UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) COMBINED QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____TO_____
COMMISSION REGISTRANT, STATE OF INCORPORATION, I.R.S. EMPLOYER
FILE NUMBER ADDRESS AND TELEPHONE NUMBER IDENTIFICATION NO.
1-1443 CENTRAL AND SOUTH WEST CORPORATION 51-0007707
(A Delaware Corporation)
1616 Woodall Rodgers Freeway
Dallas, Texas 75202-1234
(214) 777-1000
0-346 CENTRAL POWER AND LIGHT COMPANY 74-0550600
(A Texas Corporation)
539 North Carancahua Street
Corpus Christi, Texas 78401-2802
(512) 881-5300
0-343 PUBLIC SERVICE COMPANY OF OKLAHOMA 73-0410895
(An Oklahoma Corporation)
212 East 6th Street
Tulsa, Oklahoma 74119-1212
(918) 599-2000
1-3146 SOUTHWESTERN ELECTRIC POWER COMPANY 72-0323455
(A Delaware Corporation)
428 Travis Street
Shreveport, Louisiana 71156-0001
(318) 222-2141
0-340 WEST TEXAS UTILITIES COMPANY 75-0646790
(A Texas Corporation)
301 Cypress Street
Abilene, Texas 79601-5820
(915) 674-7000
INDICATE BY CHECK MARK WHETHER THE REGISTRANTS (1) HAVE FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANTS WERE REQUIRED TO FILE SUCH REPORTS), AND (2) HAVE BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
Common Stock Outstanding at May 8, 1998 Shares
Central and South West Corporation 212,292,107
Central Power and Light Company 6,755,535
Public Service Company of Oklahoma 9,013,000
Southwestern Electric Power Company 7,536,640
West Texas Utilities Company 5,488,560
This Combined Form 10-Q is separately filed by Central and South
West Corporation, Central Power and Light Company, Public Service Company of
Oklahoma, Southwestern Electric Power Company and West Texas Utilities Company.
Information contained herein relating to any individual Registrant is filed by
such Registrant on its own behalf. Each Registrant makes no representation as to
information relating to the other Registrants.
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 1998
PAGE
GLOSSARY OF TERMS..........................................................3
FORWARD LOOKING INFORMATION................................................4
CENTRAL AND SOUTH WEST CORPORATION...................................5
PART I. FINANCIAL INFORMATION.............................................5
ITEM 1. FINANCIAL STATEMENTS...........................................5
CENTRAL POWER AND LIGHT COMPANY.....................................13
PUBLIC SERVICE COMPANY OF OKLAHOMA..................................19
SOUTHWESTERN ELECTRIC POWER COMPANY.................................25
WEST TEXAS UTILITIES COMPANY........................................31
NOTES TO FINANCIAL STATEMENTS.......................................38
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL..............49
PART II - OTHER INFORMATION...............................................59
ITEM 1. LEGAL PROCEEDINGS.............................................59
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........60
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K..............................61
SIGNATURES................................................................62
2
GLOSSARY OF TERMS
The following abbreviations or acronyms used in this text are defined below:
ABBREVIATION OR ACRONYM DEFINITION
AEP.........................American Electric Power Company, Inc.
AEP Merger..................Proposed Merger between AEP and CSW where CSW
would become a wholly owned subsidiary of AEP
Anglo.......................Anglo Metal, Inc.
ANI.........................American Nuclear Insurance
Burlington Northern.........Burlington Northern Railroad Company
C3 Communications...........C3 Communications, Inc., Austin, Texas (formerly
CSW Communications, Inc.)
Cajun.......................Cajun Electric Power Cooperative, Inc.
CERCLA......................Comprehensive Environmental Response,
Compensation and Liability Act of 1980
CLECO.......................Central Louisiana Electric Company, Inc.
CPL.........................Central Power and Light Company, Corpus Christi,
Texas
CPL 1997 Final Order........Final orders received from the Texas Commission
in CPL's rate case Docket No. 14965, including
both the order received on September 10, 1997 and
the revised order received on October 16, 1997
CPL 1997 Original
Rate Order................Final order issued on March 31, 1997 by the Texas
Commission in CPL's rate case Docket No. 14965
CSW.........................Central and South West Corporation, Dallas, Texas
CSW Credit..................CSW Credit, Inc., Dallas, Texas
CSW Energy..................CSW Energy, Inc., Dallas, Texas
CSW International...........CSW International, Inc., Dallas, Texas
CSW Services................Central and South West Services, Inc., Dallas,
Texas and Tulsa, Oklahoma
CSW System..................CSW and its subsidiaries
CWIP........................Construction work in progress
ECOM........................Excess cost over market
El Paso.....................El Paso Electric Company
EnerShop....................EnerShopSM Inc., Dallas, Texas
Entergy Texas...............Entergy Texas Utilities Company
EPA.........................Environmental Protection Agency
ERCOT.......................Electric Reliability Council of Texas
Exchange Act................Securities Exchange Act of 1934, as amended
FASB........................Financial Accounting Standards Board
FERC........................Federal Energy Regulatory Commission
FMB.........................First mortgage bond
Holding Company Act.........Public Utility Holding Company Act of 1935, as
amended
ITC.........................Investment tax credit
KWH.........................Killowatt-hour
LIFO........................Last-in First-out (inventory accounting method)
MD&A........................Management's Discussion and Analysis of Financial
Condition and Results of Operations
MDEQ........................Mississippi Department of Environmental Quality
MGP.........................Manufactured gas plant or coal gasification plant
Mirror CWIP.................Mirror Construction Work in Progress
Mississippi Power...........Mississippi Power Company
MMbtu.......................Million Btu (British thermal unit)
MW..........................Megawatt
MWH.........................Megawatt-hour
NEIL........................Nuclear Electric Insurance Limited
NRC.........................Nuclear Regulatory Commission
Oklahoma Commission.........Corporation Commission of the State of Oklahoma
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 1997 rate inquiry
Registrant(s)...............CSW, CPL, PSO, SWEPCO and WTU
3
GLOSSARY OF TERMS (CONTINUED)
ABBREVIATION OR ACRONYM DEFINITION
RUS.........................Rural Utilities Service of the federal government
SEC.........................United States Securities and Exchange Commission
SEEBOARD....................SEEBOARD plc., Crawley, West Sussex, United Kingdom
SEEBOARD U.S.A..............CSW's investment in SEEBOARD consolidated and
converted to U.S. Generally Accepted Accounting
Principles
SFAS........................Statement of Financial Accounting Standards
SFAS No. 52.................Foreign Currency Translation
SFAS No. 71.................Accounting for the Effects of Certain Types of
Regulation
SFAS No. 131................Disclosure about Segments of an Enterprise and
Related Information
STP.........................South Texas Project nuclear electric generating
station, jointly owned by CPL, Houston Lighting and
Power Company, 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 March 18,
1998 with the U.S. Bankruptcy Court for the Middle
District of Louisiana
Texas Commission............Public Utility Commission of Texas
Retirement Savings Plan.....CSW's employee thrift plan
Transok.....................Transok, Inc. and subsidiaries, a former
wholly-owned subsidiary of CSW
Trust Preferred Securities..Collective term for securities issued by business
trusts of CPL, PSO and SWEPCO classified on the
balance sheet as "Certain Subsidiary
(or CPL/PSO/SWEPCO)- obligated, mandatorily
redeemable preferred securities of subsidiary trusts
holding solely Junior Subordinated Debentures of
such Subsidiaries (or CPL/PSO/SWEPCO)"
U.S. Electric(s) or
U.S. Electric Operating
Companies.................CPL, PSO, SWEPCO and WTU
Valero......................Valero Refining Company-Texas, Valero Refining
Company and Valero Energy Company
WTU.........................West Texas Utilities Company, Abilene, Texas
FORWARD LOOKING INFORMATION
This report made by CSW and its subsidiaries contains forward looking statements
within the meaning of Section 21E of the Exchange Act. Although CSW and each of
its subsidiaries believe that, in making any such statements, their expectations
are based on reasonable assumptions, any such statements may be influenced by
factors that could cause actual outcomes and results to be materially different
from those projected. Important factors that could cause actual results to
differ materially from those in the forward looking statements include, but are
not limited to: the impact of general economic changes in the U.S. and in
countries in which CSW either currently has made or in the future may make
investments; the impact of deregulation on the U.S. electric utility business;
increased competition and electric utility industry restructuring in the U.S.;
the impact of the proposed AEP Merger, other merger and acquisition activity, or
the inability to consummate the AEP Merger; federal and state regulatory
developments and changes in law which may have a substantial adverse impact on
the value of CSW System assets; timing and adequacy of rate relief; adverse
changes in electric load and customer growth; climatic changes or unexpected
changes in weather patterns; changing fuel prices, generating plant and
distribution facility performance; decommissioning costs associated with nuclear
generating facilities; uncertainties in foreign operations and foreign laws
affecting CSW's investments in those countries; the effects of retail
competition in the natural gas and electricity distribution and supply
businesses in the United Kingdom; and the timing and success of efforts to
develop domestic and international power projects. In the non-utility area, the
aforementioned factors would also apply, and, in addition, would include, but
are not limited to: the ability to compete effectively in new areas, including
telecommunications, power marketing and brokering, and other energy related
services, as well as evolving federal and state regulatory legislation and
policies that may adversely affect those industries generally or the CSW
System's business in areas in which it operates.
4
CSW
CENTRAL AND SOUTH WEST CORPORATION
AND SUBSIDIARY COMPANIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
5
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended
March 31,
--------------------
1998 1997
------ ------
(millions, except per
share amounts)
Operating Revenues
U.S. Electric $689 $743
United Kingdom 533 521
Other diversified 35 14
------ ------
1,257 1,278
Operating Expenses and Taxes
U.S. Electric fuel 236 262
U.S. Electric purchased power 21 25
United Kingdom cost of sales 385 369
Other operating 228 219
Maintenance 34 33
Provision for CPL 1997 Final Order -- 41
El Paso merger litigation -- 25
Depreciation and amortization 123 118
Taxes, other than income 46 48
Income taxes 21 11
------ ------
1,094 1,151
------ ------
Operating Income 163 127
------ ------
Other Income and Deductions
Other 18 3
Non-operating income taxes (3) 2
------ ------
15 5
------ ------
Income Before Interest and Other Charges 178 132
Interest and Other Charges
Interest on long-term debt 80 83
Interest on short-term debt and other 29 20
Distributions on trust preferred securities 7 --
Preferred dividend requirements of subsidiaries 2 4
------ ------
118 107
------ ------
Net Income for Common Stock $60 $25
====== ======
Average Common Shares Outstanding 212.3 211.8
Basic and Diluted Earnings per Share $0.28 $0.12
====== ======
Dividends Paid per Share of Common Stock $0.435 $0.435
====== ======
The accompanying notes to consolidated financial statements are an integral part
of these statements.
6
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three Months Ended
March 31,
--------------------
1998 1997
------ ------
(millions)
Net Income for Common Stock $60 $25
Other comprehensive income, net of tax
Foreign currency translation adjustment 16 (48)
Unrealized gains or losses on securities:
Unrealized gains(losses) occurring
during period 3 (1)
Adjustments for gains(losses)
included in net income (8) --
---- ----
11 (49)
Comprehensive Income (Loss) $71 $(24)
==== ====
The accompanying notes to consolidated financial statements are an integral
part of these statements.
7
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
(unaudited) (audited)
------- -------
(millions)
ASSETS
Fixed Assets
Electric
Production $5,831 $5,824
Transmission 1,570 1,558
Distribution 4,566 4,453
General 1,402 1,381
Construction work in progress 179 184
Nuclear fuel 197 196
------- -------
13,745 13,596
Other diversified 264 250
------- -------
14,009 13,846
Less - Accumulated depreciation and amortization 5,399 5,264
------- -------
8,610 8,582
------- -------
Current Assets
Cash and temporary cash investments 93 75
Accounts receivable 831 916
Materials and supplies, at average cost 167 172
Electric utility fuel inventory 70 65
Under-recovered fuel costs 32 84
Prepayments and other 75 78
------- -------
1,268 1,390
------- -------
Deferred Charges and Other Assets
Deferred plant costs 502 503
Mirror CWIP asset 282 285
Other non-utility investments 338 448
Securities available for sale 98 103
Income tax related regulatory assets, net 323 329
Goodwill 1,451 1,428
Other 516 383
------- -------
3,510 3,479
------- -------
$13,388 $13,451
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
8
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
(unaudited) (audited)
------- -------
CAPITALIZATION AND LIABILITIES (millions)
Capitalization
Common stock: $3.50 par value
Authorized shares: 350.0 million
Issued and outstanding shares:
212.3 million in 1998 and 212.2
million in 1997 $ 743 $ 743
Paid-in capital 1,040 1,039
Retained earnings 1,718 1,750
Accumulated other comprehensive income 35 24
------- -------
3,536 44% 3,556 45%
------- --- ------- ---
Preferred Stock
Not subject to mandatory redemption 176 176
Subject to mandatory redemption 26 26
------- -------
202 3% 202 2%
Certain Subsidiary-obligated,
mandatorily redeemable preferred
securities of subsidiary trusts
holding solely Junior Subordinated
Debentures of such Subsidiaries 335 4% 335 4%
Long-term debt 3,883 49% 3,898 49%
------- --- ------- ---
Total Capitalization 7,956 100% 7,991 100%
------- --- ------- ---
Current Liabilities
Long-term debt and preferred stock due
within twelve months 29 32
Short-term debt 911 721
Short-term debt - CSW Credit 556 636
Loan notes 58 56
Accounts payable 474 558
Accrued taxes 177 171
Accrued interest 106 87
Other 173 238
------- -------
2,484 2,499
------- -------
Deferred Credits
Accumulated deferred income taxes 2,434 2,432
Investment tax credits 275 278
Other 239 251
------- -------
2,948 2,961
------- -------
$ 13,388 $ 13,451
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
9
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
-------------------
1998 1997
----- -----
OPERATING ACTIVITIES (millions)
Net income for common stock $60 $25
Non-cash Items and Adjustments
Depreciation and amortization 127 127
Deferred income taxes and investment
tax credits (10) 5
Preferred stock dividends 2 4
Provision for CPL 1997 Final Order -- 41
Changes in Assets and Liabilities
Accounts receivable 88 61
Accounts payable (90) (89)
Accrued taxes 4 (230)
Fuel inventory (5) 15
Fuel recovery 51 (6)
Refund due customers (59) 4
Other (21) 11
----- -----
147 (32)
----- -----
INVESTING ACTIVITIES
Construction expenditures (119) (97)
CSW Energy/CSW International projects 19 (27)
Other (10) (5)
----- -----
(110) (129)
----- -----
FINANCING ACTIVITIES
Common stock sold 1 19
Long-term debt sold 5 --
Reacquisition/Maturity of long-term debt (59) (1)
Special deposits for the reacquisition
of preferred stock -- (77)
Other financing activities 19 16
Change in short-term debt 110 169
Payment of dividends (95) (96)
----- -----
(19) 30
----- -----
Effect of exchange rate changes on cash
and cash equivalents -- (3)
Net Change in Cash and Cash Equivalents 18 (134)
Cash and Cash Equivalents at Beginning of Year 75 254
===== =====
Cash and Cash Equivalents at End of Period $93 $120
===== =====
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $101 $80
===== =====
Income taxes paid $-- $238
===== =====
The accompanying notes to consolidated financial statements are an integral
part of these statements.
10
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
Set forth below is information concerning the consolidated results of
operations of CSW for the three month periods ended March 31, 1998 and March 31,
1997. For information concerning the results of operations for each of the U.S.
Electric Operating Companies, see the discussions under the heading RESULTS OF
OPERATIONS following the financial statements of each of the U.S. Electric
Operating Companies.
COMPARISON OF THE QUARTERS ENDED MARCH 31, 1998 AND 1997
Net income for common stock increased to $60 million in the first
quarter of 1998 from $25 million in 1997 due primarily to the absence in 1998 of
charges recorded in the first quarter of 1997 related to the CPL 1997 Original
Rate Order of $27 million, net of tax, and CSW's settlement of its El Paso
litigation of $16 million, net of tax. See NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS for more information related to the CPL 1997 Original Rate Order and
CSW's El Paso litigation. Other factors affecting earnings, that almost entirely
offset each other, are discussed below.
In the first quarter of 1998, the U.S. Electric Operating Companies
and SEEBOARD U.S.A. contributed the following percentages to CSW's results of
operations.
Corporate
U.S. SEEBOARD Total Items and
Electric U.S.A. Electric Other Total
---------------------------------------------------
Operating Revenues 55% 42% 97% 3% 100%
Operating Income 62% 35% 97% 3% 100%
Net Income for Common Stock 61% 55% 116% (16)% 100%
U.S. Electric revenue decreased $54 million, or 7%, in the first
quarter of 1998 compared to the same period a year ago due to the following
factors. The $30 million decrease in non-fuel revenue was due primarily to lower
weather-related demand and reduced rates resulting from both the CPL 1997 Final
Order and the PSO 1997 Rate Settlement Agreement. Fuel revenue was $24 million
lower in the first quarter of 1998 due to lower fuel expense discussed below.
United Kingdom revenue increased $12 million in the first quarter of 1998
compared to the same period last year due primarily to higher unit sales
partially offset by a reduction in tariffs. Other diversified revenue increased
$21 million to $35 million for the comparison periods due primarily to increased
business activity at CSW Energy, CSW Credit, C3 Communications and EnerShop.
U.S. Electric fuel expense decreased $26 million, or 10%, during the
first quarter of 1998 compared to the same period last year due primarily to a
decrease in the average unit fuel cost to $1.63 per MMbtu from $1.84 per MMbtu
resulting from purchases of lower priced spot market natural gas, utilization of
lower cost spot market coal at SWEPCO and the renegotiation of long-term fuel
contracts at WTU. Purchased power decreased $4 million, or 16%, for the
comparison periods due primarily to decreases in economy and emergency energy
purchases resulting from the effects of milder weather and lower fuel costs
discussed above. United Kingdom cost of sales increased $16 million, or 4%,
during the first quarter of 1998 compared to the same period last year due
primarily to an increase in energy purchases resulting from increased units
sold.
11
Other operating expense increased $9 million in the first quarter of
1998 compared to the same period a year ago due primarily to increased business
activity at CSW Energy of $16 million and C3 Communications of $4 million. Also
contributing to the increase was the absence in 1998 of adjustments to reserves
in 1997 at SEEBOARD of $3 million. Partially offsetting these increases were the
1997 write-off of rate case and demand side management expenditures of $11
million resulting from the CPL 1997 Original Rate Order as well as the absence
in 1998 of higher nuclear operations expense recorded in 1997 at CPL.
Depreciation and amortization expense increased $5 million in the
first quarter of 1998 compared to the same period last year due primarily to
accelerated recovery of ECOM property recorded in 1998 related to the CPL 1997
Final Order and higher levels of depreciable property at most CSW subsidiaries.
Also contributing to the increase was 1997 depreciation and amortization expense
that was classified in Provision for CPL 1997 Final Order, the classification of
which had not yet received FERC approval. Partially offsetting the increase in
depreciation and amortization expense were the lower depreciation rates utilized
in the first quarter of 1998 associated with the PSO 1997 Rate Settlement
Agreement and non-ECOM property related to the CPL 1997 Final Order.
Operating income taxes increased $10 million in the first quarter of
1998 compared to the same period last year due primarily to increased operating
income, partially offset by the recognition of foreign tax benefits at SEEBOARD
U.S.A.
Other income and deductions increased $10 million in the first quarter
of 1998 compared to the first quarter of 1997 due primarily to C3
Communications' sale of a telecommunications investment for $5 million after
tax, and higher other income at SEEBOARD of $4 million resulting from higher
profits from SEEBOARD's investment in Medway Power Station.
Interest and other charges increased $11 million in the first quarter
of 1998 compared to the same period last year due primarily to $7 million in
distributions on Trust Preferred Securities at CPL, PSO and SWEPCO and increased
interest on short-term debt due to higher levels of borrowings. These increases
were partially offset by a $3 million reduction in interest on long-term debt
due primarily to the redemption of CPL's 6% Series BB, FMBs which matured
October 1, 1997. Also partially offsetting the increase in interest and other
charges were the reduced preferred stock dividend requirements at the U.S.
Electrics related to their preferred stock reacquisitions in the second quarter
of 1997.
12
CPL
CENTRAL POWER AND LIGHT COMPANY
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
13
CENTRAL POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended
March 31,
-----------------------
1998 1997
--------- ---------
(thousands)
Electric Operating Revenues $274,453 $314,661
Operating Expenses and Taxes
Fuel 72,948 78,260
Purchased power 8,558 17,601
Other operating 60,496 75,771
Provision for CPL 1997 Final Order -- 40,923
Maintenance 13,057 14,984
Depreciation and amortization 41,712 38,373
Taxes, other than income 19,482 21,257
Income taxes 11,820 (2,711)
--------- ---------
228,073 284,458
--------- ---------
Operating Income 46,380 30,203
--------- ---------
Other Income and Deductions
Allowance for equity funds used
during construction -- 485
Other 2,314 (1,394)
Non-operating income taxes 384 1,446
--------- ---------
2,698 537
--------- ---------
Income Before Interest Charges 49,078 30,740
--------- ---------
Interest Charges
Interest on long-term debt 23,500 26,975
Distributions on Trust Preferred Securities 3,000 --
Interest on short-term debt and other 9,877 7,465
Allowance for borrowed funds used
during construction (688) (493)
--------- ---------
35,689 33,947
--------- ---------
Net Income (Loss) 13,389 (3,207)
Less: Preferred stock dividends 1,808 3,433
--------- ---------
Net Income (Loss) for Common Stock $11,581 $(6,640)
========= =========
The accompanying notes to consolidated financial statements as they relate to
CPL are an integral part of these statements.
14
CENTRAL POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
(unaudited) (audited)
----------- ----------
(thousands)
ASSETS
Electric Utility Plant
Production $3,110,209 $3,106,576
Transmission 520,668 517,903
Distribution 1,039,307 1,021,759
General 299,065 295,974
Construction work in progress 82,860 77,390
Nuclear fuel 196,848 196,147
----------- ----------
5,248,957 5,215,749
Less - accumulated depreciation 1,944,365 1,891,406
----------- ----------
3,304,592 3,324,343
----------- ----------
Current Assets
Cash 1,463 --
Accounts receivable 52,197 61,311
Materials and supplies, at average cost 63,215 65,290
Fuel inventory 19,064 14,816
Under-recovered fuel costs 1,079 43,229
Prepayments (2,253) 2,595
----------- ----------
134,765 187,241
----------- ----------
Deferred Charges and Other Assets
Deferred STP costs 484,059 484,277
Mirror CWIP asset 282,172 285,431
Income tax related regulatory assets, net 382,982 390,149
Nuclear decommissioning trust 56,465 45,676
Other 95,231 96,193
----------- ----------
1,300,909 1,301,726
----------- ----------
$4,740,266 $4,813,310
=========== ==========
The accompanying notes to consolidated financial statements as they relate to
CPL are an integral part of these statements.
15
CENTRAL POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
(unaudited) (audited)
----------- -----------
(thousands)
CAPITALIZATION AND LIABILITIES
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 804,863 833,282
----------- -----------
Total Common Stock Equity 1,378,751 46% 1,407,170 47%
----------- --- ----------- ---
Preferred stock 163,204 5% 163,204 5%
CPL-obligated, mandatorily redeemable
preferred securities of subsidiary
trust holding solely Junior
Subordinated Debentures of CPL 150,000 5% 150,000 5%
Long-term debt 1,303,682 44% 1,302,266 43%
----------- --- ----------- ---
Total Capitalization 2,995,637 100% 3,022,640 100%
----------- --- ----------- ---
Current Liabilities
Long-term debt due within twelve months -- 28,000
Advances from affiliates 192,606 142,781
Accounts payable 88,753 84,160
Accrued taxes 12,151 13,558
Accumulated deferred income taxes 17,289 21,382
Accrued interest 30,056 28,379
Refund due customers 4,560 63,713
Other 14,736 14,551
----------- -----------
360,151 396,524
----------- -----------
Deferred Credits
Accumulated deferred income taxes 1,229,054 1,237,386
Investment tax credits 141,070 142,371
Other 14,354 14,389
----------- -----------
1,384,478 1,394,146
----------- -----------
$ 4,740,266 $ 4,813,310
=========== ===========
The accompanying notes to consolidated financial statements as they relate to
CPL are an integral part of these statements.
16
CENTRAL POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
1998 1997
-------- --------
(thousands)
OPERATING ACTIVITIES
Net Income (loss) $13,389 $(3,207)
Non-cash Items Included in Net Income
Depreciation and amortization 42,944 43,353
Deferred income taxes and investment
tax credits (6,559) (194)
Provision for CPL 1997 Final Order -- 40,923
Refund due customers (59,153) 4,070
Changes in Assets and Liabilities
Accounts receivable 9,114 717
Fuel inventory (4,248) 3,080
Material and supplies 2,075 1,171
Accrued interest 1,677 4,486
Accounts payable 4,592 3,773
Accrued taxes (1,407) (41,080)
Fuel recovery 42,150 (4,816)
Other 10,975 15,551
-------- --------
55,549 67,827
-------- --------
INVESTING ACTIVITIES
Construction expenditures (32,504) (26,871)
Other (1,462) 1,006
-------- --------
(33,966) (25,865)
-------- --------
FINANCING ACTIVITIES
Retirement of long-term debt (28,000) --
Reaquisition of preferred stock -- (77,463)
Change in advances from affiliates 49,825 61,587
Payment of dividends (41,945) (26,283)
Other -- (41)
-------- --------
(20,120) (42,200)
-------- --------
Net Change in Cash and Cash Equivalents 1,463 (238)
Cash and Cash Equivalents at Beginning of Year -- 3,299
-------- --------
Cash and Cash Equivalents at End of Year $1,463 $3,061
======== ========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized
(includes distributions on Trust
Preferred Securities) $30,057 $22,685
======== ========
Income taxes paid $ -- $18,111
======== ========
The accompanying notes to consolidated financial statements as they relate to
CPL are an integral part of these statements.
17
CENTRAL POWER AND LIGHT COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED MARCH 31, 1998 AND 1997
Net income for common stock increased $18.2 million, from a loss of
$6.6 million in the first quarter of 1997 to $11.6 million during the first
quarter of 1998. This increase was due primarily to the recording of the
provision for the CPL 1997 Original Rate Order of $41 million ($27 million, net
of tax) in the first quarter of 1997. The increase was partially offset by a
decrease in non-fuel revenues resulting from weather-related demand as well as
the impact of the CPL 1997 Final Order on first quarter 1998 results which
decreased earnings $6.3 million. SEE NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS for more information related to the CPL 1997 Original Rate Order and
the CPL 1997 Final Order.
Electric operating revenues decreased $40.2 million, or 13%, to $274.5
million during the first quarter of 1998 from $314.7 million during the first
quarter of 1997. The decrease was due to a combination of lower fuel and
non-fuel related revenue. The decrease in fuel related revenue was due to lower
fuel and purchased power cost as discussed below. The decrease in non-fuel
related revenue was due primarily to lower weather-related demand and reduced
rates resulting from the CPL 1997 Final Order.
Fuel expense decreased $5.3 million, or 7%, due primarily to a decrease
in average unit fuel costs from $1.78 per MMbtu in 1997 to $1.54 per MMbtu in
1998, resulting from purchases of lower priced spot market natural gas.
Purchased power expenses for the first quarter of 1998 decreased $9.0 million,
or 51.4%, when compared to the same period of 1997 due primarily to a
combination of mild weather and a decrease in economy energy purchases.
Other operating expenses were $60.5 million during the first quarter of
1998, a decrease of $15.3 million from the same period in 1997. The decrease was
due primarily to the first quarter 1997 write-off of rate case and demand side
management expenditures resulting from the CPL 1997 Final Order as well as
reduced nuclear operations expense in 1998. These decreases were partially
offset by increased employee related expenses. Maintenance expenses decreased
$1.9 million due to the scheduled refueling of STP Unit 2 during the first
quarter of 1997.
Income taxes increased $14.5 million in the first quarter of 1998 as
compared to the first quarter of 1997 resulting from the prior year income tax
benefits associated with the provision for the CPL 1997 Original Rate Order as
well as the increase in taxable income for the first quarter of 1998.
Other income and deductions increased approximately $2.2 million as a
result of charges associated with the write-off of plant development costs,
recorded in the 1997 first quarter. Other income and deductions increased due
primarily to interest earned in the nuclear decommissioning trust. This interest
income is offset by a like amount of expense shown as interest charges on
short-term debt.
Interest charges increased $2.1 million in the first quarter of 1998
due primarily to the Distribution on Trust Preferred Securities issued in the
second quarter of 1997.
18
PSO
PUBLIC SERVICE COMPANY OF OKLAHOMA
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
19
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended
March 31,
----------------------
1998 1997
--------- ---------
(thousands)
ELECTRIC OPERATING REVENUES $151,411 $155,165
OPERATING EXPENSES AND TAXES
Fuel 61,520 62,859
Purchased power 13,597 11,925
Other operating 27,147 27,712
Maintenance 7,573 5,936
Depreciation and amortization 18,095 19,783
Taxes, other than income 6,644 7,300
Income taxes 2,032 2,972
--------- ---------
136,608 138,487
--------- ---------
OPERATING INCOME 14,803 16,678
--------- ---------
OTHER INCOME AND DEDUCTIONS
Allowance for equity funds used during
construction 155 90
Other (616) (779)
Non-operating income taxes 503 527
--------- ---------
42 (162)
--------- ---------
INCOME BEFORE INTEREST CHARGES 14,845 16,516
--------- ---------
INTEREST CHARGES
Interest on long-term debt 7,618 7,618
Interest on short-term debt and other 1,230 1,612
Distributions on Trust Preferred Securities 1,500 --
Allowance for borrowed funds used
during construction (332) (477)
--------- ---------
10,016 8,753
--------- ---------
NET INCOME 4,829 7,763
Less: Preferred stock dividends 53 204
--------- ---------
NET INCOME FOR COMMON STOCK $4,776 $7,559
========= =========
The accompanying notes to consolidated financial statements as they relate
to PSO are an integral part of these statements.
20
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
(unaudited) (audited)
---------- ----------
ASSETS (thousands)
ELECTRIC UTILITY PLANT
Production $908,566 $907,735
Transmission 375,738 375,111
Distribution 828,405 818,806
General 203,365 197,264
Construction work in progress 36,901 40,992
---------- ----------
2,352,975 2,339,908
Less - Accumulated depreciation
and amortization 1,049,198 1,031,322
---------- ----------
1,303,777 1,308,586
---------- ----------
CURRENT ASSETS
Cash 3,446 2,171
Accounts receivable 39,516 34,974
Materials and supplies, at average cost 32,249 32,211
Fuel inventory 11,364 11,427
Accumulated deferred income taxes 1,142 --
Prepayments and other 3,463 3,366
---------- ----------
91,180 84,149
---------- ----------
Deferred Charges and Other Assets 53,695 54,946
---------- ----------
$1,448,652 $1,447,681
========== ==========
The accompanying notes to consolidated financial statements as they relate
to PSO are an integral part of these statements.
21
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
(unaudited) (audited)
---------- ----------
CAPITALIZATION AND LIABILITIES (thousands)
CAPITALIZATION
Common stock: $15 par value
Authorized shares: 11,000,000
Issued and outstanding shares:
9,013,000 $ 157,230 $ 157,230
Paid-in capital 180,000 180,000
Retained earnings 132,772 136,996
---------- ----------
Total Common Stock Equity 470,002 50% 474,226 49%
---------- --- ---------- ---
Preferred stock 5,287 --% 5,287 --%
PSO-obligated, mandatorily redeemable
preferred securities of subsidiary
trust holding solely Junior
Subordinated Debentures of PSO 75,000 8% 75,000 8%
Long-term debt 397,202 42% 421,821 43%
---------- --- ---------- ---
Total Capitalization 947,491 100% 976,334 100%
---------- --- ---------- ---
CURRENT LIABILITIES
Long-term debt due within twelve months 25,000 --
Advances from affiliates 31,833 4,874
Payables to affiliates 18,079 29,011
Accounts payable 37,666 55,179
Payables to customers 19,265 18,837
Accrued taxes 3,723 --
Accumulated deferred income taxes -- 2,262
Accrued interest 10,765 9,090
Other 7,028 4,178
---------- ----------
153,359 123,431
---------- ----------
DEFERRED CREDITS
Accumulated deferred income taxes 259,962 258,848
Investment tax credits 40,680 41,160
Income tax related regulatory
liabilities, net 40,928 41,793
Other 6,232 6,115
---------- ----------
347,802 347,916
---------- ----------
$ 1,448,652 $ 1,447,681
========== ==========
The accompanying notes to consolidated financial statements as they relate to
PSO are an integral part of these statements.
22
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
----------------------
1998 1997
-------- --------
OPERATING ACTIVITIES (thousands)
Net Income $4,829 $7,763
Non-cash Items Included in Net Income
Depreciation and amortization 18,832 21,276
Deferred income taxes and investment
tax credits (3,635) (1,702)
Changes in Assets and Liabilities
Accounts receivable (4,542) (10,831)
Prepayments (97) 1,072
Accounts payable (28,502) (26,681)
Accrued taxes 3,723 4,396
Other 6,021 3,053
-------- --------
(3,371) (1,654)
-------- --------
INVESTING ACTIVITES
Construction expenditures (12,096) (19,423)
Other (1,164) (649)
-------- --------
(13,260) (20,072)
-------- --------
FINANCING ACTIVITIES
Change in advances from affiliates 26,959 27,307
Payment of dividends (9,053) (204)
-------- --------
17,906 27,103
-------- --------
Net Change in Cash and Cash Equivalents 1,275 5,377
Cash and Cash Equivalents at Beginning of Year 2,171 1,479
-------- --------
Cash and Cash Equivalents at End of Year $3,446 $6,856
======== ========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized
(includes distributions on Trust
Preferred Securities) $7,892 $6,644
======== ========
Income taxes paid $ -- $3,611
======== ========
The accompanying notes to consolidated financial statements as they relate to
PSO are an integral part of these statements.
23
PUBLIC SERVICE COMPANY OF OKLAHOMA
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED MARCH 31, 1998 AND 1997
Net income for common stock decreased 37% to $4.8 million during the
first quarter of 1998 from $7.6 million during the first quarter of 1997. The
decrease resulted primarily from lower non-fuel revenues and higher interest
charges, partially offset by decreased depreciation expense.
Electric operating revenues were $151.4 million during the first
quarter of 1998, a 2% decrease from the first quarter of 1997. This decrease was
due primarily to lower base rates resulting from the PSO 1997 Rate Settlement
Agreement in the amount of $9.0 million which was partially offset by an
increase in fuel related revenues of $3.5 million.
Fuel expenses decreased $1.3 million, or 2%, during the first quarter
of 1998 compared to the first quarter of 1997 resulting primarily from lower
average fuel cost per MMbtu. The average unit fuel costs declined from $1.95 per
MMbtu in the first quarter of 1997 to $1.72 per MMbtu in the first quarter of
1998 due primarily to lower spot market gas prices. Partially offsetting this
decrease was an increase in over-recovered fuel expense. Purchased power
expenses increased 14% to $13.6 million for the first quarter of 1998 from $11.9
million in the same period of 1997. This increase was due primarily to higher
emergency pool energy purchases, resulting from a plant outage in the first
quarter of 1998.
Maintenance expense increased $1.6 million, or 28%, during the first
quarter of 1998 compared to the same period in 1997 due primarily to higher tree
trimming expenses. Depreciation and amortization expense decreased 9% to $18.1
million in the first quarter of 1998 from $19.8 million in the first quarter of
1997. This decrease was due primarily to lower depreciation rates as a result of
the 1997 PSO Rate Settlement Agreement which was offset in part by additions of
depreciable property.
Operating income taxes were $2.0 million in the first quarter of 1998
compared to $3.0 million in the same period of 1997 due primarily to lower
taxable income in 1998.
Interest charges increased $1.3 million, or 14%, during the first
quarter of 1998 when compared to the same period of 1997 as a result of
distributions on Trust Preferred Securities.
24
SWEPCO
SOUTHWESTERN ELECTRIC POWER COMPANY
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
25
SOUTHWESTERN ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended
March 31,
-----------------------
1998 1997
--------- ---------
(thousands)
Electric Operating Revenues $197,560 $203,280
--------- ---------
Operating Expenses and Taxes
Fuel 76,233 87,596
Purchased power 6,339 5,131
Other operating 31,094 32,547
Maintenance 10,270 9,040
Depreciation and amortization 24,803 23,424
Taxes, other than income 13,522 13,396
Income taxes 6,166 6,072
--------- ---------
168,427 177,206
--------- ---------
Operating Income 29,133 26,074
--------- ---------
Other Income and Deductions
Allowance for equity funds used
during construction 662 --
Other (299) (1,008)
Non-operating income taxes 869 711
--------- ---------
1,232 (297)
--------- ---------
Income Before Interest Charges 30,365 25,777
--------- ---------
Interest Charges
Interest on long-term debt 9,808 10,543
Distributions on Trust Preferred Securities 2,166 --
Interest on short-term debt and other 1,719 2,111
Allowance for borrowed funds used
during construction (259) (399)
--------- ---------
13,434 12,255
--------- ---------
Net Income 16,931 13,522
Less: Preferred stock dividends 534 758
Gain on reacquired preferred stock 1 --
--------- ---------
Net Income for Common Stock $16,398 $12,764
========= =========
The accompanying notes to consolidated financial statements as they relate
to SWEPCO are an integral part of these statements.
26
SOUTHWESTERN ELECTRIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
(Unaudited) (Audited)
---------- ----------
(thousands)
ASSETS
Electric Utility Plant
Production $1,394,396 $1,391,676
Transmission 463,406 456,401
Distribution 888,541 870,378
General 311,517 311,323
Construction work in progress 41,586 51,665
---------- ----------
3,099,446 3,081,443
Less - Accumulated depreciation 1,250,727 1,225,865
---------- ----------
1,848,719 1,855,578
---------- ----------
Current Assets
Cash 7,992 2,298
Accounts receivable 70,163 81,507
Materials and supplies, at average cost 24,886 24,523
Fuel inventory 27,197 26,415
Under-recovered fuel cost 12,171 13,013
Prepayments and other 15,262 13,678
---------- ----------
157,671 161,434
---------- ----------
Deferred Charges and Other Assets 74,739 77,734
---------- ----------
$2,081,129 $2,094,746
========== ==========
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
27
SOUTHWESTERN ELECTRIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
(Unaudited) (audited)
--------- ---------
(thousands)
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock: $18 par value
Authorized shares: 7,600,000
Issued and outstanding shares:
7,536,640 $ 135,660 $ 135,660
Paid-in capital 245,000 245,000
Retained earnings 326,448 324,050
--------- ---------
Total Common Stock Equity 707,108 51% 704,710 51%
--------- --- --------- ---
Preferred stock
Not subject to mandatory redemption 4,707 4,709
Subject to mandatory redemption 25,930 25,930
--------- ---------
30,637 2% 30,639 2%
SWEPCO-obligated, mandatorily redeemable
preferred securities of subsidiary
trust holding solely Junior
Subordinated Debentures of SWEPCO 110,000 8% 110,000 8%
Long-term debt 546,886 39% 547,751 39%
--------- --- --------- ---
Total Capitalization 1,394,631 100% 1,393,100 100%
--------- --- --------- ---
Current Liabilities
Long-term debt and preferred stock due
within twelve months 4,111 3,555
Advances from affiliates 25,667 25,175
Accounts payable 51,304 73,582
Payables to affiliates 57,454 63,583
Customer deposits 14,630 14,359
Accrued taxes 26,315 12,884
Accumulated deferred income taxes 4,299 4,594
Accrued interest 11,636 13,425
Other 10,805 9,551
--------- ---------
206,221 220,708
--------- ---------
Deferred Credits
Accumulated deferred income taxes 395,432 395,909
Investment tax credits 65,680 66,845
Income tax related regulatory
liabilities, net 8,828 10,072
Other 10,337 8,112
--------- ---------
480,277 480,938
--------- ---------
$ 2,081,129 $ 2,094,746
========= =========
The accompanying notes to consolidated financial statements as they
relate to SWEPCO are an integral part of these statements.
28
SOUTHWESTERN ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
----------------------
1998 1997
-------- --------
(thousands)
OPERATING ACTIVITIES
Net Income $16,931 $13,522
Non-cash Items Included in Net Income
Depreciation and amortization 25,850 25,297
Deferred income taxes and investment
tax credits (3,181) (2,007)
Changes in Assets and Liabilities
Accounts receivable 11,344 16,548
Accounts payable (21,282) (12,396)
Payables to affiliates (6,129) (13,786)
Accrued taxes 13,431 699
Other 3,177 (9,794)
-------- --------
40,141 18,083
-------- --------
INVESTING ACTIVITIES
Construction expenditures (18,078) (10,116)
Other (1,246) (1,127)
-------- --------
(19,324) (11,243)
-------- --------
FINANCING ACTIVITIES
Redemption of preferred stock (2) --
Retirement of long-term debt (1,079) (990)
Change in advances from affiliates 492 7,411
Payment of dividends (14,534) (14,034)
-------- --------
(15,123) (7,613)
-------- --------
Net Change in Cash and Cash Equivalents 5,694 (773)
Cash and Cash Equivalents at Beginning of Year 2,298 1,879
-------- --------
Cash and Cash Equivalents at End of Year $7,992 $1,106
======== ========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized
(includes distributions on Trust
Preferred Securities) $14,195 $14,813
======== ========
Income taxes paid $307 $6,970
======== ========
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
29
SOUTHWESTERN ELECTRIC POWER COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED MARCH 31, 1998 AND 1997
Net income for common stock for the first quarter of 1998 was $16.4
million, an increase of $3.6 million, or 28%, from the same period of 1997. The
increase resulted primarily from increased non-fuel revenues and a decrease in
other operating expense.
Electric operating revenues decreased $5.7 million, or 3%, to $197.6
million during the first quarter of 1998 from $203.3 million during the first
quarter of 1997. The decrease was due primarily to decreased fuel revenue of
$6.9 million which was offset in part by increased non-fuel revenue resulting
from increased non-KWH related revenue of $1.2 million.
Fuel and purchased power expense decreased for the first quarter of
1998 compared to the same period of 1997. Fuel expense decreased $11.4 million,
or 13%, due primarily to a decrease in average unit fuel costs from $1.68 per
MMbtu in 1997 to $1.57 per MMbtu in 1998, which resulted from purchases of lower
priced spot market coal. A decrease in natural gas generation because of its
relatively higher costs per MMbtu also contributed to the lower fuel expense in
1998. Purchased power expenses for the first quarter of 1998 increased $1.2
million, or 24%, compared to the same period of 1997 due primarily to an
increase in economy energy purchases.
Other operating expenses were $31.1 million during the first quarter of
1998, a decrease of $1.5 million from the comparable period of 1997. The
decrease was due primarily to decreases in employee-related expenses and
additional expenses recorded in the first quarter of 1997 associated with the
restructuring undertaken by CSW in 1996, offset in part by an increase in
customer-related expenses. Maintenance expenses increased as a result of
increased overhead line expense from wind storm damage in the first quarter of
1998. Depreciation and amortization increased $1.4 million for the first quarter
of 1998 due primarily to increases in depreciable plant and capitalizable
software.
Interest charges increased $1.2 million due primarily to distributions
on Trust Preferred Securities issued in the second quarter of 1997.
30
WTU
WEST TEXAS UTILITIES COMPANY
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
31
WEST TEXAS UTILITIES COMPANY
STATEMENTS OF INCOME
(unaudited)
Three Months Ended
March 31,
--------------------
1998 1997
-------- --------
(thousands)
ELECTRIC OPERATING REVENUES $83,948 $92,646
OPERATING EXPENSES AND TAXES
Fuel 25,231 32,885
Purchased power 7,908 11,397
Other operating 22,386 20,710
Maintenance 3,186 3,084
Depreciation and amortization 10,669 10,091
Taxes, other than income 5,555 6,096
Income taxes 945 498
-------- --------
75,880 84,761
-------- --------
OPERATING INCOME 8,068 7,885
-------- --------
OTHER INCOME AND DEDUCTIONS
Allowance for equity funds used during construction 133 99
Non-operating income taxes 91 202
Other 779 (153)
-------- --------
1,003 148
-------- --------
INCOME BEFORE INTEREST CHARGES 9,071 8,033
-------- --------
INTEREST CHARGES
Interest on long-term debt 5,088 5,088
Interest on short-term debt and other 1,004 1,314
Allowance for borrowed funds used
during construction (111) (230)
-------- --------
5,981 6,172
-------- --------
NET INCOME 3,090 1,861
Less: Preferred stock dividends 26 66
-------- --------
NET INCOME FOR COMMON STOCK $3,064 $1,795
======== ========
The accompanying notes to consolidated financial statements as they relate
to WTU are an integral part of these statements.
32
WEST TEXAS UTILITIES COMPANY
BALANCE SHEETS
March 31, December 31,
1998 1997
(unaudited) (audited)
---------- ----------
ASSETS (thousands)
ELECTRIC UTILITY PLANT
Production $417,896 $417,849
Transmission 210,228 208,905
Distribution 367,041 363,911
General 105,398 104,026
Construction work in progress 17,948 14,154
---------- ----------
1,118,511 1,108,845
Less - Accumulated depreciation 450,551 441,281
---------- ----------
667,960 667,564
---------- ----------
CURRENT ASSETS
Cash 2,921 811
Receivables from affiliates -- 19,802
Accounts receivable 22,316 10,570
Materials and supplies, at average cost 14,414 14,246
Fuel inventory 12,243 12,471
Under-recovered fuel costs 12,366 11,968
Prepayments and other 5,849 4,006
---------- ----------
70,109 73,874
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred Oklaunion costs 17,706 18,637
Restructuring costs 8,494 8,966
Other 32,301 33,107
---------- ----------
58,501 60,710
$796,570 $802,148
========== ==========
The accompanying notes to consolidated financial statements as they
relate to WTU are an integral part of these statements.
33
WEST TEXAS UTILITIES COMPANY
BALANCE SHEETS
March 31, December 31,
1998 1997
(unaudited) (audited)
--------- ---------
CAPITALIZATION AND LIABILITIES (thousands)
CAPITALIZATION
Common stock: $25 par value
Authorized shares: 7,800,000
Issued and outstanding shares:
5,488,560 $ 137,214 $ 137,214
Paid-in capital 2,236 2,236
Retained earnings 118,543 119,479
--------- ---------
257,993 48% 258,929 48%
--------- --- --------- ---
Preferred stock 2,483 --% 2,483 --%
Long-term debt 279,533 52% 278,640 52%
--------- --- --------- ---
540,009 100% 540,052 100%
--------- --- --------- ---
CURRENT LIABILITIES
Advances from affiliates 6,037 --
Payables to affiliates 13,781 21,569
Accounts payable 25,509 15,419
Accrued taxes 8,511 11,375
Accumulated deferred income taxes 425 203
Accrued interest 8,093 4,525
Other 4,831 3,859
--------- ---------
67,187 56,950
--------- ---------
DEFERRED CREDITS
Accumulated deferred income taxes 145,868 149,346
Investment tax credits 27,588 27,918
Income tax related regulatory
liabilities, net 10,868 9,482
Fuel 766 14,102
Other 4,284 4,298
--------- ---------
189,374 205,146
--------- ---------
$ 796,570 $ 802,148
========= =========
The accompanying notes to consolidated financial statements as they relate
to WTU are an integral part of these statements.
34
WEST TEXAS UTILITIES COMPANY
STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Ended
March 31,
----------------------
1998 1997
-------- --------
OPERATING ACTIVITIES (thousands)
Net Income $3,090 $1,861
Non-cash Items Included in Net Income
Depreciation and amortization 10,924 10,936
Deferred income taxes and
investment tax credits (2,200) 1,035
Changes in Assets and Liabilities
Accounts receivable (11,746) (6,252)
Accounts payable 10,090 (4,591)
Accrued taxes (2,864) (8,306)
Accrued interest 3,568 3,775
Fuel recovery (398) (6,248)
Deferred fuel credit (13,336) 43
Other (6,600) (490)
-------- --------
(9,472) (8,237)
-------- --------
INVESTING ACTIVITES
Construction expenditures (9,886) (5,361)
Other (345) (815)
-------- --------
(10,231) (6,176)
-------- --------
FINANCING ACTIVITIES
Change in advances from affiliates 6,037 18,221
Payment of dividends (4,026) (4,066)
-------- --------
2,011 14,155
-------- --------
Net Change in Cash and Cash Equivalents (17,692) (258)
Cash and Cash Equivalents at Beginning of Year 20,613 664
======== ========
Cash and Cash Equivalents at End of Year $2,921 $406
======== ========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $1,134 $1,330
======== ========
Income taxes paid $ -- $1,833
======== ========
The accompanying notes to consolidated financial statements as they relate to
WTU are an integral part of these statements.
35
WEST TEXAS UTILITIES COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED MARCH 31, 1998 AND 1997
Net income for common stock increased to $3.1 million during the first
quarter of 1998 from $1.8 million in the first quarter of 1997. This increase
was due to an increase in non-fuel revenue, other interest income, and a
decrease in interest on short-term debt.
Electric operating revenues decreased $8.7 million, or 9%, in the first
quarter of 1998 compared to the first quarter of 1997 due to several factors.
The decrease is due primarily to an $11.5 million decrease in fuel related
revenue. The decrease in fuel related revenue was due primarily to a reduction
in fuel expense and purchased power as discussed below. Partially offsetting the
decline in fuel related revenue was a $2.8 million increase in non-fuel revenue
resulting from an increase in unbilled revenue, which represents KWHs sold but
not yet billed at month end, and an increase in transmission access revenue.
Non-fuel revenue was also affected by a 3% reduction in KWH sales as a result of
mild weather and reduced usage per customer.
Fuel expense decreased $7.7 million, or 23%, for the first quarter of
1998 compared to the first quarter of 1997 due primarily to a reduction in
average unit fuel costs from $2.42 per MMbtu in the first quarter of 1997 to
$1.96 in the comparable period in 1998. The decrease in average unit fuel costs
is primarily attributable to a reduction in the spot market price of natural gas
as well as the renegotiation of a long-term contract for the procurement of
natural gas. A 2% reduction in generation also contributed to the decline.
Purchased power expense decreased $3.5 million, or 31%, for the first quarter of
1998 compared to the first quarter of 1997 as a result of a reduction in economy
energy purchases.
Other operating expenses increased $1.7 million, or 8%, for 1998
compared to 1997. This increase was due primarily to a $1.5 million dollar
increase in transmission expense.
Other interest income increased $0.4 million due primarily to an
increase on interest income on merchandise sales, temporary cash investments,
and interest income on under-recovered fuel. Interest expense declined $0.3
million due to a decline in short-term debt outstanding when compared to the
first quarter of 1997.
Income taxes increase $0.5 million in the first quarter of 1998 as
compared to the first quarter of 1997 due primarily to higher taxable income.
36
INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS
BY REGISTRANT
NOTE 1. PRINCIPLES OF PREPARATION CSW, CPL, PSO, SWEPCO, WTU
NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS CSW, CPL, PSO, SWEPCO, WTU
NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES CSW, CPL, PSO, SWEPCO, WTU
NOTE 4. COMMON STOCK AND DIVIDENDS CSW, CPL, PSO, SWEPCO, WTU
NOTE 5. INCOME TAXES CSW, CPL, PSO, SWEPCO, WTU
NOTE 6. PROPOSED AEP MERGER CSW, CPL, PSO, SWEPCO, WTU
NOTE 7. LONG-TERM FINANCING CSW, SWEPCO
37
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. PRINCIPLES OF PREPARATION
The condensed financial statements of the Registrants included herein
have been prepared by each Registrant pursuant to the rules and regulations of
the SEC. Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
each Registrant believes that the disclosures are adequate to make the
information presented not misleading. These condensed financial statements
should be read in conjunction with the financial statements and the notes
thereto included in the Registrants' Combined Annual Report on Form 10-K for the
year ended December 31, 1997.
The unaudited financial information furnished herewith reflects all
adjustments of a normal recurring nature which are, in the opinion of management
of such Registrant, necessary for a fair statement of the results of operations
for the interim periods. Information for quarterly periods is affected by
seasonal variations in sales, rate changes, timing of fuel expense recovery and
other factors.
The financial statements of foreign operations have been translated
from the local currency to U.S. dollars in accordance with SFAS No. 52. SFAS No.
52 requires the translation of income statement items at average exchange rates
and balance sheet accounts at current exchange rates. All resulting translation
adjustments are recorded directly to Accumulated other comprehensive income on
CSW's consolidated balance sheets. Cash flow statement items are translated at a
combination of average, historical and current exchange rates. The non-cash
impact of the changes in exchange rates on cash and cash equivalents is shown on
CSW's consolidated statements of cash flows in Effect of exchange rate changes
on cash and cash equivalents.
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 escalation 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 accruing and recovering these decommissioning costs through rates based
on the service life of STP at a rate of $8.2 million per year. The funds are
deposited with a trustee under the terms of an irrevocable trust and are
reflected in the Consolidated Balance Sheets as Nuclear decommissioning trust. A
corresponding amount is accrued in accumulated depreciation. On CSW's
consolidated balance sheets the irrevocable trust is included in Deferred
Charges and Other Assets, Other with a corresponding amount accrued in
38
accumulated depreciation. In CSW's and CPL's consolidated statements of income
the interest income related to the irrevocable trust is recorded in Other Income
and Deductions, Other. In CPL's consolidated statements of income the interest
expense related to the irrevocable trust is recorded in Interest Charges,
Interest on short-term debt and other. In CSW's consolidated statements of
income the interest expense related to the irrevocable trust is recorded in
Interest and Other Charges, Interest on short-term debt and other.
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. There can be no assurance that any new pronouncement will result from
this project.
INVENTORY
CPL, PSO and WTU utilize the LIFO method for the valuation of all
fossil fuel inventories. SWEPCO continues to utilize the weighted average cost
method pending approval of the Arkansas Public Service Commission to utilize the
LIFO method.
CASH EQUIVALENTS
Cash equivalents are considered to be highly liquid debt instruments
purchased with a maturity of three months or less. Accordingly, temporary cash
investments and advances to affiliates are considered cash equivalents.
COMPREHENSIVE INCOME
CSW's consolidated statements of comprehensive income including all of
its components (revenues, expenses, gains and losses) are 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.
RECLASSIFICATIONS
Certain financial statement items for prior years have been
reclassified to conform to the 1998 presentation.
2. LITIGATION AND REGULATORY PROCEEDINGS
See the Registrants' Combined Annual Report on Form 10-K for the year
ended December 31, 1997 for additional discussion of litigation and regulatory
proceedings. Reference is also made to NOTE 3. COMMITMENTS AND CONTINGENT
LIABILITIES, MD&A - RATES AND REGULATORY MATTERS, CPL RATE REVIEW - DOCKET NO.
14965 and PART II - OTHER INFORMATION, ITEM 1. LEGAL PROCEEDINGS for additional
discussion of litigation 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 a final order of the Texas Commission. On March 31, 1997, the
Texas Commission issued the CPL 1997 Original Rate Order in CPL's rate review,
Docket No. 14965. Thereafter, CPL filed a motion for rehearing which requested
39
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
lowered the annual retail base rates of CPL by approximately $19 million, or
2.5%, from CPL's rate level existing prior to May 1996. The Texas Commission
also included a "Glide Path" rate methodology in the CPL 1997 Final Order
pursuant to which CPL's annual rates were reduced by $13 million beginning
May 1, 1998 and will be reduced an additional $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 provided 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 were 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 and March 1998. The majority of the second refund was
made in March 1998, to be completed in the second quarter of 1998.
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 May 1, 1998 and in mid-1999, and (iii) the
$18 million of disallowed affiliate transactions from CSW Services. As part of
the appeal, CPL sought a temporary injunction to prohibit the Texas Commission
from implementing the "Glide Path" rate reduction methodology which was denied.
Hearings on the appeal are scheduled to begin August 28, 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.
40
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 its fixed
fuel factors used to recover fuel costs 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 result
of the unanticipated increase in the price of natural gas.
In February 1998, stipulated settlements were reached with intervenors
in CPL's fuel proceeding on both the fuel factor and surcharge. The fuel factor
increase was reduced to $15.4 million, and the fuel surcharge including interest
was 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 ANGLO IRON METAL
In April 1998, CPL was sued by Anglo in the United States District
Court for the Southern District of Texas, Brownsville Division, for claims
arising from the clean up of a site owned and operated by Anglo in Harlingen,
Texas. Anglo seeks reimbursement pursuant to CERCLA and common law contribution
and indemnity for alleged response/clean up costs of $328,139 and damages of
$150,000 for "loss of fair market value" of the site. Management cannot predict
the outcome of this litigation. However management believes that CPL has
defenses to Anglo's claims and intends to defend the matter vigorously.
Management also believes that the ultimate resolution of this matter will not
have a material adverse impact on CSW's or CPL's consolidated results of
operations or financial condition.
CPL VALERO
In April 1998, Valero filed suit against CPL in Nueces County, Texas
District Court, alleging claims for breach of contract and negligence. Valero's
suit seeks in excess of $11 million as damages for property loss and lost
profits allegedly incurred after an interruption of electricity to its facility
in Corpus Christi, Texas in April 1996. Management cannot predict the outcome of
this litigation. However management believes that CPL has defenses to Valero's
claims and intends to defend the matter vigorously. Management also believes
that the ultimate resolution of this matter will not have a material adverse
impact on CSW's or CPL's consolidated results of operations or financial
condition.
CPL AND WTU TEXAS UTILITIES ELECTRIC COMPANY COMPLAINT
(DOCKET NO. 17285)
A joint CPL/WTU complaint filed with the Texas Commission asserted that
since January 1, 1997, Texas Utilities Electric Company has been effectively
double charging for transmission service within ERCOT. A proposal for decision
received in February 1998 recommends approval of a CPL/WTU proposed offset of
$15.5 million annually of payments to Texas Utilities Electric Company under
FERC-approved transmission service agreements against amounts that CPL and WTU
would otherwise owe Texas Utilities Electric Company pursuant to Texas
Commission rules for transmission service in ERCOT. The Texas Commission is
scheduled to consider the proposal in May 1998.
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.
41
In May 1997, SWEPCO filed with the Texas Commission an application to
reconcile fuel costs and implement a 12 month surcharge of fuel cost
under-recoveries. Because of the uncertainty as to when a surcharge may be
implemented, SWEPCO did not 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 whether transmission equalization payments 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
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.
On April 8, 1998, the Administrative Law Judge assigned to this
proceeding, issued a proposal for decision regarding the one outstanding issue,
whether transmission equalization payments should be included in eligible fuel
expense. The proposal for decision recommends that SWEPCO be allowed to include
transmission equalization expense in eligible fuel expense and is scheduled to
be considered by the Texas Commission in May 1998. SWEPCO cannot predict whether
the Texas Commission will adopt the proposal for decision.
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. On April 7, 1998, SWEPCO filed a motion
for rehearing of the Supreme Court of Texas' decision, where the matter is now
pending. There can be no assurance that the Supreme Court of Texas will grant
CSW's motion for rehearing.
42
3. COMMITMENTS AND CONTINGENT LIABILITIES
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 March 31, 1998, the
maximum amount SWEPCO believes it could potentially assume is $66 million.
However, the maximum amount may vary as the mining contractor's need for funds
fluctuates. The contractor's actual obligation outstanding at March 31, 1998 was
$60 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, not to exceed $10 million per reactor for
each nuclear incident in any one year. CPL and each of the other STP owners are
subject to such assessments, which CPL and the other owners have agreed will be
allocated on the basis of their respective ownership interests in STP. 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.
43
CPL purchased, for its own account, a NEIL I Business Interruption
and/or Extra Expense policy. This insurance will reimburse CPL for extra
expenses incurred for replacement generation or purchased power as the result of
a covered accident that shuts down production at one or both of the STP Units
for more than 21 consecutive weeks. In the event of an outage of STP Units 1 and
2 as a 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 Units 1 and 2. CPL is subject to an additional
assessment of up to $1.8 million for the current policy year in the event that
insured losses at a nuclear facility covered under the NEIL I policy exceed the
accumulated funds available under the policy. CPL renewed its current NEIL I
Business Interruption and/or Extra Expense policy on September 15, 1997.
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 the 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.
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. 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. 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 were completed in April 1998. Final Briefs are scheduled
to be filed in June 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. As of March 31, 1998 SWEPCO had deferred $8.8 million on its
balance sheet.
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
44
both the investigation of the extent of contamination on the site as well as the
subsequent sampling of the site. The sampling results indicated contamination at
the property as well as the possibility of contamination of an adjacent
property. A risk assessment was submitted to the MDEQ, and the MDEQ requested
that a future residential exposure scenario be evaluated for comparison with
commercial and industrial exposure scenarios. However, Mississippi Power and
SWEPCO do not believe that 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 the 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.
The State of Mississippi has passed Brownsfield legislation which
provides for levels of cleanup standards. Although regulations implementing this
legislation are not expected to be finalized until the summer of 1999, the MDEQ
has indicated that it will work with SWEPCO in the interim within the
legislation's intent to allow the project to move forward.
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 March 31, 1998, CSW Energy had
provided $175 million, including development, construction and financing, of the
total estimated $191 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
$29 million as of March 31, 1998.
45
4. COMMON STOCK AND DIVIDENDS
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. CSW's dividends per common share reflect per share
amounts paid for each of the periods. See MD&A LIQUIDITY AND CAPITAL RESOURCES,
CAPITAL STRUCTURE for information related to CSW's common stock.
At March 31, 1998, approximately $1.4 billion of CSW's subsidiary
companies' retained earnings were available for payment of cash dividends by
such subsidiaries to CSW. The mortgage indentures, as amended and supplemented,
at CPL and PSO contain certain restrictions on the use of their retained
earnings for cash dividends on their common stock. These restrictions do not
currently limit the ability of CSW to pay dividends to its shareholders. The
amounts of retained earnings available for dividends attributable to each the
U.S. Electric Operating Companies at March 31, 1998 is as follows.
CPL-$728 million PSO-$133 million SWEPCO-$326 million WTU-$119 million
46
5. INCOME TAXES
The following tables provide a reconciliation of the differences
between total income tax expense (income taxes included in Operating Expenses
and Taxes as well as Other Income and Deductions) at the federal statutory tax
rate and the effective tax rate for the Registrants.
CSW CPL PSO SWEPCO WTU
--------------------------------------------
(millions) (thousands)
----------------------------------
QUARTER ENDED MARCH 31, 1998
Income before taxes attributable to:
Domestic operations $51
Foreign operations 35
-----
Income before taxes $86 $24,824 $6,359 $22,228 $3,944
Tax at U.S. statutory rate $30 $8,688 $2,226 $7,780 $1,380
Differences
Amortization of ITC (3) (1,302) (479) (1,166) (330)
Mirror CWIP 1 1,141 -- -- --
Non-deductible goodwill
amortization 3 -- -- -- --
Foreign tax benefit (11) -- -- -- --
Prior period adjustments and other 4 2,909 (218) (1,317) (196)
----------------------------------------
Tax expense $24 $11,436 $1,529 $5,297 $854
----------------------------------------
Effective tax rate 28% 46% 24% 24% 22%
QUARTER ENDED MARCH 31, 1997
Income before taxes attributable to:
Domestic operations $(7)
Foreign operations 45
----
Income before taxes $38 $(7,363) $10,322 $18,884 $2,156
Tax at U.S. statutory rate $13 $(2,577) $3,613 $6,609 $755
Differences
Amortization of ITC (4) (1,447) (696) (1,166) (330)
Mirror CWIP 1 1,089 -- -- --
Non-deductible goodwill
amortization 3 -- -- -- --
Prior period adjustments and other (4) (1,222) (472) (82) (129)
----------------------------------------
Tax expense $9 $(4,157) $2,445 $5,361 $296
----------------------------------------
Effective tax rate 23% 56% 24% 28% 14%
6. 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. On May 27,
1998, AEP shareholders will vote on whether to issue the additional shares of
stock required to complete the merger. On May 28, 1998, CSW shareholders will
vote on whether to approve the merger. Proxy statements describing the specific
terms of the proposed agreement were mailed to shareholders of both companies in
April 1998.
47
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.
7. LONG-TERM FINANCING
CSW Services used short-term debt to repay a $60 million variable rate
bank loan due December 1, 2001 in two $30 million installments on
January 28, 1998 and April 27, 1998. On April 1, 1998 SWEPCO called the
remaining 274,000 shares of its $100 par value 6.95% preferred stock. SWEPCO
used short-term debt to fund the $28 million redemption.
48
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Registrants' Combined Annual
Report on Form 10-K for the year ended December 31, 1997. Reference is also made
to each Registrant's unaudited Financial Statements and related Notes to
Financial Statements included herein. The information included therein should be
read in conjunction with, and is essential to understanding, the following
discussion and analysis.
RESULTS OF OPERATIONS
Reference is made to ITEM 1. FINANCIAL STATEMENTS for each of the
Registrants' RESULTS OF OPERATIONS for the three month period ended March 31,
1998.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW OF CSW OPERATING, INVESTING, AND FINANCING ACTIVITIES
Net cash flows from operating activities increased $178 million to an
inflow of $146 million for the first quarter of 1998 compared to the same period
last year. The increase in net cash inflows is due primarily to the absence in
1998 of $190 million of federal and state income tax payments made in the first
quarter of 1997 for the gain on CSW's 1996 sale of Transok. However, these first
quarter 1997 payments were offset in part by the utilization of Alternative
Minimum Tax credits that CSW had previously generated.
Net cash outflows from investing activities decreased $19 million to an
outflow of $110 million for the first quarter of 1998 compared to an outflow of
$129 million for the same period last year. CSW Energy obtained permanent
external financing during the first quarter of 1997 for the Orange cogeneration
project and subsequently reduced its equity investment in the project. In
addition, CSW Energy made its final purchase agreement payment on the Ft. Lupton
cogeneration project in the first quarter of 1997. CSW Energy also experienced a
decrease in construction expenditures for the Sweeny project which went into
operation in the first quarter of 1998. The decrease in net cash outflows was
offset in part by an increase in investment for telecommunications projects at
C3 Communications.
Net cash from financing activities decreased $48 million to an outflow
of $18 million for the first quarter of 1998 compared to an inflow of $30
million for the same period last year. In April 1997, CSW made changes to its
common stock plans and stopped issuing original shares. The decrease in net cash
from financing activities was due in part to funding these common stock plans
through open market purchases. Short-term borrowings decreased during the first
quarter of 1998 compared to the same period in 1997 due primarily to borrowings
in 1997 incurred for the income tax payments for the Transok gain.
CONSTRUCTION EXPENDITURES
CSW's construction expenditures, including allowance for funds used
during construction, totaled $121 million for the three months ended March 31,
1998. Such expenditures for the U.S. Electric Operating Companies totaled $33
million, $13 million, $19 million and $10 million, for CPL, PSO, SWEPCO and WTU,
respectively. Construction expenditures at the U.S. Electric Operating Companies
were primarily for improvements to existing production, transmission and
distribution facilities. The improvements are required to meet the needs of new
49
customers and to satisfy the changing requirements of existing customers. CSW
anticipates that all funds required for construction for the remainder of the
year will be provided from internal sources.
OTHER FINANCING ISSUES
CSW can issue common stock, either through open market purchases or
original issue shares, through one of its long-term incentive plans, the
PowerShare Dividend Reinvestment and Stock Purchase Plan and the Retirement
Savings Plan. CSW began funding these plans through open market purchases
effective April 1, 1997.
The CSW System uses short-term debt to meet fluctuations in working
capital requirements and other interim capital needs. CSW has established a
system money pool to coordinate short-term borrowings for certain of its
subsidiaries, primarily the U.S. Electric Operating Companies. In addition, CSW
also incurs borrowings for other subsidiaries that are not included in the money
pool. As of March 31, 1998, CSW had revolving credit facilities totaling $1.4
billion to back up its commercial paper program.
CSW Services used short-term debt to repay a $60 million variable rate
bank loan due December 1, 2001 in two $30 million installments on January 28,
1998 and April 27, 1998. On April 1, 1998 SWEPCO called the remaining 274,000
shares of its $100 par value 6.95% preferred stock. SWEPCO used short-term debt
to fund the $28 million redemption.
CSW has recently made several finance-related filings with the SEC
under the Holding Company Act which, if approved, are expected to increase CSW's
financial flexibility and to permit CSW to respond promptly to competitive
pressures and take advantage of favorable market conditions. In the first of
these filings, CSW has requested authority to repurchase up to ten percent of
its outstanding common stock as of June 30, 1997, from its stock and employee
benefit plans (pursuant to the terms and conditions of such plans) from time to
time through December 31, 2002, and to utilize its short-term borrowing program,
including funds borrowed through its commercial paper program, to finance its
repurchase in the open market of up to twenty percent of its outstanding common
stock as of June 30, 1997. No decision regarding this application has been made
by the SEC. Although such authority would increase CSW's flexibility to adjust
its capital structure, CSW currently has no plans to repurchase any of its
common stock in light of the AEP Merger.
The second filing requested 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 requested authority to issue common stock, while the
U.S. Electric Operating Companies and CSW Services requested authority to issue
common stock, preferred stock and debt. The SEC issued an order on December 30,
1997 granting the requested authority which gives CSW the flexibility to take
advantage of favorable market conditions for routine financings. The third
filing requested an increase in the authorized short-term borrowing limitation
of CSW and certain of its subsidiaries. On April 3, 1998, the SEC issued an
order with respect to this application granting the request.
The final installment of (pound)55 million related to the windfall
profits tax, enacted by the United Kingdom government, is payable by SEEBOARD on
December 1, 1998.
50
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
lowered the annual retail base rates of CPL by approximately $19 million, or
2.5%, from CPL's rate level existing prior to May 1996. The Texas Commission
also included a "Glide Path" rate methodology in the CPL 1997 Final Order
pursuant to which CPL's annual rates were reduced by an additional $13 million
May 1, 1998 and will be reduced an additional $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.
CPL has 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 sought a temporary injunction to prohibit the Texas
Commission from implementing the "Glide Path" rate reduction methodology,
currently scheduled to begin in May 1998 which was denied. Hearings on the
appeal are scheduled to begin August 28, 1998. Management is unable to predict
51
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 March 31,
1998. 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.
SWEPCO LOUISIANA RATE REVIEW
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 has been reviewed. In
December 1997, the Louisiana Commission announced it would review SWEPCO's rates
and service. 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.
OTHER
Reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for
information regarding fuel proceedings at CPL and SWEPCO.
STRATEGIC INITIATIVES
A vital part of CSW's future strategy involves the pursuit of
initiatives that are outside the traditional United States electric utility
business 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 also has restrictions on the amounts it may spend
on these activities 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 also restrict its ability to
successfully pursue some of these 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
52
information due to changes in the underlying assumptions. See FORWARD LOOKING
INFORMATION). See RECENT DEVELOPMENTS AND TRENDS.
PROPOSED AEP MERGER
On December 22, 1997, CSW and AEP announced that their boards of
directors had approved a definitive merger agreement for a tax-free,
stock-for-stock transaction 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 American Customer Satisfaction Index(TM) (Survey conducted by the University
of Michigan Business School and the American Society of Quality Control).
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
53
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 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.
On April 30, 1998, AEP and CSW jointly filed requests with the FERC for
approval of their proposed merger and with the Texas Commission for a finding
that the merger is in the public interest. Testimony submitted in the filings
outlines the expected benefits of the merger to AEP and CSW customers and
shareholders. These benefits include:
* $2 billion in non-fuel operations and maintenance expense savings over 10
years;
* $98 million in net fuel savings over 10 years;
* Improved capital structure and increased financial strength;
* Optimization of business practices and continued high-quality service;
* Increased diversity in customer base, generating resources and service
territory;
* Increased support for restructuring of retail electric markets; and
* Increased support for an independent system operator.
The filings address required regulatory standards under applicable law
and seek favorable determinations by the FERC and the Texas Commission.
Specifically, AEP and CSW have proposed a regulatory plan in Texas that
provides for:
* Approximately $29 million in fuel cost savings to Texas customers during
the 10-year period following completion of the merger;
* A commitment to not raise base rates prior to Jan. 1, 2002 for Texas
customers and a plan to share approximately one-half of the savings created
by the merger during the first 10 years following the merger. In Texas,
approximately $183 million of the savings from synergies will be used to
reduce future costs to customers; and
* A commitment to continue the current high level of customer service and to
identify opportunities and implement measures to further improve service
quality.
The Texas filing provides that there will be minimal job reductions
among employees having direct contact with customers. CSW's work force currently
totals about 7,000 employees, and AEP's work force totals about 18,000
employees. AEP and CSW intend to use a combination of reduced hiring and
attrition to the maximum extent possible to minimize the need for employee
separations.
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. On May 27, 1998, AEP
shareholders will vote on whether to issue the additional shares of stock
required to complete the merger. On May 28, 1998, CSW shareholders will vote on
whether to approve the merger. Proxy statements describing the specific terms of
54
the proposed agreement were mailed to shareholders of both companies in April of
1998. The companies anticipate that regulatory approvals can be obtained in 12
to 18 months from the date of announcement. See NOTE 6. PROPOSED AEP MERGER.
OTHER MERGER AND ACQUISITION ACTIVITY
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 were completed in April 1998. Final briefs are scheduled to be filed in
June 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.
RECENT DEVELOPMENTS AND TRENDS
INDUSTRY RESTRUCTURING INITIATIVES
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
definitive action. The regulatory commissions in Arkansas, Louisiana and Texas
are currently studying various restructuring issues. 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. A bill has been introduced
in the 1998 Oklahoma legislative session which would accelerate the completion
date for the restructuring studies but would not change the date for retail
competition.
55
CPL - WHOLESALE CUSTOMERS
CPL's largest wholesale customer, Magic Valley Electric Cooperative,
gave CPL notice of termination of its contract in 1996. Magic Valley Electric
Cooperative's contract will expire on July 23, 2001. CPL's remaining wholesale
customers have also given CPL notice that they intend to terminate their
contracts upon expiration of the five year notice period. During the first
quarter of 1998, CPL sold 411 million KWHs to its wholesale customers which
represents 9% of total sales. While CPL will be able to compete for each of it
terminating customers in the wholesale market, there can be no assurance that
CPL will be able to retain these customers.
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 electricity power pool of England and Wales. This
pool was established at privatization of the United Kingdom's electric industry
for the bulk trading of electricity between generators and suppliers. At March
31, 1998, the gross value of such contracts for differences amounted to not more
than 97% 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 March 31, 1998, 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 $435 million.
Expected Expected Cash
Maturity Cash Inflows Outflows
Contract Date (Maturity Value) (Market Value)
- ------------------- -------------- ---------------- -----------------
Cross currency swap August 1, 2001 $200 million $218.2 million
Cross currency swap August 1, 2006 $200 million $232.5 million
56
ENVIRONMENTAL
STATE OF TEXAS
Pursuant to legislation passed last year in the Texas legislature, the
Texas Natural Resources Conservation Commission is developing a program that
will allow for the voluntary permitting of grandfathered facilities.
Grandfathered facilities are generally defined as those facilities with air
emissions that began operation before the requirements of the 1971 Clean Air Act
took effect. These facilities were not required to obtain construction or
operation permits for their air emissions. Grandfathered facilities include a
wide range of sources, including refineries, chemical plants, power plants,
cotton gins, paint shops, bakeries, and dry cleaners.
Constituents in Texas are working with the Texas Natural Resources
Conservation Commission to develop the rules for the voluntary program, which
are currently in draft form. The proposed draft rules call for grandfathered
facilities to employ "best available retrofit technology" where appropriate and
reasonable. CSW estimates the cost to permit its grandfathered units under the
voluntary program to be $3 to $15 million over the next ten years. All of CSW's
grandfathered units are gas units which are less expensive to upgrade than coal
units.
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 project includes all management
information systems which support business functions such as customer billing,
payroll and other business functions. Other systems with computer-based controls
such as telecommunications, elevators, building environmental management,
metering, plant, transmission, distribution and substations are included in this
project as well. 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's system-wide year 2000 program began with an executive sponsor and
project manager being named and a centralized team being formed. The project is
classified as high priority and the status is checked bi-weekly with weekly
updates to the senior management team. Key milestones for the year 2000 program
follow.
(i) Inventory and assessment of business applications and vendor
supplied software were completed in the first quarter of 1997. Only 25%
of the business application programs were determined to be
non-compliant and in need of remediation by December 1999.
(ii) Adequate preparation to permit effective modification and
certification testing of business application software was completed
in the third quarter of 1997.
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(iii) Remediation plans and schedules for business applications were
established in the fourth quarter of 1997 and conversion activities
were initiated. All but three applications are targeted for completion
by December 31, 1998 and the remainder by mid-year 1999.
(iv) An inventory and preliminary assessment of the electric business
operation systems were also completed in the fourth quarter of 1997.
This included switchboards, elevators, environmental controls,
vehicles, metering systems, and embedded logic or real time control
systems in support of generation and delivery of electricity.
Continuing analysis and corrective measures are now underway for these
systems with completion targeted for early 1999.
(v) Most of calendar year 1999 has been reserved for final verification
of all external interfaces.
ACCOUNTING STANDARDS ISSUED
The Registrants will adopt the following statement that the FASB issued
in 1997 on the date indicated below:
* SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION, which the registrants must adopt in the financial statements
for the year ended December 31, 1998.
The Registrants do not expect adoption of this standard to have a
material impact on their financial results or financial statement disclosures.
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PART II - OTHER INFORMATION
For background and earlier developments relating to PART II information,
reference is made to the Registrants' Combined Annual Report on Form 10-K for
the year ended December 31, 1997.
ITEM 1. LEGAL PROCEEDINGS.
CPL ANGLO IRON METAL
In April 1998, CPL was sued by Anglo in the United States District
Court for the Southern District of Texas, Brownsville Division, for claims
arising from the clean up of a site owned and operated by Anglo in Harlingen,
Texas. Anglo seeks reimbursement pursuant to CERCLA and common law contribution
and indemnity for alleged response/clean up costs of $328,000 and damages of
$150,000 for "loss of fair market value" of the site. Management cannot predict
the outcome of this litigation. However management believes that CPL has
defenses to Anglo's claims and intends to defend the matter vigorously.
Management also believes that the ultimate resolution of this matter will not
have a material adverse impact on CSW's or CPL's consolidated results of
operations or financial condition.
CPL VALERO
In April 1998, Valero filed suit against CPL in Nueces County, Texas
District Court, alleging claims for breach of contract and negligence. Valero's
suit seeks in excess of $11 million as damages for property loss and lost
profits allegedly incurred after an interruption of electricity to its facility
in Corpus Christi, Texas in April 1996. Management cannot predict the outcome of
this litigation. However management believes that CPL has defenses to Valero's
claims and intends to defend the matter vigorously. Management also believes
that the ultimate resolution of this matter will not have a material adverse
impact on CSW's or CPL's consolidated results of operations or financial
condition.
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. On April 7, 1998, SWEPCO filed a motion
for rehearing of the Supreme Court of Texas' decision, where the matter is now
pending. There can be no assurance that the Supreme Court of Texas will grant
CSW's motion for rehearing.
OTHER LEGAL CLAIMS AND PROCEEDINGS
The CSW System is party to various other legal claims and proceedings
arising in the normal course of business. Management does not expect disposition
of these matters to have a material adverse effect on the Registrants' results
of operations or financial condition. See PART I - NOTE 2. LITIGATION AND
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REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
CPL
(i) The annual meeting of stockholders of CPL was held on April 17, 1998.
(ii) Directors elected at the annual meeting were:
John F. Brimberry Robert A. McAllen
E. R. Brooks Pete Morales, Jr.
Glenn Files H. Lee Richards
Ruben M. Garcia J. Gonzalo Sandoval
Alphonso Jackson Gerald E. Vaughn
(iii) No other matters (other than procedural maters) were voted upon at the
annual meeting.
PSO
(i) The annual meeting of stockholders of PSO was held on April 22, 1998.
(ii) Directors elected at the annual meeting were:
E. R. Brooks Paul K. Lackey, Jr.
T.D. Churchwell Paula Marshall-Chapman
Harry A. Clarke William R. McKamey
Glenn Files Dr. Robert B. Taylor, Jr.
(iii) No other matters (other than procedural matters) voted upon at the annual
meeting.
SWEPCO
(i) The annual meeting of stockholders of SWEPCO was held on April 8, 1998.
(ii) Directors elected at the annual meeting were:
E. R. Brooks Michael H. Madison
James E. Davison Karen C. Martin
Glenn Files William C. Peatross
Dr. Frederick E. Joyce Maxine P. Sarpy
John M. Lewis
(iii) No other matters (other than procedural) were voted upon at the annual
meeting.
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WTU
(i) The annual meeting of stockholders of WTU was held on March 31, 1998.
(ii) Directors elected at the annual meeting were:
E. R. Brooks Tommy Morris
Paul J. Brower Dian G. Owen
Glenn Files James M. Parker
Alphonso Jackson F. L. Stephens
(iii) No other matters (other than procedural) were voted upon at the annual
meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
(3) BYLAWS OF PSO
1 Bylaws, as amended April 22, 1998, filed herewith.
(12) COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
CPL - (Exhibit 12.1), filed herewith.
PSO - (Exhibit 12.2), filed herewith.
SWEPCO - (Exhibit 12.3), filed herewith.
WTU - (Exhibit 12.4), filed herewith.
(27) FINANCIAL DATA SCHEDULES
CSW - (Exhibit 27.1), filed herewith.
CPL - (Exhibit 27.2), filed herewith.
PSO - (Exhibit 27.3), filed herewith.
SWEPCO - (Exhibit 27.4), filed herewith.
WTU - (Exhibit 27.5), filed herewith.
(B) REPORTS FILED ON FORM 8-K:
CSW, CPL, PSO, SWEPCO, WTU
ITEM 5. OTHER EVENTS, dated April 30, 1998 and filed May 12, 1998,
providing certain information regarding the AEP Merger with respect to
requesting merger approval from the FERC and the Texas Commission.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
each Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
Registrant shall be deemed to relate only to matters having reference to such
Registrant or its subsidiaries.
CENTRAL AND SOUTH WEST CORPORATION
Date: May 14, 1998 /S/ LAWRENCE B. CONNORS
Lawrence B. Connors
Controller and Chief Accounting Officer
(Principal Accounting Officer)
CENTRAL POWER AND LIGHT COMPANY
PUBLIC SERVICE COMPANY OF OKLAHOMA
SOUTHWESTERN ELECTRIC POWER COMPANY
WEST TEXAS UTILITIES COMPANY
Date: May 14, 1998 /S/ R. RUSSELL DAVIS
R. Russell Davis
Controller and Chief Accounting Officer
(Principal Accounting Officer)
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