UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) COMBINED QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1999
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) 673-3000
0-340 West Texas Utilities Company 75-0646790
(A Texas Corporation)
301 Cypress Street
Abilene, Texas 79601-5820
(915) 674-7000
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No__
Common Stock Outstanding at May 7, 1999 Shares
Central and South West Corporation 212,613,935
Central Power and Light Company 6,755,535
Public Service Company of Oklahoma 9,013,000
Southwestern Electric Power Company 7,536,640
West Texas Utilities Company 5,488,560
This Combined Form 10-Q is separately filed by Central and South West
Corporation, Central Power and Light Company, Public Service Company of
Oklahoma, Southwestern Electric Power Company and West Texas Utilities Company.
Information contained herein relating to any individual Registrant is filed by
such Registrant on its own behalf. Each Registrant makes no representation as to
information relating to the other Registrants.
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 1999
GLOSSARY OF TERMS..............................................................3
FORWARD-LOOKING INFORMATION....................................................5
PART 1. FINANCIAL INFORMATION..................................................6
ITEM 1. FINANCIAL STATEMENTS.................................................6
.........................................6
CENTRAL POWER AND LIGHT COMPANY...........................................14
PUBLIC SERVICE COMPANY OF OKLAHOMA........................................20
SOUTHWESTERN ELECTRIC POWER COMPANY.......................................26
WEST TEXAS UTILITIES COMPANY..............................................32
NOTES TO FINANCIAL STATEMENTS.............................................39
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................................56
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........72
PART II -OTHER INFORMATION....................................................74
ITEM 1. LEGAL PROCEEDINGS...................................................74
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................74
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................75
SIGNATURES....................................................................77
2
GLOSSARY OF TERMS
The following abbreviations or acronyms used in this text are defined below:
Abbreviation or Acronym Definition
AEP ....................American Electric Power Company, Inc.
AEP Merger .............Proposed merger between AEP and CSW where CSW would
become a wholly-owned subsidiary of AEP
ALJ ....................Administrative Law Judge
Alpek ..................Alpek S.A. de C.V.
Altamira................CSW International cogeneration project in Altamira,
Tamaulipas, Mexico
April 1999 SWEPCO Plan..The amended plan of reorganization for Cajun filed by
the Members Committee and SWEPCO on April 16, 1999 with
the U.S. Bankruptcy Court for the Middle District of
Louisiana
Arkansas Commission ....Arkansas Public Service Commission
Btu ....................British thermal unit
C3 Communications ......C3 Communications, Inc., Austin, Texas (formerly CSW
Communications, Inc.)
Cajun ..................Cajun Electric Power Cooperative, Inc.
Cajun Members Committee.Committee represented by 7 of the 12 Louisiana member
distribution cooperatives that are served by Cajun
CLECO ..................Central Louisiana Electric Company, Inc.
Court of Appeals .......Court of Appeals, Third District of Texas, Austin, Texas
CPL ....................Central Power and Light Company, Corpus Christi, Texas
CPL 1997 Final Order ...Final orders received from the Texas Commission in CPL's
rate case Docket No, 14965, including both the order
received on September 10, 1997 and the revised order
received on October 16, 1997
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
DHMV ...................Dolet Hills Mining Venture
Diversified Electric ...CSW Energy and CSW International
ECOM ...................Excess cost over market
EPA ....................United States Environmental Protection Agency
EPS ....................Earnings per share of common stock
ERCOT ..................Electric Reliability Council of Texas
Exchange Act ...........Securities Exchange Act of 1934, as amended
EWG ....................Exempt Wholesale Generator
FERC ...................Federal Energy Regulatory Commission
FUCO ...................Foreign utility company as defined by the Holding
Company Act
Holding Company Act ....Public Utility Holding Company Act of 1935, as amended
IBEW ...................International Brotherhood of Electrical Workers
ISO ....................Independent system operator
ITC ....................Investment tax credit
KW .....................Kilowatt
KWH ....................Kilowatt-hour
LIFO ...................Last-in first-out (inventory accounting method)
Louisiana Commission ...Louisiana Public Service Commission
Market Method...........The five year average market-related method to determine
pension costs
MD&A ...................Management's Discussion and Analysis of Financial
Condition and Results of Operations
MDEQ ...................Mississippi Department of Environmental Quality
MGP ....................Manufactured gas plant or coal gasification plant
Mirror CWIP ............Mirror construction work in progress
Mississippi Power ......Mississippi Power Company
MMbtu ..................Million Btu
MW .....................Megawatt
MWH ....................Megawatt-hour
National Grid Group ....National Grid Group plc
NEIL ...................Nuclear Electric Insurance Limited
NLRB ...................National Labor Relations Board
NRC ....................Nuclear Regulatory Commission
3
GLOSSARY OF TERMS (continued)
The following abbreviations or acronyms used in this text are defined below:
Abbreviation or Acronym Definition
Oklahoma Commission ....Corporation Commission of the State of Oklahoma
PCB ....................Polychlorinated biphenyl
PRP ....................Potentially responsible party
PSO ....................Public Service Company of Oklahoma, Tulsa, Oklahoma
Registrant(s) ..........CSW, CPL, PSO, SWEPCO and WTU
Retirement Plan ........CSW's tax-qualified Cash Balance Retirement Plan
Rights Plan ............Stockholders Rights Agreement between CSW and CSW
Services, as Rights Agent
RUS ....................Rural Utilities Service of the federal government
SEC ....................United States Securities and Exchange Commission
SEEBOARD ...............SEEBOARD Group plc, Crawley, West Sussex, United Kingdom
SEEBOARD U.S.A..........CSW's investment in SEEBOARD consolidated and converted
to U.S. Generally Accepted Accounting Principles
SFAS ...................Statement of Financial Accounting Standards
SFAS No. 52 ............Foreign Currency Translation
SFAS No. 71 ............Accounting for the Effects of Certain Types of
Regulation
SFAS No. 87.............Employers' Accounting for Pensions
SFAS No. 115 ...........Accounting for Certain Investments in Debt and Equity
Securities
SFAS No. 130 ...........Reporting Comprehensive Income
SFAS No. 131............Disclosure about Segments of an Enterprise and Related
Information
STP ....................South Texas Project nuclear electric generating station
Sweeny..................A CSW Energy cogeneration facility located in Sweeny,
Texas
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 wit
the U.S. Bankruptcy Court for the Middle District of
Louisiana
Texas Commission .......Public Utility Commission of Texas
Texas Eastman...........Eastman Chemical Company
TNRCC ..................Texas Natural Resource Conservation Commission
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.K. Electric...........SEEBOARD U.S.A.
U.S. Electric Operating
Companies or U.S.
Electric ..............CPL, PSO, SWEPCO and WTU
Vale ...................Empresa De Electricidade Vale Paranapanema S/A, a
Brazilian Electric Distribution Company
Valero..................Valero Refining Company-Texas, Valero Refining Company
and Valero Energy Company
WTU ....................West Texas Utilities Company, Abilene, Texas
Yorkshire ..............Yorkshire Electricity Group plc, a regional electricity
company in the United Kingdom
4
FORWARD-LOOKING INFORMATION
This report made by CSW and certain of 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 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 United States and in countries
in which CSW either currently has made or in the future may make
investments,
- - 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 April
1999 SWEPCO Plan,
- - the impact of deregulation on the United States electric utility business,
- - increased competition and electric utility industry restructuring in the
United States,
- - federal and state regulatory developments and changes in law which may
have a substantial adverse impact on the value of CSW System generating
and other 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,
- - costs associated with any year 2000 computer related failure(s) either
within the CSW System or supplier failures that adversely affect the CSW
System,
- - 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,
- - the timing and success of efforts to develop domestic and international
power projects, and
- - risks associated with hedging and other risk management techniques.
In the non-utility area, the previously mentioned factors apply and also
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, and
- - 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.
5
CSW
CENTRAL AND SOUTH WEST CORPORATION
PART 1. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
6
CSW
Consolidated Statements of Income (unaudited)
Central and South West Corporation
Three Months Ended March 31,
---------------------------------------
1999 1998
-------------- ---------------
(in millions, except per share amounts)
Operating Revenues
U.S. Electric $ 697 $ 689
United Kingdom 476 533
Other diversified 52 35
------- -------
1,225 1,257
------- -------
Operating Expenses and Taxes
U.S. Electric fuel 229 236
U.S. Electric purchased power 29 21
United Kingdom cost of sales 322 385
Other operating 251 228
Maintenance 41 34
Depreciation and amortization 132 123
Taxes, other than income 57 46
Income taxes 17 21
------- -------
1,078 1,094
------- -------
Operating Income 147 163
------- -------
Other Income and Deductions
Other 13 15
Non-operating income taxes (4) (3)
------- -------
9 12
------- -------
Income Before Interest and Other Charges 156 175
------- -------
Interest and Other Charges
Interest on long-term debt 78 80
Interest on short-term debt and other 24 26
Distributions on Trust Preferred Securities 7 7
Preferred dividend requirements of
subsidiaries 2 2
------- -------
111 115
------- -------
Net Income for Common Stock $ 45 $ 60
======= =======
Average Common Shares Outstanding 212.6 212.3
Basic and Diluted EPS $0.21 $0.28
======= =======
Dividends Paid per Share of Common Stock $0.435 $0.435
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
7
CSW
Consolidated Statements of Stockholders' Equity
Central and South West Corporation
(millions)
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income (Loss) Total
(audited)
Beginning Balance - January 1, 1998 $743 $1,039 $1,751 $23 $3,556
Sale of common stock 1 10 -- -- 11
Common stock dividends -- -- (370) -- (370)
Other -- -- 2 -- 2
-------
3,199
Comprehensive Income:
Foreign currency translation
adjustment (net of tax of $2) -- -- -- 7 7
Unrealized loss on securities
(net of tax of $8) -- -- -- (14) (14)
Adjustment for gain included in
net income (net of tax of $4) -- -- -- (7) (7)
Minimum pension liability
(net of tax of $0.6) -- -- -- (1) (1)
Net Income -- -- 440 -- 440
-------
Total comprehensive income 425
-----------------------------------------------------
Ending Balance -- December 31, 1998 $744 $1,049 $1,823 $8 $3,624
=====================================================
(unaudited)
Beginning Balance -- January 1, 1999 $744 $1,049 $1,823 $8 $3,624
Sale of common stock -- 1 -- -- 1
Common stock dividends -- -- (93) -- (93)
-------
3,532
Comprehensive Income:
Foreign currency translation
adjustment (62) (62)
Unrealized gain on securities
(net of tax of $2) -- -- -- 5 5
Net Income -- -- 45 -- 45
-------
Total comprehensive income (12)
-----------------------------------------------------
Ending Balance -- March 31, 1999 $744 $1,050 $1,775 ($49) $3,520
=====================================================
The accompanying notes to consolidated financial statements are an
integral part of these statements.
8
CSW
Consolidated Balance Sheets
Central and South West Corporation
- --------------------------------------------------------------------------------
March 31, December 31,
1999 1998
(unaudited) (audited)
------------ -----------
(millions)
ASSETS
Fixed Assets
Electric
Production $ 5,895 $ 5,887
Transmission 1,598 1,594
Distribution 4,686 4,681
General 1,385 1,380
Construction work in progress 172 166
Nuclear fuel 209 207
------------ -----------
13,945 13,915
Other diversified 375 333
------------ -----------
14,320 14,248
Less - Accumulated depreciation and amortization 5,717 5,652
------------ -----------
8,603 8,596
------------ -----------
Current Assets
Cash and temporary cash investments 123 157
Accounts receivable 901 1,110
Materials and supplies, at average cost 195 191
Electric utility fuel inventory 108 90
Under-recovered fuel costs -- 4
Notes receivable 113 109
Prepayments and other 103 90
------------ -----------
1,543 1,751
------------ -----------
Deferred Charges and Other Assets
Deferred plant costs 496 497
Mirror CWIP asset 253 257
Other non-utility investments 448 432
Securities available for sale 74 66
Income tax related regulatory assets, net 306 308
Other regulatory assets 198 204
Goodwill 1,353 1,402
Other 400 384
------------ -----------
3,528 3,550
------------ -----------
$ 13,674 $ 13,897
============ ===========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
9
CSW
Consolidated Balance Sheets
Central and South West Corporation
March 31, December 31,
1999 1998
(unaudited) (audited)
----------- -----------
CAPITALIZATION AND LIABILITIES (millions)
Capitalization
Common stock: $3.50 par value
Authorized: 350.0 million shares
Issued and outstanding: 212.6 million shares
in 1999 and in 1998 $ 744 $ 744
Paid-in capital 1,050 1,049
Retained earnings 1,775 1,823
Accumulated other comprehensive income (49) 8
----------- -----------
3,520 44% 3,624 45%
----------- ------ ----------- -----
Preferred Stock 176 3% 176 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 3,925 49% 3,938 49%
----------- ------ ----------- -----
7,956 100% 8,073 100%
----------- ------ ----------- -----
Current Liabilities
Long-term debt and preferred stock due within twelve months 170 169
Short-term debt 960 811
Short-term debt - CSW Credit, Inc. 567 749
Loan notes 29 32
Accounts payable 518 624
Accrued taxes 187 190
Accrued interest 105 84
Other 230 218
----------- -----------
2,766 2,877
----------- -----------
Deferred Credits
Accumulated deferred income taxes 2,391 2,410
Investment tax credits 263 267
Other 298 270
----------- -----------
2,952 2,947
----------- -----------
$ 13,674 $ 13,897
=========== ===========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
10
CSW
Consolidated Statements of Cash Flows (unaudited)
Central and South West Corporation
Three Months Ended
March 31,
---------------------
1999 1998
(millions)
OPERATING ACTIVITIES
Net income for common stock $ 45 $ 60
Non-cash Items and Adjustments
Depreciation and amortization 139 127
Deferred income taxes and investment tax credits (14) (10)
Preferred stock dividends 2 2
Changes in Assets and Liabilities
Accounts receivable 185 88
Accounts payable (72) (90)
Accrued taxes (1) 4
Fuel inventory (18) (5)
Fuel recovery 23 51
Refund due customers -- (59)
Other (40) (21)
------ ------
249 147
------ ------
INVESTING ACTIVITIES
Construction expenditures (125) (119)
CSW Energy/CSW International projects (41) 19
Other (17) (10)
------ ------
(183) (110)
------ ------
FINANCING ACTIVITIES
Common stock sold 1 1
Long-term debt sold -- 5
Reacquisition/Maturity of long-term debt (1) (59)
Other financing activities 29 19
Change in short-term debt (32) 110
Payment of dividends (95) (95)
------ ------
(98) (19)
------ ------
Effect of exchange rate changes on cash and cash
equivalent (2) --
------ ------
Net Change in Cash and Cash Equivalents (34) 18
Cash and Cash Equivalents at Beginning of Year 157 75
------ ------
Cash and Cash Equivalents at End of Period $ 123 $ 93
====== ======
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $ 86 $ 101
====== ======
Income taxes paid $ 13 $ --
====== ======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
11
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY
COMPANIES RESULTS OF OPERATIONS
Set forth below is information concerning the consolidated results of
operations of CSW for the three month periods ended March 31, 1999 and March 31,
1998. For information concerning the results of operations for each of the U.S.
Electric Operating Companies, see the discussions under the heading RESULTS OF
OPERATIONS following the financial statements of each of the U.S. Electric
Operating Companies.
COMPARISON OF THE QUARTERS ENDED MARCH 31, 1999 AND 1998
Net income for common stock decreased to $45 million in the first quarter
of 1999 from $60 million in 1998 due primarily to the absence in 1999 of the
recovery in the first quarter of 1998 of certain regulatory allowed revenues in
the United Kingdom. Also contributing to the decrease in earnings was the
absence in 1999 of the gain from an investment available for sale by C3
Communications in the first quarter of 1998. Other factors affecting earnings
are discussed below.
In the first quarter of 1999, the U.S. Electric Operating Companies and
U.K. Electric contributed the following percentages to CSW's results of
operations.
Corporate
U.S. U.K. Total Items and
Electric Electric Electric Other Total
---------------------------------------------------
Operating Revenues 57% 39% 96% 4% 100%
Operating Income 66% 34% 100% --% 100%
Net Income for Common 72% 59% 131% (31)% 100%
Stock
Operating revenues decreased $32 million, or 3% in the first quarter of
1999 compared to the same period a year ago due to the following factors. United
Kingdom revenues decreased $57 million in the first quarter of 1999 compared to
the same period last year due primarily to the absence in 1999 of the recovery
of regulatory allowed revenues in 1998, which represented allowed but
unrecovered revenues for previous years. Also contributing to the decrease in
United Kingdom revenues were lower sales volumes in the low-margin business
market and the absence of revenues in 1999 from SEEBOARD's retail business,
which was sold in the second quarter of 1998. Also contributing to the decline
in operating revenues was lower fuel revenues of $2 million in the first quarter
of 1999 due to lower fuel expense, discussed below. Partially offsetting the
decrease in operating revenues was an increase in other diversified revenues of
$17 million for the comparison periods due primarily to increased business
activity at CSW Energy and CSW Credit. Further offsetting the decrease in
operating revenues was an $8 million increase in non-fuel revenues, due
primarily to higher weather-related demand.
U.S. Electric fuel expense decreased $7 million, or 3%, during the first
quarter of 1999 compared to the same period last year due primarily to a
decrease in the average unit fuel cost to $1.54 per MMbtu from $1.63 per MMbtu.
The decrease resulted from lower spot market natural gas prices. Purchased power
expense increased $8 million, or 38%, for the comparison periods primarily at
CPL and WTU. Purchased power expense increased at CPL due primarily to increased
demand and scheduled power plant outages for routine maintenance. Purchased
power expense increased at WTU due primarily increased purchases resulting from
scheduled maintenance on a generating plant. United Kingdom cost of sales
decreased $63 million, or 16%, during the first quarter of 1999 compared to the
same period last year due primarily to a lower level of sales of electricity and
the absence in 1999 of cost of sales for SEEBOARD's retail business, which were
sold in the second quarter of 1998.
12
Other operating expense increased $23 million in the first quarter of 1999
compared to the same period a year ago due primarily to increased expenses of $9
million at SEEBOARD. Expenses increased at SEEBOARD as a result of additional
operating costs related to SEEBOARD's Powerlink joint venture to operate the
London Underground rail system associated with running SEEBOARD's systems for
operating in the competitive electricity market in the United Kingdom. Other
operating expense also increased $8 million at CSW Energy reflecting a full
quarter of operations of the Sweeny cogeneration facility, which began service
in February 1998.
Depreciation and amortization expense increased $9 million in the first
quarter of 1999 compared to the same period last year due primarily to an
increase of depreciable property at most CSW subsidiaries.
Taxes other than income increased $11 million in the first quarter of 1999
compared to the corresponding period last year due primarily to higher franchise
and ad valorem taxes at the U.S. Electric Operating Companies. Operating income
taxes decreased $4 million in the first quarter of 1999 compared to the same
period last year due primarily to lower taxable income.
Other income and deductions decreased $3 million in the first quarter of
1999 compared to the first quarter of 1998 due primarily to the absence in 1999
of the $5 million gain from the sale by C3 Communications of an investment
available for sale.
Interest and other charges decreased $4 million in the first quarter of
1999 compared to the same period last year due primarily to the absence in 1999
of $5 million in decreased interest expenses from a bonded rate refund related
to the CPL 1997 Final Order. In addition, interest on long-term debt decreased
$2 million from the reacquisition of long-term debt of $55 million at PSO and
$36 million at CPL in the third quarter of 1998.
13
CPL
CENTRAL POWER AND LIGHT COMPANY
PART 1. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS
14
CPL
Consolidated Statements of Income (unaudited)
Central Power and Light Company
Three Months Ended March 31,
----------------------------
1999 1998
--------- ----------
(thousands)
Electric Operating Revenues $ 282,278 $ 274,453
--------- ---------
Operating Expenses and Taxes
Fuel 67,915 72,948
Purchased power 13,147 8,558
Other operating 61,827 60,496
Maintenance 15,226 13,057
Depreciation and amortization 43,114 41,712
Taxes, other than income 23,324 19,482
Income taxes 11,105 11,820
--------- ---------
235,658 228,073
--------- ---------
Operating Income 46,620 46,380
--------- ---------
Other Income and Deductions
Other (730) (735)
Non-operating income taxes 1,678 384
--------- ---------
948 (351)
--------- ---------
Income Before Interest Charges 47,568 46,029
--------- ---------
Interest Charges
Interest on long-term debt 22,829 23,500
Distributions on Trust Preferred Securities 3,000 3,000
Interest on short-term debt and other 5,064 6,828
Allowance for borrowed funds used during
construction (873) (688)
--------- ---------
30,020 32,640
--------- ---------
Net Income 17,548 13,389
Less: Preferred stock dividends 1,812 1,808
--------- ---------
Net Income for Common Stock $ 15,736 $ 11,581
========= =========
The accompanying notes to consolidated financial statements as they relate
to CPL are an integral part of these statements.
15
CPL
Consolidated Balance Sheets
Central Power and Light Company
March 31, December 31,
1999 1998
(unaudited) (audited)
----------- ------------
(thousands)
ASSETS
Electric Utility Plant
Production $3,147,129 $ 3,146,269
Transmission 527,863 527,146
Distribution 1,101,920 1,090,175
General 299,210 298,352
Construction work in progress 79,456 67,300
Nuclear fuel 208,957 206,949
----------- ------------
5,364,535 5,336,191
Less - accumulated depreciation 2,111,785 2,072,686
----------- ------------
3,252,750 3,263,505
----------- ------------
Current Assets
Cash 9,773 5,195
Accounts receivable 54,724 51,056
Materials and supplies, at average cost 58,101 59,814
Fuel inventory 22,993 20,340
Accumulated deferred income taxes 3,436 713
Prepayments and other 3,879 2,952
----------- ------------
152,906 140,070
----------- ------------
Deferred Charges and Other Assets
Deferred STP costs 481,883 482,447
Mirror CWIP asset 253,380 256,702
Income tax related regulatory assets, net 357,013 360,482
Nuclear decommissioning trust 71,982 65,972
Other 164,497 167,011
----------- ------------
1,328,755 1,332,614
----------- ------------
$ 4,734,411 $ 4,736,189
=========== ============
The accompanying notes to consolidated financial statements as they relate
to CPL are an integral part of these statements.
16
CPL
Consolidated Balance Sheets
Central Power and Light Company
March 31, December 31,
1999 1998
(unaudited) (audited)
----------- ------------
CAPITALIZATION AND LIABILITIES (thousands)
Capitalization
Common stock: $25 par value
Authorized shares: 12,000,000
Issued and outstanding shares: 6,755,535 $ 168,888 $ 168,888
Paid-in capital 405,000 405,000
Retained earnings 717,767 739,031
--------- ----------
1,291,655 46% 1,312,919 46%
--------- ---- ---------- ----
Preferred stock 163,204 6% 163,20 6%
CPL-obligated, mandatorily redeemable preferred
securities of subsidiary trust holding solely
Junior Subordinated Debentures of CPL 150,000 5% 150,00 5%
Long-term debt 1,225,798 43% 1,225,70 43%
--------- ---- ---------- ----
2,830,657 100% 2,851,829 100%
--------- ---- ---------- ----
Current Liabilities
Long-term debt due within twelve months 125,000 125,000
Advances from affiliates 192,638 160,298
Accounts payable 71,087 86,998
Payables to affiliates 31,964 38,331
Accrued taxes 53,342 46,855
Accrued interest 30,522 27,036
Over-recovered fuel costs 18,244 9,135
Other 19,574 18,819
--------- ----------
542,371 512,472
--------- ----------
Deferred Credits
Accumulated deferred income taxes 1,212,331 1,221,561
Investment tax credits 137,212 138,513
Other 11,840 11,814
--------- ----------
1,361,383 1,371,888
--------- ----------
$ 4,734,411 $ 4,736,189
========= ==========
The accompanying notes to consolidated financial statements as they relate
to CPL are an integral part of these statements.
17
CPL
Consolidated Statements of Cash Flows (unaudited)
Central Power and Light Company
Three Months Ended
March 31,
-------------------
1999 1998
--------- --------
(thousands)
OPERATING ACTIVITIES
Net Income $ 17,548 $ 13,389
Non-cash Items Included in Net Income
Depreciation and amortization 48,110 42,944
Deferred income taxes and investment
tax credits (9,785) (6,559)
Refund due customers -- (59,153)
Changes in Assets and Liabilities
Accounts receivable (3,668) 9,114
Fuel inventory (2,653) (4,248)
Material and supplies 1,713 2,075
Accrued interest 3,486 1,677
Accounts payable (22,523) 4,592
Accrued taxes 6,487 (1,407)
Fuel recovery 9,109 42,150
Other 2,088 10,975
--------- --------
49,912 55,549
--------- --------
INVESTING ACTIVITIES
Construction expenditures (37,018) (32,504)
Other (1,600) (1,462)
--------- --------
(38,618) (33,966)
--------- --------
FINANCING ACTIVITIES
Repayment of long-term debt -- (28,000)
Change in advances from affiliates 32,340 49,825
Payment of dividends (39,056) (41,945)
--------- --------
(6,716) (20,120)
--------- --------
Net Change in Cash and Cash Equivalents 4,578 1,463
Cash and Cash Equivalents at Beginning of Year 5,195 --
--------- --------
Cash and Cash Equivalents at End of Period $ 9,773 $ 1,463
========= ========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on Trust Preferred Securities) $ 22,327 $ 30,057
========= ========
Income taxes paid/(refund received) $ (3,727) $ --
========= ========
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
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED MARCH 31, 1999 AND 1998
Net income for common stock for the first quarter of 1999 was $15.7
million, an increase of $4.1 million, or 36%, from the first quarter of 1998.
The increase resulted primarily from an increase in non-fuel revenues, which was
offset in part by an increase in taxes, other than income.
Electric operating revenues increased $7.8 million, or 3%, to $282.3
million during the first quarter of 1999 compared to the same period of 1998.
The increase is mainly attributable to an $8.7 million increase in non-fuel
revenues partially offset by a $0.9 million decrease in fuel-related revenues.
The increase in non-fuel related revenues resulted from a 9% increase in MWH
sales due to customer demand.
Fuel expense decreased $5.0 million, or 7%, due primarily to a decrease in
average unit fuel costs from $1.54 per MMbtu in 1998 to $1.33 per MMbtu in the
first quarter of 1999, resulting from purchases of lower-priced spot market
natural gas. Purchased power expenses for the first quarter of 1999 increased
$4.6 million, or 54%, compared to the same period of 1998 due primarily to
increased demand and scheduled power plant outages for routine maintenance.
Other operating expenses were $61.8 million during the first quarter of
1999, an increase of $1.3 million from the same period in 1998. The increase was
due primarily to higher outside services expense, which was offset in part by
lower transmission expenses resulting from the transmission service agreement
related to the final order in Texas Commission Docket No. 17285. See NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint Versus Texas
Utilities Electric Company (Docket No. 17285). Maintenance expenses increased
$2.1 million, or 17% over 1998 largely due to the scheduled refueling of STP
Unit No. 1, flood damage and storm repairs.
Taxes, other than income, were $23.3 million in the first quarter of 1999,
a $3.8 million increase above 1998. This increase was due to a combination of
higher ad valorem taxes, which reflect higher assessed values and state
franchise taxes which are calculated based on a higher 1998 taxable income.
Other income and deductions increased due primarily to a higher
non-operating income tax benefit resulting from $1.6 million in consolidated tax
savings from CSW in 1999.
Other interest expense decreased in the first quarter of 1999 due
primarily to the absence in 1999 of interest expense related to the 1998 bonded
rate refund and the reacquisition of long-term debt in 1998.
19
PSO
PUBLIC SERVICE COMPANY OF OKLAHOMA
PART 1. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
20
PSO
Consolidated Statements of Income (unaudited)
Public Service Company of Oklahoma
Three Months Ended March 31,
----------------------------
1999 1998
---------- ----------
(thousands)
Electric Operating Revenues $ 151,030 $ 151,411
---------- ----------
Operating Expenses and Taxes
Fuel 61,881 61,520
Purchased power 14,044 13,597
Other operating 25,713 27,147
Maintenance 9,207 7,573
Depreciation and amortization 18,455 18,095
Taxes, other than income 8,059 6,644
Income taxes 1,143 2,032
---------- ----------
138,502 136,608
---------- ----------
Operating Income 12,528 14,803
---------- ----------
Other Income and Deductions
Allowance for equity funds used during construction 81 155
Other (1,311) (616)
Non-operating income taxes 709 503
---------- ----------
(521) 42
---------- ----------
Income Before Interest Charges 12,007 14,845
---------- ----------
Interest Charges
Interest on long-term debt 6,610 7,618
Distributions on Trust Preferred Securities 1,500 1,500
Interest on short-term debt and other 1,169 1,230
Allowance for borrowed funds used during
construction (192) (332)
---------- ----------
9,087 10,016
---------- ----------
Net Income 2,920 4,829
Less: Preferred stock dividends 53 53
---------- ----------
Net Income for Common Stock $ 2,867 $ 4,776
========== ==========
The accompanying notes to consolidated financial statements as they relate
to PSO are an integral part of these statements.
21
PSO
Consolidated Balance Sheets
Public Service Company of Oklahoma
March 31, December 31,
1999 1998
(unaudited) (audited)
----------- -----------
(thousands)
ASSETS
Electric Utility Plant
Production $ 915,594 $ 913,083
Transmission 379,157 378,719
Distribution 855,897 855,277
General 216,502 211,124
Construction work in progress 35,912 33,519
----------- -----------
2,403,062 2,391,722
Less - Accumulated depreciation 1,091,811 1,082,081
----------- -----------
1,311,251 1,309,641
----------- -----------
Current Assets
Cash 1,253 4,670
Accounts receivable 31,692 32,916
Materials and supplies, at average cost 33,654 33,006
Fuel inventory, at LIFO cost 17,411 16,441
Accumulated deferred income taxes 12,969 11,789
Prepayments and other 5,871 2,881
----------- -----------
102,850 101,703
----------- -----------
Deferred Charges and Other Assets 71,809 71,384
----------- -----------
$ 1,485,910 $ 1,482,728
=========== ===========
The accompanying notes to consolidated financial statements as they relate to
PSO are an integral part of these statements.
22
PSO
Consolidated Balance Sheets
Public Service Company of Oklahoma
- -------------------------------------------------------------------------
March 31, December 31,
1999 1998
(unaudited) (audited)
----------- -----------
CAPITALIZATION AND LIABILITIES (thousands)
Capitalization
Common stock: $15 par value
Authorized: 11,000,000 shares
Issued 10,482,000 shares and
outstanding 9,013,000 shares $157,230 $157,230
Paid-in capital 180,000 180,000
Retained earnings 132,493 144,626
----------- -----------
469,723 50% 481,856 51%
----------------------------- ------
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 384,144 41% 384,064 41%
----------------------------- ------
934,154 100% 946,207 100%
----------------------------- ------
Current Liabilities
Advances from affiliates 46,793 15,892
Payables to affiliates 20,767 33,489
Accounts payable 46,396 52,888
Payables to customers 41,926 32,608
Accrued taxes 14,073 23,095
Accrued interest 10,187 7,606
Other 7,005 6,599
----------- -----------
187,147 172,177
----------- -----------
Deferred Credits
Accumulated deferred income taxes 277,528 277,181
Investment tax credits 38,917 39,365
Income tax related regulatory liabilities,
net 35,132 35,818
Other 13,032 11,980
----------- -----------
364,609 364,344
----------- -----------
$ 1,485,910 $ 1,482,728
=========== ===========
The accompanying notes to consolidated financial statements as they relate
to PSO are an integral part of these statements.
23
PSO
Consolidated Statements of Cash Flows (unaudited)
Public Service Company of Oklahoma
Three Months Ended
March 31,
--------------------
1999 1998
--------- --------
(thousands)
OPERATING ACTIVITIES
Net Income $ 2,920 $ 4,829
Non-cash Items Included in Net Income
Depreciation and amortization 18,700 18,832
Deferred income taxes and investment tax
credits (1,967) (3,635)
Changes in Assets and Liabilities
Accounts receivable 1,224 (4,542)
Prepayments and other (2,990) (97)
Accounts payable (10,479) (28,502)
Accrued taxes (9,022) 3,723
Other 1,873 6,021
--------- --------
259 (3,371)
--------- --------
INVESTING ACTIVITIES
Construction expenditures (21,299) (12,096)
Other 1,775 (1,164)
--------- --------
(19,524) (13,260)
--------- --------
FINANCING ACTIVITIES
Change in advances from affiliates 30,901 26,959
Payment of dividends (15,053) (9,053)
--------- --------
15,848 17,906
--------- --------
Net Change in Cash and Cash Equivalents (3,417) 1,275
Cash and Cash Equivalents at Beginning of Year 4,670 2,171
--------- --------
Cash and Cash Equivalents at End of Period $ 1,253 $ 3,446
========= ========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on Trust Preferred Securities) $ 6,125 $ 7,892
========= ========
Income taxes paid $ 5,510 $ --
========= ========
The accompanying notes to consolidated financial statements as they relate
to PSO are an integral part of these statements.
24
PUBLIC SERVICE COMPANY OF OKLAHOMA
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED MARCH 31, 1999 AND 1998
Net income for common stock for the first quarter of 1999 was $2.9
million, a decrease of $1.9 million compared to 1998. The decrease resulted
primarily from higher maintenance expenses as well as a decrease in other income
and deductions, which was offset in part by lower other operating expenses and
interest on long-term debt.
Electric operating revenues were relatively stable during the first
quarter of 1999 compared to the first quarter of 1998. Non-fuel related revenues
increased $2.9 million during the first quarter of 1999 primarily from changes
in the average price of retail sales by customer rate class. Fuel-related
revenues decreased $3.3 million as discussed below.
Fuel expense was relatively stable for the first quarter of 1999 compared
to the first quarter of 1998. Deferred fuel costs increased slightly in 1999. A
change in fuel mix due to more gas generation and less coal generation occurred
in the first quarter of 1999. The average unit fuel costs declined from $1.72
per MMbtu in the first quarter of 1998 to $1.70 per MMbtu in the first quarter
of 1999 due primarily to lower spot market gas prices.
Other operating expenses were $25.7 million in the first three months of
1999, a 5% decrease compared to 1998, due primarily to lower transmission and
customer accounting expenses. The reduction in transmission expenses was due
primarily to a transmission service agreement adjustment related to the final
order in Texas Commission Docket No. 17285. See NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS - CPL and WTU Complaint vs. Texas Utilities Electric
Company (Docket No. 17285). The decline in customer accounting expenses was due
primarily to lower customer collections-related expenses. Maintenance expense
increased by $1.6 million, or 22%, during the first quarter of 1999 when
compared to the same period in 1998 due primarily to higher expenses related to
scheduled power plant maintenance.
Operating income taxes decreased to $1.1 million in the first quarter of
1999 from $2.0 million in the same period of 1998, due primarily to lower
taxable income in 1999.
Other income and deductions decreased $0.6 million in the first three
months of 1999 primarily as a result of losses on equity investments in 1999.
Interest charges decreased $0.9 million, or 9%, during the first quarter of 1999
when compared to the same period of 1998 primarily as a result of the
reacquisition of long-term debt in the third quarter of 1998.
25
SWEPCO
SOUTHWESTERN ELECTRIC POWER COMPANY
PART 1. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
26
SWEPCO
Consolidated Statements of Income (unaudited)
Southwestern Electric Power Company
Three Months Ended March 31,
----------------------------
1999 1998
----------- -----------
(thousands)
Electric Operating Revenues $ 197,064 $ 197,560
----------- -----------
Operating Expenses and Taxes
Fuel 76,271 76,233
Purchased power 6,193 6,339
Other operating 30,180 31,094
Maintenance 12,244 10,270
Depreciation and amortization 26,206 24,803
Taxes, other than income 15,794 13,522
Income taxes 3,807 6,166
----------- -----------
170,695 168,427
----------- -----------
Operating Income 26,369 29,133
----------- -----------
Other Income and Deductions
Allowance for equity funds used during
construction 47 662
Other (454) (299)
Non-operating income taxes 683 869
----------- -----------
276 1,232
----------- -----------
Income Before Interest Charges 26,645 30,365
----------- -----------
Interest Charges
Interest on long-term debt 9,802 9,808
Distributions on Trust Preferred Securities 2,166 2,166
Interest on short-term debt and other 2,391 1,719
Allowance for borrowed funds used during
construction (367) (259)
----------- -----------
13,992 13,434
----------- -----------
Net Income 12,653 16,931
Less: Preferred stock dividends 57 534
Gain on reacquired preferred stock -- 1
----------- -----------
Net Income for Common Stock $ 12,596 $ 16,398
=========== ===========
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
27
SWEPCO
Consolidated Balance Sheets
Southwestern Electric Power Company
March 31, December 31,
1999 1998
(unaudited) (audited)
---------- ------------
(thousands)
ASSETS
Electric Utility Plant
Production $ 1,399,130 $ 1,397,924
Transmission 476,320 474,035
Distribution 923,986 916,293
General 327,437 321,136
Construction work in progress 40,195 48,523
---------- ------------
3,167,068 3,157,911
Less - Accumulated depreciation 1,337,269 1,317,057
---------- ------------
1,829,799 1,840,854
---------- ------------
Current Assets
Cash 2,597 4,444
Accounts receivable 44,560 40,430
Materials and supplies, at average cost 25,762 25,135
Fuel inventory 53,347 40,238
Accumulated deferred income taxes 2,983 4,869
Prepayments and other 18,024 16,651
---------- ------------
147,273 131,767
---------- ------------
Deferred Charges and Other Assets 114,352 113,701
---------- ------------
$ 2,091,424 $ 2,086,322
========== ============
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
28
Consolidated Balance Sheets
Southwestern Electric Power Company
- --------------------------------------------------------------------
March 31, December 31,
1999 1998
(unaudited) (audited)
---------- ----------
CAPITALIZATION AND LIABILITIES (thousands)
Capitalization
Common stock: $18 par value
Authorized: 7,600,000 shares
Issued and outstanding: 7,536,640 $ 135,660 $ 135,660
Paid-in capital 245,000 245,000
Retained earnings 286,188 300,592
-------- --------
Total Common Stock Equity 666,848 51% 681,252 51%
-------- --- -------- ---
Preferred stock 4,706 --% 4,707 --%
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 541,092 41% 543,741 41%
-------- --- -------- ----
1,322,646 100% 1,339,700 100%
-------- ---- ------- ----
Current Liabilities
Long-term debt and preferred stock due
within twelve months 44,959 43,932
Advances from affiliates 88,501 40,705
Accounts payable 46,547 73,507
Payables to affiliates 29,006 37,795
Customer deposits 13,600 13,316
Accrued taxes 34,310 23,189
Accrued interest 12,756 14,275
Over-recovered fuel costs 6,397 5,378
Other 12,529 12,538
--------- ---------
288,605 264,635
--------- ---------
Deferred Credits
Accumulated deferred income taxes 394,579 398,664
Investment tax credits 61,072 62,213
Income tax related regulatory liabilities,
net 3,761 4,931
Other 20,761 16,179
--------- ---------
480,173 481,987
--------- ----------
$ 2,091,424 $ 2,086,322
========= =========
The accompanying notes to consolidated financial statements as they relate t
SWEPCO are an integral part of these statements.
29
SWEPCO
Consolidated Statements of Cash Flows (unaudited)
Southwestern Electric Power Company
Three Months Ended
March 31,
---------------------
1999 1998
--------- ---------
(thousands)
OPERATING ACTIVITIES
Net Income $ 12,653 $ 16,931
Non-cash Items Included in Net Income
Depreciation and amortization 27,403 25,850
Deferred income taxes and investment tax
credits (4,510) (3,181)
Changes in Assets and Liabilities
Accounts receivable (4,130) 11,344
Fuel inventory (13,109) (782)
Accounts payable (26,393) (21,282)
Payables to affiliates (8,789) (6,129)
Accrued taxes 11,121 13,431
Other deferred credits 4,582 2,225
Other (2,909) 1,734
--------- ---------
(4,081) 40,141
--------- ---------
INVESTING ACTIVITIES
Construction expenditures (17,250) (18,078)
Other 383 (1,246)
--------- ---------
(16,867) (19,324)
--------- ---------
FINANCING ACTIVITIES
Redemption of preferred stock (1) (2)
Retirement of long-term debt (1,637) (1,079)
Change in advances from affiliates 47,796 492
Payment of dividends (27,057) (14,534)
--------- ---------
19,101 (15,123)
--------- ---------
Net Change in Cash and Cash Equivalents (1,847) 5,694
Cash and Cash Equivalents at Beginning of Year 4,444 2,298
--------- ---------
Cash and Cash Equivalents at End of Period $ 2,597 $ 7,992
========= =========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on Trust Preferred Securities) $ 14,485 $ 14,195
========= =========
Income taxes paid $ 1,676 $ 307
========= =========
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
30
SOUTHWESTERN ELECTRIC POWER COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED MARCH 31, 1999 AND 1998
Net income for common stock for the first quarter of 1999 was $12.6
million, a decrease of $3.8 million, or 23%, from the same period of 1998. The
decrease resulted primarily from increased maintenance expenses, depreciation
and amortization expense and taxes, other than income.
Electric operating revenues decreased $0.5 million to $197.1 million
during the first quarter of 1999 compared to the first quarter of 1998. The
decrease was due primarily to lower fuel revenue of $0.6 million which was
offset in part by increased non-fuel revenue of $0.2 million.
Fuel expense for the first quarter of 1999 was relatively stable when
compared to the same period of 1998. Fuel expense for 1999 was affected by
increased natural gas generation, offset in part by a decrease in average unit
fuel costs for natural gas.
Other operating expenses were $30.2 million during the first quarter of
1999, a decrease of $0.9 million from the comparable period of 1998. The
decrease was due primarily to decreases in employee-related expenses and
decreased customer assistance expenses. Maintenance expenses increased $2.0
million, or 19%, due primarily to scheduled power plant maintenance expenses and
increases in tree-trimming maintenance activities.
Taxes, other than income increased $2.3 million, or 17%, as a result of
increased ad valorem taxes, which reflect higher assessed values, and increased
state franchise taxes which are calculated on a higher 1998 taxable income.
Operating income taxes decreased $2.4 million, or 38%, as a result of lower
taxable income for the first quarter of 1999.
Interest charges increased $0.6 million for the first quarter of 1999, due
primarily to increases in the levels of short-term debt.
31
WTU
WEST TEXAS UTILITIES COMPANY
PART 1. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
32
WTU
Statements of Income (unaudited)
West Texas Utilities Company
Three Months Ended March 31,
----------------------------
1999 1998
--------- ---------
(thousands)
Electric Operating Revenues $ 81,052 $ 83,948
--------- ---------
Operating Expenses and Taxes
Fuel 23,134 25,231
Purchased power 8,294 7,908
Other operating 20,133 22,386
Maintenance 4,178 3,186
Depreciation and amortization 10,774 10,669
Taxes, other than income 7,488 5,555
Income taxes (247) 945
--------- ---------
73,754 75,880
--------- ---------
Operating Income 7,298 8,068
--------- ---------
Other Income and Deductions
Allowance for equity funds used during
construction 96 133
Other (199) 779
Non-operating income taxes 219 91
--------- ---------
116 1,003
--------- ---------
Income Before Interest Charges 7,414 9,071
--------- ---------
Interest Charges
Interest on long-term debt 5,088 5,088
Interest on short-term debt and other 1,162 1,004
Allowance for borrowed funds used during
construction (143) (111)
--------- ---------
6,107 5,981
--------- ---------
Net Income 1,307 3,090
Less: Preferred stock dividends 26 26
--------- ---------
Net Income for Common Stock $ 1,281 $ 3,064
========= =========
The accompanying notes to financial statements as they relate to WTU
are an integral part of these statements.
33
WTU
Balance Sheets
West Texas Utilities Company
March 31, December 31,
1999 1998
(unaudited) (audited)
------------ ------------
(thousands)
ASSETS
Electric Utility Plant
Production $ 433,170 $ 429,896
Transmission 214,729 213,630
Distribution 386,086 382,373
General 110,125 108,878
Construction work in progress 10,834 11,805
------------ ------------
1,154,944 1,146,582
Less - Accumulated depreciation 476,852 473,503
------------ ------------
678,092 673,079
------------ ------------
Current Assets
Cash 2,700 2,093
Accounts receivable 31,322 31,689
Materials and supplies, at average cost 14,580 14,191
Fuel inventory 14,093 13,186
Accumulated deferred income taxes 1,722 366
Under-recovered fuel costs 238 3,980
Prepayments and other 6,976 5,988
------------ ------------
71,631 71,493
------------ ------------
Deferred Charges and Other Assets
Deferred Oklaunion costs 13,978 14,910
Restructuring costs 6,607 7,079
Other 53,145 53,251
------------ ------------
73,730 75,240
------------ ------------
$ 823,453 $ 819,812
============ ============
The accompanying notes to financial statements as they relate to WTU
are an integral part of these statements.
34
WTU
Balance Sheets
West Texas Utilities Company
March 31, December 31,
1999 1998
(unaudited) (audited)
----------- -----------
CAPITALIZATION AND LIABILITIES (thousands)
Capitalization
Common stock: $25 par value
Authorized: 7,800,000 shares
Issued and outstanding: 5,488,560
shares $ 137,214 $ 137,214
Paid-in capital 2,236 2,236
Retained earnings 111,470 117,189
----------- -----------
250,920 45% 256,639 46%
----------- ----- ----------- ------
Preferred stock 2,482 --% 2,482 --%
Long-term debt 303,561 55% 303,519 54%
----------- ----- ----------- ------
556,963 100% 562,640 100%
----------- ----- ----------- ------
Current Liabilities
Advances from affiliates 18,634 4,573
Payables to affiliates 15,794 19,917
Accounts payable 31,017 31,473
Accrued taxes 5,488 10,031
Accrued interest 8,000 4,125
Other 4,918 3,797
----------- -----------
83,851 73,916
----------- -----------
Deferred Credits
Accumulated deferred income taxes 141,145 140,731
Investment tax credits 26,078 26,597
Income tax related regulatory
liabilities, net 11,627 12,088
Other 3,789 3,840
----------- -----------
182,639 183,256
----------- -----------
$ 823,453 $ 819,812
=========== ===========
The accompanying notes to financial statements as they relate to WTU
are an integral part of these statements.
35
WTU
Statements of Cash Flows (unaudited)
West Texas Utilities Company
Three Months Ended
March 31,
------------------
1999 1998
------- -------
(thousands)
OPERATING ACTIVITIES
Net Income $ 1,307 $ 3,090
Non-cash Items Included in Net Income
Depreciation and amortization 11,051 10,924
Deferred income taxes and investment tax
credits (1,922) (2,200)
Changes in Assets and Liabilities
Accounts receivable 367 (11,746)
Fuel inventory (907) 228
Accounts payable (456) 10,090
Payables to affiliates (4,123) (7,788)
Accrued taxes (4,543) (2,864)
Accrued interest 3,875 3,568
Fuel recovery 3,742 (398)
Other deferred credits (51) (13,336)
Other (246) 960
------- -------
8,094 (9,472)
------- -------
INVESTING ACTIVITIES
Construction expenditures (12,445) (9,886)
Other (2,077) (345)
------- -------
(14,522) (10,231)
------- -------
FINANCING ACTIVITIES
Payment of dividends (7,026) (4,026)
Change in advances from affiliates 14,061 6,037
------- -------
7,035 2,011
------- -------
Net Change in Cash and Cash Equivalents 607 (17,692)
Cash and Cash Equivalents at Beginning of Year 2,093 20,613
------- -------
Cash and Cash Equivalents at End of Period $ 2,700 $ 2,921
======= =======
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $ 1,200 $ 1,134
======= =======
Income taxes paid $ 295 $ --
======= =======
The accompanying notes to financial statements as they relate to WTU
are an integral part of these statements.
36
WEST TEXAS UTILITIES COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED MARCH 31, 1999 AND 1998
Net income for common stock decreased to $1.3 million for the first
quarter of 1999 from $3.1 million in the first quarter of 1998. The decline in
net income was due to decreases in electric operating revenues and other income.
These decreases were partially offset by a decline in operating expenses and
taxes.
Electric operating revenues decreased $2.9 million, or 3%, in the first
quarter of 1999 compared to the first quarter of 1998. The decrease was due
primarily to lower non-fuel related revenues of $2.6 million in 1999 due to less
favorable weather in the first quarter of 1999 as compared to 1998.
Fuel expense decreased $2.1 million, or 8%, in the first quarter of 1999
compared to the first quarter of 1998 due primarily to a reduction in average
unit fuel costs from $1.95 per MMbtu in 1998 to $1.75 per MMbtu in 1999. The
decrease was due primarily to a decline in the spot market price of natural gas.
The decrease in fuel expense was partially offset by an increase in purchased
power of $0.4 million from the first quarter of 1998 to the first quarter of
1999 due to increased purchases resulting from scheduled maintenance for a
generating plant.
Other operating expenses declined $2.3 million for the first quarter of
1999 compared to the same period of 1998 due to a $2.2 million reduction in
transmission expenses. This reduction resulted from a transmission service
agreement adjustment related to the final order in Texas Commission Docket No.
17285. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint
vs. Texas Utilities Electric Company (Docket No. 17285). Maintenance expense
rose $1.0 million from the comparable period in 1998 due primarily to scheduled
maintenance occurring in the first quarter of 1999.
Taxes, other than income increased $1.9 million in the first quarter of
1999 compared to the first quarter of 1998 due to an increase in ad valorem
taxes, which reflect higher assessed values, and state franchise taxes, which
are calculated based on a higher 1998 taxable income.
Operating income taxes decreased $1.2 million as a result of lower taxable
income for the first quarter of 1999 compared to the first quarter of 1998.
Other income and deductions declined $0.9 million in the first quarter of
1999 compared to the same time period in 1998. Income from merchandise
operations decreased $0.5 million from 1998 to 1999 for the respective time
periods. Interest and dividend income also declined $0.3 million for the first
quarter of 1999 compared to the same quarter of 1998.
37
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. PROPOSED AEP MERGER CSW, CPL, PSO, SWEPCO, WTU
NOTE 6. BUSINESS SEGMENTS CSW
NOTE 7. SOUTH AMERICAN INVESTMENTS CSW
38
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. PRINCIPLES OF PREPARATION
General
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 included in the
Registrants' Combined Annual Report on Form 10-K for the year ended December 31,
1998.
The unaudited financial information reflects all adjustments of a normal
recurring nature which are, in the opinion of management of such Registrant,
necessary for a fair statement of the results of operations for the interim
periods. Information for quarterly periods is affected by seasonal variations in
sales, rate changes, timing of fuel expense recovery and other factors.
Benefit Plans
During the first quarter of 1999, CSW changed to the Market Method to
determine pension costs. Prior to January 1, 1999, CSW utilized the market value
of the pension assets at September 30 in its calculation of pension costs. The
change was made to minimize the plan asset market value volatility effect on
recorded pension costs. Adopting the Market Method did not have a material
effect on first quarter 1999 results of operations or financial position on CSW
or its subsidiaries. The cumulative effect of the accounting change to the
Market Method was not material to first quarter 1999 results of operations or
financial position on CSW or its subsidiaries.
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 condition.
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 was 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, the 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
39
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. At March 31, 1999, the nuclear trust
balance was $72.0 million.
Foreign Currency Translation
The financial statements of SEEBOARD U.S.A., which are included in CSW's
consolidated financial statements, have been translated from British pounds to
U.S. dollars in accordance with SFAS No. 52. All balance sheet accounts are
translated at the exchange rate at the end of the period and all income
statement items are translated at the average exchange rate for the applicable
period. At March 31, 1999, the current exchange rate was approximately
(pound)1.00=$1.61, and the average exchange rate for the three month period
ended March 31, 1999 was approximately (pound)1.00=$1.62. At March 31, 1998, the
current exchange rate was approximately (pound)l.00=$1.68, and the average
exchange rate for the three month period ended March 31, 1998 was approximately
(pound)l.00=$1.65. All the resulting translation adjustments are recorded
directly to Accumulated other comprehensive income on CSW's Consolidated Balance
Sheets. Cash flow statement items are translated at a combination of average,
historical and current exchange rates. The non-cash impact of the changes in
exchange rates on cash and cash equivalents, resulting from the translation of
items at the different exchange rates, is shown on CSW's Consolidated Statements
of Cash Flows in Effect of exchange rate changes on cash and cash equivalents.
See NOTE 7. SOUTH AMERICAN INVESTMENTS for information regarding CSW's
investments in Brazil.
Risk Management
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. CSW has utilized certain risk management tools, including cross
currency swaps, foreign currency futures and foreign currency options, to manage
adverse changes in exchange rates and to facilitate financing transactions
resulting from CSW's acquisition of SEEBOARD.
SEEBOARD has entered into contracts for differences to reduce exposure to
fluctuations in the price of electricity purchased from the United Kingdom's
electricity power pool. This pool was established at privatization of the United
Kingdom's electric industry for the bulk trading of electricity between
generators and suppliers.
CSW accounts for these transactions as hedge transactions and any gains or
losses associated with the risk management tools are recognized in the financial
statements at the time the hedge transactions are settled. CSW believes its
credit risk in these contracts is negligible.
Reclassifications
Certain financial statement items for prior periods have been reclassified
to conform to the 1999 presentation.
2. LITIGATION AND REGULATORY PROCEEDINGS
See the Registrants' Combined Annual Report on Form 10-K for the year
ended December 31, 1998 for additional discussion of litigation and regulatory
proceedings. Reference is also made to NOTE 3. COMMITMENTS AND CONTINGENT
40
LIABILITIES and ITEM 2. MD&A - RATES AND REGULATORY MATTERS, CPL Rate Review -
Docket No. 14965 for additional discussion of litigation and regulatory matters.
Litigation Related to the Rights Plan and AEP Merger
Two lawsuits were filed in Delaware state court seeking to enjoin the AEP
Merger. CSW and each of its directors were named as defendants in both cases.
The first suit alleged that the Rights Plan, approved by the CSW Board of
Directors on September 27, 1997, constituted a "poison pill" precluding
acquisition offers and resulting in a heightened fiduciary duty on the part of
the CSW Board of Directors to pursue an auction-type sales process to obtain the
best value for CSW stockholders. This suit was voluntarily dismissed on April
12, 1999. The second suit alleged that the AEP Merger was unfair to CSW
stockholders in that it did not recognize the underlying intrinsic value of
CSW's assets and its future profitability. The plaintiffs have filed a notice of
dismissal in that case.
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 reduction methodology in the CPL 1997 Final Order pursuant
to which CPL's annual rates were reduced by $13 million beginning May 1, 1998
and an additional $13 million on May 1, 1999.
CPL appealed the CPL 1997 Final Order to the State District Court of
Travis County to challenge the resolution of several issues in the rate case.
The primary issues include: (i) the classification of $800 million of invested
capital in STP as ECOM which was assigned a lower return on equity than non-ECOM
property; (ii) the Texas Commission's application of the "Glide Path" rate
reduction methodology applied on May 1, 1998 and May 1, 1999; and (iii) the $18
million of disallowed affiliate expenses 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 reductions were implemented in
May 1998 and May 1999. Hearings on the appeal were held during the third quarter
of 1998, and a judgment was issued in February 1999 affirming the Texas
Commission order, except for a consolidated tax issue in the amount of $6
million, which was remanded to the Texas Commission. While CPL appealed this
most recent order to the Court of Appeals, 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. Regarding the AEP/CSW merger
case, on May 4, 1999, AEP and CSW announced that they had reached a stipulated
agreement with the general counsel of the Texas Commission and other intervenors
in the state of Texas. If the stipulated agreement is approved by the Texas
Commission and the AEP Merger is ultimately consummated, the agreement states
that CSW will withdraw its appeal with respect to the "glide path" rate
reduction methodology. See NOTE 5. PROPOSED AEP MERGER and ITEM 2. MD&A -
PROPOSED AEP MERGER for additional information on the stipulated agreement.
CPL currently accounts for the economic effects of regulation in
accordance with SFAS No. 71. Pursuant to the provisions of SFAS No. 71, CPL has
recorded approximately $1.2 billion of regulatory-related assets at March 31,
1999. 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, 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
41
deregulated plant assets. 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.
Also see ITEM 2. MD&A - RATES AND REGULATORY MATTERS, CPL Rate Review -
Docket No. 14965 for a discussion of the CPL 1997 Final Order.
CPL Fuel Proceeding
On December 31, 1998, CPL 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. CPL did not seek a
surcharge of the reconciled balance in the filing.
During the reconciliation period of July 1, 1995 through June 30, 1998,
CPL incurred $828.5 million in eligible fuel and fuel-related expenses. The
Texas jurisdictional allocation of such fuel and fuel-related expenses is $783.4
million.
In addition to requesting reconciliation of its fuel and fuel-related
expenses for the reconciliation period, CPL requested the Texas Commission to
authorize CPL to recover the reward that was earned during the reconciliation
period under the performance standard adopted in Docket No. 14965 for CPL's
share of STP. In Docket No. 14965, the Texas Commission adopted a three-year
average capacity factor of 83% performance standard for STP. During the
reconciliation period, STP operated at a net capacity factor of 93.1%, saving
customers $28.4 million in fuel and purchased power costs. CPL proposed an equal
sharing with its customers of the benefit, or reward, resulting from STP
operation during the reconciliation period above the 83% capacity factor target,
net of any reduction of eligible fuel expense as a result of this case. CPL
requested that it be authorized to recover the Texas retail amount, or $13.4
million, of its 50% share of the performance standard reward, by including 1/36
of this amount, or $373,003, in retail eligible fuel expense each month for the
three-year period following the Texas Commission's order in this case. These
amounts will be included in calculating the monthly over-recovery or
under-recovery balances. CPL further requested that it be authorized to apply
the amounts of the reward recovered through Texas retail eligible fuel expense
as additional amortization of its STP deferred accounting regulatory asset.
CPL also made an alternative proposal if consistent and uniform equal
sharing of potential penalties and rewards is not intended by the Texas
Commission. CPL proposed that it be authorized to recover the Texas portion of
50% of the reward by including 1/36 of this amount, or $373,003, in Texas retail
eligible fuel expense each month for three years following the Texas Commission
order in this case and that the remaining 50% of the reward be "banked" to be
used against potential future penalties or other disallowance of fuel costs. CPL
will recognize such amounts at the time Texas Commission approval is obtained.
CPL Municipal Franchise Fee Litigation
In May 1996, the City of San Juan, Texas filed a class action in Hidalgo
County, Texas District Court on behalf of all cities served by CPL based upon
CPL's alleged underpayment of municipal franchise fees. The plaintiffs' petition
asserts various contract and tort claims against CPL as well as certain audit
rights. The suit seeks unspecified damages and attorneys' fees. CPL filed a
counterclaim for any overpayment of franchise fees it may have made as well as
its attorneys' fees. CPL also filed a motion to transfer venue to Nueces County,
Texas, and a plea to the jurisdiction and pleas in abatement asserting that the
Texas Commission has primary jurisdiction over the claims. In May 1996 and
December 1996, respectively, the Cities of Pharr, Texas and San Benito, Texas
filed individual suits making claims virtually identical to those claimed by the
42
City of San Juan. In January 1997, CPL filed an original petition at the Texas
Commission requesting the Texas Commission to declare its jurisdiction over
CPL's collection and payment of municipal franchise fees.
In April 1997, the Texas Commission issued a declaratory order in which it
declined to assert jurisdiction over the claims of the City of San Juan. CPL
appealed the Texas Commission's decision to the Travis County, Texas District
Court, which affirmed the Texas Commission ruling on February 19, 1999. After
the Texas Commission's order, the Hidalgo County District Court overruled CPL's
plea to the jurisdiction and plea in abatement. In July 1997, the Hidalgo County
District Court entered an order certifying the case as a class action. CPL
appealed this order to the Corpus Christi Court of Appeals. In February 1998,
the Corpus Christi Court of Appeals affirmed the trial court's order certifying
the class. CPL appealed the Corpus Christi Court of Appeals ruling to the Texas
Supreme Court, which declined to hear the case. In August 1998, the Hidalgo
County District Court ordered the case to mediation and suspended all
proceedings pending the completion of the mediation. The mediation was completed
in December 1998, but the case was not resolved.
On January 5, 1999, a class notice was mailed to each of the cities served
by CPL. Over 90 of the 128 cities declined to participate in the lawsuit.
However, CPL has pledged that if any final, non-appealable court decision in the
litigation awards a judgement against CPL for a franchise underpayment, CPL will
extend the principles of that decision, with regard to the franchise
underpayment, to the cities that decline to participate in the litigation. The
plaintiffs have filed a motion to extend the time for the cities to decide
whether to participate in the lawsuit.
Although CPL believes that it has substantial defenses to the cities'
claims and intends to defend itself against the cities' claims and pursue its
counterclaims vigorously, CPL cannot predict the outcome of the municipal
franchise fee litigation or its impact on CPL's results of operations or
financial position.
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.
CPL and WTU Complaint vs. Texas Utilities Electric Company Complaint
(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 had been
effectively double charging for transmission service within ERCOT. A proposal
for decision received in February 1998 recommended approval of a CPL and WTU
proposed reduction 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 September 1998. Even though Texas Utilities
Electric Company has appealed the Texas Commission final order, it refunded
$26.6 million to CPL and WTU in November 1998. Prior to the Texas Commission's
September 1998 decision, the $15.5 million annual payment to Texas Utilities
Electric Company had been allocated to the U.S. Electric Operating Companies. As
a result of this order, the payment will continue to be recorded on CPL's and
WTU's books as a reduction to ERCOT transmission expense with no future expenses
on the books of PSO and SWEPCO.
43
Transmission Coordination Agreement
The transmission coordination agreement provides the means by which the
U.S. Electric Operating Companies will operate, plan and maintain the four
separate transmission systems as a single unit. The agreement also establishes a
process for the U.S. Electric Operating Companies to allocate revenues received
under open access transmission tariffs. In August 1998, the FERC accepted the
transmission coordination agreement for filing, suspended it for a nominal
period, and made it effective retroactive to January 1, 1997, subject to refund
and investigation. In the first quarter of 1999, U.S. Electric Operating
Companies and supporting intervenor signatories filed an uncontested offer of
settlement, which is awaiting approval from the FERC. Management cannot predict
if FERC will approve the offer of settlement.
PSO PCB Cases
PSO has been named a defendant in petitions filed in state court in
Oklahoma in February and August 1996. The petitions allege that the plaintiffs
suffered personal injury and fear future injury as a result of contamination by
PCBs from a transformer malfunction that occurred in April 1982 at the Page
Belcher Federal Building in Tulsa, Oklahoma. Each of the plaintiffs seeks actual
and punitive damages in excess of $10,000. Other claims arising from this
incident have been settled and the suits dismissed. Management believes that PSO
has defenses to the remaining complaints and intends to defend the suits
vigorously. Management believes that the remaining claims, excluding claims for
punitive damages, are covered by insurance. Management also believes that the
ultimate resolution of the remaining lawsuits will not have a material adverse
effect on CSW's or PSO's results of operations or financial condition.
PSO Union Negotiations
In March 1999, PSO and its Local Union 1002 of the IBEW reached an
agreement to contract negotiations, which began in July 1996. In December 1996,
PSO had implemented portions of its then final proposal after declaring an
impasse. The principal issue of disagreement involved PSO's need for flexibility
in a deregulated environment. In April 1997, Oklahoma's governor signed into law
an electric industry-restructuring bill. The law mandates the implementation of
retail competition to begin on July 1, 2002. Following passage of the law, PSO
resumed negotiations with the union. The new contract allows PSO to be in a
better position to compete as the electric utility industry in Oklahoma
restructures. The effective of the new agreement was on April 4, 1999, and it
will remain in effect until September 30, 2000.
PSO and the union continued discussions to resolve issues related to a
recent NLRB ruling against PSO. In October 1998, PSO received an adverse ruling
from a NLRB ALJ on the union's unfair labor practice charge against PSO. The ALJ
upheld PSO's right to cease collecting union dues through payroll deductions.
The ALJ ruled that PSO did negotiate in good faith but that PSO's position on
some issues was too harsh, and therefore the December 1996 implementation should
be rolled back and employees made whole. Additionally, the ALJ ruled that PSO
improperly solicited employees to withdraw from the union. In December 1998, PSO
appealed the ALJ's ruling to the NLRB. At this time, PSO cannot predict the
ultimate outcome of the NLRB matter. However, PSO believes that it will not have
a material adverse effect on its results of operations or financial condition.
As a result of the agreement, the union agreed to withdraw its opposition to the
AEP merger proceedings.
SWEPCO Fuel Proceeding
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 under-recovered Texas
jurisdictional fuel costs in the amount balance of approximately $16.8 million,
44
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 as to 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 resulted 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 expense. 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 was not associated with any
particular activity or issue within the fuel proceedings.
On April 8, 1998, the ALJ 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 declined to allow
SWEPCO to recover its transmission equalization payments as a component of
eligible fuel expense. This ruling resulted in an earnings reduction of
approximately $1.8 million, which was recorded in the second quarter of 1998. On
June 8, 1998, SWEPCO filed a motion for rehearing on the transmission
equalization issue, which was denied through operation of law. 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 has filed an
appeal regarding this matter in the State District Court of Travis County,
Texas. Management is unable to predict the ultimate outcome of this litigation.
However, SWEPCO will withdraw the appeal if the stipulated AEP merger settlement
is approved and the merger is consummated.
SWEPCO Lignite Mining Agreement Litigation
SWEPCO and CLECO are each a 50% owner of Dolet Hills Power Station Unit 1
and jointly own lignite reserves in the Dolet Hills area of northwestern
Louisiana. In 1982, SWEPCO and CLECO entered into a lignite mining agreement
with the DHMV, a partnership for the mining and delivery of lignite from a
portion of these reserves.
On April 15, 1997, SWEPCO and CLECO filed suit against DHMV and its
partners in the United States District Court for the Western District of
Louisiana seeking to enforce various obligations of DHMV to SWEPCO and CLECO
under the lignite mining agreement, including provisions relating to the quality
of the delivered lignite, pricing, and mine reclamation practices. On June 15,
1997, DHMV filed an answer denying the allegations in the suit and filed a
counterclaim asserting various contract-related claims against SWEPCO and CLECO.
SWEPCO and CLECO have denied the allegations in the counterclaims on the grounds
the counterclaims have no merit. On January 8, 1999, SWEPCO and CLECO amended
the claims against DHMV in the lawsuit to include a request that, if the court
determines that DHMV has breached the lignite mining agreement, the lignite
mining agreement be terminated. This federal court suit is set for trial
beginning in November 1999.
SWEPCO intends to vigorously prosecute the claims against DHMV and defend
against the counterclaims which DHMV has asserted. Although SWEPCO cannot
predict the ultimate outcome of this matter, management believes that the
resolution of this matter will not have a material adverse effect on SWEPCO's
results of operations or financial condition.
45
WTU Fuel Reconciliation
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.
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 resulted
from the Texas Commission's ruling concerning transmission equalization payments
in the SWEPCO fuel reconciliation described above.
On October 14, 1998, the general counsel of the Texas Commission and WTU
agreed to a non-unanimous stipulation regarding WTU's eligible fuel and
fuel-related expenses. One party does not accept the stipulation's proposed
treatment of transmission equalization payment. Parties filed briefs in November
1998, and a proposal for decision from the ALJ was received on January 29, 1999.
In the proposal for decision, the ALJ recommends recovery of all eligible fuel
and fuel-related expenses requested by WTU except for $70,000, or approximately
0.02%, of the amount requested. On March 26, 1999, the Texas Commission issued a
final order accepting the ALJ's proposal for decision. The final order provided
for the recovery of ERCOT ISO transaction fees in eligible fuel expense, which
the ALJ had previously disallowed. On April 14, 1999, certain cities served by
WTU filed motions for rehearing at the Texas Commission. The motions for
rehearing were considered by the Texas Commission on April 29, 1999, and no
material change was made to the March 26, 1999 final order. The period for
motions for rehearing has not yet lapsed.
3. COMMITMENTS AND CONTINGENT LIABILITIES
SWEPCO Henry W. Pirkey Power Plant
In connection with the South Hallsville lignite-mining contract for its
Henry W. Pirkey Power Plant, SWEPCO has agreed, under certain conditions, to
assume the obligations of the mining contractor. As of March 31, 1999, the
maximum amount SWEPCO believes it may have to assume is $92 million. However,
the maximum amount may vary as the mining contractor's need for funds
fluctuates. The contractor's actual obligation outstanding at March 31, 1999 was
$70 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 guarantee the
costs of mine reclamation of up to $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.
SWEPCO Cajun Asset Purchase Proposal
Cajun filed a petition for reorganization under Chapter 11 of the United
States Bankruptcy Code on December 21, 1994 and is currently operating under the
supervision of the United States Bankruptcy Court for the Middle District of
Louisiana.
46
On April 16, 1999, the April 1999 SWEPCO Plan was filed with the
bankruptcy court. The April 1999 SWEPCO Plan replaces all previous plans filed
by SWEPCO. Under the April 1999 SWEPCO Plan, a SWEPCO affiliate would acquire
all the non-nuclear assets of Cajun for $1.017 billion. SWEPCO's bid is based on
interest rate adjustments to its base bid of $940.5 million. The April 1999
SWEPCO Plan incorporates the terms of a settlement between the RUS, the Cajun
Members Committee, Clairborne Electric Cooperative, Inc. and SWEPCO. In
addition, the April 1999 SWEPCO Plan provides for SWEPCO and the Cajun member
cooperatives to enter into long-term power supply agreements with rate plan
options and market access provisions designed to ensure long-term
competitiveness of the cooperatives. Eight cooperatives and Central Louisiana
Electric Company, Inc. agreed to purchase power from SWEPCO, if the bankruptcy
court confirms the April 1999 SWEPCO Plan.
The trustee for Cajun supports a revised competing bid of $960 million, on
an interest-adjusted basis, filed by the Cajun trustee and Louisiana Generating
LLC on April 16, 1999. The Cajun trustee filed additional changes to the
proposed purchase price on April 19, 1999. On April 22, 1999, the Cajun trustee
and Louisiana Generating LLC then filed additional changes to the proposed
purchase price. The interest-adjusted purchase price under the amended Louisiana
Generating LLC bid is now approximately $1.037 billion.
The bankruptcy court has ordered mediation to occur among the parties in
an effort to resolve the bankruptcy case. Final confirmation hearings are
scheduled to begin June 22, 1999.
Consummation of the April 1999 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
boards of directors approvals. If the April 1999 SWEPCO Plan is ultimately
confirmed by the bankruptcy court, the $1.017 billion required to consummate the
acquisition of Cajun's non-nuclear assets is expected to be financed through a
combination of external non-recourse borrowings and internally generated funds.
There can be no assurance that the bankruptcy court will confirm the April 1999
SWEPCO Plan or, if it is confirmed, that federal and state regulators will
approve it. As of March 31, 1999, SWEPCO had deferred $12.1 million in costs
related to the Cajun acquisition on its consolidated balance sheet, which would
be expensed if the April 1999 SWEPCO Plan is not ultimately successful.
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 scenario is appropriate
since this site has been industrial/commercial for more than 100 years, and
Mississippi Power plans to continue this type of usage. Mississippi Power and
SWEPCO also presented a report to the MDEQ demonstrating that the ground water
on the site was not potable, further demonstrating that cleanup to residential
standards is not necessary. Resolution of this issue is still pending.
Currently, a feasibility study is being conducted to evaluate remedial
strategies for the property. The feasibility study process will require public
input prior to a final decision and will result in a remediation strategy along
with associated costs.
47
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 an
additional $2 million for the cleanup of the site.
The State of Mississippi has passed Brownfield 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 to allow the cleanup
project to move forward.
SWEPCO Wilkes Power Plant Copper Limit Compliance
The EPA has cited SWEPCO's Wilkes power plant in an administrative order
for wastewater permit violations related to copper level limits. Past and
planned compliance activities, including activities that have been conducted to
determine the source of copper, were presented by SWEPCO to EPA during an
administrative meeting, which was held on August 13, 1998. Negotiations continue
between SWEPCO and the EPA. The EPA has not issued an administrative penalty
order nor a referral to the United States Department of Justice for judicial
action with monetary fines. On December 29, 1998, the TNRCC fined SWEPCO $8,250
for the same issue on the state permit, which was paid in February 1999.
SEEBOARD London Underground Commitment
SEEBOARD has committed (pound)79 million, or $127 million, for costs
associated with its contract related to the London Underground transportation
system. In 1998, SEEBOARD, through its subsidiary, SEEBOARD Powerlink, signed a
$1.6 billion, 30 year contract as a joint venture partner to operate, maintain,
finance and renew the high-voltage power distribution network of the London
Underground.
SEEBOARD Third Party Pension Litigation
In the U.K., National Grid Group and National Power have been involved in
continuing litigation in respect of their use of actuarial surpluses declared in
the electricity industry's occupational pension scheme, the Electricity Supply
Pension Scheme. A high court decision in favor of the National Grid Group and
National Power was appealed and on February 10, 1999 the Court of Appeal ruled
that the particular arrangements made by these corporations to dispose of the
surplus, partly by canceling liabilities relating to additional pension payments
resulting from early retirement, were invalid due to procedural defects.
SEEBOARD employees are members of the Electricity Supply Pension Scheme and
SEEBOARD has made similar use of actuarial surplus. For SEEBOARD, the amount of
the cancelled payments was approximately $33 million. The Court of Appeal did
not order the National Grid Group and National Power to make payment to the
Electricity Supply Pension Scheme but will hold a further hearing to decide what
action to take. It is likely that the case will then be referred to the U.K.
House of Lords. The final outcome of the hearing, or any referral to the U.K.
House of Lords, cannot be determined and therefore it is not possible for
management to quantify the potential impact, if any, on the results of
operations and financial condition of CSW and/or SEEBOARD.
Diversified Electric Loans and Commitments
CSW Energy began construction in August 1998 of a 500 MW power plant,
known as Frontera, in the Rio Grande Valley, near the city of Mission, Texas.
In addition to funds already spent, at March 31, 1999, CSW Energy had committed
costs of approximately $36 million, including development construction and
financing of the projected $210 million project costs. The natural gas-fired
facility should begin simple cycle operation in the summer of 1999 and combined
cycle operation by the end of 1999. The Frontera project is being built as a
merchant power plant. Frontera is expected to supply power to the rapidly
growing Rio Grande Valley and to supply customers throughout Texas. Pursuant to
AEP and CSW's stipulated settlement with several intervenors in the state of
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Texas related to the AEP merger, CSW Energy willsell 250 MW of Frontera upon
completion of the merger. See NOTE 5. PROPOSED AEP MERGER and ITEM 2. MD&A,
PROPOSED AEP MERGER for additional information including timing of the sale.
CSW Energy has entered into an agreement with Texas Eastman to construct
and operate a 440-MW cogeneration facility in Longview, Texas. This facility
will be known as the Eastex Cogeneration Project. At March 31, 1999, CSW Energy
had construction obligations of $72 million. Construction of the facility is
scheduled to begin in mid-1999, with expected operation in 2001. Excess
electricity generated by the plant will be sold by CSW Energy in the wholesale
electricity market.
During the first quarter of 1999, CSW International and its 50% joint
venture partner, Scottish Power, obtained construction financing of (pound)190
million (at March 31, 1999, $306 million) for the South Coast power project, a
400-MW combined cycle gas turbine power station in Shoreham, United Kingdom. The
permanent financing of (pound)152 million (at March 31, 1999, $245 million) of
debt was also arranged. CSW International has guaranteed approximately $31
million of the (pound)190 million construction financing, and the permanent
financing is unconditionally guaranteed by the project. Commercial operation is
expected to begin in 2000.
CSW, CSW Energy and CSW International have provided letters of credit and
guarantees on behalf of independent power projects of approximately $26 million,
$23 million, and $237 million, respectively, as of March 31, 1999.
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
At March 31, 1999, approximately $1.3 billion of CSW's subsidiary
companies' retained earnings were available for payment of cash dividends by
such subsidiaries to CSW. The amounts of retained earnings available for
dividends attributable to each the U.S. Electric Operating Companies at March
31, 1999 is as follows.
CPL-$718 million PSO-$132 million SWEPCO-$286 million WTU-$111 million
5. 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. The combined company would serve more than 4.6 million customers in
11 states and approximately 4 million customers outside the United States. 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 stockholders
approved the merger.
Under the merger agreement, each common share of CSW will be converted
into 0.6 shares of AEP common stock. CSW stockholders will own approximately 40%
of the combined company. CSW plans to continue to pay dividends on its common
stock until the closing of the AEP Merger at approximately the same times and
rates per share as in 1998, subject to continuing evaluation of CSW's financial
condition, earnings, prospects and other factors by the CSW board of directors.
49
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's subsidiaries.
AEP and CSW 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 expect to 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 expects to use a combination of
growth, reduced hiring and attrition to minimize the need for employee
separations. Transition teams of employees from both companies will make
organizational and staffing recommendations.
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 limited to specific agreed upon
projects and in 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 limitations do not preclude CSW and its subsidiaries from
making investments and expenditures in amounts previously budgeted.
Merger Regulatory Approvals
The merger is conditioned, among other things, upon the approval of
several state and federal regulatory agencies.
General
Testimony submitted in the filings in Arkansas, Louisiana, Oklahoma, Texas
and at the FERC outlined the expected company-wide benefits of the merger to AEP
and CSW customers and shareholders. These expected benefits include $2 billion
in non-fuel savings over 10 years and $98 million in net fuel savings over 10
years.
FERC
On April 30, 1998, AEP and CSW jointly filed a request with the FERC for
approval of their proposed merger.
Hearings at the FERC are scheduled to begin June 29, 1999. A final order
is expected in the fourth quarter of 1999.
Arkansas
On June 12, 1998, AEP and CSW jointly filed a request with the Arkansas
Commission for approval of their proposed merger. The Arkansas Commission issued
an order approving the merger subject to approval of the associated regulatory
plan on August 13, 1998. On December 17, 1998, the Arkansas Commission issued a
final order granting conditional approval of a stipulated agreement related to a
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proposed merger regulatory plan. The stipulated agreement calls for SWEPCO to
reduce rates through a net merger savings rider for its Arkansas retail
customers by $6 million over the five-year period following completion of the
merger. The Arkansas Commission order notes the possibility of decisions in
other jurisdictions adversely affecting provisions of the stipulated agreement.
Consequently, the Arkansas Commission final order is conditioned on its
consideration of approval of the merger in other state and federal
jurisdictions.
Louisiana
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.
In Louisiana, hearings have been postponed as AEP and CSW negotiate with
all parties in an attempt to settle all issues in that state.
Oklahoma
On August 14, 1998, AEP and CSW jointly filed a request with the Oklahoma
Commission for approval of their proposed merger.
An amended application was filed with the Oklahoma Commission on February
25, 1999. On May 11, 1999, the Oklahoma Commission approved the proposed merger
between AEP and CSW. The approval follows a partial settlement between the
Oklahoma Commission Utility Division Staff, the Oklahoma Commission Consumer
Services Division, the Office of the Attorney General for Oklahoma, and AEP and
CSW.
Under the partial settlement agreement, AEP and CSW would share merger
savings with Oklahoma customers as well as AEP shareholders, effective with the
merger closing; not increase Oklahoma base rates prior to January 1, 2003; file
by December 31, 2001 with the FERC an application to join a regional
transmission organization; and establish additional quality of service standards
for PSO's retail customers. Oklahoma's share of the $50.2 million in guaranteed
net merger savings over the first five years after the merger is consummated
will be split between Oklahoma customers and AEP shareholders, with customers
receiving approximately 55% of the savings.
The partial settlement agreement includes a recommendation by the Oklahoma
Commission Staff that the Oklahoma Commission file a position statement with
FERC indicating that it does not oppose the merger while reserving the right to
ensure that there are no adverse impacts on the Oklahoma transmission system.
Texas
On April 30, 1998, AEP and CSW jointly filed a request with the Texas
Commission for a finding that the merger is in the public interest.
On May 4, 1999, AEP and CSW announced a proposed settlement with several
intervenor groups for the proposed merger between AEP and CSW and to resolve
issues associated with CPL, SWEPCO and WTU rate and fuel reconciliation
proceedings. The settlement would result in combined rate reductions totaling
$221 million over a six-year period for Texas customers of the three CSW Texas
electric operating companies (CPL, SWEPCO and WTU) if the settlement is approved
by the Texas Commission and the merger is completed as planned.
The settlement was reached with the General Counsel of the Texas
Commission, the State of Texas, the Texas Industrial Energy Consumers, the Low
Income Intervenors, the Office of Public Utility Counsel of Texas and the
steering committee of the Cities of McAllen, Corpus Christi, Victoria, Abilene,
Big Lake, Vernon and Paducah. The settlement expands upon a previous Texas
settlement announced on November 12, 1998, with the Office of Public Utility
51
Counsel of Texas and the cities' steering committee. That prior settlement
agreement provided for Texas retail rate reductions of $180 million over the six
years following completion of the merger. The new settlement agreement proposes
additional rate reductions totaling $41 million for a total of $221 million. The
settlement also calls for the divestiture of a total of 1,604 MW of existing
and proposed generating capacity within Texas.
The first rate-reduction rider provides for $84.4 million in net-merger
savings. The amounts are to be credited to Texas customers' bills through a
net-merger-savings rate-reduction rider over six years following completion of
the merger.
Additional rate-reduction riders will be implemented to resolve issues
associated with CPL, WTU and SWEPCO rate and fuel reconciliation proceedings and
court appeals in Texas. The settlement provides for an additional reduction of
$136.6 million, which will be implemented over the six years following
completion of the merger.
The cumulative amount of the rate-reduction riders proposed in the
settlement will result in total reductions over the six-year period in the
following amounts.
Cumulative Reduction Annual Reduction
(millions)
CPL $142.8 $23.8
SWEPCO $42.1 $7.0
WTU $36.1 $6.0
AEP and CSW also agree to divest a total of 1,604 MW of generation capacity in
the ERCOT, while retaining the right to purchase power from the CPL plants
during peak periods. The generation to be divested includes the previously
announced plan to divest 250 MW of CSW Energy's Frontera Plant, which is
currently under construction near Mission, Texas, as well as the following power
plants currently owned by CPL.
Lon C. Hill Power Station Corpus Christi 546 MW
Nueces Bay Power Station Corpus Christi 559 MW
Ennis S. Joslin Power Station Point Comfort 249 MW
If it is determined that the divestiture can proceed immediately after the
merger closes without jeopardizing pooling of interests accounting treatment for
the merger, sale of the plants would begin no later than 90 days after the
merger closes. Without that determination, the divestiture would occur
consistent with SEC pooling of interests requirements, approximately two years
after the merger closes.
Other provisions of the proposed settlement include:
- - Accelerate depreciation and amortization by CPL of $60 million over the
six-year period to reduce its amount of potentially stranded cost.
- - Quality-of-service standards that the newly merged company must meet.
- - Continuation of programs for low-income and elderly customers and expansion
of these programs by $4.5 million over the six-year period.
52
- - In the absence of legislative or regulatory initiatives establishing
affiliate standards, AEP and CSW have agreed to affiliate standards that will
be observed by their subsidiaries.
- - As provided in the earlier settlement, CSW has agreed to withdraw its appeal
of the CPL glide-path rate reduction of $13 million implemented in May 1998
as well as the second glide-path rate reduction of $13 million implemented in
May 1999 if the settlement is approved and the AEP/CSW merger is completed.
- - AEP and CSW commit to file prior to December 31, 2000, with the FERC an
application to transfer the operational control of bulk transmission
facilities located in the Southwest Power Pool to a FERC-approved Regional
Transmission Organization directly interconnected with AEP's existing
Southwest Power Pool transmission facilities.
- - CPL, SWEPCO and WTU agree not to seek an increase in base rates before
January 1, 2003 or three years from the effective date of the merger,
whichever is later. All signatories to the agreement except the Texas
Commission General Counsel have agreed not to initiate rate reviews that
would result in a change in base rates prior to January 1, 2001.
- - The settlement proposal also provides for a sharing of margins from
off-system sales on the wholesale electricity market after the effective date
of the merger.
Hearings on the merger proceedings in Texas are scheduled to begin August
9, 1999 and a final order is expected in the fourth quarter of 1999.
NRC
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 from CSW to AEP. CPL would continue
to own its 25.2% interest in STP, and CPL's name would remain on the NRC
operating license. On November 5, 1998, the NRC approved the license transfer
application with a condition that the merger must be completed by December 31,
1999.
Other Federal
On October 13, 1998, AEP and CSW jointly filed an application with the SEC
for approval of the proposed merger. The SEC merger filing is similar to
requests currently before other jurisdictions and outlines the expected combined
company benefits of the merger to AEP and CSW customers and shareholders. In
November 1998 and March 1999, AEP and CSW filed amendments to the application.
Several parties have intervened in the proceedings at the SEC.
AEP and CSW plan to make a merger filing with the Department of Justice in
the near future.
United Kingdom
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. Although the merger of CSW into AEP is not
subject to approval of United Kingdom regulatory authorities, the common
ownership of the United Kingdom entities could be referred by the United Kingdom
Secretary of State for Trade and Industry for an investigation by the United
Kingdom Competition Commission. CSW is unable to predict the ultimate outcome of
any such regulatory proceeding.
AEP
AEP has received a request from the staff of the Kentucky Public Service
Commission to file an application seeking Kentucky Public Service Commission
approval for the indirect change in control of Kentucky Power Company that will
occur as a result of the proposed merger. CSW understands that although AEP does
not believe that the Kentucky Public Service Commission has the jurisdictional
authority to approve the merger, AEP prepared a merger application filing, which
53
was filed April 15, 1999, with the Kentucky Public Service Commission. Under the
governing statute the Kentucky Public Service Commission must act on the
application within 60 days.
On April 20, 1999, AEP reached a settlement with the Indiana Utility
Regulatory Commission staff addressing matters pertinent to Indiana regarding
the proposed merger. The Indiana Utility Regulatory Commission approved the
settlement on April 26, 1999. The settlement agreement resulted from an
investigation of the proposed merger between AEP and CSW initiated by the
Indiana Utility Regulatory Commission.
On April 21, 1999, AEP and CSW announced that they had reached separate
settlements with six wholesale customers that address issues related to the
proposed merger.
On April 28, 1999, AEP and CSW announced that they ratified a settlement
agreement with local unions of the IBEW representing employees of AEP and CSW.
The settlement agreement covered issues raised in the pending merger between AEP
and CSW. As part of the settlement, the IBEW local unions will withdraw their
opposition to the merger.
Completion of the Merger
The proposed AEP merger has a targeted completion date in the fourth
quarter of 1999. The merger is conditioned, among other things, upon the
approval of several state and federal regulatory agencies. The transaction must
satisfy many conditions, including the condition that it must be accounted for
as a pooling of interests. The parties may not waive some of these conditions.
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. After December 31, 1999, either CSW or AEP may terminate
the merger agreement if all of the conditions to its obligation to close have
not been satisfied, provided that either party may extend the merger agreement,
under certain circumstances, through June 30, 2000. There can be no assurance
that the AEP merger will be consummated.
Merger Costs
As of March 31, 1999, CSW had deferred $31 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.
6. BUSINESS SEGMENTS
Effective December 31, 1998, CSW adopted SFAS No. 131. CSW's business
segments include the U.S. Electric and U.K. Electric segments. The U.S. Electric
segment is comprised of CSW's four domestic electric operating companies, CPL,
PSO, SWEPCO and WTU. The U.K. Electric segment is comprised of CSW's foreign
electric operating company, SEEBOARD, U.S.A. The U.S. Electric segment's primary
business is the generation, transmission and distribution of electricity. The
U.K. Electric segment's primary business is the supply and distribution of
electricity. Financial data for the business segments for the periods covered in
this form 10-Q is in the following table.
54
Other and CSW
U.S. U.K. Reconciling Consolidated
Electric Electric
(millions)
Three months ended March 31, 1999
Operating Revenues $697 $476 $52 $1,225
Income/(Loss) from Continuing Operations 34 27 (16) 45
Total Assets at March 31, 1999 9,146 2,966 1,562 13,674
Total Assets at December 31, 1998 9,151 3,032 1,714 13,897
Three months ended March 31, 1998
Operating Revenues $689 $533 $35 $1,257
Income/(Loss) from Continuing Operations 38 33 (11) 60
Total Assets at March 31, 1998 9,235 3,035 1,276 13,546
Total Assets at December 31, 1997 9,338 2,931 1,347 13,616
7. SOUTH AMERICAN INVESTMENTS
Through March 31, 1999, CSW International has invested $80 million in Vale
to obtain a 36% equity interest. CSW International also issued $100 million of
debt to Vale, convertible to equity by the end of 1999. CSW International
accounts for its $80 million investment in Vale on the equity method of
accounting, and the $100 million debt as a loan.
In mid-January 1999, amid market instability, the Brazilian government
abandoned its policy of pegging the Real in a broad range against the dollar.
This resulted in a 37% devaluation of the Brazilian currency, by the end of
April 1999. Vale is unfavorably impacted by the devaluation primarily due to the
revaluation of foreign denominated debt.
CSW International has a put option which requires that Vale purchase CSW
International's shares, upon CSW International exercising the put, at a minimum
price equal to the purchase price paid for the shares ($80 million). As a result
of the put option arrangement, management has concluded that CSW International's
investment carrying amount will not be reduced below the put option value unless
there is deemed to be a permanent impairment. Pursuant to the put option
arrangement, CSW International will not recognize its proportionate share of any
future earnings until its proportionate share of any losses of Vale, that are
not recognized as a result of the floor established by the put option, are
recouped. At March 31, 1999, CSW International had deferred losses of
approximately $19 million. CSW International views its investment in Vale as a
long-term investment strategy and believes that the investment in Vale continues
to have significant long-term value and is recoverable. Management will continue
to closely evaluate the changes in the Brazilian economy, and its impact on CSW
International's investment in Vale.
As of March 31, 1999, CSW International had invested $110 million in stock
of a Chilean electric company. The investment is classified as securities
available for sale and accounted for by the cost method. Based on the market
value of the shares and foreign exchange rates, the value of the investment at
March 31, 1999 is $74 million. The reduction in the carrying value of this
investment has been reflected in Other Comprehensive Income in CSW's
Consolidated Statements of Stockholder's Equity. Management views its investment
in Chile as a long-term investment strategy. Management will continue to closely
evaluate the changes in the South American economy and its impact on CSW
International's investment in the Chilean electric company.
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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, 1998. Reference is also made
to each Registrant's unaudited Financial Statements and related Notes to
Financial Statements included herein. The information included therein should be
read in conjunction with, and is essential to understanding, the following
discussion and analysis.
RESULTS OF OPERATIONS
Reference is made to ITEM 1. FINANCIAL STATEMENTS for each of the
Registrants' RESULTS OF OPERATIONS for the three month period ended March 31,
1999.
LIQUIDITY AND CAPITAL RESOURCES
Overview of CSW Operating, Investing, and Financing Activities
Net cash inflows from operating activities increased $102 million to $249
million for the first quarter of 1999 compared to the same period last year. The
increase in net cash inflows is due primarily to a lower accounts receivable
balance, which increased cash flows $97 million, and the absence in 1999 of a
$59 million refund paid to CPL customers in the first quarter of 1998. Partially
offsetting the increase in net cash inflows were lower levels of fuel recovery,
which decreased cash flows $28 million, and higher levels of fuel inventories
that decreased cash flows $13 million.
Net cash outflows from investing activities increased $73 million to $183
million for the first quarter of 1999 compared to the same period a year ago.
The increase in investing activity cash outflows was due primarily to higher
levels of spending in 1999 for CSW Energy and CSW International projects. Also
affecting the increase in cash outflows were lower levels of spending in 1999
for CSW Energy's Sweeny power plant, which began commercial operation in the
first quarter of 1998, and a cash inflow in 1998 from CSW International's
Altamira partner, Alpek, which assumed its 50% obligation of that power plant
project.
Net cash outflows from financing activities increased $79 million to $98
million for the first quarter of 1999 compared to the first quarter 1998 due
primarily to a $142 million change in short-term debt from a cash inflow of $110
million in 1998 to a cash outflow of $32 million in 1999. This change is due
primarily to the absence in 1999 of short-term debt borrowings in the first
quarter of 1998 used to repay a $60 million variable bank loan at CSW Services
and to redeem $28 million of preferred stock at SWEPCO. The increase in cash
outflows from investing activities was offset in part by the absence in 1999 of
the retirement and reacquisition of long-term debt in the first quarter of 1998.
Construction Expenditures
CSW's construction expenditures, including allowance for funds used during
construction, totaled $167 million for the three months ended March 31, 1999.
Such expenditures for the U.S. Electric Operating Companies totaled $38 million,
$22 million, $18 million and $13 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.
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Other Financing Issues
The CSW System uses short-term debt to meet fluctuations in working
capital requirements and other interim capital needs. CSW has established a
system money pool to coordinate short-term borrowings for certain of its
subsidiaries, primarily the U.S. Electric Operating Companies. In addition, CSW
also incurs borrowings for other subsidiaries that are not included in the money
pool. As of March 31, 1999, CSW had revolving credit facilities totaling $1.4
billion to back up its commercial paper program.
On April 2, 1999, C3 Communications announced a major expansion of C3
Networks, its long haul fiber network division. C3 Networks plans to invest over
$50 million in existing routes and new construction in 1999. C3 Networks
delivers networking and services in Texas and Louisiana and plans to expand the
network to Oklahoma and Louisiana (the foregoing statement constitutes
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).
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. The combined company would serve more than 4.6 million customers in
11 states and approximately 4 million customers outside the United States. 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 stockholders
approved the merger.
Under the merger agreement, each common share of CSW will be converted
into 0.6 shares of AEP common stock. CSW stockholders will own approximately 40%
of the combined company. CSW plans to continue to pay dividends on its common
stock until the closing of the AEP Merger at approximately the same times and
rates per share as in 1998, subject to continuing evaluation of CSW's financial
condition, earnings, prospects and other factors by the CSW board of directors.
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's subsidiaries.
AEP and CSW 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 expect to 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 expects to use a combination of
growth, reduced hiring and attrition to minimize the need for employee
separations. Transition teams of employees from both companies will make
organizational and staffing recommendations.
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
57
operating and maintenance expenditures are limited to specific agreed upon
projects and in 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 limitations do not preclude CSW and its subsidiaries from
making investments and expenditures in amounts previously budgeted.
Merger Regulatory Approvals
The merger is conditioned, among other things, upon the approval of
several state and federal regulatory agencies.
General
Testimony submitted in the filings in Arkansas, Louisiana, Oklahoma, Texas
and at the FERC outlined the expected company-wide benefits of the merger to AEP
and CSW customers and shareholders. These expected benefits include $2 billion
in non-fuel savings over 10 years and $98 million in net fuel savings over 10
years.
FERC
On April 30, 1998, AEP and CSW jointly filed a request with the FERC for
approval of their proposed merger.
Hearings at the FERC are scheduled to begin June 29, 1999. A final order
is expected in the fourth quarter of 1999.
Arkansas
On June 12, 1998, AEP and CSW jointly filed a request with the Arkansas
Commission for approval of their proposed merger. The Arkansas Commission issued
an order approving the merger subject to approval of the associated regulatory
plan on August 13, 1998. On December 17, 1998, the Arkansas Commission issued a
final order granting conditional approval of a stipulated agreement related to a
proposed merger regulatory plan. The stipulated agreement calls for SWEPCO to
reduce rates through a net merger savings rider for its Arkansas retail
customers by $6 million over the five-year period following completion of the
merger. The Arkansas Commission order notes the possibility of decisions in
other jurisdictions adversely affecting provisions of the stipulated agreement.
Consequently, the Arkansas Commission final order is conditioned on its
consideration of approval of the merger in other state and federal
jurisdictions.
Louisiana
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.
In Louisiana, hearings have been postponed as AEP and CSW negotiate with
all parties in an attempt to settle all issues in that state.
Oklahoma
On August 14, 1998, AEP and CSW jointly filed a request with the Oklahoma
Commission for approval of their proposed merger.
An amended application was filed with the Oklahoma Commission on February
25, 1999. On May 11, 1999, the Oklahoma Commission approved the proposed merger
between AEP and CSW. The approval follows a partial settlement between the
58
Oklahoma Commission Utility Division Staff, the Oklahoma Commission Consumer
Services Division, the Office of the Attorney General for Oklahoma, and AEP and
CSW.
Under the partial settlement agreement, AEP and CSW would share merger
savings with Oklahoma customers as well as AEP shareholders, effective with the
merger closing; not increase Oklahoma base rates prior to January 1, 2003; file
by December 31, 2001 with the FERC an application to join a regional
transmission organization; and establish additional quality of service standards
for PSO's retail customers. Oklahoma's share of the $50.2 million in guaranteed
net merger savings over the first five years after the merger is consummated
will be split between Oklahoma customers and AEP shareholders, with customers
receiving approximately 55% of the savings.
The partial settlement agreement includes a recommendation by the Oklahoma
Commission Staff that the Oklahoma Commission file a position statement with
FERC indicating that it does not oppose the merger while reserving the right to
ensure that there are no adverse impacts on the Oklahoma transmission system.
Texas
On April 30, 1998, AEP and CSW jointly filed a request with the Texas
Commission for a finding that the merger is in the public interest.
On May 4, 1999, AEP and CSW announced a proposed settlement with several
intervenor groups for the proposed merger between AEP and CSW. The settlement
would result in combined rate reductions totaling $221 million over a six-year
period for Texas customers of the three CSW Texas electric operating companies
(CPL, SWEPCO and WTU) if the settlement is approved by the Texas Commission and
the merger is completed as planned and resolve issues associated with CPL,
SWEPCO and WTU rate and fule reconciliation proceedings.
The settlement was reached with the General Counsel of the Texas
Commission, the State of Texas, the Texas Industrial Energy Consumers, the Low
Income Intervenors, the Office of Public Utility Counsel of Texas and the
steering committee of the Cities of McAllen, Corpus Christi, Victoria, Abilene,
Big Lake, Vernon and Paducah. The settlement expands upon a previous Texas
settlement announced on November 12, 1998, with the Office of Public Utility
Counsel of Texas and the cities' steering committee. That prior settlement
agreement provided for Texas retail rate reductions of $180 million over the six
years following completion of the merger. The new settlement agreement proposes
additional rate reductions totaling $41 million for a total of $221 million. The
settlement also calls for the divestiture of a total of 1,604 MW of existing
and proposed generating capacity within Texas.
The first rate-reduction rider provides for $84.4 million in net-merger
savings. The amounts are to be credited to Texas customers' bills through a
net-merger-savings rate-reduction rider over six years following completion of
the merger.
Additional rate-reduction riders will be implemented to resolve issues
associated with CPL, WTU and SWEPCO rate and fuel reconciliation proceedings and
court appeals in Texas. The settlement provides for an additional reduction of
$136.6 million, which will be implemented over the six years following
completion of the merger.
59
The cumulative amount of the rate-reduction riders proposed in the
settlement will result in total reductions over the six-year period in the
following amounts.
Cumulative Reduction Annual Reduction
(millions)
CPL $142.8 $23.8
SWEPCO $42.1 $7.0
WTU $36.1 $6.0
AEP and CSW also agree to divest a total of 1,604 MW of generation capacity in
the ERCOT, while retaining the right to purchase power from the CPL plants
during peak periods. The generation to be divested includes the previously
announced plan to divest 250 MW of CSW Energy's Frontera Plant, which is
currently under construction near Mission, Texas, as well as the following power
plants currently owned by CPL.
Lon C. Hill Power Station Corpus Christi 546 MW
Nueces Bay Power Station Corpus Christi 559 MW
Ennis S. Joslin Power Station Point Comfort 249 MW
If it is determined that the divestiture can proceed immediately after the
merger closes without jeopardizing pooling of interests accounting treatment for
the merger, sale of the plants would begin no later than 90 days after the
merger closes. Without that determination, the divestiture would occur
consistent with SEC pooling of interests requirements, approximately two years
after the merger closes.
Other provisions of the proposed settlement include:
- - Accelerate depreciation and amortization by CPL of $60 million over the
six-year period to reduce its amount of potentially stranded cost.
- - Quality-of-service standards that the newly merged company must meet.
- - Continuation of programs for low-income and elderly customers and expansion
of these programs by $4.5 million over the six-year period.
- - In the absence of legislative or regulatory initiatives establishing
affiliate standards, AEP and CSW have agreed to affiliate standards that will
be observed by their subsidiaries.
- - As provided in the earlier settlement, CSW has agreed to withdraw its appeal
of the CPL glide-path rate reduction of $13 million implemented in May 1998
as well as the second glide-path rate reduction of $13 million implemented in
May 1999 if the settlement is approved and the AEP/CSW merger is completed.
- - AEP and CSW commit to file prior to December 31, 2000, with the FERC an
application to transfer the operational control of bulk transmission
facilities located in the Southwest Power Pool to a FERC-approved Regional
Transmission Organization directly interconnected with AEP's existing
Southwest Power Pool transmission facilities.
- - CPL, SWEPCO and WTU agree not to seek an increase in base rates before
January 1, 2003 or three years from the effective date of the merger,
whichever is later. All signatories to the agreement except the Texas
Commission General Counsel have agreed not to initiate rate reviews that
would result in a change in base rates prior to January 1, 2001.
60
- - The settlement proposal also provides for a sharing of margins from
off-system sales on the wholesale electricity market after the effective date
of the merger.
Hearings on the merger proceedings in Texas are scheduled to begin August
9, 1999 and a final order is expected in the fourth quarter of 1999.
NRC
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 from CSW to AEP. CPL would continue
to own its 25.2% interest in STP, and CPL's name would remain on the NRC
operating license. On November 5, 1998, the NRC approved the license transfer
application with a condition that the merger must be completed by December 31,
1999.
Other Federal
On October 13, 1998, AEP and CSW jointly filed an application with the SEC
for approval of the proposed merger. The SEC merger filing is similar to
requests currently before other jurisdictions and outlines the expected combined
company benefits of the merger to AEP and CSW customers and shareholders. In
November 1998 and March 1999, AEP and CSW filed amendments to the application.
Several parties have intervened in the proceedings at the SEC.
AEP and CSW plan to make a merger filing with the Department of Justice in
the near future.
United Kingdom
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. Although the merger of CSW into AEP is not
subject to approval of United Kingdom regulatory authorities, the common
ownership of the United Kingdom entities could be referred by the United Kingdom
Secretary of State for Trade and Industry for an investigation by the United
Kingdom Competition Commission. CSW is unable to predict the ultimate outcome of
any such regulatory proceeding.
AEP
AEP has received a request from the staff of the Kentucky Public Service
Commission to file an application seeking Kentucky Public Service Commission
approval for the indirect change in control of Kentucky Power Company that will
occur as a result of the proposed merger. CSW understands that although AEP does
not believe that the Kentucky Public Service Commission has the jurisdictional
authority to approve the merger, AEP prepared a merger application filing, which
was filed April 15, 1999, with the Kentucky Public Service Commission. Under the
governing statute the Kentucky Public Service Commission must act on the
application within 60 days.
On April 20, 1999, AEP reached a settlement with the Indiana Utility
Regulatory Commission staff addressing matters pertinent to Indiana regarding
the proposed merger. The Indiana Utility Regulatory Commission approved the
settlement on April 26, 1999. The settlement agreement resulted from an
investigation of the proposed merger between AEP and CSW initiated by the
Indiana Utility Regulatory Commission. The settlement agreement resulted from an
investigation of the proposed merger between AEP and CSW initiated by the
Indiana Utility Regulatory Commission.
On April 21, 1999, AEP and CSW announced that they had reached separate
settlements with six wholesale customers that address issues related to the
proposed merger.
On April 28, 1999, AEP and CSW announced that they ratified a settlement
agreement with local unions of the IBEW representing employees of AEP and CSW.
The settlement agreement covered issues raised in the pending merger between AEP
and CSW. As part of the settlement, the IBEW local unions will withdraw their
opposition to the merger.
61
Completion of the Merger
The proposed AEP merger has a targeted completion date in the fourth
quarter of 1999. The merger is conditioned, among other things, upon the
approval of several state and federal regulatory agencies. The transaction must
satisfy many conditions, including the condition that it must be accounted for
as a pooling of interests. The parties may not waive some of these conditions.
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. After December 31, 1999, either CSW or AEP may terminate
the merger agreement if all of the conditions to its obligation to close have
not been satisfied, provided that either party may extend the merger agreement,
under certain circumstances, through June 30, 2000. There can be no assurance
that the AEP merger will be consummated.
Merger Costs
As of March 31, 1999, CSW had deferred $31 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
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 April 16, 1999, the April 1999 SWEPCO Plan was filed with the
bankruptcy court. The April 1999 SWEPCO Plan replaces all previous plans filed
by SWEPCO. Under the April 1999 SWEPCO Plan, a SWEPCO affiliate would acquire
all the non-nuclear assets of Cajun for $1.017 billion. SWEPCO's bid is based on
interest rate adjustments to its base bid of $940.5 million. The April 1999
SWEPCO Plan incorporates the terms of a settlement between the RUS, the Cajun
Members Committee, Clairborne Electric Cooperative, Inc. and SWEPCO. In
addition, the April 1999 SWEPCO Plan provides for SWEPCO and the Cajun member
cooperatives to enter into long-term power supply agreements with rate plan
options and market access provisions designed to ensure long-term
competitiveness of the cooperatives. Eight cooperatives and Central Louisiana
Electric Company, Inc. agreed to purchase power from SWEPCO, if the bankruptcy
court confirms the April 1999 SWEPCO Plan.
The trustee for Cajun supports a revised competing bid of $960 million, on
an interest-adjusted basis, filed by the Cajun trustee and Louisiana Generating
LLC on April 16, 1999. The Cajun trustee filed additional changes to the
proposed purchase price on April 19, 1999. On April 22, 1999, the Cajun trustee
and Louisiana Generating LLC then filed additional changes to the proposed
purchase price. The interest-adjusted purchase price under the amended Louisiana
Generating LLC bid is now approximately $1.037 billion.
The bankruptcy court has ordered mediation to occur among the parties in
an effort to resolve the bankruptcy case. Final confirmation hearings are
scheduled to begin June 22, 1999.
Consummation of the April 1999 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
boards of directors approvals. If the April 1999 SWEPCO Plan is ultimately
confirmed by the bankruptcy court, the $1.017 billion required to consummate the
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acquisition of Cajun's non-nuclear assets is expected to be financed through a
combination of external non-recourse borrowings and internally generated funds.
There can be no assurance that the bankruptcy court will confirm the April 1999
SWEPCO Plan or, if it is confirmed that federal and state regulators will
approve it. As of March 31, 1999, SWEPCO had deferred $12.1 million in costs
related to the Cajun acquisition on its consolidated balance sheet, which would
be expensed if the April 1999 SWEPCO Plan was not ultimately successful. See
NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES. The preceding discussion
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.
RECENT DEVELOPMENTS AND TRENDS
Industry Restructuring Initiatives in Texas, Louisiana, Oklahoma and
Arkansas
Several initiatives to restructure the electric utility industry and enact
retail competition have been undertaken in the four states in which the U. S.
Electric Operating Companies operate. Legislation was enacted in Oklahoma in
1997 and 1998, and in Arkansas in 1999. Legislative activity in Texas and
Louisiana has, to date, stopped short of any such definitive action.
In April 1997, the Oklahoma Legislature passed restructuring legislation
providing for retail access by July 1, 2002. That legislation called for a
number of studies to be completed on a variety of restructuring issues,
including independent system operator issues, technical issues, financial
issues, transition issues, and consumer issues. The study on independent system
operator issues was completed in January 1998.
In 1998, the Oklahoma Legislature passed Senate Bill 888, which
accelerated the schedule for completion of the remaining studies to October
1999. Those studies are to be conducted under the direction of the Legislative
Joint Electric Utility Task Force, rather than by the Oklahoma Commission as the
previous legislation required. The Task Force has organized the study effort
into several working groups, which have been directed to evaluate assigned
issues. The Task Force will develop its report to the Legislature based on the
work performed by these working groups. The Task Force's final report will be
provided to the Legislature by October 1, 1999. Management is unable to predict
the outcome of these studies or their ultimate impact on the results of
operations and financial condition of CSW and PSO.
In April 1999, the Arkansas Legislature passed, and the Arkansas Governor
signed, legislation for electric utility restructuring in Arkansas. Some major
provisions of that legislation include:
- - Retail competition begins January 1, 2002. The Arkansas Commission can
delay implementation, but not beyond June 30, 2003.
- - Companies with transmission lines must submit those facilities to
operation by a transmission organization approved by the FERC.
- - A one-year rate freeze after restructuring will be implemented for
default service customers of companies that do not apply for stranded
cost recovery. A three-year rate freeze will be implemented for
companies with stranded costs.
- - The Arkansas Commission is given broad authority to address market
power issues.
In 1998, a special legislative committee created by the Louisiana Senate
studied the impact of retail competition on the state of Louisiana. No
legislation has been enacted as a result of that effort. In addition, during
1998 and 1999, the Louisiana Commission conducted a proceeding to study
restructuring and retail competition. Parties submitted comments, and hearings
63
were held on a number of specific restructuring topics. Also, as a part of that
proceeding, utilities filed rate unbundling information with the Louisiana
Commission staff.
As a result of that proceeding, the Louisiana Commission staff recently
released its report on industry restructuring, including its recommendations
regarding retail competition in Louisiana. In its report, the Louisiana
Commission staff recommended that electric industry restructuring should not
proceed at this time because it is not in the public interest. However, the
Louisiana Commission Staff proposed a restructuring plan as an alternative, in
the event the Louisiana Commission decides to move forward with electric
industry restructuring and retail competition. The Louisiana Commission voted to
begin additional study and analysis of the issues associated with restructuring.
The Louisiana Commission has adopted a procedural schedule to further review
restructuring issues and to have a final restructuring plan by January 1, 2001.
Several bills addressing industry restructuring and retail competition
have been filed in the 1999 session of the Texas legislature. In March 1999, the
Texas Senate passed Senate Bill No. 7, which would begin retail competition in
qualifying power regions on January 1, 2002, although municipal utilities and
retail electric cooperatives can choose whether to participate in retail
competition. The bill provides for a rate freeze until January 1, 2002 for
utilities participating in retail competition. The bill further provides for a
price freeze period for residential and small commercial customers, starting on
January 1, 2002, after a five percent reduction in rates for such customers. The
bill also provides for stranded cost recovery. The Texas House of
Representatives is currently considering several restructuring bills. The Texas
Legislative session concludes on May 31, 1999.
Management cannot predict the ultimate outcome of the initiatives
concerning restructuring and retail competition in Arkansas, Louisiana, Oklahoma
and Texas, or their ultimate impact on the results of operations, financial
condition, or competitive position of CSW, CPL, SWEPCO and WTU.
PSO Union Negotiations
In March 1999, PSO and its Local Union 1002 of the IBEW reached an
agreement to contract negotiations, which began in July 1996. In December 1996,
PSO had implemented portions of its then final proposal after declaring an
impasse. The principal issue of disagreement involved PSO's need for flexibility
in a deregulated environment. In April 1997, Oklahoma's governor signed into law
an electric industry-restructuring bill. The law mandates the implementation of
retail competition to begin on July 1, 2002. Following passage of the law, PSO
resumed negotiations with the union. The new contract allows PSO to be in a
better position to compete as the electric utility industry in Oklahoma
restructures. The effective of the new agreement was on April 4, 1999, and it
will remain in effect until September 30, 2000.
PSO and the union continued discussions to resolve issues related to a
recent NLRB ruling against PSO. In October 1998, PSO received an adverse ruling
from a NLRB ALJ on the union's unfair labor practice charge against PSO. The ALJ
upheld PSO's right to cease collecting union dues through payroll deductions.
The ALJ ruled that PSO did negotiate in good faith but that PSO's position on
some issues was too harsh, and therefore the December 1996 implementation should
be rolled back and employees made whole. Additionally, the ALJ ruled that PSO
improperly solicited employees to withdraw from the union. In December 1998, PSO
appealed the ALJ's ruling to the NLRB. At this time, PSO cannot predict the
ultimate outcome of the NLRB matter. However, PSO believes that it will not have
a material adverse effect on its results of operations or financial condition.
As a result of the agreement, the union agreed to withdraw its opposition to the
AEP merger proceedings. The preceding discussion 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.
64
SWEPCO - Texas Eastman
Texas Eastman, one of SWEPCO's largest customers, and CSW Energy announced
an agreement to construct and operate a 440 MW cogeneration facility in
Longview, Texas. Construction of the facility is scheduled to begin in mid-1999
with expected operation in March 2001. The plant will provide a significant
portion of the steam and all electricity requirements needed by Texas Eastman.
It is anticipated that Texas Eastman will remain a SWEPCO customer until the
cogeneration facility is operational. Texas Eastman currently provides
approximately 3% of SWEPCO's total electric operating revenues. See NOTE 3.
COMMITMENTS AND CONTINGENT LIABILITIES- Diversified Electric Loans and
Commitments.
SEEBOARD - Third Party Pension Litigation
In the U.K., National Grid Group and National Power have been involved in
continuing litigation in respect of their use of actuarial surpluses declared in
the electricity industry's occupational pension scheme, the Electricity Supply
Pension Scheme. A high court decision in favor of the National Grid Group and
National Power was appealed and on February 10, 1999, the Court of Appeal ruled
that the particular arrangements made by these corporations to dispose of the
surplus, partly by canceling liabilities relating to additional pension payments
resulting from early retirement, were invalid due to procedural defects.
SEEBOARD employees are members of the Electricity Supply Pension Scheme, and
SEEBOARD has made similar use of actuarial surplus. For SEEBOARD, the amount of
the cancelled payments was approximately $33 million. The Court of Appeal did
not order the National Grid Group and National Power to make payment to the
Electricity Supply Pension Scheme but will hold a further hearing to decide what
action to take. It is likely that the case will then be referred to the U.K.
House of Lords. The final outcome of the hearing, or any referral to the U.K.
House of Lords, cannot be determined and therefore it is not possible for
management to quantify the impact, on the results of operations and financial
condition of CSW and SEEBOARD.
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 $13 million on May 1, 1998 and an additional
$13 million on May 1, 1999.
CPL appealed the CPL 1997 Final Order to the State District Court of
Travis County to challenge the resolution of several issues in the rate case.
The primary issues include: (i) the classification of $800 million of invested
capital in STP as ECOM which was assigned a lower return on equity than non-ECOM
property; (ii) the Texas Commission's application of the "Glide Path" rate
reduction methodology applied on May 1, 1998 and May 1, 1999; and (iii) $18
million of disallowed affiliate expenses 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 reductions were implemented in
May 1998 and May 1999. Hearings on the appeal were held during the third quarter
of 1998, and a judgment was issued in February 1999 affirming the Texas
Commission order, except for a consolidated tax issue in the amount of $6
million, which was remanded to the Texas Commission. While CPL appealed this
most recent order to the Court of Appeals, management is unable to predict how
the final resolution of these issues will ultimately affect CSW's and CPL's
65
results of operations andfinancial condition. On May 4, 1999, AEP and CSW
announced that they had reached a stipulated agreement with the general counsel
of the Texas Commission and other intervenors in the state of Texas. If the
stipulated agreement is approved by the Texas Commission and the AEP Merger is
ultimately consummated, the agreement states that CSW will withdraw its appeal
with respect to the "glide path" rate reduction methodology. See ITEM 1. NOTE 5.
PROPOSED AEP MERGER and ITEM 2. MD&A - PROPOSED AEP MERGER for additional
information on the stipulated agreement.
CPL currently accounts for the economic effects of regulation in
accordance with SFAS No. 71. Pursuant to the provisions of SFAS No. 71, CPL has
recorded approximately $1.2 billion of regulatory-related assets at March 31,
1999. 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, 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.
SWEPCO Louisiana Rate Review
In December 1997, the Louisiana Commission announced it would review
SWEPCO's rates and service. The Louisiana Commission has selected consultants
and legal counsel to perform a review of SWEPCO's rates and charges and to
review SWEPCO's quality of service. The Louisiana Commission's legal counsel
will issue a report in June 1999, and hearings will begin in September 1999.
Management cannot predict the outcome of this review.
SWEPCO Arkansas Rate Review
In June 1998, the Arkansas Commission indicated that it would conduct a
review of SWEPCO's earnings. The review began in July 1998. 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.
DIVERSIFIED ELECTRIC
CSW Energy
CSW Energy presently owns interests in six operating power projects
totaling 978 MW which are located in Colorado, Florida and Texas. CSW Energy
began construction in August 1998 of a 500 MW merchant power plant, known as
Frontera, in the Rio Grande Valley, near the city of Mission, Texas. The natural
gas-fired facility should begin simple cycle operation in the summer of 1999 and
combined cycle operation by the end of 1999. Pursuant to AEP and CSW's
stipulated agreement with several intervenors in the state of Texas related to
the AEP Merger, CSW Energy will sell 250 MW of Frontera upon completion of the
merger. See ITEM 1. NOTE 5. PROPOSED AEP MERGER and MD&A, PROPOSED AEP MERGER
for additional information including timing of the sale.
66
CSW Energy has entered into an agreement with Texas Eastman to construct
and operate a 440-MW cogeneration facility in Longview, Texas. This facility
will be known as the Eastex Cogeneration Project. At March 31, 1999, CSW Energy
had construction obligations of $72 million related to the project. Construction
of the facility is scheduled to begin in mid-1999, with expected operation in
2001. Excess electricity generated by the plant will be sold by CSW Energy in
the wholesale electricity market.
In addition to these projects, CSW Energy has other projects in various
stages of development.
The preceding discussion 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.
CSW International
CSW International was organized to pursue investment opportunities in EWGs
and FUCOs and currently holds investments in the United Kingdom, Mexico and
South America. In the first quarter of 1998, CSW International and its joint
venture partner, Alpek, commenced commercial operations of a 109 MW, gas fired
cogeneration project at Alpek's Petrocel industrial complex in Altamira,
Tamaulipas, Mexico.
During the first quarter of 1999, CSW International and its 50% joint
venture partner, Scottish Power, obtained construction financing of (pound)190
million (at March 31, 1999, $306 million) for the South Coast power project, a
400-MW combined cycle gas turbine power station in Shoreham, United Kingdom. The
permanent financing of (pound)152 million (at March 31, 1999, $245 million) of
debt was also arranged. CSW International has guaranteed approximately $31
million of the (pound)190 million construction financing, and the permanent
financing is unconditionally guaranteed by the project. Commercial operation is
expected to begin in 2000.
Through March 31, 1999, CSW International has invested $80 million in Vale
to obtain a 36% equity interest. CSW International also issued $100 million of
debt to Vale, convertible to equity by the end of 1999. CSW International
accounts for its $80 million investment in Vale on the equity method of
accounting, and the $100 million as a loan.
In mid-January 1999, amid market instability, the Brazilian government
abandoned its policy of pegging the Real in a broad range against the dollar.
This resulted in a 37% devaluation of the Real by the end of January 1999. Vale
is unfavorably impacted by the devaluation primarily due to the revaluation of
foreign denominated debt.
CSW International has a put option which requires that Vale purchase CSW
International's shares, upon CSW International exercising the put, at a minimum
price equal to the purchase price paid for the shares ($80 million). As a result
of the put option arrangement, management has concluded that CSW International's
investment carrying amount will not be reduced below the put option value unless
there is deemed to be a permanent impairment. Pursuant to the put option
arrangement, CSW International will not recognize its proportionate share of any
future earnings until its proportionate share of any losses of Vale, that are
not recognized as a result of the floor established by the put option, are
recouped. At March 31, 1999, CSW International had deferred losses of
approximately $19 million. CSW International views its investment in Vale as a
long-term investment strategy and believes that the investment in Vale continues
to have significant long-term value and is recoverable. Management will continue
to closely evaluate the changes in the Brazilian economy, and its impact on CSW
International's investment in Vale.
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As of March 31, 1999, CSW International had invested $110 million in stock
of a Chilean electric company. The investment is classified as securities
available for sale and accounted for by the cost method. Based on the market
value of the shares and foreign exchange rates, the value of the investment at
March 31, 1999 is $74 million. The reduction in the carrying value of this
investment has been reflected in Other Comprehensive Income in CSW's
Consolidated Statements of Stockholder's Equity. Management views its investment
in Chile as a long-term investment strategy. Management will continue to closely
evaluate the changes in the South American economy and its impact on CSW
International's investment in the Chilean electric company.
In addition to these projects, CSW International has other projects in
various stages of development.
The preceding discussion 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.
OTHER MATTERS
Year 2000
On a system-wide basis, CSW initiated a year 2000 project to prepare
internal computer systems and applications for the year 2000. These systems and
applications include management information systems that support business
operations such as customer billing, payroll, inventory and maintenance. 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.
Year 2000 readiness is a top priority for CSW. The formal project was
initiated in late 1996 at which time an executive sponsor and project manager
were named and a centralized project management office was formed. More than 30
Readiness Teams have been initiated and are in various phases of the project.
Currently, those teams represent the equivalent of about 90 full-time employee
positions working on year 2000 readiness. The teams are using a formal approach
that includes inventory, assessment, remediation, testing of systems and
development of contingency plans. Formal progress checkpoints are conducted
biweekly by the project management team. An executive oversight council
comprising the functional vice presidents convenes monthly to review progress
and address issues. The project executive sponsor updates top management on a
weekly basis and at every Board of Directors' Audit Committee meeting.
CSW has completed a review of its year 2000 project. External consultants
assisted in the review. The purpose of the review was to assess the project
plans and processes to ensure that the significant risks to CSW associated with
the year 2000 are prudently managed. Several changes have been incorporated into
the year 2000 project as a result of the review findings.
State of Readiness
Key milestones for the CSW system-wide year 2000 program excluding
SEEBOARD and Vale are listed below:
- - A detailed inventory and assessment of critical systems was completed in
the third quarter of 1998. 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 findings indicate that less than 15% of installed controls
have microprocessors, very few have date logic and over 90% of those with
date logic already process new millennium dates correctly. The need for
additional functionality in the early 1990's resulted in the modernization
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of several electric operation systems that has reduced the conversion
requirements. Corrective and certification measures are well underway for
these systems and completion is targeted for all systems by June 30, 1999.
- - Inventory and assessment of business applications and vendor-supplied
software was completed in the first quarter of 1997. Only 25% of the business
application programs were determined to require remediation by December 1999.
- - Plans for modification and certification testing of business application
software were completed in the third quarter of 1997.
- - Remediation plans and schedules for business applications were established in
the fourth quarter of 1997, and conversion and certification activities were
initiated. As of the end the first quarter of 1999, 82% of business critical
applications were converted and certified. The remaining 18% of applications
are targeted for completion by mid-year 1999.
SEEBOARD completed an inventory of date dependent assets including, but
not limited to, embedded chip technology, software, hardware, applications,
telecommunications, access and security systems in the third quarter of 1998.
SEEBOARD completed an assessment of all critical systems in January 1999.
Remediation and testing of mission critical distribution and safety systems was
completed in March 1999. The remediation of all other critical path systems is
on schedule for completion by July 1999. Final verification of those systems is
scheduled for completion by the third quarter of 1999. As of March 31, 1999, 74%
of the work to be performed in electric operations has been completed.
Vale completed an inventory of date dependent assets and critical systems
in the fourth quarter of 1998. Vale is on schedule for remediation of these
assets and systems by the third quarter of 1999. Most business system
remediation has been completed.
Cost to Address Year 2000 Issues
Work related to the year 2000 project is being performed using a mix of
internal and external resources. The funds for year 2000 project expenditures
are included in CSW's budget. The majority of costs related to the project are
expensed as incurred. The historical cost incurred to date for the year 2000
project is approximately $14 million, $4 million of which was incurred in the
first quarter of 1999. Remaining testing and conversion is expected to cost an
additional $22 million to $24 million over the next 12 months. Approximately 33%
of the projected cost is to be covered through the redeployment of existing
labor resources. Approximately 37% of the projected cost is for outside contract
labor. The remaining 30% of the projected cost is for computer hardware and
software purchases.
In the first quarter of 1999 a software version upgrade to provide
contract management features to the materials management information system was
deferred until calendar year 2000 in order to minimize risk. The financial
impact on this deferment is minimal, as minor enhancements to the current design
have provided an alternative, interim solution for the needed functionality. No
other planned CSW computer information system projects have been affected by the
year 2000 project, but that may change as the year 2000 approaches and change
freezes are implemented to further minimize risk. Accordingly, no estimate has
been made for the financial impact of any future projects foregone due to
resources allocated to the year 2000 project.
Risk of Year 2000 Issues
The greatest financial risk to the CSW domestic operation would be a total
inability to generate and deliver electricity. Many primary systems and backup
systems would have to fail in order for that total inability to occur. The
probability of a total inability to generate and deliver electricity by CSW is
very low.
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To date at CSW System power plants, no year 2000 issues have been found
that would have caused power plants to fail. Risk of power plant failure is
limited because 50% of power plant controls do not operate with date sensitive
logic. Additionally, the year 2000 issues, which have been identified in the
plants, are generally minor issues typically affecting reporting systems.
The vast majority of the transmission and distribution system consists of
wires, poles, transformers, switches and fuses where year 2000 is not an issue.
Fewer than 15% of control systems that operate transmission and distribution
equipment are micro-processor based, and of those, 95% have been found to
process year 2000 dates correctly. The standard residential meter is not
affected; however, about 10% of industrial and large commercial meters have
microprocessors. So far most of those microprocessors process dates correctly.
The areas requiring the greatest amount of work are the computers that
operate business systems such as customer billing and accounting. CSW is on
schedule to have year 2000 issues in these systems resolved by the summer of
1999.
Currently, no cost estimate exists related to CSW's year 2000 risk.
The greatest risk to SEEBOARD is that it is part of a large supplier
chain. While SEEBOARD is confident of its ability to ensure that there will be
no year 2000 impact to the distribution network, it is reliant upon both the
generators and the National Grid in the U.K. However, through very close
relationships within the electricity industry the risk is considered minimal.
To date at SEEBOARD, the year 2000 testing on embedded chip technology has
revealed a less than 2% failure rate.
Contingency Plans
Contingency plans have been in place in CSW's domestic electric operation
for years to address problems resulting from weather. These plans are being
updated to include year 2000 issues. Contingency planning is engineered into the
transmission and distribution systems as it is designed with the capability to
by-pass failed equipment. A margin of power generation reserve above what is
needed is normally maintained. This reserve is a customary operating contingency
plan that allows CSW to operate normally even when a power plant unexpectedly
quits operating. Backup supplies of fuels are normally maintained at CSW power
plants. Natural gas plants have fuel oil as a backup and multiple pipelines
provide redundant supplies. At coal plants about 40-45 days of extra coal is
kept on hand.
The North American Electric Reliability Council is coordinating with all
national power regions to assess the risks and to develop contingency plans
within the national electric delivery system. During the fourth quarter of 1998,
CSW developed first drafts of the contingency plans to address year 2000 issues.
These contingency plans are currently being further developed and will be
completed in the second quarter of 1999. CSW participated in an industry-wide
drill focused on sustaining reliable operations with a simulated partial loss of
voice and data communications on April 9, 1999. The drill results clearly
demonstrated CSW's ability to successfully sustain reliable operations by
utilizing alternative means to acquire net generation and transmission tie-flow
readings, communicate those readings to transmission dispatch operation centers,
and communicate those readings to CSW's central control center who in turn
communicated those readings to the regional power reliability councils.
Additionally, CSW will participate in an industry-wide drill to test its
operational preparedness in the third quarter of 1999. Final verification of
external interfaces will be performed in the last half of 1999. Contingency
plans will continue to be revised as needed as a result of the drills.
70
The CSW supply chain has contacted over 6,000 suppliers to determine their
organization readiness and 70% responded. Approximately 250 of those 6,000 are
mission critical suppliers, of which 96% have responded that their organizations
are either already year 2000 ready or will be before December 31, 1999.
Contingency plans have been developed to cover the possible failure of those 8
to 10 critical suppliers that have not responded with positive statements on
their year 2000 readiness.
Like CSW's U.S. operations, SEEBOARD also has contingency plans that have
been in place for years to address problems resulting from weather. These plans
are covered effectively within the distribution and customer services business
areas and are being updated to include Year 2000 scenarios. Contingency planning
is considered essential by SEEBOARD and also other external bodies such as the
government who are proposing legislation that key infrastructure utilities and
industries make readily available their contingency plans for external viewing.
These plans are continually being reviewed by SEEBOARD's year 2000 central team.
In addition, SEEBOARD is working with other utilities through interest groups
and the National Grid on interface contingency plans and testing.
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In 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 response to the development of a more competitive electric energy
market, CSW has received regulatory approval which authorizes the four U.S.
Electric Operating Companies to conduct a pilot program involving power sales
agreements at tariffed rates with a fixed fuel cost. To offset the commodity
price risk associated with these contracts, CSW has purchased natural gas swaps.
These swaps cover natural gas deliveries beginning in January and continuing for
the remainder of 1999. Natural gas volumes purchased to perform these contracts
for which CSW has secured swap agreements represents approximately 1% of annual
natural gas purchases.
The table below provides information about CSW's natural gas swaps and
electricity forward contracts that are sensitive to changes in commodity prices.
The swaps hedge commodity price exposure for the year 1999. Cash outflows on the
swap agreements should be offset by increased margins on electricity sales to
customers under tariffed rates with fixed fuel costs. The electricity forward
contracts hedge a portion of CSW's energy requirements through September 1999.
The average contract price for forward purchases is $75 per MWH, and the average
contract price for forward sales is $81 per MWH.
Contractual commitments at March 31, 1999 are as follows.
Products Net Notional Fair Value of Assets Fair Value of
Amount Liabilities
----------------------------------------------------------------------------
(millions)
Swaps 5,140,000 MMbtu $-- $--
Forwards: purchases 430,400 MWH -- 3
sales 361,600 MWH 4 --
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. CSW has utilized certain risk management tools to manage adverse
changes in exchange rates and to facilitate financing transactions resulting
from CSW's acquisition of SEEBOARD. At March 31, 1999, CSW had positions in two
cross currency swap contracts, which were used to eliminate currency
fluctuations in respect of the $400 million of debt. The following table
presents information relating to these contracts. The market value represents
the foreign exchange/interest rate terms inherent in the cross currency swaps at
current market pricing. CSW expects to hold these contracts to maturity. At
exchange rates on March 31, 1999, this liability is included in long-term debt
on the balance sheet at a carrying value of approximately $416 million.
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Expected Expected Cash
Cash Inflows Outflows
Contract Maturity Date (Maturity Value) (Market Value)
- --------------------------------------------------------------------------------
Cross currency swaps August 1, 2001 $200 million $215.0 million
Cross currency swaps August 1, 2006 $200 million $234.2 million
For information related to currency risk in South America see ITEM 1.,
NOTE 8 SOUTH AMERICAN INVESTMENTS.
The preceding discussion 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.
73
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, 1998.
ITEM 1. LEGAL PROCEEDINGS.
Other Legal Claim 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.
CPL
(i) The annual meeting of stockholders of CPL was held on April 8, 1999.
(ii) Directors elected at the annual meeting were:
John F. Brimberry Robert A. McAllen
E. R. Brooks Pete Morales, Jr.
Glenn Files H. Lee Richards
Ruben M. Garcia J. Gonzalo Sandoval
Alphonso Jackson Gerald E. Vaughn
(iii) No other matters (other than procedural matters) were voted upon at the
annual meeting.
PSO
(i) The annual meeting of stockholders of PSO was held on April 20, 1999.
(ii) Directors elected at the annual meeting were:
E. R. Brooks Paul K. Lackey, Jr.
T.D. Churchwell Paula Marshall-Chapman
Harry A. Clarke William R. McKamey
Glenn Files Dr. Robert B. Taylor, Jr.
(iii) No other matters (other than procedural matters) voted upon at the annual
meeting.
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SWEPCO
(i) The annual meeting of stockholders of SWEPCO was held on April 14, 1999.
(ii) Directors elected at the annual meeting were:
Karen C. Adams John M. Lewis
E. R. Brooks Michael H. Madison
James E. Davison William C. Peatross
Glenn Files Maxine P. Sarpy
Dr. Frederick E. Joyce
(iii) No other matters (other than procedural matters) were voted upon at the
annual meeting.
WTU
(i) The annual meeting of stockholders of WTU was held on March 30, 1999.
(ii) Directors elected at the annual meeting were:
E. R. Brooks Tommy Morris
Paul J. Brower Dian G. Owen
Glenn Files James M Parker
Alphonso Jackson F.L. Stephens
(iii) No other matters (other than procedural matters) were voted upon at the
annual meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
(2) Plan of Acquisition, reorganization, arrangement, liquidation or succession.
Second Amended and Restated Joint Plan of Reorganization for Cajun
Electric Power Cooperative, Inc. submitted jointly by the Committee of
Certain Member, Washington-St. Tammany Electric Cooperative, Inc. and
Southwestern Electric Power Company Dated April 19, 1999 (Exhibit 2.1),
filed herewith.
Supplemental Disclosure Statement in support of the Second Amended and
Restated Joint Plan of Reorganization for Cajun Electric Power
Cooperative, Inc. submitted by the Committee of Certain Member,
Washington-St.Tammany Electric Cooperative, Inc. and Southwestern Electric
Power Company Dated April 19, 1999 (Exhibit 2.2), filed herewith.
(12) Computation of Ratio of Earnings to Fixed Charges
CPL - (Exhibit 12. 1), filed herewith.
PSO - (Exhibit 12.2), filed herewith.
SWEPCO - (Exhibit 12.3), filed herewith.
WTU - (Exhibit 12.4), filed herewith.
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(18)Letter re: Change in Accounting Principle
CSW - (Exhibit 18.1), filed herewith.
CPL - (Exhibit 18.2), filed herewith.
PSO - (Exhibit 18.3), filed herewith.
SWEPCO - (Exhibit 18.4), filed herewith.
WTU - (Exhibit 18.5), filed herewith.
(27) Financial Data Schedules
CSW - (Exhibit 27.1), filed herewith.
CPL - (Exhibit 27.2), filed herewith.
PSO - (Exhibit 27.3), filed herewith.
SWEPCO - (Exhibit 27.4), filed herewith.
WTU - (Exhibit 27.5), filed herewith.
(b) REPORTS FILED ON FORM 8-K:
CSW, CPL, PSO, SWEPCO and WTU
Date of earliest event reported: December 17, 1998
Date of report: January 5, 1999
Item 5. Other Events and Item 7. Financial Statements and Exhibits, reporting
developments in the CSW and AEP merger proceedings in Arkansas as well as the
current status of other regulatory proceedings.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
Registrant shall be deemed to relate only to matters having reference to such
Registrant or its subsidiaries.
CENTRAL AND SOUTH WEST CORPORATION
Date: May 14, 1999 /s/ Lawrence B. Connors
-----------------------------
Lawrence B. Connors
Controller and Chief Accounting Officer
(Principal Accounting Officer)
CENTRAL POWER AND LIGHT COMPANY
PUBLIC SERVICE COMPANY OF OKLAHOMA
SOUTHWESTERN ELECTRIC POWER COMPANY
WEST TEXAS UTILITIES COMPANY
Date: May 14, 1999 /s/ R. Russell Davis
-----------------------------
R. Russell Davis
Controller and Chief Accounting Officer
(Principal Accounting Officer)
77