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 JUNE 30, 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 August 11, 1998 Shares
Central and South West Corporation 212,456,619
Central Power and Light Company 6,755,535
Public Service Company of Oklahoma 9,013,000
Southwestern Electric Power Company 7,536,640
West Texas Utilities Company 5,488,560
This Combined Form 10-Q is separately filed by Central and South
West Corporation, Central Power and Light Company, Public Service Company of
Oklahoma, Southwestern Electric Power Company and West Texas Utilities Company.
Information contained herein relating to any individual Registrant is filed by
such Registrant on its own behalf. Each Registrant makes no representation as to
information relating to the other Registrants.
2
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 1998
PAGE
GLOSSARY OF TERMS.............................................................3
FORWARD LOOKING INFORMATION...................................................5
PART I. FINANCIAL INFORMATION................................................6
ITEM 1. FINANCIAL STATEMENTS..............................................6
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES.............6
CENTRAL POWER AND LIGHT COMPANY........................................16
PUBLIC SERVICE COMPANY OF OKLAHOMA.....................................23
SOUTHWESTERN ELECTRIC POWER COMPANY....................................30
WEST TEXAS UTILITIES COMPANY...........................................37
NOTES TO FINANCIAL STATEMENTS..........................................45
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................61
PART II - OTHER INFORMATION..................................................76
ITEM 1. LEGAL PROCEEDINGS................................................76
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............77
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................77
SIGNATURES...................................................................79
3
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 as a result of
which CSW would become a wholly owned subsidiary of
AEP
ALJ.........................Administrative Law Judge
Alpek.......................Alpek S.A. de C.V.
Anglo.......................Anglo Iron and Metal, Inc.
ANI.........................American Nuclear Insurance
Arkansas Commission.........Arkansas Public Service Commission
Burlington Northern.........Burlington Northern Railroad Company
C3 Communications...........C3 Communications, Inc., Austin, Texas (formerly CSW
Communications, Inc.)
Cajun.......................Cajun Electric Power Cooperative, Inc.
Cajun Members Committee.....A committee which represents 7 of the 12 Louisiana
member distribution cooperatives that are served by
Cajun
CELPA.......................Centrais Eletricas do Para S.A.
CEMAT.......................Centrais Eletricas Matogrossenses S.A.
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
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
Enertek.....................Co-generation power plant, Tampico, Mexico
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
ISO.........................Independent System Operator
ITC.........................Investment tax credit
Inepar......................Inepar S.A. Industria e Construcoes
LIFO........................Last-in First-out (inventory accounting method)
Louisiana Commission........Louisiana Public Service Commission
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
Midwest ISO.................ISO comprised of the following charter members:
Wisconsin Energy, Common Wealth Edison, Cinergy,
Illinois Power, Ameren, Louisville Gas and Electric,
Hoosier Cooperative, and Walbash Cooperative
Mirror CWIP.................Mirror Construction Work in Progress
Mississippi Power...........Mississippi Power Company
MMbtu.......................Million Btu (British thermal unit)
MW..........................Megawatt
MWH.........................Megawatt-hour
4
GLOSSARY OF TERMS (CONTINUED)
ABBREVIATION OR ACRONYM DEFINITION
NRC.........................Nuclear Regulatory Commission
Oklahoma Commission.........Corporation Commission of the State of Oklahoma
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
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
SFAS No. 133................Accounting for Derivative Instruments and Hedging
Activities
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
STPNOC......................STP Nuclear Operating Company, a non-profit Texas
Corporation, 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
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. District Court.........U.S. District Court for the Middle District of
Louisiana
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
Vale........................Empresa De Electricidade Vale Paranpanema S/A
WTU.........................West Texas Utilities Company, Abilene, Texas
Yorkshire...................Yorkshire plc, a regional electricity company in the
United Kingdom
5
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 including any regulatory conditions
imposed on the merger, the inability to consummate the AEP Merger, or other
merger and acquisition activity including the SWEPCO Plan; 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.
6
CSW
CENTRAL AND SOUTH WEST CORPORATION
AND SUBSIDIARY COMPANIES
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
7
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------- ----------------
1998 1997 1998 1997
------ ------- ------- -------
(millions, except per share amounts)
Operating Revenues
U.S. Electric $885 $765 $1,574 $1,508
United Kingdom 403 403 935 923
Other diversified 56 16 92 31
------ ------- ------- -------
1,344 1,184 2,601 2,462
Operating Expenses and Taxes
U.S. Electric fuel 315 261 551 522
U.S. Electric purchased power 26 17 47 43
United Kingdom cost of sales 270 282 654 651
Other operating 244 224 472 442
Maintenance 40 40 74 73
Provision for CPL 1997 Final Order -- (26) -- 15
El Paso merger litigation -- 10 -- 35
Depreciation and amortization 126 120 249 239
Taxes, other than income 55 46 101 94
Income taxes 54 41 76 52
------ ------- ------- -------
1,130 1,015 2,224 2,166
------ ------- ------- -------
Operating Income 214 169 377 296
------ ------- ------- -------
Other Income and Deductions
Other 11 10 29 11
Non-operating income taxes 1 1 (2) 4
------ ------- ------- -------
12 11 27 15
------ ------- ------- -------
Income Before Interest and Other Charges 226 180 404 311
Interest and Other Charges
Interest on long-term debt 80 85 160 167
Interest on short-term debt and
other 29 15 60 35
Distributions on trust preferred
securities 7 4 13 4
Preferred dividend requirements
of subsidiaries 2 3 4 7
(Gain)/Loss on reacquired
preferred stock 1 (10) 1 (10)
------ ------- ------- -------
119 97 238 203
------ ------- ------- -------
Net Income for Common Stock $107 $83 $166 $108
====== ======= ======= =======
Average Common Shares Outstanding 212.3 212.2 212.3 212.0
Basic and Diluted Earnings per Share $0.50 $0.39 $0.78 $0.51
====== ======= ======= =======
Dividends Paid per Share of Common Stock $0.435 $0.435 $0.87 $0.87
====== ======= ======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
8
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
Three Six
Months Ended Months Ended
June 30, June 30,
------------ -------------
1998 1997 1998 1997
----- ----- ----- -----
(millions) (millions)
Net Income for Common Stock $107 $83 $166 $108
----- ----- ----- -----
Other Comprehensive Income, Net of Tax
Foreign currency translation adjustment (6) 9 10 (39)
Unrealized gains or losses on
securities:
Unrealized gains(losses) occurring
during period (12) 2 (10) 1
Adjustments for gains(losses) included
in net income -- -- (8) --
----- ----- ----- -----
(18) 11 (8) (38)
Comprehensive Income $89 $94 $158 $70
===== ===== ===== =====
The accompanying notes to consolidated financial statements are an integral
part of these statements.
9
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
(unaudited) (audited)
------- -------
(millions)
ASSETS
Fixed Assets
Electric
Production $5,845 $5,824
Transmission 1,580 1,558
Distribution 4,630 4,453
General 1,359 1,381
Construction work in progress 185 184
Nuclear fuel 202 196
------- -------
13,801 13,596
Other diversified 299 250
------- -------
14,100 13,846
Less - Accumulated depreciation and amortization 5,476 5,264
------- -------
8,624 8,582
------- -------
Current Assets
Cash and temporary cash investments 218 75
Accounts receivable 1,051 916
Materials and supplies, at average cost 157 172
Electric utility fuel inventory 83 65
Under-recovered fuel costs 34 84
Notes receivable 71 --
Prepayments and other 76 78
------- -------
1,690 1,390
------- -------
Deferred Charges and Other Assets
Deferred plant costs 500 503
Mirror CWIP asset 279 285
Other non-utility investments 430 448
Securities available for sale 74 103
Income tax related regulatory assets, net 321 329
Goodwill 1,428 1,428
Other 437 383
------- -------
3,469 3,479
------- -------
$13,783 $13,451
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
10
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 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 $ 744 $ 743
Paid-in capital 1,045 1,039
Retained earnings 1,732 1,750
Accumulated other comprehensive income 16 24
--------- ---------
3,537 45% 3,556 45%
--------- ----- --------- -----
Preferred stock
Not subject to mandatory redemption 176 176
Subject to mandatory redemption -- 26
--------- ---------
176 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 3,783 48% 3,898 49%
--------- ----- --------- -----
Total Capitalization 7,831 100% 7,991 100%
--------- ----- --------- -----
Current Liabilities
Long-term debt and preferred stock
due within twelve months 94 32
Short-term debt 890 721
Short-term debt - CSW Credit 814 636
Loan notes 58 56
Accounts payable 634 573
Accrued taxes 232 171
Accrued interest 103 87
Other 160 238
--------- ---------
2,985 2,514
--------- ---------
Deferred Credits
Accumulated deferred income taxes 2,459 2,431
Investment tax credits 272 278
Other 236 237
--------- ---------
2,967 2,946
--------- ---------
$ 13,783 $ 13,451
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
11
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
----------------------
1998 1997
------ ------
OPERATING ACTIVITIES (millions)
Net Income for Common Stock $166 $108
Non-cash Items and Adjustments
Depreciation and amortization 256 256
Deferred income taxes and
investment tax credits 14 (15)
Preferred stock dividends
included in Net income
for common stock 4 7
(Gain)/loss on reacquired
preferred stock 1 (10)
Provision for CPL 1997 Final Order -- 15
Changes in Assets and Liabilities
Accounts receivable (135) (167)
Accounts payable 61 (136)
Accrued taxes 61 (79)
Fuel inventory (18) 19
Fuel recovery 50 (13)
Refund due customers (64) 56
Other 7 129
----- -----
403 170
----- -----
INVESTING ACTIVITIES
Construction expenditures (252) (243)
CSW Energy/CSW International projects (74) (97)
Other (9) (5)
----- -----
(335) (345)
----- -----
FINANCING ACTIVITIES
Common stock sold 6 20
Long-term debt sold 5 --
Reacquisition/Maturity of long-term debt (89) (51)
Reacquisition of preferred stock (28) (110)
Proceeds from the issuance of Subsidiary
obligated, mandatorily redeemable,
trust preferred securities -- 324
Change in short-term debt 346 164
Payment of dividends (186) (194)
Other 26 39
----- -----
80 192
----- -----
Effect of exchange rate changes on cash
and cash equivalents (5) (3)
Net Change in Cash and Cash Equivalents 143 14
Cash and Cash Equivalents at Beginning of Period 75 254
===== =====
Cash and Cash Equivalents at End of Period $218 $268
===== =====
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $210 $190
===== =====
Income taxes paid $53 $174
===== =====
The accompanying notes to consolidated financial statements are an integral
part of these statements.
12
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 and six month periods ended June 30, 1998
and June 30, 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 JUNE 30, 1998 AND 1997
Net income for common stock increased to $107 million in the second
quarter of 1998 from $83 million in 1997. The increase in earnings was due to
more favorable weather at the U.S. Electric Operating Companies, increased
earnings at CPL of $8 million and SEEBOARD U.S.A. of $11 million, and the
absence in 1998 of $7 million in after-tax charges recorded in the second
quarter of 1997 for the settlement of the El Paso litigation. Partially
offsetting the increase in earnings was the absence in 1998 of a $10 million
gain recognized on the reacquisition of a portion of the U.S. Electric Operating
Companies' preferred stock. Earnings at CPL increased due to higher MWH sales
due to warmer weather and the absence in 1998 of the provision recorded in the
second quarter of 1997 for the CPL 1997 Final Rate Order partially offset by
CPL's $3 million share of the previously mentioned gain on reacquired preferred
stock recorded in the second quarter of 1997. Earnings at SEEBOARD U.S.A.
increased due primarily to higher MWH sales due to colder weather and foreign
tax benefits. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and MD&A - RATES
AND REGULATORY MATTERS for more information related to the CPL 1997 Final Rate
Order. Other factors affecting earnings are discussed below.
In the second 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 66% 30% 96% 4% 100%
Operating Income 75% 20% 95% 5% 100%
Net Income for Common Stock 93% 19% 112% (12)% 100%
U.S. Electric revenue increased $120 million, or 16%, in the second
quarter of 1998 compared to the same period a year ago. The increase was due to
higher non-fuel related revenues of $66 million and fuel revenues of $54
million. Non-fuel revenue increased as a result of hotter weather and the
absence in 1998 of the provision for the CPL 1997 Final Order. These increases
were partially offset by lower non-fuel base rates resulting from the CPL 1997
Final Order and the PSO 1997 Rate Settlement Agreement. Higher fuel related
revenues of $54 million were due to increased weather related usage and higher
fuel expense as discussed below. In 1998 there was an additional $12 million in
transmission access revenue which increased revenues but there was also a
corresponding $12 million increase in transmission expense which increased other
operating expenses. Other diversified revenue increased $40 million to $56
million during the comparison periods. Increased business activity at CSW Energy
in the second quarter of 1998, primarily a power plant project becoming
operational, was responsible for $34 million of the increase. However, CSW
Energy also experienced a corresponding increase in other operating expenses, as
discussed below.
13
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
U.S. Electric fuel expense increased $54 million, or 21%, during the
second quarter of 1998 compared to the same period last year due to warmer
weather and an increase in the average unit fuel cost to $1.78 per MMbtu from
$1.69 per MMbtu. Also, there was an increase in the recovery of deferred fuel
costs at PSO. Purchased power increased $9 million, or 53%, during the
comparison periods due primarily to increases in economy and emergency energy
purchases resulting from the effects of warmer weather. United Kingdom cost of
sales decreased $12 million, or 4%, during the second quarter of 1998 compared
to the same period last year due primarily to a decrease in the cost of
purchased power.
Other operating expenses increased $20 million in the second quarter of
1998 compared to the same period a year ago. As previously discussed, a CSW
Energy power plant went into service in February 1998 resulting in a $27 million
increase in other operating expense in the second quarter of 1998 compared to
the same period last year. Partially offsetting this increase were several small
reductions in operating expenses at several other subsidiaries.
In the first quarter of 1997, CPL recorded a $41 million contingency
related to the CPL 1997 Rate Order. In the second quarter of 1997, CPL
reclassified $26 million of the contingency to reflect the effects of the CPL
1997 Final Order in its specific accounts. Approximately $15 million remained as
a Provision for the CPL 1997 Final Order at the end of the second quarter of
1997.
Another item for which there is no corresponding amount in 1998 was the
$10 million dollar accrual for settlement of the El Paso merger litigation
recorded in the second quarter of 1997.
Depreciation and amortization expense increased $6 million in the
second 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, as well as increases in depreciable property. Partially offsetting
this increase is reduced depreciation rates as a result of the CPL 1997 Final
Order (on non-ECOM property) and the PSO 1997 Rate Settlement Agreement.
Operating income taxes increased $13 million in the second quarter of
1998 compared to the same period last year due primarily to increased taxable
income, partially offset by the recognition of foreign tax benefits at SEEBOARD
U.S.A.
Interest and other charges increased $22 million in the second quarter
of 1998 compared to the same period last year due primarily to a $14 million
increase in interest on short-term debt due to higher levels of borrowings. Also
contributing to the increase was an additional $3 million in distributions on
Trust Preferred Securities at CPL, PSO and SWEPCO resulting from the securities
being outstanding for a full quarter in 1998 as well as the absence of a $10
million gain on reacquired preferred stock which lowered the interest and other
charges in 1997. These increases were partially offset by a $5 million reduction
in interest on long-term debt resulting from the repayment of a $60 million
variable rate bank loan. See ITEM 2. MD&A - OTHER FINANCING ISSUES for more
information.
14
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Net income for common stock for the first six months of 1998 increased
to $166 million from $108 million in the first half of 1997. The increase in
earnings was due to more favorable weather at the U.S. Electric Operating
Companies, increased earnings at CPL of $26 million and SEEBOARD U.S.A. of $13
million, and the absence in 1998 of $23 million in after-tax charges recorded in
the first half of 1997 for the settlement of the El Paso litigation and $37
million in after-tax charges for the CPL 1997 Final Order. Partially offsetting
the increase in earnings was the absence in 1998 of a $10 million gain
recognized on the reacquisition of a portion of the U.S. Electric Operating
Companies' preferred stock. Earnings at CPL increased due to higher MWH sales
due to warmer weather in the second quarter of 1998 and the absence in 1998 of
the provisions recorded in the first half of 1997 for the CPL 1997 Final Rate
Order partially offset by CPL's $3 million share of the previously mentioned
gain on reacquired preferred stock recorded in the second quarter of 1997.
Earnings at SEEBOARD U.S.A. increased due primarily to higher MWH sales due to
colder weather and foreign tax benefits. See NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS and MD&A, RATES AND REGULATORY MATTERS for more information related
to the CPL 1997 Final Rate Order. Other factors affecting earnings are discussed
below.
In the first half 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 60% 36% 96% 4% 100%
Operating Income 69% 27% 96% 4% 100%
Net Income for Common Stock 81% 32% 113% (13)% 100%
U.S. Electric revenue increased $66 million, or 4%, in the first six
months of 1998 compared to the same period a year ago. The increase was due to
higher non-fuel related revenues of $36 million and fuel revenues of $30
million. Non-fuel revenue increased as a result of hotter weather and the
absence in 1998 of the provision for the CPL 1997 Final Order. These increases
were partially offset by lower base rates resulting from the CPL 1997 Final
Order and the PSO 1997 Rate Settlement Agreement. Higher fuel related revenues
of $30 million were due to increased weather related usage and higher fuel
expense as discussed below. In 1998 there was an additional $27 million in
transmission access revenue which increased revenues but there was also a
corresponding $27 million increase in transmission expense which increased other
operating expenses. United Kingdom revenue increased $12 million due to colder
weather, foreign tax benefits and earnings from SEEBOARD's investment in the
Medway power project. Other diversified revenue increased $61 million to $92
million for the comparison periods. Increased business activity at CSW Energy,
primarily a power plant project becoming operational, was responsible for $53
million of the increase. CSW Energy had a corresponding increase in other
operating expenses, which is discussed below.
U.S. Electric fuel expense increased $29 million, or 6%, during the
first half of 1998 compared to the same period last year due primarily to warmer
weather and higher MWH sales. Also, there was an increase in the recovery of
deferred fuel costs at PSO. These increases were partially offset by a decrease
in the average unit fuel cost from $1.76 per MMbtu in 1997 to $1.71 per MMbtu
15
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
in 1998. Purchased power increased $4 million, or 9%, for the comparison
periods due primarily to increases in economy and emergency energy purchases
resulting from plant outages and warmer weather. United Kingdom cost of sales
increased $3 million during the first half of 1998 compared to the same period
last year due primarily to increased sales as discussed above.
Other operating expenses increased $30 million in the first six months
of 1998 compared to the same period a year ago. As previously discussed, a CSW
Energy power plant went into service in February 1998 resulting in a $43 million
increase in other operating expense in the first six months of 1998 compared to
the same period a year ago. Partially offsetting this increase were several
small reductions in operating expenses at several other subsidiaries.
In the first quarter of 1997, CPL recorded a $41 million contingency
related to the CPL 1997 Rate Order. In the second quarter of 1997, CPL
reclassified $26 million of the contingency to reflect the effects of the CPL
1997 Final Order in its specific accounts. Approximately $15 million remained as
a Provision for the CPL 1997 Final Order at the end of the first half of 1997.
Another item for which there is no corresponding amount in 1998 was the
$35 million dollar accrual for settlement of the El Paso merger litigation
recorded in the first half of 1997.
Depreciation and amortization expense increased $10 million in the
first six months 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, as well as increases in depreciable property. Partially offsetting
this increase is reduced depreciation rates as a result of the CPL 1997 Final
Order (on non-ECOM property) and the PSO 1997 Rate Settlement Agreement.
Operating income taxes increased $24 million in the first half of 1998
compared to the same period last year due primarily to increased taxable income,
partially offset by the recognition of foreign tax benefits at SEEBOARD U.S.A.
Other income and deductions increased $12 million to $27 million in the
first six months of 1998 as compared to the same period in 1997 due to the
following items. In 1998 SEEBOARD U.S.A. recorded $4 million from the sale of
their retail business unit and $6 million of increased earnings from their
Medway power plant. Also in the first six months of 1998, C3 Communications
recorded a $5 million dollar after-tax gain on the sale of their WorldCom stock.
Reducing these increases was a litigation award that CSW Energy recorded in 1997
of $3 million.
Interest and other charges increased $35 million in the first six
months of 1998 compared to the same period last year due primarily to a $25
million increase in interest on short-term debt due to higher levels of
borrowings. Also contributing to the increase was an additional $9 million in
distributions on Trust Preferred Securities at CPL, PSO and SWEPCO resulting
from the securities being outstanding for a full six months in 1998. Also
contributing to the increase in 1998 was the absence of a $10 million gain on
reacquired preferred stock which lowered the interest and other charges in 1997.
These increases were partially offset by a $7 million reduction in interest on
long-term debt resulting from the repayment of a $60 million variable rate bank
loan. See ITEM 2. MD&A - OTHER FINANCING ISSUES for more information.
16
CPL
CENTRAL POWER AND LIGHT COMPANY
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
17
CENTRAL POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(thousands) (thousands)
Electric Operating Revenues $363,651 $301,121 $638,104 $615,782
Operating Expenses and Taxes
Fuel 108,330 83,936 181,277 162,196
Purchased power 7,976 10,550 16,534 28,151
Other operating 62,259 70,153 122,754 145,924
Provision for CPL 1997
Final Order -- (25,885) -- 15,038
Maintenance 14,468 14,450 27,525 29,433
Depreciation and amortization 42,276 39,534 83,989 77,907
Taxes, other than income 21,573 19,671 41,056 40,928
Income taxes 28,352 23,482 40,172 20,771
--------- --------- --------- ---------
285,234 235,891 513,307 520,348
--------- --------- --------- ---------
Operating Income 78,417 65,230 124,797 95,434
--------- --------- --------- ---------
Other Income and Deductions
Allowance for equity funds used
during construction (8) 288 (8) 773
Other 234 640 2,548 (1,091)
Non-operating income taxes 707 1,148 1,091 2,593
--------- --------- --------- ---------
933 2,076 3,631 2,275
--------- --------- --------- ---------
Income Before Interest Charges 79,350 67,306 128,428 97,709
--------- --------- --------- ---------
Interest Charges
Interest on long-term debt 23,567 27,143 47,066 54,118
Distributions on Trust
Preferred Securities 3,000 1,548 6,000 1,548
Interest on short-term debt
and other 4,947 1,083 14,825 8,211
Allowance for borrowed funds
used during construction (654) (633) (1,341) (1,126)
--------- --------- --------- ---------
30,860 29,141 66,550 62,751
--------- --------- --------- ---------
Net Income 48,490 38,165 61,878 34,958
Less: Preferred stock
dividends 1,801 2,177 3,609 5,610
Gain on reacquired preferred
stock -- 2,706 -- 2,706
--------- --------- --------- ---------
Net Income for Common Stock $46,689 $38,694 $58,269 $32,054
========= ========= ========= =========
The accompanying notes to consolidated financial statements as they relate to
CPL are an integral part of these statements.
18
CENTRAL POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
(unaudited) (audited)
----------- ----------
(thousands)
ASSETS
Electric Utility Plant
Production $3,116,133 $3,106,576
Transmission 525,175 517,903
Distribution 1,057,745 1,021,759
General 302,070 295,974
Construction work in progress 78,442 77,390
Nuclear fuel 201,952 196,147
---------- ----------
5,281,517 5,215,749
Less - accumulated depreciation 1,987,245 1,891,406
---------- ----------
3,294,272 3,324,343
---------- ----------
Current Assets
Cash 5,895 --
Accounts receivable 54,908 61,311
Materials and supplies, at average cost 63,035 65,290
Fuel inventory 16,386 14,816
Under-recovered fuel costs 1,602 43,229
Prepayments 2,995 2,595
---------- ----------
144,821 187,241
---------- ----------
Deferred Charges and Other Assets
Deferred STP costs 483,521 484,277
Mirror CWIP asset 278,901 285,431
Income tax related regulatory assets, net 379,351 390,149
Nuclear decommissioning trust 57,233 45,676
Other 95,744 96,193
---------- ----------
1,294,750 1,301,726
---------- ----------
$4,733,843 $4,813,310
========== ==========
The accompanying notes to consolidated financial statements as they relate to
CPL are an integral part of these statements.
19
CENTRAL POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
June 30, 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 819,552 833,282
----------- -----------
Total Common Stock Equity 1,393,440 47% 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 1,269,099 43% 1,302,266 43%
----------- ----- ----------- -----
Total Capitalization 2,975,743 100% 3,022,640 100%
----------- ----- ----------- -----
Current Liabilities
Long-term debt due within twelve months 36,000 28,000
Advances from affiliates 145,396 142,781
Accounts payable 102,312 84,160
Accrued taxes 26,536 13,558
Accumulated deferred income taxes 6,777 21,382
Accrued interest 28,509 28,379
Refund due customers -- 63,713
Other 9,374 14,551
----------- -----------
354,904 396,524
----------- -----------
Deferred Credits
Accumulated deferred income taxes 1,249,172 1,237,386
Investment tax credits 139,768 142,371
Other 14,256 14,389
----------- -----------
1,403,196 1,394,146
----------- -----------
$ 4,733,843 $ 4,813,310
=========== ===========
The accompanying notes to consolidated financial statements as they relate to
CPL are an integral part of these statements.
20
CENTRAL POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
1998 1997
--------- ---------
(thousands)
OPERATING ACTIVITIES
Net Income $61,878 $34,958
Non-cash Items Included in Net Income
Depreciation and amortization 86,011 89,050
Deferred income taxes and investment
tax credits 5,376 (20,298)
Provision for CPL 1997 Final Order -- 15,038
Refund due customers (63,713) 55,685
Changes in Assets and Liabilities
Accounts receivable 6,403 (40,889)
Material and supplies 2,255 3,125
Fuel inventory (1,570) 4,453
Fuel recovery 41,627 (5,282)
Accounts payable 18,152 36,022
Accrued taxes 12,978 2,557
Other 1,166 11,003
--------- ---------
170,563 185,422
--------- ---------
INVESTING ACTIVITIES
Construction expenditures (63,530) (73,603)
Other (3,070) 9,239
--------- ---------
(66,600) (64,364)
--------- ---------
FINANCING ACTIVITIES
Retirement of long-term debt (28,000) --
Reacquisition of preferred stock -- (84,441)
Trust Preferred Securities -- 144,861
Change in advances from affiliates 2,615 (52,525)
Payment of dividends (72,683) (54,501)
Other -- (41)
--------- ---------
(98,068) (46,647)
--------- ---------
Net Change in Cash and Cash Equivalents 5,895 74,411
Cash and Cash Equivalents at Beginning of Period -- 3,299
--------- ---------
Cash and Cash Equivalents at End of Period $5,895 $77,710
========= =========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized
(includes distributions on Trust
Preferred Securities) $52,700 $57,212
========= =========
Income taxes paid $23,021 $25,912
========= =========
The accompanying notes to consolidated financial statements as they relate to
CPL are an integral part of these statements.
21
CENTRAL POWER AND LIGHT COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED JUNE 30, 1998 AND 1997
Net income for common stock increased $8.0 million to $46.7 million
during the second quarter of 1998 from $38.7 million in the second quarter of
1997. This increase was due primarily to higher non-fuel related revenues as
well as the absence of the impact of the provision for the CPL 1997 Final Rate
Order. SEE NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and MD&A, RATES AND
REGULATORY MATTERS for more information related to the CPL 1997 Final Rate
Order.
Electric operating revenues increased $62.6 million, or 21%, to $363.7
million during the second quarter of 1998 from $301.1 million during the second
quarter of 1997. The increase was due primarily to higher fuel-related revenues
of $20.7 million and non-fuel revenues of $6.9 million as a result of a 10%
increase in MWH sales relating to weather demands, as well as the absence in
1998 of the provision for the CPL 1997 Final Rate Order. These increases were
partially offset by lower base rates as a result of the CPL 1997 Final Rate
Order.
Fuel expense increased $ 24.4 million, or 29%, due primarily to an
increase in average unit fuel costs from $1.56 per MMbtu in 1997 to $1.67 per
MMbtu in 1998, resulting from purchases of higher priced spot market natural gas
and coal. Due to higher generation and a lower volume of economy energy
purchased, purchased power for the second quarter of 1998 decreased $2.6
million, or 24%, when compared to the same period of 1997.
Other operating expenses were $62.3 million during the second quarter
of 1998, a decrease of $7.9 million from the same period of 1997. The decrease
was due primarily to the absence in 1998 of $2.3 million in expenses related to
the CPL 1997 Final Order, as well as lower transmission expenses due to a
reduction in transmission access expense, which has a corresponding decrease in
transmission access revenues. Lower customer-related expenses and
employee-related benefits also contributed to the overall decrease in operating
expenses. Depreciation and amortization increased $2.7 million for the second
quarter of 1998 due primarily to the accelerated recovery of ECOM property
recorded in 1998 related to the CPL 1997 Final Order as well as increases in
depreciable plant and capitalizable software. Partially offsetting these
increases are reduced depreciation rates on non-ECOM property related to the CPL
1997 Final Order.
Income taxes increased $4.9 million in the second quarter of 1998 as
compared to the second quarter of 1997 resulting from the prior year income tax
benefits associated with the Provision for CPL 1997 Final Order as well as an
increase in 1998 taxable income. Taxes other than income increased $1.9 million
in the second quarter of 1998 due to increased state franchise taxes.
Other income and deductions increased primarily due to interest earned
from the nuclear decommissioning trust. This interest income is offset by a like
amount of interest expense shown as interest charges in short-term debt and
other. Interest charges increased $1.7 million in the second quarter of 1998
compared to the same period last year due primarily to the $1.5 million
distribution on Trust Preferred Securities which were outstanding for only part
of the second quarter of 1997. The increase in interest charges was offset in
part by a decrease in interest on long-term debt due primarily to Series J FMB's
maturing January 1, 1998.
22
CENTRAL POWER AND LIGHT COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Net income for common stock increased $26.2 million to $58.3 million
during the first six months of 1998 from $32.1 million in the first six months
of 1997. This increase was due primarily to increased non-fuel revenue and the
absence of the 1997 recording of the provision for the CPL 1997 Final Rate
Order. SEE NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and MD&A, RATES AND
REGULATORY MATTERS for more information related to the CPL 1997 Final Rate
Order.
Electric operating revenues increased $22.3 million, or 3.6%, to $638.1
million during the first six months of 1998 from $615.8 million during the first
six months of 1997. This increase was due primarily to the absence in 1998 of
the provision for rate refund in 1997 as well as increased weather-related
demand, which was partially offset by lower base rates resulting from the CPL
1997 Final Order.
Fuel and purchased power expenses increased approximately $7.5 million
in the first six months of 1998 compared to the first six months of 1997. Fuel
expenses increased $19.1 million as a result of a 13% increase in generation,
which was offset in part by a reduction in the average unit cost of fuel. The
average unit cost of fuel declined from $1.66 per MMbtu in the first half of
1997 to $1.62 per MMbtu in the first half of 1998 due to lower spot market gas
and coal prices. Purchased power expenses decreased approximately 41% from $28.2
million in the first half of 1997 to $16.5 million in the first half of 1998 due
primarily to MWH generation meeting customer demand.
Other operating expenses were $122.8 million during the first six
months of 1998, a decrease of $23.2 million compared to the same period in 1997.
The decrease was due primarily to the absence in 1998 of the 1997 write-off of
rate case and demand side management expenditures resulting from the CPL 1997
Final Order and expenses recorded in 1997 associated with the restructuring of
CSW. Reduced nuclear operations expense in 1998 also contributed to the
decrease. Maintenance expenses decreased $1.9 million due to the scheduled
refueling of STP Unit 2 during the first half of 1997. Depreciation and
amortization expense increased $6.1 million, or 8%, for the first six months of
1998 compared to the same period last year due primarily to the accelerated
recovery of ECOM property recorded in 1998 related to the CPL 1997 Final Order
as well as increases in depreciable plant and capitalizable software. Partially
offsetting these increases are reduced depreciation rates on non-ECOM property
related to the CPL 1997 Final Order.
Income taxes increased $19.4 million in the first six months of 1998
compared to the first six months of 1997 resulting from the prior year income
tax benefits associated with the provision for the CPL 1997 Final Rate Order as
well as an increase in taxable income for the first six months of 1998.
Other income and deductions increased approximately $1.4 million due
primarily to the absence in 1998 of charges associated with the write-off of
plant development costs and interest earned from the nuclear decommissioning
trust. Interest income from the nuclear decommissioning trust is offset by a
like amount of expense shown as interest charges in short-term debt and other.
Interest charges increased $3.8 million during the first six months of 1998 when
compared to the same period of 1997 primarily as a result of higher
distributions on Trust Preferred Securities.
23
PSO
PUBLIC SERVICE COMPANY OF OKLAHOMA
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
24
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(thousands) (thousands)
Electric Operating Revenues $191,866 $166,692 $343,277 $321,857
Operating Expenses and Taxes
Fuel 76,667 58,949 138,187 121,808
Purchased power 13,700 12,515 27,297 24,440
Other operating 28,229 30,363 55,376 58,075
Maintenance 8,312 9,420 15,885 15,356
Depreciation and amortization 18,061 20,034 36,156 39,817
Taxes, other than income 8,576 7,104 15,220 14,404
Income taxes 10,250 6,696 12,282 9,668
--------- --------- --------- ---------
163,795 145,081 300,403 283,568
--------- --------- --------- ---------
Operating Income 28,071 21,611 42,874 38,289
--------- --------- --------- ---------
Other Income and Deductions
Allowance for equity funds used
during construction 71 167 226 257
Other 398 904 (218) 125
Non-operating income taxes (129) (42) 374 485
--------- --------- --------- ---------
340 1,029 382 867
--------- --------- --------- ---------
Income Before Interest Charges 28,411 22,640 43,256 39,156
--------- --------- --------- ---------
Interest Charges
Interest on long-term debt 7,619 7,619 15,237 15,237
Interest on short-term debt
and other 1,234 1,054 2,464 2,666
Distributions on Trust Preferred
Securities 1,500 968 3,000 968
Allowance for borrowed funds
used during construction (330) (443) (662) (920)
--------- --------- --------- ---------
10,023 9,198 20,039 17,951
--------- --------- --------- ---------
Net Income 18,388 13,442 23,217 21,205
Less: Preferred stock dividends 53 53 106 257
Gain on reacquired preferred stock -- 4,444 -- 4,444
--------- --------- --------- ---------
Net Income for Common Stock $18,335 $17,833 $23,111 $25,392
========= ========= ========= =========
The accompanying notes to consolidated financial statements as they relate to
PSO are an integral part of these statements.
25
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
(unaudited) (audited)
----------- ----------
ASSETS (thousands)
Electric Utility Plant
Production $913,497 $907,735
Transmission 376,641 375,111
Distribution 837,814 818,806
General 204,527 197,264
Construction work in progress 36,355 40,992
---------- ----------
2,368,834 2,339,908
Less - Accumulated depreciation
and amortization 1,066,355 1,031,322
---------- ----------
1,302,479 1,308,586
---------- ----------
Current Assets
Cash 6,387 2,171
Accounts receivable 45,737 34,974
Materials and supplies, at average cost 32,975 32,211
Fuel inventory 14,962 11,427
Accumulated deferred income taxes 1,889 --
Prepayments and other 1,624 3,366
---------- ----------
103,574 84,149
---------- ----------
Deferred Charges and Other Assets 56,093 54,946
---------- ----------
$1,462,146 $1,447,681
========== ==========
The accompanying notes to consolidated financial statements as they relate to
PSO are an integral part of these statements.
26
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
(unaudited) (audited)
----------- -----------
CAPITALIZATION AND LIABILITIES (thousands)
Capitalization
Common stock: $15 par value
Authorized shares: 11,000,000
Issued shares: 10,482,000
Outstanding shares: 9,013,000 $ 157,230 $ 157,230
Paid-in capital 180,000 180,000
Retained earnings 142,107 136,996
----------- -----------
Total Common Stock Equity 479,337 52% 474,226 49%
----------- ----- ----------- -----
Preferred stock 5,287 1% 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 367,582 39% 421,821 43%
----------- ----- ----------- -----
Total Capitalization 927,206 100% 976,334 100%
----------- ----- ----------- -----
Current Liabilities
Long-term debt due within twelve months 55,000 --
Advances from affiliates 3,740 4,874
Payables to affiliates 24,633 29,011
Accounts payable 55,508 55,179
Payables to customers 17,401 18,837
Accumulated deferred income taxes -- 2,262
Accrued interest 8,887 9,090
Other 6,840 4,178
----------- -----------
172,009 123,431
----------- -----------
Deferred Credits
Accumulated deferred income taxes 276,127 258,848
Investment tax credits 40,260 41,160
Income tax related regulatory
liabilities, net 40,157 41,793
Other 6,387 6,115
----------- -----------
362,931 347,916
----------- -----------
$ 1,462,146 $ 1,447,681
=========== ===========
The accompanying notes to consolidated financial statements as they relate to
PSO are an integral part of these statements.
27
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
-----------------------
1998 1997
-------- --------
OPERATING ACTIVITIES (thousands)
Net Income $23,217 $21,205
Non-cash Items Included in Net Income
Depreciation and amortization 37,698 42,756
Deferred income taxes and
investment tax credits 10,592 (4,033)
Changes in Assets and Liabilities
Accounts receivable (10,763) (13,883)
Prepayments and other 1,742 (1,152)
Accounts payable (5,950) (7,340)
Accrued taxes (292) 14,194
Other (2,140) (2,166)
-------- --------
54,104 49,581
-------- --------
INVESTING ACTIVITES
Construction expenditures (27,574) (38,793)
Other (3,074) (1,713)
-------- --------
(30,648) (40,506)
-------- --------
FINANCING ACTIVITIES
Change in advances from affiliates (1,134) (42,867)
Proceeds from the issuance of
Trust Preferred Securities -- 72,520
Reacquisition of preferred stock -- (10,090)
Payment of dividends (18,106) (17,378)
-------- --------
(19,240) 2,185
-------- --------
Net Change in Cash and Cash Equivalents 4,216 11,260
Cash and Cash Equivalents at Beginning of Period 2,171 1,479
-------- --------
Cash and Cash Equivalents at End of Period $6,387 $12,739
======== ========
SUPPLEMENTARY INFORMATION
Interest paid less amounts
capitalized (includes distributions
on Trust Preferred Securities) $19,348 $17,558
======== ========
Income taxes paid $7,524 $8,788
======== ========
The accompanying notes to consolidated financial statements as they relate to
PSO are an integral part of these statements.
28
PUBLIC SERVICE COMPANY OF OKLAHOMA
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED JUNE 30, 1998 AND 1997
Net income for common stock was $18.3 million for the second quarter of
1998, a 3% increase, or $0.5 million above the equivalent period of 1997. The
increase resulted primarily from higher non-fuel revenues, the absence in 1998
of a provision for rate refund and decreased depreciation expense. The increase
was offset in part by the absence in 1998 of a gain on the reacquisition of
preferred stock.
Electric operating revenues were $191.9 million during the second
quarter of 1998, a 15% increase from $166.7 million in the second quarter of
1997. This increase was due primarily to increases in non-fuel and fuel-related
revenues of $16.0 million and $14.5 million, respectively. The increase in
non-fuel revenue is due primarily to a 13% increase in retail MWH sales
resulting from warmer weather, as well as the absence in 1998 of a $3.1 million
provision for rate refund. The increase in fuel revenue was due primarily to
higher fuel expense, as discussed below. The increase was partially offset by
lower base rates resulting from the PSO 1997 Rate Settlement Agreement in the
amount of $8.4 million.
Fuel expenses increased $17.7 million, or 30%, during the second
quarter of 1998 compared to the second quarter of 1997 resulting primarily from
a 58% increase in gas powered generation and a $3.9 million increase in the
recovery of deferred fuel costs. Gas generation increased due to higher
weather-related demand and coal plant outages. Purchased power expenses
increased 9% to $13.7 million for the second quarter of 1998 from $12.5 million
in the same period of 1997. This increase was due primarily to greater amounts
of economy energy purchases.
Other operating expenses were $28.2 million during the second quarter
of 1998, a decrease of $2.1 million from the comparable period of 1997. The
decrease resulted primarily from lower customer accounting and customer service
expenses as well as the absence of a 1997 employee related expense resulting
from changes to a vehicle program. Maintenance expense decreased $1.1 million,
or 12%, as a result of lower general building maintenance and distribution
overhead line expenses. Depreciation and amortization expense decreased 10% to
$18.1 million in the second quarter of 1998 from $20.0 million in the second
quarter of 1997. This decrease was due primarily to lower depreciation rates as
a result of the PSO 1997 Rate Settlement Agreement, offset in part by an
increase in depreciable property.
Taxes other than income were $1.5 million higher in the second quarter
of 1998 than the same period of 1997 due primarily to increased ad valorem tax
expenses. Operating income taxes increased from $6.7 million in the second
quarter of 1997 compared to $10.3 million in the same period of 1998 due
primarily to higher taxable income in 1998. Interest charges increased $0.8
million, or 9%, during the second quarter of 1998 when compared to the same
period of 1997 primarily as a result of distributions on Trust Preferred
Securities which were issued in May 1997.
29
PUBLIC SERVICE COMPANY OF OKLAHOMA
RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Net income for common stock was $23.1 million for the first half of
1998, a 9% decrease compared to $25.4 million for the equivalent period of 1997.
The decrease resulted primarily from the impact of the PSO 1997 Rate Settlement
Agreement, the absence in 1998 of a gain on the reacquisition of preferred
stock, and higher interest expenses. The decrease was offset in part by higher
retail MWH sales.
Electric operating revenues were $343.3 million during the first six
months of 1998, a 7% increase from $321.9 million during the same period of
1997. This increase was due primarily to higher non-fuel and fuel-related
revenues of $16.4 million and $17.5 million, respectively. The higher non-fuel
revenue is due primarily to a 9% increase in retail MWH sales resulting from
warmer weather, as well as the absence in 1998 of a $3.2 million provision for
rate refund. The increase in fuel revenue was due primarily to higher fuel
expense, as discussed below. The increase was partially offset by lower base
rates resulting from the PSO 1997 Rate Settlement Agreement in the amount of
$15.7 million.
Fuel expenses increased $16.4 million, or 13%, during the first half of
1998 compared to the first half of 1997 resulting primarily from an increase in
the recovery of deferred fuel costs as well as a 37% increase in gas powered
generation. Partially offsetting this increase were lower average unit costs of
fuel. The average unit cost of fuel declined from $1.90 per MMbtu in the first
six months of 1997 to $1.79 per MMbtu in the first six months of 1998 due
primarily to lower spot market gas and coal prices. Purchased power expenses
increased 12% to $27.3 million for the first six months of 1998 from $24.4
million in the same period of 1997. This increase was due primarily to greater
amounts of economy energy purchases and higher emergency pool energy purchases
associated with higher weather-related demand in the first six months of 1998
and a plant outage in the first quarter of 1998, partially offset by lower
cogeneration purchases.
Other operating expenses were $55.4 million during the first six months
of 1998, a decrease of $2.7 million from the comparable period of 1997. This
decrease was primarily the result of lower employee pension benefits offset in
part byhigher distribution meter and overhead line expenses. Maintenance
expenses increased $0.5 million, or 3%, in the first half of 1998 when compared
to the first half of 1997. This increase is attributable to higher production
expenses as a result of costs associated with the restart of a power plant
generating unit that was in storage, as well as higher tree trimming expenses
offset in part by lower general building maintenance. Depreciation and
amortization expense decreased 9% to $36.2 million in 1998 from $39.8 million in
1997. This decrease was due primarily to lower depreciation rates as a result
of the PSO 1997 Rate Settlement Agreement offset in part by additions of
depreciable property.
Taxes other than income were $0.8 million higher in the first half of
1998 when compared to the same period in 1997 as a result of higher ad valorem
tax expenses. Operating income taxes were $12.3 million in the first six months
of 1998 compared to $9.7 million in the same period of 1997 due primarily to
higher taxable income in 1998. Interest charges increased $2.1 million, or 12%
during the first six months of 1998 when compared to the same period of 1997 as
a result of higher distributions on Trust Preferred Securities.
30
SWEPCO
SOUTHWESTERN ELECTRIC POWER COMPANY
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
31
SOUTHWESTERN ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(thousands) (thousands)
Electric Operating Revenues $246,936 $227,327 $444,495 $430,607
--------- --------- --------- ---------
Operating Expenses and Taxes
Fuel 98,087 90,987 174,320 178,583
Purchased power 11,664 5,309 18,003 10,440
Other operating 33,228 33,208 64,322 65,756
Maintenance 13,160 12,399 23,429 21,439
Depreciation and amortization 24,826 23,604 49,629 47,028
Taxes, other than income 15,558 12,698 29,080 26,093
Income taxes 11,087 10,765 17,253 16,837
--------- --------- --------- ---------
207,610 188,970 376,036 366,176
--------- --------- --------- ---------
Operating Income 39,326 38,357 68,459 64,431
--------- --------- --------- ---------
Other Income and Deductions
Allowance for equity funds
used during construction 44 176 706 176
Other 197 216 (102) (792)
Non-operating income taxes 343 462 1,212 1,173
--------- --------- --------- ---------
584 854 1,816 557
--------- --------- --------- ---------
Income Before Interest Charges 39,910 39,211 70,275 64,988
--------- --------- --------- ---------
Interest Charges
Interest on long-term debt 9,808 10,278 19,617 20,820
Distributions on Trust
Preferred Securities 2,166 1,398 4,331 1,398
Interest on short-term debt
and other 2,478 1,479 4,197 3,591
Allowance for borrowed funds
used during construction (437) (343) (697) (742)
--------- --------- --------- ---------
14,015 12,812 27,448 25,067
--------- --------- --------- ---------
Net Income 25,895 26,399 42,827 39,921
Less: Preferred stock dividends 57 575 591 1,333
Gain (Loss) on reacquired
preferred stock (856) 2,180 (855) 2,180
--------- --------- --------- ---------
Net Income for Common Stock $24,982 $28,004 $41,381 $40,768
========= ========= ========= =========
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
32
SOUTHWESTERN ELECTRIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
(unaudited) (audited)
---------- ----------
(thousands)
ASSETS
Electric Utility Plant
Production $1,396,824 $1,391,676
Transmission 466,996 456,401
Distribution 900,606 870,378
General 314,197 311,323
Construction work in progress 45,088 51,665
---------- ----------
3,123,711 3,081,443
Less - Accumulated depreciation 1,276,251 1,225,865
---------- ----------
1,847,460 1,855,578
---------- ----------
Current Assets
Cash 12,189 2,298
Accounts receivable 87,068 81,507
Materials and supplies, at average cost 24,102 24,523
Fuel inventory 37,575 26,415
Under-recovered fuel cost 15,957 13,013
Prepayments and other 18,847 13,678
---------- ----------
195,738 161,434
---------- ----------
Deferred Charges and Other Assets 77,855 77,734
---------- ----------
$2,121,053 $2,094,746
========== ==========
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
33
SOUTHWESTERN ELECTRIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS
June 30, 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 337,430 324,050
---------- ----------
Total Common Stock Equity 718,090 52% 704,710 51%
---------- ---- ---------- -----
Preferred stock
Not subject to mandatory redemption 4,707 4,709
Subject to mandatory redemption -- 25,930
---------- ----------
4,707 --% 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 547,657 40% 547,751 39%
---------- ---- ---------- -----
Total Capitalization 1,380,454 100% 1,393,100 100%
---------- ---- ---------- -----
Current Liabilities
Long-term debt and preferred stock
due within twelve months 2,911 3,555
Advances from affiliates 60,222 25,175
Accounts payable 62,377 73,582
Payables to affiliates 61,963 63,583
Customer deposits 12,878 14,359
Accrued taxes 30,132 12,884
Accumulated deferred income taxes 5,625 4,594
Accrued interest 14,169 13,425
Other 12,166 9,551
---------- ----------
262,443 220,708
---------- ----------
Deferred Credits
Accumulated deferred income taxes 396,960 395,909
Investment tax credits 64,513 66,845
Income tax related regulatory
liabilities, net 7,159 10,072
Other 9,524 8,112
---------- ----------
478,156 480,938
---------- ----------
$2,121,053 $2,094,746
========== ==========
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
34
SOUTHWESTERN ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
------------------------
1998 1997
--------- ---------
(thousands)
OPERATING ACTIVITIES
Net Income $42,827 $39,921
Non-cash Items Included in Net Income
Depreciation and amortization 52,156 49,272
Deferred income taxes and investment
tax credits (3,163) (429)
Changes in Assets and Liabilities
Accounts receivable (5,561) 12,154
Fuel inventory (11,160) 14,519
Prepayments and other (5,169) (909)
Accounts payable (10,201) 9,320
Payables to affiliates (1,620) (6,800)
Accrued taxes 17,248 8,176
Other current liabilities 2,615 (15,422)
Other (659) (6,468)
--------- ---------
77,313 103,334
--------- ---------
INVESTING ACTIVITIES
Construction expenditures (41,869) (48,708)
Other (2,466) (2,125)
--------- ---------
(44,335) (50,833)
--------- ---------
FINANCING ACTIVITIES
Redemption of preferred stock (27,988) (13,300)
Retirement of long-term debt (1,079) (51,200)
Change in advances from affiliates 35,047 (57,495)
Trust Preferred Securities -- 106,393
Payment of dividends (29,067) (28,066)
--------- ---------
(23,087) (43,668)
--------- ---------
Net Change in Cash and Cash Equivalents 9,891 8,833
Cash and Cash Equivalents at Beginning of Period 2,298 1,879
--------- ---------
Cash and Cash Equivalents at End of Period $12,189 $10,712
========= =========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized
(includes distributions on Trust
Preferred Securities) $25,660 $25,645
========= =========
Income taxes paid $16,781 $12,441
========= =========
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
35
SOUTHWESTERN ELECTRIC POWER COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED JUNE 30, 1998 AND 1997
Net income for common stock for the second quarter of 1998 was $25.0
million, a decrease of $3.0 million, or 11%, from the same period of 1997. The
decrease resulted primarily from increased operating expenses and taxes,
increased interest expense and the loss on reacquisition of preferred stock in
1998 as well as the gain on the reacquisition of preferred stock in the second
quarter of 1997. The decrease was offset in part by increased non-fuel revenues.
Electric operating revenues increased $19.6 million, or 9% to $246.9
million during the second quarter of 1998 from $227.3 million during the second
quarter of 1997. The increase was due to a $15 million increase in non-fuel
revenue as a result of a 13% increase in retail MWH sales attributable to warmer
weather. Fuel revenue increased $11.4 million as discussed below. The operating
income increase was partially offset by a provision for rate refund of $3.6
million in connection with the annual determination of cost of service formula
rates for SWEPCO's wholesale customers, and a $3.2 million reduction in fuel
revenue in accordance with a Texas Commission order in SWEPCO's fuel
reconciliation regarding transmission equalization expense recovery. Reference
is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional
discussion of SWEPCO's fuel proceedings.
Fuel expense increased $7.1 million, or 8%, for the second quarter of
1998 compared to the second quarter of 1997 due primarily to increased
weather-related demand and an increase in average unit fuel cost from $1.70 per
MMbtu in 1997 to $1.83 per MMbtu in 1998 resulting from an increase in higher
cost natural gas generation. Purchased power expenses for the second quarter of
1998 increased $6.4 million compared to the same period of 1997 due primarily to
an increase in economy energy purchases.
Depreciation and amortization increased $1.2 million for the second
quarter of 1998 due primarily to increases in depreciable plant and
capitalizable software. Taxes, other than income increased $2.9 million, or 23%,
primarily as a result of increased ad valorem taxes due to higher assessed
values.
Interest charges increased $1.2 million due primarily to distributions
on Trust Preferred Securities which were outstanding for only part of the second
quarter of 1997, as well as increased short-term borrowings.
36
SOUTHWESTERN ELECTRIC POWER COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Net income for common stock for the six months ended June 30, 1998 was
$41.4 million, an increase of $0.6 million, or 2%, from $40.8 for the same
period of 1997. The increase resulted primarily from increased non-fuel
revenues, offset in part by an increase in operating and maintenance expenses,
increased interest charges and the loss on reacquisition of preferred stock in
1998 as well as the gain on reacquisition of preferred stock in 1997.
Electric operating revenues increased $13.9 million, or 3%, to $444.5
million during the six months period ended June 30, 1998 from $430.6 million
during the same period of 1997. The increase was due to higher non-fuel revenue
of $16.2 million resulting from a 6% increase in weather-related MWH sales and
increased fuel revenue of $4.5 million. The increase was offset in part by a
provision for rate refund of $3.6 million in connection with the annual
determination of cost of service formula rates for SWEPCO's wholesale customers
and a $3.2 million reduction in fuel revenue in accordance with a Texas
Commission order in SWEPCO's fuel reconciliation regarding transmission
equalization expense recovery. Reference is made to NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS for additional discussion of SWEPCO's Fuel Proceedings.
Fuel expense decreased $4.3 million, or 2%, for the six month period
ended June 30, 1998 when compared to the same period of 1997 due primarily to a
decrease in generation and a decrease in the average unit fuel cost which
resulted from purchases of lower priced spot-market natural gas and coal.
Purchased power expense for the six month period ended June 30, 1998 increased
$7.6 million when compared to the same period of 1997 due primarily to an
increase in economy energy purchases.
Other operating expenses were $64.3 million during the first six months
of 1998, a decrease of $1.4 million or 2% from the comparable period of 1997.
The decrease was due primarily to lower employee-related expenses and additional
restructuring expenses recorded in the first six months of 1997. Maintenance
expenses increased $2.0 million, or 9%, as a result of increased overhead lines
expense from wind storm damage and increased power station maintenance expenses.
Depreciation and amortization expense increased $2.6 million, or 6%, for the
first six months of 1998 due primarily to increases in depreciable plant and
capitalizable software. Taxes, other than income increased $3.0 million, or 11%,
as a result of increased ad valorem taxes due to higher assessed values.
Other income and deductions increased $1.3 million due primarily to the
absence in 1998 of charges associated with the write-off of certain plant
development costs recorded in the first quarter of 1997. In addition, allowance
for equity funds used during construction increased in 1998.
Interest charges increased $2.4 million due primarily to distributions
on Trust Preferred Securities which were outstanding for only part of the second
quarter of 1997 and increased short-term borrowings.
37
WTU
WEST TEXAS UTILITIES COMPANY
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
38
WEST TEXAS UTILITIES COMPANY
STATEMENTS OF INCOME
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(thousands) (thousands)
Electric Operating Revenues $104,353 $91,237 $188,301 $183,883
Operating Expenses and Taxes
Fuel 31,454 27,026 56,684 59,911
Purchased power 12,754 7,028 20,663 18,425
Other operating 20,474 22,408 42,861 43,118
Maintenance 3,720 4,071 6,906 7,155
Depreciation and amortization 10,719 10,236 21,389 20,327
Taxes, other than income 6,626 5,704 12,180 11,800
Income taxes 4,137 2,789 5,081 3,287
--------- --------- --------- ---------
89,884 79,262 165,764 164,023
--------- --------- --------- ---------
Operating Income 14,469 11,975 22,537 19,860
--------- --------- --------- ---------
Other Income and Deductions
Allowance for equity funds
used during construction 97 -- 229 99
Other 719 378 1,498 223
Non-operating income taxes (68) (27) 23 176
--------- --------- --------- ---------
748 351 1,750 498
--------- --------- --------- ---------
Income Before Interest Charges 15,217 12,326 24,287 20,358
--------- --------- --------- ---------
Interest Charges
Interest on long-term debt 5,088 5,088 10,176 10,176
Interest on short-term debt
and other 1,085 1,469 2,088 2,783
Allowance for borrowed funds used
during construction (177) (237) (288) (467)
--------- --------- --------- ---------
5,996 6,320 11,976 12,492
--------- --------- --------- ---------
Net Income 9,221 6,006 12,311 7,866
Less: Preferred stock dividends 26 26 52 92
Gain on Reacquired preferred stock -- 1,183 -- 1,183
--------- --------- --------- ---------
Net Income for Common Stock $9,195 $7,163 $12,259 $8,957
========= ========= ========= =========
The accompanying notes to financial statements as they relate to WTU are an
integral part of these statements.
39
WEST TEXAS UTILITIES COMPANY
BALANCE SHEETS
June 30, December 31,
1998 1997
(unaudited) (audited)
---------- ----------
ASSETS (thousands)
ELECTRIC UTILITY PLANT
Production $418,247 $417,849
Transmission 211,592 208,905
Distribution 372,674 363,911
General 107,453 104,026
Construction work in progress 21,946 14,154
---------- ----------
1,131,912 1,108,845
Less - Accumulated depreciation 457,620 441,281
---------- ----------
674,292 667,564
---------- ----------
CURRENT ASSETS
Cash 4,105 811
Advances to affiliates -- 19,802
Accounts receivable 23,750 10,570
Materials and supplies, at
average cost 12,339 14,246
Fuel inventory 14,415 12,471
Under-recovered fuel costs 12,212 11,968
Prepayments and other 6,520 4,006
---------- ----------
73,341 73,874
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred Oklaunion costs 16,774 18,637
Restructuring costs 8,022 8,966
Other 32,989 33,107
---------- ----------
57,785 60,710
$805,418 $802,148
========== ==========
The accompanying notes to financial statements as they relate to WTU are an
integral part of these statements.
40
WEST TEXAS UTILITIES COMPANY
BALANCE SHEETS
June 30, 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 123,738 119,479
---------- ---------
263,188 48% 258,929 48%
---------- ------ --------- -----
Preferred stock 2,483 1% 2,483 --%
Long-term debt 280,426 51% 278,640 52%
---------- ------ --------- -----
546,097 100% 540,052 100%
---------- ------ --------- -----
CURRENT LIABILITIES
Advances from affiliates 1,690 --
Payables to affiliates 13,142 21,569
Accounts payable 34,660 29,521
Accrued taxes 13,018 11,375
Accumulated deferred income taxes 210 203
Accrued interest 4,199 4,525
Other 5,832 3,859
---------- ---------
72,751 71,052
---------- ---------
DEFERRED CREDITS
Accumulated deferred income taxes 144,198 149,346
Investment tax credits 27,258 27,918
Income tax related regulatory
liabilities, net 10,799 9,482
Other 4,315 4,298
---------- ---------
186,570 191,044
---------- ---------
$805,418 $802,148
========== =========
The accompanying notes to financial statements as they relate to WTU are an
integral part of these statements.
41
WEST TEXAS UTILITIES COMPANY
STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended
June 30,
-----------------------
1998 1997
-------- --------
OPERATING ACTIVITIES (thousands)
Net Income $12,311 $7,866
Non-cash Items Included in Net Income
Depreciation and amortization 21,919 21,195
Deferred income taxes and
investment tax credits (4,484) 2,021
Changes in Assets and Liabilities
Accounts receivable (13,180) (8,818)
Accounts payable 5,452 7,605
Accrued taxes 1,643 (4,702)
Fuel recovery (244) (6,055)
Other (7,670) (5,007)
-------- --------
15,747 14,105
-------- --------
INVESTING ACTIVITES
Construction expenditures (22,864) (13,495)
Other (3,029) (785)
-------- --------
(25,893) (14,280)
-------- --------
FINANCING ACTIVITIES
Change in advances from affiliates 1,690 10,928
Redemption of preferred stock -- (2,624)
Payment of dividends (8,052) (8,132)
-------- --------
(6,362) 172
-------- --------
Net Change in Cash and Cash Equivalents (16,508) (3)
Cash and Cash Equivalents at Beginning of Period 20,613 664
-------- --------
Cash and Cash Equivalents at End of Period $4,105 $661
======== ========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $8,714 $10,534
======== ========
Income taxes paid $5,540 $2,931
======== ========
The accompanying notes to financial statements as they relate to WTU are an
integral part of these statements.
42
WEST TEXAS UTILITIES COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED JUNE 30, 1998 AND 1997
Net income for common stock for the second quarter of 1998 was $9.2
million compared to $7.2 million in the second quarter of 1997. The increase was
the result of higher non-fuel revenues offset by increased operating expenses
and taxes. The change also reflects the recognition of the gain on the
reacquired preferred stock in the second quarter of 1997.
Electric operating revenues were $104.4 million in the second quarter
of 1998, a 14% change from $91.2 million in the second quarter of 1997. The rise
in operating revenues was attributable to increases in fuel and non-fuel related
revenues of $7.7 million and $5.4 million, respectively. The change in non-fuel
related revenue was due primarily to a 17% rise in customer demand resulting
from warmer weather. Fuel related revenue was higher as a result of higher fuel
costs, as discussed below.
Fuel expenses for the second quarter of 1998 were $31.5 million for an
increase of $4.4 million, or 16%, compared to the second quarter of 1997 as a
result of a 14% increase in generation and an increase in the average unit cost
of fuel. The average unit cost of fuel rose from $1.77 per MMbtu in the second
quarter of 1997 to $1.85 per MMbtu during the second quarter of 1998. This rise
in the average unit cost of fuel was due primarily to a shift in the generating
mix, resulting from a planned coal plant outage. Purchased power expense also
increased as a result of this planned coal plant outage and additional economy
energy purchases.
Other operating expenses declined $1.9 million in the second quarter of
1998 when compared to 1997 as a result of a $1.6 million decrease in
transmission expense and lower customer-related expenses.
Taxes other than income were $6.6 million in the second quarter of 1998
compared to $5.7 million in the comparable period for 1997. The increase was due
primarily to increases in state franchise and ad valorem taxes. Operating income
taxes increased $1.3 million in the second quarter of 1998 as compared to the
second quarter of 1997 due primarily to higher taxable income.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Net income for common stock during the first six months of 1998 was
$12.3 million compared to $9.0 million in the first six months of 1997. This
increase was due primarily to a rise in non-fuel revenue, a reduction in
interest expense on short-term debt, and offset by an increase in income taxes.
The change also reflects the recognition of the gain on reacquired preferred
stock in the first half of 1997.
Electric operating revenues were $188.3 million for the first six
months of 1998, an increase of $4.4 million, or 2%, compared to the first six
months of 1997. This result was due to an $8.2 million increase in non-fuel
revenue resulting from weather-related demand, offset by a decrease in fuel
related revenue of $3.8 million.
Fuel expenses decreased $3.2 million, or 5%, for the first six months
of 1998 as compared to the first six months of 1997. This decline was due to a
reduction in the average unit fuel costs from $2.08 per
43
WEST TEXAS UTILITIES COMPANY
RESULTS OF OPERATIONS
MMbtu in the first six months of 1997 to $1.90 MMbtu in the comparable period in
1998. The decrease in average unit fuel costs is a result of the reduction in
the spot market price of natural gas. Purchased power expense increased $2.2
million, or 12%, for the first six months of 1998 compared to the first six
months of 1997 as a result of additional economy energy purchases.
Operating income taxes were $5.1 million for the first six months of
1998 compared to $3.3 million the first six months of 1997 for an increase of
$1.8 million as a result of higher taxable income.
Other income increased $1.3 million due to an increase in income associated with
merchandise sales, temporary cash investments, and under-recovered fuel cost.
Interest expense declined $0.5 million in the first six months of 1998 when
compared to the comparable period in 1997 due to a reduction in the amount of
short-term debt.
44
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. SHORT-TERM AND LONG-TERM CSW, CPL, PSO, SWEPCO
FINANCING
NOTE 8. NEW ACCOUNTING STANDARD CSW, CPL, PSO, SWEPCO, WTU
45
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. PRINCIPLES OF PREPARATION
The condensed financial statements of the Registrants 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 and the Registrants' Combined Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998.
The unaudited financial information reflects all adjustments which are,
in the opinion of management of such Registrant, necessary for a fair statement
of the results of operations for the interim periods. Information for quarterly
periods is affected by seasonal variations in sales, rate changes, timing of
fuel expense recovery and other factors.
The financial statements of 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 balance sheet
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 CPL's consolidated balance sheets as Nuclear decommissioning trust
with a corresponding amount accrued in Accumulated depreciation. On CSW's
consolidated balance sheets, the irrevocable trust is included in Deferred
Charges and Other Assets, Other with a corresponding amount accrued in
Accumulated depreciation. In CSW's and CPL's consolidated statements of income,
46
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 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
Consistent with the requirements of SFAS 131, CSW's has presented
consolidated statements of comprehensive income. Comprehensive income is defined
as the change in equity (net assets) of a business enterprise during a period
from transactions and other events and circumstances from non-owner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners.
RECLASSIFICATIONS
Certain financial statement items for prior periods 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 and Combined Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998 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. 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
47
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 on May 1, 1999.
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 applied on May 1, 1998 and to be applied on May 1, 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. The court denied the temporary injunction and the "Glide Path" rate
reduction was implemented in May 1998. 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.
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 LITIGATION
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 and 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 valid
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 LITIGATION
In April 1998, Valero filed suit against CPL in Nueces County, Texas
District Court, alleging claims for breach of contract and negligence. Valero's
suit seeks in excess of $11 million as damages for property loss and lost
profits allegedly incurred after an interruption of electricity to its facility
in Corpus Christi, Texas in April 1996. Management cannot predict the outcome of
this litigation. However, management believes that CPL has valid defenses to
Valero's claims and intends to defend the matter vigorously. Management also
believes that the 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.
48
CPL AND WTU COMPLAINT VERSUS TEXAS UTILITIES ELECTRIC COMPANY
(DOCKET NO. 17285)
A joint complaint filed by CPL and WTU with the Texas Commission
asserted that since January 1, 1997, Texas Utilities Electric Company has been
effectively double charging for transmission service within ERCOT. A proposal
for decision received in February 1998 recommends approval of a CPL and 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 approved the proposal in June 1998. After the Texas Commission
approved the proposal in June 1998, Texas Utilities Electric Company requested
and received a rehearing with the Texas Commission. In July 1998, the Texas
Commission reaffirmed its approval of the CPL and WTU proposal.
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 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 $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 whether transmission equalization payments should be included in
fuel or base revenues. 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 $6.0
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.
On April 8, 1998, the ALJ 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 recommended that SWEPCO be allowed to include transmission
equalization expense in eligible fuel expense. On May 19, 1998, the Texas
Commission reversed the ALJ and did not allow SWEPCO to recover its transmission
equalization payments as a component of eligible fuel expense. This ruling
resulted in an earnings reduction of $1.8 million. On June 8, 1998, SWEPCO filed
a motion for rehearing on the transmission equalization issue which was denied
through operation of law. SWEPCO has filed an appeal regarding this matter in
the State District Court of Travis County.
49
After the Texas Commission's order on May 19, 1998, SWEPCO had still
under-recovered its fuel and fuel related expenses. On July 1, 1998, the Texas
Commission issued an order allowing SWEPCO to surcharge its Texas retail
customers $6.9 million of under-recovered fuel and fuel related expenses and
associated interest. The surcharge began in July 1998 and will end in June 1999.
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 which would have benefited 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. On June 5, 1998 the
motion for rehearing was denied and the court reaffirmed the judgment of the
court of appeals. SWEPCO does not plan additional litigation for this lawsuit.
No financial impact resulted from these proceedings other than the legal
expenses which were expensed as incurred.
WTU FUEL PROCEEDING
On December 31, 1997, WTU filed with the Texas Commission an
application to reconcile fuel costs and to request authorization to carry the
reconciled balance forward into the next reconciliation period. WTU did not seek
a surcharge of the reconciled balance in the December 31, 1997 filing.
During the reconciliation period of July 1, 1994 through June 30, 1997,
WTU incurred approximately $422 million in eligible fuel and fuel-related
expenses to generate and purchase electricity. The Texas jurisdictional
allocation of such fuel and fuel-related expenses is approximately $295 million.
In March 1998, WTU filed with the Texas Commission an Application for
Authority to Implement an increase in fuel factors of $7.4 million, or 7.3%, on
an annual basis. Additionally, WTU proposed to implement a fuel surcharge of
$6.8 million, including accumulated interest, over a six month period to collect
its under-recovered fuel costs. WTU implemented the revised fuel factors with
its June 1998 billings.
On June 11, 1998, WTU amended its application to reconcile fuel costs
to remove a credit from the calculation of eligible fuel in the amount of $3
million related to transmission equalization payments. This amendment was a
result of the Texas Commission's ruling concerning transmission equalization
payments in the SWEPCO fuel reconciliation described above. Hearings are
scheduled to begin in the fourth quarter of 1998.
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.
50
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 June 30, 1998, the
maximum amount SWEPCO believes it could potentially assume is $95 million.
However, the maximum amount may vary as the mining contractor's need for funds
fluctuates. The contractor's actual obligation outstanding at June 30, 1998 was
$65 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
51
and property insurance for STP, including premiums and assessments, on a pro
rata basis, according to each owner's respective ownership interest in STP.
CPL purchased, for its own account, a NEIL I Business Interruption
and/or Extra Expense policy. This insurance will reimburse CPL for extra
expenses incurred for replacement generation or purchased power as the result of
a covered accident that shuts down production at one or both of the STP Units
for more than 21 consecutive weeks. In the event of an outage of STP Units 1 and
2 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
As previously reported, Cajun filed a petition for reorganization under
Chapter 11 of the United States Bankruptcy Code on December 21, 1994 and is
currently operating under the supervision of the United States Bankruptcy Court
for the Middle District of Louisiana.
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.
On September 3, 1997, the bankruptcy court confirmed SWEPCO's right to
assist the Cajun Members Committee with $1 million in legal fees and expenses,
pending court review to assure that specific fees and expenses were reasonable.
SWEPCO and the Cajun Members Committee also are co-plaintiffs in litigation
regarding a central issue in the bankruptcy case - whether a competing plan
supported by the Cajun trustee can force the cooperatives to buy power for 25
years under the nonconsensual arrangements contained in that plan.
The SWEPCO Plan, filed March 18, 1998, replaces plans filed previously
by SWEPCO on January 15, 1998, October 26, 1996, September 30, 1996 and April
19, 1996. 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.
In a June 16, 1998 ruling and a June 19, 1998 order, the U.S. District
Court disagreed with the September 3, 1997 findings and conclusions of the
bankruptcy court and reversed that court's order. The district court's ruling
52
immediately disqualified the reorganization plan proposed by SWEPCO and the
Cajun Members Committee and ordered the cooperatives to return their portions of
the expense assistance to SWEPCO. The cooperatives have returned the funds to
SWEPCO.
On June 26, 1998, the U.S. District Court denied an emergency motion by
SWEPCO and the Cajun Members Committee to stay the ruling pending their appeal.
SWEPCO and the Cajun Members Committee then filed their request for a stay and
expedited appeal to the U.S. Fifth Circuit Court of Appeals.
The bankruptcy court extended the deadline for final reply briefs from
July 2, 1998 to July 7, 1998 and allowed SWEPCO and the Cajun Members Committee
to file briefs, which they did. Confirmation hearings on the reorganization
plans began in December 1996 and concluded in May 1998 with final legal briefs
submitted July 7, 1998.
On July 11, 1998, the U.S. Fifth Circuit Court of Appeals granted a
request by SWEPCO and the Cajun Members Committee to stay a ruling that
disqualified their reorganization plan for Cajun. The U.S. Fifth Circuit Court
of Appeals also granted a stay of the bankruptcy proceedings pending the appeal
and ordered expedited consideration of the appeal The U.S. Fifth Circuit Court
of Appeals set oral arguments on appeal for August 4, 1998 and, on August 11,
1998, overturned the U.S. District Court ruling that disqualified the SWEPCO
plan from competing in the Cajun bankruptcy reorganization process. The U.S.
Fifth Circuit Court of Appeals said the U.S. District Court erred in reversing
the bankruptcy court, which originally had determined that $1 million in
assistance payments from SWEPCO to the Members Committee did not constitute
vote-buying and were completely legal. The bankruptcy court concluded
confirmation hearings in May 1998, received final briefs in July 1998 and can
confirm a plan at any time now that the U.S. Fifth Circuit Court of Appeals has
lifted a stay that had been granted pending the appeal by SWEPCO and the Cajun
Members Committee.
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 respective board of directors
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 June 30, 1998, SWEPCO had deferred $9.9 million in costs
related to the SWEPCO Plan on its consolidated balance sheet which would be
expensed if the SWEPCO plan is not confirmed by the bankruptcy court.
SWEPCO BILOXI, MISSISSIPPI MGP SITE
SWEPCO was notified by Mississippi Power in 1994 that it may be a PRP
at a MGP site in Biloxi, Mississippi, which was formerly owned and operated by a
predecessor of SWEPCO. Since then, SWEPCO has worked with Mississippi Power on
both the investigation of the extent of contamination on the site as well as the
subsequent sampling of the site. The sampling results indicated contamination at
the property as well as the possibility of contamination of an adjacent
property. A risk assessment was submitted to the MDEQ, and the MDEQ requested
that a future residential exposure scenario be evaluated for comparison with
commercial and industrial exposure scenarios. However, Mississippi Power and
SWEPCO do not believe that cleanup to a residential usage 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
53
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.
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 and Mississippi Power have executed an agreement that will
permit the companies to conduct additional off-site investigation of soil and
groundwater impacts. The MDEQ approved the proposed sampling plan for this
additional work. In June 1998, SWEPCO and Mississippi Power met with the MDEQ to
get approval of an earlier request to remediate the site as a non-residential
property using the recently passed Brownsfield legislation as a basis for
rendering such a decision. The MDEQ has not determined if groundwater
remediation will be required for the site and a decision on this issue was
requested. The MDEQ requested a Total Dissolved Solids study on the groundwater
wells be conducted to provide additional information as to whether the
groundwater is potable. Based on the outcome of this study, MDEQ will render
decisions on the above two issues. A feasibility study will then be completed
and a remedial strategy selected for the site.
SWEPCO VODA PETROLEUM SUPERFUND SITE
In April 1996, SWEPCO received correspondence from the EPA notifying
SWEPCO that it is a PRP to a cleanup action planned for the Voda Petroleum
Superfund Site located in Clarksville, Texas. SWEPCO is conducting a records
review to compile documentation relating to SWEPCO's past use of the Voda
Petroleum site. The proposed cleanup of the site is estimated by the EPA to cost
approximately $2 million and to take approximately twelve months to complete.
SWEPCO is considering an option where over 30 PRPs would conduct the cleanup in
lieu of EPA. Any SWEPCO liability associated with this project is not expected
to have a material adverse effect on SWEPCO's results of operations or financial
condition.
SWEPCO WILKES POWER PLANT COPPER LIMIT COMPLIANCE
The EPA has issued Wilkes Power Plant, which is owned by SWEPCO, an
administrative order for wastewater permit violations related to copper limits.
The administrative order is initially for a show cause meeting only. Past and
future compliance activities including activities that have been conducted to
determine the source of copper will be presented by SWEPCO during this meeting.
The show cause meeting with the EPA held on August 13, 1998, resulted in
continued negotiations. The EPA has not issued an administrative penalty order
or referral to the United States Department of Justice for judicial action with
monetary fines.
54
CSW ENERGY LOANS AND COMMITMENTS
In June 1998, the 325 MW Philips Sweeny cogeneration facility, an
entity 50% owned by CSW Energy, obtained permanent project financing. The $149
million of debt, with an effective interest rate of 7.4%, is unconditionally
guaranteed by the project and is non-recourse to CSW Energy and CSW.
Concurrently, the project repaid its outstanding note to CSW Energy for
construction financing. CSW Energy obtained the funds for this project from
CSW's short-term borrowings program, which were also repaid. In addition, CSW
has provided letters of credit and guarantees on behalf of independent power
projects, including Philip's Sweeny, totaling approximately $262 million as of
June 30, 1998.
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 June 30, 1998, approximately $1.7 billion of CSW's subsidiary
companies' retained earnings were available for payment of cash dividends by
such subsidiaries to CSW. The CPL and PSO mortgage indentures, as amended and
supplemented, contain certain restrictions on the use of their retained earnings
for cash dividends on their common stock. These restrictions do not 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 June 30, 1998 is as follows.
CPL-$766 million PSO-$142 million SWEPCO-$337 million WTU-$124 million
55
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 JUNE 30, 1998
Income before taxes attributable to:
Domestic operations $139
Foreign operations 24
---
Income before taxes $163 $76,135 $28,767 $36,640 $13,426
Tax at U.S. statutory rate $57 $26,647 $10,068 $12,824 $4,699
Differences
Amortization of ITC (3) (1,302) (420) (1,166) (330)
Mirror CWIP 1 1,145 -- -- --
Non-deductible goodwill
Amortization 3 -- -- -- --
Foreign tax benefit (3) -- -- -- --
Prior period adjustments and other (1) 1,155 731 (914) (164)
---------------------------------------------------
Tax expense $54 $27,645 $10,379 $10,744 $4,205
---------------------------------------------------
Effective tax rate 33% 36% 36% 29% 31%
QUARTER ENDED JUNE 30, 1997
Income before taxes attributable to:
Domestic operations $102
Foreign operations 13
---
Income before taxes $115 $60,499 $20,180 $36,702 $8,821
Tax at U.S. statutory rate $40 $21,175 $7,063 $12,846 $3,087
Differences
Amortization of ITC (4) (1,447) (696) (1,166) (330)
Mirror CWIP 1 1,111 -- -- --
Non-deductible goodwill
amortization 3 -- -- -- --
Prior period adjustments and other 1 1,495 371 (1,377) 59
---------------------------------------------------
Tax expense $41 $22,334 $6,738 $10,303 $2,816
---------------------------------------------------
Effective tax rate 36% 37% 33% 28% 32%
SIX MONTHS ENDED JUNE 30, 1998
Income before taxes attributable to:
Domestic operations $190
Foreign operations 59
---
Income before taxes $249 $100,959 $35,125 $58,868 $17,370
Tax at U.S. statutory rate $87 $35,336 $12,294 $20,604 $6,080
Differences
Amortization of ITC (6) (2,603) (900) (2,331) (661)
Mirror CWIP 2 2,286 -- -- --
Non-deductible goodwill
Amortization 6 -- -- -- --
Foreign tax benefit (14) -- -- -- --
Prior period adjustments and other 2 4,060 514 (2,232) (361)
---------------------------------------------------
Tax expense $77 $39,081 $11,908 $16,041 $5,058
---------------------------------------------------
Effective tax rate 31% 39% 34% 27% 29%
56
CSW CPL PSO SWEPCO WTU
-------------------------------------------------------
(millions) (thousands)
----------------------------------------------
SIX MONTHS ENDED JUNE 30, 1997
Income before taxes attributable to:
Domestic operations $95
Foreign operations 58
---
Income before taxes $153 $53,135 $30,388 $55,589 $10,978
Tax at U.S. statutory rate $54 $18,597 $10,636 $19,456 $3,842
Differences
Amortization of ITC (7) (2,895) (1,392) (2,331) (661)
Mirror CWIP 2 2,200 -- -- --
Non-deductible goodwill
amortization 6 -- -- -- --
Prior period adjustments and other (7) 276 (61) (1,461) (69)
---------------------------------------------------
Tax expense $48 $18,178 $9,183 $15,664 $3,112
---------------------------------------------------
Effective tax rate 31% 34% 30% 28% 28%
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 as the surviving
corporation. The transaction is subject to the approval of various state and
federal regulatory agencies. The shareholders of CSW were asked to approve the
AEP Merger and the shareholders of AEP were 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 approved the additional shares of stock required to
complete the merger. On May 28, 1998, CSW shareholders approved the merger. For
additional information related to the CSW shareholders vote, see ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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. On May 15, 1998, AEP and CSW jointly
filed a request with the Louisiana Commission for approval of their proposed
merger and for a finding that the merger is in the public interest. On June 12,
1998, AEP and CSW jointly filed a request with the Arkansas Commission for
approval of their proposed merger.
Testimony submitted in the filings in Arkansas, Louisiana, Texas and at
the FERC outlined the expected company-wide benefits of the merger to AEP and
CSW customers and shareholders, which would 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.
57
Approximately 80 parties, including public utility commissions, other
electric companies and trade groups representing electric customers, have filed
with the FERC to be recognized as intervenors in the FERC proceeding. The major
issues raised by most parties include conditioning the merger on AEP's
participation in the Midwest ISO, rate payer protections, market power
mitigation, federal preemption of state rate making and transmission rates.
AEP and CSW have proposed a regulatory plan in Arkansas that provides for:
* Approximately $1.8 million in fuel cost savings to Arkansas
customers of CSW's SWEPCO subsidiary during the 10 years following
completion of the merger;
* A commitment not to raise base rates above current levels prior to
Jan. 1, 2002, for SWEPCO customers in Arkansas and to share with
those customers approximately one-half of the savings allocated to
Arkansas from synergies created by the merger during the first 10
years following the merger. Under this plan, approximately $16.9
million of these non-fuel merger-related savings will be used to
reduce future costs to SWEPCO's Arkansas 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.
On July 13, 1998, the Arkansas Commission staff recommended conditional
approval of the proposed merger between AEP and CSW. A stipulation was reached
with the Arkansas Commission staff to divide the merger application into
approval of the merger and approval of the proposed regulatory plan. The
recommendation is subject to the terms of a stipulated agreement between the
Arkansas Commission staff, AEP and CSW, as well as the outcome of hearings that
will consider regulatory proposals pertaining to the merger. Key provisions of
the stipulation include:
* A "most favored nations" clause that ensures that SWEPCO's Arkansas
customers benefit from any future settlements that are negotiated
in other jurisdictions;
* A recommitment that Arkansas customers will continue to enjoy at
least the same level of customer service that they now receive or
better;
* Assurance that Arkansas customers will not have to absorb the
stranded costs of other CSW or AEP customers; and
* Arkansas Commission approval of the stipulation does not constitute
a finding regarding retail market power.
On August 13, 1998, the Arkansas Commission issued a conditional order
approving the proposed merger between CSW and AEP. CSW is currently evaluating
the conditions contained in the order. Hearings to consider the regulatory
proposals are scheduled to begin November 10, 1998.
58
AEP and CSW have proposed a regulatory plan in Louisiana that provides for:
* Approximately $2.6 million in fuel cost savings to Louisiana
customers of CSW's SWEPCO subsidiary during the 10 years following
completion of the merger;
* A commitment not to raise base rates above current levels prior to
Jan. 1, 2002, for SWEPCO customers in Louisiana and a plan to share
with those customers approximately one-half of the savings
allocated to Louisiana related to the merger during the first 10
years following the merger. Under this plan, approximately $26
million of these non-fuel merger-related savings will be used to
reduce future costs to SWEPCO's Louisiana 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.
Hearings in Louisiana are scheduled to begin January 18, 1999.
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 with those customers
approximately one-half of the savings allocated to Texas related to
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.
On July 2, 1998, the Texas Commission issued a preliminary order
setting forth the issues the Texas Commission will consider in the merger
application. In addition to applying the statutory standards for determination
that the merger is in the public interest, the Texas commission will address the
following issues:
* The consistency of the proposed regulatory plan with the last CPL
rate order and prior settlements by CSW's U.S. Electric Operating
Companies;
* Sharing and allocation of merger savings;
* Whether customers should receive a greater share of merger savings
in the first five years after the merger;
* Assurance that CSW's U.S. Electric Operating Companies will not pay
any stranded costs of AEP companies;
* Guarantees of quality of service; and
* Guarantees that no cross-subsidization between affiliates will
occur.
In its preliminary order, the Texas Commission also determined that the
merger application was not a rate proceeding, that restructuring issues should
not be addressed and that matters which are in the jurisdiction of other
regulatory bodies should not be addressed. Hearings are scheduled to begin
December 2, 1998.
On June 19, 1998, CPL filed a license transfer application with the NRC
requesting the NRC's consent to the indirect transfer of control of CPL's
interests in the NRC licenses issued for STP, which would result from the
proposed merger between CSW, CPL's parent company, and AEP. CPL would continue
59
to own its 25.2% interest in STP and CPL's name would remain on the NRC
operating license. The merger would have no effect on either the technical
management or operation of STP. The STPNOC would continue management of the
STP's operations.
AEP and CSW plan to file a merger application with the Oklahoma
Commission shortly and to make other required federal merger filings with the
SEC, the Federal Communications Commission and the Department of Justice and/or
the Federal Trade Commission later in 1998.
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.
CSW has a 100% interest in SEEBOARD, and AEP has a 50% interest in
Yorkshire. The proposed merger of CSW into AEP would result in common ownership
of the United Kingdom entities. As a result, the proposed merger could be
referred by the United Kingdom Secretary of State for Trade and Industry for an
investigation by the United Kingdom Mergers and Monopolies Commission. CSW is
unable to predict the outcome of any such regulatory proceeding.
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. The
merger is conditioned, among other things, upon the approval of several state
and federal regulatory agencies. The transaction must satisfy many conditions,
some of which may not be waived by the parties. AEP and CSW have initiated the
process of seeking regulatory approvals, but there can be no assurances as to
when, on what terms or whether the required approvals will be received or
whether there will be any regulatory proceedings in the United Kingdom. There
can be no assurance that the AEP merger will be consummated. See NOTE 6.
PROPOSED AEP MERGER.
As of June 30, 1998, CSW had deferred $21 million in costs related to
the merger on its consolidated balance sheet, which will be charged to expense
if AEP and CSW are not successful in completing their proposed merger.
7. SHORT-TERM AND 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 274,010
shares of its $100 par value 6.95% preferred stock. SWEPCO used short-term debt
to fund the $28 million redemption.
On September 1, 1998, PSO will call Series K and L FMBs, in their
entirety, at call prices of 100 and 100.77, respectively. On September 1, 1998,
CPL will call Series L FMBs, in its entirety, at a call price of 100.53.
On April 3, 1998, the SEC issued an order under the Holding Company Act
granting a requested increase in the authorized short-term borrowing limitation
to $2.5 billion for CSW and certain of its subsidiaries.
60
8. NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including derivative instruments embedded in other contracts) be
recorded on the balance sheet as either an asset or liability measured at fair
value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. A company may also implement SFAS No. 133 for any fiscal quarter
beginning June 16, 1998 and thereafter. SFAS No. 133 cannot be applied
retroactively. SFAS No. 133 must be applied to derivative instruments and
certain derivative instruments embedded in hybrid contracts that were issued,
acquired or substantially modified after December 31, 1997.
The Registrants have not yet quantified the impacts of adopting SFAS
No. 133 on their financial statements and have not determined the timing or the
method of adopting SFAS No. 133.
61
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 and the Registrants'
Combined Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
Reference is also made to each Registrant's unaudited Financial Statements and
related Notes to Financial Statements. The information 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 and six month periods ended
June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW OF CSW OPERATING, INVESTING, AND FINANCING ACTIVITIES
Net cash inflows from operating activities increased $233 million to
$403 million for the first six months 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 half
of 1997 for the gain on CSW's 1996 sale of Transok. However, these payments were
offset in part by the utilization of Alternative Minimum Tax credits that CSW
had previously generated. Also contributing to the increase were better fuel
recovery positions and higher accounts receivable and payable balances. The
increase in net cash inflows was also offset in part by decreases in other
working capital accounts.
Net cash outflows from investing activities decreased $10 million to an
outflow of $335 million for the first six months of 1998 compared to an outflow
of $345 million for the same period last year. CSW Energy obtained permanent
external financing during the first half 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 half 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. Further reducing the cash outflows from
investing activities was a cash inflow resulting from CSW International's
Enertek partner, Alpek, assuming its 50% obligation of that power plant project.
Also contributing to the lower net cash outflows from investing activities was
reduced spending at the U.S. Electric Operating Companies for generation,
distribution and general plant facilities. The decrease in net cash outflows was
offset in part by an increase in investment for telecommunications projects at
C3 Communications.
Net cash inflows from financing activities decreased $112 million to an
inflow of $80 million for the first half of 1998 compared to an inflow of $192
million for the same period last year. In the second quarter of 1997, CSW
received proceeds from the issuance of Trust Preferred Securities. The proceeds
were used primarily to reacquire preferred stock and pay down short-term debt in
the second quarter of 1997. 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.
62
CONSTRUCTION EXPENDITURES
CSW's construction expenditures, including allowance for funds used
during construction, totaled $253 million for the six months ended June 30,
1998. Construction expenditures for the U.S. Electric Operating Companies
totaled $65 million, $28 million, $43 million and $23 million, for CPL, PSO,
SWEPCO and WTU, respectively. Construction expenditures at the U.S. Electric
Operating Companies were primarily for improvements to existing production,
transmission and distribution facilities. The improvements are required to meet
the needs of new customers and to satisfy the changing requirements of existing
customers. CSW anticipates that all funds required for construction for the
remainder of the year will be provided from internal sources.
OTHER FINANCING ISSUES
CSW provides common stock, either through the purchase of shares from
the open market or original issue shares, to fund its long-term incentive plan,
the CSW PowerShare Dividend Reinvestment and Stock Purchase Plan and the CSW
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 and CSW Services.
In addition, CSW also incurs borrowings for other subsidiaries that are not
included in the money pool. As of June 30, 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 274,010
shares of its $100 par value 6.95% preferred stock. SWEPCO used short-term debt
to fund the $28 million redemption.
On September 1, 1998, PSO will call Series K and L FMBs, in their
entirety, at call prices of 100 and 100.77, respectively. On September 1, 1998,
CPL will call Series L FMBs, in its entirety, at a call price of 100.53.
On May 22, 1998, the Sabine Mining Company entered into a $30 million
credit agreement supporting its contractual mining obligations for SWEPCO's
Henry W. Pirkey Power Plant. SWEPCO has agreed, under certain conditions, to
assume the obligations of the Sabine Mining Company, the mining contractor,
including the obligations under the credit agreement.
On April 3, 1998, the SEC issued an order under the Holding Company
Act granting a requested increase in the authorized short-term borrowing
limitation to $2.5 billion for CSW.
As of July 27, 1998, CSW Credit's revolving credit agreement totaled
$1.1 billion.
The final installment of (pound)55 million, or an estimated $91 million
using an exchange rate of (pound)1.00 = $1.65, related to the windfall profits
tax, enacted by the United Kingdom government, is payable by SEEBOARD on
December 1, 1998.
63
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. 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 beginning May 1, 1998 and
will be reduced an additional $13 million on May 1, 1999.
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 applied on May 1, 1998 and to be applied on May 1, 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. The court denied the injunction and the "Glide Path" rate reduction
was implemented in May 1998. 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.
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, or some portion of
its business, no longer meets the criteria for following SFAS No. 71, a
write-off of regulatory assets and liabilities would be required, absent a means
of recovering such assets or settling such liabilities in a continuing regulated
segment of the business. CPL would also be required to evaluate whether there
was any impairment of any deregulated plant assets. 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.
64
The Louisiana Commission has selected consultants to perform a review
of SWEPCO's rates and charges and to review SWEPCO's quality of service. A
timeline for the review has yet to be determined. Management cannot predict the
outcome of this review.
SWEPCO ARKANSAS RATE REVIEW
In June 1998, the Arkansas Commission indicated that they would conduct
a review of SWEPCO's earnings. The review began in July 1998, but no case has
yet been docketed. 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, SWEPCO and WTU.
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 previously mentioned industry factors have
resulted in CSW pursuing other initiatives. These initiatives have taken a
variety of forms; however, they are all consistent with the overall plan for CSW
to develop a global energy business. CSW also has restrictions on the amounts it
may spend on these activities under the AEP merger agreement as discussed below.
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 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).
65
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 work forces. At the same time, the companies will
continue their commitment to high quality, reliable service. Job reductions
related to the merger are expected to be approximately 1,050 out of a total
domestic workforce of approximately 25,000. The combined company will use a
combination of growth, reduced hiring and attrition to minimize the need for
employee separations. Organizational and staffing recommendations will be made
by transition teams of employees from both companies.
The electric systems of AEP and CSW will operate on an integrated and
coordinated basis as required by the Holding Company Act. Any fuel savings
resulting from the coordinated operation of the combined company will be passed
on to customers.
The merger agreement contains covenants and agreements that restrict
the manner in which the parties may operate their respective businesses until
the time of closing of the merger. In particular, without the prior written
consent of AEP, CSW may not engage in a number of activities that could affect
its sources and uses of funds. Pending closing of the merger, CSW's and its
subsidiaries' strategic investment activity, capital expenditures and non-fuel
operating and maintenance expenditures are restricted to specific agreed upon
projects or agreed upon amounts. In addition, prior to consummation of the
merger, CSW and its subsidiaries are restricted from (i) issuing shares of
common stock other than pursuant to employee benefit plans, (ii) issuing shares
of preferred stock or similar securities other than to refinance existing
obligations or to fund permitted investment or capital expenditures and (iii)
incurring indebtedness other than pursuant to existing credit facilities, in the
ordinary course of business or to fund permitted projects or capital
expenditures. These restrictions are not expected to limit the ability of CSW
and its subsidiaries to make investments and expenditures in amounts previously
budgeted.
The shareholders of CSW were asked to approve the AEP Merger and the
shareholders of AEP were 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
approved the issuance of the additional shares of stock required to complete the
merger. On May 28, 1998, CSW shareholders approved the merger. For additional
information related to the CSW shareholders vote, see ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS.
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. On May 15, 1998, AEP and CSW jointly
filed a request with the Louisiana Commission for approval of their proposed
merger and for a finding that the merger is in the public interest. On June 12,
1998, AEP and CSW jointly filed a request with the Arkansas Commission for
approval of their proposed merger.
66
Testimony submitted in the filings in Arkansas, Louisiana, Texas and at
the FERC outlined the expected company-wide benefits of the merger to AEP and
CSW customers and shareholders, which would 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.
Approximately 80 parties, including public utility commissions, other
electric companies and trade groups representing electric customers, have filed
with the FERC to be recognized as intervenors in the FERC proceeding. The major
issues raised by most parties include conditioning the merger on AEP's
participation in the Midwest ISO, rate payer protections, market power
mitigation, federal preemption of state rate making and transmission rates.
AEP and CSW have proposed a regulatory plan in Arkansas that provides for:
* Approximately $1.8 million in fuel cost savings to Arkansas
customers of CSW's SWEPCO subsidiary during the 10 years following
completion of the merger;
* A commitment not to raise base rates above current levels prior to
Jan. 1, 2002, for SWEPCO customers in Arkansas and to share with
those customers approximately one-half of the savings allocated to
Arkansas from synergies created by the merger during the first 10
years following the merger. Under this plan, approximately $16.9
million of these non-fuel merger-related savings will be used to
reduce future costs to SWEPCO's Arkansas 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.
On July 13, 1998, the Arkansas Commission staff recommended conditional
approval of the proposed merger between AEP and CSW. A stipulation was reached
with the Arkansas Commission staff to divide the merger application into
approval of the merger and approval of the proposed regulatory plan. The
recommendation is subject to the terms of a stipulated agreement between the
Arkansas Commission staff, AEP and CSW, as well as the outcome of hearings that
will consider regulatory proposals pertaining to the merger. Key provisions of
the stipulation include:
* A "most favored nations" clause that ensures that SWEPCO's Arkansas
customers benefit from any future settlements that are negotiated
in other jurisdictions;
* A recommitment that Arkansas customers will continue to enjoy at
least the same level of customer service that they now receive or
better;
* Assurance that Arkansas customers will not have to absorb the
stranded costs of other CSW or AEP customers; and
* Arkansas Commission approval of the stipulation does not constitute
a finding regarding retail market power.
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On August 13, 1998, the Arkansas Commission issued a conditional order
approving the proposed merger between CSW and AEP. CSW is currently evaluating
the conditions contained in the order. Hearings to consider the regulatory
proposals are scheduled to begin November 10, 1998.
AEP and CSW have proposed a regulatory plan in Louisiana that provides for:
* Approximately $2.6 million in fuel cost savings to Louisiana
customers of CSW's SWEPCO subsidiary during the 10 years following
completion of the merger;
* A commitment not to raise base rates above current levels prior to
Jan. 1, 2002, for SWEPCO customers in Louisiana and a plan to share
with those customers approximately one-half of the savings
allocated to Louisiana related to the merger during the first 10
years following the merger. Under this plan, approximately $26
million of these non-fuel merger-related savings will be used to
reduce future costs to SWEPCO's Louisiana 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.
Hearings in Louisiana are scheduled to begin January 18, 1999.
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 with those customers
approximately one-half of the savings allocated to Texas related to
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.
On July 2, 1998, the Texas Commission issued a preliminary order
setting forth the issues the Texas Commission will consider in the merger
application. In addition to applying the statutory standards for determination
that the merger is in the public interest, the Texas commission will address the
following issues:
* The consistency of the proposed regulatory plan with the last CPL
rate order and prior settlements by CSW's U.S. Electric Operating
Companies;
* Sharing and allocation of merger savings;
* Whether customers should receive a greater share of merger savings
in the first five years after the merger;
* Assurance that CSW's U.S. Electric Operating Companies will not pay
any stranded costs of AEP companies;
* Guarantees of quality of service; and Guarantees that no
cross-subsidization between affiliates will occur.
In its preliminary order, the Texas Commission also determined that the
merger application was not a rate proceeding, that restructuring issues should
not be addressed and that matters which are in the jurisdiction of other
regulatory bodies should not be addressed. Hearings are scheduled to begin
December 2, 1998.
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On June 19, 1998, CPL filed a license transfer application with the NRC
requesting the NRC's consent to the indirect transfer of control of CPL's
interests in the NRC licenses issued for STP, which would result from the
proposed merger between CSW, CPL's parent company, and AEP. CPL would continue
to own its 25.2% interest in STP and CPL's name would remain on the NRC
operating license. The merger would have no effect on either the technical
management or operation of STP. The STPNOC would continue management of the
STP's operations.
AEP and CSW plan to file a merger application with the Oklahoma
Commission shortly and to make other required federal merger filings with the
SEC, the Federal Communications Commission and the Department of Justice and/or
the Federal Trade Commission later in 1998.
CSW has a 100% interest in SEEBOARD, and AEP has a 50% interest in
Yorkshire. The proposed merger of CSW into AEP would result in common ownership
of the United Kingdom entities. As a result, the proposed merger could be
referred by the United Kingdom Secretary of State for Trade and Industry for an
investigation by the United Kingdom Mergers and Monopolies Commission. CSW is
unable to predict the outcome of any such regulatory proceeding.
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. The
merger is conditioned, among other things, upon the approval of several state
and federal regulatory agencies. The transaction must satisfy many conditions,
some of which may not be waived by the parties. AEP and CSW have initiated the
process of seeking regulatory approvals, but there can be no assurances as to
when, on what terms or whether the required approvals will be received or
whether there will be any regulatory proceedings in the United Kingdom. There
can be no assurance that the AEP merger will be consummated. See NOTE 6.
PROPOSED AEP MERGER.
As of June 30, 1998, CSW had deferred $21 million in costs related to
the merger on its consolidated balance sheet, which will be charged to expense
if AEP and CSW are not successful in completing their proposed merger.
OTHER MERGER AND ACQUISITION ACTIVITY
SWEPCO CAJUN ASSET PURCHASE PROPOSAL
As previously reported, Cajun filed a petition for reorganization under
Chapter 11 of the United States Bankruptcy Code on December 21, 1994 and is
currently operating under the supervision of the United States Bankruptcy Court
for the Middle District of Louisiana.
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.
69
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.
On September 3, 1997, the bankruptcy court confirmed SWEPCO's right to
assist the Cajun Members Committee with $1 million in legal fees and expenses,
with court review pending to assure specific fees and expenses were reasonable.
SWEPCO and the Cajun Members Committee also are co-plaintiffs in litigation
regarding a central issue in the bankruptcy case - whether a competing plan
supported by the Cajun trustee can force the cooperatives to buy power for 25
years under the nonconsensual arrangements contained in that plan.
The SWEPCO Plan, filed March 18, 1998, replaces plans filed previously
by SWEPCO on January 15, 1998, October 26, 1996, September 30, 1996 and April
19, 1996. 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 May 1998.
In a June 16, 1998 ruling and a June 19, 1998 order, the U.S. District
Court disagreed with the detailed findings and conclusions of the bankruptcy
court and reversed that court's order. The district court's ruling immediately
disqualified the reorganization plan proposed by SWEPCO and the Cajun Members
Committee and ordered the cooperatives to return their portions of the expense
assistance to SWEPCO. The cooperatives have returned the funds to SWEPCO.
On June 26, 1998, the U.S. District Court denied an emergency motion by
SWEPCO and the Cajun Members Committee to stay the ruling pending their appeal.
SWEPCO and the Cajun Members Committee then filed their request for a stay and
expedited appeal to the U.S. Fifth Circuit Court of Appeals.
The bankruptcy court extended the deadline for final reply briefs from
July 2, 1998 to July 7, 1998 and allowed SWEPCO and the Cajun Members Committee
to file briefs, which they did. Confirmation hearings on the reorganization
plans began in December 1996 and concluded in May 1998 with final legal briefs
submitted July 7, 1998.
On July 11, 1998, the U.S. Fifth Circuit Court of Appeals granted a
request by SWEPCO and the Cajun Members Committee to stay a ruling that
disqualified their reorganization plan for Cajun. The U.S. Fifth Circuit Court
of Appeals also granted a stay of the bankruptcy proceedings pending the appeal
and ordered expedited consideration of the appeal. The U.S. Fifth Circuit Court
of Appeals set oral arguments on appeal for August 4, 1998 and, on
August 11, 1998, overturned the U.S. District Court ruling that disqualified the
SWEPCO plan from competing in the Cajun bankruptcy reorganization process. The
U.S. Fifth Circuit Court of Appeals said the U.S. District Court erred in
reversing the bankruptcy court, which originally had determined that $1 million
in assistance payments from SWEPCO to the Members Committee did not constitute
vote-buying and were completely legal. The bankruptcy court concluded
confirmation hearings in May 1998, received final briefs in July 1998 and can
confirm a plan at any time now that the U.S. Fifth Circuit Court of Appeals has
lifted a stay that had been granted pending the appeal by SWEPCO and the Cajun
Members Committee.
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 respective board of directors
70
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 June 30, 1998, SWEPCO had deferred $9.9 million in costs
related to the SWEPCO Plan on its consolidated balance sheet which would be
expensed if the SWEPCO plan is not confirmed by the bankruptcy court.
INVESTMENT IN VALE
In the second quarter of 1998, CSW International invested an additional
$69 million in convertible securities of Vale, a private Brazilian electric
distribution company based in Sao Paulo, Brazil. On July 17, 1998, CSW
International announced it had invested an additional $31 million in Vale.
Separately, on July 9, 1998, Vale and its partner, Inepar, bought 51% of the
equity in CELPA, for $388 million. CELPA distributes electricity to
approximately 800,000 customers in the state of Para in northern Brazil.
In November 1997, Vale and Inepar acquired CEMAT in the neighboring
state of Mato Grosso, which lies south of Para. With the addition of CELPA and
CEMAT, Vale now operates and controls electric distribution systems in several
Brazilian states serving 2 million customers.
FRONTERA PROJECT
On July 7, 1998, CSW Energy announced plans to begin construction in
August 1998 of a 500MW power plant, known as Frontera, in the Rio Grande Valley,
near the city of Mission, Texas. At June 30, 1998, CSW Energy had spent
approximately $24 million, including development, construction and financing of
the projected $210 million project costs. The natural gas-fired facility should
begin partial operation in the summer of 1999 and full operation by the end of
1999. Although the Frontera project is being built without long-term purchase
power contracts as a merchant power plant, Frontera is expected to supply power
to the rapidly growing Rio Grande Valley and to supply customers throughout
Texas.
SALE OF SEEBOARD RETAIL BUSINESS
At the end of the second quarter SEEBOARD sold its appliance retail
business to Dixons Stores Group, the market leading UK electrical retailer, for
consideration of (pound)18 million, or $29 million, in cash. The agreement
transfers 41 sites including shops, superstores and the warehouse with the
majority of the staff expected to be offered employment within Dixons Stores
Group. SEEBOARD recorded a pre-tax gain from the disposal of the retail business
of (pound)2.7 million, or $4.4 million.
The sale will allow SEEBOARD to focus on the competitive energy
markets, providing customers with award winning customer service and low prices,
and to develop its successful electricity network management business.
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
71
the Oklahoma Commission to study all relevant issues relating to restructuring
and develop a framework for a restructured industry. A bill was passed in the
1998 Oklahoma legislative session that accelerates the completion date for the
restructuring studies but does not change the date for retail competition.
ELECTRICITY DEREGULATION IN THE U.K.
Beginning September 1998, the market for the supply of electricity will
be opened up to competition in part of the United Kingdom with competition being
extended to the rest of the country in phases. SEEBOARD will be competing in
this market in October 1998. Customers in SEEBOARD's region will be able to
choose from whom they purchase electricity but will also be able to win
customers previously supplied by other regional electricity companies.
The opening up of the market to competition has seen significant
industry-wide investment in systems to enable competition. A substantial part of
the cost borne by SEEBOARD will be recoverable under a regulatory pricing
formula for the distribution business.
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 upon privatization of the United Kingdom's electric
industry for the bulk trading of electricity between generators and suppliers.
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 June 30, 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
72
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 $431 million.
Expected Expected Cash
Cash Inflows Outflows
Contract Maturity Date (Maturity Value) (Market Value)
- ------------------------------------------------------------------------
Cross currency swap August 1, 2001 $200 million $214.4 million
Cross currency swap August 1, 2006 $200 million $227.3 million
CSW Energy or its affiliates use natural gas swaps and collars to
manage prices on underlying floating price purchases for physical quantities of
natural gas used to generate electricity at its power plants. CSW Energy or its
affiliates have entered into a natural gas hedging program for 2.4 million
MMbtus of natural gas to be used from November 1998 to March 1999. The average
price for the swaps is $2.33 per MMbtu. The average prices of floors and caps
for the collars have been $2.16 and $2.59 per MMbtu , respectively.
CSW Energy or its affiliates use interest rate swap agreements to hedge
exposure to fluctuations in the interest rates to be paid on outstanding
indebtedness. CSW Energy or its affiliates have entered into swaps on debt
totaling $163 million with expiration dates through the year 2013. The interest
rates under these instruments range from 6.02% to 8.98%.
CSW Energy or its affiliates are exposed to credit risk in the event of
nonperformance by the counter parties. An analysis of the financial condition of
each counter party is made prior to entering into an agreement, credit limits
are established and the appropriateness of these limits are monitored on an
on-going basis.
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.
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OTHER MATTERS
YEAR 2000
In 1996, CSW initiated a system-wide program to prepare CSW's computer
systems and applications for the year 2000. The year 2000 activities are a top
priority. 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. The historical costs incurred to date
for the year 2000 project are $4 million, $2 million of which has been incurred
in 1998. Testing and conversion is expected to cost an additional $32 million to
$42 million over the next eighteen months, including both domestic and foreign
operations. The estimated costs have increased from the first quarter 1998
estimate of $20 million to $21 million due to additional systems replacement
requirements at SEEBOARD, and the addition of CPL's portion of the costs to
prepare STP operations for the year 2000. Approximately 52% of the expected
costs are to be covered through the redeployment of existing resources.
Approximately 10% of the projected costs are for contract labor. The remaining
38% of the costs is for computer hardware and software purchases. CSW has hired
a consultant to assist the project team. The funds for year 2000 project
expenditures are included in CSW's operating budget. At present, no other CSW
computer information system projects have been affected by the year 2000
project, but that may change as the year 2000 approaches. The financial impact
of any future forgone projects has not been estimated at this time. CSW's
internal audit department is presently conducting a review of CSW's year 2000
project. A consultant has been engaged by CSW's internal audit department to
assist in this review. The purpose of the review of the year 2000 project is to
assess the project processes so CSW's management can manage CSW's risks related
to the year 2000. The audit is 75% complete and may be completed by the end of
September 1998. Currently no cost estimates exist related to CSW's year 2000
risks.
The year 2000 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 applications and operations which pose the greatest risk for CSW if
implementation is not successful are the power production, system control,
transmission and distribution systems; 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 include electric service
interruptions to customers, interrupted revenue data gathering and poor customer
relations resulting from delayed billing. Costs related to the year 2000 program
are being expensed as incurred.
CSW's system-wide year 2000 program began with the naming of an
executive sponsor and project manager and the formation of a program management
office. Status is checked bi-weekly with weekly updates to the senior management
team, monthly review by an executive oversight committee comprised of the
functional vice presidents, and quarterly review by the board of directors'
audit committee. Key milestones for the year 2000 program include the following.
(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.
(iii) Remediation plans and schedules for business applications were
established in the fourth quarter of 1997 and conversion and
certification activities were initiated. All but three applications are
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targeted for completion by December 31, 1998 and the remainder by
mid-year 1999. The conversion and certification activities are on
schedule.
(iv) A detail inventory and assessment of the electric business
operation systems is 75% complete. This includes switchboards,
elevators, environmental controls, vehicles, metering systems, and
embedded logic or real time control systems in support of generation and
delivery of electricity. The assessment is expected to be completed by
the end of third quarter 1998. Corrective and certification measures are
already underway for some of these systems and completion is targeted
for all systems by third quarter 1999. The need for additional
functionality in the early 1990's resulted in the modernization of
several electric operation systems that has reduced the conversion
requirements.
(v) Contingency plans will be developed in the first quarter of 1999 and
most of calendar year 1999 has been reserved for final verification of
all external interfaces, and rehearsal of contingency plans.
The preceding discussion contains forward looking information within the
meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information due to changes in the underlying
assumptions. See FORWARD LOOKING INFORMATION.
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including derivative instruments embedded in other contracts) be
recorded on the balance sheet as either an asset or liability measured at fair
value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. A company may also implement SFAS No. 133 for any fiscal quarter
beginning June 16, 1998 and thereafter. SFAS No. 133 cannot be applied
retroactively. SFAS No. 133 must be applied to derivative instruments and
certain derivative instruments embedded in hybrid contracts that were issued,
acquired or substantially modified after December 31, 1997.
The Registrants have not yet quantified the impacts of adopting SFAS
No. 133 on their financial statements and have not determined the timing or the
method of adopting SFAS No. 133.
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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 and Combined Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998.
ITEM 1. LEGAL PROCEEDINGS.
CPL ANGLO LITIGATION
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 valid
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 LITIGATION
In April 1998, Valero filed suit against CPL in Nueces County, Texas
District Court, alleging claims for breach of contract and negligence. Valero's
suit seeks in excess of $11 million as damages for property loss and lost
profits allegedly incurred after an interruption of electricity to its facility
in Corpus Christi, Texas in April 1996. Management cannot predict the outcome of
this litigation. However management believes that CPL has valid defenses to
Valero's claims and intends to defend the matter vigorously. Management also
believes that the 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 have benefited 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. On June 5, 1998, the
court denied the motion for rehearing and reaffirmed the judgment of the court
of appeals. SWEPCO does not plan additional litigation for this lawsuit. No
financial impact resulted from these proceedings other than the legal expenses
which were expensed as incurred.
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OTHER LEGAL CLAIMS AND PROCEEDINGS
The CSW System is party to various other legal claims and proceedings
arising in the normal course of business. Management does not expect disposition
of these matters to have a material adverse effect on the Registrants' results
of operations or financial condition. See PART I - NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
CSW
(i) The annual meeting of stockholders of CSW was held on May 28, 1998.
(ii) The CSW stockholders elected five directors at the annual meeting. The name
of each nominee and the number of shares voted for or against were as follows:
NOMINEE For Against
---------------- --------------
E.R. Brooks 190,280,966 4,253,094
William R. Howell 190,329,265 4,202,765
Robert W. Lawless 190,359,584 4,174,476
James L. Powell 190,322,446 4,211,614
Richard L. Sandor 189,331,788 5,202,272
Stockholders also voted to approve the proposed merger AEP, with 172,974,243
votes cast for approval, 3,873,541 votes cast against approval and 1,544,877
votes abstaining.
In addition, stockholders voted to approve the appointment of Arthur Andersen
LLP, independent public accountants, as CSW's auditors for 1998 with 191,824,234
votes cast for approval, 1,281,299 votes cast against approval and 1,394,029
votes abstaining.
In total, 194,534,060, or approximately 92%, of CSW's outstanding shares were
voted at the annual meeting.
(iii) No other matters (other than procedural matters) were voted upon at the
annual meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS:
(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.
77
(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 AND WTU
Item 5. Other Events and Item 7. Financial Statements and Exhibits, dated April
30, 1998, reporting information related to the proposed merger between CSW and
AEP (requested merger approval from FERC and the Texas Commission).
CSW AND SWEPCO
Item 5. Other Events and Item 7. Financial Statements and Exhibits, dated May
15, 1998, reporting information related to the proposed merger between CSW and
AEP (requested merger approval from the Louisiana Commission).
Item 5. Other Events and Item 7. Financial Statements and Exhibits, dated June
12, 1998, reporting information related to the proposed merger between CSW and
AEP (requested merger approval from the Arkansas Commission).
Item 5. Other Events and Item 7. Financial Statements and Exhibits, dated June
17, 1998, reporting information related to the disqualification of SWEPCO's bid
for Cajun by the U.S. District Court and SWEPCO's intent to appeal that
decision.
Item 5. Other Events and Item 7. Financial Statements and Exhibits, dated June
24, 1998, reporting SWEPCO and the Cajun Members Committee filing of a notice of
appeal and an emergency motion seeking a stay of the U.S. District Court order
of disqualification of SWEPCO's bid for Cajun.
CSW
Item 5. Other Events and Item 7. Financial Statements and Exhibits, dated May
28, 1998, reporting information related to CSW's Annual Shareholder Meeting
(approval of merger, elect directors and ratify the appointment of Arthur
Andersen LLP as auditors).
78
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: August 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: August 14, 1998 /S/ R. RUSSELL DAVIS
-----------------------
R. Russell Davis
Controller and Chief Accounting Officer
(Principal Accounting Officer)