES
PSO has been named a defendant in petitions filed in state court in
Oklahoma in February and August, 1996. The petitions allege that the plaintiffs
suffered personal injury and fear future injury as a result of contamination by
PCBs from a transformer malfunction that occurred in April, 1982 at the Page
Belcher Federal Building in Tulsa. Each of the plaintiffs seeks actual and
punitive damages in excess of $10,000. As previously reported, other claims
arising from this incident have been settled and the suits dismissed. Management
believes that PSO has defenses to the remaining complaints and intends to defend
the suits vigorously. Management believes that the remaining claims are covered
by insurance. Management also believes that the ultimate resolution of the
remaining lawsuits will not have a material adverse effect on CSW's or PSO's
results of operations or financial condition.
PSO SAND SPRINGS/GRANDFIELD, OKLAHOMA SITES
In 1989, PSO found 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 EPA alleged 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 also alleged
failure to date PCB articles at a Grandfield, Oklahoma site. The total proposed
penalty, which was accrued by PSO in 1996, was $479,000. PSO settled all claims
in the suit by March 1998. The settlement did not have a material adverse effect
on CSW's or PSO's results of operations or financial condition.
SWEPCO FUEL PROCEEDING
In April 1997, SWEPCO filed with the Texas Commission an application
concerning fuel cost under-recoveries and a possible fuel surcharge. The
application included a motion to either abate the requested interim surcharge
and 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 the 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 in its filing a proposed surcharge period or
a total surcharge amount which would reflect interest through the entire
surcharge period. However, 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.
On December 8, 1997, SWEPCO and the other parties to the above
consolidated proceedings before the Texas Commission filed a settlement on all
issues except for one issue which will be decided by the Texas Commission. The
outstanding issue concerns transmission equalization payments and whether they
should be included in fuel or base revenues. The settlement is subject to
approval by the Texas Commission. Of the $16.8 million in under-recovered fuel
costs as of December 31, 1996, the settlement 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. However, should SWEPCO not prevail on the outstanding
issue, SWEPCO would be required to reduce earnings by approximately $1.8
million. The settlement also provides that SWEPCO's fuel and fuel-related
CSW
2-51
expenses during the reconciliation period were reasonable and necessary and
would allow them to be reconciled as eligible fuel. Also, the settlement
provides that SWEPCO's actions in litigating and renegotiating certain fuel
contracts, together with the prices, terms and conditions of the renegotiated
contracts were prudent. The $6.0 million reduction is not associated with any
particular activity or issue within the fuel proceedings. SWEPCO cannot predict
whether approval of the settlement will be granted by the Texas Commission.
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 benefit 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. On March 13, 1998, the Supreme Court of Texas affirmed
the judgment of the court of appeals.
SWEPCO LIGNITE MINING AGREEMENT LITIGATION
SWEPCO and CLECO are each a 50% owner of Dolet Hills Power Station Unit
1 and jointly own lignite reserves in the Dolet Hills area of northwestern
Louisiana. In 1982, SWEPCO and CLECO entered into a lignite mining agreement
with the DHMV, a partnership for the mining and delivery of lignite from a
portion of these reserves.
On April 15, 1997, SWEPCO and CLECO 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.
WTU FUEL PROCEEDINGS
In March 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 from June 1997 through February 1999. The Texas
Commission approved the settlement in May 1997.
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2-52
On December 31, 1997, WTU filed with the Texas Commission an
application to reconcile fuel costs and to request authorization to carry the
reconciled balance forward into the next reconciliation period. WTU did not seek
a surcharge of the reconciled balance in the December 31, 1997 filing.
During the reconciliation period of July 1, 1994 through June 30, 1997
WTU incurred approximately $418 million in eligible fuel and fuel-related
expenses to generate and purchase electricity. The Texas jurisdictional
allocation of such fuel and fuel-related expenses is approximately $292 million.
In March 1998, WTU filed with the Texas Commission an Application for
Authority to Implement an increase in fuel factors of $7.4 million, or 7.3%, on
an annual basis. Additionally, WTU proposed to implement a fuel surcharge of
$6.8 million, including accumulated interest, over a six month period to collect
its under-recovered fuel costs. WTU requested authority to implement the revised
fuel factors and to commence the surcharge with its June 1998 billings.
WTU 1995 STIPULATION AND AGREEMENT
The WTU 1995 Stipulation and Agreement which was approved by the Texas
Commission in October 1996 has affected WTU's results of operations for 1996 and
1997. Details of the items with significant earnings impact for 1995, including
certain accounting treatments, are set forth in the following table.
Pre-tax After-tax
------------------
(millions)
Refund to retail customers $(21.0) $(13.7)
Effect of retail rate reduction (2.4) (1.6)
Current flowback of property related excess
deferred federal income taxes 6.9 6.9
Five year flowback of non-property related
excess deferred federal income taxes 0.1 0.1
Capitalization and amortization of previously
expensed restructuring costs 12.7 8.2
Other amortization (0.2) (0.1)
Other one-time items 1.0 0.7
The WTU 1995 Stipulation and Agreement also eliminated several
significant risks that have been the subject of regulatory proceedings relating
to deferred accounting and rates and will enable WTU's rates to remain at
competitive levels for the foreseeable future.
OTHER
The Registrants are party to various other legal claims, actions and
complaints arising in the normal course of business. Management does not expect
disposition of these matters to have a material adverse effect on the
Registrants' results of operations or financial condition.
3. COMMITMENTS AND CONTINGENT LIABILITIES
CONSTRUCTION AND CAPITAL EXPENDITURES
It is estimated that CSW, including the U.S. Electric Operating
Companies, SEEBOARD and other diversified operations, will spend approximately
$569 million in capital expenditures (but excluding capital
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2-53
that may be required for acquisitions) during 1998. Substantial commitments have
been made in connection with these programs.
CPL - $129 million PSO - $71 million SWEPCO - $95 million WTU - $36 million
FUEL AND RELATED COMMITMENTS
To supply a portion of their fuel requirements, the U.S. Electric
Operating Companies have entered into various commitments for the procurement of
fuel.
SWEPCO HENRY W. PIRKEY POWER PLANT
In connection with the South Hallsville lignite mining contract for its
Henry W. Pirkey Power Plant, SWEPCO has agreed, under certain conditions, to
assume the obligations of the mining contractor. As of December 31, 1997, the
maximum amount SWEPCO believes it could potentially assume is $67 million.
However, the maximum amount may vary as the mining contractor's need for funds
fluctuates. The contractor's actual obligation outstanding at December 31, 1997
was $59 million.
SWEPCO SOUTH HALLSVILLE LIGNITE MINE
As part of the process to receive a renewal of a Texas Railroad
Commission permit for lignite mining at the South Hallsville lignite mine 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.
OTHER COMMITMENTS AND CONTINGENCIES
CPL NUCLEAR INSURANCE
In connection with the licensing and operation of STP, the owners have
purchased nuclear property and liability insurance coverage as required by law,
and have executed indemnification agreements with the NRC in accordance with the
financial protection requirements of the Price-Anderson Act.
The Price-Anderson Act, a comprehensive statutory arrangement providing
limitations on nuclear liability and governmental indemnities, is in effect
until August 1, 2002. The limit of liability under the Price-Anderson Act for
licensees of nuclear power plants is $8.92 billion per incident, effective as of
December 1997. The owners of STP are insured for their share of this liability
through a combination of private insurance amounting to $200 million and a
mandatory industry-wide program for self-insurance totaling $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 other owners have agreed will be
allocated on the basis of their respective ownership interests in STP.
For purposes of these assessments, STP has two licensed reactors.
The owners of STP currently maintain on-site decontamination liability
and property damage insurance in the amount of $2.75 billion provided by ANI and
NEIL. Policies of insurance issued by ANI and NEIL stipulate that policy
proceeds must be used first to pay decontamination and cleanup costs before
being used to cover direct losses to property. Under project agreements, CPL and
the other owners of STP will share the total cost of decontamination liability
and property insurance for STP, including premiums and assessments, on a pro
rata basis, according to each owner's respective ownership interest in STP.
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CPL purchased, for its own account, a NEIL I Business Interruption
and/or Extra Expense policy. This insurance will reimburse CPL for extra
expenses incurred for replacement generation or purchased power as the result of
a covered accident that shuts down production at one or both of the STP Units
for more than 23 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 recovery. The maximum amount recoverable for a
single unit outage is $118.6 million for both Unit 1 and 2. CPL is subject to an
additional assessment up to $1.8 million for the current policy year in the
event that insured losses at a nuclear facility covered under the NEIL I policy
exceeds the accumulated funds available under the policy. CPL renewed its
current NEIL I Business Interruption and/or Extra Expense policy September 15,
1997.
For further information relating to litigation associated with CPL
nuclear insurance claims, reference is made to NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS.
SWEPCO CAJUN ASSET PURCHASE PROPOSAL
Cajun filed a petition for reorganization under Chapter 11 of the
United States Bankruptcy Code on December 21, 1994 and is currently operating
under the supervision of the United States Bankruptcy Court for the Middle
District of Louisiana.
On March 18, 1998, SWEPCO, together with the Cajun Members Committee,
which currently represents 7 of the 12 Louisiana member distribution
cooperatives that are served by Cajun, filed the SWEPCO Plan in the bankruptcy
court. Under the SWEPCO Plan, a SWEPCO affiliate or subsidiary would acquire all
of the non-nuclear assets of Cajun, comprised of the two-unit Big Cajun I
natural gas-fired plant, the three-unit Big Cajun II coal-fired plant, and
related non-nuclear assets, for $940.5 million in cash, subject to adjustment
pursuant to terms of the asset purchase agreement proposed as part of the SWEPCO
plan. The SWEPCO Plan incorporates the terms of a settlement between the RUS,
Cajun Members Committee, Claiborne Electric Cooperative, Inc. and SWEPCO. In
addition, the SWEPCO Plan provides for SWEPCO and the Cajun member cooperatives
to enter into long-term power supply agreements which will provide the Cajun
member cooperatives with rate plan options and market access provisions designed
to ensure the long-term competitiveness of the cooperatives. Eight cooperatives
and CLECO, successor to Teche Electric Cooperative, already have agreed to
purchase power from SWEPCO if SWEPCO's plan is confirmed by the bankruptcy
court.
Entergy Texas is no longer a co-plan proponent with SWEPCO and the
Cajun Members Committee, as it had been under SWEPCO plans filed prior to the
January 15, 1998 plan. SWEPCO continues to work with Entergy Texas to resolve
its objection to the plan. The SWEPCO Plan filed March 18, 1998 replaces plans
filed previously by SWEPCO on January 15, 1998, October 26, 1996, September 30,
1996 and April 19, 1996. Two competing plans of reorganization for the
non-nuclear assets of Cajun have been filed with the bankruptcy court, each with
different purchase prices, rate paths and other provisions. Confirmation
hearings in Cajun's bankruptcy case are now scheduled through April 1998.
Consummation of the SWEPCO Plan is conditioned upon confirmation by the
bankruptcy court, and the receipt by SWEPCO and CSW of all requisite state and
federal regulatory approvals in addition to their board approvals. If the SWEPCO
Plan is confirmed, the $940.5 million required to consummate the acquisition of
Cajun's non-nuclear assets is expected to be financed through a combination of
external borrowings and internally generated funds with approximately 70% of the
external borrowings funded with non-recourse debt. There can be no assurance
that the SWEPCO Plan will be confirmed by the bankruptcy court or, if it is
confirmed, that it will be approved by federal and state regulators.
SWEPCO RENTAL AND LEASE COMMITMENTS
SWEPCO has entered into various financing arrangements primarily with
respect to coal transportation and related equipment, which are treated as
operating leases for rate-making purposes. At December 31, 1997, leased assets
of $45.7 million, less accumulated amortization of $39.0 million, were included
in Electric Utility Plant on the Consolidated Balance Sheets and at December 31,
1996, leased assets were $46.0 million, less accumulated amortization of $36.9
million.
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SWEPCO BILOXI, MISSISSIPPI MGP SITE
SWEPCO was notified by Mississippi Power in 1994 that it may be a PRP
at a MGP site in Biloxi, Mississippi, which was formerly owned and operated by a
predecessor of SWEPCO. Since then, SWEPCO has worked with Mississippi Power on
both the investigation of the extent of contamination on the site as well as 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 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 must meet a residential usage scenario or a
commercial/industrial scenario, 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 yet determinable. SWEPCO has
incurred approximately $200,000 to date for its portion of the cleanup of this
site, and based on its preliminary estimates, anticipates that an additional $2
million may be incurred. Accordingly, SWEPCO has accrued $2 million for the
cleanup of the site.
SWEPCO VODA PETROLEUM SUPERFUND SITE
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.
CSW ENERGY LOANS AND COMMITMENTS
CSW Energy has agreed to provide construction financing and other
credit support up to $235 million for the 330 MW Phillips Sweeny project. CSW
Energy obtained the funds for this project through CSW's short-term borrowing
program. Construction of this plant began in September 1996 and commenced
commercial operations in February 1998. At December 31, 1997, CSW Energy had
provided $163 million, including development, construction and financing, of the
total estimated $189 million in project costs. CSW Energy expects to obtain
permanent project financing in the second quarter of 1998 at which time the
project will return a significant portion of the investment and the short-term
borrowings will be repaid. In addition, CSW has provided letters of credit and
guarantees on behalf of other independent power projects totaling approximately
$27 million.
CSW INTERNATIONAL ENERTEK PROJECT
In July 1996, CSW International announced a joint venture with Alpek,
through a subsidiary, to build, own and operate a 109 MW, gas-fired cogeneration
project at Alpek's Petrocel industrial complex in Altamira, Tamaulipas, Mexico.
CSW International and Alpek each will have 50% ownership in the project,
Enertek, which will cost approximately $75 million. CSW International has agreed
to provide construction financing for the project of which $62 million had been
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funded at December 31, 1997. The Enertek project began operations in the first
quarter of 1998.
4. INCOME TAXES
CSW files a consolidated United States federal income tax return and
participates in a tax sharing agreement with its subsidiaries. Income tax
includes United States federal income taxes, applicable state income taxes and
SEEBOARD's United Kingdom corporation taxes. Total income taxes differ from the
amounts computed by applying the United States federal statutory income tax rate
to income before taxes for a number of reasons which are presented in the INCOME
TAX RATE RECONCILIATION table below. Information concerning income taxes,
including total income tax expense, the reconciliation between the United States
federal statutory tax rate and the effective tax rate and significant components
of deferred income taxes follow.
INCOME TAX EXPENSE CSW CPL PSO SWEPCO WTU
----------------------------------------------
1997 (millions) (thousands)
-------------------------------------
INCLUDED IN OPERATING
EXPENSES AND TAXES
Current (1) $47 $43,600 $14,543 $46,358 $11,765
Deferred (1) 117 35,263 8,498 (1,984) (954)
Deferred ITC (2) (13) (4,819) (2,278) (4,662) (1,321)
--------------------------------------------
151 74,044 20,763 39,712 9,490
INCLUDED IN OTHER
INCOME AND DEDUCTIONS
Current -- (4,271) (2,230) (1,962) (471)
Deferred (6) (779) (50) (260) --
--------------------------------------------
(6) (5,050) (2,280) (2,222) (471)
--------------------------------------------
$145 $68,994 $18,483 $37,490 $9,019
--------------------------------------------
1996
INCLUDED IN OPERATING
EXPENSES AND TAXES
Current (1) $118 $46,588 $26,152 $33,904 $6,953
Deferred (1) 120 57,416 14,190 10,696 9,706
Deferred ITC (2) (14) (5,553) (2,784) (4,730) (1,321)
--------------------------------------------
224 98,451 37,558 39,870 15,338
INCLUDED IN OTHER
INCOME AND DEDUCTIONS
Current (1) 639 (895) (973) (406)
Deferred (39) (5,940) (15,518) (7,847) (3,988)
--------------------------------------------
(40) (5,301) (16,413) (8,820) (4,394)
INCOME TAXES FOR
DISCONTINUED OPERATIONS
(includes $72 resulting
from the gain on the sale) 78 -- -- -- --
--------------------------------------------
$262 $93,150 $21,145 $31,050 $10,944
--------------------------------------------
1995
INCLUDED IN OPERATING
EXPENSES AND TAXES
Current (1) $105 $51,626 $37,687 $41,852 $4,892
Deferred 1 (30,025) 2,704 6,287 1,971
Deferred ITC (2) (14) (5,789) (2,789) (4,786) (1,321)
--------------------------------------------
92 15,812 37,602 43,353 5,542
INCLUDED IN OTHER
INCOME AND DEDUCTIONS
Current 2 129 (197) (721) 1,564
Deferred (4) -- -- -- --
--------------------------------------------
(2) 129 (197) (721) 1,564
INCOME TAXES FOR
DISCONTINUED OPERATIONS 13 -- -- -- --
--------------------------------------------
$103 $15,941 $37,405 $42,632 $7,106
--------------------------------------------
(1) Approximately $30 million, $49 million and $7 million of CSW's Current
Income Tax Expense was attributable to SEEBOARD U.S.A. operations and
was recognized as United Kingdom corporation tax expense for 1997,
1996 and 1995, respectively. In addition, approximately $7 million and
CSW
2-57
$19 million of CSW's Deferred Income Tax Expense in 1997 and 1996,
respectively, was attributed to SEEBOARD U.S.A.
(2) ITC deferred in prior years are included in income over the lives of
the related properties.
INCOME TAX RATE CSW CPL PSO SWEPCO WTU
RECONCILIATION
-------------------------------------------------------
1997 ($ in millions) ($ in thousands)
-----------------------------------------
Income before taxes
attributable to:
Domestic operations $327
Foreign operations 147
----
Income before taxes $474 $197,465 $64,689 $130,392 $30,480
Tax at U.S. statutory rate $166 $69,113 $22,641 $45,637 $10,668
Differences
Amortization of ITC (13) (4,819) (2,278) (4,662) (1,321)
Mirror CWIP 5 4,647 -- -- --
Non-deductible goodwill
amortization 12 -- -- -- --
Tax credit on foreign
operations dividend (3) -- -- -- --
United Kingdom deferred
income tax adjustment (16) -- -- -- --
Adjustments (4) (1,361) (1,324) (633) (177)
Other (2) 1,414 (556) (2,852) (151)
-------------------------------------------------
$145 $68,994 $18,483 $37,490 $9,019
-------------------------------------------------
Effective tax rate 31% 35% 29% 29% 30%
1996
Income before taxes
attributable to:
Domestic operations $562
Foreign operations 146
----
Income before taxes $708 $240,201 $52,622 $97,605 $27,515
Tax at U.S. statutory rate $248 $84,070 $18,418 $34,162 $9,630
Differences
Amortization of ITC (14) (5,553) (2,784) (4,730) (1,321)
Mirror CWIP 5 4,584 -- -- --
Non-deductible goodwill
amortization 13 -- -- -- --
Tax credit on foreign
operations dividend (18) -- -- -- --
Adjustments 10 5,127 201 1,544 1,467
Other 18 4,922 5,310 74 1,168
-------------------------------------------------
$262 $93,150 $21,145 $31,050 $10,944
-------------------------------------------------
Effective tax rate 37% 39% 40% 32% 40%
1995
Income before taxes
attributable to:
Domestic operations $506
Foreign operations 13
----
Income before taxes $519 $222,388 $119,233 $159,675 $41,636
Tax at U.S. statutory rate $182 $77,836 $41,732 $55,886 $14,573
Differences
Amortization of ITC (14) (5,789) (2,789) (4,786) (1,321)
Mirror CWIP (11) (10,843) -- -- --
CPL 1995 Agreement (34) (34,289) -- -- --
WTU 1995 Stipulation and
Agreement (7) -- -- -- (6,859)
Adjustments (22) (13,462) (2,949) (2,783) 953
Other 9 2,488 1,411 (5,685) (240)
-------------------------------------------------
$103 $15,941 $37,405 $42,632 $7,106
-------------------------------------------------
Effective tax rate 20% 7% 31% 27% 17%
CSW
2-58
DEFERRED INCOME TAXES (1) CSW CPL PSO SWEPCO WTU
-------------------------------------------------
(millions) (thousands)
---------------------------------------
1997
Deferred Income Tax Liabilities
Depreciable utility plant $1,920 $802,279 $291,547 $410,313 $144,690
Deferred plant costs 176 169,497 -- -- 6,523
Mirror CWIP asset 100 99,901 -- -- --
Income tax related regulatory
assets 211 149,834 10,539 38,603 12,284
Other 371 147,513 36,836 36,237 20,651
------------------------------------------------
2,778 1,369,024 338,922 485,153 184,148
Deferred Income Tax Assets
Income tax related regulatory
liability (123) (40,552) (26,704) (40,916) (14,969)
Unamortized ITC (100) (49,830) (15,920) (24,673) (9,771)
Alternative minimum tax
carryforward (27) (16,129) -- -- --
Other (76) (3,744) (35,188) (19,061) (9,859)
------------------------------------------------
(326) (110,255) (77,812) (84,650) (34,599)
------------------------------------------------
Net Accumulated Deferred Income
Taxes $2,452 $1,258,769 $261,110 $400,503 $149,549
------------------------------------------------
Net Accumulated Deferred Income
Taxes
Noncurrent $2,432 $1,237,387 $258,848 $395,909 $149,346
Current 20 21,382 2,262 4,594 203
------------------------------------------------
$2,452 $1,258,769 $261,110 $400,503 $149,549
------------------------------------------------
1996
Deferred Income Tax Liabilities
Depreciable utility plant $1,867 $791,693 $275,938 $389,575 $135,215
Deferred plant costs 178 170,442 -- -- 7,237
Mirror CWIP asset 105 104,548 -- -- --
Income tax related regulatory
assets 207 156,059 10,976 30,486 9,743
Other 307 72,798 35,626 38,875 26,055
------------------------------------------------
2,664 1,295,540 322,540 458,936 178,250
Deferred Income Tax Assets
Income tax related regulatory
liability (126) (39,202) (28,771) (42,533) (15,664)
Unamortized ITC (105) (51,517) (16,802) (26,394) (10,234)
Alternative minimum tax
carryforward (83) (16,129) -- -- --
Other (99) (19,331) (28,519) (13,295) (9,285)
------------------------------------------------
(413) (126,179) (74,092) (82,222) (35,183)
------------------------------------------------
Net Accumulated Deferred Income
Taxes $2,251 $1,169,361 $248,448 $376,714 $143,067
------------------------------------------------
Net Accumulated Deferred Income
Taxes
Noncurrent $2,272 $1,162,051 $251,007 $372,552 $144,146
Current (21) 7,310 (2,559) 4,162 (1,079)
------------------------------------------------
$2,251 $1,169,361 $248,448 $376,714 $143,067
------------------------------------------------
(1) In 1996, CSW generated $33 million of excess foreign tax credits
against which a full valuation allowance was established as of
December 31, 1996. In 1997, the valuation reserve was reduced to
$17 million due to lower levels of excess foreign tax credits.
Other than excess foreign tax credits, CSW did not have other
valuation allowances recorded against other deferred tax assets at
December 31, 1997 and 1996 due to a favorable earnings history.
5. BENEFIT PLANS
PENSION PLANS
Prior to June 30, 1997, CSW maintained a tax qualified,
non-contributory defined benefit pension plan covering substantially all CSW
employees in the United States. Benefits were based on employees' years of
credited service, age at retirement, and final average annual earnings with an
offset for the participant's primary Social Security benefit. The CSW board of
CSW
2-59
directors approved an amendment, effective July 1, 1997, which converted the
present value of accrued benefits under the existing pension plan into a cash
balance pension plan. Under the cash balance formula, each participant has an
account, for recordkeeping purposes only, to which credits are allocated
annually based on a percentage of the participant's pay. The applicable
percentage is determined by age and years of vested service the participant has
with CSW as of December 31 of each year.
The 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, CSW realized 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 were recognized evenly throughout 1997 with a portion being capitalized.
The approximate amount of savings attributable to the U.S. Electric Operating
Companies for 1997 is as follows.
CPL-$4.7 million PSO-$3.6 million SWEPCO-$4.4 million WTU-$2.6 million
Pension plan assets consist primarily of common stocks and short-term
and intermediate-term fixed income investments.
The majority of SEEBOARD's employees joined a pension plan that is
administered for the United Kingdom's electricity industry. The assets of this
plan are held in a separate trustee-administered fund that is actuarially valued
every three years. SEEBOARD and its participating employees both contribute to
the plan. Subsequent to July 1, 1995, new employees were no longer able to
participate in that plan. Instead, two new pension plans were made available to
new employees, both of which are also separate trustee-administered plans.
Information about the two separate pension plans (the U.S. plan and the
non-U.S. plan), including: (i) pension plan net periodic costs and
contributions; (ii) pension plan participation; (iii) a reconciliation of the
funded status of the pension plan to the amounts recognized on the balance
sheets; and (iv) assumptions used in accounting for the pension plan follow.
CSW
2-60
NET PERIODIC NON-
PENSION PLAN COSTS CSW U.S. U.S.
AND CONTRIBUTIONS PLANS PLAN PLAN CPL PSO SWEPCO WTU
----------------------------------------------------------
(millions) (thousands)
------------------------------------
1997
Net Periodic Pension Costs
Service cost $34 $20 $14 $4,602 $3,421 $4,260 $2,488
Interest cost on
projected benefit
obligation 137 65 72 15,085 11,214 13,965 8,156
Actual return on plan
assets (245) (163) (82) (38,031) (28,272) (35,206) (20,561)
Net amortization and
deferral 68 66 2 15,648 11,633 14,486 8,460
----------------------------------------------------------
$(6) $(12) $6 $(2,696) $(2,004) $(2,495) $(1,457)
----------------------------------------------------------
Pension Plan Contributions $6 $-- $6 $-- $-- $-- $--
1996
Net Periodic Pension Costs
Service cost $37 $23 $14 $5,367 $4,238 $4,891 $3,005
Interest cost on
projected benefit
obligation 136 69 67 16,233 12,817 14,793 9,089
Actual return on plan
assets (184) (110) (74) (26,033) (20,554) (23,723) (14,576)
Net amortization and
deferral 27 27 -- 6,509 5,139 5,932 3,645
----------------------------------------------------------
$16 $9 $7 $2,076 $1,640 $1,893 $1,163
----------------------------------------------------------
Pension Plan Contributions $35 $28 $7 $6,622 $5,228 $6,034 $3,708
1995
Net Periodic Pension Costs
Service cost $20 $20 $-- $4,699 $3,614 $4,220 $2,609
Interest cost on
projected benefit
obligation 64 64 -- 14,860 11,428 13,345 8,251
Actual return on plan
assets (117) (117) -- (27,137) (20,869) (24,370) (15,068)
Net amortization and
deferral 44 44 -- 10,136 7,795 9,102 5,628
----------------------------------------------------------
$11 $11 $-- $2,558 $1,968 $2,297 $1,420
----------------------------------------------------------
Pension Plan Contributions $29 $29 $-- $6,754 $5,195 $6,066 $3,751
APPROXIMATE NUMBER NON-
OF PARTICIPANTS IN CSW U.S. U.S.
PLANS DURING 1997 PLANS PLAN PLAN CPL PSO SWEPCO WTU
--------------------------------------------------------
Active employees 10,100 7,200 2,900 1,800 1,300 1,700 1,000
Retirees 10,200 4,200 6,000 1,400 1,300 900 600
Terminated employees 6,800 2,000 4,800 400 400 200 200
CSW
2-61
RECONCILIATION OF FUNDED 1997 1996
STATUS OF PLAN TO AMOUNTS 1997 1997 NON- 1996 1996 NON-
RECOGNIZED ON THE CSW CSW U.S. U.S. CSW U.S. U.S.
CONSOLIDATED BALANCE SHEETS PLANS PLAN PLANS PLANS PLAN PLAN
----------------------------------------------
(millions)
Actuarial present value of
Accumulated benefit obligation
for service rendered to date $1,860 $896 $964 $1,748 $781 $967
Additional benefit for future
salary levels 94 35 59 200 141 59
--------------------- --------------------
Projected benefit obligation 1,954 931 1,023 1,948 922 1,026
Plan assets, at fair value 2,290 1,109 1,181 2,077 991 1,086
--------------------- --------------------
Plan assets in excess of the
projected benefit obligation 336 178 158 129 69 60
Unrecognized net loss (86) 12 (98) 30 27 3
Unrecognized prior service cost (93) (88) (5) (12) (7) (5)
Unrecognized net obligation 16 11 4 16 12 4
--------------------- --------------------
Prepaid pension cost $173 $113 $59 $163 $101 $62
--------------------- --------------------
The vested portion of the accumulated benefit obligations for the
combined plans was $1.8 billion at December 31, 1997 and $1.7 billion for the
combined plans at December 31, 1996. The unrecognized net obligation for the
U.S. plan is being amortized over the average remaining service life of
employees or 15 years. Prepaid pension cost is included in Deferred Charges and
Other Assets on the balance sheets. No reconciliation of the funding status of
the plan for CPL, PSO, SWEPCO or WTU is presented because the plan is
administered for the CSW System as a whole and such information is unavailable
for the U.S. Electric Operating Companies individually.
In addition to the amounts shown in the above table, CSW has a
non-qualified excess benefit plan. This plan is available to all pension plan
participants who are entitled to receive a pension benefit from CSW which is in
excess of the limitations imposed on benefits by the Internal Revenue Code
through the qualified plan. CSW's net periodic cost for this non-qualified plan
for the years ended December 31, 1997, 1996 and 1995 was $3.7 million, $4.8
million and $2.4 million, respectively.
ASSUMPTIONS USED IN Long-Term
ACCOUNTING FOR Discount Compensation Return on
THE PENSION PLAN Rate Increase Plan Assets
--------------------------------------
1997 U.S. Plan 7.50% 5.46% 9.00%
Non-U.S. Plan 6.75% 4.75% 7.25%
1996 U.S. Plan 8.00% 5.46% 9.50%
Non-U.S. Plan 7.75% 5.75% 8.25%
1995 U.S. Plan 8.00% 5.46% 9.50%
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (U.S. COMPANIES ONLY)
CSW, including each of the U.S. Electric Operating Companies, adopted
SFAS No. 106 effective January 1, 1993. The transition obligation established at
adoption is being amortized over twenty years, with fifteen years remaining.
Prior to 1993, these benefits were accounted for on a pay-as-you-go basis.
Pursuant to an order by the Oklahoma Commission, PSO established a regulatory
asset of approximately $5 million in 1993 for the difference between the
pay-as-you-go basis and the costs determined under SFAS No. 106. PSO is
recovering the amortization of this regulatory asset over a ten year period.
Information about the non-pension postretirement benefit plan,
including: (i) net periodic postretirement benefit costs; (ii) a reconciliation
of the funded status of the postretirement benefit plan to the amounts
recognized on the balance sheets; and (iii) assumptions used in accounting for
the postretirement benefit plan follow.
CSW
2-62
NET PERIODIC
POSTRETIREMENT
BENEFIT COSTS CSW CPL PSO SWEPCO WTU
-------------------------------------------
(millions) (thousands)
----------------------------------
1997
Service cost $ 8 $2,076 $1,694 $1,771 $1,120
Interest cost on APBO 18 5,663 4,794 4,190 2,564
Actual return on plan assets (22) (4,948) (6,707) (6,737) (2,266)
Amortization of transition
obligation 9 2,900 2,528 1,967 1,225
Net amortization and deferral 11 2,047 3,344 3,769 1,009
-----------------------------------------
$24 $7,738 $5,653 $4,960 $3,652
-----------------------------------------
1996
Service cost $8 $2,077 $1,705 $1,810 $1,111
Interest cost on APBO 19 5,887 5,018 4,321 2,602
Actual return on plan assets (7) (1,695) (2,236) (2,168) (766)
Amortization of transition
obligation 9 2,900 2,528 1,967 1,225
Net amortization and deferral (2) (560) (250) (100) (261)
-----------------------------------------
$27 $8,609 $6,765 $5,830 $3,911
-----------------------------------------
1995
Service cost $8 $2,123 $1,986 $1,803 $1,113
Interest cost on APBO 18 5,929 5,175 4,299 2,561
Actual return on plan assets (8) (1,948) (2,597) (2,466) (870)
Amortization of transition
obligation 9 2,900 2,528 1,967 1,225
Net amortization and deferral 2 238 631 679 96
-----------------------------------------
$29 $9,242 $7,723 $6,282 $4,125
-----------------------------------------
RECONCILIATION OF FUNDED
STATUS OF PLAN TO AMOUNTS
RECOGNIZED ON THE BALANCE SHEETS CSW CPL PSO SWEPCO WTU
-------------------------------------------
(millions) (thousands)
----------------------------------
1997
APBO
Retirees $158 $51,426 $43,732 $34,906 $21,607
Other fully eligible participants 24 5,449 5,707 6,559 3,184
Other active participants 59 16,116 11,995 12,749 7,725
----------------------------------------
Total 241 72,991 61,434 54,214 32,516
Plan assets at fair value (159) (44,168) (43,366) (39,630) (20,411)
----------------------------------------
APBO in excess of plan assets 82 28,823 18,068 14,584 12,105
Unrecognized transition obligation (135) (43,508) (37,928) (29,502) (18,372)
Unrecognized gain 53 15,443 19,018 14,715 6,503
----------------------------------------
Accrued/(Prepaid) Cost $-- $758 $(842) $(203) $236
----------------------------------------
1996
APBO
Retirees $163 $54,158 $45,736 $36,013 $22,880
Other fully eligible participants 18 4,281 3,789 5,302 2,398
Other active participants 55 14,871 12,534 12,694 7,857
----------------------------------------
Total 236 73,310 62,059 54,009 33,135
Plan assets at fair value (123) (34,566) (33,748) (30,028) (15,806)
----------------------------------------
APBO in excess of plan assets 113 38,744 28,311 23,981 17,329
Unrecognized transition obligation (144) (46,408) (40,456) (31,469) (19,597)
Unrecognized gain 32 8,723 11,569 7,527 2,662
----------------------------------------
Accrued/(Prepaid) Cost $1 $1,059 $(576) $39 $394
----------------------------------------
ASSUMPTIONS USED IN THE Discount Return on Tax Rate for
ACCOUNTING FOR SFAS NO. 106 Rate Plan Assets Taxable Trusts
----------------------------------------
1997 7.50% 9.00% 39.6%
1996 8.00% 9.50% 39.6%
1995 8.00% 9.50% 39.6%
Health care cost trend rates
1997 Average Rate of 7.0% grading down .50% per year to
an ultimate average rate of 5.00% in 2001.
1996 Average Rate of 9.0% grading down .75% per year to an ultimate
average rate of 5.25% in 2001.
1995 Average Rate of 10.25% grading down .75% per year to an ultimate
average rate of 5.75% in 2001.
Increasing the assumed health care cost trend rates by one percentage
point in each year would increase the APBO and the aggregate of the service and
interest costs components on net postretirement benefits by the amounts
presented in the following table.
CSW CPL PSO SWEPCO WTU
-------------------------------------------
(millions)
APBO $25.1 $7.1 $5.7 $6.9 $3.2
Service and interest costs 3.6 0.9 0.7 1.0 0.5
HEALTH AND WELFARE PLANS
CSW provides medical, dental, group life insurance, dependent life
insurance, and accidental death and dismemberment insurance plans for
substantially all active CSW System employees in the United States. The total
contributions, recorded on a pay-as-you-go basis, for the years 1995 - 1997 are
listed in the following table.
CSW CPL PSO SWEPCO WTU
-----------------------------------------
(millions)
1997 $35.6 $9.0 $7.0 $8.3 $5.1
1996 28.4 7.0 5.5 6.5 4.0
1995 27.0 6.6 5.3 6.2 3.6
Employer provided health care benefits are not common in the United
Kingdom due to the country's national health care system. Accordingly, SEEBOARD
does not provide health care benefits to the majority of its employees.
6. JOINTLY OWNED ELECTRIC UTILITY PLANT
The U.S. Electric Operating Companies are parties to various joint
ownership agreements with other non-affiliated entities. Such agreements provide
for the joint ownership and operation of generating stations and related
facilities, whereby each participant bears its share of the project costs. At
December 31, 1997, the U.S. Electric Operating Companies had undivided interests
in five such generating stations and related facilities as shown in the
following table.
CPL SWEPCO SWEPCO SWEPCO CSW(1)
STP Flint Creek Pirkey Dolet Hills Oklaunion
Nuclear Coal Lignite Lignite Coal
Plant Plant Plant Plant Plant
----------------------------------------------------------
($ in millions)
Plant in service $2,336 $80 $437 $230 $398
Accumulated $517 $47 $176 $84 $122
depreciation
Plant capacity-MW 2,501 528 675 650 676
Participation 25.2% 50.0% 85.9% 40.2% 78.1%
Share of capacity-MW 630 264 580 262 528
CSW
2-64
(1) CPL, PSO and WTU have joint ownership agreements with each other and
other non-affiliated entities. Such agreements provide for the joint
ownership and operation of Oklaunion Power Station. Each participant
provided financing for its share of the project, which was placed in
service in December 1986. CPL's 7.8%, PSO's 15.6% and WTU's 54.7%
ownership interest represents CSW's 78.1% participation in the plant.
The statements of income reflect CPL's, PSO's and WTU's respective
portions of the operating costs of Oklaunion Power Station. The total
investments, including AFUDC, in Oklaunion Power Station for CPL, PSO
and WTU were $37 million, $80 million and $281 million, respectively,
at December 31, 1997. Accumulated depreciation was $11 million, $32
million and $79 million for CPL, PSO and WTU, respectively, at
December 31, 1997.
7. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the
following fair values of each class of financial instruments for which it is
practicable to estimate fair value. The fair value does not affect any of the
liabilities unless the issues are redeemed prior to their maturity dates.
CASH, TEMPORARY CASH INVESTMENTS, ACCOUNTS RECEIVABLE, OTHER FINANCIAL
INSTRUMENTS AND SHORT-TERM DEBT The fair value equals the carrying
amount as stated on the balance sheets due to the short maturity of
those instruments.
SECURITIES HELD FOR SALE
The fair values, which are based on quoted market prices, equal the
carrying amounts as stated on the balance sheet because the accounting treatment
prescribed under SFAS No. 115.
LONG-TERM DEBT
The fair value of long-term debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
CSW for debt of the same remaining maturities.
TRUST PREFERRED SECURITIES
The fair value of the Trust Preferred Securities are based on quoted
market prices on the New York Stock Exchange.
PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
The fair value of preferred stock subject to mandatory redemption is
estimated based on quoted market prices for the same or similar issues or on the
current rates offered to CSW for preferred stock with the same or similar
remaining redemption provisions.
LONG-TERM DEBT AND PREFERRED STOCK DUE WITHIN 12 MONTHS
The fair value of current maturities of long-term debt and preferred
stock due within 12 months are estimated based on quoted market prices for the
same or similar issues or on the current rates offered for long-term debt or
preferred stock with the same or similar remaining redemption provisions.
CSW
2-65
CARRYING VALUE AND
ESTIMATED FAIR VALUE CSW CPL PSO SWEPCO WTU
--------------------------------------------------
(millions) (thousands)
----------------------------------------
LONG-TERM DEBT
1997 carrying amount $3,898 $1,302,266 $421,821 $547,751 $278,640
fair value 4,052 1,361,539 435,908 576,387 290,489
1996 carrying amount 4,024 1,323,054 420,301 597,151 275,070
fair value 4,065 1,346,306 420,863 605,853 275,355
TRUST PREFERRED SECURITIES
1997 carrying amount 335 150,000 75,000 110,000 --
fair value 344 153,375 78,000 112,750 --
PREFERRED STOCK SUBJECT TO
MANDATORY REDEMPTION
1997 carrying amount 26 -- -- 25,930 --
fair value 27 -- -- 26,809 --
1996 carrying amount 33 -- -- 32,464 --
fair value 34 -- -- 33,579 --
LONG-TERM DEBT AND
PREFERRED STOCK DUE WITHIN
12 MONTHS
1997 carrying amount 32 28,000 -- 3,555 --
fair value 32 28,000 -- 3,555 --
1996 carrying amount 204 200,000 -- 3,760 --
fair value 204 200,000 -- 3,760 --
CROSS-CURRENCY SWAPS AND SEEBOARD'S ELECTRICITY CONTRACTS FOR
DIFFERENCES
The fair value of cross currency swaps reflect third-party valuations
calculated using proprietary pricing models. Based on these valuations, CSW's
position in these cross currency swaps represented an unrealized loss of $43
million at December 31, 1997. This unrealized loss is offset by unrealized gains
related to the underlying transactions being hedged. CSW expects to hold these
contracts to maturity. The fair value of SEEBOARD's contracts for differences is
not determinable due to the absence of a trading market.
DERIVATIVE CONTRACTS NOTIONAL AMOUNTS Notional Fair
AND ESTIMATED FAIR VALUES Amount Value
----------------------
(millions)
CROSS CURRENCY SWAPS
Maturities: 2001 and 2006 $400 $443
CSW
2-66
8. LONG-TERM DEBT
The CSW System's long-term debt outstanding as of the end of the last
two years is presented in the following table.
Maturities Interest Rates December 31,
From To From To 1997 1996
- ----------------------------------------------------------------------
(millions)
Secured bonds
1998 2025 5.25% 7.75% $2,080 $2,108
Unsecured bonds
2001 2030 3.9%(1) 8.88% 1,353 1,384
Notes and Lease Obligations
1999 2003 5.54% 9.75% 641 724
Unamortized discount (10) (12)
Unamortized cost of
reacquired debt (166) (180)
---------------------
$3,898 $4,024
---------------------
(1) Variable rate
The mortgage indentures, as amended and supplemented, securing FMBs
issued by the U.S. Electric Operating Companies, constitute a direct first
mortgage lien on substantially all electric utility plant. The U.S. Electric
Operating Companies may offer additional FMBs, medium-term notes and other
securities subject to market conditions and other factors.
CSW's year end weighted average cost of long-term debt was 7.2% for
1995-1997. For additional information about the U.S. Electric Operating
Companies' long term debt, see their STATEMENTS OF CAPITALIZATION in the
FINANCIAL STATEMENTS.
ANNUAL REQUIREMENTS
Certain series of outstanding FMBs have annual sinking fund
requirements, which are generally 1% of the amount of each such series issued.
These requirements may be, and generally have been, satisfied by the application
of net expenditures for bondable property in an amount equal to 166-2/3% of the
annual requirements. Certain series of pollution control revenue bonds also have
sinking fund requirements. At December 31, 1997, the annual sinking fund
requirements and annual maturities (including sinking fund requirements) for all
long-term debt for the next five years are presented in the following table.
CSW CPL PSO SWEPCO WTU
- ----------------------------------------------------------------------
(millions) (thousands)
----------------------------------------------
Sinking Fund
Requirements
1998 $1 $360 $550 $145 $--
1999 1 360 300 595 --
2000 1 360 300 595 --
2001 1 -- 300 595 --
2002 1 -- -- 595 --
Annual
Maturities
1998 $31 $28,360 $550 $2,355 $--
1999 195 125,360 25,300 43,932 --
2000 208 100,360 20,300 47,807 40,000
2001 517 36,000 20,300 595 --
2002 181 115,000 30,000 595 35,000
CSW
2-67
DIVIDENDS
At December 31, 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 of the
U.S. Electric Operating Companies at December 31, 1997 is as follows.
CPL-$747 million PSO-$137 million SWEPCO-$324 million WTU-$119 million
REACQUIRED LONG-TERM DEBT
During 1996 and 1995, the U.S. Electric Operating Companies reacquired
$205 million and $355 million of long-term debt, respectively, including
reacquisition premiums, prior to maturity. The premiums and related
reacquisition costs and discounts are included in long-term debt on the balance
sheets and are being amortized over periods consistent with their expected
ratemaking treatment. The remaining amortization periods for such items range
from 2 to 33 years. No long-term debt was reacquired prior to maturity during
1997.
Reference is made to MD&A, LIQUIDITY AND CAPITAL RESOURCES for further
information related to long-term debt, including new issues and reacquisitions
of long-term debt during 1997 as well as information related to the financing of
the SEEBOARD acquisition.
9. PREFERRED STOCK
The outstanding preferred stock of the U.S. Electric Operating
Companies as of the end of the last two years is presented in the following
table.
Current
Dividend Rate December 31, Redemption Price
From - To 1997 1996 From - To
--------------------------------------------------
(millions)
Not subject to mandatory redemption
1,352,900 shares 4.00% - 8.72% $19 $135 $102.75 - $109.00
1,600,000 shares auction 160 160 $100.00
Issuance expenses/premiums (3) (3)
------------
$176 $292
------------
Subject to mandatory redemption
340,000 shares 6.95% $27 $34 $102.32
To be redeemed within one year (1) (1)
------------
$26 $33
------------
Total authorized shares
6,405,000
All of the outstanding preferred stock is redeemable at the option of
the U.S. Electric Operating Companies upon 30 days notice at the current
redemption price per share. During 1997, 1996 and 1995, SWEPCO redeemed $1.2
million annually pursuant to its annual sinking fund requirement. In addition
during 1997, each of the U.S. Electric Operating Companies reacquired a
significant portion of its outstanding preferred stock. As a result of
differences between the dividend rates on the reacquired securities and
prevailing market rates, CSW realized an overall gain of approximately $10
million on the transactions. This gain is shown separately, as Gain on
reacquired preferred stock, on the Consolidated Statements of Income. The
following table shows the results of the tender offers of the U.S. Electric
Operating Companies' preferred stock.
CSW
2-68
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% 37,261 37,739
Series 6.95% 65,990 274,010
WTU
Series 4.40% 36,325 23,675
CPL
The dividends on CPL's $160 million auction and money market preferred
stocks are adjusted every 49 days, based on current market rates. The dividend
rates averaged 4.3%, 4.1% and 4.5% during 1997, 1996 and 1995, respectively.
SWEPCO
The minimum annual sinking fund requirement for SWEPCO's preferred
stock subject to mandatory redemption is $1.2 million for the years 1997 through
2001. This sinking fund retires 12,000 shares annually.
For additional information about the U.S. Electric Operating Companies'
preferred stock, see their STATEMENTS OF CAPITALIZATION in the FINANCIAL
STATEMENTS.
10. TRUST PREFERRED SECURITIES
The following Trust Preferred Securities issued by the wholly-owned
statutory business trusts of CPL, PSO and SWEPCO were outstanding at December
31, 1997. They are classified on the balance sheets as Certain Subsidiary (or
CPL/PSO/SWEPCO)-obligated, mandatorily redeemable preferred securities of
subsidiary trusts holding solely Junior Subordinated Debentures of such
Subsidiaries (or CPL/PSO/SWEPCO).
Amount Description of Underlying
Business Trust Security Units (millions) Debentures of Registrant
- ------------------------------------------------------------------------------
CPL Capital I 8.00%, Series A 6,000,000 $150 CPL, $154.6 million, 8.00%,
Series A
PSO Capital I 8.00%, Series A 3,000,000 75 PSO, $77.3 million, 8.00%,
Series A
SWEPCO Capital I 7.875%, Series A 4,400,000 110 SWEPCO, $113.4 million,
7.875%, Series A
---------- -----
13,400,000 $335
---------- -----
Each of the business trusts will be treated as a subsidiary of its
parent company. The only assets of the business trusts are the subordinated
debentures issued by their parent company as specified above. In addition to the
obligations under their subordinated debentures, each of the parent companies
has also agreed to a security obligation which represents a full and
unconditional guarantee of its capital trust's obligation.
CSW
2-69
11. SHORT-TERM FINANCING
The CSW System uses short-term debt, primarily commercial paper, to
meet fluctuations in working capital requirements and other interim capital
needs. CSW has established a money pool to coordinate short-term borrowings for
certain subsidiaries and also incurs borrowings outside the money pool for other
subsidiaries. As of December 31, 1997, CSW had revolving credit facilities
totaling $1.4 billion to back up its commercial paper program. At December 31,
1997, CSW had $721 million outstanding in short-term borrowings. The maximum
amount of such short-term borrowings outstanding during the year, which had a
weighted average interest yield for the year of 5.8%, was $725 million during
December 1997.
CSW Credit, which does not participate in the money pool, issues
commercial paper on a stand-alone basis. At December 31, 1997, CSW Credit had a
$900 million revolving credit agreement that is secured by the assignment of its
receivables to back up its commercial paper program which had $637 million
outstanding. The maximum amount of such commercial paper outstanding during the
year, which had a weighted average interest yield for the year of 5.6%, was $890
million during September 1997.
12. COMMON STOCK
CSW adopted SFAS No. 128 during 1997. SFAS No. 128 requires the
computation of earnings per share on both a basic as well as a diluted basis.
CSW's basic earnings per share of common stock are computed by dividing net
income for common stock by the average number of common shares outstanding for
the respective periods. Diluted earnings per share reflect the potential
dilution that could occur if all options outstanding under CSW's stock incentive
plan were converted to common stock and then shared in the income for common
stock. CSW's basic and diluted earnings per share were the same for the years
1995 - 1997. CSW's dividends per common share reflect per share amounts paid for
each of the periods.
CSW can issue common stock, either through the purchase and reissuance
of shares from the open market or original issue shares, through the LTIP, a
stock option plan, PowerShare and ThriftPlus. 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.
Prior to that time, CSW had issued $20 million in new common stock in 1997.
Information concerning common stock activity issued through the LTIP, the stock
option plan, PowerShare and ThriftPlus is presented in the following table.
1997 1996 1995
-------------------------------------------------------
Number of new shares
issued (millions) 0.8 2.9 2.3
Range of stock price for
new shares $21 1/4 - $25 5/8 $24 3/8 - $28 7/8 $22 5/8 - $28 3/8
New common stock
equity (millions) $20 $79 $57
During February 1996, CSW sold 15,525,000 shares of CSW Common in a
primary stock offering and received net proceeds of approximately $398 million.
These proceeds were used to repay a portion of indebtedness incurred during the
acquisition of SEEBOARD.
13. STOCK-BASED COMPENSATION PLANS
CSW has a key employee incentive plan. This plan is accounted for under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized. Had compensation cost for this plan been determined consistent
with SFAS No. 123, pro forma calculations of CSW's and each of the U.S. Electric
CSW
2-70
Operating Companies' net income for common stock and earnings per share as
required by SFAS No. 123 would not have changed significantly from amounts
reported.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
CSW may grant options for up to 4.0 million shares of CSW Common under
the stock option plan. Under the stock option plan, the option exercise price
equals the stock's market price on the date of grant. The grant vests over three
years, one-third on each of the three anniversary dates of the grant, and
expires 10 years after the original grant date. CSW has granted 2.8 million
shares through December 31, 1997.
A summary of the status of CSW's stock option plan at December 31,
1997, 1996 and 1995 and the changes during the years then ended is presented in
the following table.
1997 1996 1995
-----------------------------------------------------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
(thousands) Exercise (thousands) Exercise (thousands) Exercise Price
Price Price
Outstanding at
beginning of year 1,412 $26 1,564 $26 1,616 $26
Granted 694 21 70 27 -- --
Exercised -- 22 (147) 24 (23) 22
Canceled (204) 28 (75) 27 (29) 27
------ ----- ----
Outstanding at end of
year 1,902 24 1,412 26 1,564 26
Exercisable at end of
year 1,162 n/a 1,004 n/a 828 n/a
Weighted average fair
value of options $2.24 - $2.39
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997: (i) risk-free interest rate of 5.9%; (ii)
expected dividend rate of 6.5%; (iii) and expected volatility of 19%. The
expected life of the options granted did not materially impact the values
produced.
CSW
2-71
14. BUSINESS SEGMENTS
CSW's business segments at December 31, 1997 included the U.S. Electric
operations (CPL, PSO, SWEPCO, WTU) and the United Kingdom Electric operations
(SEEBOARD U.S.A.). See NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES for a
discussion of the accounting for the SEEBOARD acquisition. Eight additional
non-utility companies are included with CSW in Corporate items and Other (CSW
Energy, CSW International, C3 Communications, CSW Credit, CSW Leasing, CSW
Services, EnerShop and CSW Energy Services). Gas Operations (Transok) were sold
on June 6, 1996. See NOTE 15. TRANSOK DISCONTINUED OPERATIONS for additional
information. CSW's business segment information is presented in the following
tables.
1997 1996 1995
-------- -------- --------
(millions)
OPERATING REVENUES
Electric Operations
United States $3,321 $3,248 $2,883
United Kingdom (1) 1,870 1,848 208
Corporate items and Other 77 59 52
-------- -------- --------
$5,268 $5,155 $3,143
-------- -------- --------
OPERATING INCOME
Electric Operations
United States $661 $768 $719
United Kingdom (1) 255 236 21
Corporate items and Other (30) 15 (27)
-------- -------- --------
Operating income before taxes 886 1,019 713
Income taxes (151) (224) (92)
-------- -------- --------
$735 $795 $621
-------- -------- --------
DEPRECIATION AND AMORTIZATION
Electric Operations
United States $389 $362 $335
United Kingdom (1) 92 88 7
Corporate items and Other 16 14 11
-------- -------- --------
$497 $464 $353
-------- -------- --------
IDENTIFIABLE ASSETS
Electric Operations
United States $9,172 $9,142 $9,278
United Kingdom (1) 2,931 3,061 2,821
Corporate items and Other 1,348 1,129 1,004
-------- -------- --------
13,451 13,332 13,103
Gas Operations (Discontinued) -- -- 766
-------- -------- --------
$13,451 $13,332 $13,869
-------- -------- --------
CAPITAL EXPENDITURES AND
ACQUISITIONS
Electric Operations
United States $346 $356 $398
United Kingdom (1), (2) 126 1,543 731
Corporate items and Other (3) 276 109 19
-------- -------- --------
748 2,008 1,148
Gas Operations (Discontinued) -- 23 66
-------- -------- --------
$748 $2,031 $1,214
-------- -------- --------
(1) Represents equity method of accounting for November 1995 (27.6%) and full
consolidation accounting for December 1995 (76.45%).
(2) Includes $1,394 million and $731 million in 1996 and 1995, respectively,
used to purchase SEEBOARD.
(3) Includes CSW Energy and CSW International equity investments.
CSW
2-72
15. TRANSOK DISCONTINUED OPERATIONS
On June 6, 1996, CSW sold Transok to Tejas. Accordingly, the results of
operations for Transok have been reported as discontinued operations and prior
periods have been restated for consistency.
As a wholly owned subsidiary of CSW, Transok operated as an intrastate
natural gas gathering, transmission, marketing and processing company that
provided natural gas services to the U.S. Electric Operating Companies,
predominantly PSO, and to other gas customers throughout the United States.
CSW sold Transok to Tejas for approximately $890 million, consisting of
$690 million in cash and $200 million in existing long-term debt that remained
with Transok after the sale. A portion of the cash proceeds was used to repay
borrowings incurred related to the SEEBOARD acquisition and the remaining
proceeds were used to repay commercial paper borrowings. CSW recorded an after
tax gain on the sale of Transok of approximately $120 million in 1996.
Transok's operating results for 1996 and 1995 are summarized in the
following table (transactions with CSW have not been eliminated).
1996 1995
-------------------
Total revenue $362 $721
Operating income before income taxes 23 52
Earnings before income taxes 18 38
Income taxes (6) (13)
-------------------
Net income from discontinued operations $12 $25
-------------------
16. PROPOSED AEP MERGER
In December 1997, CSW and AEP entered into a definitive merger agreement
for a tax-free, stock-for stock transaction with AEP being the surviving
corporation. The transaction is subject to the approval of various state and
federal regulatory agencies. The shareholders of CSW will be asked to approve
the AEP Merger and the shareholders of AEP will be asked to approve the issuance
of shares of AEP common stock pursuant to the AEP Merger Agreement and to amend
AEP's certificate of incorporation to increase the number of authorized shares
of AEP common stock from 300 million shares to 600 million shares.
The proposed AEP Merger, with a targeted completion date in the first
half of 1999, is expected to be accounted for as a pooling of interests.
Upon completion of the AEP Merger, CSW common stockholders will
receive 0.6 shares of AEP common stock for each share of CSW common stock. At
that time, CSW common stockholders will own approximately 40% of the outstanding
common stock of AEP. Under the AEP Merger Agreement, there will be no changes
required with respect to the outstanding debt, preferred stock or Trust
Preferred Securities of CSW or its subsidiaries. The transaction must satisfy
many conditions, some of which may not be waived by the parties. There can be
no assurance that the AEP Merger will be consummated.
CSW
2-73
17. 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. On December 1, 1997, SEEBOARD made the first such
payment.
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.
18. PRO FORMA INFORMATION (UNAUDITED)
CSW secured effective control of SEEBOARD in December 1995. The
unaudited pro forma information is presented in response to applicable
accounting rules relating to acquisition transactions. The pro forma information
gives effect to the acquisition of SEEBOARD accounted for under the purchase
method of accounting for the twelve months ended December 31, 1995 as if the
transaction had been consummated at the beginning of the period presented.
The unaudited pro forma information has been prepared in accordance
with United States generally accepted accounting principles. The pro forma
information in the following table is presented for illustrative purposes only
and is not necessarily indicative of the operating results that would have
occurred if the SEEBOARD acquisition had taken place at the beginning of the
period specified, nor is it necessarily indicative of future operating results.
The following pro forma information has been prepared reflecting the February
1996 issuance of CSW Common, and has been converted at an exchange rate of
(pound)1.00=$1.58 for the twelve months ended December 31, 1995.
1995
-----------------
(millions except EPS)
Operating Revenues $5,404
Operating Income 750
Net Income for Common Stock 445
EPS of Common Stock $2.15
CSW
2-74
19. QUARTERLY INFORMATION (UNAUDITED)
The following unaudited quarterly information includes, in the opinion
of management, all adjustments necessary for a fair presentation of such
amounts. Information for quarterly periods is affected by seasonal variations in
sales, rate changes, timing of fuel expense recovery and other factors.
QUARTER ENDED 1997(1) 1996(2)
- -------------------------------------------------------------------------------
(millions, except EPS)
MARCH 31
Operating Revenues $1,278 $1,215
Operating Income 127 144
Income from Continuing Operations 25 43
Net Income for Common Stock 25 51
Basic and Diluted EPS from Continuing Operations $0.12 $0.22
Basic and Diluted EPS $0.12 $0.26
JUNE 30
Operating Revenues $1,184 $1,267
Operating Income 169 214
Income from Continuing Operations 83 11
Net Income for Common Stock 83 128
Basic and Diluted EPS from Continuing Operations $0.39 $0.05
Basic and Diluted EPS $0.39 $0.61
SEPTEMBER 30
Operating Revenues $1,477 $1,438
Operating Income 303 284
Income from Continuing Operations 196 190
Extraordinary Item (176) --
Net Income for Common Stock 20 190
Basic and Diluted EPS from Continuing Operations $0.93 $0.90
Basic and Diluted EPS from Extraordinary Item $(0.83) --
Basic and Diluted EPS $0.10 $0.90
DECEMBER 31
Operating Revenues $1,329 $1,235
Operating Income 136 153
Income from Continuing Operations 25 53
Net Income for Common Stock 25 60
Basic and Diluted EPS from Continuing Operations $0.11 $0.26
Basic and Diluted EPS $0.11 $0.28
TOTAL
Operating Revenues $5,268 $5,155
Operating Income 735 795
Income from Continuing Operations 329 297
Extraordinary Item (176) --
Net Income for Common Stock 153 429
Basic and Diluted EPS from Continuing Operations $1.55 $1.43
Basic and Diluted EPS from Extraordinary Item $(0.83) --
Basic and Diluted EPS $0.72 $2.07
(1) The first, second and third quarters of 1997 include the effect of certain
reclassifications to conform with the 1997 year end financial statement
presentation.
(2) In 1996, CSW EPS of Common Stock for the year do not sum to the total of
the individual quarters' EPS of Common Stock due to different levels of
average shares outstanding for the different periods.
CSW
2-75
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF CENTRAL AND SOUTH WEST
CORPORATION:
We have audited the accompanying consolidated balance sheets of Central
and South West Corporation (a Delaware corporation) and subsidiary companies as
of December 31, 1997 and 1996, and the related consolidated statements of
income, stockholders' equity and cash flows, for each of the three years ended
December 31, 1997. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of CSW UK Finance Company (1997 - which includes CSW Investments) and
CSW Investments (1996), which statements reflect total assets and total revenues
of 22 percent and 35 percent in 1997 and 23 percent and 36 percent in 1996,
respectively, of the consolidated totals. Those statements were audited by other
auditors whose reports have been furnished to us and our opinion, insofar as it
relates to the amounts included for those entities, is based solely on the
reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Central and South West Corporation and
subsidiary companies as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years ended December 31, 1997, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Dallas, Texas
February 16, 1998
CSW
2-76
AUDITOR'S REPORT TO THE MEMBERS OF CSW UK FINANCE COMPANY
We have audited the consolidated balance sheets of CSW UK Finance Company and
subsidiaries as of 31 December 1997 and the related consolidated statement of
earnings and statements of cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used in and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CSW UK Finance
Company and subsidiaries at 31 December 1997 and the result of their operations
and cash flows for the year then ended in conformity with generally accepted
accounting principles in the United Kingdom.
Generally accepted accounting principles in the United Kingdom vary in certain
significant respects from generally accepted accounting principles in the United
States. Application of generally accepted accounting principles in the United
States would have affected results of operations and shareholders' equity as of
and for the year ended 31 December 1997 to the extent summarised in Note 23 to
the consolidated financial statements.
KPMG Audit Plc
Chartered Accountants London, England
Registered Auditor 19 January 1998
CSW
2-77
AUDITOR'S REPORT TO THE MEMBERS OF CSW INVESTMENTS
We have audited the consolidated balance sheets of CSW Investments and
subsidiaries as of 31 December 1996 and the related consolidated statement of
earnings and statements of cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used in and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CSW Investments and
subsidiaries at 31 December 1996 and the result of their operations and cash
flows for the year then ended in conformity with generally accepted accounting
principles in the United Kingdom.
Generally accepted accounting principles in the United Kingdom vary in certain
significant respects from generally accepted accounting principles in the United
States. Application of generally accepted accounting principles in the United
States would have affected results of operations and shareholders' equity as of
and for the year ended 31 December 1996 to the extent summarised in the notes to
the consolidated financial statements.
KPMG Audit Plc
Chartered Accountants London, England
Registered Auditor 22 January 1997
CSW
2-78
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and
objectivity of the consolidated financial statements of Central and South West
Corporation and subsidiary companies as well as other information contained in
this Annual Report. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis and, in some cases, reflect amounts based on the best estimates and
judgments of management, giving due consideration to materiality. Financial
information contained elsewhere in this Annual Report is consistent with that in
the consolidated financial statements.
The consolidated financial statements have been audited by CSW's
independent public accountants who were given unrestricted access to all
financial records and related data, including minutes of all meetings of
stockholders, the board of directors and committees of the board. CSW and its
subsidiaries believe that representations made to the independent public
accountants during their audit were valid and appropriate. The reports of
independent public accountants are presented elsewhere in this report.
CSW, together with its subsidiary companies, maintains a system of
internal controls to provide reasonable assurance that transactions are executed
in accordance with management's authorization, that the consolidated financial
statements are prepared in accordance with generally accepted accounting
principles and that the assets of CSW and its subsidiaries are properly
safeguarded against unauthorized acquisition, use or disposition. The system
includes a documented organizational structure and division of responsibility,
established policies and procedures including a policy on ethical standards
which provides that the companies will maintain the highest legal and ethical
standards, and the careful selection, training and development of our employees.
Internal auditors continuously monitor the effectiveness of the
internal control system following standards established by the Institute of
Internal Auditors. Actions are taken by management to respond to deficiencies as
they are identified. The board, operating through its audit committee, which is
comprised entirely of directors who are not officers or employees of CSW or its
subsidiaries, provides oversight to the financial reporting process.
Due to the inherent limitations in the effectiveness of internal
controls, no internal control system can provide absolute assurance that errors
will not occur. However, management strives to maintain a balance, recognizing
that the cost of such a system should not exceed the benefits derived.
CSW and its subsidiaries believe that, in all material respects, its
system of internal controls over financial reporting and over safeguarding of
assets against unauthorized acquisition, use or disposition functioned
effectively as of December 31, 1997.
E. R. Brooks Glenn D. Rosilier Lawrence B. Connors
Chairman and Executive Vice President and Controller
Chief Executive Officer Chief Financial Officer
CSW
2-79
CENTRAL POWER AND LIGHT
COMPANY
CPL
2-80
SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended
December 31 is provided to highlight significant trends in the financial
condition and results of operations for CPL. Certain financial statement items
for prior years have been reclassified to conform to the most recent period
presented.
---------------------------------------------------------
1997 1996 (1) 1995 1994 1993(2)
(thousands except ratios)
INCOME STATEMENT DATA
Revenues $1,376,282 $1,300,688 $1,073,469 $1,217,979 $1,223,528
Income before cumulative
effect of changes in 128,471 147,051 206,447 205,439 145,130
accounting principles
Net income for common 121,350 133,488 191,978 191,635 158,422
stock
BALANCE SHEET DATA
Assets 4,813,310 4,828,263 4,881,136 4,822,699 4,781,745
Long-term
obligations (3) 1,452,266 1,323,054 1,517,347 1,466,393 1,384,820
Capitalization ratios
Common stock equity 47% 48% 45% 45% 47%
Preferred stock 5 8 8 8 9
CPL-obligated, mandatorily
redeemable preferred
securities of subsidiary
trusts holding solely
Junior Subordinated
Debentures of CPL 5 -- -- -- --
Long-term debt 43 44 47 47 44
Ratio of earnings to fixed 2.48 2.86 2.63 3.24 2.69
charges (SEC Method) (4)
(1) Earnings in 1996 reflect a $15.6 million one-time charge, net of tax,
associated with certain investments for plant sites, engineering studies
and lignite reserves and the expiration in 1995 of Mirror CWIP liability
amortization income.
(2) Earnings in 1993 were significantly affected by restructuring charges, the
$27 million cumulative effect of changes in accounting principles and prior
year tax adjustments. CPL changed its method of accounting for unbilled
revenues in 1993.
(3) Long-term obligations includes long-term debt and Trust Preferred
Securities, and for 1993 preferred stock subject to mandatory redemption.
(4) Ratio of earnings to fixed charges for 1993 was calculated before
cumulative effect of change in accounting principles.
CPL
2-81
CENTRAL POWER AND LIGHT COMPANY
RESULTS OF OPERATIONS
Reference is made to CPL's Consolidated Financial Statements and
related Notes to Consolidated Financial Statements and Selected Financial Data.
The information contained therein should be read in conjunction with, and is
essential in understanding, the following discussion and analysis.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Net income for common stock decreased to $121.4 million, or 9%,
compared to $133.5 million in 1996. The major reason for the decrease was the
impact of the CPL 1997 Final Order. This decrease was partially offset by an
increase in other income and deductions of $19.4 million, primarily due to the
absence in 1997 of a one-time charge associated with certain investments for
plant sites, engineering studies and lignite reserves of $15.6 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 $75.6 million, or 5.8%, in
1997 compared to 1996 due primarily to a 3% increase in retail MWH sales
resulting from increased customers and demand as well as higher fuel related
revenue due to higher fuel costs, as discussed below. Another factor that
contributed to the increase was a $41.5 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 offset by a
corresponding increase in transmission expense.
Fuel expense increased $55.7 million, or 16%, during 1997 as compared
to 1996. The increase in fuel expense was due primarily to a 13% increase in the
average unit cost of fuel from $1.62 per MMbtu in 1996 to $1.83 per MMbtu in
1997. The increase in fuel costs reflects an increase in the spot market price
of natural gas partially offset by a decrease in the delivery cost of coal. 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 5% from
$59.9 million in 1996 to $56.4 million in 1997 due primarily to decreased
economy energy purchases.
Other operating expense increased $52.1 million to $283.6 million in
1997 when compared to 1996. The increase is 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, 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 No. 14965
and the write-off of obsolete inventory of $3.8 million. The increase in other
operating expense was offset in part by reductions in pension expense, other
employee related expenses and the absence in 1997 of the write-off of a canceled
transmission project of $9.5 million. See NOTE 5. BENEFIT PLANS for additional
information related to changes in the pension plan. Maintenance expense
increased $6.7 million, or 12%, in 1997 as compared to 1996 due primarily to
higher steam and nuclear production and distribution overhead line expenses in
1997.
Depreciation and amortization expenses increased $18.5 million compared
to 1996 due primarily to the impact of the CPL 1997 Final Order. Taxes, other
than income increased approximately $8.8 million during 1997 as compared to 1996
due primarily to an increase in ad valorem and franchise taxes.
CPL
2-82
Other income and deductions increased $19.4 million from a loss of
$11.1 million in 1996 to $8.2 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 $15.6 million, net of tax, recorded
in 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 increased $3.7 million in 1997 due primarily
to the new distributions on Trust Preferred Securities of $7.7 million. For
additional information on these new securities see NOTE 10. TRUST PREFERRED
SECURITIES. Partially offsetting this increase was a decrease of $5.3 million in
long-term debt expense due primarily to the maturity of CPL's $200 million,
Series BB, 6% FMBs in October 1997 and also refinancing activities in 1996.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Net income for common stock for 1996 decreased 30% to $133 million from
$192 million in 1995. The decrease was due primarily to the expiration of Mirror
CWIP liability amortization, the CPL 1996 Fuel Agreement, a charge in 1996
associated with certain investments for plant sites, engineering studies and
lignite reserves of $15.6 million, net of tax, and management's expectation of
the outcome of CPL's pending rate review . Partially offsetting the decline was
the absence of the net effect of the CPL 1995 Agreement. See NOTE 2. LITIGATION
AND REGULATORY PROCEEDINGS for additional information.
Electric operating revenues were $1.3 billion in 1996, an increase of
21% when compared to 1995 revenues of $1.1 billion. The increase was due
primarily to a $96.6 million increase in fuel revenues resulting primarily from
higher average unit fuel costs and purchased power as discussed below. The
increase was also attributable to a one-time $50 million base rate refund and a
$62.3 million disallowance of under-recovered fuel costs in 1995 as a result of
the CPL 1995 Agreement. KWH sales increased 6% resulting primarily from
increased customer and favorable weather-related demand as well as residential
and commercial customer growth.
Fuel expense increased $53.0 million, or 18%, during 1996 as compared
to 1995. The increase in fuel expense was due primarily to an 18% increase in
the average unit cost of fuel from $1.37 per MMbtu in 1995 to $1.62 per MMbtu in
1996. The fuel costs reflect an increase in the spot market price of natural gas
partially offset by a decrease in the delivered cost of coal and a one-time $9.6
million reduction in fuel expense as a result of the CPL 1996 Fuel Agreement.
Purchased power increased $39.9 million during 1996 when compared to the prior
year primarily as a result of increased economy energy purchases at a higher
cost per MWH. Also contributing to this increase were additional cogeneration
purchases in 1996.
Other operating expenses increased $22.5 million, or 11%, during 1996
when compared to 1995. This increase was due primarily to a $9.5 million
write-off associated with the cancellation of a transmission project, a $2.2
million write-off of demand side management assets as well as increased rate
case and decommissioning expenses, all associated with management's expectation
of the outcome of CPL's pending rate review. Also contributing to the increase
was the establishment of a regulatory asset for rate case costs previously
expensed and subsequent amortization of such regulatory asset pursuant to the
CPL 1995 Agreement. Further contributing to this increase were lower
employee-related costs in 1995. The overall restructuring charges increase of
$25.4 million during 1996 when compared to 1995 was due primarily to the
recognition of a $20.7 million regulatory asset established in accordance with
the CPL 1995 Agreement for previously recorded restructuring charges. In 1996,
the CSW System began implementation of organizational and executive changes
which were completed in 1997. CPL recorded its $4.6 million portion of the
estimated cost of the restructuring during 1996. Maintenance expenses decreased
$10.1 million or 16% during 1996 when compared to 1995 due primarily to lower
production and distribution maintenance. The decrease in production maintenance
was the result of fewer scheduled steam maintenance repair projects in 1996 as
well as lower nuclear maintenance due to fewer scheduled refueling outages in
CPL
2-83
1996. The decrease in distribution maintenance was due primarily to lower tree
trimming expenses in 1996.
Depreciation and amortization increased $2.3 million, or 2%, during
1996 as compared to 1995 as a result of an increase in depreciable property and
the amortization of regulatory assets associated with the CPL 1995 Agreement.
Such increases were partially offset by a decrease in depreciation rates,
effective May 1996, in accordance with management's expectation of the outcome
of CPL's pending rate review. Taxes, other than income increased $8.1 million
during 1996 as compared to 1995 due primarily to lower 1995 ad valorem taxes
resulting from revisions of prior year estimates. Income taxes increased $82.6
million in 1996 as compared to 1995 due primarily to the accelerated flowback in
1995 of $34.3 million of unprotected excess deferred income taxes in accordance
with the CPL 1995 Agreement. This increase was also attributable to prior year
tax adjustments, higher pre-tax income, excluding the effects of the one-time
charge, as discussed below, and the permanent tax effect associated with the
expiration of the Mirror CWIP liability amortization, also discussed below.
Other income and deductions decreased $67.5 million in 1996 when
compared to 1995. Mirror CWIP liability amortization, which expired in 1995,
contributed $41.0 million to other income and deductions in 1995. Also, a
one-time charge in 1996 associated with certain investments for plant sites,
engineering studies and lignite reserves of approximately $15.6 million, net of
tax, contributed to this decline. Furthermore, other income and deductions
decreased in 1996 as a result of the recognition of previously deferred
factoring income in 1995 pursuant to the CPL 1995 Agreement. Interest on
long-term debt also decreased $5.8 million during 1996 when compared to 1995 as
a result of refinancing activity in 1995. Interest on short-term debt and other
decreased $1.4 million during 1996 when compared to 1995 primarily as a result
of lower levels of short-term debt outstanding at lower interest rates partially
offset by an increase in the amortization of debt issuance costs and AFUDC for
borrowed funds.
CPL
2-84
CPL
CONSOLIDATED STATEMENTS OF INCOME
CENTRAL POWER AND LIGHT COMPANY
- -------------------------------------------------------------------------------
For the Years Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(thousands)
Electric Operating Revenues
Residential $541,169 $528,916 $465,478
Commercial 400,412 388,008 355,238
Industrial 330,481 308,186 256,223
Sales for resale 70,461 72,164 52,081
Other 33,759 3,414 (55,551)
----------- ----------- -----------
1,376,282 1,300,688 1,073,469
----------- ----------- -----------
Operating Expenses and Taxes
Fuel 396,707 340,962 287,979
Purchased power 56,475 59,562 19,632
Other operating 283,640 231,501 209,021
Restructuring charges -- 4,628 (20,793)
Maintenance 59,791 53,077 63,201
Depreciation and amortization 171,349 152,831 150,508
Taxes, other than income 82,909 74,029 65,925
Income taxes 74,044 98,451 15,812
----------- ----------- -----------
1,124,915 1,015,041 791,285
----------- ----------- -----------
Operating Income 251,367 285,647 282,184
----------- ----------- -----------
Other Income and Deductions
Charges for investments and
plant development costs (2,060) (21,509) --
Allowance for equity funds
used during construction 1,724 427 442
Mirror CWIP liability amortization -- -- 41,000
Other 3,563 4,636 15,009
Non-operating income taxes 5,050 5,301 (129)
----------- ----------- -----------
8,277 (11,145) 56,322
----------- ----------- -----------
Income Before Interest Charges 259,644 274,502 338,506
----------- ----------- -----------
Interest Charges
Interest on long-term debt 105,081 110,375 116,205
Distributions on Trust
Preferred Securities 7,533 -- --
Interest on short-term debt and other 20,613 18,494 19,926
Allowance for borrowed funds
used during construction (2,054) (1,418) (4,072)
----------- ----------- -----------
131,173 127,451 132,059
----------- ----------- -----------
Net Income 128,471 147,051 206,447
Less: Preferred stock dividends 9,523 13,563 14,469
Gain on reacquired preferred stock 2,402 -- --
----------- ----------- -----------
Net Income for Common Stock $121,350 $133,488 $191,978
=========== =========== ===========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
CPL
2-85
CPL
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
CENTRAL POWER AND LIGHT COMPANY
- ----------------------------------------------------------------------------
For the Years Ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
(thousands)
Retained Earnings at Beginning of Year $868,932 $863,444 $857,466
Net income for common stock 121,350 133,488 191,978
Deduct: Common stock dividends 157,000 128,000 186,000
-------- -------- --------
Retained Earnings at End of Year $833,282 $868,932 $863,444
======== ======== ========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
CPL
2-86
CPL
CONSOLIDATED BALANCE SHEETS
CENTRAL POWER AND LIGHT COMPANY
- -------------------------------------------------------------------------------
As of December 31,
-----------------------
1997 1996
---------- ----------
(thousands)
ASSETS
Electric Utility Plant
Production $3,106,576 $3,102,929
Transmission 517,903 505,801
Distribution 1,021,759 956,928
General 295,974 271,347
Construction work in progress 77,390 95,336
Nuclear fuel 196,147 184,229
---------- ----------
5,215,749 5,116,570
Less - accumulated depreciation 1,845,730 1,697,552
---------- ----------
3,370,019 3,419,018
---------- ----------
Current Assets
Cash -- 3,299
Special deposits -- 113
Accounts receivable 61,311 53,038
Materials and supplies, at average cost 65,290 75,732
Fuel inventory 14,816 15,461
Under-recovered fuel costs 43,229 26,298
Prepayments 2,595 4,371
---------- ----------
187,241 178,312
---------- ----------
Deferred Charges and Other Assets
Deferred STP costs 484,277 486,978
Mirror CWIP asset 285,431 298,708
Income tax related regulatory assets, net 390,149 335,226
Other 96,193 110,021
---------- ----------
1,256,050 1,230,933
---------- ----------
$4,813,310 $4,828,263
========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
CPL
2-87
CPL
CONSOLIDATED BALANCE SHEETS
CENTRAL POWER AND LIGHT COMPANY
- --------------------------------------------------------------------------
As of December 31,
----------------------------
1997 1996
---------- ----------
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 833,282 868,932
---------- ----------
Total Common Stock Equity 1,407,170 47% 1,442,820 48%
---------- ---- ---------- ----
Preferred stock 163,204 5% 250,351 8%
CPL-obligated, mandatorily redeemable
preferred securities of subsidiary
trust holding solely Junior
Subordinated Debentures of CPL 150,000 5% -- --
Long-term debt 1,302,266 43% 1,323,054 44%
---------- ---- ---------- ----
Total Capitalization 3,022,640 100% 3,016,225 100%
---------- ---- ---------- ----
Current Liabilities
Long-term debt due within twelve months 28,000 200,000
Advances from affiliates 142,781 52,525
Accounts payable 84,160 69,941
Accrued taxes 13,558 64,207
Accumulated deferred income taxes 21,382 7,310
Accrued interest 28,379 31,566
Refund due customers 63,713 43,266
Other 14,551 19,048
---------- ----------
396,524 487,863
---------- ----------
Deferred Credits
Accumulated deferred income taxes 1,237,386 1,162,051
Investment tax credits 142,371 147,191
Other 14,389 14,933
---------- ----------
1,394,146 1,324,175
---------- ----------
$4,813,310 $4,828,263
========== ==========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
CPL
2-88
CPL
CONSOLIDATED STATEMENTS OF CASH FLOWS
CENTRAL POWER AND LIGHT COMPANY
- -------------------------------------------------------------------------------
For the Years Ended December 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
(thousands)
OPERATING ACTIVITIES
Net Income $128,471 $147,051 $206,447
Non-cash Items Included in Net Income
Depreciation and amortization 192,775 178,271 173,711
Deferred income taxes and
investment tax credits 29,666 45,923 (35,815)
Mirror CWIP liability amortization -- -- (41,000)
Establishment of regulatory assets -- -- (20,652)
Refund due customers 20,447 43,266 --
Charges for investments and assets 2,061 21,374 --
Inventory reserve 3,834 717 --
Changes in Assets and Liabilities
Accounts receivable (8,273) (7,852) (15,321)
Fuel inventory 645 11,011 (3,556)
Material and supplies 10,442 (4,620) (4,902)
Accrued interest (3,187) 1,176 (8,061)
Accounts payable 14,219 19,780 (35,101)
Accrued taxes (50,649) 2,593 2,228
Fuel recovery (16,931) (38,884) 66,712
Other deferred credits 2,701 (2,856) 2,022
Other 13,419 (6,672) 13,106
--------- --------- ---------
339,640 410,278 299,818
--------- --------- ---------
INVESTING ACTIVITIES
Construction expenditures (126,693) (136,901) (150,372)
Other 1,185 (3,257) (4,072)
--------- --------- ---------
(125,508) (140,158) (154,444)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 63,930 337,828
Retirement of long-term debt -- (231) --
Reacquisition of long-term debt (200,000) (67,720) (295,938)
Redemption of preferred stock (84,745) -- --
Proceeds from issuance of Trust
Preferred Securities 144,706 -- --
Change in advances from affiliates 90,256 (123,809) 15,014
Payment of dividends (167,648) (141,874) (200,037)
--------- --------- ---------
(217,431) (269,704) (143,133)
--------- --------- ---------
Net Change in Cash and Cash Equivalents (3,299) 416 2,241
Cash and Cash Equivalents at
Beginning of Year 3,299 2,883 642
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ -- $3,299 $2,883
========= ========= =========
SUPPLEMENTARY INFORMATION
Interest paid less amounts
capitalized (includes distributions
on Trust Preferred Securities) $116,782 $117,974 $115,845
========= ========= =========
Income taxes paid $61,509 $44,082 $37,151
========= ========= =========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
CPL
2-89
CPL
CONSOLIDATED STATEMENTS OF CAPITALIZATION
CENTRAL POWER AND LIGHT COMPANY
- -------------------------------------------------------------------------------
As of December 31,
-----------------------
1997 1996
---------- ----------
(thousands)
COMMON STOCK EQUITY $1,407,170 $1,442,820
---------- ----------
PREFERRED STOCK
Cumulative $100 Par Value, Authorized
3,035,000 shares
Current
Number of Shares Redemption
Series Outstanding Price
- -----------------------------------------------
Not Subject to Mandatory Redemption
4.00% 42,048 $105.75 4,205 10,000
4.20% 17,476 $103.75 1,748 7,500
7.12% -- -- -- 26,000
8.72% -- -- -- 50,000
Auction Money Market 750,000 $100.00 75,000 75,000
Auction Series A 425,000 $100.00 42,500 42,500
Auction Series B 425,000 $100.00 42,500 42,500
Issuance Expense (2,749) (3,149)
---------- ----------
163,204 250,351
---------- ----------
TRUST PREFERRED SECURITIES
CPL-obligated, mandatorily redeemable
preferred securities of subsidiary
trust holding solely Junior Subordinated
Debentures of CPL, 8.00%, due April 30, 2037 150,000 --
---------- ----------
LONG-TERM DEBT
First Mortgage Bonds
Series J, 6 5/8%, due January 1, 1998 28,000 28,000
Series L, 7%, due February 1, 2001 36,000 36,000
Series T, 7 1/2%, due December 15, 2014* (Matagorda) 111,700 111,700
Series AA, 7 1/2%, due March 1, 2020* (Matagorda) 50,000 50,000
Series BB, 6%, due October 1, 1997 -- 200,000
Series CC, 7 1/4%, due October 1, 2004 100,000 100,000
Series DD, 7 1/8%, due December 1, 1999 25,000 25,000
Series EE, 7 1/2%, due December 1, 2002 115,000 115,000
Series FF, 6 7/8%, due February 1, 2003 50,000 50,000
Series GG, 7 1/8%, due February 1, 2008 75,000 75,000
Series HH, 6%, due April 1, 2000 100,000 100,000
Series II, 7 1/2%, due April 1, 2023 100,000 100,000
Series JJ, 7 1/2%, due May 1, 1999 100,000 100,000
Series KK, 6 5/8%, due July 1, 2005 200,000 200,000
Installment Sales Agreements - PCRBs
Series 1993, 6%, due July 1, 2028 (Matagorda) 120,265 120,265
Series 1995, 6.10%, due July 1, 2028 (Matagorda) 100,635 100,635
Series 1995, variable rate, due
November 1, 2015 (Guadalupe) 40,890 40,890
Series 1996, 6 1/8%, due June 1, 2020 (Red River) 6,330 6,330
Series 1996,6 1/2%, due May 1, 2030 (Matagorda) 60,000 60,000
Unamortized Discount (4,484) (5,015)
Unamortized Costs of Reacquired Debt (84,070) (90,751)
Amount to be Redeemed Within One Year (28,000) (200,000)
---------- ----------
1,302,266 1,323,054
---------- ----------
TOTAL CAPITALIZATION $3,022,640 $3,016,225
========== ==========
*Obligations incurred in connection with the sale by public authorities
of tax-exempt PCRBs.
The accompanying notes to consolidated financial statements are an
integral part of these statements.
CPL
2-90
CENTRAL POWER AND LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See CSW's NOTE 1.
2. LITIGATION AND REGULATORY PROCEEDINGS
See CSW's NOTE 2.
3. COMMITMENTS AND CONTINGENT LIABILITIES
See CSW's NOTE 3.
4. INCOME TAXES
See CSW's NOTE 4.
5. BENEFIT PLANS
See CSW's NOTE 5.
6. JOINTLY OWNED ELECTRIC UTILITY PLANT
See CSW's NOTE 6.
7. FINANCIAL INSTRUMENTS
See CSW's NOTE 7.
8. LONG-TERM DEBT
See CSW's NOTE 8.
9. PREFERRED STOCK
See CSW's NOTE 9.
10. TRUST PREFERRED SECURITIES
See CSW's NOTE 10.
11. SHORT-TERM FINANCING
See CSW's NOTE 11.
12. STOCK BASED COMPENSATION PLANS
See CSW's NOTE 13.
CPL
2-91
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF CENTRAL POWER AND LIGHT COMPANY:
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of Central Power and Light Company (a
Texas corporation and a wholly owned subsidiary of Central and South West
Corporation) and subsidiary company as of December 31, 1997 and 1996, and the
related consolidated statements of income, retained earnings and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of Central Power and Light Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Central
Power and Light Company and subsidiary company as of December 31, 1997 and 1996,
and the results of their operations and cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental Exhibit 12 is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not a required part of the basic financial statements. This exhibit has
been subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
Dallas, Texas
February 16, 1998
CPL
2-92
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and
objectivity of the consolidated financial statements of Central Power and Light
Company and subsidiary company as well as other information contained in this
Annual Report. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis and, in some cases, reflect amounts based on the best estimates and
judgments of management, giving due consideration to materiality. Financial
information contained elsewhere in this Annual Report is consistent with that in
the consolidated financial statements.
The consolidated financial statements have been audited by CPL's
independent public accountants who were given unrestricted access to all
financial records and related data, including minutes of all meetings of
shareholders, the board of directors and committees of the board. CPL and its
subsidiary company believe that representations made to the independent public
accountants during their audit were valid and appropriate. The report of
independent public accountants is presented elsewhere in this report.
CPL, together with its subsidiary company, maintains a system of
internal controls to provide reasonable assurance that transactions are executed
in accordance with management's authorization, that the consolidated financial
statements are prepared in accordance with generally accepted accounting
principles and that the assets of the companies are properly safeguarded against
unauthorized acquisition, use or disposition. The system includes a documented
organizational structure and division of responsibility, established policies
and procedures including a policy on ethical standards which provides that CPL
will maintain the highest legal and ethical standards, and the careful
selection, training and development of our employees.
Internal auditors continuously monitor the effectiveness of the
internal control system following standards established by the Institute of
Internal Auditors. Actions are taken by management to respond to deficiencies as
they are identified. The board, operating through its audit committee, which is
comprised entirely of directors who are not officers or employees of CPL or its
subsidiary company, provides oversight to the financial reporting process.
Due to the inherent limitations in the effectiveness of internal
controls, no internal control system can provide absolute assurance that errors
will not occur. However, management strives to maintain a balance, recognizing
that the cost of such a system should not exceed the benefits derived.
CPL and its subsidiary believe that, in all material respects, their
system of internal controls over financial reporting and over safeguarding of
assets against unauthorized acquisition, use or disposition functioned
effectively as of December 31, 1997.
J. Gonzalo Sandoval R. Russell Davis
General Manager/President - CPL Controller - CPL
CPL
2-93
PUBLIC SERVICE COMPANY
OF OKLAHOMA
PSO
2-94
SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended
December 31 is provided to highlight significant trends in the financial
condition and results of operations for PSO. Certain financial statement items
for prior years have been reclassified to conform to the most recent period
presented.
---------------------------------------------------------
1997 1996 (1) 1995 1994 1993 (2)
(thousands, except ratios)
INCOME STATEMENT DATA
Revenues $ 712,690 $ 735,265 $ 690,823 $ 740,496 $ 707,536
Income before cumulative
effect of changes in
accounting principles 46,206 31,478 81,828 68,266 40,496
Net income for common
stock 50,053 30,662 81,012 67,450 45,903
BALANCE SHEET DATA
Assets 1,447,681 1,431,597 1,480,816 1,465,114 1,420,379
Long-term
obligations (3) 496,821 420,301 379,250 402,752 401,255
Capitalization ratios
Common stock equity 49% 52% 55% 52% 51%
Preferred stock -- 2 2 2 2
PSO-obligated, mandatorily
redeemable preferred
securities of subsidiary
trusts holding solely
Junior Subordinated
Debentures of PSO 8 -- -- -- --
Long-term debt 43 46 43 46 47
Ratio of earnings to fixed 2.68 2.45 4.32 4.03 2.78
charges (SEC Method) (4)
(1) Earnings in 1996 reflect a $35.7 million one-time charge, net of tax,
associated with certain investments for plant sites, engineering studies
and lignite reserves.
(2) Earnings in 1993 were significantly affected by restructuring charges, the
$6 million cumulative effect of changes in accounting principles and the
establishment of reserves for fuel and other properties.
(3) Long-term obligations includes long-term debt and Trust Preferred
Securities.
(4) Ratio of earnings to fixed charges for 1993 was calculated before
cumulative effect of changes in accounting principles.
PSO
2-95
PUBLIC SERVICE COMPANY OF OKLAHOMA
RESULTS OF OPERATIONS
Reference is made to PSO's Consolidated Financial Statements and
related Notes to Consolidated Financial Statements and Selected Financial Data.
The information contained therein should be read in conjunction with, and is
essential to understanding, the following discussion and analysis.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Net income for common stock increased to $50.1 million for the year
ended 1997 from $30.7 million in 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 $35.7 million, net of
tax, recorded in 1996 partially offset by the impact of recording the effects
associated with the outcome of the PSO 1997 Rate Settlement Agreement. See NOTE
2. LITIGATION AND REGULATORY PROCEEDINGS for additional information related to
the PSO 1997 Rate Settlement Agreement.
Electric operating revenues were $712.7 million during 1997, a 3%
decrease from $735.3 million for the same period in 1996. The decrease was due
primarily to a $29 million provision for rate refund established in September
and paid in December related to the PSO 1997 Rate Settlement Agreement.
Partially offsetting this decrease was an increase in transmission access and
wheeling revenues.
Fuel expense decreased $11.4 million during 1997 compared to 1996 due
primarily to a 4% reduction in generation. Also contributing to this decrease
was a decline in the average unit cost of fuel from $2.04 per MMbtu in 1996 to
$1.98 per MMbtu 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. Partially offsetting the decrease in fuel expense was a decline in
the amount of under-recovered fuel costs in 1997 when compared to 1996.
Purchased power expenses increased 25% to $51.6 million in 1997 from $41.2
million in 1996 as a result of increased purchases of economy energy along with
increased cogeneration purchases in 1997.
Other operating expenses increased $14.7 million, or 12%, to $135.9
million in 1997 when compared to 1996. The increase was due primarily to the
write-off of previously capitalized demand side management energy efficiency
incentives of $9.6 million, the write-off of $2.2 million of rate case related
expenses, both associated with the aforementioned rate settlement agreement, as
well as the write-off of $0.8 million of obsolete inventory. Operating expenses
were also affected by a decrease in pension related expenses. See NOTE 5.
BENEFIT PLANS for additional information related to changes in the pension plan.
Maintenance expenses decreased 13% to $33.6 million in 1997 from $38.5 million
in 1996. The decrease was due primarily to a $3.2 million write-down of
production inventory in 1996 and lower tree management expenses in 1997.
Depreciation and amortization expense increased $3.8 million, or 5%,
during 1997 when compared to the prior year. This increase was due primarily to
the write-off of $5.8 million of regulatory assets resulting from the PSO 1997
Rate Settlement Agreement, as well as an increase in depreciable assets, offset
in part by a decrease in depreciation expense of $5.2 million also attributable
to the agreement. Taxes, other than income were $28.8 million in 1997, a 6%
increase from $27.2 million in 1996 as a result of higher ad valorem tax expense
in 1997. Operating income taxes were $20.8 million in 1997 compared to $37.6
million in 1996 due primarily to lower taxable operating income in 1997.
Other income and deductions increased $37.2 million in 1997 when
compared to 1996 primarily as a result of the absence in 1997 of a one-time
charge associated with certain investments for plant sites, engineering studies
and lignite reserves of $35.7 million, net of tax, recorded in 1996.
PSO
2-96
Interest and other charges increased $2.5 million, or 7%, in 1997 when
compared to the same period in 1996 primarily due to the new distributions on
Trust Preferred Securities, partially offset by a decrease in short-term
interest expense as a result of a reduction of short-term debt outstanding
during 1997. For information on the new securities see NOTE 10. TRUST PREFERRED
SECURITIES.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Net income for common stock for 1996 was $30.7 million, a 62% decrease
from 1995 net income for common stock of $81 million. The decrease resulted
primarily from a one-time charge associated with certain investments for plant
sites, engineering studies and lignite reserves of approximately $35.7 million,
net of tax, and prior year tax adjustments recorded in 1995 offset in part by
increased non-fuel revenue.
Electric operating revenues increased 6% to $735.3 million during 1996
from $690.8 million during 1995. The increase was due primarily to increased
fuel revenues, as discussed below and a 6% increase in retail KWH sales
resulting from increased customer usage, as well as additional weather-related
demand.
Fuel expense for 1996 was $290.4 million, a 6% increase compared to
$273.5 million during 1995. The increase was due primarily to an increase in
average unit fuel costs from $1.73 per MMbtu in 1995 to $2.04 per MMbtu in 1996.
The increase in average unit fuel costs is attributable to an increase in the
spot market price of natural gas brought about by strong demand offset in part
by a decline in the delivered cost of coal resulting from lower transportation
charges as well as purchases of lower priced spot market coal. Offsetting these
factors in part was an under-recovery of fuel costs in 1996 compared to an
over-recovery in 1995, as well as decreased KWH generation. Purchased power
expense increased 75% to $41.2 million for 1996 from $23.6 million for 1995. The
increase was due primarily to increases in purchases of economy energy at a
higher cost per MWH.
Other operating expenses increased 4% to $121.2 million in 1996 from
$116.2 million in 1995 due primarily to the 1996 restructuring charges,
increased employee-related expenses and increased outside services expenses.
Maintenance expenses increased 9% to $38.5 million in 1996 from $35.4 million in
1995. The increase was due primarily to a $3.2 million write-down of production
inventory in 1996. Depreciation and amortization expense increased approximately
$9.8 million during 1996 when compared to the prior year due to increases in
depreciable property and completion in 1995 of the amortization of previously
expensed inventory and supply items that were credited through amortization to
cost of service.
Income tax expense for 1996 compared to 1995 was affected by prior year
tax adjustments recorded in 1995 offset in part by lower pre-tax income,
excluding the effects of a one-time charge associated with certain investments
as discussed below. Other income and deductions for 1996 decreased approximately
$39 million when compared to 1995 as a result of a one-time charge associated
with certain investments for plant sites, engineering studies and lignite
reserves of $35.7 million, net of tax. Other income and deductions were also
affected by the $2.7 million gain on the sale of non-utility fiber optic
telecommunication property in the first quarter of 1995.
PSO
2-97
PSO
CONSOLIDATED STATEMENTS OF INCOME
PUBLIC SERVICE COMPANY OF OKLAHOMA
- ----------------------------------------------------------------------------
For the Years Ended December 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
(thousands)
Electric Operating Revenues
Residential $297,265 $299,550 $280,127
Commercial 226,525 221,985 210,875
Industrial 161,974 157,509 147,811
Sales for resale 30,896 39,285 34,273
Other (3,970) 16,936 17,737
--------- --------- ---------
712,690 735,265 690,823
--------- --------- ---------
Operating Expenses and Taxes
Fuel 278,976 290,408 273,533
Purchased power 51,619 41,194 23,584
Other operating 135,943 121,235 116,175
Maintenance 33,608 38,469 35,356
Depreciation and amortization 81,227 77,470 67,657
Taxes, other than income 28,778 27,194 25,147
Income taxes 20,763 37,558 37,602
--------- --------- ---------
630,914 633,528 579,054
--------- --------- ---------
Operating Income 81,776 101,737 111,769
--------- --------- ---------
Other Income and Deductions
Allowance for equity funds used
during construction 995 292 1,270
Charges for investments and plant
development costs (123) (51,109) --
Other (1,503) (1,107) 2,077
Non-operating income taxes 2,280 16,413 197
--------- --------- ---------
1,649 (35,511) 3,544
--------- --------- ---------
Income Before Interest Charges 83,425 66,226 115,313
--------- --------- ---------
Interest Charges
Interest on long-term debt 30,474 30,555 29,594
Interest on short-term debt and other 4,100 5,623 6,355
Distributions on Trust Preferred
Securities 3,967 -- --
Allowance for borrowed funds used
during construction (1,322) (1,430) (2,464)
--------- --------- ---------
37,219 34,748 33,485
--------- --------- ---------
Net Income 46,206 31,478 81,828
Less: Preferred stock dividends 364 816 816
Gain on reacquired preferred stock 4,211 -- --
--------- --------- ---------
Net Income for Common Stock $50,053 $30,662 $81,012
========= ========= =========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
PSO
2-98
PSO
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
PUBLIC SERVICE COMPANY OF OKLAHOMA
- ----------------------------------------------------------------------------
For the Years Ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
(thousands)
Retained Earnings at Beginning of Year $145,943 $150,281 $124,269
Net income for common stock 50,053 30,662 81,012
Deduct: Common stock dividends 59,000 35,000 55,000
-------- -------- --------
Retained Earnings at End of Year $136,996 $145,943 $150,281
======== ======== ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
PSO
2-99
PSO
CONSOLIDATED BALANCE SHEETS
PUBLIC SERVICE COMPANY OF OKLAHOMA
- -------------------------------------------------------------------------------
As of December 31,
-----------------------
1997 1996
---------- ----------
(thousands)
ASSETS
Electric Utility Plant
Production $907,735 $902,813
Transmission 375,111 368,280
Distribution 818,806 773,590
General 197,264 186,252
Construction work in progress 40,992 59,241
---------- ----------
2,339,908 2,290,176
Less - Accumulated depreciation 1,031,322 987,283
---------- ----------
1,308,586 1,302,893
---------- ----------
Current Assets
Cash 2,171 1,479
Accounts receivable 34,974 11,069
Materials and supplies, at average cost 32,211 34,542
Fuel inventory, at LIFO cost 11,427 14,061
Accumulated deferred income taxes -- 2,558
Prepayments and other 3,366 2,991
---------- ----------
84,149 66,700
---------- ----------
Deferred Charges and Other Assets 54,946 62,004
---------- ----------
$1,447,681 $1,431,597
========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
PSO
2-100
PSO
CONSOLIDATED BALANCE SHEETS
PUBLIC SERVICE COMPANY OF OKLAHOMA
- -----------------------------------------------------------------------
As of December 31,
----------------------------
1997 1996
---------- ----------
CAPITALIZATION AND LIABILITIES (thousands)
Capitalization
Common stock:
$15 par value
Authorized shares:
11,000,000 shares
Issued 10,482,000 shares and
outstanding 9,013,000 shares $ 157,230 $ 157,230
Paid-in capital 180,000 180,000
Retained earnings 136,996 145,943
---------- ----------
Total Common Stock Equity 474,226 49% 483,173 52%
---------- ---- ---------- ----
Preferred stock 5,287 -- 19,826 2%
PSO-obligated, mandatorily redeemable
preferred securities of subsidiary
trust holding solely Junior
Subordinated Debentures of PSO 75,000 8% -- --
Long-term debt 421,821 43% 420,301 46%
---------- ---- ---------- ----
Total Capitalization 976,334 100% 923,300 100%
---------- ---- ---------- ----
Current Liabilities
Advances from affiliates 4,874 42,867
Payables to affiliates 29,011 27,425
Accounts payable 55,179 47,604
Payables to customers 18,837 14,329
Accrued taxes -- 12,306
Accumulated deferred income taxes 2,262 --
Accrued interest 9,090 9,193
Other 4,178 7,421
---------- ----------
123,431 161,145
---------- ----------
Deferred Credits
Accumulated deferred income taxes 258,848 251,007
Investment tax credits 41,160 43,438
Income tax related regulatory
liabilities, net 41,793 46,007
Other 6,115 6,700
---------- ----------
347,916 347,152
---------- ----------
$1,447,681 $1,431,597
========== ==========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
PSO
2-101
PSO
CONSOLIDATED STATEMENTS OF CASH FLOWS
PUBLIC SERVICE COMPANY OF OKLAHOMA
- -------------------------------------------------------------------------------
For the Years Ended December 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
(thousands)
OPERATING ACTIVITIES
Net Income $46,206 $31,478 $81,828
Non-cash Items Included in Net Income
Depreciation and amortization 85,459 83,424 73,218
Deferred income taxes and
investment tax credits 6,169 (4,112) (85)
Charges for investments and assets 12,803 50,854 --
Inventory reserve 838 3,150 --
Changes in Assets and Liabilities
Accounts receivable (23,905) 6,888 3,574
Other investments and property (5,682) (6,264) 2,196
Accounts payable 13,433 (5,878) (22,970)
Accrued taxes (12,306) (14,708) 9,658
Other deferred credits (585) 1,078 (3,193)
Other (776) (3,292) (338)
--------- --------- ---------
121,654 142,618 143,888
--------- --------- ---------
INVESTING ACTIVITIES
Construction expenditures (79,568) (83,509) (98,415)
Other (6,008) (8,596) (9,715)
--------- --------- ---------
(85,576) (92,105) (108,130)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- 51,744 --
Retirement of long-term debt -- (25,000) --
Reacquisition of long-term debt -- (13,040) --
Reacquisition of preferred stock (10,329) -- --
Proceeds from issuance of Trust
Preferred Securities 72,450 -- --
Change in advances from affiliates (37,993) (27,643) 15,350
Payment of dividends (59,514) (35,839) (55,817)
--------- --------- ---------
(35,386) (49,778) (40,467)
--------- --------- ---------
Net Change in Cash and Cash Equivalents 692 735 (4,709)
Cash and Cash Equivalents at Beginning
of Year 1,479 744 5,453
--------- --------- ---------
Cash and Cash Equivalents at End of Year $2,171 $1,479 $744
========= ========= =========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized
(includes distributions on Trust
Preferred Securities) $35,557 $32,488 $31,285
========= ========= =========
Income taxes paid $34,244 $30,353 $27,651
========= ========= =========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
PSO
2-102
PSO
CONSOLIDATED STATEMENTS OF CAPITALIZATION
PUBLIC SERVICE COMPANY OF OKLAHOMA
- -----------------------------------------------------------------------------
As of December 31,
-------------------
1997 1996
-------- --------
(thousands)
COMMON STOCK EQUITY $474,226 $483,173
-------- --------
PREFERRED STOCK
(Cumulative $100 Par Value, Authorized
700,000 shares, redeemable at the option
of PSO upon 30 days notice)
Number Current
of Shares Redemption
Series Outstanding Price
- -----------------------------------------
4.00% 44,640 $105.75 4,464 9,790
4.24% 8,069 $103.19 807 10,000
Premium 16 36
-------- --------
5,287 19,826
-------- --------
TRUST PREFERRED SECURITIES
PSO-obligated, mandatorily redeemable
preferred securities of subsidiary
trust holding solely Junior Subordinated
Debentures of PSO, 8.00%, due April 30, 2037 75,000 --
-------- --------
LONG-TERM DEBT
First Mortgage Bonds
Series K, 7 1/4%, due January 1, 1999 25,000 25,000
Series L, 7 3/8%, due March 1, 2002 30,000 30,000
Series S, 7 1/4%, due July 1, 2003 65,000 65,000
Series T, 7 3/8%, due December 1, 2004 50,000 50,000
Series U, 6 1/4%, due April 1, 2003 35,000 35,000
Series V, 7 3/8%, due April 1, 2023 100,000 100,000
Series W, 6 1/2%, due June 1, 2005 50,000 50,000
Medium-term Notes, 5.89%-6.43%, due
December 15, 2000-March 1, 2001 40,000 40,000
Installment sales agreement - PCRBs
Series A, 5.9%, due December 1, 2007 (OEFA) 34,700 34,700
Series 1996, 6.0%, due June 1, 2020 (Red River) 12,660 12,660
Unamortized discount (3,657) (3,991)
Unamortized costs of reacquired debt (16,882) (18,068)
-------- --------
421,821 420,301
-------- --------
TOTAL CAPITALIZATION $976,334 $923,300
======== ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
PSO
2-103
PUBLIC SERVICE COMPANY OF OKLAHOMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See CSW's NOTE 1.
2. LITIGATION AND REGULATORY PROCEEDINGS
See CSW's NOTE 2.
3. COMMITMENTS AND CONTINGENT LIABILITIES
See CSW's NOTE 3.
4. INCOME TAXES
See CSW's NOTE 4.
5. BENEFIT PLANS
See CSW's NOTE 5.
6. JOINTLY OWNED ELECTRIC UTILITY PLANT
See CSW's NOTE 6.
7. FINANCIAL INSTRUMENTS
See CSW's NOTE 7.
8. LONG-TERM DEBT
See CSW's NOTE 8.
9. PREFERRED STOCK
See CSW's NOTE 9.
10. TRUST PREFERRED SECURITIES
See CSW's NOTE 10.
11. SHORT-TERM FINANCING
See CSW's NOTE 11.
12. STOCK BASED COMPENSATION PLANS
See CSW's NOTE 13.
PSO
2-104
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF PUBLIC SERVICE COMPANY OF
OKLAHOMA:
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of Public Service Company of Oklahoma
(an Oklahoma corporation and a wholly owned subsidiary of Central and South West
Corporation) and subsidiary companies, as of December 31, 1997 and 1996, and the
related consolidated statements of income, retained earnings and cash flows, for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of Public Service Company of Oklahoma's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Public
Service Company of Oklahoma and subsidiary companies as of December 31, 1997 and
1996, and the results of their operations and cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental Exhibit 12 is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not a required part of the basic financial statements. This exhibit has
been subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
Dallas, Texas
February 16, 1998
PSO
2-105
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and
objectivity of the consolidated financial statements of Public Service Company
of Oklahoma and its subsidiary companies as well as other information contained
in this Annual Report. The consolidated financial statements have been prepared
in conformity with generally accepted accounting principles applied on a
consistent basis and, in some cases, reflect amounts based on the best estimates
and judgments of management, giving due consideration to materiality. Financial
information contained elsewhere in this Annual Report is consistent with that in
the consolidated financial statements.
The consolidated financial statements have been audited by PSO's
independent public accountants who were given unrestricted access to all
financial records and related data, including minutes of all meetings of
shareholders, the board of directors and committees of the board. PSO and its
subsidiaries believe that representations made to the independent public
accountants during their audit were valid and appropriate. The report of
independent public accountants is presented elsewhere in this report.
PSO, together with its subsidiary companies, maintains a system of
internal controls to provide reasonable assurance that transactions are executed
in accordance with management's authorization, that the consolidated financial
statements are prepared in accordance with generally accepted accounting
principles and that the assets of the companies are properly safeguarded against
unauthorized acquisition, use or disposition. The system includes a documented
organizational structure and division of responsibility, established policies
and procedures including a policy on ethical standards which provides that PSO
will maintain the highest legal and ethical standards, and the careful
selection, training and development of our employees.
Internal auditors continuously monitor the effectiveness of the
internal control system following standards established by the Institute of
Internal Auditors. Actions are taken by management to respond to deficiencies as
they are identified. The board, operating through its audit committee, which is
comprised entirely of directors who are not officers or employees of PSO or its
subsidiaries, provides oversight to the financial reporting process.
Due to the inherent limitations in the effectiveness of internal
controls, no internal control system can provide absolute assurance that errors
will not occur. However, management strives to maintain a balance, recognizing
that the cost of such a system should not exceed the benefits derived.
PSO and its subsidiaries believe that, in all material respects, their
system of internal controls over financial reporting and over safeguarding of
assets against unauthorized acquisition, use or disposition functioned
effectively as of December 31, 1997.
T. D. Churchwell R. Russell Davis
President - PSO Controller - PSO
PSO
2-106
SOUTHWESTERN ELECTRIC
POWER COMPANY
SWEPCO
2-107
SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended
December 31 is provided to highlight significant trends in the financial
condition and results of operations for SWEPCO. Certain financial statement
items for prior years have been reclassified to conform to the most recent
period presented.
--------------------------------------------------------
1997 1996 (1) 1995 1994 1993 (2)
(thousands, except ratios)
INCOME STATEMENT DATA
Revenues $ 939,869 $ 920,786 $ 836,705 $ 825,296 $ 837,192
Income before cumulative
effect of changes in 92,902 66,566 117,114 105,712 78,471
changes in accounting
principles
Net income for common
stock 92,254 63,503 113,870 102,351 78,514
BALANCE SHEET DATA
Assets 2,094,746 2,099,156 2,116,719 2,079,207 1,968,285
Long-term obligations(3) 683,681 629,615 632,579 630,661 638,093
Capitalization ratios
Common stock equity 51% 52% 51% 51% 50%
Preferred stock 2 4 4 4 4
SWEPCO-obligated, mandatorily
redeemable preferred
securities of subsidiary
trusts holding solely
Junior Subordinated
Debentures of SWEPCO 8 -- -- -- --
Long-term debt 39 44 45 45 46
Ratio of earnings to fix 3.46 2.81 3.80 3.70 3.27
(SEC Method) (4)
(1) Earnings in 1996 reflect a $21.8 million one-time charge, net of tax,
associated with certain investments for plant sites, engineering studies
and lignite reserves.
(2) Earnings in 1993 were significantly affected by restructuring charges, the
$3 million cumulative effect of changes in accounting principles and the
establishment of reserves for fuel properties.
(3) Long-term obligations includes long-term debt, preferred stock subject to
mandatory redemption and Trust Preferred Securities. (4) Ratio of earnings
to fixed charges for 1993 was calculated before cumulative effect of changes
in accounting principles.
SWEPCO
2-108
SOUTHWESTERN ELECTRIC POWER COMPANY
RESULTS OF OPERATIONS
Reference is made to SWEPCO's Consolidated Financial Statements and
related Notes to Consolidated Financial Statements and Selected Financial Data.
The information contained therein should be read in conjunction with, and is
essential in understanding, the following discussion and analysis.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 AND 1996
Net income for common stock increased 45% during 1997 to $92.3 million
from $63.5 million in 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 $21.8 million, net of tax.
Electric operating revenues increased $19.1 million, or 2%, to $939.9
million in 1997 from $920.8 million in 1996. The increase was due primarily to
an increase in non-fuel revenue of $31.5 million, including $15.9 million in
non-fuel wholesale sales, as a result of increased retail customer usage and
customer growth, offset in part by a $12.4 million decrease in fuel revenue.
Fuel and purchased power expense decreased for 1997 when compared to
1996. Fuel expense decreased $6.1 million, or 2%, due primarily to a decrease in
average unit fuel costs from $1.76 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 relatively higher cost per MMbtu also contributed to the lower fuel expense
for 1997. Purchased power expenses decreased approximately $1.2 million, or 5%,
during 1997 when compared to 1996 due primarily to a decrease in economy energy
purchases.
Other operating expenses increased $15.6 million, or 11%, to $157.2
million during 1997 when compared to 1996. The increase is due primarily to
costs associated with a canceled transmission project of $10.2 million, the
write-off of previously capitalized energy efficiency incentives of $4.2 million
and the write-off of obsolete inventory of $1.2 million. Operating expenses were
also positively affected by a decrease in pension expenses. See NOTE 5. BENEFIT
PLANS for additional information related to changes in the pension plan.
Depreciation and amortization expense increased $3.7 million, or 4%, during 1997
when compared to 1996 due primarily to increases in depreciable plant. Taxes,
other than income, increased $5.6 million, or 11%, during 1997 when compared to
1996 due primarily to an increase in ad valorem taxes due to higher assessed
values and the expiration of a 10-year exemption on one of SWEPCO's power
plants.
Other income and deductions increased $25.2 million for 1997 compared
to 1996 due primarily to a one-time charge associated with certain investments
for plant sites, engineering studies and lignite reserves of $21.8 million, net
of tax, recorded in 1996, and a $1.1 million, net of tax, gain on the sale of
lignite properties recorded in 1997.
Interest expense on long-term debt decreased $3.6 million due to
retirement of long-term debt in 1997. Interest expense on short-term debt
decreased $2.6 million resulting from decreased short-term debt outstanding.
Offsetting these decreases were the distributions on newly-issued Trust
Preferred Securities of $5.6 million. See NOTE 10. TRUST PREFERRED SECURITIES
for additional information on the new securities.
SWEPCO
2-109
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 AND 1995
Net income for common stock decreased 44% during 1996 to $63.5 million
from $113.9 million in 1995. The decrease resulted primarily from increased
other operating expenses and a one-time charge associated with certain
investments for plant sites, engineering studies and lignite reserves of $21.8
million, net of tax. Increased depreciation and amortization also contributed to
the decrease in net income for common stock.
Total electric operating revenues increased $84.1 million, or 10%, to
$920.8 million in 1996 due primarily to a $61 million increase in fuel revenues
and a $22 million increase in non-fuel revenues. The increase in fuel revenues
was due to higher average unit fuel cost as discussed below. The increase in
non-fuel revenues was primarily due to a 3% increase in retail KWH sales
resulting from increased customer demand.
Fuel expense increased 22% to $388.5 million due primarily to a 10%
increase in generation and an increase in the average unit cost of fuel from
$1.61 per MMbtu in 1995 to $1.76 per MMbtu in 1996. The increase in the average
unit cost of fuel is attributable to an increase in the spot market price of
natural gas offset in part by a decline in the delivered cost of coal resulting
from lower transportation charges as well as purchases of lower priced spot
market coal. Purchased power expense increased $8.1 million, or 42%, during 1996
when compared to 1995 due primarily to an increase in economy energy purchases
at higher cost per MWH.
Other operating expenses increased $20.3 million, or 17%, during 1996
when compared to 1995. The increase is due primarily to $4.6 million in
restructuring charges, an increase in outside services employed and a $3.0
million increase in factoring costs. The increase in factoring costs resulted
from an increase in accounts receivable factored and the correction in 1995 of
an error relating to a prior year, partially offset by a decrease in the average
interest rate associated with factored receivables. Also contributing to the
increase in other operating expense was the write-off of $3.6 million in
deferred SFAS 106 costs which SWEPCO began deferring in 1993 pursuant to an
order issued by the Arkansas Commission. The order allowed deferral of the
difference between OPEB costs recorded under SFAS 106 and OPEB costs paid to
retirees for up to five years. The order required such deferrals to be expensed
if at the end of five years amortization of such deferrals is not included in
rates. Depreciation and amortization expense increased $8.3 million, or 10%,
during 1996 when compared to 1995 due primarily to increases in depreciable
plant and the completion in 1995 of the amortization of previously expensed
inventory and supply items that were credited through amortization to cost of
service.
Taxes, other than income, increased $5.2 million, or 12%, during 1996
when compared to 1995 due primarily to an increase in ad valorem taxes and state
franchise taxes. The higher ad valorem taxes resulted primarily from a higher
state assessed value in Louisiana and the addition of an HVdc tie in Texas. The
state franchise taxes increased due mainly to higher federal taxable income
associated with Texas franchise tax. Income tax expense decreased approximately
$3.5 million in 1996 due primarily to lower pre-tax income partially offset by
prior year tax adjustments recorded in 1995.
Other income and deductions decreased $25.6 million during 1996 when
compared to 1995 due primarily to a one-time charge associated with certain
investments for plant sites, engineering studies and lignite reserves of $21.8
million, net of tax.
SWEPCO
2-110
SWEPCO
CONSOLIDATED STATEMENTS OF INCOME
SOUTHWESTERN ELECTRIC POWER COMPANY
- ----------------------------------------------------------------------------
For the Years Ended December 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
(thousands)
Electric Operating Revenues
Residential $289,723 $290,020 $278,319
Commercial 192,115 189,954 177,135
Industrial 263,207 262,878 246,182
Sales for resale 146,916 134,836 94,638
Other 47,908 43,098 40,431
--------- --------- ---------
939,869 920,786 836,705
--------- --------- ---------
Operating Expenses and Taxes
Fuel 382,404 388,450 318,506
Purchased power 25,928 27,160 19,077
Other operating 157,188 141,542 121,248
Maintenance 44,038 43,742 43,320
Depreciation and amortization 95,228 91,566 83,272
Taxes, other than income 55,962 50,373 45,153
Income taxes 39,712 39,870 43,353
--------- --------- ---------
800,460 782,703 673,929
--------- --------- ---------
Operating Income 139,409 138,083 162,776
--------- --------- ---------
Other Income and Deductions
Charges for investments and plant
development costs (743) (29,700) --
Allowance for equity funds used
during construction 934 325 4,290
Other 1,616 (623) (543)
Non-operating income taxes 2,222 8,820 721
--------- --------- ---------
4,029 (21,178) 4,468
--------- --------- ---------
Income Before Interest Charges 143,438 116,905 167,244
--------- --------- ---------
Interest Charges
Interest on long-term debt 40,440 44,066 44,468
Distributions on Trust Preferred
Securities 5,582 -- --
Interest on short-term debt and other 5,736 8,381 10,706
Allowance for borrowed funds used
during construction (1,222) (2,098) (5,044)
--------- --------- ---------
50,536 50,349 50,130
--------- --------- ---------
Net Income 92,902 66,556 117,114
Less: Preferred stock dividends 2,467 3,053 3,244
Gain on reacquired preferred stock 1,819 -- --
--------- --------- ---------
Net Income for Common Stock $92,254 $63,503 $113,870
========= ========= =========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
SWEPCO
2-111
SWEPCO
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
SOUTHWESTERN ELECTRIC POWER COMPANY
- ---------------------------------------------------------------------------
For the Years Ended December 31,
----------------------------------
1997 1996 1995
--------- --------- --------
(thousands)
Retained Earnings at Beginning of Year $321,801 $302,334 $297,462
Net income for common stock 92,254 63,503 113,870
Gain/(loss) on reacquisition of
preferred stock (5) (36) 2
Deduct: Common stock dividends 90,000 44,000 109,000
--------- --------- --------
Retained Earnings at End of Year $324,050 $321,801 $302,334
========= ========= ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
SWEPCO
2-112
SWEPCO
CONSOLIDATED BALANCE SHEETS
SOUTHWESTERN ELECTRIC POWER COMPANY
- -------------------------------------------------------------------------------
As of December 31,
-----------------------
1997 1996
---------- ----------
(thousands)
ASSETS
Electric Utility Plant
Production $1,391,676 $1,407,134
Transmission 456,401 463,425
Distribution 870,378 844,503
General 311,323 283,878
Construction work in progress 51,665 45,374
---------- ----------
3,081,443 3,044,314
Less - Accumulated depreciation 1,225,865 1,192,356
---------- ----------
1,855,578 1,851,958
---------- ----------
Current Assets
Cash and temporary cash investments 2,298 1,879
Accounts receivable 81,507 68,140
Materials and supplies, at average cost 24,523 29,265
Fuel inventory 26,415 55,775
Under-recovered fuel costs 13,013 9,120
Prepayments and other 13,678 13,499
---------- ----------
161,434 177,678
---------- ----------
Deferred Charges and Other Assets 77,734 69,520
---------- ----------
$2,094,746 $2,099,156
========== ==========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
SWEPCO
2-113
SWEPCO
CONSOLIDATED BALANCE SHEETS
SOUTHWESTERN ELECTRIC POWER COMPANY
- -------------------------------------------------------------------------
As of December 31,
-----------------------------
1997 1996
---------- ----------
CAPITALIZATION AND LIABILITIES (thousands)
Capitalization
Common stock:
$18 par value
Authorized:
7,600,000 shares
Issued and outstanding:
7,536,640 shares $ 135,660 $ 135,660
Paid-in capital 245,000 245,000
Retained earnings 324,050 321,801
---------- ----------
Total Common Stock Equity 704,710 51% 702,461 52%
---------- ---- ---------- ----
Preferred stock
Not subject to mandatory redemption 4,709 16,032
Subject to mandatory redemption 25,930 32,464
---------- ----------
30,639 2% 48,496 4%
SWEPCO-obligated, mandatorily redeemable
preferred securities of subsidiary
trust holding solely Junior
Subordinated Debentures of SWEPCO 110,000 8% -- --%
Long-term debt 547,751 39% 597,151 44%
---------- ---- ---------- ----
Total Capitalization 1,393,100 100% 1,348,108 100%
---------- ---- ---------- ----
Current Liabilities
Long-term debt and preferred stock due
within twelve months 3,555 3,760
Advances from affiliates 25,175 57,495
Accounts payable 73,582 48,826
Payables to affiliates 63,583 68,708
Customer deposits 14,359 10,497
Accrued taxes 12,884 25,241
Accumulated deferred income taxes 4,594 4,162
Accrued interest 13,425 14,782
Other 9,551 27,449
---------- ----------
220,708 260,920
---------- ----------
Deferred Credits
Accumulated deferred income taxes 395,909 372,552
Investment tax credits 66,845 71,507
Income tax related regulatory
liabilities, net 10,072 36,106
Other 8,112 9,963
---------- ----------
480,938 490,128
---------- ----------
$2,094,746 $2,099,156
========== ==========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
SWEPCO
2-114
SWEPCO
CONSOLIDATED STATEMENTS OF CASH FLOWS
SOUTHWESTERN ELECTRIC POWER COMPANY
- -----------------------------------------------------------------------------
For the Years Ended December 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
(thousands)
OPERATING ACTIVITIES
Net Income $92,902 $66,556 $117,114
Non-cash Items Included in Net Income
Depreciation and amortization 100,015 101,204 93,624
Deferred income taxes and
investment tax credits (6,907) (1,881) 1,501
Charges for investments and assets 16,493 29,590 --
Inventory reserve 1,150 1,632 --
Changes in Assets and Liabilities
Accounts receivable (13,367) (13,512) (284)
Fuel inventory 29,360 17,501 (11,575)
Accounts payable 24,374 12,253 (3,303)
Payables to affiliates (5,125) 16,234 11,735
Accrued taxes (12,357) (27) 17,844
Other current liabilities (17,699) (3,076) (5,161)
Fuel recovery (3,893) (18,043) (3,277)
Other (4,458) (8,506) (4,706)
--------- --------- ---------
200,488 199,925 213,512
--------- --------- ---------
INVESTING ACTIVITIES
Construction expenditures (108,126) (92,737) (105,193)
Other (4,545) (7,510) (9,437)
--------- --------- ---------
(112,671) (100,247) (114,630)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from sale of long-term debt -- 79,346 --
Reacquisition of long-term debt -- (83,334) --
Redemption of preferred stock (16,043) (1,236) (1,198)
Proceeds from issuance of Trust
Preferred Securities 106,231 -- --
Retirement of long-term debt (52,600) (3,901) (3,600)
Change in advances from affiliates (32,320) (43,734) 19,360
Payment of dividends (92,666) (46,642) (113,038)
--------- --------- ---------
(87,398) (99,501) (98,476)
--------- --------- ---------
Net Change in Cash and Cash Equivalents 419 177 406
Cash and Cash Equivalents at Beginning
of Year 1,879 1,702 1,296
--------- --------- ---------
Cash and Cash Equivalents at End of Year $2,298 $1,879 $1,702
========= ========= =========
SUPPLEMENTARY INFORMATION
Interest paid less amounts
capitalized (includes distributions
on Trust Preferred Securities) $49,847 $53,231 $46,243
========= ========= =========
Income taxes paid $57,715 $35,549 $28,079
========= ========= =========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
SWEPCO
2-115
SWEPCO
CONSOLIDATED STATEMENTS OF CAPITALIZATION
SOUTHWESTERN ELECTRIC POWER COMPANY
- -------------------------------------------------------------------------------
As of December 31,
-----------------------
1997 1996
---------- ----------
(thousands)
COMMON STOCK EQUITY $704,710 $702,461
---------- ----------
PREFERRED STOCK
Cumulative $100 Par Value, Authorized 1,860,000 shares
Current
Number of Shares Redemption
Series Outstanding Price
- ------------------------------------------------------
Not Subject to Mandatory Redemption
5.00% 37,749 $109.00 3,775 7,500
4.65% 1,908 $102.75 191 2,500
4.28% 7,386 $103.90 739 6,000
Premium 4 32
---------- ----------
4,709 16,032
---------- ----------
Subject to Mandatory Redemption
6.95% 274,010 $102.32 27,401 34,000
Issuance Expense (271) (336)
Amount to be redeemed within one year (1,200) (1,200)
---------- ----------
25,930 32,464
---------- ----------
30,639 48,496
---------- ----------
TRUST PREFERRED SECURITIES
SWEPCO-obligated, mandatorily redeemable
preferred securities of subsidiary
trust holding solely Junior Subordinated
Debentures of SWEPCO, 7.875%, due April 30, 2037 110,000 --
---------- ----------
LONG-TERM DEBT
First Mortgage Bonds
Series V, 7 3/4%, due June 1, 2004 40,000 40,000
Series W, 6 1/8%, due September 1, 1999 40,000 40,000
Series X, 7%, due September 1, 2007 90,000 90,000
Series Y, 6 5/8%, due February 1, 2003 55,000 55,000
Series Z, 7 1/4%, due July 1, 2023 45,000 45,000
Series AA, 5 1/4%, due April 1, 2000 45,000 45,000
Series BB, 6 7/8%, due October 1, 2025 80,000 80,000
1976 Series A, 6.20%, due November 1, 2006*
(Siloam Springs) 6,230 6,375
1976 Series B, 6.20%, due November 1, 2006*
(Siloam Springs) 1,000 1,000
Installment Sales Agreements - PCRBs
1978 Series A, 6%, due January 1, 2008 (Titus County) 14,420 14,420
1991 Series A, 8.2%, due August 1, 2011
(Titus County) 17,125 17,125
1991 Series B, 6.9%, due November 1, 2004
(Titus County) 12,290 12,290
Series 1992, 7.6%, due January 1, 2019 (DeSoto) 53,500 53,500
Series 1996, 6.1%, due April 1, 2018 (Sabine) 81,700 81,700
Bank Loan, Variable Rate, due June 15, 2000 -- 50,000
Railcar lease obligations 7,759 10,242
Unamortized discount and premium 955 903
Unamortized costs of reacquired debt (39,873) (42,844)
Amount to be redeemed within one year (2,355) (2,560)
---------- ----------
547,751 597,151
---------- ----------
TOTAL CAPITALIZATION $1,393,100 $1,348,108
========== ==========
*Obligations incurred in connection with the sale by public authorities of
tax-exempt PCRBs.
The accompanying notes to consolidated financial statements are an
integral part of these statements.
SWEPCO
2-116
SOUTHWESTERN ELECTRIC POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See CSW's NOTE 1.
2. LITIGATION AND REGULATORY PROCEEDINGS
See CSW's NOTE 2.
3. COMMITMENTS AND CONTINGENT LIABILITIES
See CSW's NOTE 3.
4. INCOME TAXES
See CSW's NOTE 4.
5. BENEFIT PLANS
See CSW's NOTE 5.
6. JOINTLY OWNED ELECTRIC UTILITY PLANT
See CSW's NOTE 6.
7. FINANCIAL INSTRUMENTS
See CSW's NOTE 7.
8. LONG-TERM DEBT
See CSW's NOTE 8.
9. PREFERRED STOCK
See CSW's NOTE 9.
10. TRUST PREFERRED SECURITIES
See CSW's NOTE 10.
11. SHORT-TERM FINANCING
See CSW's NOTE 11.
12. STOCK BASED COMPENSATION PLANS
See CSW's NOTE 13.
SWEPCO
2-117
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF SOUTHWESTERN ELECTRIC POWER
COMPANY:
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of Southwestern Electric Power Company
(a Delaware corporation and a wholly owned subsidiary of Central and South West
Corporation) and subsidiary company as of December 31, 1997 and 1996, and the
related consolidated statements of income, retained earnings and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of Southwestern Electric Power Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Southwestern
Electric Power Company and subsidiary company as of December 31, 1997 and 1996,
and the results of their operations and cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental Exhibit 12 is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not a required part of the basic financial statements. This exhibit has
been subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
Dallas, Texas
February 16, 1998
SWEPCO
2-118
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and
objectivity of the consolidated financial statements of Southwestern Electric
Power Company and its subsidiary company as well as other information contained
in this Annual Report. The consolidated financial statements have been prepared
in conformity with generally accepted accounting principles applied on a
consistent basis and, in some cases, reflect amounts based on the best estimates
and judgments of management, giving due consideration to materiality. Financial
information contained elsewhere in this Annual Report is consistent with that in
the financial statements.
The financial statements have been audited by SWEPCO's independent
public accountants who were given unrestricted access to all financial records
and related data, including minutes of all meetings of shareholders, the board
of directors and committees of the board. SWEPCO and its subsidiary believe that
representations made to the independent public accountants during their audit
were valid and appropriate. The report of independent public accountants is
presented elsewhere in this report.
SWEPCO, together with its subsidiary, maintains a system of internal
controls to provide reasonable assurance that transactions are executed in
accordance with management's authorization, that the consolidated financial
statements are prepared in accordance with generally accepted accounting
principles and that the assets of the companies are properly safeguarded against
unauthorized acquisition, use or disposition. The system includes a documented
organizational structure and division of responsibility, established policies
and procedures including a policy on ethical standards which provides that
SWEPCO will maintain the highest legal and ethical standards, and the careful
selection, training and development of our employees.
Internal auditors continuously monitor the effectiveness of the
internal control system following standards established by the Institute of
Internal Auditors. Actions are taken by management to respond to deficiencies as
they are identified. The board, operating through its audit committee, which is
comprised entirely of directors who are not officers or employees of SWEPCO or
its subsidiary provides oversight to the financial reporting process.
Due to the inherent limitations in the effectiveness of internal
controls, no internal control system can provide absolute assurance that errors
will not occur. However, management strives to maintain a balance, recognizing
that the cost of such a system should not exceed the benefits derived.
SWEPCO and its subsidiary believe that, in all material respects, their
system of internal controls over financial reporting and over safeguarding of
assets against unauthorized acquisition, use or disposition functioned
effectively as of December 31, 1997.
Michael D. Smith R. Russell Davis
President - SWEPCO Controller - SWEPCO
SWEPCO
2-119
WEST TEXAS UTILITIES COMPANY
WTU
2-120
SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended
December 31 is provided to highlight significant trends in the financial
condition and results of operations for WTU. Certain financial statement items
for prior years have been reclassified to conform to the most recent period
presented.
---------------------------------------------------------
1997 1996 (1) 1995 1994 1993 (2)
(thousands, except ratios)
INCOME STATEMENT DATA
Revenues $397,778 $377,057 $319,835 $342,991 $345,445
Income before cumulative
effect of changes in
changes in accounting
principles 21,461 16,571 34,530 37,366 26,517
Net income for common 22,402 16,307 34,266 36,914 29,329
stock
BALANCE SHEET DATA
Assets 802,148 810,379 815,614 771,977 754,443
Long-term obligations 278,640 275,070 273,245 210,047 176,882
Capitalization ratios
Common stock equity 48% 48% 49% 56% 59%
Preferred stock -- 1 1 1 1
Long-term debt 52 51 50 43 40
Ratio of earnings to 2.21 2.05 2.63 3.37 2.79
fixed charges
(SEC Method) (3)
(1) Earnings in 1996 reflect a $10.9 million one-time charge, net of tax,
associated with certain investments for plant sites, engineering studies
and lignite reserves.
(2) Earnings in 1993 were significantly affected by restructuring charges and
the $4 million cumulative effect of changes in accounting principles.
(3) Ratio of earnings to fixed charges for 1993 was calculated before
cumulative effect of change in accounting principles.
WTU
2-121
WEST TEXAS UTILITIES COMPANY
RESULTS OF OPERATIONS
Reference is made to WTU's Financial Statements and related Notes to
Financial Statements and Selected Financial Data. The information contained
therein should be read in conjunction with, and is essential to understanding,
the following discussion and analysis.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 AND 1996
Net income for common stock increased 37% during 1997 to $22.4 million
from $16.3 million in 1996. The increase resulted primarily from the absence 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 $20.7 million, or 6%, in 1997
when compared to 1996. The increase was due primarily to a $16.0 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. Also contributing to
the increase was a 4% increase in total MWH sales. The impact on net income of
the transmission revenues was offset by a corresponding increase of $17.2
million in transmission expense related to these transmission activities. Also
contributing to the increase was $2.8 million in additional fuel revenues due to
higher purchased power expense as discussed below.
Fuel expense decreased $12.9 million, or 10%, for 1997 compared to 1996
due to lower-priced spot market coal and a 16% decrease in natural gas
generation. This decrease was also reflected by a decline in the average unit
cost of fuel to $1.98 per MMbtu in 1997 from $2.02 per MMbtu in 1996. Purchased
power expenses increased $18.7 million for 1997 as compared to 1996, primarily
as a result of additional economy purchases at a higher cost per MWH.
Other operating expense increased $26.7 million, or 40%, for 1997
compared to 1996 due primarily to a $17.2 million increase in transmission
expenses as a result of the Texas Commission rules regarding transmission access
and pricing. Also contributing to the increase was a $5.2 million write-off of
previously capitalized demand side management energy efficiency incentives and
the write-off of obsolete inventory for $1.5 million. Partially offsetting the
increase in other operating expense was a decrease in pension expense for 1997
compared to 1996. See NOTE 5. BENEFIT PLANS for additional information related
to changes in the pension plan. Depreciation and amortization increased $1.8
million, or 4.6%, as a result of an increase in depreciable plant. Taxes, other
than income increased $1.3 million due to changes in ad valorem, local
franchise, and gross receipt taxes. Income taxes decreased $5.8 million in 1997
compared to 1996 due primarily to lower taxable income in 1997 and timing
differences. Other income and deductions increased $11.4 million for 1997
compared to 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 $10.9 million, net of tax.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Net income for common stock decreased 52% during 1996 to $16.3 million
from $34.2 million in 1995. The decrease resulted primarily from a one-time
charge associated with certain investments for plant sites, engineering studies
and lignite reserves of $10.9 million, net of tax.
Electric operating revenues increased $57.2 million in 1996 when
compared to the prior year. The increase was attributable primarily to an
increase in fuel revenues as well as a one-time $21 million base rate refund
WTU
2-122
made pursuant to the WTU 1995 Stipulation and Agreement. Also contributing to
the variance was a $14.3 million increase in non-fuel revenues resulting from a
5% increase in KWH sales due to additional weather-related demand as well as
increased customer demand. Partially offsetting this increase in non-fuel
revenues was a $6.0 million reduction reflecting the lower rates implemented in
accordance with the WTU 1995 Stipulation and Agreement.
Fuel expense was $132.0 million in 1996, which represented an increase
of 7% when compared to 1995 fuel expense of $123.7 million. The increase was
primarily attributable to a 10% increase in average unit fuel costs from $1.83
per MMbtu in 1995 to $2.02 per MMbtu in 1996 due largely to higher spot gas
market prices. The increase was partially offset by lower coal costs resulting
from resolution of coal transportation litigation as well as purchases of lower
priced spot market coal. Purchased power expenses increased approximately $20.8
million during 1996 when compared with 1995, primarily as a result of increased
economy energy purchases at a higher cost per MWH.
Other operating expense increased $3.3 million during 1996 when
compared to 1995. The increase was primarily due to increased expenses
associated with regulatory activity, increased employee-related expenses,
increased expenses associated with accounts receivable factoring due to higher
revenues, and the amortization of a regulatory asset for rate case expenses in
accordance with the WTU 1995 Stipulation and Agreement. Depreciation and
amortization expense increased $6.5 million during 1996 when compared to the
prior year due primarily to the accelerated amortization of Oklaunion deferred
costs and amortization of a regulatory asset for restructuring costs, both in
accordance with the WTU 1995 Stipulation and Agreement. Also contributing to the
increase were additions to depreciable property. Income taxes increased
approximately $9.8 million when compared with 1995 due primarily to a reduction
of $6.9 million of deferred income taxes in accordance with the WTU 1995
Stipulation and Agreement recorded in 1995 and prior year tax adjustments
recorded in 1996. During 1996, the CSW System began implementation of
organizational and executive changes. Although implementation will not be
complete until early 1997, WTU recorded its portion of the estimated cost of the
implementation, $1.8 million, during 1996. In 1995, WTU established a $13.2
million regulatory asset for previously expensed restructuring costs in
accordance with the WTU 1995 Stipulation and Agreement
Other income and deductions decreased $9.8 million in 1996 due
primarily to a one-time charge associated with certain investments for plant
sites, engineering studies and lignite reserves of $10.9 million, net of tax.
WTU
2-123
WTU
STATEMENTS OF INCOME
WEST TEXAS UTILITIES COMPANY
- ---------------------------------------------------------------------------
For the Years Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(thousands)
Electric Operating Revenues
Residential $124,578 $124,214 $114,269
Commercial 73,196 72,422 66,363
Industrial 56,928 52,375 51,443
Sales for resale 88,814 88,921 73,905
Other 54,262 39,125 13,855
--------- --------- ---------
397,778 377,057 319,835
--------- --------- ---------
Operating Expenses and Taxes
Fuel 119,158 132,034 123,723
Purchased power 50,493 31,803 10,998
Other operating 93,796 67,060 63,727
Restructuring charges -- 1,809 (13,582)
Maintenance 14,013 14,122 13,931
Depreciation and amortization 41,592 39,755 33,290
Taxes, other than income 24,669 23,402 22,720
Income taxes 9,490 15,338 5,542
--------- --------- ---------
353,211 325,323 260,349
--------- --------- ---------
Operating Income 44,567 51,734 59,486
--------- --------- ---------
Other Income and Deductions
Charges for investments and
plant development costs -- (14,949) --
Allowance for equity funds
used during construction 227 423 378
Other 766 210 1,101
Non-operating income taxes 471 4,394 (1,564)
--------- --------- ---------
1,464 (9,922) (85)
--------- --------- ---------
Income Before Interest Charges 46,031 41,812 59,401
--------- --------- ---------
Interest Charges
Interest on long-term debt 20,352 21,169 21,413
Interest on short-term debt
and other 4,911 4,925 4,111
Allowance for borrowed funds
used during construction (693) (853) (653)
--------- --------- ---------
24,570 25,241 24,871
--------- --------- ---------
Net Income 21,461 16,571 34,530
Less: Preferred stock dividends 144 264 264
Gain on Reaquired Preferred Stock 1,085 -- --
--------- --------- ---------
Net Income for Common Stock $22,402 $16,307 $34,266
========= ========= =========
The accompanying notes to financial statements are an integral part
of these statements.
WTU
2-124
WTU
STATEMENTS OF RETAINED EARNINGS
WEST TEXAS UTILITIES COMPANY
- -----------------------------------------------------------------------------
For the Years Ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
(thousands)
Retained Earnings at Beginning of Year $123,077 $125,770 $132,504
Net income for common stock 22,402 16,307 34,266
Deduct: Common stock dividends 26,000 19,000 41,000
-------- -------- --------
Retained Earnings at End of Year $119,479 $123,077 $125,770
======== ======== ========
The accompanying notes to financial statements are an integral part of
these statements.
WTU
2-125
WTU
BALANCE SHEETS
WEST TEXAS UTILITIES COMPANY
- -------------------------------------------------------------------------------
As of December 31,
-----------------------
1997 1996
---------- ----------
(thousands)
ASSETS
Electric Utility Plant
Production $417,849 $417,467
Transmission 208,905 200,688
Distribution 363,911 347,328
General 104,026 92,622
Construction work in progress 14,154 30,036
---------- ----------
1,108,845 1,088,141
Less - Accumulated depreciation 441,281 414,777
---------- ----------
667,564 673,364
---------- ----------
Current Assets
Cash 811 664
Receivables from affiliates 19,802 --
Accounts receivable 10,570 24,123
Materials and supplies, at average cost 14,246 15,966
Fuel inventory 12,471 16,674
Accumulated deferred income taxes -- 1,079
Under-recovered fuel costs 11,968 8,961
Prepayments and other 4,006 1,331
---------- ----------
73,874 68,798
---------- ----------
Deferred Charges and Other Assets
Deferred Oklaunion costs 18,637 22,365
Restructuring costs 8,966 10,854
Other 33,107 34,998
---------- ----------
60,710 68,217
---------- ----------
$802,148 $810,379
========== ==========
The accompanying notes to financial statements are an integral part
of these statements.
WTU
2-126
WTU
BALANCE SHEETS
WEST TEXAS UTILITIES COMPANY
- ---------------------------------------------------------------------
As of December 31,
-------------------------
1997 1996
-------- --------
CAPITALIZATION AND LIABILITIES (thousands)
Capitalization
Common stock: $25 par value
Authorized: 7,800,000 shares
Issued and outstanding:
5,488,560 shares $137,214 $137,214
Paid-in capital 2,236 2,236
Retained earnings 119,479 123,077
-------- --------
Total Common Stock Equity 258,929 48% 262,527 48%
-------- ---- -------- ----
Preferred stock 2,483 --% 6,291 1%
Long-term debt 278,640 52% 275,070 51%
-------- ---- -------- ----
Total Capitalization 540,052 100% 543,888 100%
-------- ---- -------- ----
Current Liabilities
Advances from affiliates -- 14,833
Payables to affiliates 21,569 13,578
Accounts payable 15,419 19,669
Accrued taxes 11,375 13,463
Accumulated deferred income taxes 203 --
Accrued interest 4,525 5,403
Other 3,859 4,124
-------- --------
56,950 71,070
-------- --------
Deferred Credits
Accumulated deferred income taxes 149,346 144,146
Investment tax credits 27,918 29,239
Income tax related regulatory
liabilities, net 9,482 16,918
Other 18,400 5,118
-------- --------
205,146 195,421
-------- --------
$802,148 $810,379
======== ========
The accompanying notes to financial statements are an
integral part of these statements.
WTU
2-127
WTU
STATEMENTS OF CASH FLOWS
WEST TEXAS UTILITIES COMPANY
- ------------------------------------------------------------------------------
For the Years Ended December 31,
--------------------------------
1997 1996 1995
-------- --------- ---------
(thousands)
OPERATING ACTIVITIES
Net Income $21,461 $16,571 $34,530
Non-cash Items Included in Net Income
Depreciation and amortization 43,138 41,342 34,382
Deferred income taxes and investment
tax credits (2,275) 4,397 650
Charges for investments and assets 5,296 14,905 --
Inventory Reserve 1,498 809 --
Regulatory asset established for
previously incurred restructuring
charges -- -- (13,213)
Changes in Assets and Liabilities
Accounts receivable 13,553 4,800 (5,758)
Fuel inventory 4,203 (2,848) 1,845
Accounts payable (4,182) 584 (4,922)
Payables to affiliates 7,991 5,334 3,697
Accrued taxes (2,088) 281 5,730
Fuel recovery (3,007) (11,917) 2,474
Refunds due customers -- (1,811) 1,812
Other deferred credits 13,284 (5,482) (1,039)
Other (3,626) 3,798 (6,848)
-------- --------- ---------
95,246 70,763 53,340
-------- --------- ---------
INVESTING ACTIVITIES
Construction expenditures (31,817) (42,453) (44,076)
Other 261 (1,795) (2,517)
-------- --------- ---------
(31,556) (44,248) (46,593)
-------- --------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of
long-term debt -- 43,256 118,376
Reacquisition of long-term debt -- (45,639) (59,082)
Redemption of preferred stock (2,724) -- --
Payment of dividends (26,184) (19,198) (41,330)
Change in advances from affiliates (14,833) (4,987) (26,495)
-------- --------- ---------
(43,741) (26,568) (8,531)
-------- --------- ---------
Net Change in Cash and Cash Equivalents 19,949 (53) (1,784)
Cash and Cash Equivalents at Beginning
of Year 664 717 2,501
-------- --------- ---------
Cash and Cash Equivalents at End of Year $20,613 $664 $717
======== ========= =========
SUPPLEMENTARY INFORMATION
Interest paid less amounts
capitalized $19,659 $20,248 $20,496
======== ========= =========
Income taxes paid $15,710 $6,295 $8,399
======== ========= =========
The accompanying notes to financial statements are an integral
part of these statements.
WTU
2-128
WTU
Statements of Capitalization
West Texas Utilities Company
- ------------------------------------------------------------------------------
As of December 31,
-----------------------
1997 1996
-------- --------
(thousands)
COMMON STOCK EQUITY $258,929 $262,527
-------- --------
PREFERRED STOCK
Cumulative $100 Par Value, Authorized
810,000 shares
Number Current
of Shares Redemption
Series Outstanding Price
- ---------------------------------------------
4.40% 23,675 $107.00 2,368 6,000
Premium 115 291
-------- --------
2,483 6,291
-------- --------
LONG-TERM DEBT
First Mortgage Bonds
Series P, 7 3/4%, due June 1, 2007 25,000 25,000
Series Q, 6 7/8%, due October 1, 2002 35,000 35,000
Series R, 7%, due October 1, 2004 40,000 40,000
Series S, 6 1/8%, due February 1, 2004 40,000 40,000
Series T, 7 1/2%, due April 1, 2000 40,000 40,000
Series U, 6 3/8%, due October 1, 2005 80,000 80,000
Installment Sales Agreements - PCRBs
Series 1996, 6%, due June 1, 2020 (Red River) 44,310 44,310
Unamortized discount (960) (1,128)
Unamortized costs of reacquired debt (24,710) (28,112)
-------- --------
278,640 275,070
-------- --------
TOTAL CAPITALIZATION $540,052 $543,888
======== ========
The accompanying notes to financial statements are an integral part of
these statements.
WTU
2-129
WEST TEXAS UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See CSW's NOTE 1.
2. LITIGATION AND REGULATORY PROCEEDINGS
See CSW's NOTE 2.
3. COMMITMENTS AND CONTINGENT LIABILITIES
See CSW's NOTE 3.
4. INCOME TAXES
See CSW's NOTE 4.
5. BENEFIT PLANS
See CSW's NOTE 5.
6. JOINTLY OWNED ELECTRIC UTILITY PLANT
See CSW's NOTE 6.
7. FINANCIAL INSTRUMENTS
See CSW's NOTE 7.
8. LONG-TERM DEBT
See CSW's NOTE 8.
9. PREFERRED STOCK
See CSW's NOTE 9.
10. SHORT-TERM FINANCING
See CSW's NOTE 11.
11. STOCK BASED COMPENSATION PLANS
See CSW's NOTE 13.
WTU
2-130
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF WEST TEXAS UTILITIES COMPANY:
We have audited the accompanying balance sheets and statements of
capitalization of West Texas Utilities Company (a Texas corporation and a wholly
owned subsidiary of Central and South West Corporation) as of December 31, 1997
and 1996, and the related statements of income, retained earnings and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of West Texas Utilities Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of West Texas Utilities Company
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental Exhibit 12 is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not a required part of the basic financial statements. This exhibit has
been subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Arthur Andersen LLP
Dallas, Texas
February 16, 1998
WTU
2-131
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and objectivity of
the financial statements of West Texas Utilities Company as well as other
information contained in this Annual Report. The financial statements have been
prepared in conformity with generally accepted accounting principles applied on
a consistent basis and, in some cases, reflect amounts based on the best
estimates and judgments of management, giving due consideration to materiality.
Financial information contained elsewhere in this Annual Report is consistent
with that in the financial statements.
The financial statements have been audited by WTU's independent public
accountants who were given unrestricted access to all financial records and
related data, including minutes of all meetings of shareholders, the board of
directors and committees of the board. WTU believes that representations made to
the independent public accountants during their audit were valid and
appropriate. The report of independent public accountants is presented elsewhere
in this report.
WTU maintains a system of internal controls to provide reasonable
assurance that transactions are executed in accordance with management's
authorization, that the financial statements are prepared in accordance with
generally accepted accounting principles and that the assets of the companies
are properly safeguarded against unauthorized acquisition, use or disposition.
The system includes a documented organizational structure and division of
responsibility, established policies and procedures including a policy on
ethical standards which provides that WTU will maintain the highest legal and
ethical standards, and the careful selection, training and development of our
employees.
Internal auditors continuously monitor the effectiveness of the internal
control system following standards established by the Institute of Internal
Auditors. Actions are taken by management to respond to deficiencies as they are
identified. The board, operating through its audit committee, which is comprised
entirely of directors who are not officers or employees of WTU, provides
oversight to the financial reporting process.
Due to the inherent limitations in the effectiveness of internal controls,
no internal control system can provide absolute assurance that errors will not
occur. However, management strives to maintain a balance, recognizing that the
cost of such a system should not exceed the benefits derived.
WTU believes that, in all material respects, its system of internal
controls over financial reporting and over safeguarding of assets against
unauthorized acquisition, use or disposition functioned effectively as of
December 31, 1997.
Paul J. Brower R.Russell Davis
General Manager/President - WTU Controller - WTU
WTU
2-132
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
CSW None.
CPL None.
PSO None.
SWEPCO None.
WTU None.
2-133
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS.
CSW has filed with the SEC its Joint Proxy Statement relating to its
1998 Annual Meeting of Stockholders. The information required by ITEM 10, other
than with respect to certain information regarding the executive officers of CSW
which is included in ITEM 1-BUSINESS, is hereby incorporated by reference herein
from the CSW MEETING - ADDITIONAL MATTERS of the Joint Proxy Statement.
(A) Directors of each of the U.S. Electric Operating Companies,
together with certain information with respect to each of them, are listed
below.
Name, Age, Principal Year
Occupation, Business Experience First Became
and Other Directorships Director
- --------------------------------------------------------------------------------
CPL
JOHN F. BRIMBERRY AGE - 65 1995
Chief Executive Officer Professional Insurance Agents, Inc.,
Victoria, Texas.
E. R. BROOKS AGE - 60 1991
Chairman and CEO of CSW since 1991. Director of CSW and each of its
subsidiaries. President of CSW from 1991 to 1997. Director of
Hubbell, Inc., Orange, Connecticut. Trustee of Baylor Health Care
Center, Dallas, Texas and Hardin-Simmons University, Abilene, Texas.
GLENN FILES AGE - 50 1996
Senior Vice President of CSW since 1996. President and CEO of WTU
from 1992 to 1996.
RUBEN M. GARCIA AGE - 66 1981
President and Chief Executive Officer of Modern Construction Inc.
and Modern Machine Shop, Inc., Laredo, Texas.
ALPHONSO R. JACKSON AGE - 51 1998
President of CSW-Texas since 1998. Vice President of CSW Energy,
Inc., from 1996 to 1997. President and CEO of The Housing Authority
of the City of Dallas, Texas, from 1989 to 1996. Director of Chase
Bank of Texas N.A., Dallas, Texas.
ROBERT A. McALLEN AGE - 63 1983
Robert A. McAllen, Insurance Agency, Weslaco, Texas.
PETE MORALES, JR. AGE - 57 1990
President of Morales Feed Lots, Inc., Devine, Texas.
3-1
Name, Age, Principal Year
Occupation, Business Experience First Became
and Other Directorships Director
- --------------------------------------------------------------------------------
H. LEE RICHARDS AGE - 64 1987
Chairman of the Board of Hygeia Dairy Company, Harlingen, Texas.
J. GONZALO SANDOVAL AGE - 49 1992
President and General Manager of CPL since February 1998. General
Manager of CPL since 1996. Vice President, Operations and
Engineering of CPL from 1993 to 1996. Vice President, Regional
Operations of CPL from 1992 to 1993.
GERALD E. VAUGHN AGE - 55 1993
Vice President, Nuclear of CSW Services since 1994. Vice
President, Nuclear Affairs of CPL from 1993 to 1994. Vice
President for Shearon Harris Nuclear Plant from 1992 to 1993.
Chairman for the STPNOC since its formation in September 1997.
Each of the directors and executive officers of CPL is elected to hold
office until the first meeting of CPL's Board of Directors after the 1998 Annual
Meeting of Stockholders. CPL's 1998 Annual Meeting of Stockholders is presently
scheduled to be held on April 17, 1998. All outside directors have engaged in
their principal occupations listed above for a period of more than five years,
unless otherwise indicated.
PSO
E. R. BROOKS AGE - 60 1991
Chairman and CEO of CSW since 1991. Director of CSW and each of its
subsidiaries. President of CSW from 1991 to 1997. Director of
Hubbell, Inc., Orange, Connecticut. Trustee of Baylor Health Care
Center, Dallas, Texas and Hardin-Simmons University, Abilene, Texas.
T. D. CHURCHWELL AGE - 53 1996
President of PSO since 1996. Executive Vice President, Operations
and Engineering of WTU from 1995 to 1996. Executive Vice President
of WTU from 1993 to 1995. Vice President, Corporate Services of
CSW Services from 1991 to 1993.
HARRY A. CLARKE AGE - 69 1972
General Partner and President of HAC Investments, Afton, Oklahoma.
GLENN FILES AGE - 50 1996
Senior Vice President of CSW since 1996. President and CEO of WTU
from 1992 to 1996.
PAUL K. LACKEY, JR. AGE - 54 1992
Chief of Staff for the Governor of the State of Oklahoma, since 1997.
Secretary of Health and Human Services, Executive Director of the
Office of Juvenile Affairs, State of Oklahoma, from 1995 to 1997.
Consultant, Flint Industries, Inc., a construction, electronics
manufacturing, and environmental services company, Tulsa, Oklahoma
during a portion of 1995. President, Flint Industries, Inc., from
1986 to 1995. Advisory Director of Bank IV-Tulsa, Tulsa, Oklahoma.
3-2
Name, Age, Principal Year
Occupation, Business Experience First Became
and Other Directorships Director
- --------------------------------------------------------------------------------
PAULA MARSHALL-CHAPMAN AGE - 44 1991
Chief Executive Officer of Bama Companies, a baked goods produce
company, Tulsa, Oklahoma.
WILLIAM R. McKAMEY AGE - 51 1993
General Manager of PSO since 1996. Vice President, Marketing
and Business Development of PSO from 1993 to 1996. Director of
Marketing and Business Development of CSW from 1992 to 1993.
DR. ROBERT B. TAYLOR, JR. AGE - 69 1975
Dentist, Okmulgee, Oklahoma.
Each of the directors and executive officers of PSO is elected to hold
office until the first meeting of PSO's Board of Directors after the 1998 Annual
Meeting of Stockholders. PSO's 1998 Annual Meeting of Stockholders is presently
scheduled to be held on April 22, 1998. All outside directors have engaged in
their principal occupations listed above for a period of more than five years,
unless otherwise indicated.
SWEPCO
E. R. BROOKS AGE - 60 1991
Chairman and CEO of CSW since 1991. Director of CSW and each of its
subsidiaries. President of CSW from 1991 to 1997. Director of
Hubbell, Inc., Orange, Connecticut. Trustee of Baylor Health Care
Center, Dallas, Texas and Hardin-Simmons University, Abilene, Texas.
JAMES E. DAVISON AGE - 60 1993
President and CEO of Davison Terminal Services, Inc. President and
CEO of Davison Motor Company, Inc. President and CEO of Davison
Insurance Company, Inc. All of the above entities are located in
Ruston, Louisiana. Director of Bank One, Louisiana, Baton Rouge,
Louisiana.
GLENN FILES AGE - 50 1996
Senior Vice President of CSW since 1996. President and CEO of WTU
from 1992 to 1996.
DR. FREDERICK E. JOYCE AGE - 63 1990
President of Chappell-Joyce Pathology Association, P.A., Texarkana,
Texas. President of Doctors Diagnostic Laboratory, Inc., Texarkana,
Texas. Director of State First National Bank, Texarkana, Arkansas.
Director of First Commercial Corporation, Little Rock, Arkansas.
JOHN M. LEWIS AGE - 58 1997
Chairman and Chief Executive Officer of The Bank of Fayetteville,
Fayetteville, Arkansas.
3-3
Name, Age, Principal Year
Occupation, Business Experience First Became
and Other Directorships Director
- --------------------------------------------------------------------------------
KAREN C. MARTIN AGE - 37 1996
General Manager of SWEPCO since 1996. Director of Regulatory
Services at CSW from 1995 to 1996. Administrative Director of the
El Paso Transition Team at CSW from 1993 to 1995. Director of
Audits at SWEPCO from 1992 to 1993.
WILLIAM C. PEATROSS AGE - 54 1990
President and CEO of United Title of Louisiana, Inc. Director of
Deposit Guaranty Bank. Both entities are located in Shreveport,
Louisiana.
MAXINE P. SARPY AGE - 58 1996
Vice President and Office Manager for Sarpy Medical Clinic;
Shreveport, Louisiana.
MICHAEL D. SMITH AGE - 46 1996
President of SWEPCO since 1996. Vice President of Mergers and
Acquisitions at CSW from 1995 to 1996. Vice President of CSW
Corporate Services from 1993 to 1995. Controller of CSW from
1990 to 1993.
Each of the directors and executive officers of SWEPCO is elected to
hold office until the first meeting of SWEPCO's Board of Directors after the
1998 Annual Meeting of Stockholders. SWEPCO's 1998 Annual Meeting of
Stockholders is presently scheduled to be held on April 8, 1998. All outside
directors have engaged in their principal occupations listed above for a period
of more than five years, unless otherwise indicated.
WTU
E. R. BROOKS AGE - 60 1991
Chairman and CEO of CSW since 1991. Director of CSW and each of its
subsidiaries. President of CSW from 1991 to 1997. Director of
Hubbell, Inc., Orange, Connecticut. Trustee of Baylor Health Care
Center, Dallas, Texas and Hardin-Simmons University, Abilene, Texas.
PAUL J. BROWER AGE - 49 1991
President and General Manager of WTU since 1998. General Manager
of WTU since 1996. Vice President, Marketing and Business
Development of WTU from 1991 to 1996.
GLENN FILES AGE - 50 1996
Senior Vice President of CSW since 1996. President and CEO of WTU
from 1992 to 1996.
ALPHONSO R. JACKSON AGE - 51 1998
President of CSW-Texas since 1998. Vice President of CSW Energy,
Inc., from 1996 to 1997. President and CEO of The Housing
Authority of the City of Dallas, Texas, from 1989 to 1996. Director
of Chase Bank of Texas N.A., Dallas, Texas.
3-4
Name, Age, Principal Year
Occupation, Business Experience First Became
and Other Directorships Director
- --------------------------------------------------------------------------------
TOMMY MORRIS AGE - 63 1976
President of The Tommy Morris Agency, an independent insurance
and investment agency, Abilene, Texas.
DIAN G. OWEN AGE - 58 1994
Corporate Executive/Founder of Owen Healthcare, Inc., hospital
pharmacy management company services, Abilene, Texas.
JAMES M. PARKER AGE - 67 1987
President and CEO of J. M. Parker and Associates, Inc., an
investment company, Abilene, Texas. Director of First Financial
Bankshares, Inc. and First National Bank of Abilene, Abilene, Texas.
F. L. STEPHENS AGE - 60 1980
Chairman and CEO of Town & Country Food Stores, Inc., San Angelo,
Texas.
Each of the directors and executive officers of WTU is elected to hold
office until the first meeting of WTU's Board of Directors after the 1998 Annual
Meeting of Stockholders. WTU's 1998 Annual Meeting of Stockholders is presently
scheduled to be held on March 31, 1998. All outside directors have engaged in
their principal occupations listed above for a period of more than five years,
unless otherwise indicated.
(B) The following is a list of officers who are not directors of the
registrants, together with certain information with respect to each of them:
Year First
Name, Age, Principal Elected to
Occupation, Business Experience Present Position
- --------------------------------------------------------------------------------
U.S. ELECTRIC OPERATING COMPANIES
WENDY G. HARGUS AGE - 40 1996
Treasurer of CSW, CPL, PSO, SWEPCO, WTU and CSW Services since
1996. Controller of CSW from 1993 to 1996. Director of Strategic
Planning during a portion of 1993 at CSW and Director of Investor
Relations at CSW from 1990 to 1993.
R. RUSSELL DAVIS AGE - 41 1994
Controller of CPL, WTU, SWEPCO and CSW Services since 1994.
Controller of PSO since 1993. Assistant Controller of CSW from
1992 to 1993.
CPL
BRENDA I. SNIDER AGE - 44 1996
Corporate Secretary of CPL since 1996. Manager of Planning and
Analysis at CPL since 1996. Senior Financial Consultant at CPL
from 1994 to 1996. Internal Business Consultant of Business
Development at CPL from 1991 to 1994.
3-5
Year First
Name, Age, Principal Elected to
Occupation, Business Experience Present Position
- --------------------------------------------------------------------------------
PSO
LINA P. HOLM AGE - 57 1997
Corporate Secretary and Executive Secretary to the President of
PSO since 1997. Executive Secretary to the President and Assistant
Corporate Secretary of PSO from 1992 to 1997.
SWEPCO
MARILYN S. KIRKLAND AGE - 50 1995
Corporate Secretary of SWEPCO since 1995. Executive Administrator
since 1997. Senior executive secretary to the president, from
1992 to 1997.
WTU
MARTHA MURRAY AGE - 52 1992
Corporate Secretary of WTU since 1992. Previously a senior
secretary at WTU.
3-6
ITEM 11. EXECUTIVE COMPENSATION.
CASH AND OTHER FORMS OF COMPENSATION
CSW
Information required by ITEM 11 with respect to CSW is hereby
incorporated by reference herein from the CSW MEETING - ADDITIONAL MATTERS of
the Joint Proxy Statement.
The following table sets forth the aggregate cash and other
compensation for services rendered for the fiscal years of 1997, 1996 and 1995
for the President of each of the U.S. Electric Operating Companies and the Named
Executive Officers as defined below.
Because of the functional restructuring undertaken by CSW during 1996,
certain of the Executive Officers of the U.S. Electric Operating Companies,
Messrs. Files, Bremer, Zemanek and Verret, are not actually employed by any of
the U.S. Electric Operating Companies. Instead, they are employed by CSW
Services and manage CSW business units and perform policy-making functions that
are integral to the U.S. Electric Operating Companies. Therefore, these
individuals are included in the Summary Compensation Table as Named Executive
Officers due to the functional perspective regarding the management of the
companies. For additional information regarding the restructuring, see PART
II-MD&A.
U.S. ELECTRIC OPERATING COMPANIES
SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION
---------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------- ------------------------ -------
CSW
Other CSW Securities
Annual Restricted Underlying All Other
Name and Compen- Stock Options/ LTIP Compen-
Principal Position Salary Bonus sation Award(s) SARs Payouts sation
At Registrant YEAR ($) ($)(1) ($)(2) ($)(1)(3) (#) ($) ($)(4)
- -------------------------------------------------------------------------------------------------------------
Glenn Files, Senior 1997 374,999 143,099 8,534 -- 31,000 -- 23,757
Vice President of CSW 1996 331,135 44,860 66,415 153,750 -- -- 23,992
Electric Operations (2,5) 1995 266,223 85,048 19,144 -- -- -- 23,117
Richard H. Bremer, 1997 307,462 99,993 4,648 -- 26,000 -- 21,357
President of CSW Energy 1996 305,910 144,404 73,711 153,750 -- -- 21,742
Services business unit 1995 298,372 89,358 14,691 -- -- -- 21,706
(2,5)
Robert L. Zemanek, 1997 283,250 89,279 10,272 -- 24,000 -- 23,757
President of CSW Energy 1996 283,250 176,863 6,500 153,750 -- -- 23,992
Delivery business unit (5) 1995 276,270 91,436 9,192 -- -- -- 23,117
Richard P. Verret, 1997 251,230 83,390 2,083 -- 21,000 -- 7,953
President of CSW 1996 236,154 84,788 6,055 89,688 -- -- 7,590
Production (5)
M. Bruce Evans 1997 208,000 65,780 882 -- 14,000 -- 5,520
President of CPL (2,5) 1996 208,000 91,376 70,783 89,688 -- -- 4,500
T. D. Churchwell, 1997 192,500 53,672 2,167 -- 13,000 -- 6,398
President of PSO (2,5) 1996 192,500 24,097 79,730 38,438 -- -- 5,340
1995 180,400 40,388 9,206 -- -- -- 4,500
Michael D. Smith, 1997 190,923 64,306 945 -- 13,000 -- 6,419
President of SWEPCO (2,5) 1996 184,269 64,050 115,322 38,438 -- -- 5,340
Floyd W. Nickerson, 1997 160,769 40,293 1,806 -- 11,000 -- 6,661
President of WTU (2,5) 1996 147,692 36,384 69,665 38,438 -- -- 5,270
3-7
(1) Amounts in this column are paid or awarded in a calendar year for
performance in a preceding year.
(2) The following are the perquisites and other personal benefits required to
be identified in respect of each Named Executive Officer.
1996 Relocation Reimbursements
- --------------------------------------------------------------
Glenn Files $25,662
Richard H. Bremer 34,117
M. Bruce Evans 32,537
T.D. Churchwell 38,955
Michael D. Smith 63,818
Floyd W. Nickerson 37,416
(3) Grants of restricted stock are administered by the Executive Compensation
Committee of the CSW Board of Directors, which has the authority to
determine the individuals to whom and the terms upon which restricted stock
grants, including the number of underlying shares, shall be made. The
awards reflected in this column all have four-year vesting periods with 25%
vesting on the first, second, third and fourth anniversary dates of the
award. Upon vesting, CSW Shares are re-issued without restrictions. The
individuals receive dividends and may vote shares of restricted stock, even
before they are vested. The amount reported in the table represents the
market value of the shares at the date of grant. As of December 31, 1997,
the aggregate restricted stock holdings of each of the Named Executive
Officers are presented in the following table.
Restricted Stock Held Market Value at
Name at December 31, 1997 December 31, 1997
- --------------------------------------------------------------------
Glenn Files 4,500 $121,781
Richard H. Bremer 4,500 121,781
Robert L. Zemanek 4,500 121,781
Richard P. Verret 2,625 71,039
M. Bruce Evans 2,625 71,039
T. D. Churchwell 1,125 30,445
Michael D. Smith 1,125 30,445
Floyd W. Nickerson 1,125 30,445
(4) Amounts shown in this column consist of: (i) the annual employer matching
payments to CSW's Retirement Savings Plan, (ii) premiums paid per
participant for personal liability insurance and (iii) average amounts of
premiums paid per participant in those years under CSW's memorial gift
program. Under this program, for certain executive officers, directors and
retired directors from the CSW System, CSW will make a donation in a
participant's name to up to three charitable organizations in an aggregate
of $500,000, payable by CSW upon such person's death. CSW maintains
corporate-owned life insurance policies to fund the program. The annual
premiums paid by CSW are based on pooled risks and averaged $15,803 per
participant for 1997, $16,402 for 1996 and $16,367 for 1995. In 1997, 1996
and 1995, Messrs. Bremer, Files and Zemanek participated.
(5) System Affiliations.
In the first quarter of 1998, the positions of President and General
Manager at both CPL and WTU were combined into one. These position's were
assumed by J. Gonzalo Sandoval for CPL and Paul J. Brower for WTU. Messrs.
Evans and Nickerson assumed other positions within the CSW System.
3-8
Messrs. Files, Bremer, Zemanek and Verret assumed policy making functions
for each of the U.S. Electric Operating Companies in 1996. Messrs. Evans,
Smith and Nickerson assumed policy-making positions at the U.S. Electric
Operating Companies in 1996.
Messrs. Verret, Evans, Smith and Nickerson received no compensation from
any of the U.S. Electric Operating Companies in 1995.
OPTION/SAR GRANTS
Shown below is information on grants of stock options made in 1997
pursuant to the CSW stock option plan to the Named Executive Officers. No stock
appreciation rights were granted in 1997.
CSW OPTION/SAR GRANTS IN 1997(1)
Potential Realizable
Value at Assumed Annual
Rates of CSW Stock
Price Appreciation for
Individual Grants Option Terms(3)
- ---------------------------------------------------------------------------- ------------------
Number of CSW % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees In Base Price Expiration
Name Granted(#)(2) Fiscal Year ($/Sh) Date 5%($) 10%($)
- ---- ------------- ----------- ------------ ------------ ------- ---------
Glenn Files 31,000 4.5 20.750 5/23/2007 405,248 1,022,768
Richard H. Bremer 26,000 3.8 20.750 5/23/2007 339,885 857,805
Robert L. Zemanek 24,000 3.5 20.750 5/23/2007 313,740 791,820
Richard P. Verret 21,000 3.0 20.750 5/23/2007 274,523 692,843
M. Bruce Evans 14,000 2.0 20.750 5/23/2007 183,015 461,895
T. D. Churchwell 13,000 1.9 20.750 5/23/2007 169,943 428,903
Michael D. Smith 13,000 1.9 20.750 5/23/2007 169,943 428,903
Floyd W. Nickerson 11,000 1.6 20.750 5/23/2007 143,798 362,918
(1) The stock option plans are administered by the Executive Compensation
Committee of the Board, which has the authority to determine the
individuals to whom and the terms upon which option and SAR grants
shall be made.
(2) All options were granted on May 23, 1997, and are first exercisable 12
months after the grant date, with one-third of the shares becoming
exercisable at that time and with an additional one third of the
aggregate becoming exercisable on each of the next two anniversary
dates.
(3) The annual rates of appreciation of 5% and 10% are specifically
required by SEC disclosure rules and in no way guarantee that such
annual rates of appreciation will be achieved by CSW nor should this be
construed in any way to constitute any representation by CSW that such
growth will be achieved.
3-9
OPTION/SAR EXERCISES AND YEAR-END VALUE TABLE
Shown below is information regarding option/SAR exercises during 1997
and unexercised options/SARs at December 31, 1997 for the Named Executive
Officers.
AGGREGATED OPTION/SAR EXERCISES IN 1997
AND FISCAL YEAR-END OPTION/SAR VALUES
Number of CSW
Securities Value of
Underlying Unexercised In-the-Money
Shares Options/SARs at Options/SARs
Name Acquired Value Year-End at Year-End
on Exercise Realized Exercisable/ Exercisable/
(#) ($) Unexercisable Unexercisable (1)
- -------------------------------------------------------------------------------
Glenn Files -- -- 23,653/31,000 5,593/195,688
Richard H. Bremer -- -- 28,332/26,000 3,915/164,125
Robert L. Zemanek -- -- 25,430/24,000 6,015/151,500
Richard P. Verret 100 1,081 13,325/21,000 14,889/132,563
M. Bruce Evans -- -- 8,928/14,000 9,810/88,375
T. D. Churchwell -- -- 9,268/13,000 5,763/82,063
Michael D. Smith -- -- 7,779/13,000 2,413/82,063
Floyd W. Nickerson -- -- 4,867/11,000 675/69,438
(1) Calculated based upon the difference between the closing price of CSW's
Shares on the New York Stock Exchange on December 31, 1997 ($27.0625 per
share) and the exercise price per share of the outstanding unexercisable
and exercisable options ($16.250, $20.750, $24.813 and $29.625, as
applicable).
LONG-TERM INCENTIVE PLAN-AWARDS IN 1997
The following table shows information concerning awards made to the
Named Executive Officers during 1997 under the CSW stock option plan.
Estimated
Future Payouts under
Number of Performance or Non-stock Price Based Plans
Shares, Units Other Period ----------------------------
or Other Until Maturation Threshold Target Maximum
Name Rights or Payout ($) ($) ($)
- --------------------------------------------------------------------------------
Glenn Files -- 2 years -- 225,000 337,500
Richard H. Bremer -- 2 years -- 183,546 275,319
Robert L. Zemanek -- 2 years -- 169,950 254,925
Richard P. Verret -- 2 years -- 150,000 225,000
M. Bruce Evans -- 2 years -- 90,667 136,001
T. D. Churchwell -- 2 years -- 63,258 94,887
Michael D. Smith -- 2 years -- 54,740 82,110
Floyd W. Nickerson -- 2 years -- 47,369 71,054
Payouts of these awards are contingent upon CSW's achieving a specified
level of total stockholder return, relative to the S&P Electric Index, for a
three-year period, or cycle, and exceeding a certain defined minimum threshold.
If the Named Executive Officer's employment is terminated during the performance
period for any reason other than death, total and permanent disability or
retirement, then the award is canceled. The CSW stock option plan contains a
provision accelerating awards upon a change in control of CSW. Except as
provided in the next sentence, if a change in control of CSW occurs, all options
become fully exercisable and all restrictions, terms and conditions applicable
to all restricted stock are deemed lapsed and satisfied and all
performance-based units are deemed to have been fully earned, as of the date of
the change in control. Awards which have been outstanding for less than six
months prior to the date the change in control occurs are not subject to
acceleration upon the occurrence of a change of control. The CSW stock option
3-10
plan also contains provisions designed to prevent circumvention of the above
acceleration provisions through coerced termination of an employee prior to a
change in control.
RETIREMENT PLAN
CSW maintains the Retirement Plan for eligible employees, in addition,
CSW maintains the SERP, a non-qualified ERISA excess plan, that primarily
provides benefits that cannot be payable under the qualified Retirement Plan
because of maximum limitations imposed on such plans by the Internal Revenue
Code.
Through June 30, 1997, the Retirement Plan was structured as a
traditional, defined benefit final average pay plan. Effective, July 1, 1997,
the present value of accrued benefits under the Retirement Plan was converted to
a cash balance.
Under the cash balance formula, each participant has an account, for
recordkeeping purposes only, to which pay credits are allocated annually based
on a percentage of the participant's pay. As of July 1, 1997, the definition of
pay for the CSW Cash Balance Plan was expanded to include not only base pay but
also bonuses, overtime, and commissions. The applicable percentage is determined
by the age and years of vesting service the participant has with CSW and its
affiliates as of December 31 of each year (or termination date, if earlier). The
following table shows the Applicable Percentage used to determine credits at the
age and years of service indicated.
Sum of Age plus
YEARS OF SERVICE APPLICABLE PERCENTAGE
< 30 3.0%
30-39 3.5%
40-49 4.5%
50-59 5.5%
60-69 7.0%
70 or more 8.5%
As of December 31, 1997, the sum of age plus years of service of the
Named Executive Officers for the cash balance formula are as follows: Mr.
Files, 76; Mr. Bremer, 69; Mr. Zemanek, 73; Mr. Verret, 76; Mr. Evans, 60; Mr.
Churchwell, 72; Mr. Smith, 53; Mr. Nickerson, 58.
All balances in the accounts of participants earn a fixed rate of
interest which is also credited annually. The interest rate for a particular
year is the average rate of return of the 30-year Treasury Rate for November of
the prior year. For 1997, the interest rate was 6.48%. For 1998, the interest
rate is 6.11%. Interest continues to be credited as long as the participant's
balance remains in the plan.
At retirement or other termination of employment, an amount equal to
the vested balance (including qualified and SERP benefit) then credited to the
account is payable to the participant in the form of an immediate or deferred
lump-sum or annuity. Benefits (both from the CSW Cash Balance Plan and the SERP)
under the cash balance formula are not subject to reduction for Social Security
benefits or other offset amounts. The estimated annual benefit payable to each
of the Named Officers as a single life annuity at age 65 under the Retirement
Plan and the SERP is: Mr. Files, $272,378; Mr. Bremer, $213,333; Mr. Zemanek,
$243,305; Mr. Verret, $173,626; Mr. Evans, $185,905; Mr. Churchwell; $109,329;
Mr. Smith, $91,560; Mr. Nickerson, $139,609. These projections are based on the
following assumptions: (1) participant remains employed until age 65; (2) salary
used is base pay paid for calendar year 1997 assuming no future increases plus
bonus at 1997 target level; (3) interest credit at 6.11% for 1998 and future
years; (4) the conversion of the lump-sum cash balance to a single life annuity
at normal retirement age is based on an interest rate of 6.11% and the 1983
Group Annuity Mortality Table, which sets forth generally accepted life
expectancies.
3-11
In addition, certain employees who were 50 or over and had completed at
least 10 years of service as of July 1, 1997, also continue to earn a benefit
using the prior pension formula. At commencement of benefits, the following
Named Officers have a choice of their accrued benefit using the cash balance
formula or their accrued benefit using the prior pension formula: Mr. Verret and
Mr. Churchwell. Once the participant selects either the earned benefit under the
cash balance formula or the earned benefit under the prior pension formula, the
other earned benefit is no longer available.
The table below shows the estimated combined benefits payable from both
the prior pension formula and the SERP based on retirement age of 65, the
average compensation shown, the years of credited service shown , continued
existence of the prior pension formula without substantial change and payment in
the form of a single life annuity.
ANNUAL BENEFITS AFTER
SPECIFIED YEARS OF CREDITED SERVICE
Average
Compensation 15 20 25 30 or More
-----------------------------------------------------------------------
$100,000 $ 25,050 $ 33,333 $ 41,667 $ 50,000
150,000 37,575 50,000 62,500 75,000
200,000 50,100 66,667 83,333 100,000
250,000 62,625 83,333 104,167 125,000
300,000 75,150 100,000 125,000 150,000
350,000 87,675 116,667 145,833 175,000
450,000 112,725 150,000 187,500 225,000
550,000 137,775 183,333 229,167 275,000
650,000 162,825 216,667 270,833 325,000
750,000 187,875 250,000 312,500 375,000
850,000 212,500 283,333 357,000 425,000
Benefits payable under the prior pension formula are based upon the
participant's years of credited service, age at retirement, and covered
compensation earned by the participant. The annual normal retirement benefit
payable under the prior pension formula and the SERP are based on 1.67 percent
of "Average Compensation" times the number of years of credited service (reduced
by no more than 50 percent of a participant's age 62 or later Social Security
benefit). "Average compensation" is covered compensation for the prior pension
formula and equals the average annual compensation, reported as salary in the
Summary Compensation Table, during the 36 consecutive months highest pay during
the 120 months prior to retirement.
Respective years of credited service and ages, as of December 31, 1997,
for the following officers who continue to earn a benefit under the prior
pension formula are: Mr. Verret, 25 and 51, Mr. Churchwell, 19 and 53.
The registrants have entered into change in control agreements with
certain individuals named in the Summary Compensation Table. The purpose of the
agreements is to assure the objective judgment, and to retain the loyalties of
these key individuals in the event CSW is faced with a potential change in
control. Consummation of the proposed AEP Merger will constitute a change in
control under these agreements, information related to the change in control
agreements is incorporated by reference herein from THE MERGER - CSW LONG-TERM
INCENTIVE PLAN and CHANGE IN CONTROL AGREEMENTS of the Joint Proxy Statement.
3-12
MEETINGS AND COMPENSATION
Those directors who are not also officers of CPL, PSO, SWEPCO and WTU
receive annual directors' fees and a fee of $300 plus expenses for each board or
committee meeting attended, as described below. They are also eligible to
participate in a deferred compensation plan. Under this plan such directors may
elect to defer payment of annual directors' and meeting fees until they retire
from the board or as they otherwise direct. The number of board meetings and
annual directors' fees are presented in the following table.
CPL PSO SWEPCO WTU
----------------------------------------
Number of regular board meetings 4 4 4 4
Annual directors' fees $6,000 $6,000 $6,600 $6,000
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No person serving during 1997 as a member of the Executive Compensation
Committee of the Board of Directors of CSW served as an officer or employee of
any registrant during or prior to 1997. No person serving during 1997 as an
executive officer of the U.S. Electric Operating Companies serves or has served
on the compensation committee or as a director of another company whose
executive officers serve or has served as a member of the Executive Compensation
Committee of CSW or as a director of one of the U.S. Electric Operating
Companies.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.
CSW
The information required by ITEM 12 is incorporated by reference herein
from THE CSW MEETING ADDITIONAL MATTERS of the Joint Proxy Statement.
U.S. ELECTRIC OPERATING COMPANIES
All of the outstanding shares of common stock of each of the U.S.
Electric Operating Companies, presented in the following table, is owned
beneficially and of record by CSW, 1616 Woodall Rodgers Freeway, Dallas, Texas
75202-1234.
Company Shares Par Value
- -------------------------------------------------------------
CPL 6,755,535 $25
PSO 9,013,000 15
SWEPCO 7,536,640 18
WTU 5,488,560 25
SECURITY OWNERSHIP OF MANAGEMENT
The following tables show securities beneficially owned as of December
31, 1997, by each director, the President and Executive Officers of each of the
U.S. Electric Operating Companies. Share amounts shown in this table include
options exercisable within 60 days after December 31, 1997, restricted stock,
CSW Shares credited to thrift plus accounts and all other CSW Shares
beneficially owned by the listed persons.
Each of the U.S. Electric Operating Companies has one or more series of
preferred stock outstanding. As of December 31, 1997, none of the individuals
listed in the following tables owned any shares of preferred stock of any U.S.
Electric Operating Company.
3-13
BENEFICIAL OWNERSHIP AS OF DECEMBER 31, 1997
CSW Common
CPL Underlying
CSW Restricted Immediately
Name Common (1) Stock (2) (3) Exercisable Options (3)
- --------------------------------------------------------------------------------
John F. Brimberry 765 -- --
E. R. Brooks 131,529 12,225 65,175
M. Bruce Evans 12,574 2,625 8,928
Glenn Files 42,269 4,500 23,653
Ruben M. Garcia -- -- --
Robert A. McAllen 1,500 -- --
Pete Morales, Jr. -- -- --
H. Lee Richards 1,400 -- --
J. Gonzalo Sandoval 16,850 1,125 6,926
Gerald E. Vaughn 6,023 1,125 1,337
All of the above and other
officers as a group 223,958 22,725 112,742
PSO
E. R. Brooks 131,529 12,225 65,175
T. D. Churchwell 12,597 1,125 9,268
Harry A. Clarke -- -- --
Glenn Files 42,269 4,500 23,653
Paul K. Lackey, Jr. -- -- --
Paula Marshall-Chapman -- -- --
William R. McKamey 13,554 1,125 3,323
Dr. Robert B. Taylor, Jr. -- -- --
All of the above and other
officers as a group 210,428 20,100 108,142
SWEPCO
E. R. Brooks 131,529 12,225 65,175
James E. Davison -- -- --
Glenn Files 42,269 4,500 23,653
Dr. Frederick E. Joyce -- -- --
John M. Lewis -- -- --
Karen C. Martin 3,741 -- 2,005
William C. Peatross -- -- --
Maxine P. Sarpy 100 -- --
Michael D. Smith 10,176 1,125 7,779
All of the above and other
officers as a group 198,867 18,975 105,335
WTU
E. R. Brooks 131,529 12,225 65,175
Paul J. Brower 10,911 1,125 7,145
Glenn Files 42,269 4,500 23,653
Tommy Morris 2,000 -- --
Floyd W. Nickerson 6,403 1,125 4,867
Dian G. Owen 100 -- --
James M. Parker 5,000 -- --
F. L. Stephens 2,800 -- --
All of the above and other
officers as a group 214,142 20,100 107,563
(1) Beneficial ownership percentages are all less than one percent and
therefore are omitted.
(2) These individuals currently have voting power, but not investment power,
with respect to these shares.
(3) These shares are included in the CSW Common column.
3-14
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CSW
The information required by ITEM 13 is incorporated herein by reference
from THE CSW MEETING ADDITIONAL MATTERS of the Joint Proxy Statement.
U.S. ELECTRIC OPERATING COMPANIES
None.
3-15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT ON THIS FORM
10-K.
(1) FINANCIAL STATEMENTS.
Reports of Independent Public Accountants on the financial statements
for CSW and subsidiary companies, CPL, PSO, SWEPCO and WTU are listed
under ITEM 8 herein.
The financial statements filed as a part of this report for CSW and
subsidiary companies, CPL, PSO, SWEPCO and WTU are listed under ITEM 8
herein.
(2) EXHIBITS.
Exhibits for CSW, CPL, PSO, SWEPCO and WTU are listed in (C) INDEX TO
EXHIBITS below.
(B) REPORTS ON FORM 8-K.
CSW
ITEM 5. OTHER EVENTS and ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS,
dated December 22, 1997, reporting SEC approval of CSW's stockholders
rights plan, as amended.
CSW AND PSO
ITEM 5. OTHER EVENTS, dated October 15, 1997, reporting the PSO 1997
Rate Settlement Agreement.
CSW, CPL, PSO, SWEPCO AND WTU
ITEM 5. OTHER EVENTS and ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS,
dated December 22, 1997, reporting the proposed merger between CSW and
AEP.
4-1
CSW
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
25, 1998. The signature of the undersigned registrant shall be deemed to relate
only to matters having reference to such registrant and any subsidiaries
thereof.
CENTRAL AND SOUTH WEST CORPORATION
By: Lawrence B. Connors
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 25, 1998. The signature
of each of the undersigned shall be deemed to relate only to matters having
reference to the above named registrant and any subsidiaries thereof.
SIGNATURE TITLE
E. R. Brooks Chairman, CEO and Director
(Principal Executive Officer)
Glenn D. Rosilier Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Lawrence B. Connors Controller
(Principal Accounting Officer)
*Molly Shi Boren Director
*Dr. Donald M. Carlton Director
*T. J. Ellis Director
*Joe H. Foy Director
*William R. Howell Director
*Dr. Robert W. Lawless Director
*James L. Powell Director
*Dr. Richard L. Sandor Director
*T. V. Shockley, III President, Chief Operating Officer and Director
*Lawrence B. Connors, by signing his name hereto, does sign this document on
behalf of the persons indicated above pursuant to a power of attorney duly
executed by each such person.
*By: Lawrence B. Connors
Attorney-in-Fact
4-2
CPL
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
25, 1998. The signature of the undersigned registrant shall be deemed to relate
only to matters having reference to such registrant.
CENTRAL POWER AND LIGHT COMPANY
By: R. Russell Davis
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 25, 1998. The signature
of each of the undersigned shall be deemed to relate only to matters having
reference to the above named registrant.
SIGNATURE TITLE
J. Gonzalo Sandoval General Manager/President and Director
(Principal Executive Officer)
R. Russell Davis Controller
(Principal Accounting and Financial Officer)
*John F. Brimberry Director
*E. R. Brooks Director
*Glenn Files Director
*Ruben M. Garcia Director
*Alphonso R. Jackson Director
*Robert A. McAllen Director
*Pete Morales, Jr. Director
*H. Lee Richards Director
*Gerald E. Vaughn Director
*R. Russell Davis, by signing his name hereto, does sign this document on behalf
of the persons indicated above pursuant to a power of attorney duly executed by
each such person.
*By: R. Russell Davis
Attorney-in-Fact
4-3
PSO
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
25, 1998. The signature of the undersigned registrant shall be deemed to relate
only to matters having reference to such registrant.
PUBLIC SERVICE COMPANY OF OKLAHOMA
By: R. Russell Davis
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 25, 1998. The signature
of each of the undersigned shall be deemed to relate only to matters having
reference to the above named registrant.
SIGNATURE TITLE
T. D. Churchwell President and Director
(Principal Executive Officer)
R. Russell Davis Controller
(Principal Accounting and Financial Officer)
*E. R. Brooks Director
*Harry A. Clarke Director
*Glenn Files Director
*Paul K. Lackey, Jr. Director
*Paula Marshall-Chapman Director
*William R. McKamey General Manager and Director
*Dr. Robert B. Taylor, Jr. Director
*R. Russell Davis, by signing his name hereto, does sign this document on behalf
of the persons indicated above pursuant to a power of attorney duly executed by
each such person.
*By: R. Russell Davis
Attorney-in-Fact
4-4
SWEPCO
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
25, 1998. The signature of the undersigned registrant shall be deemed to relate
only to matters having reference to such registrant.
SOUTHWESTERN ELECTRIC POWER COMPANY
By: R. Russell Davis
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 25, 1998. The signature
of each of the undersigned shall be deemed to relate only to matters having
reference to the above named registrant.
SIGNATURE TITLE
Michael D. Smith President and Director
(Principal Executive Officer)
R. Russell Davis Controller
(Principal Accounting and Financial Officer)
*E. R. Brooks Director
*James E. Davison Director
*Glenn Files Director
*Dr. Frederick E. Joyce Director
*John M. Lewis Director
*Karen C. Martin General Manager and Director
*William C. Peatross Director
*Maxine P. Sarpy Director
*R. Russell Davis, by signing his name hereto, does sign this document on behalf
of the persons indicated above pursuant to a power of attorney duly executed by
each such person.
*By: R. Russell Davis
Attorney-in-Fact
4-5
WTU
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
25, 1998. The signature of the undersigned registrant shall be deemed to relate
only to matters having reference to such registrant.
WEST TEXAS UTILITIES COMPANY
By: R. Russell Davis
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 25, 1998. The signature
of each of the undersigned shall be deemed to relate only to matters having
reference to the above named registrant.
SIGNATURE TITLE
Paul J. Brower General Manager/President and Director
(Principal Executive Officer)
R. Russell Davis Controller
(Principal Accounting and Financial Officer)
*E. R. Brooks Director
*Glenn Files Director
*Alphonso R. Jackson Director
*Tommy Morris Director
*Dian G. Owen Director
*James M. Parker Director
*F. L. Stephens Director
*R. Russell Davis, by signing his name hereto, does sign this document on behalf
of the persons indicated above pursuant to a power of attorney duly executed by
each such person.
*By: R. Russell Davis
Attorney-in-Fact
4-6
(C) INDEX TO EXHIBITS.
The following exhibits indicated by an asterisk (*) preceding the
exhibit number are filed herewith. The balance of the exhibits have heretofore
been filed with the SEC, respectively, as the exhibits and in the file numbers
indicated and are incorporated herein by reference. The exhibits marked with a
plus (+) are management contracts or compensatory plans or arrangements required
to be filed herewith and required to be identified as such by ITEM 14. of Form
10-K. Reference is made to a duplicate list of exhibits being filed as a part of
this Form 10-K, which list, prepared in accordance with Item 102 of Regulation
S-T of the SEC, immediately precedes the exhibits being filed with this Form
10-K.
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION.
CSW AND SWEPCO
1 Plan of Reorganization for Cajun Electric Power Cooperative,
Inc. Submitted Jointly by The Members Committee, SWEPCO and
Gulf States Utilities Company (incorporated herein by reference
to CSW and SWEPCO's Form 8-K dated April 19, 1996).
2 Amended Plan of Reorganization for Cajun Electric Power
Cooperative, Inc. Submitted Jointly by the Members Committee,
SWEPCO and Entergy Texas, Inc. (incorporated herein by
reference to CSW and SWEPCO's Form 8-K dated September 30,
1996).
* 3 Amended and Restated Joint Plan of Reorganization for Cajun
Electric Power Cooperative, Inc. Submitted Jointly by the
Committee of Certain Members and Southwestern Electric Power
Company dated March 18, 1998.
(3) ARTICLES OF INCORPORATION AND BY-LAWS.
CSW
1 Certificate of Amendment to Second Restated Certificate of
Incorporation of CSW (incorporated herein by reference to Item
10, Exhibit B-1.2 to the 1993 CSW annual report on Form U5S).
* 2 Bylaws of CSW, as amended.
CPL
3 Restated Articles of Incorporation Without Amendment, Articles
of Correction to Restated Articles of Incorporation Without
Amendment, Articles of Amendment to Restated Articles of
Incorporation, Statements of Registered Office and/or Agent
(3), and Articles of Amendment to the Articles of Incorporation
(incorporated herein by reference to Exhibit 3.1 to CPL's Form
10-Q for the quarterly period ended March 31, 1997).
4 Bylaws of CPL, as amended (incorporated herein by reference to
Exhibit 3.1 to CPL's Form 10-Q dated September 30, 1996, File
No. 0-346).
PSO
5 Restated Certificate of Incorporation of PSO (incorporated
herein by reference to Exhibit B-3.1 of CSW's 1996 Form U5S,
File No. 1-1443).
6 Bylaws of PSO, as amended (incorporated herein by reference to
Exhibit B-3.2 of CSW's 1996 Form U5S, File No. 1-1443).
SWEPCO
7 Restated Certificate of Incorporation, as amended through May
6, 1997, including Certificate of Amendment of Restated
Certificate of Incorporation (both incorporated herein by
reference to Exhibit 3.4 to SWEPCO's Form 10-Q dated March 31,
1997, File No. 1-3146).
8 Bylaws of SWEPCO, as amended (incorporated herein by reference
to Exhibit 3.3 to SWEPCO's Form 10-Q dated September 30, 1996,
File No. 1-3146).
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WTU
9 Restated Articles of Incorporation, as amended, and Articles of
Amendment to the Articles of Incorporation (both incorporated
herein by reference to Exhibit 3.5 to WTU's March 31, 1997 Form
10-Q, File No. 0-340).
10 Bylaws of WTU, as amended (incorporated herein by reference to
Exhibit 3.4 to WTU's Form 10-Q dated September 30, 1996, File
No. 0-340).
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDER, INCLUDING
INDENTURES.
CSW
1 Rights Agreement dated as of December 22, 1997 between CSW and
Central and South West Services, Inc., as Rights Agent
(incorporated herein by reference to Exhibit 1 to CSW Form
8-A/A dated March 19, 1998, File No. 1-1443).
CPL
(a) Indenture of mortgage or deed of trust date November 1, 1943,
executed by CPL to the First National Bank of Chicago and
Robert L. Grinnell as trustee, as amended through October 1,
1977, (incorporated herein by reference to Exhibit 5.01 in File
No. 2-60712).
(b) Supplemental Indentures to the First Mortgage Indenture:
DATED FILE REFERENCE EXHIBIT
September 1, 1978 2-62271 2.02
December 15, 1984 Form U-1, No. 70-7003 17
July 1, 1985 2-98944 4 (b)
May 1, 1986 Form U-1, No. 70-7236 4
November 1, 1987 Form U-1, No. 70-7249 4
June 1, 1988 Form U-1, No. 70-7520 2
December 1, 1989 Form U-1, No. 70-7721 3
March 1, 1990 Form U-1, No. 70-7725 10
October 1, 1992 Form U-1, No. 70-8053 10 (a)
December 1, 1992 Form U-1, No. 70-8053 10 (b)
February 1, 1993 Form U-1, No. 70-8053 10 (c)
April 1, 1993 Form U-1, No. 70-8053 10 (d)
May 1, 1994 Form U-1, No. 70-8053 10 (e)
July 1, 1995 Form U-1, No. 70-8053 10 (f)
(c) CPL-obligated, mandatorily redeemable preferred securities of
subsidiary trust holding solely Junior Subordinated Debentures
of CPL:
2 Indenture, dated as of May 1, 1997, between CPL and the Bank of
New York, as Trustee (incorporated herein by reference to
Exhibit 4.1 of CPL's March 31, 1997 Form 10-Q, File No.
0-346).
3 First Supplemental Indenture, dated as of May 1, 1997, between
CPL and the Bank of New York, as Trustee (incorporated herein
by reference to Exhibit 4.2 of CPL's March 31, 1997 Form 10-Q,
File No. 0-346).
4 Amended and Restated Trust Agreement of CPL Capital I, dated as
of May 1, 1997, among CPL, as Depositor; the Bank of New York,
as Property Trustee; the Bank of New York (Delaware), as
Delaware Trustee; and the Administrative Trustee (incorporated
herein by reference to Exhibit 4.3 of CPL's March 31, 1997 Form
10-Q, File No. 0-346).
4-8
5 Guarantee Agreement, dated as of May 1, 1997, delivered by CPL
for the benefit of the holders of CPL Capital I's Preferred
Securities (incorporated herein by reference to Exhibit 4.4 of
CPL's March 31, 1997 Form 10-Q, File No. 0-346).
6 Agreement as to Expenses and Liabilities, dated as of May 1,
1997, between CPL and CPL Capital I (incorporated herein by
reference to Exhibit 4.5 of CPL's March 31, 1997 Form 10-Q,
File No. 0-346).
PSO
(a) Indenture dated July 1, 1945, as amended, of PSO (incorporated
herein by reference to Exhibit 5.03 in Registration No.
2-60712).
(b) Supplemental Indentures to the First Mortgage Indenture:
DATED FILE REFERENCE EXHIBIT
June 1, 1979 2-64432 2.02
December 1, 1979 2-65871 2.02
March 1, 1983 Form U-1, No. 70-6822 2
May 1, 1986 Form U-1, No. 70-7234 3
July 1, 1992 Form S-3, No. 33-48650 4 (b)
December 1, 1992 Form S-3, No. 33-49143 4 (c)
April 1, 1993 Form S-3, No. 33-49575 4 (b)
June 1, 1993 Form 10-K, No. 0-343 4 (b)
February 1, 1996 Form 8-K, March 4, 1996, No. 0-343 4.01
February 1, 1996 Form 8-K, March 4, 1996, No. 0-343 4.02
February 1, 1996 Form 8-K, March 4, 1996, No. 0-343 4.03
(c) PSO-obligated, mandatorily redeemable preferred securities of
subsidiary trust holding solely Junior Subordinated Debentures
of PSO:
7 Indenture, dated as of May 1, 1997, between PSO and the Bank of
New York, as Trustee (incorporated herein by reference to
Exhibit 4.6 of PSO's March 31, 1997 Form 10-Q, File No.
0-343).
8 First Supplemental Indenture, dated as of May 1, 1997, between
PSO and the Bank of New York, as Trustee (incorporated herein
by reference to Exhibit 4.7 of PSO's March 31, 1997 Form 10-Q,
File No. 0-343).
9 Amended and Restated Trust Agreement of PSO Capital I, dated as
of May 1,1997, among PSO, as Depositor; the Bank of New York,
as Property Trustee; the Bank of New York (Delaware), as
Delaware Trustee; and the Administrative Trustee (incorporated
herein by reference to Exhibit 4.8 of PSO's March 31, 1997 Form
10-Q, File No. 0-343).
10 Guarantee Agreement, dated as of May 1, 1997, delivered by PSO
for the benefit of the holders of PSO Capital I's Preferred
Securities (incorporated herein by reference to Exhibit 4.9 of
PSO's March 31, 1997 Form 10-Q, File No. 0-343).
11 Agreement as to Expenses and Liabilities, dated as of May 1,
1997, between PSO and PSO Capital I (incorporated herein by
reference to Exhibit 4.10 of PSO's March 31, 1997 Form 10-Q,
File No. 0-343).
SWEPCO
(a) Indenture dated February 1, 1940, as amended through November
1, 1976, of SWEPCO (incorporated herein by reference to Exhibit
5.04 in Registration No. 2-60712).
(b) Supplemental Indentures to the First Mortgage Indenture:
4-9
DATED FILE REFERENCE EXHIBIT
August 1, 1978 2-61943 2.02
January 1, 1980 2-66033 2.02
April 1, 1981 2-71126 2.02
May 1, 1982 2-77165 2.02
August 1, 1985 Form U-1, No. 70-7121 4
May 1, 1986 Form U-1, No. 70-7233 3
November 1, 1989 Form U-1, No. 70-7676 3
June 1, 1992 Form U-1, No. 70-7934 10
September 1, 1992 Form U-1, No. 72-8041 10 (b)
July 1, 1993 Form U-1, No. 70-8041 10 (c)
October 1, 1993 Form U-1, No. 70-8239 10 (a)
(c) SWEPCO-obligated, mandatorily redeemable preferred securities
of subsidiary trust holding solely Junior Subordinated
Debentures of SWEPCO:
12 Indenture, dated as of May 1, 1997, between SWEPCO and the Bank
of New York, as Trustee (incorporated herein by reference to
Exhibit 4.11 of SWEPCO's March 31, 1997 Form 10-Q, File No.
1-3146).
13 First Supplemental Indenture, dated as of May 1, 1997, between
SWEPCO and the Bank of New York, as Trustee (incorporated
herein by reference to Exhibit 4.12 of SWEPCO's March 31, 1997
Form 10-Q, File No. 1-3146).
14 Amended and Restated Trust Agreement of SWEPCO Capital I, dated
as of May 1, 1997, among SWEPCO, as Depositor; the Bank of New
York, as Property Trustee; the Bank of New York (Delaware), as
Delaware Trustee; and the Administrative Trustee (incorporated
herein by reference to Exhibit 4.13 of SWEPCO's March 31, 1997
Form 10-Q, File No. 1-3146).
15 Guarantee Agreement, dated as of May 1, 1997, delivered by
SWEPCO for the benefit of the holders of SWEPCO Capital I's
Preferred Securities (incorporated herein by reference to
Exhibit 4.14 of SWEPCO's March 31, 1997 Form 10-Q, File No.
1-3146).
16 Agreement as to Expenses and Liabilities, dated as of May 1,
1997 between SWEPCO and SWEPCO Capital I (incorporated herein
by reference to Exhibit 4.15 of SWEPCO's March 31, 1997 Form
10-Q, File No. 1-3146).
WTU
(a) Indenture dated August 1, 1943, as amended through July 1,
1973, of WTU, incorporated herein by reference to Exhibit 5.05
in File No. 2-60712.
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(b) Supplemental Indentures to the First Mortgage Indenture:
DATED FILE REFERENCE EXHIBIT
May 1, 1979 2-63931 2.02
November 15, 1981 2-74408 4.02
November 1, 1983 Form U-1, No. 70-6820 12
April 15, 1985 Form U-1, No. 70-6925 13
August 1, 1985 2-98843 4 (b)
May 1, 1986 Form U-1, No. 70-7237 4
December 1, 1989 Form U-1, No. 70-7719 3
June 1, 1992 Form U-1, No. 70-7936 10
October 1, 1992 Form U-1, No. 72-8057 10
February 1, 1994 Form U-1, No. 70-8265 10
March 1, 1995 Form U-1, No. 70-8057 10 (b)
October 1, 1995 Form U-1, No. 70-8057 10 (c)
(10) MATERIAL CONTRACTS.
CSW
* + 1 Change in Control Agreement between CSW and E. R. Brooks.
* + 2 Change in Control Agreement between CSW and Thomas V.
Shockley, III.
* + 3 Change in Control Agreement between CSW and Ferd. C. Meyer, Jr.
* + 4 Change in Control Agreement between CSW and Glenn D. Rosilier.
* + 5 Change in Control Agreement between CSW and Venita
McCellon-Allen.
* + 6 Change in Control Agreement between CSW and Thomas M. Hagan.
* + 7 Change in Control Agreement between CSW and Glenn Files.
* + 8 Change in Control Agreement between CSW and Robert L. Zemanek.
* + 9 Change in Control Agreement between CSW and Richard H. Bremer.
* + 10 Change in Control Agreement between CSW and Richard P. Verret.
* + 11 Change in Control Agreement between CSW and T. J. Ellis.
* + 12 Change in Control Agreement between CSW and Terry D. Dennis.
* + 13 Change in Control Agreement between CSW and Bruce Evans.
* + 14 Change in Control Agreement between CSW and Pete Churchwell.
* + 15 Change in Control Agreement between CSW and Michael D. Smith.
* + 16 Change in Control Agreement between CSW and Floyd Nickerson.
+ 17 Restricted Stock Plan for Central and South West Corporation
(incorporated herein by reference to Exhibit 10(a) to CSW's
1990 Form 10-K, File No. 1-1443).
+ 18 Central and South West System Special Executive Retirement
Plan (incorporated herein by reference to Exhibit 10(b) to
CSW's 1990 Form 10-K, File No. 1-1443).
+ 19 Executive Incentive Compensation Plan for Central and South
West System (incorporated herein by reference to Exhibit 10(c)
to the Corporation's 1990 Form 10-K, File No. 1-1443).
20 Central and South West Corporation Stock Option Plan
(incorporated herein by reference to Exhibit 10(d) to the
Corporation's 1990 Form 10-K, File No. 1-1443).
21 Central and South West Corporation Deferred Compensation Plan
for Directors (incorporated herein by reference to Exhibit
10(e) to the Corporation's 1990 Form 10-K, File No. 1-1443).
+ 22 Central and South West Corporation 1992 Long-Term Incentive
Plan (incorporated herein by reference to Appendix A to the
Central and South West Corporation Notice of 1992 Annual
Meeting of Shareholders and Proxy Statement).
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23 Agreement and Plan of Merger, dated as of December 21, 1997, by
and among American Electric Power Company, Inc.; a New York
Corporation, Augusta Acquisition Corporation, a Delaware
Corporation and a wholly-owned subsidiary of AEP; and Central
and South West Corporation, a Delaware Corporation
(incorporated herein by reference to the Joint Proxy Statement,
File No. 1-1443).
(12) STATEMENTS RE COMPUTATION OF RATIOS.
CPL, PSO, SWEPCO AND WTU
* 1 CPL's Statement re computation of Ratio of Earnings to Fixed
Charges for the five years ended December 31, 1997.
* 2 PSO's Statement re computation of Ratio of Earnings to Fixed
Charges for the five years ended December 31, 1997.
* 3 SWEPCO's Statement re computation of Ratio of Earnings to
Fixed Charges for the five years ended December 31, 1997.
* 4 WTU's Statement re computation of Ratio of Earnings to Fixed
Charges for the five years ended December 31, 1997.
* (13) ANNUAL REPORT TO SECURITY HOLDERS.
CSW's 1997 Financial Report.
* (21) SUBSIDIARIES OF THE REGISTRANT (CSW).
(23) CONSENT OF EXPERTS AND COUNSEL.
CSW, CPL, PSO
* 1 CSW's Consent of Independent Public Accountants.
* 2 CSW UK Finance Company Consent of Independent Public
Accountants.
* 3 CPL's Consent of Independent Public Accountants.
* 4 PSO's Consent of Independent Public Accountants.
(24) POWER OF ATTORNEY.
CSW
* 1 Power of Attorney.
* 2 Power of Attorney.
* 3 Power of Attorney.
* 4 Power of Attorney.
CPL
* 5 Power of Attorney.
* 6 Power of Attorney.
* 7 Power of Attorney.
PSO
* 8 Power of Attorney.
* 9 Power of Attorney.
* 10 Power of Attorney.
SWEPCO
* 11 Power of Attorney.
* 12 Power of Attorney.
* 13 Power of Attorney.
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WTU
* 14 Power of Attorney.
* 15 Power of Attorney.
* 16 Power of Attorney.
(27) FINANCIAL DATA SCHEDULES.
PSO
* 1 PSO's Financial Data Schedule
(D) INDEX TO FINANCIAL STATEMENT SCHEDULES.
OTHER SCHEDULES.
All other exhibits and schedules are omitted because of the absence of
the conditions under which they are required or because the required
information is included in the financial statements or related notes to
financial statements.
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