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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ________ to _______
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification No.
- ----------- ----------------------------------- ------------------
1-1443 Central and South West Corporation 51-0007707
(A Delaware Corporation)
1616 Woodall Rodgers Freeway
Dallas, Texas 75202-1234
(214) 777-1000
0-346 Central Power and Light Company 74-0550600
(A Texas Corporation)
539 North Carancahua Street
Corpus Christi, Texas 78401-2802
(512) 881-5300
0-343 Public Service Company of Oklahoma 73-0410895
(An Oklahoma Corporation)
212 East 6th Street
Tulsa, Oklahoma 74119-1212
(918) 599-2000
1-3146 Southwestern Electric Power Company 72-0323455
(A Delaware Corporation)
428 Travis Street
Shreveport, Louisiana 71156-0001
(318) 673-3000
0-340 West Texas Utilities Company 75-0646790
(A Texas Corporation)
301 Cypress Street
Abilene, Texas 79601-5820
(915) 674-7000
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of Each Exchange
Registrant Title of Each Class on Which Registered
- ---------- ------------------- ---------------------
Central and South West Corporation Common Stock, $3.50 Par Value New York Stock Exchange, Inc.
Chicago Stock Exchange, Inc.
CPL Capital I 8.00% Cumulative Quarterly Income Preferred New York Stock Exchange, Inc.
Securities, Series A, Liquidation Preference
$25 per Preferred Security
PSO Capital I 8.00% Trust Originated Preferred Securities New York Stock Exchange, Inc.
Series A, Liquidation Preference $25 per
Preferred Security
SWEPCO Capital I 7.875% Trust Preferred Securities, Series A, New York Stock Exchange, Inc.
Liquidation amount $25 per Preferred
Security
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Registrant Title of Each Class
- ---------- -------------------
Central Power and Light Company Cumulative Preferred Stock, $100 Par Value
Public Service Company of Oklahoma Cumulative Preferred Stock, $100 Par Value
Southwestern Electric Power Company Cumulative Preferred Stock, $100 Par Value
West Texas Utilities Company Cumulative Preferred Stock, $100 Par Value
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) have been subject to such filing
requirements for the past 90 days. Yes __X__ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K:
Central and South West Corporation[__X__], Central Power and Light Company
[__X__], Public Service Company of Oklahoma [__X__], Southwestern Electric
Power Company [__X__] and West Texas Utilities Company [__X__]
Aggregate market value of the Common Stock of Central and South West
Corporation at February 22, 1999 held by non-affiliates was approximately $5.4
billion. Number of shares of Common Stock outstanding at February 22, 1999:
212,612,368. Central and South West Corporation is the sole holder of the common
stock of Central Power and Light Company, Public Service Company of Oklahoma,
Southwestern Electric Power Company and West Texas Utilities Company.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1999 Notice of Annual Meeting and Proxy Statement of
Central and South West Corporation are hereby incorporated by reference into
Part III hereof.
This Combined Form 10-K is separately filed by Central and South West
Corporation, Central Power and Light Company, Public Service Company of
Oklahoma, Southwestern Electric Power Company and West Texas Utilities Company.
Information contained herein relating to any individual Registrant is filed by
such Registrant on its own behalf. Each Registrant makes no representation as to
information relating to the other Registrants.
TABLE OF CONTENTS
GLOSSARY OF TERMS................................................ii
FORWARD-LOOKING INFORMATION......................................v
PART I
ITEM 1. BUSINESS ...............................................1
ITEM 2. PROPERTIES .............................................26
ITEM 3. LEGAL PROCEEDINGS ......................................27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ....28
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS .......................................2-1
ITEM 6. SELECTED FINANCIAL DATA ................................2-2
Registrants
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .......................2-2
Registrants
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................2-2
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............2-2
Registrants
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE .......................2-151
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS ..3-1
ITEM 11. EXECUTIVE COMPENSATION ...............................3-7
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ...............................................3-12
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .......3-14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K ..............................................4-1
i
GLOSSARY OF TERMS
The following abbreviations or acronyms used in this Form 10-K are defined
below:
Abbreviation or Acronym Definition
AEP ....................American Electric Power Company, Inc.
AEP Merger .............Proposed Merger between AEP and CSW where CSW would
become a wholly owned subsidiary of AEP
AFUDC ..................Allowance for funds used during construction
ALJ ....................Administrative Law Judge
Alpek ..................Alpek S.A. de C.V.
Altamira................CSW International cogeneration project in Altamira,
Tamaulipas, Mexico
Anglo Iron..............Anglo Iron and Metal, Inc.
APBO ...................Accumulated Postretirement Benefit Obligation
Arkansas Commission ....Arkansas Public Service Commission
Btu ....................British thermal unit
Burlington Northern ....Burlington Northern Railroad Company
C3 Communications ......C3 Communications, Inc., Austin, Texas (formerly CSW
Communications, Inc.)
CAAA ...................Clean Air Act/Clean Air Act Amendments
Cajun ..................Cajun Electric Power Cooperative, Inc.
CEO ....................Chief Executive Officer
CERCLA .................Comprehensive Environmental Response, Compensation and
Liability Act of 1980
ChoiceCom ..............CSW/ICG ChoiceCom, L.P., a terminated joint venture
between C3 Communications and ICG Communications, Inc.
CLECO ..................Central Louisiana Electric Company, Inc.
Court of Appeals .......Court of Appeals, Third District of Texas, Austin, Texas
CPL ....................Central Power and Light Company, Corpus Christi, Texas
CPL 1997 Final Order ...Final orders received from the Texas Commission in
CPL's rate case Docket No, 14965, including both the
order received on September 10, 1997 and the revised
order received on October 16, 1997
CPL 1996 Fuel Agreement.Fuel settlement agreement entered into by CPL and
other parties
CSW ....................Central and South West Corporation, Dallas, Texas
CSW Credit .............CSW Credit, Inc., Dallas, Texas
CSW Energy .............CSW Energy, Inc., Dallas, Texas
CSW Energy Services ....CSW Energy Services, Inc., Dallas, Texas
CSW International ......CSW International, Inc., Dallas, Texas
CSW Investments ........CSW Investments, an unlimited company organized in the
United Kingdom through which CSW International owns
SEEBOARD
CSW Leasing ............CSW Leasing, Inc., Dallas, Texas
CSW Power Marketing ....CSW Power Marketing, Inc., Dallas, Texas
CSW Services ...........Central and South West Services, Inc., Dallas, Texas
and Tulsa, Oklahoma
CSW System .............CSW and its subsidiaries
CSW UK Finance Company..An unlimited company organized in the United Kingdom
through which CSW International owns CSW Investments
CSW U.S. Electric
System...............CSW and the U.S. Electric Operating Companies
CWIP ...................Construction work in progress
DeSoto .................Parish of DeSoto, State of Louisiana pollution control
revenue bond issuing authority
DGES ...................Director General of Electricity Supply
DHMV ...................Dolet Hills Mining Venture
Diversified Electric ...CSW Energy and CSW International
DOE ....................United States Department of Energy
ECOM ...................Excess cost over market
EITF....................Emerging Issues Task Force
El Paso ................El Paso Electric Company
EMF ....................Electric and magnetic fields
EnerACT.................Energy Aggregation and Control Technology
Energy Policy Act ......National Energy Policy Act of 1992
EnerShop ...............EnerShopsm Inc., Dallas, Texas
Entergy Texas, Inc. ....Entergy Texas Utilities Company, Inc.
EPA ....................United States Environmental Protection Agency
EPS ....................Earnings per share of common stock
ERCOT ..................Electric Reliability Council of Texas
ERISA ..................Employee Retirement Income Security Act of 1974, as
amended
Exchange Act ...........Securities Exchange Act of 1934, as amended
EWG ....................Exempt Wholesale Generator
FERC ...................Federal Energy Regulatory Commission
FMB ....................First mortgage bond
FUCO ...................Foreign utility company as defined by the Holding
Company Act
Guadalupe ..............Guadalupe-Blanco River Authority pollution control
revenue bond issuing authority
HL&P ...................Houston Lighting & Power Company
Holding Company Act ....Public Utility Holding Company Act of 1935, as amended
HVdc ...................High-voltage direct-current
ii
GLOSSARY OF TERMS (continued)
The following abbreviations or acronyms used in this Form 10-K are defined
below:
Abbreviation or Acronym Definition
IPP ....................Independent power producer
IBEW ...................International Brotherhood of Electrical Workers
ISO ....................Independent system operator
ITC ....................Investment tax credit
Joint Proxy Statement...The Notice of Annual Meeting and Joint Proxy Statement
of American Electric Power Company, Inc. and Central and
South West Corporation
KW .....................Kilowatt
KWH ....................Kilowatt-hour
LIFO ...................Last-in first-out (inventory accounting method)
Louisiana Commission ...Louisiana Public Service Commission
LTIP ...................Amended and Restated 1992 Long-Term Incentive Plan
Matagorda ..............Matagorda County Navigation District Number One
(Texas) pollution control revenue bond issuing authority
Mcfs ...................Thousand cubic feet of gas
MD&A ...................Management's Discussion and Analysis of Financial
Condition and Results of Operations
MDEQ ...................Mississippi Department of Environmental Quality
MGP ....................Manufactured gas plant or coal gasification plant
Mirror CWIP ............Mirror construction work in progress
Mississippi Power ......Mississippi Power Company
MMbtu ..................Million Btu
MW .....................Megawatt
MWH ....................Megawatt-hour
National Grid ..........National Grid Group plc
NEIL ...................Nuclear Electric Insurance Limited
NLRB ...................National Labor Relations Board
NRC ....................Nuclear Regulatory Commission
OASIS ..................Open access same time information system
OEFA ...................Oklahoma Environmental Finance Authority pollution
control revenue bond issuing authority
Oklahoma Commission ....Corporation Commission of the State of Oklahoma
Oklaunion ..............Oklaunion Power Station Unit No. I
OPEB ...................Other postretirement benefits (other than pension)
PCB ....................Polychlorinated biphenyl
PCRB ...................Pollution Control Revenue Bond
PowerShare .............CSW's PowerShareSM Dividend Reinvestment and Stock
Purchase Plan
PRP ....................Potentially responsible party
PSO ....................Public Service Company of Oklahoma, Tulsa, Oklahoma
PSO 1997 Rate Settlement
Agreement............Joint stipulation agreement reached by PSO and other
parties to settle PSO's rate inquiry
PURPA ..................Public Utility Regulatory Policies Act of 1978
QF .....................Qualifying Facility as defined in PURPA
RCRA ...................Federal Resource Conservation and Recovery Act of 1976
Red River ..............Red River Authority of Texas pollution control revenue
bond issuing authority
Registrant(s) ..........CSW, CPL, PSO, SWEPCO and WTU
RESCTA .................Rural Electric Supplier Certified Territory Act
Retirement Plan ........CSW's tax-qualified Cash Balance Retirement Plan
Retirement Savings Plan.CSW's employee retirement savings plan
Rights Plan ............Stockholders Rights Agreement between CSW and CSW
Services, as Rights Agent
RUS ....................Rural Utilities Service of the federal government
Sabine .................Sabine River Authority of Texas pollution control
revenue bond issuing authority
Siloam Springs .........City of Siloam Springs, Arkansas pollution control
revenue bond issuing authority
SAR ....................Stock Appreciation Right
SEC ....................United States Securities and Exchange Commission
SEEBOARD ...............SEEBOARD 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
SERP ...................Special Executive Retirement Plan
SFAS ...................Statement of Financial Accounting Standards
SFAS No. 52 ............Foreign Currency Translation
SFAS No. 71 ............Accounting for the Effects of Certain Types of
Regulation
SFAS No. 87 ............Employers' Accounting for Pensions
SFAS No. 88.............Employers' Accounting for Settlements and Curtailments
of Defined Pension Plans and for Termination Benefits
SFAS No. 106 ...........Employers' Accounting for Postretirement Benefits
Other than Pensions
SFAS No. 115 ...........Accounting for Certain Investments in Debt and Equity
Securities
SFAS No. 123 ...........Accounting for Stock-Based Compensation
SFAS No. 130 ...........Reporting Comprehensive Income
iii
GLOSSARY OF TERMS (continued)
The following abbreviations or acronyms used in this Form 10-K are defined
below:
Abbreviation or Acronym Definition
SFAS No. 131 ...........Disclosure about Segments of an Enterprise and Related
Information
SFAS No. 132 ...........Employers' Disclosures about Pensions and Other
Postretirement Benefits
SFAS No. 133 ...........Accounting for Derivative Instruments and Hedging
Activities
SOP 98-5 ...............Statement of Position 98-5, Reporting on the Costs of
Start-up Activities
SPP ....................Southwest Power Pool
STP ....................South Texas Project nuclear electric generating station
STPNOC .................STP Nuclear Operating Company, a non-profit Texas
corporation, jointly owned by CPL, HL&P, City of Austin,
and City of San Antonio
SWEPCO .................Southwestern Electric Power Company, Shreveport,
Louisiana
SWEPCO Plan ............The amended plan of reorganization for Cajun filed by
the Members Committee and SWEPCO on March 18, 1998 with
the U.S. Bankruptcy Court for the Middle District of
Louisiana
Tejas ..................Tejas Gas Corporation
Texas Commission .......Public Utility Commission of Texas
Titus County ...........Titus County Fresh Water Supply District No. 1 pollution
control revenue bond issuing authority
TNRCC ..................Texas Natural Resource Conservation Commission
Transok.................Transok, Inc. and subsidiaries
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.
Union Pacific ..........Union Pacific Railroad Company
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 plc, a regional electricity company in the
United Kingdom
iv
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 deregulation on the United States electric utility
business,
- increased competition and electric utility industry restructuring in
the United States,
- the impact of the proposed AEP Merger including any regulatory
conditions imposed on the merger, the inability to consummate the AEP
Merger, or other merger and acquisition activity including the SWEPCO
Plan,
- federal and state regulatory developments and changes in law which may
have a substantial adverse impact on the value of CSW System assets,
- timing and adequacy of rate relief,
- adverse changes in electric load and customer growth,
- climatic changes or unexpected changes in weather patterns,
- changing fuel prices, generating plant and distribution facility
performance,
- decommissioning costs associated with nuclear generating facilities,
- 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, and
- the timing and success of efforts to develop domestic and international
power projects.
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.
v
PART I
ITEM 1. BUSINESS.
CSW, incorporated under the laws of Delaware in 1925, is a Dallas-based
public utility holding company registered under the Holding Company Act. CSW
owns all of the outstanding shares of common stock of the U.S. Electric
Operating Companies, CSW Services, CSW Credit, CSW Energy, CSW International, C3
Communications, EnerShop and a currently inactive CSW Energy Services and
indirectly owns all of the outstanding share capital of SEEBOARD. In addition,
CSW owns 80% of the outstanding shares of common stock of CSW Leasing. In 1998,
CSW's operating segments, including its four registrants that form the U.S.
Electric segment, contributed the following percentages to aggregate operating
revenues, operating income and net income.
Other and
U.S. U.K. Reconciling
CPL PSO SWEPCO WTU Electric Electric Items Total
-------------------------------------------------------------
Operating
Revenues 25 14 17 8 64 32 4 100%
Operating
Income 32 15 16 10 73 26 1 100%
Net Income 35 17 22 9 83 27 (10) 100%
The relative contributions of the U.S. Electric, U.K. Electric and
Diversified Electric segments and other non-utility subsidiaries to the
aggregate operating revenues, operating income and net income differ from year
to year due to variations in weather, fuel costs, timing and amount of rate
changes and other factors, including but not limited to changes in business
conditions and the results of non-utility businesses. Sales of electricity by
the U.S. Electric Operating Companies tend to increase during warmer summer
months and, to a lesser extent, cooler winter months, because of higher demand
for power. The sale of electricity by the U.K. Electric segment tends to
increase during colder winter months because of a higher demand for power. For
additional detail related to CSW's reportable business segments, see ITEM 8 -
NOTE 14. BUSINESS SEGMENTS. For financial results showing CSW's seasonality, see
ITEM 8 - NOTE 19. QUARTERLY INFORMATION.
The CSW System is subject to the jurisdiction of the SEC under the Holding
Company Act with respect to the issuance, acquisition and sale of securities,
the acquisition and sale of utility assets or any interest in any other business
and accounting practices, including certain affiliate transactions, and other
matters. See RATES AND REGULATION below, and ITEM 7. MD&A for additional
information regarding the Holding Company Act.
PROPOSED AEP MERGER
Background Information
On December 22, 1997, CSW and AEP announced that their boards of directors
had approved a definitive merger agreement for a tax-free, stock-for-stock
transaction creating a company with a total market capitalization of
approximately $28 billion at that time. At December 31, 1998, the total market
capitalization of the combined company would have been $28 billion ($15 billion
in equity; $13 billion in debt), the combined company would have served 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.
1
Under the merger agreement, each common share of CSW will be converted
into 0.6 shares of AEP common stock. Based upon AEP's closing price immediately
prior to the merger announcement, this represented a premium of 20% over the CSW
closing price and would have issued approximately $6.6 billion in stock to CSW
stockholders to complete the transaction. At December 31, 1998, AEP would have
issued approximately $6.0 billion in stock to CSW stockholders to complete the
transaction. 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
and earnings 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.
The companies anticipate net savings related to the merger of
approximately $2 billion over a 10-year period from the elimination of
duplication in corporate and administrative programs, greater efficiencies in
operations and business processes, increased purchasing efficiencies, and the
combination of the two work forces.
The electric systems of AEP and CSW will operate on an integrated and
coordinated basis as required by the Holding Company Act. Any fuel savings
resulting from the coordinated operation of the combined company will be passed
on to customers.
The merger agreement contains covenants and agreements that restrict the
manner in which the parties may operate their respective businesses until the
time of closing of the merger. In particular, without the prior written consent
of AEP, CSW may not engage in a number of activities that could affect its
sources and uses of funds. Pending closing of the merger, CSW's and its
subsidiaries' strategic investment activity, capital expenditures and non-fuel
operating and maintenance expenditures are restricted to specific agreed upon
projects or agreed upon amounts. In addition, prior to consummation of the
merger, CSW and its subsidiaries are restricted from: (i) issuing shares of
common stock other than pursuant to employee benefit plans; (ii) issuing shares
of preferred stock or similar securities other than to refinance existing
obligations or to fund permitted investment or capital expenditures; and (iii)
incurring indebtedness other than pursuant to existing credit facilities, in the
ordinary course of business or to fund permitted projects or capital
expenditures. These restrictions are not expected to limit the ability of CSW
and its subsidiaries to make investments and expenditures in amounts previously
budgeted. (The foregoing statements constitute forward-looking statements within
the meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information due to changes in the underlying
assumptions. See FORWARD-LOOKING INFORMATION).
Merger Regulatory Approval
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. The proposed AEP merger has a targeted completion date in the fourth
quarter of 1999. However, there can be no assurance that the AEP merger will be
consummated.
See ITEM 7. MD&A and ITEM 8 - NOTE 16. PROPOSED AEP MERGER.
U.S. ELECTRIC
The U.S. Electric Operating Companies generate, purchase, transmit,
distribute and sell electricity. The U.S. Electric Operating Companies serve
approximately 1.7 million customers in one of the largest combined service
2
territories in the United States covering approximately 152,000 square miles in
portions of Texas, Oklahoma, Louisiana and Arkansas. The customer base includes
a mix of residential, commercial and diversified industrial customers. CPL and
WTU operate in portions of south and central west Texas, respectively. PSO
operates in portions of eastern and southwestern Oklahoma, and SWEPCO operates
in portions of northeastern Texas, northwestern Louisiana and western Arkansas.
Information concerning each of the U.S. Electric Operating Companies for 1998 is
presented in the following table.
Estimated
Estimated Service Average Rural Electric
State and Year of Population Territory Number of Municipal Cooperatives
Registrant Incorporation Served (sq. miles) Customers Customers Served
---------------------------------------------------------------------------------------------
CPL Texas - 1945 1,808,000 44,000 642,000 1 4
PSO Oklahoma - 1913 1,112,000 30,000 486,000 2 2
SWEPCO Delaware - 1912 952,000 25,000 419,000 3 8
WTU Texas - 1927 394,000 53,000 188,000 4 13
The largest cities in CPL's service territory are Corpus Christi, Laredo
and McAllen. The economic base of CPL's service territory includes
manufacturing, mining, agricultural, transportation and public utilities
sectors. Major activities in these sectors include oil and gas extraction, food
processing, apparel, metal refining, chemical and petroleum refining, plastics
and machinery equipment. Contracts with substantially all large industrial
customers provide for both demand and energy charges. Demand charges continue
under such contracts even during periods of reduced industrial activity, thus
mitigating the effect of reduced activity on operating income.
The largest cities in PSO's service territory are Tulsa, Lawton, Broken
Arrow and Bartlesville. The economic base of PSO's service territory includes
petroleum products, manufacturing and agriculture. The principal industries in
the territory include natural gas and oil production, oil refining, steel
processing, aircraft maintenance, paper manufacturing and timber products,
glass, chemicals, cement, plastics, aerospace manufacturing, telecommunications
and rubber goods.
The largest cities in SWEPCO's service territory are Shreveport/Bossier
City, Longview and Texarkana. The economic base of SWEPCO's service territory
includes mining, manufacturing, chemical products, petroleum products,
agriculture and tourism. The principal industries in the territory include
natural gas and oil production, petroleum refining, manufacturing of pulp and
paper, chemicals, food processing and metal refining. The territory also has
several military installations, colleges and universities.
The largest cities in WTU's service territory are Abilene and San Angelo.
The economic base of WTU's service territory includes agricultural businesses,
such as the production of cattle, sheep, goats, cotton, wool, mohair and feed
crops. Significant gains have been made in economic diversification through
value added processing of these products. The natural resources of the territory
include oil, natural gas, sulfur, gypsum and ceramic clays. Important
manufacturing and processing plants served by WTU produce cottonseed products,
oil products, electronic equipment, precision and consumer metal products, meat
products, gypsum products and carbon fiber products. The territory also has
several military installations and state correctional institutions.
The U.S. Electric Operating Companies operate on an interstate basis to
facilitate exchanges of power. PSO and WTU are interconnected through the 200 MW
North HVdc transmission interconnection located at Vernon, Texas. SWEPCO and CPL
are interconnected through the 600 MW East HVdc transmission interconnection
located at Pittsburg, Texas.
CPL and WTU are members of the ERCOT power grid that operates in Texas.
Other ERCOT members include Texas Utilities Electric Company, HL&P, Texas
Municipal Power Agency, Lower Colorado River Authority, the municipal systems of
San Antonio, Austin and Brownsville, the South Texas and Medina Electric
Cooperatives, and several other interconnected systems and cooperatives. PSO and
3
SWEPCO are members of the SPP power grid that includes 12 investor-owned
utilities, 7 municipalities, 7 cooperatives, 3 state and 1 federal agency as
well as IPPs and power marketers operating in the states of Arkansas, Kansas,
Louisiana, Oklahoma and parts of Mississippi, Missouri, New Mexico and Texas.
ERCOT members interchange power and energy with one another on a firm, economy
and emergency basis, as do the members of the SPP.
CSW Services performs, at cost, various accounting, engineering, tax,
legal, financial, electronic data processing, centralized economic dispatching
of electric power and other services for the CSW System, primarily for the U.S.
Electric Operating Companies. The U.S. Electric Operating Companies are
functionally organized into power generation, energy delivery and energy
services business units, which are centrally managed by CSW Services. Currently,
CSW is developing management information systems to report segment information
along these business lines.
U.K. ELECTRIC
SEEBOARD is one of the 12 regional electricity companies formed as a
result of the restructuring and subsequent privatization of the United Kingdom
electricity industry in 1990. CSW acquired indirect control of SEEBOARD in April
1996. SEEBOARD's principal businesses are the distribution and supply of
electricity. In addition, SEEBOARD is engaged in other businesses, including gas
supply, electricity generation, and electrical contracting.
SEEBOARD's service area covers approximately 3,000 square miles in
Southeast England. The service area extends from the outlying areas of London to
the English Channel, and includes large towns such as Kingston-upon-Thames,
Croydon, Crawley, Maidstone, Ashford and Brighton, as well as substantial rural
areas. The area has a population of approximately 4.7 million people with
significant portions of the area, such as south London, having a high population
density. Over the past 25 years, the services sector of the area's economy has
grown in importance, while the industrial sector has declined. Considerable
commercial development has occurred in a number of towns in the area over the
last ten years, in particular in the areas around Gatwick Airport and the
English Channel ports.
In 1998, the electricity market in the U.K. began a phased in opening of
competition, allowing domestic and small business customers in selected areas to
choose their electric suppliers. During 1999, competition will be extended to
the entire country. SEEBOARD became one of the first regional electricity
companies to compete in the open marketplace, with part of its service area
being opened to competition in October 1998. SEEBOARD is actively competing to
retain its existing customers and win new customers in other regions.
In 1998, SEEBOARD streamlined its business by selling its 41 retail
appliance superstores to the Dixons Stores Group for about $30 million. SEEBOARD
recognized that its retail business would not be able to compete successfully
over the long term with the larger national chains.
In a joint venture, SEEBOARD Powerlink won a 30 year contract for $1.6
billion to operate, maintain, finance and renew the high-voltage power
distribution network of the London Underground, the largest metropolitan rail
system in the world. SEEBOARD Powerlink will be responsible for distributing
high voltage electricity supply to all 270 London Underground stations and to
some 250 miles of the rail system's track. SEEBOARD's partners in the Powerlink
consortium are the international electrical engineering group, ABB, and the
international cable and construction group, BICC.
OTHER CSW BUSINESS OPERATIONS
CSW continually seeks opportunities to expand its non-utility business in
areas related to energy and energy services. This expansion frequently occurs
through strategic domestic and international acquisitions, through marketing
4
initiatives inside and outside of the service territories of the U.S. Electric
Operating Companies and through new business investments. Acquisitions of any
new assets, or development of any new business opportunities, must meet defined
criteria, including the potential to lower CSW System costs, increase long-term
efficiency and competitiveness, and provide an acceptable return on investment
to CSW. See PROPOSED AEP MERGER for information related to covenants and
restrictions on certain business activities.
Diversified Electric
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.
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.
Also during 1998, CSW International provided $100 million of debt, to be
converted to equity at the end of 1999, to Vale based in Sao Paulo, Brazil. At
December 31, 1998, CSW International had approximately $290 million invested in
South America.
In late 1998, CSW International and Scottish Power commenced construction
of a 400 MW combined cycle gas turbine power station in southeast England.
Commercial operation is expected to begin in the year 2000. CSW International
has a 50% interest in the project.
In addition to these projects, CSW Energy and CSW International have other
projects in various stages of development.
Energy Services
C3 Communications
C3 Communications, an exempt telecommunications company, is comprised of
two divisions. C3 Communications' Utility Automation Division provides automatic
meter reading, interval meter data and related products and services to
commercial and industrial customers, electric, gas and water utilities and other
energy service providers. C3 Communications' Networks Division was formed from
the dissolution of ChoiceCom. C3 Communications' Networks Division offers high
capacity inter-city fiber optic network services to telecommunications carriers
and wholesale customers in Texas and Louisiana with plans to expand into
Arkansas and Oklahoma.
C3 Communications' Utility Automation Division entered the direct access
market in 1998 and received approval from all three utility distribution
companies in California to manage meter data for the state's deregulated
electric utility industry. The Utility Automation Division continues to seek
other domestic opportunities.
In 1998, ChoiceCom expanded its switch-based local dial tone markets from
three cities to five by installing state-of-the art Lucent 5ESS(R) switches in
Dallas and Houston, Texas. ChoiceCom also expanded its long haul network with
the installation and operation of a high capacity fiber optic system linking the
Texas cities of Dallas, Houston, Austin and San Antonio in July of 1998.
5
By mutual agreement, the ChoiceCom partnership was terminated December 31,
1998. ICG Communications, Inc. purchased ChoiceCom's local dial tone business
while C3 Communications retained the long haul, high-capacity fiber optic
network. With the fiber assets, C3 Communications established the Networks
Division and plans to focus on CSW's original strategies to build new routes in
the states of Texas, Oklahoma, Louisiana and Arkansas.
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.
EnerShop
EnerShop's two product lines are performance contracting and EnerACT
advisory services.
Through performance contracting, EnerShop provides energy services to
customers in Texas and Louisiana that help reduce customers' operating costs
through increased energy efficiencies and improved equipment operations.
EnerShop utilizes the skills of local trade allies in offering services that
include energy and facility analysis, project management, engineering design,
equipment procurement and construction and performance monitoring.
EnerACT is an innovative system that communicates with all brands and
models of energy management systems and utility meters. EnerACT aggregates load
profiles of multiple facilities into a single purchasing entity, optimizes
real-time control of buildings simultaneously with real-time energy prices, and
predicts energy consumption for operations through building simulation models.
Customers in California, Illinois, Louisiana, New York, Texas, and Wisconsin
currently subscribe to EnerACT advisory services.
Other Ventures
The CSW Services' Business Ventures group pursues energy-related projects.
Projects for these groups include staffing services for electric utility nuclear
power plants, energy management systems, and electric substation automation
software. In August 1998, the SEC approved the marketing and distribution of
electric bikes, and associated accessories under the TotalEV name.
In late 1997, CSW Energy Services was launched to explore the electric
utility industry's emerging retail supply markets as they were deregulated on a
state-by-state basis. CSW Energy Services began selling retail electric supply
to commercial customers in California and Pennsylvania. In March 1998, CSW
Energy Services signed its first major supply contract in California. In January
1999, CSW Energy Services announced that it was ceasing its business as a retail
electric supplier and that it would assign or terminate its existing electricity
supply contracts to other suppliers.
In June 1997, the FERC approved the request of CSW Power Marketing to sell
power and energy at market-based rates in the wholesale market. AEP is currently
pursuing this initiative. As a result, CSW has temporarily suspended this
initiative.
Other Diversified
CSW Credit was originally formed to purchase, without recourse, accounts
receivable from the U.S. Electric Operating Companies to reduce working capital
requirements. In addition, because CSW Credit's capital structure is more
leveraged than that of the U.S. Electric Operating Companies, CSW's overall cost
of capital is lower. Subsequent to its formation, CSW Credit's business has
expanded to include the purchase, without recourse, of accounts receivable from
certain non-affiliated utilities subject to limitations imposed by the SEC under
the Holding Company Act.
CSW Leasing has investments in leveraged leases.
6
COMPETITION AND INDUSTRY CHALLENGES
Competitive forces at work in the electric utility industry are affecting
the CSW System and electric utilities generally. Current legislative and
regulatory initiatives are likely to result in even greater competition in both
the wholesale and retail markets in the future. As competition in the industry
increases, the U.S. Electric Operating Companies will have the opportunity to
seek new customers and at the same time will be at risk of losing customers to
other competitors. Additionally, the U.S. Electric Operating Companies will
continue to compete with suppliers of alternative forms of energy, such as
natural gas, fuel oil and coal, some of which may be cheaper than electricity.
As a whole, the U.S. Electric Operating Companies believe that their prices for
electricity and the quality and reliability of their service currently place
them in a position to compete effectively in the marketplace. In light of these
anticipated changes, CSW continues to seek opportunities to expand its business
operations that are not regulated by state utility commissions (The foregoing
statement constitutes a forward-looking statement within the meaning of Section
21E of the Exchange Act. Actual results may differ materially from such
projected information due to changes in the underlying assumptions. See
FORWARD-LOOKING INFORMATION).
To address the anticipated changes in the electric utility industry and to
properly align its business operations with its non-regulated activities, CSW
manages its business operations in six distinct lines of business. These
business lines fall into both the regulated and non-regulated categories. In
addition, given the expected restructuring of the utility industry, certain
aspects of the business lines will eventually cease to be regulated.
Consequently, CSW's operating structure is designed to accommodate both the
current business environment as well as the future. The six business lines are:
(i) power generation; (ii) energy delivery; (iii) energy services; (iv)
international energy operations; (v) energy trading; and (vi)
telecommunications. Currently, CSW is developing management information systems
to report segment information along these business lines.
For additional information regarding competition and industry challenges,
including legislative initiatives at both the state and federal level, see ITEM
7. MD&A.
RATES AND REGULATION
The CSW System is subject to the jurisdiction of the SEC under the Holding
Company Act with respect to the issuance of securities, certain acquisition and
divestiture activities, certain affiliate transactions and other matters. The
Holding Company Act generally limits the operations of a registered holding
company to that of a single integrated public utility system, plus such
additional businesses as are functionally related to such system. The U.S.
Electric Operating Companies have been classified as public utilities under the
Federal Power Act. Accordingly, the FERC has jurisdiction, in certain respects,
over their electric utility facilities and operations, wholesale rates, and
certain other matters. The U.S. Electric Operating Companies are subject to the
jurisdiction of various state commissions as to retail rates, accounting
matters, standards of service and, in some cases, issuances of securities,
certification of facilities and extensions or divisions of service territories.
For a discussion of regulation by the various environmental agencies that
applies to the CSW System, see ENVIRONMENTAL MATTERS below.
U.S. ELECTRIC
Franchises
The U.S. Electric Operating Companies hold franchises to provide electric
service in various municipalities within their service areas. These franchises
have varying provisions and expiration dates including, in some cases,
termination and buy-out provisions. CSW considers the franchises of the U.S.
Electric Operating Companies to be adequate for the conduct of their business.
7
Texas Rates - CPL, SWEPCO and WTU
The Texas Commission has original jurisdiction over retail rates in the
unincorporated areas of Texas. The governing bodies of incorporated
municipalities have original jurisdiction over rates within their incorporated
limits. Municipalities may elect, and some have elected, to surrender this
original jurisdiction to the Texas Commission. The Texas Commission has
appellate jurisdiction over rates set by incorporated municipalities.
In Texas, electric service areas are approved by the Texas Commission. A
given tract in a utility's overall service area may be certificated to one
utility, to one of several competing electric cooperatives or investor owned
utilities, to one of the competing municipal electric systems, or it may be
certificated to two or more of these entities. The Texas Commission has changed
these certificated areas only slightly since 1976.
Three parties have filed applications at the Texas Commission requesting
authority to provide retail electric service in CPL's currently certificated
areas. Two of the parties requested that the Texas Commission order CPL to
permit them to use CPL's distribution facilities, which management believes to
be unlawful resulting in mandatory retail wheeling. The third party seeks to
operate as a distribution utility that will serve a major economic development
project located in the service areas of CPL and an electric cooperative in South
Texas. The Texas Commission has docketed the cases for hearings. CPL is actively
opposing these applications.
In a separate docket, the Texas Commission has determined that three large
naval bases, which are currently served as industrial customers by CPL, may
qualify as wholesale customers. A second phase of the proceeding has been
docketed to analyze all issues pertinent to the bases being able to take
electric service from other wholesale providers. Among the issues to be
addressed is the extent to which the Navy would have to compensate CPL for costs
that may be stranded if the naval facilities were to obtain electric service
from another wholesale provider. The Texas Commission's ultimate decision could
have ramifications for other industrial customers in the State of Texas who own
facilities upon which extensive distribution systems are located and who believe
access to wholesale electric power providers would reduce their electric costs.
Oklahoma Rates - PSO
PSO currently is subject to the jurisdiction of the Oklahoma Commission
with respect to retail prices. Pursuant to authority granted under RESCTA, the
Oklahoma Commission established service territorial boundary maps in all
unincorporated areas for all regulated retail electric suppliers serving
Oklahoma. In accordance with RESCTA, a retail electric supplier may not extend
retail electric service into the certified territory of another supplier, except
to serve its own facilities or to serve a new customer with an initial full load
of 1,000 KW or more. RESCTA provides that when any territory certified to a
retail electric supplier or suppliers is annexed and becomes part of an
incorporated city or town, the certification becomes null and void. However,
once established in the annexed territory, a supplier may generally continue to
serve within the annexed area. See ITEM 7. MD&A, RECENT DEVELOPMENTS AND TRENDS.
Arkansas and Louisiana Rates - SWEPCO
SWEPCO is subject to the jurisdiction of the Arkansas Commission and
Louisiana Commission with respect to retail rates, as well as the Texas
Commission as described above.
Nuclear Regulation - CPL
Ownership of an interest in a nuclear generating unit exposes CPL and,
indirectly, CSW to regulation not common to a fossil fuel generating unit. Under
the Atomic Energy Act of 1954 and the Energy Reorganization Act of 1974,
operation of nuclear plants is intensively regulated by the NRC, which has broad
power to impose licensing and safety-related requirements. Along with other
federal and state agencies, the NRC also has extensive regulations pertaining to
the environmental aspects of nuclear reactors. The NRC has the authority to
impose fines and/or shut down a unit until compliance is achieved, depending
8
upon its assessment of the severity of the situation. For additional information
regarding STP, see ITEM 7. MD&A.
U.K. ELECTRIC
SEEBOARD Rates and Franchise Area
The distribution and supply businesses of SEEBOARD are principally
regulated by the Electricity Act of 1989 and by the conditions contained in
SEEBOARD's public electricity supply license. The public electricity supply
license generally continues until at least 2025, although it may be revoked upon
25 years prior notice after 2000. In addition, the public electricity supply
license may be revoked by the United Kingdom's Secretary of State in certain
specified circumstances. Before October 1998, SEEBOARD had the sole right to
supply substantially all of the consumers in its authorized area, except where
demand exceeds 100 KW. However, commencing in October 1998, on a phased-in
basis, SEEBOARD no longer has monopoly supply rights in its franchise area. At
December 31, 1998, 10.5% of SEEBOARD's domestic customers had the option to
elect an alternative supplier but no more than 0.5% had done so.
Most of the income of the distribution business is regulated by a formula
set by the DGES based upon, among other factors, the United Kingdom Retail Price
Index. The formula generally sets a cap on the average price per unit of
electricity distributed, with allowed annual increases based upon changes in the
United Kingdom Retail Price Index plus a percentage factor set from time to time
by the DGES. The DGES has commenced the review of allowed distribution charges
for the regional electricity companies, including SEEBOARD, to take effect from
April 1, 2000.
The prices charged by SEEBOARD in its franchise supply business are also
determined from a formula set from time to time by the DGES, although as
competition increases, the significance of the regulatory allowance will
decline. The formula provides for a price cap derived from the forecast
electricity purchase costs, transmission charges, distribution costs and
overheads, together with an allowed margin as determined by the DGES. All
holders of a second-tier license, including SEEBOARD, who supply electricity to
non-franchise customers must pay charges to the host regional electricity
company for the use of its distribution network.
FUEL RECOVERY - U.S. ELECTRIC
The recovery of fuel costs from retail customers by the U.S. Electric
Operating Companies is subject to regulation by the state utility commissions in
the states in which they operate. All of the contracts of the U.S. Electric
Operating Companies with their wholesale customers contain FERC approved
fuel-adjustment provisions for recovery of fuel costs.
Texas Fuel Recovery - CPL, SWEPCO and WTU
Electric utilities in Texas, including CPL, SWEPCO and WTU, are not
allowed to make automatic adjustments to recover changes in fuel costs from
retail customers. A utility is allowed to recover its known or reasonably
predictable fuel costs through a fixed fuel factor. The Texas Commission
established procedures whereby each utility under its jurisdiction may petition
to revise its fuel factor every six months according to a specified schedule.
Fuel factors may also be revised in the case of emergencies or in a general rate
proceeding. Fuel factors are in the nature of temporary rates and the utility's
collection of revenues by such factors is subject to adjustment at the time of a
fuel reconciliation. Under these procedures, at its semi-annual adjustment date,
a utility is required to petition the Texas Commission for a surcharge or to
make a refund when it has materially under- or over-collected its fuel costs and
projects that it will continue to materially under- or over-collect. Material
under- or over-collections including interest are defined as variances of four
percent or more of the most recent Texas Commission adopted annual estimated
fuel cost for the utility. A utility does not have to revise its fuel factor
9
when requesting a surcharge or refund. An interim emergency fuel factor order
must be issued by the Texas Commission within 30 days after such petition is
filed by the utility. Final reconciliation of fuel costs is made through a
reconciliation proceeding, which may contain a maximum of three years and a
minimum of one year of reconcilable data, and must be filed with the Texas
Commission no later than six months after the end of the period to be
reconciled. In addition, a utility must include a reconciliation of fuel costs
in any general rate proceeding regardless of the time since its last fuel
reconciliation proceeding. Any fuel costs that are determined to be unreasonable
in a reconciliation proceeding are not recoverable from retail customers.
Oklahoma Fuel Recovery - PSO
In general, MWH sales to PSO's retail customers are made at rates which
include a service level fuel cost adjustment factor reflecting the difference
between projected fuel and purchased power costs and the fuel rate embedded in
PSO's base rates. The factors are determined twice each year and are based upon
projected fuel, natural gas transportation, and purchased power costs. Any
difference between projected and actual costs is included in the fuel recovery
calculation for future periods. Oklahoma law requires that an examination of
PSO's retail fuel cost adjustment factor be performed annually by the Oklahoma
Commission which approves the utility's embedded fuel rate per KWH.
Arkansas and Louisiana Fuel Recovery - SWEPCO
SWEPCO's retail rates currently in effect in Louisiana are adjusted based
on SWEPCO's cost of fuel in accordance with a fuel cost adjustment which is
applied to each billing month based on the second previous month's average cost
of fuel. Provision for any over- or under-recovery of fuel costs is allowed
under an automatic fuel clause. Under SWEPCO's fuel adjustment rider currently
in effect in Arkansas, the fuel cost adjustment is applied to each billing month
on a basis which permits SWEPCO to recover the level of fuel cost experienced
two months earlier. SWEPCO's fuel recovery mechanisms are subject to the
jurisdiction of the Arkansas Commission and the Louisiana Commission.
Recoverability of Fuel Costs
Under current regulation, the U.S. Electric Operating Companies recover
all their material fuel costs from their customers. The inability of any of the
U.S. Electric Operating Companies to recover its fuel costs under the procedures
described above could have a material adverse effect on such company's results
of operations and financial condition.
See ITEM 7. MD&A and ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS
for further information with respect to regulatory, rate and fuel proceedings.
10
FUEL SUPPLY AND PURCHASED POWER - U.S. ELECTRIC
The U.S. Electric Operating Companies' net dependable summer rating, power
generation capabilities and the type of fuel used are set forth in ITEM 2.
PROPERTIES. Information concerning energy sources and cost data for the years
1996 through 1998 is presented in the following tables. In addition, detailed
fuel cost and consumption information for 1998 is also presented.
CSW
Source of Energy (based on MW) 1998 1997 1996
-----------------------------------
Natural Gas 38% 36% 36%
Coal 39 41 39
Lignite 8 9 9
Nuclear 7 7 8
Other -- -- 1
-----------------------------------
Total Generated 92 93 93
Purchased Power 8 7 7
-----------------------------------
Total 100% 100% 100%
-----------------------------------
Fuel Cost data
Average Btu per net KWH 10,514 10,405 10,440
Cost per Mmbtu $1.67 $1.83 $1.81
Cost per KWH generated 1.75(cent) 1.90(cent) 1.89(cent)
Cost, including purchased power, as a
percentage of revenue 37.3% 38.1% 37.4%
CPL
Source of Energy (based on MW)
Natural Gas 51% 50% 42%
Coal 20 18 22
Nuclear 21 22 22
-----------------------------------
Total Generated 92 90 86
Purchased Power 8 10 14
-----------------------------------
Total 100% 100% 100%
-----------------------------------
Fuel cost data
Average Btu per net KWH 10,563 10,386 10,391
Cost per Mmbtu $1.59 $1.83 $1.62
Cost per KWH generated 1.68(cent) 1.90(cent) 1.68(cent)
Cost, including purchased power, as a
percentage of revenue 30.3% 32.9% 30.8%
PSO
Source of Energy (based on MW)
Natural Gas 43% 39% 43%
Coal 43 48 46
-----------------------------------
Total Generated 86 87 89
Purchased Power 14 13 11
-----------------------------------
Total 100% 100% 100%
-----------------------------------
Fuel cost data
Average Btu per net KWH 10,272 10,264 10,225
Cost per Mmbtu $1.77 $1.98 $2.04
Cost per KWH generated 1.82(cent) 2.03(cent) 2.09(cent)
Cost, including purchased power, as a
percentage of revenue 47.1% 46.4% 45.1%
11
SWEPCO
Source of Energy (based on MW) 1998 1997 1996
-----------------------------------
Natural Gas 15% 12% 15%
Coal 51 52 45
Lignite 23 26 26
Other -- -- 4
-----------------------------------
Total Generated 89 90 90
Purchased Power 11 10 10
-----------------------------------
Total 100% 100% 100%
-----------------------------------
Fuel cost data
Average Btu per net KWH 10,544 10,554 10,606
Cost per Mmbtu $1.63 $1.69 $1.76
Cost per KWH generated 1.72(cent) 1.79(cent) 1.87(cent)
Cost, including purchased power, as a
percentage of revenue 42.7% 43.4% 45.1%
WTU
Source of Energy (based on MW)
Natural Gas 42% 37% 46%
Coal 33 36 35
-----------------------------------
Total Generated 75 73 81
Purchased Power 25 27 19
-----------------------------------
Total 100% 100% 100%
-----------------------------------
Fuel cost data
Average Btu per net KWH 10,828 10,275 10,568
Cost per Mmbtu $1.83 $1.98 $2.01
Cost per KWH generated 1.98(cent) 2.03(cent) 2.12(cent)
Cost, including purchased power, as a
percentage of revenue 40.2% 42.6% 43.5%
12
1998 Cost 1998 Consumption
Fuel Type per MMbtu (millions)
- --------------------------------------------------------------------------------
Mmbtus Mcfs Tons
CSW
Natural gas $2.21 295 288
Coal 1.40 285 17
Lignite 1.35 59 4
Nuclear .46 55
Composite 1.67
CPL
Natural gas $2.12 137 133
Coal 1.37 51 3
Nuclear .46 55
Composite 1.59
PSO
Natural gas $2.36 79 77
Coal 1.17 78 4
Composite 1.77
SWEPCO
Natural gas $2.18 41 40
Coal 1.58 127 8
Lignite 1.35 59 4
Composite 1.63
WTU
Natural gas $2.23 38 38
Coal 1.26 29 2
Composite 1.83
Natural Gas
CSW Services purchased approximately 295 billion cubic feet of natural gas
during 1998 for the U.S. Electric Operating Companies, which ranks them as the
third largest consumer of natural gas in the United States. A majority of the
gas fired electric generation plants are connected to at least two natural gas
pipelines, which provides greater access to competitive supplies and improves
reliability. Natural gas requirements for each plant are supplied by a portfolio
of long-term and short-term gas purchase and transportation agreements which
were acquired on a competitive basis and are market price based.
Coal and Lignite
The U.S. Electric Operating Companies purchase coal from a number of
suppliers. In 1998, the U.S. Electric Operating Companies purchased
approximately 73% of their total coal purchases under long-term contracts with
the balance procured on the spot market. The coal for the plants comes primarily
from Wyoming and Colorado mines which are located between 1,000 and 1,700 rail
miles from the generating plants.
Oklaunion - CPL, PSO and WTU
The jointly-owned Oklaunion plant purchases coal under a coal supply
contract with Caballo Coal Company which accounts for approximately 64% each of
the total 1998 Oklaunion coal requirements for CPL, PSO and WTU with the balance
procured on the spot market. As of December 31, 1998, CPL's share of the
year-end 1998 coal inventory at Oklaunion was approximately 30,000 tons,
13
representing a 39-day supply. PSO's share was approximately 50,000 tons,
representing a 32-day supply. WTU's share was approximately 180,000 tons,
representing a 34-day supply.
Coleto Creek - CPL
CPL has a long-term coal supply agreement with Colowyo Coal Company
covering approximately 25% of the coal requirements of its Coleto Creek plant.
During 1998, this agreement was extended to cover approximately 40% of the plant
deliveries. The balance of the plant's coal deliveries came from spot market
purchases of Powder River Basin and Colorado coal that was delivered under one
spot market rail transportation agreement. Additionally, approximately 102,000
tons of coal were purchased from suppliers in Venezeula and transported via ship
to the Port of Corpus Christi where it was then transferred by train and/or
truck to the plant. At December 31, 1998, CPL had approximately 334,000 tons of
coal in inventory at Coleto Creek, representing a 44-day supply.
During 1999, CPL intends to purchase Powder River Basin coal on the spot
market for approximately 50% of the Coleto Creek plant requirements and will
transport such coal pursuant to a rail transportation agreement with Union
Pacific. The remainder of CPL's coal will be purchased from multiple Colorado
suppliers. This coal will also be transported by Union Pacific. As a result of
the recent merger between Union Pacific and the Southern Pacific Transportation
Company, Union Pacific is currently the only rail carrier with access to the
Coleto Creek Plant. In 1994, CPL instituted a proceeding at the Interstate
Commerce Commission requesting a reasonable rate for the 16 miles transported
from Victoria, Texas to Coleto Creek. Southern Pacific Transportation Company
moved to dismiss the complaint and, in a decision issued December 31, 1996, the
Surface Transportation Board of the U.S. Department of Transportation, successor
to the Interstate Commerce Commission, granted the motion. CPL has appealed this
decision to the U.S. Court of Appeals for the Eighth Circuit where the matter is
pending.
Northeastern Station - PSO
PSO has a contract with Kerr-McGee Coal Corporation, which substantially
covers the coal supply for PSO's Northeastern Station coal units through 2007.
In 1998, Kennecott Energy Corporation purchased Kerr-McGee Coal Corporation and
assumed the PSO coal contract. Coal delivery is by unit trains from mines
located in the Gillette, Wyoming vicinity, a distance of about 1,100 rail miles
from the Northeastern Station. PSO owns sufficient railcars for operation of six
unit trains. Coal is transported to the Northeastern Station pursuant to a
long-term contract with Burlington Northern. The plant is also equipped to
accept deliveries from Union Pacific. At December 31, 1998, PSO had
approximately 522,000 tons of coal in inventory at Northeastern Station
representing a 42-day supply.
Welsh and Flint Creek - SWEPCO
The long-term coal supply for SWEPCO's Welsh plant and its 50% owned Flint
Creek plant is provided under a contract with Cyprus Amax Minerals Company. Coal
under this contract is mined near Gillette, Wyoming, a distance of about 1,500
and 1,100 miles, respectively, from the Welsh and Flint Creek plants. Coal is
delivered to the plants under rail transportation contracts with Burlington
Northern and the Kansas City Southern Railroad Company having expiration dates
ranging between 2001 and 2006. SWEPCO owns or leases, under long-term leases,
sufficient railcars and spares for the operation of 15 unit trains. SWEPCO has
supplemented its railcar fleet from time to time with short-term leases. At
December 31, 1998, SWEPCO had coal inventories of approximately 875,000 tons at
Welsh, representing a 44-day supply and approximately 503,000 tons at Flint
Creek, representing a 67-day supply, See ITEM 8-NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for
additional information.
Pirkey and Dolet Hills - SWEPCO
SWEPCO has acquired lignite leases covering an aggregate of about 27,000
acres near the Henry W. Pirkey power plant. Sabine Mining Company is the
contract miner of these reserves. At December 31, 1998, approximately 277,000
tons of lignite were in SWEPCO's inventory at the Pirkey plant representing a
23-day supply. Another 25,000 acres are jointly leased in equal portions by
SWEPCO and CLECO in the Dolet Hills area of Louisiana near the Dolet Hills Power
14
Plant. The DHMV is the contract miner for these reserves. At December 31, 1998,
SWEPCO had 133,000 tons of lignite in inventory at the Dolet Hills plant,
representing a 23-day supply. SWEPCO believes the acreage under lease in these
areas contains sufficient reserves to cover the anticipated lignite requirements
for the estimated useful lives of the lignite-fired plants.
Nuclear Fuel - CPL
The supply of fuel for STP involves a complex process. This process
includes the acquisition of uranium concentrate, the conversion of uranium
concentrate to uranium hexafluoride, the enrichment of uranium hexafluoride into
the isotope U235, the fabrication of the enriched uranium into fuel rods and
incorporation of fuel rods into fuel assemblies. The fuel assemblies are the
final product loaded into the reactor core. The time associated with this
process requires that fuel decisions be made years in advance of the actual need
to refuel the reactor. Fuel requirements for STP are being handled by the
STPNOC.
Outages are necessary approximately every 18 months for refueling. Because
STP's fuel costs are significantly lower than any of the other CPL units, CPL's
average fuel costs are expected to be higher whenever a STP unit is down for
refueling or maintenance.
CPL and the other STP participants have entered into contracts with
suppliers for 100% of the uranium concentrate sufficient for the operation of
both STP units through October 2001, with additional flexible contracts to
provide 53% of the uranium concentrate needed for STP through 2003. In addition,
CPL and the other STP participants have entered into contracts with suppliers
for 100% of the nuclear fuel conversion service sufficient for the operation of
both STP units through October 2001, with additional flexible contracts to
provide at least 40% of the conversion service needed for STP through 2005.
Enrichment contracts were secured for a 30-year period from the initial
operation of each unit. The STP participants have canceled the enrichment
requirements for the period after October 2000 by negotiating a new contract
with the initial supplier. The participants believe that other, lower cost
options will be available in the future. CPL and the other STP participants have
entered into flexible contracts to provide for 100% of enrichment services from
October 2000 to December 2004, with additional flexible contracts to provide at
least 40% of enrichment services through 2006. Also, fuel fabrication services
have been contracted for operation through 2005 for Unit 1 and 2006 for Unit 2.
Although CPL and the other STP owners cannot predict the availability of uranium
and related services, CPL and the other STP owners do not currently expect to
have difficulty obtaining uranium and related services required for the
remaining years of STP operation.
The Energy Policy Act has provisions for the recovery of a portion of the
costs associated with the decommissioning and decontamination of the gaseous
diffusion plants used in the enrichment process. These costs are being recovered
on the basis of enrichment services purchased by utilities from the DOE prior to
October of 1992. The total annual assessment for all domestic utilities is
limited to $150 million per federal fiscal year and assessable until October
2007. The STP assessment will be approximately $2.0 million each year with CPL's
share being 25.2% of the annual STP assessment.
The Nuclear Waste Policy Act of 1982, as amended, required the DOE to
develop a permanent high level waste disposal facility for the storage of spent
nuclear fuel by 1998. The DOE last estimated that the permanent facility will
not be available until 2010. The DOE will take possession of all spent fuel
generated at STP as a result of a contract CPL and other STP participants have
entered into with the DOE. STP has on-site storage facilities with the
capability to store all the spent nuclear fuel generated by the STP units over
their lives. Therefore, the DOE delay in providing the disposal facility will
not impact the operation of the STP units. Under provisions of the Nuclear Waste
Policy Act of 1992, a one-mill per KWH assessment on electricity generated and
sold from nuclear reactors funds the DOE waste disposal program.
Risks of substantial liability could arise from the operation of STP and
from the use, handling, disposal and possible radioactive emissions associated
with nuclear fuel. While CPL carries insurance, the availability, amount and
coverage thereof is limited and may become more limited in the future. The
15
available insurance may not cover all types or amounts of loss or expense which
may be experienced in connection with the ownership of STP. See ITEM 8-NOTE 3.
COMMITMENTS AND CONTINGENT LIABILITIES for information relating to nuclear
insurance.
Governmental Regulation
The price and availability of each of the foregoing fuel types are
significantly affected by governmental regulation. Any inability in the future
to obtain adequate fuel supplies or adoption of additional regulatory measures
restricting the use of such fuels for the generation of electricity might affect
the U.S. Electric Operating Companies' ability to economically meet the needs of
their customers. Such regulatory measures could require the U.S. Electric
Operating Companies to supplement or replace, prior to normal retirement,
existing generating capability with units using other fuels. This would be
impossible to accomplish quickly, would require substantial additional
expenditures for construction and could have a significant adverse effect on the
financial condition and results of operations of CSW and/or any of the U.S.
Electric Operating Companies.
The Registrants are unable to predict the future cost of fuel (The
foregoing statements constitute forward-looking statements within the meaning of
Section 21E of the Exchange Act. Actual results may differ materially from such
projected information due to changes in the underlying assumptions. See
FORWARD-LOOKING INFORMATION). See ITEM 7. MD&A and ITEM 8-NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS for additional information concerning fuel costs.
Power Purchases and Sales
The U.S. Electric Operating Companies serve various municipalities,
electric cooperatives and public power authorities. The U.S. Electric Operating
Companies exchange power with various neighboring electric systems and engage in
electric interchanges with each other. In addition, they contract with certain
suppliers including power marketers and independent power producers for the
purchase or sale of capacity, firm energy, responsive reserves and other
wholesale services.
CPL - Wholesale Customers
Certain CPL wholesale customers have given notice of their intent to
terminate their contract when they expire in 2001 through 2004. During 1998,
these customers represented 3% of CPL's total electric operating revenues.
ENVIRONMENTAL MATTERS
The CSW System is subject to regulation with respect to air and water
quality, solid waste standards and other environmental matters. These
authorities have continuing jurisdiction in most cases to require modifications
in facilities and operations. Any such changes in environmental statutes or
regulations could require substantial additional expenditures to modify the CSW
System's facilities and operations and could have a material adverse effect on
the results of operations and financial condition of CSW and/or any of the U.S.
Electric Operating Companies. Violations of environmental statutes or
regulations can result in fines and other costs.
EMFs
Research is ongoing whether exposure to EMFs may result in adverse health
effects. Although earlier studies suggested a correlation between EMFs and some
types of effects, the research to date has not established a cause-and-effect
relationship between EMFs and adverse health effects from electric lines.
Recently, more comprehensive studies have failed to show any correlation. CSW
cannot predict the impact on CSW or the electric utility industry if further
investigations or proceedings were to establish that the present electricity
delivery system is contributing to increased risk or incidence of health
problems.
16
Other Environmental Matters
From time to time the Registrants are made aware of various other
environmental issues or are named as parties to various other legal claims,
actions, complaints or other proceedings related to environmental matters.
Management does not expect disposition of any such pending environmental
proceedings to have a material adverse effect on the results of operations or
financial condition of CSW and/or any of the U.S. Electric Operating Companies.
See ITEM 7. MD&A, ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS
and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES, for additional information
relating to environmental matters.
U.S. ELECTRIC ENVIRONMENTAL MATTERS
Air Quality
Air quality standards and emission limitations are subject to the
jurisdiction of state regulatory authorities in each state in which the CSW
System operates, with oversight by the EPA. In accordance with regulations of
these state authorities, permits are required for all generating units on which
construction is commenced or which are substantially modified after the
effective date of the applicable regulations.
In 1990, the U.S. Congress amended the Clean Air Act. CAAA places
restrictions on the emission of sulfur dioxide from gas-, coal- and
lignite-fired generating plants. Beginning in the year 2000, the U.S. Electric
Operating Companies will be required to hold allowances in order to emit sulfur
dioxide. The EPA issues allowances to owners of existing generating units based
on historical operating conditions. Based on the CSW U.S. Electric System
facilities plan, CSW believes that the allowances of the U.S. Electric Operating
Companies are adequate to meet their needs through 2008. Public and private
markets are developing for trading of excess allowances.
The CAAA also directed the EPA to issue regulations governing nitrogen
oxide emissions and requiring government studies to determine what controls, if
any, should be imposed on utilities to control toxic air emissions. The acid
rain rules have not been released. Accordingly, the impact on CSW and the U.S.
Electric Operating Companies cannot be determined at this time.
Under the Acid Rain Title IV rules of the CAAA for nitrogen oxide control
for coal units, the U.S. Electric Operating Companies have elected alternate
standards for their units under an optional provision regarding emission limits.
This will eliminate any capital expenses through 2007, if the alternate
standards are met.
There is a legislative initiative in Texas to have older units, which were
grandfathered under the CAAA, operate under permits and reduce emissions. Based
upon reduction levels being discussed, the U.S. Electric Operating Companies'
compliance cost could be approximately $131 million. The time frame has not been
established for these controls. The issue will be considered in the 1999 Texas
legislative session.
The EPA recently promulgated revised, more stringent ambient air quality
standards for ozone and particulates. While these standards do not mandate
emission constraints or reductions for facilities such as electricity generating
power plants, they may result in more areas being designated as non-attainment
for these two pollutants. States will be required to develop strategies to
achieve compliance in these areas, strategies that may include lower emission
levels for electricity generating power plants, possibly including facilities
within the CSW System. The impact, if any, on CSW or the U.S. Electric Operating
Companies cannot yet be determined, but the impact could be significant.
At the Kyoto Conference on Global Warming held in December 1997, U.S.
representatives agreed to a treaty which could require new limitations on
"greenhouse gases" from power plants. CSW and the U.S. Electric Operating
17
Companies could be affected if this treaty, in its present form, is approved by
the United States Congress. The impact, if any, on CSW or the U.S. Electric
Operating Companies cannot be determined because most of the greenhouse gas
emission reduction would come from coal generation that would have to be
switched to natural gas or retired. Currently, 47% of the U.S. Electric
Operating Companies' MWH generation and 34% of its installed generating capacity
was coal and lignite.
Water Quality
Water quality is subject to the jurisdiction of each of the state
regulatory authorities in which the U.S. Electric Operating Companies operate as
well as the EPA. These authorities have jurisdiction over all wastewater
discharges into state waters, establish water quality standards and issue waste
control permits covering discharges which might affect the quality of state
waters. The EPA has jurisdiction over point source discharges through the
National Pollutant Discharge Elimination System provisions of the Clean Water
Act.
RCRA and CERCLA
The RCRA and the Arkansas, Louisiana, Oklahoma and Texas solid waste rules
provide for comprehensive control of all solid wastes from generation to final
disposal. The appropriate state regulatory authorities in the states in which
the U.S. Electric Operating Companies operate have received authorization from
the EPA to administer the RCRA solid waste control program for their respective
states.
The operations of the U.S. Electric Operating Companies, like those of
other utility systems, generally involve the use and disposal of substances
subject to environmental laws. CERCLA, the federal "Superfund" law, addresses
the cleanup of sites contaminated by hazardous substances. Superfund requires
that PRPs fund remedial actions regardless of fault or the legality of past
disposal activities. PRPs include owners and operators of contaminated sites and
transporters and/or generators of hazardous substances. Many states have similar
laws. Theoretically, any one PRP can be held responsible for the entire cost of
a cleanup. Typically, however, cleanup costs are allocated among PRPs.
CSW's subsidiaries incur significant costs for the handling,
transportation, storage and disposal of hazardous and non-hazardous waste
materials. Unit costs for waste classified as hazardous exceed by a substantial
margin unit costs for waste classified as non-hazardous.
The U.S. Electric Operating Companies, like other electric utilities,
produce combustion and other generation by-products, such as ash, sludge, slag,
low-level radioactive waste and spent nuclear fuel. The U.S. Electric Operating
Companies own distribution poles treated with creosote or other substances. The
EPA currently exempts coal combustion by-products from regulation as hazardous
wastes. Distribution poles treated with creosote or other substances are not
expected to exhibit characteristics that would cause them to be hazardous waste.
In connection with their operations, the U.S. Electric Operating Companies also
have used asbestos, PCBs and materials classified as hazardous waste. If
additional by-products or other materials generated or used by companies in the
CSW U.S. Electric System were reclassified as hazardous wastes, or other new
laws or regulations concerning hazardous wastes were put into effect, CSW System
disposal and remedial costs could increase materially. The EPA is expected to
issue new regulations stating whether certain other materials will be classified
as hazardous.
EPA Toxic Release Inventory Initiative
Beginning July 1, 1999, the EPA is requiring electric utilities to report
the amount of certain chemicals released by coal-fired power plants under its
Toxic Release Inventory Initiative. The regulations currently require nearly
30,000 facilities nationwide to report their annual emissions of certain
chemicals. The Toxic Release Inventory Initiative allows the public to access
information on the types and quantities of listed chemicals that are released.
The Toxic Release Inventory regulations require reports on the amounts of
materials disposed of, transferred offsite, recovered and recycled.
18
U.K. ELECTRIC ENVIRONMENTAL MATTERS
SEEBOARD's operations are subject to regulation with respect to water
quality standards and other environmental matters by various authorities within
the United Kingdom. Under certain circumstances, these authorities may require
modifications to SEEBOARD's facilities and operations or impose fines and other
costs for violations of applicable statutes and regulations. From time to time
SEEBOARD is made aware of various environmental issues or is named as a party to
various legal claims, actions, complaints or other proceedings related to
environmental matters. Management does not expect disposition of any such
pending environmental proceedings to have a material adverse effect on CSW's
consolidated results of operations or financial condition.
19
OPERATING INFORMATION - CSW SYSTEM
CSW
(excludes SEEBOARD)
1998 1997 1996
Kilowatt-hour sales (millions) --------------------------
Residential 19,757 17,995 17,883
Commercial 15,554 14,546 14,256
Industrial 21,481 21,087 20,266
Other retail 1,906 1,705 1,592
--------------------------
Sales to retail customers 58,698 55,333 53,997
Sales for resale 8,296 7,824 8,428
--------------------------
Total 66,994 63,157 62,425
--------------------------
Average number of electric customers (thousands)
Residential 1,480 1,462 1,443
Commercial 218 214 210
Industrial 22 23 24
Other retail 15 13 13
--------------------------
Total 1,735 1,712 1,690
--------------------------
Revenue per KWH
Residential 6.60(cent)6.96(cent)6.95(cent)
Commercial 5.71 6.13 6.12
Industrial 3.62 3.85 3.85
Sales for Resale 3.16 3.11 3.03
Peak Load and Capability
Net system capability (MW) (1) 14,839 14,290 14,377
Maximum coincident system demand (MW) 13,718 13,105 12,613
Percentage increase in peak demand over prior
period 4.7% 3.9% 2.4%
Generation at time of peak (MW) 13,012 12,817 11,625
Percent of peak demand generated 94.9% 97.8% 92.2%
Net purchases at time of peak (MW) 706 288 988
Percent of net purchases at time of peak 5.2% 2.2% 7.8%
Date of maximum coincident system demand July 27 July 28 July 22
The preceding table sets forth: (i) the net system capability, including the net
amounts of contracted purchases and contracted sales, at the time of peak
demand; (ii) the maximum coincident system demand on a one-hour integrated
basis, exclusive of sales to other electric utilities; and (iii) the respective
amounts and percentages of peak demand generated and net purchases and sales.
(1)Excludes 85 MW of system capability in storage in 1998 as described in ITEM
2. PROPERTIES, 310 MW of system capability in storage and 156 MW of system
capability under repair in 1997 and 358 MW of system capability in storage in
1996.
20
CPL
1998 1997 1996
-----------------------------
Kilowatt-hour sales (millions)
Residential 7,167 6,771 6,680
Commercial 5,122 4,846 4,773
Industrial 8,350 7,999 7,610
Other retail 553 486 499
-----------------------------
Sales to retail customers 21,192 20,102 19,562
Sale for resale 1,867 1,737 2,029
-----------------------------
Total 23,059 21,839 21,591
-----------------------------
Average number of electric customers
Residential 550,000 538,700 529,100
Commercial 82,000 79,700 78,000
Industrial 5,500 5,600 5,700
Other 4,500 3,900 3,900
-----------------------------
Total 642,000 627,900 616,700
-----------------------------
Revenue per KWH
Residential 7.35(cent)7.99(cent)7.92(cent)
Commercial 7.37 8.26 8.13
Industrial 3.71 4.13 4.05
Sales for resale 3.57 4.06 3.56
Peak Load and Capability
Net system capability (MW) (1) 4,542 4,319 4,380
Maximum coincident system demand (MW) 4,537 4,232 4,046
Percentage increase in peak demand over prior
period 7.2% 4.6% 4.8%
Generation at time of peak (MW) 3,688 4,227 3,484
Percent of peak demand generated 81.3% 99.9% 86.1%
Net purchases at time of peak (MW) 849 5 562
Percent of net purchases at time of peak 18.7% 0.1% 13.9%
Date of maximum coincident system demand August 13 August 20 August 13
The preceding table sets forth; (i) the net system capability, including the net
amounts of contracted purchases and contracted sales, at the time of peak
demand; (ii) the maximum coincident system demand on a one-hour integrated
basis, exclusive of sales to other electric utilities; and (iii) the respective
amounts and percentages of peak demand generated and net purchases and sales.
(1) Excludes 60 MW of system capability in storage in 1997 and 108 MW of
system capability in storage in 1996.
21
PSO
1998 1997 1996
----------------------------------
Kilowatt-hour sales (millions)
Residential 5,772 5,054 5,098
Commercial 5,091 4,698 4,621
Industrial 4,873 4,714 4,581
Other retail 265 192 81
----------------------------------
Sales to retail customers 16,001 14,658 14,381
Sales for resale 861 958 1,487
----------------------------------
Total 16,862 15,616 15,868
----------------------------------
Average number of electric customers
Residential 423,300 419,600 414,800
Commercial 56,100 55,300 54,400
Industrial 5,000 5,100 5,200
Other 1,600 1,400 1,400
----------------------------------
Total 486,000 481,400 475,800
----------------------------------
Revenue per KWH
Residential 5.70(cent) 5.88(cent)5.89(cent)
Commercial 4.64 4.82 4.80
Industrial 3.34 3.44 3.45
Sales for Resale 3.18 3.23 2.64
Peak Load and Capability
Net system capability (MW) (1) 4,042 3,882 3,848
Maximum coincident system demand (MW) 3,683 3,474 3,360
Percentage increase in peak demand over
prior period 6.0% 3.4% 2.1%
Generation at time of peak (MW) 3,048 3,376 3,009
Percent of peak demand generated 82.8% 97.2% 89.6%
Net purchases at time of peak (MW) 635 98 351
Percent of net purchases at time of peak 17.2% 2.8% 10.4%
Date of maximum coincident system demand September 4 July 28 August 7
The preceding table sets forth: (i) the net system capability, including the net
amounts of contracted purchases and contracted sales, at the time of peak
demand; (ii) the maximum coincident system demand on a one-hour integrated
basis, exclusive of sales to other electric utilities: and (iii) the respective
amounts and percentages of peak demand generated and net purchases and sales.
(1) Excludes 85 MW of system capability in storage in 1998 as described in ITEM
2. PROPERTIES, and 250 MW of system capability in storage in 1997 and 1996.
22
SWEPCO
1998 1997 1996
------------------------------------
Kilowatt-hour sales (millions)
Residential 5,052 4,549 4,487
Commercial 4,039 3,780 3,658
Industrial 6,929 6,968 6,833
Other retail 467 445 432
------------------------------------
Sales to retail customers 16,487 15,742 15,410
Sales for resale 6,449 6,791 6,395
------------------------------------
Total 22,936 22,533 21,805
------------------------------------
Average number of electric customers
Residential 358,600 356,600 353,200
Commercial 51,800 50,800 49,600
Industrial 5,800 5,800 5,900
Other 2,800 2,700 2,600
------------------------------------
Total 419,000 415,900 411,300
------------------------------------
Revenue per KWH
Residential 6.23(cent) 6.37(cent) 6.46(cent)
Commercial 4.90 5.08 5.19
Industrial 3.66 3.78 3.85
Sales for Resale 2.17 2.16 2.11
Peak Load and Capability
Net system capability (MW) 4,559 4,636 4,554
Maximum coincident system demand (MW) 4,372 4,157 4,018
Percentage increase in peak demand over
prior period 5.2% 3.5% 2.2%
Generation at time of peak (MW) 4,414 3,839 3,608
Percent of peak demand generated 101.0% 92.4% 89.8%
Net purchases (sales) at time of peak (MW) (42) 318 410
Percent of net purchases at time of peak (1.0)% 7.6% 10.2%
Date of maximum coincident system demand July 29 July 28 July 22
The preceding table sets forth: (i) the net system capability, including the net
amounts of contracted purchases and contracted sales, at the time of peak
demand; (ii) the maximum coincident system demand on a one-hour integrated
basis, exclusive of sales to other electric utilities; and (iii) the respective
amounts and percentages of peak demand generated and net purchases and sales.
23
WTU
1998 1997 1996
-------------------------------
Kilowatt-hour sales (millions)
Residential 1,766 1,622 1,620
Commercial 1,302 1,223 1,203
Industrial 1,329 1,406 1,241
Other retail 621 580 581
-------------------------------
Sales to retail customers 5,018 4,831 4,645
Sales for resale 2,622 2,504 2,411
-------------------------------
Total 7,640 7,335 7,056
-------------------------------
Average number of electric customers
Residential 147,600 146,900 146,500
Commercial 28,400 27,800 27,600
Industrial 5,800 6,000 6,300
Other 6,200 6,000 5,700
-------------------------------
Total 188,000 186,700 186,100
-------------------------------
Revenue per KWH
Residential 7.60(cent) 7.68(cent)7.67(cent)
Commercial 5.85 5.99 6.02
Industrial 3.89 4.05 4.22
Sales for Resale 3.72 3.55 3.69
Peak Load and Capability
Net system capability (MW) (1) 1,696 1,453 1,595
Maximum coincident system demand (MW) 1,591 1,481 1,433
Percentage increase (decrease) in peak demand
over prior period 7.4% 3.3% (0.1)%
Generation at time of peak (MW) 1,357 865 1,048
Percent of peak demand generated 85.3% 58.4% 73.1%
Net purchases at time of peak (MW) 234 616 385
Percent of net purchases at time of peak 14.7% 41.6% 26.9%
Date of maximum coincident system demand August 3 September 17 July 8
The preceding table sets forth: (i) the net system capability, including the net
amounts of contracted purchases and contracted sales, at the time of peak
demand; (ii) the maximum coincident system demand on a one-hour integrated
basis, exclusive of sales to other electric utilities; and (iii) the respective
amounts and percentages of peak demand generated and net purchases and sales.
(1) Excludes 156 MW of system capability for under repair 1997.
24
EMPLOYEES AND EXECUTIVE OFFICERS
The number of employees in the CSW System at December 31, 1998 is
presented in the table below. Of the employees listed below, 562 of the
positions at PSO and 788 of the positions at SWEPCO are covered under collective
bargaining agreements with the IBEW. In addition, 2,174 employees at SEEBOARD
are covered by collective agreements with several different unions. For
information related to ongoing union negotiations at PSO, reference is made to
ITEM 7. MD&A.
CSW SYSTEM EMPLOYEES
CPL 1,555
PSO 1,227
SWEPCO 1,461
WTU 913
-----------
U.S. Electric 5,156
UK Electric 3,985
Diversified Electric 137
Other (including CSW Services) 1,678
-----------
10,956
Age at
EXECUTIVE March 1,
OFFICERS 1999 Present Position
- --------------------------------------------------------------------------------
E. R. Brooks 61 Chairman, CEO and Director
T. V. Shockley, III 53 President, Chief Operating Officer and
Director
Glenn Files 51 Senior Vice President, Electric Operations
Ferd. C. Meyer, Jr. 59 Executive Vice President and General
Counsel
Glenn D. Rosilier 51 Executive Vice President and Chief
Financial Officer
Thomas M. Hagan 54 Senior Vice President, External Affairs
Venita McCellon-Allen 39 Senior Vice President, Customer Relations
and Corporate Development and Assistant
Corporate Secretary
Kenneth C. Raney 47 Vice President, Associate General Counsel
and Corporate Secretary
Wendy G. Hargus 41 Treasurer
Lawrence B. Connors 47 Controller
The information in the foregoing table is included in Part I pursuant to
Regulation S-K, Item 401 (b), Instruction 3. Each of the executive officers of
CSW is elected to hold office until the first meeting of CSW's Board of
Directors after the next annual meeting of stockholders. CSW's next annual
meeting of stockholders is scheduled to be held April 22, 1999. CSW or an
affiliate of CSW has employed each of the executive officers listed in the table
above in an executive or managerial capacity for at least the last five years.
25
ITEM 2. PROPERTIES.
U.S. ELECTRIC
The total capabilities (MW, net dependable summer rating) of the U.S.
Electric Operating Companies, which owned the following electric generating
units or portions thereof in the case of jointly owned facilities, as of
December 31, 1998 are shown in the following table. These properties are all
located in either Arkansas, Louisiana, Oklahoma or Texas.
Natural Coal Lignite Nuclear Other Total MW
Company Stations(a) Gas MW MW MW MW MW(b) (c)
- --------------------------------------------------------------------------------
CPL 12 3,142 686 630 6 4,464
PSO 8 2,794 1,008 25 3,827 (d)
SWEPCO 9 1,784 1,848 842 4,474
WTU 11 1,018 377 11 1,406
-----------------------------------------------------------------
CSW 40 8,738 3,919 842 630 42 14,171
-----------------------------------------------------------------
(a) CSW actually owns 38 stations. CPL, PSO and WTU each include the jointly
owned Oklaunion power station in their respective ownership count.
(b) Some plants have the capability of burning oil in combination with gas.
Use of oil in facilities primarily designed to burn gas results in
increased maintenance expense and a slight reduction in capability. PSO and
WTU have 25 MW and 11 MW, respectively, of facilities primarily designed to
burn oil. CPL has 6 MW of hydroelectric generation.
(c) Data reflects only the U.S. Electric Operating Companies' portion of
plants which are jointly owned with non-affiliates. For additional
information concerning jointly owned facilities see ITEM 8 - NOTE 6.
JOINTLY OWNED ELECTRIC UTILITY PLANT.
(d) Excludes 85 MW from units in storage at Tulsa for PSO, which should be
available in the summer of 1999.
All of the generating facilities described above are located on land owned by
the U.S. Electric Operating Companies or, in the case of jointly owned
facilities, jointly with other participants. The U.S. Electric Operating
Companies' electric transmission and distribution facilities are mostly located
over or under highways, streets and other public places or property owned by
others, for which permits, grants, easements or licenses have been obtained
(which the U.S. Electric Operating Companies believe to be satisfactory, but
without examination of underlying land titles). The principal plants and
properties of the U.S. Electric Operating Companies are subject to the liens of
the first mortgage indentures under which the U.S.
Electric Operating Companies' FMBs are issued.
26
DIVERSIFIED ELECTRIC
In addition to the generating facilities described above, CSW has
ownership interests in other electrical generating facilities, both foreign and
domestic. Information concerning these facilities is listed below.
Capacity Capacity Ownership
Company Location Total Committed Interest Status
----------------------------------------------------------
Operating Facilities - United States
Brush II CSW Energy Colorado 68 68 47% QF
Ft. Lupton CSW Energy Colorado 272 272 50% QF
Mulberry CSW Energy Florida 120 110 50% QF
Orange Cogen CSW Energy Florida 103 97 50% QF
Newgulf (1) CSW Energy Texas 85 80 100% EWG
Sweeny (2) CSW Energy Texas 330 292 50% QF
---------------------
978 919
---------------------
Operating Facilities - International
CSW United
Medway International Kingdom 675 675 37.5% n/a
CSW
Altamira International Mexico 109 109 50% FUCO
---------------------
784 784
---------------------
(1) The committed capacity at Newgulf is for the summer of 1999 only.
(2) 205 MW of the committed capacity is for the summer of 1999 only.
CAPITAL EXPENDITURES
The CSW System, including the U.S. Electric Operating Companies, maintains
a continuing construction program, the nature and extent of which is based upon
current and estimated demands upon the system. In addition, the CSW System
requires capital to invest in new enterprises, either through equity investments
or loans to projects, when deemed appropriate. See ITEM 7. MD&A for detailed
information related to historical and projected capital expenditures.
ITEM 3. LEGAL PROCEEDINGS.
The Registrants are parties to various legal claims, actions and
complaints arising in the normal course of business which are not described
herein. Management does not expect disposition of these matters to have a
material adverse effect on any of the Registrants' results of operations or
financial condition. See ITEM 1. BUSINESS, ITEM 7. MD&A and ITEM 8-NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS for information relating to pending legal,
environmental and regulatory proceedings.
27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
CSW None.
CPL None.
PSO None.
SWEPCO None.
WTU None.
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
CSW COMMON STOCK INFORMATION
1998 1997
Market Price Dividends Market Price Dividends
High Low Paid High Low Paid
------------------------------ -----------------------------------
First Quarter $27 13/16 $26 1/4 43.5(cent) $25 3/4 $21 1/4 43.5(cent)
Second Quarter 27 5/8 25 5/8 43.5 22 1/8 18 1/4 43.5
Third Quarter 28 3/4 25 1/4 43.5 22 7/16 19 3/4 43.5
Fourth Quarter 30 1/16 27 3/8 43.5 27 5/16 20 5/8 43.5
CSW's common stock is traded under the ticker symbol CSR and listed on the
New York Stock Exchange, Inc. and Chicago Stock Exchange, Inc. Market prices
were obtained from the composite listing of all closing prices on CSW common
stock trades as reported on Bloomberg Financial Commodities News.
In January 1999, CSW's board of directors elected to maintain the
quarterly dividend, payable on March 1, 1999, to stockholders of record on
February 5, 1999, unchanged at $0.435 per share, or an indicated rate of $1.74
per year.
CSW plans to continue to pay dividends on its common stock until the
closing of the AEP Merger at approximately the same times and rates per share as
was paid during 1998, subject to continuing evaluation of CSW's financial
condition and earnings by the CSW board of directors. Traditionally, the CSW
board of directors has declared dividends to be payable on the last business day
of February, May, August and November.
There were approximately 60,000 record holders of CSW's common stock as of
February 22, 1999. See NOTE 12. COMMON STOCK for information on CSW common
stock.
U.S. ELECTRIC COMMON STOCK INFORMATION
All of the outstanding shares of common stock of the U.S. Electric
Operating Companies are owned by CSW. Consequently, there is no market for their
common stock. Cash dividends declared and paid by the U.S. Electric Operating
Companies to CSW on their respective common stock for 1998 and 1997 are
presented in the following table.
CPL PSO SWEPCO WTU
-----------------------------------------------------
(thousands)
1998 $249,000 $69,000 $120,000 $40,000
1997 $157,000 $59,000 $90,000 $26,000
2-1
Reference is made to the page numbers noted in the table below for the locations
of the following items:
ITEM 6. SELECTED FINANCIAL DATA.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See ITEM 7. MD&A - RISK MANAGEMENT and ITEM 8. - NOTE 1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES, NOTE 7. FINANCIAL INSTRUMENTS
and NOTE 20. SUBSEQUENT EVENT.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page Number
CSW CPL PSO SWEPCO WTU
-------------------------------------
Selected Financial Data 2-4 2-98 2-112 2-126 2-139
MD&A (1) 2-5 2-5 2-5 2-5 2-5
Results of Operations 2-35 2-99 2-113 2-127 2-140
Quantitative and Qualitative Disclosures
About Market Risk 2-2 2-2 2-2 2-2 2-2
Financial Statements and Supplementary Data 2-40 2-102 2-116 2-129 2-142
Report of Independent Public Accountants 2-93 2-109 2-123 2-136 2-149
Report of Management 2-96 2-110 2-124 2-137 2-150
(1) CSW combines the MD&A sections of the Registrants except for the Results
of Operations which are located at the page numbers indicated in the table
above.
2-2
CENTRAL AND SOUTH WEST
CORPORATION
2-3
SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended
December 31 is provided to highlight significant trends in the financial
condition and results of operations for CSW. CSW recorded the United Kingdom
windfall profits tax in the third quarter of 1997 as an extraordinary item. CSW
sold Transok in 1996. Accounting rules require the classification of both the
sale and the actual operating results prior to such sale as discontinued
operations. In addition to these reclassifications, certain other financial
statement items for prior years have been reclassified to conform to the 1998
presentation.
1998 (1) 1997 (1) 1996 (1) 1995 1994
--------------------------------------------------
(millions, except per share and ratio data)
INCOME STATEMENT DATA
Revenues $5,482 $5,268 $5,155 $3,143 $3,105
Income from continuing
operations 440 329 297 377 369
Income before extraordinary item 440 329 429 402 394
Net income for common stock 440 153 429 402 394
Basic and diluted EPS of
common stock from
continuing operations $2.07 $1.55 $1.43 $1.97 $1.95
Basic and diluted EPS of
common stock $2.07 $0.72 $2.07 $2.10 $2.08
Dividends paid per share of
common stock $1.74 $1.74 $1.74 $1.72 $1.70
Average common shares outstanding 212.4 212.1 207.5 191.7 189.3
BALANCE SHEET DATA
Assets $13,744 $13,451 $13,332 $13,869 $11,066
Long-term obligations (2) 4,120 4,259 4,057 3,948 2,975
Capitalization ratios
Common stock equity 46% 45% 47% 43% 48%
Preferred stock 2 2 4 4 5
Trust Preferred Securities 4 4 -- -- --
Long-term debt 48 49 49 53 47
(1)See CENTRAL AND SOUTH WEST CORPORATION - RESULTS OF OPERATIONS for factors
affecting earnings.
(2)Long-term obligations includes long-term debt, Trust Preferred Securities
and preferred stock subject to mandatory redemption.
2-4
REGISTRANTS' COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND CENTRAL AND SOUTH WEST CORPORATION'S RESULTS OF OPERATIONS
Reference is made to CSW's Consolidated Financial Statements and related
Notes to Consolidated Financial Statements and Selected Financial Data. The
information contained therein should be read in conjunction with, and is
essential in understanding, the following discussion and analysis. The RESULTS
OF OPERATIONS of CSW and the U.S. Electric Operating Companies precede their
financial statements.
OVERVIEW
The electric utility industry is changing rapidly as it is becoming more
competitive. In anticipation of increasing competition and fundamental changes
in the industry, CSW's management is implementing a strategic plan designed to
help position CSW to be competitive in this rapidly changing environment and is
developing a global energy business.
CSW has undertaken key initiatives in the implementation of this overall
strategy and is determining new directions for the corporation's future. One of
these key initiatives is the proposed merger between AEP and CSW that was
announced in December 1997. CSW would become a subsidiary of AEP in the proposed
merger. The proposed merger would join two companies which are low cost
providers of electricity and would achieve greater economies of scale than
either company could achieve on its own. In addition, CSW International
continues to make investments in South America. CSW continues to pursue the
acquisition of the non-nuclear generating assets of Cajun, a Louisiana member
electric cooperative. In 1998, C3 Communications sold its interest in ChoiceCom
and retained the long haul, high-capacity fiber optic network from that
partnership. These initiatives are discussed in more detail below and elsewhere
in this report.
CSW believes that compared to other electric utilities, the CSW System is
well positioned to capitalize on the opportunities and challenges of an
increasingly deregulated and competitive market for the generation, transmission
and distribution of electricity. (The foregoing statement constitutes a
forward-looking statement within the meaning of Section 21E of the Exchange Act.
Actual results may differ materially from such projected information due to
changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). The CSW
System benefits from economies of scale by virtue of its size and is a reliable
and relatively low-cost provider of electric power. Specifically, CSW seeks
competitive advantages through its diverse and stable customer base, competitive
prices for electricity, diversified fuel mix, extensive transmission
interconnections, diversity of regulation and financial flexibility. See RECENT
DEVELOPMENTS AND TRENDS for additional information.
LIQUIDITY AND CAPITAL RESOURCES
Overview of Operating, Investing and Financing Activities
Net cash inflows from operating activities increased $216 million to $942
million during 1998 compared to 1997. The increase in net cash inflows is due
primarily to the absence in 1998 of $190 million of federal and state income tax
payments made in the first half of 1997 for the gain on CSW's 1996 sale of
Transok. However, these payments were offset in part by the utilization of
Alternative Minimum Tax credits that CSW had previously generated. Also
contributing to the increase were better fuel recovery positions and a higher
accounts payable balance. The increase in net cash inflows was offset in part by
an increase in the accounts receivable balance. The second installment of the
2-5
United Kingdom windfall profits tax was paid in December 1998 in the amount of
(pound)55 million, or $91 million; however, this cash outflow did not reduce the
increase in cash flows from operations when compared to the prior year because a
comparable amount was paid in December 1997.
Net cash outflows from investing activities decreased $269 million to an
outflow of $635 million during 1998 compared to an outflow of $904 million for
1997. CSW Energy obtained permanent external financing during the first half of
1997 for the Orange cogeneration project and subsequently reduced its equity
investment in the project. In addition, CSW Energy made its final payment on the
Ft. Lupton cogeneration project in the first half of 1997. CSW Energy also
experienced a decrease in construction expenditures for the Phillips Sweeny
project that began operating in the first quarter of 1998. Further reducing the
cash outflows from investing activities was a cash inflow resulting from CSW
International's Enertek partner, Alpek, assuming its 50% obligation of that
power plant project. Reduced spending at the U.S. Electric Operating Companies
for facilities also contributed to the lower net cash outflows from investing
activities.
Net cash flows from financing activities decreased $229 million to an
outflow of $225 million during 1998 compared to an inflow of $4 million for the
same period last year. In the second quarter of 1997, CSW received proceeds from
the issuance of Trust Preferred Securities. The proceeds were used primarily to
reacquire preferred stock and pay down short-term debt in the second quarter of
1997. In April 1997, CSW made changes to its common stock plans and stopped
issuing original shares. The decrease in net cash from financing activities was
due in part to funding these common stock plans through open market purchases.
The decrease in cash flows from financing activities was offset in part by
higher amounts of reacquisitions and maturities of long-term debt in 1997
compared to 1998. Also partially offsetting the decrease in cash flows from
financing activities was a cash inflow in 1998 from financing CSW Energy's
Sweeny project.
The non-cash impacts of exchange rate differences on the translation of
foreign currency denominated assets and liabilities were recorded on a separate
line on the cash flow statement in accordance with accounting guidelines.
Internally Generated Funds
Internally generated funds, which consist of cash flows from operating
activities less common and preferred stock dividends, should meet most of the
capital requirements of the CSW System. However, CSW's strategic initiatives,
including expanding CSW's core electric utility and non-utility businesses
through acquisitions or otherwise, may require additional capital from external
sources. For a description of certain restrictions on CSW's ability to raise
capital from external sources, see PROPOSED AEP MERGER. Productive investment of
net funds from operations in excess of capital expenditures and dividend
payments is necessary to enhance the long-term value of CSW for its investors.
CSW is continually evaluating the best use of internally generated funds, which
totaled $564 million, $343 million and $499 million for 1998, 1997 and 1996,
respectively. The amounts of internally generated funds for the U.S. Electric
Operating Companies are detailed in the following table.
2-6
1998 1997 1996
--------------------------------
($ millions)
CPL
Internally Generated Funds $183 $172 $268
Construction Expenditures Provided by
Internally Generated Funds 148% 136% 196%
PSO
Internally Generated Funds $124 $62 $107
Construction Expenditures Provided by
Internally Generated Funds 180% 78% 128%
SWEPCO
Internally Generated Funds $105 $108 $153
Construction Expenditures Provided by
Internally Generated Funds 127% 100% 165%
WTU
Internally Generated Funds $20 $69 $52
Construction Expenditures Provided by
Internally Generated Funds 53% 217% 121%
Capital Expenditures
The CSW System's need for capital results primarily from its construction
of facilities to provide reliable electric service to its customers. The
historical capital requirements of the CSW System have been primarily for the
construction of electric utility plant. However, current projected capital
expenditures are expected to be primarily for existing transmission and
distribution systems and for various non-utility investments. The U.S. Electric
Operating Companies maintain a continuing construction program, the nature and
extent of which is based upon current and estimated future demands upon the
system. Planned construction expenditures for the U.S. Electric Operating
Companies for the next three years are primarily to improve and expand
transmission and distribution facilities and will be funded primarily through
internally generated funds. These improvements will be required to meet the
anticipated needs of new customers and the growth in the requirements of
existing customers.
CSW regularly evaluates its capital spending policies and generally seeks
to fund only those projects and investments that management believes will offer
satisfactory returns in the current environment. Consistent with this strategy,
the CSW System is likely to continue to make additional investments in
energy-related and non-utility businesses and will continue to search for other
electric utility properties to acquire. Primary sources of capital for these
expenditures are long-term debt, trust preferred securities and preferred stock
issued by the U.S. Electric Operating Companies, long-term and short-term debt
issued by CSW, as well as internally generated funds. Historically, the issuance
of common stock by CSW has also been a source of capital. CSW Energy and CSW
International typically use various forms of non-recourse project financing to
provide a portion of the capital required for their respective projects as well
as utilizing long-term debt for other investments. Although CSW and each of the
U.S. Electric Operating Companies expect to fund the majority of their
respective capital expenditures for their existing utility systems through
internally generated funds, for any significant investment or acquisition,
additional funds from the capital markets may be required. For a description of
certain restrictions on CSW's ability to make investments and raise capital from
external sources, including through the issuance of common stock, see PROPOSED
AEP MERGER.
The historical and estimated capital expenditures for the CSW System,
including the U.S. Electric Operating Companies, SEEBOARD and other operations
are shown in the CAPITAL EXPENDITURES table. The amounts include construction
expenditures for the U.S. Electric Operating Companies and, for SEEBOARD and
CSW's other operations, construction expenditures and net equity investments.
The 1996 CSW amount does not include SEEBOARD acquisition expenditures. The
2-7
majority of the capital expenditures for the U.S. Electric Operating Companies
for 1996 through 1998 were spent on transmission and distribution facilities. It
is anticipated that the majority of the estimated capital expenditures for 1999
through 2001 will be for transmission and distribution facilities as well. For a
description of certain restrictions on CSW's ability to make capital
expenditures, including through the issuance of common stock, see PROPOSED AEP
MERGER (The table and statements below contain forward-looking information
within the meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information due to changes in the underlying
assumptions. See FORWARD-LOOKING INFORMATION).
CAPITAL EXPENDITURES
Estimated Expenditures
1996 1997 1998 1999 2000 2001
------------------------------ --------------------------------
(millions including AFUDC)
CSW $644 $760 $584 $855 $814 $664
CPL 139 130 127 224 167 152
PSO 85 82 71 91 174 117
SWEPCO 95 110 86 108 121 118
WTU 44 33 38 51 48 49
Estimated capital expenditures for 1999 - 2001 do not include
expenditures for acquisition-type investments.
Although CSW does not believe that the U.S. Electric Operating Companies
will require substantial additions of generating capacity over the next several
years, the U. S. Electric system's internal resource plan presently anticipates
that any additional capacity needs will come from a variety of sources including
power purchases. See Integrated Resource Plan below for additional information
regarding the U. S. Electric System's capacity needs.
Inflation
Annual inflation rates, as measured by the U. S. Consumer Price Index,
have averaged approximately 2.3% during the three years ended December 31, 1998.
CSW believes that inflation, at this level, does not materially affect CSW's
results of operations or financial position. However, under existing regulatory
practice, only the historical cost of plant is recoverable from customers. As a
result, cash flows designed to provide recovery of historical plant costs may
not be adequate to replace plant in future years.
Financial Structure, Shelf Registrations and Credit Ratings
As of December 31, 1998, the capitalization ratios of CSW were 46% common
stock equity, 2% preferred stock, 4% Trust Preferred Securities and 48%
long-term debt. CSW is committed to maintaining financial flexibility through a
strong capital structure and favorable securities ratings in order to access
capital markets opportunistically or when required. CSW continually monitors the
capital markets for opportunities to lower its cost of capital through
refinancing activities. The estimated embedded cost of long-term debt for CSW
and the U.S. Electric Operating Companies is shown below.
CSW 7.3%
CPL 6.7
PSO 6.9
SWEPCO 6.8
WTU 6.7
CSW can issue common stock, either through the purchase and reissuance of
shares from the open market or original issue shares, to fund its LTIP, stock
option plan, PowerShare plan and Retirement Savings Plan. CSW began funding
these plans through open market purchases on April 1, 1997. CPL has shelf
registration statements on file for the issuance of up to $60 million of FMBs,
up to $75 million of preferred stock, and up to $350 million of Senior Notes.
2-8
PSO has a shelf registration statement on file for the issuance of up to $35
million of Senior Notes. For a description of certain restrictions on CSW's
ability to raise capital from external sources, see PROPOSED AEP MERGER.
The current securities ratings for each of the Registrants is presented in
the following table, including the securities rating on the Trust Preferred
Securities issued by CPL Capital I, PSO Capital I and SWEPCO Capital I.
Standard &
Moody's Duff & Phelps Poor's
---------------------------------------
CPL
First mortgage bonds A3 A A
Senior unsecured Baa1 A- A-
Preferred stock Baa1 BBB+ BBB+
Trust preferred (CPL
Capital I) Baa1 BBB+ BBB+
Junior subordinated
deferrable Interest
debentures Baa2 -- --
PSO
First mortgage bonds A1 AA- AA-
Senior unsecured A2 A+ A
Preferred stock a3 A+ A-
Trust preferred (PSO
Capital I) a2 A+ A-
Junior subordinated
deferrable Interest
debentures A3 -- --
SWEPCO
First mortgage bonds Aa3 AA AA-
Senior unsecured A1 AA- A
Preferred stock a1 AA- A-
Trust preferred (SWEPCO
Capital I) aa3 AA- A-
Junior subordinated
deferrable Interest
debentures A2 -- --
WTU
First mortgage bonds A2 A+ A
Senior unsecured A3 -- A-
Preferred stock a3 A BBB+
CSW
Commercial paper P-2 D-2 A-2
These securities ratings may be revised or withdrawn at any time, and each
rating should be evaluated independently of any other rating.
Long-Term Financing
CSW Services used short-term debt to repay a $60 million variable rate
bank loan due December 1, 2001 in two $30 million installments on January 28,
1998 and April 27, 1998. On April 1, 1998, SWEPCO called the remaining 274,010
shares of its $100 par value 6.95% preferred stock. SWEPCO used short-term debt
to fund the $28 million redemption cost.
On September 1, 1998, CPL reacquired in its entirety $36 million principal
amount outstanding of its 7% Series L FMBs, due February 1, 2001 at a call price
of 100.53. On September 1, 1998, PSO reacquired in their entirety $25 million
principal amount outstanding of its 7 1/4% Series K FMBs, due January 1, 1999
and $30 million principal amount outstanding of its 7 3/8% Series L FMBs, due
March 1, 2002, at call prices of 100 and 100.77, respectively. CPL and PSO used
short-term borrowings and internally generated cash to fund the reacquisitions.
2-9
The final installment of (pound)55 million, or $91 million, related to the
windfall profits tax, enacted by the United Kingdom government, was paid by
SEEBOARD on December 1, 1998.
Short-Term Financing and Accounts Receivable Factoring
The CSW System uses short-term debt, primarily commercial paper, to meet
fluctuations in working capital requirements and other interim capital needs.
CSW has established a system money pool to coordinate short-term borrowings for
certain of its subsidiaries, primarily the U.S. Electric Operating Companies. In
addition, CSW also incurs borrowings for other subsidiaries that are not
included in the money pool. As of December 31, 1998, CSW had revolving credit
facilities totaling $1.0 billion to back up its commercial paper program. At
December 31, 1998, CSW had $811 million outstanding in short-term borrowings.
The maximum amount of short-term borrowings outstanding during the year, which
had a weighted average interest yield for the year of 5.8%, was $1.1 billion
during June 1998. Information concerning short-term borrowings for each of the
U.S. Electric Operating Companies is presented in the following table.
Borrowing Borrowing
Limit at Limit at date Maximum
Year Of Maximum Amount Date of Maximum
End Borrowed Borrowed Borrowed
-----------------------------------------------------------
(millions)
CPL $600 $300 $227 March 10, 1998
PSO 300 125 58 January 30, 1998
SWEPCO 250 250 70 June 2, 1998
WTU 165 165 16 June 2, 1998
CSW Credit purchases, without recourse, the accounts receivable of the
U.S. Electric Operating Companies and certain non-affiliated electric utility
companies. The sale of accounts receivable provides the U.S. Electric Operating
Companies with cash immediately, thereby reducing working capital needs and
revenue requirements. In addition, CSW Credit's capital structure contains
greater leverage than that of the U.S. Electric Operating Companies, so CSW's
cost of capital is lowered. CSW Credit issues commercial paper to meet its
financing needs. At December 31, 1998, CSW Credit had a $1.0 billion revolving
credit agreement, secured by the assignment of its receivables, to back up its
commercial paper program, which had $749 million outstanding. The maximum amount
of such commercial paper outstanding during the year, which had a weighted
average interest yield of 5.6%, was $1.0 billion during September 1998. The
average and year end amounts of accounts receivable sold during 1998 by the U.S.
Electric Operating Companies to CSW Credit are shown in the following table.
1998 1998
Average End of Year
-----------------------
(millions)
CPL $124 $145
PSO 80 77
SWEPCO 98 90
WTU 48 43
CSW Energy and CSW International
CSW Energy has authority from the SEC to expend up to $250 million for
general development activities related to qualifying facilities and independent
power facilities. CSW Energy may seek specific authority to spend additional
amounts on certain projects subject to limitations contained in the AEP merger
agreement. See NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES, for a discussion
of CSW's investments and commitments in CSW Energy projects at December 31,
1998.
2-10
In January 1997, CSW received authority from the SEC under the Holding
Company Act to spend an amount up to 100% of consolidated retained earnings on
EWG or FUCO investments, subject to certain restrictions. This represents a
twofold increase in authority previously granted under the Holding Company Act.
However, the amount of any such expenditures is subject to the terms of the AEP
merger agreement. As of December 31, 1998, CSW had invested an amount equal to
49% of consolidated retained earnings, as defined by Rule 53 of the Holding
Company Act, on EWG and FUCO investments. For a description of certain
restrictions on the ability of CSW and its subsidiaries to make capital
expenditures in respect of qualifying facilities and independent power
facilities and to make EWG and FUCO investments, see PROPOSED AEP MERGER.
RECENT DEVELOPMENTS AND TRENDS
AEP Merger
In December 1997, AEP and CSW announced that their boards of directors
approved a definitive merger agreement. If the merger is completed, the combined
company will be a diversified electric utility serving more than 4.6 million
customers in 11 states and approximately 4 million customers outside the United
States. In 1998, CSW undertook a corporate realignment to more effectively
position itself for competition and to better align itself with AEP related to
the proposed merger of the two companies. The merger must receive regulatory
approval from federal and state authorities and must satisfy a number of other
conditions, some of which may not be waived by the parties. There can be no
assurance that the AEP Merger will be consummated, and if it is, the timing of
such consummation or the effect of any regulatory conditions that may be imposed
on such consummation. See PROPOSED AEP MERGER.
Competition and Industry Challenges
Competitive forces at work in the electric utility industry are impacting
the CSW System and electric utilities generally. Increased competition facing
electric utilities is driven by complex economic, political and technological
factors. These factors have resulted in legislative and regulatory initiatives
that are likely to result in even greater competition at both the wholesale and
retail levels in the future. As competition in the industry increases, the U.S.
Electric Operating Companies will have the opportunity to seek new customers and
at the same time be at risk of losing customers to other competitors.
Additionally, the U.S. Electric Operating Companies will continue to compete
with suppliers of alternative forms of energy, such as natural gas, fuel oil and
coal, some of which may be less expensive than electricity. In the United
Kingdom, the franchised electricity supply business opened to full competition
on a phased-in basis beginning October 1998. As a result, SEEBOARD will be able
to seek customers while risking the loss of existing customers to other
competitors. CSW believes that, overall, its prices for electricity and the
quality and reliability of its service currently place it in a position to
compete effectively in the energy marketplace (The foregoing statement
constitutes a forward-looking statement within the meaning of Section 21E of the
Exchange Act. Actual results may differ materially from such projected
information due to changes in the underlying assumptions. See FORWARD-LOOKING
INFORMATION). See RATES AND REGULATORY MATTERS for a discussion of several
current issues affecting the CSW System.
Electric industry restructuring and the development of competition in the
generation and sale of electric power requires resolution of several important
issues, including, but not limited to: (i) who will bear the costs of prudent
utility investments or past commitments incurred under traditional
cost-of-service regulation that will be uneconomic in a competitive environment,
sometimes referred to as stranded costs; (ii) whether all customers have access
to the benefits of competition; (iii) how, and by whom, the rules of competition
will be established; (iv) what the impact of deregulation will be on
conservation, environmental protection and other regulator-imposed programs; and
(v) how transmission system reliability will be ensured. The degree of risk to
2-11
CSW and the U.S. Electric Operating Companies associated with various federal
and state restructuring proposals aimed at resolving any or all of these issues
will vary depending on many factors, including the proposals' competitive
position and treatment of stranded utility investment, primarily at CPL,
resulting from such requirements. Although the U.S. Electric Operating Companies
believe they are in a position to compete effectively in a deregulated, more
competitive marketplace, if stranded costs are not recovered from customers then
the U.S. Electric Operating Companies may be required by existing accounting
standards to recognize potentially significant losses from unrecovered stranded
costs, especially with respect to STP (The foregoing statement constitutes a
forward-looking statement within the meaning of Section 21E of the Exchange Act.
Actual results may differ materially from such projected information due to
changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). See
Regulatory Accounting for additional information.
A majority of the states, including the four states in which the U.S.
Electric Operating Companies operate, have considered industry restructuring
including retail competition. Several states have enacted legislation mandating
retail competition, including Oklahoma in which PSO operates. CSW and the U.S.
Electric Operating Companies cannot predict when and if they will be subject to
legislative or regulatory initiatives enacting industry restructuring and retail
competition, nor can they predict the scope or effect of such initiatives on
their results of operations or financial condition in Texas, Louisiana, Oklahoma
and Arkansas. For additional information related to such state initiatives, see
Industry Restructuring Initiatives in Texas, Louisiana, Oklahoma and Arkansas.
Wholesale Electric Competition in the United States
The Energy Policy Act, which was enacted in 1992, significantly altered
the way in which electric utilities compete. The Energy Policy Act created
exemptions from regulation under the Holding Company Act and permits utilities,
including registered utility holding companies and non-utility companies, to own
EWGs. EWGs are a relatively new category of non-utility wholesale power
producers that are free from most federal and state regulation, including
restrictions under the Holding Company Act. These provisions enable broader
participation in wholesale power markets by reducing regulatory hurdles to such
participation. The Energy Policy Act also allows the FERC, on a case-by-case
basis and with certain restrictions, to order wholesale transmission access and
to order electric utilities to enlarge their transmission systems. A FERC order
requiring a transmitting utility to provide wholesale transmission service must
include provisions generally that permit the utility to recover from the FERC
applicant all of the costs incurred in connection with the transmission services
and any enlargement of the transmission system and associated services.
Wholesale energy markets, including the market for wholesale electric power,
have been increasingly competitive since enactment of the Energy Policy Act. The
U.S. Electric Operating Companies must compete in the wholesale energy markets
with other public utilities, cogenerators, qualifying facilities, EWGs and
others for sales of electric power. While CSW believes the Energy Policy Act
will continue to make the wholesale markets more competitive, CSW is unable to
predict how the Energy Policy Act will ultimately impact the U.S. Electric
Operating Companies.
FERC Orders 888 and 889
The FERC issued Order No. 888 in 1996, which is the final comparable open
access transmission service rule. The provisions of FERC Order No. 888 provide
for comparable transmission service between utilities and their transmission
customers by requiring utilities to take transmission service under their open
access tariffs for wholesale sales and purchases and by requiring utilities to
rely on the same transmission information that their transmission customers rely
on to make wholesale purchases and sales.
In addition, the Texas Commission adopted a rule governing transmission
access and pricing for ERCOT in 1996. The pricing method adopted by the Texas
Commission is a hybrid combination of an ERCOT-wide postage stamp rate covering
70% of total ERCOT transmission costs and a distance-sensitive component which
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recovers the remaining 30% of ERCOT's transmission costs. CPL and WTU began
recording transmission revenues and expenses in accordance with the Texas
Commission's rule on January 1, 1997. In May 1998, the Texas Commission issued
an order in Docket No. 17285, Complaint of CPL and WTU against Texas Utilities
Electric Company, granting CPL and WTU the relief they sought, which is to net
the annual payment paid to Texas Utilities Electric Company under a prior FERC
settlement for transmission service in ERCOT against the amounts CPL and WTU
would otherwise owe Texas Utilities Electric Company under the Texas
Commission's transmission rule. Texas Utilities Electric Company has appealed
the order.
FERC Order No. 888 requires holding companies to offer single system
transmission rates. The transmission rates of the U. S. Electric Operating
Companies are under the exclusive jurisdiction of the FERC while the
transmission rates of most of the transmitting utilities in ERCOT are under the
exclusive jurisdiction of the Texas Commission. Because the two commissions have
different approaches to defining and implementing comparable open access
transmission service, Order No. 888 granted the U. S. Electric Operating
Companies an exemption permitting them an opportunity to propose a solution that
provides comparability to all wholesale users. On November 1, 1996, the U. S.
Electric Operating Companies filed a system-wide tariff to comply with Order No.
888 and, on December 31, 1996, the FERC accepted for filing the system-wide
tariff which became effective on January 1, 1997, subject to refund and to the
issuance of further orders.
On December 10, 1997 the FERC issued an order regarding the U. S. Electric
Operating Companies' proposed system-wide tariff filed on November 1, 1996. The
FERC's order accepted the proposed tariff subject to several modifications,
including revisions to provide for system-wide transmission service under a
single system rate. The U.S. Electric Operating Companies filed the required
compliance tariff on February 17, 1998. On November 13, 1998, the FERC issued an
order that accepted the U.S. Electric Operating Companies' compliance tariff
providing for system-wide transmission service under a single system rate,
subject to further modifications.
In 1996, the FERC issued Order No. 889 requiring transmitting utilities to
establish and operate an OASIS for the dissemination of information regarding
available transfer capability for their respective transmission systems. The
OASIS is an on-line information system that provides the same information about
the utility's transmission system to all transmission customers. The U.S.
Electric Operating Companies utilize, and participate in the OASIS systems for
ERCOT and SPP. Order No. 889 also created standards of conduct requiring
utilities to conduct any wholesale power sales business separately from their
transmission operations. The standards of conduct are designed to ensure that
utilities and their affiliates, as sellers of power, do not have preferential
access to information about wholesale transmission prices and availability. The
FERC has accepted, subject to minor modifications, the U.S. Electric Operating
Companies' standards of conduct.
Retail Electric Competition in the United States
Most states have considered the adoption of various legislative and
regulatory initiatives to restructure the electric utility industry and enact
retail competition, and several states have already passed legislation that
requires the implementation of retail access for customers. CSW believes that
initiatives adopting industry restructuring and retail competition will be in
the best interest of CSW and the U.S. Electric Operating Companies only if such
initiatives fairly treat customers, utilities and their shareholders. More
specifically CSW believes industry restructuring will not be in the best
interests of CSW's and the U.S. Electric Operating Companies' security holders,
unless CSW and the U.S. Electric Operating Companies receive fair recovery of
the full amounts previously invested to serve customers, including amounts
invested to finance generation facilities. These investments, which were
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reasonably incurred, were made by the U.S. Electric Operating Companies to meet
their obligation to serve the public interest, necessity and convenience. This
obligation has existed for nearly a century and remains in force under current
law. CSW intends to strongly oppose attempts to impose retail competition
without just compensation for the risks and investments CSW undertook to serve
the public's demand for electricity. For additional information related to
retail wheeling in the United States, see Industry Restructuring Initiatives in
Texas, Louisiana, Oklahoma and Arkansas and Holding Company Act and Legislative
Update.
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, while legislative activity in Texas, Louisiana and Arkansas
stopped short of any such definitive action.
In April 1997, the Oklahoma Legislature passed restructuring legislation
providing for retail access by July 1, 2002. The 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. These studies are to be conducted under the direction of the Joint
Electric Utility Task Force. 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 March 1997, the Arkansas Legislature passed a resolution directing
interim legislative committees to study competition in the electric power
industry in Arkansas. The study began in October 1997, and the committees held
hearings throughout 1998. Also, the Arkansas Commission initiated a series of
generic restructuring dockets in 1998, and held hearings on restructuring in May
1998. In October 1998, the Arkansas Commission released a report to the Arkansas
Legislature, recommending the establishment of retail competition in Arkansas by
January 2002. Bills have been filed in the 1999 session of the Arkansas
legislature concerning the restructuring of the electric utility industry in
Arkansas.
In 1998, a special legislative committee created by the Louisiana Senate
studied the impact of retail competition on the state of Louisiana. Further, the
Louisiana Commission opened a proceeding to study restructuring and retail
competition. Comments were submitted and hearings were held throughout 1998 on a
number of specific restructuring topics. In addition, utilities filed rate
unbundling information with the Louisiana Commission staff. The Louisiana
Commission staff recently released its report on industry restructuring in
Louisiana, including its recommendations to the Louisiana Commission regarding
retail competition in Louisiana. In its report, the Louisiana Commission staff
found that electric industry restructuring in Louisiana is not in the public
interest at this time, although the staff did approve an electric industry
restructuring plan in case the commissioners decide to move forward with
electric industry restructuring and retail competition.
In 1997, the Texas legislature considered but did not pass legislation
enacting industry restructuring, including retail competition. Following the
1997 Texas legislative session, the Texas Lieutenant Governor appointed a Senate
interim committee to study retail competition and restructuring. The committee
held a series of hearings in late 1997 and throughout 1998, and issued its
report to the legislature in late 1998.
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The 1999 session of the Texas legislature has already produced three
comprehensive electric industry restructuring bills as electric industry
restructuring has become one of the primary topics the legislature will address.
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.
Texas Independent System Operator
An ISO is managing the ERCOT power grid in a competitive wholesale
electric market in Texas.
Integrated Resource Plan
In January 1997, CPL, WTU, and SWEPCO filed with the Texas Commission a
joint integrated resource plan outlining the companies' future electric needs
over a 10-year forecast horizon and the manner in which the companies propose to
meet those needs. In July 1997, the Texas Commission issued an Interim Order on
the Preliminary Plan which adopted a settlement agreement that had been reached
with all the parties in the case. The Interim Order approved the load forecast
and individual resource needs for each of the companies, as well as the request
for proposal documents to be used to procure future resource needs. The Interim
Order also approved the targeted purchase goal amounts for renewable and energy
efficiency programs, which will result in renewable and energy efficiency
programs being included in the companies' resource mix. In June 1997, CSW
Services, on behalf of CPL, SWEPCO and WTU, issued a request for proposal for up
to 75 MW of renewable resources. In November 1998, the Texas Commission approved
the winning contract from that solicitation, a 75 MW wind farm to be constructed
near McCamey, Texas. Additionally, CPL, SWEPCO and WTU have each issued
solicitations for additional resources to be available in 2001. The contracts
awarded as a result of these solicitations will be presented to the Texas
Commission for certification during 1999. In May 1997, a separate phase of the
Integrated Resource Plan was created to address the value of interruptible
resources at CPL. As a result of that proceeding, in January 1999, the Texas
Commission approved a new interruptible tariff for CPL. The tariff will go into
effect in 2000 prior to the expiration of CPL's current tariffs.
Holding Company Act and Legislative Update
In 1995, the SEC issued a report to the U.S. Congress advocating repeal of
the Holding Company Act, which restricts certain activities of CSW and other
registered holding companies, finding the Holding Company Act anachronistic and
duplicative of other federal and state regulatory regimes.
In the last Congress, and again in February 1999, Holding Company Act
repeal legislation was reported out of the U.S. Senate Banking Committee.
Management cannot predict the outcome of this, or similar, legislation.
Also in the last Congress, several bills which provided for the
restructuring and/or deregulating of the electric utility industry were
considered but did not pass. Several similar bills have been introduced as of
February 1999. Management cannot predict the ultimate outcome of any legislative
initiatives.
Regulatory Accounting
Consistent with industry practice and the provisions of SFAS No. 71, which
allows for the recognition of regulatory assets, the U.S. Electric Operating
Companies have recognized significant regulatory assets and liabilities.
Management believes that the U.S. Electric Operating Companies currently meet
the criteria for following SFAS No. 71. However, in the event the U.S. Electric
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Operating Companies or some portion of their business no longer meets the
criteria for following SFAS No. 71 due to deregulation or for other reasons, a
write-off of regulatory assets and liabilities would be required, absent a means
of recovering such assets or settling such liabilities in a continuing regulated
segment of the business. For additional information regarding regulatory
accounting, reference is made to NEW ACCOUNTING STANDARDS and NOTE 1. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES.
PSO Union Negotiations
PSO and its Local Union 1002 of the IBEW have been engaged in contract
renewal negotiations. The underlying agreement expired in September 1996 and, to
date, the parties have been unable to reach an agreement. In December 1996, PSO
implemented portions of its then final proposal after declaring an impasse. The
principal issue of disagreement involves PSO's need for flexibility in a
deregulated environment. In April 1997, Oklahoma's governor signed into law an
electric industry restructuring bill. The new law mandates the implementation of
retail competition to begin on July 1, 2002. PSO believed that the new law also
broke the impasse in the contract negotiations and has resumed negotiations with
the union.
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 also 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 had improperly
solicited employees to withdraw from the union. In December 1998, PSO appealed
the ALJ's ruling to the NLRB. The union is an intervenor in the AEP merger
proceedings. PSO continues to negotiate with the union. At this time, PSO cannot
predict the outcome of this matter. However, PSO believes that even in the event
of a strike, its operations would continue without a significant disruption and
that a strike would not have a material adverse effect on its results of
operations or financial condition. (The foregoing statement constitutes a
forward-looking statement within the meaning of Section 21E of the Exchange Act.
Actual results may differ materially from such projected information due to
changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION).
Impact of Competition and Industry Restructuring Initiatives
CSW believes that compared to other electric utilities, the CSW System is
well positioned to capitalize on the opportunities and challenges of an
increasingly deregulated and competitive market for the generation, transmission
and distribution of electricity. CSW is unable to predict the ultimate outcome
or impact of competitive forces on the electric utility industry in the United
States, and in the United Kingdom or on the CSW System. As the electricity
markets become more competitive, however, the principal factor determining
success is likely to be price, and to a lesser extent, reliability, availability
of capacity, and customer service. CSW and the U.S. Electric Operating Companies
cannot predict the form or effect of any federal or state electric utility
restructuring initiatives at this time. Federal and/or state electric utility
restructuring may cause impairment of significant recorded assets, material
reductions of profit margins, and/or increased costs of capital. No assurance
can be made that such events would not have a material adverse effect on CSW's
or any of the U.S. Electric Operating Companies' results of operations,
financial condition or competitive position. (The foregoing statement
constitutes a forward-looking statement within the meaning of Section 21E of the
Exchange Act. Actual results may differ materially from such projected
information due to changes in the underlying assumptions. See FORWARD-LOOKING
INFORMATION).
CPL - Wholesale Customers
Certain CPL wholesale customers have given notice of their intent to
terminate their contract when they expire in 2001 through 2004. During 1998,
these customers represented 3% of CPL's total electric operating revenues.
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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 payments cancelled 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 to
quantify the impact, if any, on the results of operations and financial
condition of CSW and/or SEEBOARD.
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RATES AND REGULATORY MATTERS
U.S. ELECTRIC
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 beginning May 1, 1998 and will be
reduced 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 also assigned a lower return on equity than
non-ECOM property; (ii) the Texas Commission's use of the "Glide Path" rate
reduction methodology applied on May 1, 1998 and to be applied on May 1, 1999;
and (iii) the $18 million of disallowed affiliate 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 reduction was
implemented in May 1998. 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 will be remanded to the Texas Commission. While CPL intends to
appeal 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.
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 December 31,
1998. The application of SFAS No. 71 is conditioned upon CPL's rates being set
based on the cost of providing service. In the event management concludes that
as a result of changes in regulation, legislation, the competitive environment,
or other factors, 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.
See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for information on the
CPL 1997 Final Order.
SWEPCO Louisiana Rate Review
In December 1997, the Louisiana Commission announced it would review
SWEPCO's rates and service. SWEPCO's last rate activity was an $8.2 million rate
decrease, initiated by SWEPCO and approved for its small and large industrial
customers in January 1988. Prior to that SWEPCO's last rate increase was in
1985.
The Louisiana Commission has selected consultants and legal counsel to
perform a review of SWEPCO's rates and charges and to review SWEPCO's quality of
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service. The Louisiana Commission's legal counsel will issue a report in May
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.
U.K. ELECTRIC
SEEBOARD Recent Regulatory Actions
Following the commencement of the phased-in opening of the United Kingdom
domestic and small business electricity market to competition, since September
1998, many customers are now able to choose their electricity supplier. SEEBOARD
competes for customers in its own area as well as throughout the rest of the
United Kingdom. The DGES has allowed a significant portion of the system
development costs associated with the introduction of competition to be
recovered by the regional electricity companies through a charge to all
customers over the next five years. The DGES has also announced price restraints
which set a maximum amount that existing electricity supply companies can charge
their domestic and small business customers, taking into account its view of
future electricity purchase costs. For SEEBOARD, these price restraints reduce
prices in real terms by 6% for the regulatory year ending March 31, 1999 and a
further 3% for the following regulatory year ending March 31, 2000.
PROPOSED AEP MERGER
Background Information
On December 22, 1997, CSW and AEP announced that their boards of directors
had approved a definitive merger agreement for a tax-free, stock-for-stock
transaction creating a company with a total market capitalization of
approximately $28 billion at that time. At December 31, 1998, the total market
capitalization of the combined company would have been $28 billion ($15 billion
in equity; $13 billion in debt), the combined company would have served 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. Based upon AEP's closing price immediately
prior to the merger announcement, this represented a premium of 20% over the CSW
closing price. At December 22, 1997, AEP would have issued approximately $6.6
billion in stock to CSW stockholders to complete the transaction. At December
31, 1998, AEP would have issued approximately $6.0 billion in stock to CSW
stockholders to complete the transaction. 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 1998, subject to continuing
evaluation of CSW's financial condition and earnings 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.
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The companies anticipate net savings related to the merger of
approximately $2 billion over a 10-year period from the elimination of
duplication in corporate and administrative programs, greater efficiencies in
operations and business processes, increased purchasing efficiencies, and the
combination of the two work forces. At the same time, the companies will
continue their commitment to high quality, reliable service. Job reductions
related to the merger are expected to be approximately 1,050 out of a total
domestic workforce of approximately 25,000. The combined company will use a
combination of growth, reduced hiring and attrition to minimize the need for
employee separations. 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 restricted to specific agreed upon
projects or agreed upon amounts. In addition, prior to consummation of the
merger, CSW and its subsidiaries are restricted from: (i) issuing shares of
common stock other than pursuant to employee benefit plans; (ii) issuing shares
of preferred stock or similar securities other than to refinance existing
obligations or to fund permitted investment or capital expenditures; and (iii)
incurring indebtedness other than pursuant to existing credit facilities, in the
ordinary course of business or to fund permitted projects or capital
expenditures. These restrictions are not expected to limit the ability of CSW
and its subsidiaries to make investments and expenditures in amounts previously
budgeted. (The foregoing statements constitute forward-looking statements within
the meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information due to changes in the underlying
assumptions. See FORWARD-LOOKING INFORMATION).
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 benefits would 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. On July 15, the FERC approved a draft order
accepting the proposed transmission service agreements between the Ameren System
and PSO. The draft order confirms that PSO's 250 MW firm contract path is
available for AEP and CSW to meet the Holding Company Act's requirement that the
two systems operate on an integrated and coordinated basis. In November 1998,
the FERC issued an order setting issues for hearing. Hearings are scheduled to
begin on June 1, 1999. The FERC order indicated that the review of the proposed
merger would address the issues of competition, market power and customer
protection and instructed AEP and CSW to refile an updated market power study.
The updated market power study was filed in January 1999. CSW has filed a
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proposed settlement with the FERC to sell 250 MWs of capacity in the Frontera
power plant project, two years after the AEP merger closes to respond to
market-power issues. 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 savings merger 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 orders are 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. AEP and CSW have proposed a regulatory plan in
Louisiana that provides for:
- Approximately $2.6 million in fuel cost savings to Louisiana customers
of CSW's SWEPCO subsidiary during the 10 years following completion of
the merger; and
- A commitment not to raise base rates above current levels prior to
January 1, 2002, for SWEPCO customers in Louisiana and a plan to share
with those customers approximately one-half of the savings allocated to
Louisiana related to the merger during the first 10 years following the
merger. Under this plan, approximately $26 million of these non-fuel
merger-related savings will be used to reduce future costs to SWEPCO's
Louisiana customers.
Hearings in Louisiana are expected to begin in the first quarter of 1999,
and a final order is expected in the second quarter of 1999.
Oklahoma
On August 14, 1998, AEP and CSW jointly filed a request with the Oklahoma
Commission for approval of their proposed merger. AEP and CSW have proposed a
regulatory plan in Oklahoma that provides for
- Approximately $11.8 million in fuel cost savings to Oklahoma customers
of CSW's PSO subsidiary during the 10 years following completion of
the merger; and
- A commitment not to raise base rates above current levels prior to
January 1, 2002, for PSO retail customers and to share approximately
one-half of the savings from synergies created by the merger during the
first 10 years following the merger. Under this plan, approximately
$78.6 million of these non-fuel merger-related savings will be used to
reduce future costs to PSO's retail customers.
On October 1, 1998, an Oklahoma Commission ALJ issued an oral ruling
recommending to the Oklahoma Commission that the merger filing be dismissed
without prejudice for lack of information regarding the potential impact of the
merger on the retail electric market in Oklahoma. The ruling was in response to
comments received from intervenors to the merger. A dismissal without prejudice
would allow AEP and CSW to submit an amended application with the added
information.
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Subsequent meetings with the parties to the merger proceeding resulted in
an agreement on criteria for the additional studies. On October 21, 1998, the
ALJ approved these criteria, as well as plans by AEP and CSW to file an amended
application along with the additional studies.
An amended application was filed with the Oklahoma Commission on February
25, 1999. Submission of the amended application reset Oklahoma's 90-day
statutory time period for Oklahoma Commission action on the merger. All other
material in the written record in the merger case will be preserved since the
docket is not being dismissed. AEP and CSW anticipate that the Oklahoma
Commission will establish a procedural schedule that will result in a final
order in Oklahoma in the second quarter of 1999.
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. AEP and CSW
have proposed a regulatory plan in Texas that provides for:
- Approximately $29 million in fuel cost savings to Texas customers
during the 10-year period following completion of the merger; and
- A commitment to not raise base rates prior to January 1, 2002 for
Texas customers and a plan to share with those customers approximately
one-half of the savings allocated to Texas related to the merger
during the first 10 years following the merger. In Texas,
approximately $183 million of the savings from synergies will be used
to reduce future costs to customers.
On July 2, 1998, the Texas Commission issued a preliminary order setting
forth the issues the Texas Commission will consider in the merger application.
In its preliminary order, the Texas Commission also determined that: (i) the
merger application was not a rate proceeding; (ii) restructuring issues should
not be addressed; and (iii) matters in the jurisdiction of other regulatory
bodies should not be addressed.
AEP and CSW have reached a settlement in principle with the Texas Office
of Public Utility Counsel and several cities in Texas. The proposed settlement
provides for combined rate reductions totaling approximately $180 million over a
six-year period for CSW's electric operating company customers through two
separate rate riders. Both rate reduction riders become effective upon approval
of the settlement and completion of the merger.
The first rate reduction rider provides for $84.4 million in estimated net
merger savings to be credited to Texas customer bills. The reduction would come
from a net merger savings rate reduction rider over the six years following
completion of the merger with the aggregate rate reductions for customers of the
CSW Texas companies as follows:
- - $52.7 million for CPL;
- - $16.1 million for SWEPCO; and
- - $15.6 million for WTU.
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The second rate reduction rider will be implemented to resolve issues
associated with CPL, WTU and SWEPCO rate and fuel reconciliation proceedings in
Texas. The $95.6 million rate reductions over the six years following completion
of the merger include:
- - $61.3 million for CPL;
- - $19.9 million for SWEPCO; and
- - $14.4 million for WTU.
CSW has agreed to withdraw the appeal of the CPL glide-path rate reduction
of $13.0 million implemented in May 1998, as well as the second glide-path rate
reduction of $13.0 million scheduled to take effect May 1999, if the settlement
is approved and the merger between AEP and CSW merger is completed.
In addition, as a part of the settlement proposal, CPL, SWEPCO and WTU
agree not to seek an increase in base rates prior to January 1, 2003. The Texas
Office of Public Utility Counsel and members of the Texas cities will not
initiate rate reviews prior to January 1, 2001.
The settlement proposal also provides for a sharing of off-system sales
margins on the wholesale electricity market after the effective date of the
merger. The proposed settlement also includes affiliate transaction standards
and provides for the maintenance of service quality for Texas customers.
Hearings in Texas are expected to begin in the second quarter of 1999, and
a final order is expected by the end of the third 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 on the condition that the merger is 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. On
November 9, 1998, AEP and CSW filed an amendment to the application.
AEP and CSW plan to make other required federal merger filings with the
Federal Communications Commission and 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 Monopolies and Mergers Commission. CSW is unable to predict the 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
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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 will prepare a merger application filing to
be made with the Kentucky Public Service Commission, which is expected to be
filed by April 15, 1999. Under the governing statute the Kentucky Public Service
Commission must act on the application within 60 days. Therefore this matter is
not expected to impact the timing of 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 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. The merger agreement will terminate on December 31, 1999 unless, in
certain circumstances, extended by either party as provided in the merger
agreement. There can be no assurance that the AEP merger will be consummated.
Merger Costs
As of December 31, 1998, CSW had deferred $26 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.
See NOTE 16. PROPOSED AEP MERGER.
OTHER MERGER AND ACQUISITION ACTIVITIES
SWEPCO Cajun Asset Purchase Proposal
Cajun filed a petition for reorganization under Chapter 11 of the United
States Bankruptcy Code on December 21, 1994 and is currently operating under the
supervision of the United States Bankruptcy Court for the Middle District of
Louisiana.
On March 18, 1998, SWEPCO, together with the Cajun Members Committee,
which currently represents 7 of the 12 Louisiana member distribution
cooperatives that are served by Cajun, filed the SWEPCO Plan in the bankruptcy
court. The SWEPCO Plan replaces plans filed previously by SWEPCO. Under the
SWEPCO Plan, a SWEPCO affiliate or subsidiary would acquire all of the
non-nuclear assets of Cajun, comprised of the two-unit Big Cajun I natural
gas-fired plant, the three-unit Big Cajun II coal-fired plant, and related
non-nuclear assets. The purchase price under the SWEPCO Plan is $940.5 million
in cash, subject to adjustment pursuant to the terms of the asset purchase
agreement proposed as part of the SWEPCO Plan.
Two competing plans of reorganization for the non-nuclear assets of Cajun
were filed with the bankruptcy court. On September 25, 1998, Enron Capital and
Trade Resource Corporation, a subsidiary of Enron Corporation, withdrew its bid.
The trustee for Cajun supports the sole remaining competing bid of $1.19 billion
by Louisiana Generating LLC, a partnership of subsidiaries of Southern Energy,
Inc., Northern States Power Company and Zeigler Coal Holding Company.
Confirmation hearings in Cajun's bankruptcy case were completed in May 1998.
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On February 11, 1999, the bankruptcy court issued a ruling that denied
confirmation of both the Louisiana Generating LLC reorganization plan and the
SWEPCO Plan. Although both plans were rejected, the bankruptcy court said its
ruling should provide guidance for the bidders to modify their existing plans.
SWEPCO expects to modify the SWEPCO Plan consistent with the bankruptcy court's
direction and to continue to pursue the acquisition of the non-nuclear assets of
Cajun. The bankruptcy court has scheduled a status conference for March 15, 1999
to determine the next step in the process.
Consummation of a SWEPCO reorganization plan for Cajun is conditioned upon
confirmation by the bankruptcy court, and the receipt by SWEPCO and CSW of all
requisite state and federal regulatory approvals in addition to their respective
board of directors approvals. If a SWEPCO reorganization plan for Cajun is
ultimately confirmed by the bankruptcy court, the $940.5 million required to
consummate the acquisition of Cajun's non-nuclear assets is expected to be
financed through a combination of external non-recourse borrowings and
internally generated funds. There can be no assurance that the bankruptcy court
will confirm a SWEPCO reorganization plan for Cajun, or, if it is confirmed,
that federal and state regulators will approve it. As of December 31, 1998,
SWEPCO had deferred $11.9 million in costs related to the Cajun acquisition on
its consolidated balance sheet, which would be expensed if a SWEPCO
reorganization plan for Cajun was not ultimately successful. See NOTE 3.
COMMITMENTS AND CONTINGENT LIABILITIES.
OTHER INITIATIVES
As described in OVERVIEW, a vital part of CSW's future strategy involves
initiatives that are outside of the traditional United States electric utility
industry due to increasing competition and fundamental changes in this industry.
In addition, lower anticipated growth rates in CSW's core United States electric
utility business combined with the previously mentioned industry factors have
resulted in CSW pursuing other initiatives. These initiatives have taken a
variety of forms; however, they are all consistent with the overall plan for CSW
to develop a global energy business. CSW has restrictions on the amounts it may
spend under the AEP merger agreement. While CSW believes that such initiatives
are necessary to maintain its competitiveness and to supplement its growth in
the future, the Holding Company Act may impede or delay its ability to
successfully pursue such initiatives. (The foregoing statement constitutes a
forward-looking statement within the meaning of Section 21E of the Exchange Act.
Actual results may differ materially from such projected information due to
changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION). See
OVERVIEW and RECENT DEVELOPMENTS AND TRENDS.
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.
In addition to these projects, CSW Energy has other projects in various
stages of development.
CSW International
CSW International was organized to pursue investment opportunities in EWGs
and FUCOs and currently holds investments in the United Kingdom, Mexico and
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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.
In late 1998, CSW International and Scottish Power commenced construction
of a 400 MW combined cycle gas turbine power station in southeast England.
Commercial operation is expected to begin in the year 2000. CSW International
has a 50% interest in the project.
Also during 1998, CSW International invested an additional $100 million in
convertible securities of Vale. At December 31, 1998, CSW International had
approximately $290 million invested in South America.
Through December 31, 1998, 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 currency in a broad range against the
dollar. This resulted in a 40% devaluation of the Brazilian currency, the real,
by the end of January. Vale will be 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
of the purchase price paid for the shares ($80 million). As a result of the put
option arrangement, management has reached a preliminary conclusion 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. 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 December 31, 1998, 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 year-end
market value of the shares and foreign exchange rates, the value of the
investment at December 31, 1998 is $66 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.
ENERGY SERVICES
C3 Communications
C3 Communications, an exempt telecommunications company, is comprised of
two divisions. C3 Communications' Utility Automation Division provides automatic
meter reading, interval meter data and related products and services to
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commercial and industrial customers, electric, gas and water utilities and other
energy service providers. C3 Communications' Networks Division was formed from
the dissolution of ChoiceCom. C3 Communications' Networks Division offers high
capacity inter-city fiber optic network services to telecommunications carriers
and wholesale customers in Texas and Louisiana with plans to expand into
Arkansas and Oklahoma.
C3 Communications' Utility Automation Division entered the direct access
market in 1998 and received approval from all three utility distribution
companies in California to manage meter data for the state's deregulated
electric utility industry. The Utility Automation Division continues to seek
other domestic opportunities.
In 1998, ChoiceCom expanded its switch-based local dial tone markets from
three cities to five by installing state-of-the art Lucent 5ESS(R) switches in
Dallas and Houston, Texas. ChoiceCom also expanded its long haul network with
the installation and operation of a high capacity fiber optic system linking the
Texas cities of Dallas, Houston, Austin and San Antonio in July of 1998.
By mutual agreement, the ChoiceCom partnership was terminated December 31,
1998. ICG Communications, Inc. purchased ChoiceCom's local dial tone business
while C3 Communications retained the long haul, high-capacity fiber optic
network. With the fiber assets, C3 Communications established the Networks
Division and plans to focus on CSW's original strategies to build new routes in
the states of Texas, Oklahoma, Louisiana and Arkansas.
EnerShop
EnerShop's two product lines are performance contracting and EnerACT
advisory services.
Through performance contracting, EnerShop provides energy services to
customers in Texas and Louisiana that help reduce customers' operating costs
through increased energy efficiencies and improved equipment operations.
EnerShop utilizes the skills of local trade allies in offering services that
include energy and facility analysis, project management, engineering design,
equipment procurement and construction and performance monitoring.
EnerACT is an innovative system that communicates with all brands and
models of energy management systems and utility meters. EnerACT aggregates load
profiles of multiple facilities into a single purchasing entity, optimizes
real-time control of buildings simultaneously with real-time energy prices, and
predicts energy consumption for operations through building simulation models.
Customers in California, Illinois, Louisiana, New York, Texas, and Wisconsin
currently subscribe to EnerACT advisory services.
Other Ventures
The CSW Services Business Ventures group pursues energy-related projects.
Projects for these groups include staffing services for electric utility nuclear
power plants, energy management systems, and electric substation automation
software. In August 1998, the SEC approved the marketing and distribution of
electric bikes, and associated accessories under the TotalEV name.
In late 1997, CSW Energy Services was launched to explore the electric
utility industry's emerging retail supply markets as they were deregulated on a
state-by-state basis. CSW Energy Services began selling retail electric supply
to commercial customers in California and Pennsylvania. In March 1998, CSW
Energy Services signed its first major supply contract in California. In January
1999, CSW Energy Services announced that it was ceasing its business as a retail
electric supplier and that it would assign or terminate its existing electricity
supply contracts to other suppliers.
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In June 1997, the FERC approved the request of CSW Power Marketing to sell
power and energy at market-based rates in the wholesale market. AEP is currently
pursuing this initiative, as a result, CSW has temporarily suspended this
initiative.
SOUTH TEXAS PROJECT
CPL owns 25.2% of STP, a two-unit nuclear power plant which is located
near Bay City, Texas. HL&P owns 30.8%, San Antonio owns 28.0%, and Austin
owns 16.0% of STP. STP Unit 1 was placed in service in August 1988, and STP Unit
2 was placed in service in June 1989. In November 1997, STPNOC assumed the
duties of STP operator. Each of the four STP co-owners are represented on the
STPNOC board of directors.
STP unit 2 was removed from service during 1998 for a scheduled refueling
outage. For the year 1998, Unit 1 and Unit 2 operated at net capacity factors of
99.1% and 91.1%, respectively.
For additional information regarding STP and the accounting for the
decommissioning of STP, see NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS.
ENVIRONMENTAL MATTERS
The operations of the CSW System, like those of other utility systems,
generally involve the use and disposal of substances subject to environmental
laws. CERCLA, the federal "Superfund" law, addresses the cleanup of sites
contaminated by hazardous substances. Superfund requires that PRPs fund remedial
actions regardless of fault or the legality of past disposal activities. PRPs
include owners and operators of contaminated sites and transporters and/or
generators of hazardous substances. Many states have similar laws. Legally, any
one PRP can be held responsible for the entire cost of a cleanup.
Usually, however, cleanup costs are allocated among PRPs.
The U.S. Electric Operating Companies are subject to various pending
claims alleging that they are PRPs under federal or state remedial laws for
investigating and cleaning up contaminated property. CSW believes that
resolution of these claims, individually or in the aggregate, will not have a
material adverse effect on CSW's or any U.S. Electric Operating Company's
results of operations or financial condition. Although the reasons for this
expectation differ from site to site, factors that are the basis for the
expectation for specific sites include the volume and/or type of waste allegedly
contributed by the U.S. Electric Operating Company, the estimated amount of
costs allocated to the U.S. Electric Operating Company and the participation of
other parties (The foregoing statements constitute forward-looking statements
within the meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information due to changes in the underlying
assumptions. See FORWARD-LOOKING INFORMATION). See NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for
additional discussion regarding environmental matters.
The EPA recently promulgated revised, more stringent ambient air quality
standards for ozone and particulates. While these standards do not mandate
emission constraints or reductions for facilities such as electricity generating
power plants, they may result in more areas being designated as non-attainment
for these two pollutants. States will be required to develop strategies to
achieve compliance in these areas, strategies that may include lower emission
levels for electricity generating power plants, possibly including facilities
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within the CSW System. The impact, if any, on CSW or the U.S. Electric Operating
Companies cannot yet be determined, but the impact could be significant.
At the Kyoto Conference on Global Warming held in December 1997, U.S.
representatives agreed to a treaty which could require new limitations on
"greenhouse gases" from power plants. CSW and the U.S. Electric Operating
Companies could be affected if this treaty is approved by the United States
Congress in its present form. The impact, if any, on CSW or the U.S. Electric
Operating Companies cannot be determined because most of the greenhouse gas
emission reduction would come from coal generation that would have to be
switched to natural gas or retired. At December 31, 1998, 34% of the U.S.
Electric Operating Companies' installed generating capacity was coal and
lignite. For the year ended December 31, 1998, 47% of the U.S. Electric
Operating Companies' MWH generation was coal and lignite.
RISK MANAGEMENT
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 which offers 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 serve these contracts
for which CSW has secured swap agreements represents approximately 1% of annual
natural gas purchases.
The table below provides information about the Company'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 $58
per MWH and the average contract price for forward sales is $80 per MWH.
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Contractual commitments at December 31, 1998 are as follows:
Net Notional Fair Value of
Products Amount Fair Value of Assets Liabilities
----------------------------------------------------------------------------
(millions)
Swaps 6,510,000 MMbtu $-- $1
Forwards:
purchases 440,000 MWH 3 --
sales 292,800 MWH 1 --
SEEBOARD has entered into contracts for differences to reduce exposure to
fluctuations in the price of electricity purchased from the United Kingdom's
electricity power pool. This pool was established at privatization of the United
Kingdom's electric industry for the bulk trading of electricity between
generators and suppliers. At December 31, 1998, the gross value of such
contracts for differences was approximately 92% of the expected power purchases
for 1999.
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 the end of 1998, CSW had positions in two
cross currency swap contracts. The following table presents information relating
to these contracts. The market value represents the foreign exchange/interest
rate terms inherent in the cross currency swaps at current market pricing. CSW
expects to hold these contracts to maturity. At current exchange rates, this
liability is included in long-term debt on the balance sheet at a carrying value
of approximately $429 million.
Expected Expected Cash
Cash Inflows Outflows
Contract Maturity Date (Maturity Value) (Market Value)
- --------------------------------------------------------------------------------
Cross currency swaps August 1, 2001 $200 million $220.4 million
Cross currency swaps August 1, 2006 $200 million $236.2 million
For information related to currency risk in South America see OTHER
INITIATIVES, DIVERSIFIED ELECTRIC, CSW International. For information on
commodity contracts see NOTE 7. FINANCIAL INSTRUMENTS.
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
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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 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
the second quarter of 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 of 1998, 75% of
business critical applications were converted and certified. The
remaining 25% 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 is on schedule to complete an assessment of all critical systems by the
first quarter of 1999 and remediation of those systems in the second quarter of
1999. Final verification of those systems is scheduled for completion by the
third quarter of 1999. To date, 70% 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 $10 million, $9 million of which was incurred in 1998.
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Remaining testing and conversion is expected to cost an additional $23 million
to $28 million over the next 15 months. Approximately 33% of the projected cost
is to be covered through the redeployment of existing resources. Approximately
42% of the projected cost is for contract labor. The remaining 25% of the
projected cost is for computer hardware and software purchases.
Development and upgrade costs totaling approximately $12 million relating
to certain SEEBOARD systems have been removed from the projected cost. The
primary purpose for implementing those particular systems is related to the
competitive electricity markets in the U.K., not an acceleration of expenditure
for year 2000 purposes.
At present no planned CSW computer information system projects have been
affected by the year 2000 project, but that may change as the year 2000
approaches. 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 CSW 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.
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.
Contingency Plans
Contingency plans have been in place 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,
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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 will participate in an
industry-wide drill focused on sustaining reliable operations with a simulated
partial loss of voice and data communications on April 9, 1999. 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.
CSW has contacted over 6,000 suppliers to determine their readiness with
70% responding. Of those responding, 55% say they are prepared for the year
2000. CSW is developing plans for the possible failure of some critical
suppliers.
The preceding discussion contains forward-looking information within the
meaning of Section 21E of the Exchange Act. Actual results may differ materially
from such projected information due to changes in the underlying assumptions.
See FORWARD-LOOKING INFORMATION.
NEW ACCOUNTING STANDARDS
SFAS No. 130
SFAS No. 130 is effective for fiscal year 1998 and was the basis of
preparation for the Consolidated Statements of Stockholders' Equity in this
report. The statement adds the requirement to present comprehensive income and
all of its components (revenues, expenses, gains and losses) in a full set of
financial statements, and this new statement must be displayed with the same
prominence given other financial statements. Comprehensive income is defined as
the change in equity (net assets) of a business enterprise during a period
except those resulting from investments by owners and distributions to owners.
SFAS No. 131
CSW adopted SFAS No. 131 for fiscal year 1998. The statement requires
disclosure of selected information about its reportable operating segments.
Operating segments are components of an enterprise that engage in business
activities that may earn revenues and incur expenses, for which discrete
financial information is available and is evaluated regularly by the chief
operating decision-maker within a company for making operating decisions and
assessing performance. Segments may be based on products and services,
geography, legal structure or management structure.
SFAS No. 132
SFAS No. 132 is effective for fiscal year 1998 and is reflected in NOTE 5.
BENEFIT PLANS. This statement standardizes the disclosure requirements for
pensions and OPEBs, requires additional information for changes in the benefit
obligations and fair value of plan assets and eliminates certain disclosure
requirements.
SOP No. 98-5
SOP No. 98-5 is effective for fiscal years beginning after December 15,
1998. The statement requires entities to expense the costs of start-up
activities as incurred. SOP No. 98-5 broadly defines start-up activities to
include: (i) costs that are incurred before operations have begun; (ii) costs
incurred after operations have began but before full productive capacity has
been reached; (iii) learning costs and non-recurring operating losses incurred
before a project is fully operational; and (iv) one-time activities related to
opening a new facility, introducing a new product or service, conducting
business in a new territory or with a new class of customer, and initiating a
new process in an existing operation.
2-33
CSW adopted SOP No. 98-5 in 1998 and, as a result, CSW Energy and CSW
International expensed $4.5 million and $1.5 million, after tax, respectively,
of start-up costs, which had previously been capitalized.
SFAS No. 133
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999
(January 1, 2000 for calendar year entities). This statement replaces existing
pronouncements and practices with a single integrated accounting framework for
derivatives and hedging activities and eliminates previous inconsistencies in
generally accepted accounting principles. The statement expands the accounting
definition of derivatives, which had focused on freestanding contracts (futures,
forwards, options and swaps) to include embedded derivatives and many commodity
contracts. All derivatives will be reported on the balance sheet either as an
asset or liability measured at fair value. Changes in a derivative's fair value
will be recognized currently in earnings unless specific hedge accounting
criteria is met. CSW has not yet quantified the impacts of adopting SFAS No. 133
on its financial statements and has not determined the timing or the method of
adopting SFAS No. 133.
EITF Issue 98-10
In December 1998, the EITF reached consensus on Issue 98-10, Accounting
for Contracts Involved in Energy Trading and Risk Management Activities. EITF
Issue 98-10 is effective for fiscal years beginning after December 15, 1998.
EITF Issue 98-10 requires energy trading contracts to be recorded at fair value
on the balance sheet, with the changes in fair value included in earnings. In
reaching its consensus, the EITF distinguished between energy contracts entered
to generate a profit and energy contracts entered to provide for the physical
delivery of a commodity. Generally, CSW's energy contracts are entered into for
the physical delivery of energy. These contracts, therefore, do not meet the
definition of "trading activities" addressed by EITF Issue 98-10. Therefore,
adoption of EITF Issue 98-10 will not have a material impact on CSW's results of
operations or financial condition.
2-34
CENTRAL AND SOUTH WEST CORPORATION
RESULTS OF OPERATIONS
Reference is made to CSW's Consolidated Financial Statements, Notes to
Consolidated Financial Statements and Selected Financial Data. Referenced
information should be read in conjunction with, and is essential to
understanding, the following discussion and analysis. CSW's results fluctuate,
in part, with the weather. CSW's 1998 results reflect an outstanding
weather-related year, and that type of weather may not occur in 1999. Also,
other than certain one-time items, as discussed throughout the results of
operations, CSW's income statement line items as a percentage of total revenues
remain fairly consistent, due primarily to the regulatory environment in which
CSW operates. 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.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997
CSW's earnings increased to $440 million in 1998 from $153 million in
1997. CSW's return on average common stock equity was 12.4% in 1998 compared to
4.2% in 1997. The primary reason for the higher earnings and return on average
common stock equity was the absence in 1998 of the accrual of $176 million for
the one-time United Kingdom windfall profits tax. Hotter than normal summer
weather and increased customer growth and usage at the U.S. Electric Operating
Companies were also factors in the increase in earnings over 1997. Additionally,
the sale of a telecommunications partnership interest in 1998 and a decrease in
the United Kingdom corporate tax rate contributed to the earnings increase. The
absence of the impact of CSW's final settlement of litigation with El Paso in
1997 contributed to the increase in earnings in 1998 as well. Also contributing
to the increase in earnings was the absence in 1998 of the effect of both the
PSO 1997 Rate Settlement Agreement and the CPL 1997 Final Order. See NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS for additional information on the CPL 1997
Final Order and the PSO 1997 Rate Settlement Agreement. See NOTE 17.
EXTRAORDINARY ITEM for additional information on the windfall profits tax.
Partially offsetting the higher earnings was a charge for accelerated capital
recovery of STP and asset write-offs at several of CSW's business segments.
Operating revenues increased $214 million in 1998 compared to 1997. The revenue
variances are shown in the following table.
1998 REVENUE VARIANCES
Increase (decrease) from prior year, millions
U.S. Electric
KWH Sales, Weather-Related $72
KWH Sales, Growth and Usage 53
Fuel Revenue 31
Sales for Resale 6
Other Electric 5
------------
167
United Kingdom (101)
Other Diversified 148
------------
$214
------------
U.S. Electric revenues increased $167 million, or 5%, in 1998 compared to
1997. Retail MWH sales increased 6% with increases in all customer classes. U.S.
Electric revenues increased due primarily to higher MWH sales resulting from
2-35
hotter than normal summer weather and increased customer usage and growth. An
increase in fuel revenues, as discussed in fuel expense below, also contributed
to the higher revenues. United Kingdom revenues decreased $101 million, or 5%,
in 1998 compared to 1997 due to the loss of revenues associated with the sale of
its retail stores in the second quarter of 1998 and the effect of price control
on the supply business. Other diversified revenues increased $148 million in
1998 compared to 1997 due primarily to increased revenues from CSW Energy, CSW
Credit and EnerShop.
During 1998 and 1997 the U.S. Electric Operating Companies generated 92%
and 93% of their electric energy requirements, respectively. U.S. Electric fuel
expense increased $13 million in 1998 compared to 1997 due primarily to
increased generation offset in part by a decrease in fuel prices to $1.67 per
MMbtu in 1998 from $1.83 per MMbtu in 1997. United Kingdom cost of sales
decreased $87 million in 1998 compared to 1997 due primarily to lower cost of
sales associated with the sale of SEEBOARD's retail stores and a decrease in the
cost of purchased power reflecting lower business volumes.
Other operating expense increased $48 million in 1998 compared to 1997 due
in part to a CSW Energy power plant that went into service in February 1998. The
increase in other operating expense was offset in part by the absence in 1998 of
the settlement of litigation with El Paso which increased other operating
expense $35 million in 1997. Further offsetting the increase in other operating
expense in 1998 was the absence of the $12 million impact of the CPL 1997 Final
Order and the $4 million impact of the PSO 1997 Rate Settlement Agreement. See
NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the
CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. Also partially
offsetting the increase in other operating expense was reduced pension expense
in 1997 resulting from changes made to the pension plan for CSW's domestic
employees. See NOTE 5. BENEFIT PLANS for additional information related to the
changes in the pension plan.
Depreciation and amortization expense increased $24 million, or 5%, in
1998 due primarily to accelerated recovery of ECOM property recorded in 1998
related to the CPL 1997 Final Order, a charge for accelerated capital recovery
of STP, as well as increases in depreciable property. Income tax expense
increased $52 million due primarily to higher pre-tax income.
Other income and deductions increased to $42 million in 1998 from $32
million in 1997 due primarily to the sale of a telecommunications partnership
interest. Long-term interest expense decreased $22 million in 1998 due primarily
to the prepayment of a $60 million variable rate bank loan due December 1, 2001;
the maturity of $200 million of CPL FMBs on October 1, 1997 and $28 million of
CPL FMBs on January 1, 1998; and the redemption of $91 million of FMBs of
certain of the U.S. Electric Operating Companies on September 1, 1998. See NOTE
8. LONG-TERM DEBT for additional information on the redemption of these
securities. Short-term debt was used to prepay the variable rate bank loan in
two $30 million installments on January 28, 1998 and April 27, 1998. Short-term
borrowings and internal cash generation were used to fund the maturities and
redemption of the previously mentioned FMBs. Short-term and other interest
expense increased $35 million in 1998 when compared to 1997 due primarily to
higher levels of short-term borrowings. Distributions on Trust Preferred
Securities increased interest and other charges by $10 million in 1998. The
Trust Preferred Securities were outstanding for all of 1998, while they were
outstanding for only part of 1997. See NOTE 10. TRUST PREFERRED SECURITIES for
additional information on these securities.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
CSW's earnings decreased to $153 million in 1997 from $429 million in
1996. CSW's return on average common stock equity was 4.2% in 1997 compared to
12.1% in 1996. The primary reason for the lower earnings and return on average
common stock equity was the accrual of the one-time United Kingdom windfall
2-36
profits tax. The impact of CSW's final settlement of litigation with El Paso
contributed to the decline in earnings as well. Also contributing to the
decrease in earnings was the effect of both the PSO 1997 Rate Settlement
Agreement and the CPL 1997 Final Order. See NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO
1997 Rate Settlement Agreement. See NOTE 17. EXTRAORDINARY ITEM for additional
information on the windfall profits tax. Further reducing earnings for 1997 were
certain asset write-offs predominately at the U.S. Electric Operating Companies.
Partially offsetting the lower earnings was the gain on the reacquisition of a
portion of the U.S. Electric Operating Companies' preferred stock and an
adjustment to deferred tax balances of $15 million resulting from a 2% reduction
in the United Kingdom corporation tax rate. Further offsetting the decline in
earnings was an increase in non-fuel electric revenues. Significant items
occurring in 1997 that affected earnings are listed below (in millions).
Earnings
Impact
---------------
United Kingdom Windfall Profits Tax $(176)
CPL 1997 Final Order (48)
Asset Write-offs and Reserves (48)
PSO 1997 Rate Settlement Agreement (27)
Settlement of Litigation with El Paso (23)
Gain on the Reacquisition of
Preferred Stock 10
United Kingdom Deferred Tax Adjustment 15
In addition, several items that occurred in 1996 were not present in 1997.
Prior to the sale of Transok in 1996, CSW realized $12 million of earnings from
Transok's operations. As a result of the sale, CSW also recorded an after-tax
gain of approximately $120 million in 1996. However, the U.S. Electric Operating
Companies and CSW Energy recorded charges totaling $102 million, after-tax, for
certain investments in the second quarter of 1996 which decreased earnings. See
NOTE 15. TRANSOK DISCONTINUED OPERATIONS for additional information concerning
the effects of the sale of Transok.
2-37
Operating revenues increased $113 million in 1997 compared to 1996. The
revenue variances are shown in the following table.
1997 REVENUE VARIANCES
Increase (decrease) from prior year, millions
U.S. Electric
CPL and WTU Transmission
Revenues $56
KWH Sales, Growth and Usage 41
Fuel Revenue 23
CPL 1996 Fuel Agreement 18
Sales for Resale 12
CPL 1997 Final Order (45)
KWH Sales, Weather-Related (37)
PSO 1997 Rate Settlement
Agreement (32)
Other Electric 37
------
73
------
United Kingdom 22
Other Diversified 18
------
$113
------
U.S. Electric revenues increased $73 million, or 2%, in 1997 compared to
1996. Retail MWH sales increased 2.5%, with increases in all customer classes.
U.S. Electric revenues increased due primarily to higher MWH sales resulting
from increased customer usage and new transmission access revenues at CPL and
WTU, in accordance with FERC Order No. 888 and the Texas Commission's rule
regarding transmission access and pricing. The new transmission revenues had no
material effect on earnings because they were almost completely offset by a
corresponding amount of transmission expense. Revenues increased due in part to
the absence in 1997 of the revenue decrease in 1996 from the CPL 1996 Fuel
Agreement. An increase in fuel revenues, as discussed in fuel expense below,
also contributed to the higher revenues. Partially offsetting the revenue
increase was a decrease in weather-related demand due to milder weather in the
first nine months of 1997. Further offsetting the increase in U.S. Electric
revenues was the revenue decrease from both the CPL 1997 Final Order and the PSO
1997 Rate Settlement Agreement. See NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO
1997 Rate Settlement Agreement. United Kingdom revenues increased $22 million,
or 1%, in 1997 compared to 1996 due primarily to the effect of the exchange rate
movement between the British pound and the U.S. dollar, partially offset by a
reduction in the fossil fuel levy collected on behalf of the United Kingdom
government. Other diversified revenues increased $18 million, or 31%, in 1997
compared to 1996 due primarily to increased revenues from CSW International, C3
Communications, CSW Credit and EnerShop.
During 1997 and 1996 the U.S. Electric Operating Companies generated 93%
of their electric energy requirements. U.S. Electric fuel expense increased $26
million to $1.3 billion in 1997 compared to 1996 due primarily to an increase in
natural gas fuel costs to $2.67 per MMbtu from $2.50 per MMbtu. Also
contributing to the increase was the absence in 1997 of a one-time reduction to
fuel expense of approximately $9 million recorded in the first quarter of 1996
related to the CPL 1996 Fuel Agreement. Partially offsetting these increases in
fuel expense was the effect of lower-cost coal. United Kingdom cost of sales
decreased approximately $40 million to $1.3 billion in 1997 compared to 1996 due
primarily to a reduction in the fossil fuel levy collected on behalf of the
United Kingdom government, which was partially offset by the effect of the
exchange rate movement between the British pound and the U.S. dollar.
Other operating expense increased $196 million to $981 million in 1997
compared to 1996 due in part to the absence in 1997 of a $27 million pension
adjustment recorded in the second quarter of 1996 at SEEBOARD which decreased
2-38
pension expense. The effect of the exchange rate movement between the British
pound and U.S. dollar also contributed to the increase in other operating
expense of SEEBOARD U.S.A. In addition, approximately $56 million in new
transmission access expense was recorded at CPL and WTU in 1997 related to FERC
Order No. 888 and the Texas Commission rules regarding transmission access and
pricing. Also increasing other operating expense were asset write-offs of
approximately $57 million including certain regulatory assets, capitalized
demand side management assets and obsolete inventories. In addition, the
settlement of litigation with El Paso increased other operating expense $35
million. Further contributing to the increase in other operating expense was the
$12 million impact of the CPL 1997 Final Order and the $4 million impact of the
PSO 1997 Rate Settlement Agreement. See NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO
1997 Rate Settlement Agreement. Partially offsetting these increases were the
absence in 1997 of expenses recorded in 1996 related to inventory write-offs of
$10 million and CPL rate case adjustments of $15 million. Further offsetting the
increases were charges in 1996 associated with restructuring costs. Also
partially offsetting the increase in other operating expense was reduced pension
expense in 1997 resulting from changes made to the pension plan for CSW's
domestic employees. See NOTE 5. BENEFIT PLANS for additional information related
to the changes in the pension plan.
Depreciation and amortization expense increased $33 million, or 7%, in
1997 due primarily to the implementation of depreciation and amortization in
accordance with the CPL 1997 Final Order. As a result of that order, the
increase in depreciation due to the accelerated recovery of ECOM property was
offset in part by the implementation of lower depreciation rates. Taxes other
than income increased $17 million, or 10%, in 1997 compared to 1996 due
primarily to higher property taxes at CPL and the absence in 1997 of a CPL Texas
franchise tax refund and true-up in 1996. Income tax expense decreased $73
million to $151 million in 1997 due primarily to lower pre-tax income and a $15
million adjustment to deferred income tax balances resulting from a 2% reduction
in the United Kingdom corporation tax rate.
Other income and deductions increased to a gain of $32 million in 1997
from a loss of $61 million in 1996 due primarily to the absence in 1997 of
charges for certain investments recorded in the second quarter of 1996 of
approximately $84 million, after tax, at the U.S. Electric Operating Companies
and $18 million at CSW Energy. Long-term interest expense increased $8 million,
or 2%, in 1997 due primarily to interest expense resulting from a fourth quarter
1996 debt issuance by CSW Energy. Short-term and other interest expense
decreased $8 million to $86 million in 1997 when compared to 1996 due primarily
to lower levels of short-term borrowings. Distributions on newly-issued Trust
Preferred Securities increased interest and other charges by $17 million in
1997, which was partially offset by lower dividend requirements resulting from
the related preferred stock reacquisitions at the U.S. Electric Operating
Companies. See NOTE 10. TRUST PREFERRED SECURITIES for additional information on
the new securities.
2-39
CSW
Consolidated Statements of Income
Central and South West Corporation
- -------------------------------------------------------------------------------
For the Years Ended December
31,
------------------------------
1998 1997 1996
------------------------------
($ in millions, except share
amounts)
Operating Revenues
U.S. Electric $ 3,488 $ 3,321 $ 3,248
United Kingdom 1,769 1,870 1,848
Other diversified 225 77 59
------------------------------
5,482 5,268 5,155
------------------------------
Operating Expenses and Taxes
U.S. Electric fuel 1,190 1,177 1,151
U.S. Electric purchased power 111 89 77
United Kingdom cost of sales 1,204 1,291 1,331
Other operating 1,029 981 785
Maintenance 169 152 150
Depreciation and amortization 521 497 464
Taxes, other than income 189 195 178
Income taxes 203 151 224
-----------------------------
4,616 4,533 4,360
-----------------------------
Operating Income 866 735 795
-----------------------------
Other Income and Deductions
U.S. Electric charges for investments and
plant development costs -- (3) (117)
Other 60 29 16
Non-operating income taxes (18) 6 40
-----------------------------
42 32 (61)
-----------------------------
Income Before Interest and Other Charges 908 767 734
-----------------------------
Interest and Other Charges
Interest on long-term debt 311 333 325
Distributions of Trust Preferred Securities 27 17 --
Interest on short-term debt and other 121 86 94
Preferred dividend requirements of subsidiaries 8 12 18
Gain on reacquired preferred stock 1 (10) --
-----------------------------
468 438 437
-----------------------------
Income from Continuing Operations 440 329 297
-----------------------------
Discontinued Operations
Income from discontinued operations, net of
tax of $6 -- -- 12
Gain on the sale of discontinued operations, -- -- 120
net of tax of $72 ------------------------------
-- -- 132
------------------------------
Income Before Extraordinary Item 440 329 429
Extraordinary Item - United Kingdom windfall
profits tax -- (176) --
------------------------------
Net Income for Common Stock $440 $ 153 $ 429
==============================
Average Common Shares Outstanding 212.4 212.1 207.5
Basic and Diluted EPS from Continuing Operations $2.07 1.55 $1.43
Basic and Diluted EPS from Discontinued Operations -- -- 0.64
------------------------------
Basic and Diluted EPS before Extraordinary Item 2.07 1.55 2.07
Basic and Diluted EPS from Extraordinary Item -- (0.83) --
------------------------------
Basic and Diluted EPS $2.07 $0.72 $2.07
==============================
Dividends Paid per Share of Common Stock $1.74 $1.74 $1.74
==============================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
2-40
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
Beginning Balance -- January 1, 1996 $675 $610 $1,893 ($4) $3,174
Sale of common stock 65 412 -- -- 477
Common stock dividends -- -- (358) -- (358)
Other -- -- 3 -- 3
-------
3,296
Comprehensive Income:
Foreign currency translation adjustment
(net of tax of $35) -- -- -- 75 75
Unrealized gain on securities
(net of tax of $1) -- -- -- 2 2
Net Income -- -- 429 -- 429
-------
Total comprehensive income 506
------ ------ ------ ------ -------
Ending Balance -- December 31, 1996 $740 $1,022 $1,967 $73 $3,802
============================================= =======
Beginning Balance -- January 1, 1997 $740 $1,022 $1,967 $73 $3,802
Sale of common stock 3 17 -- -- 20
Common stock dividends -- -- (369) -- (369)
-------
3,453
Comprehensive Income:
Foreign currency translation adjustment
(net of tax of $23) -- -- -- (48) (48)
Unrealized loss on securities
(net of tax of $0.3) -- -- -- (1) (1)
Minimum pension liability
(net of tax of $0.3) -- -- -- (1) (1)
Net Income -- -- 153 -- 153
-------
Total comprehensive income 103
------ ------ ------ ------ -------
Ending Balance -- December 31, 1997 $743 $1,039 $1,751 $23 $3,556
============================================= =======
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
============================================= ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
2-41
CSW
Consolidated Balance Sheets
Central and South West Corporation
- -------------------------------------------------------------------------
As of December 31,
-------------------------------
1998 1997
-------------- ------------
(millions)
ASSETS
Fixed Assets
Electric
Production $5,887 $ 5,824
Transmission 1,594 1,558
Distribution 4,681 4,453
General 1,380 1,381
Construction work in progress 166 184
Nuclear fuel 207 196
-------------- ------------
13,915 13,596
Other diversified 333 250
-------------- ------------
14,248 13,846
Less - Accumulated depreciation and
amortization 5,652 5,264
-------------- ------------
8,596 8,582
-------------- ------------
Current Assets
Cash and temporary cash investments 157 75
Accounts receivable 1,110 916
Materials and supplies, at average cost 191 172
Electric utility fuel inventory 90 65
Under-recovered fuel costs 4 84
Notes receivable 109 --
Prepayments and other 90 78
-------------- ------------
1,751 1,390
-------------- ------------
Deferred Charges and Other Assets
Deferred plant costs 497 503
Mirror CWIP asset 257 285
Other non-utility investments 432 448
Securities available for sale 66 103
Income tax related regulatory assets, net 308 329
Goodwill 1,402 1,428
Other 435 383
-------------- ------------
3,397 3,479
-------------- ------------
$ 13,744 $ 13,451
============== ============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
2-42
CSW
Consolidated Balance Sheets
Central and South West Corporation
- --------------------------------------------------------------------------------
As of December 31,
---------------------------
1998 1997
-------- -------
CAPITALIZATION AND LIABILITIES (millions)
Capitalization
Common stock: $3.50 par value
Authorized shares: 350.0 million
shares
Issued and outstanding: 212.6 million
shares in 1998 and 212.2 million
shares in 1997 $ 744 $ 743
Paid-in capital 1,049 1,039
Retained earnings 1,823 1,751
Accumulated other comprehensive income 8 23
-------- -------
3,624 46% 3,556 45%
-------- ------ ------- -----
Preferred Stock
Not subject to mandatory redemption 176 176
Subject to mandatory redemption -- 26
-------- -------
176 2% 202 2%
Certain Subsidiary-obligated, mandatorily
redeemable preferred securities of
subsidiary trusts holding solely Junior
Subordinated Debentures of such Subsidiaries 335 4% 335 4%
Long-term debt 3,785 48% 3,898 49%
------- ------ ------ -----
Total Capitalization 7,920 100% 7,991 100%
-------- ------ ------- -----
Current Liabilities
Long-term debt and preferred stock due
within twelve months 169 32
Short-term debt 811 721
Short-term debt - CSW Credit, Inc. 749 636
Loan notes 32 56
Accounts payable 624 573
Accrued taxes 190 171
Accrued interest 84 87
Other 218 238
-------- -------
2,877 2,514
-------- -------
Deferred Credits
Accumulated deferred income taxes 2,410 2,431
Investment tax credits 267 278
Other 270 237
------- -------
2,947 2,946
------- -------
$13,744 $13,451
======== =======
The accompanying notes to consolidated financial statements are an integral part
of these statements.
2-43
CSW
Consolidated Statements of Cash Flows
Central and South West Corporation
For the Years Ended December 31,
------------------------------
1998 1997 1996
-------- -------- --------
(millions)
OPERATING ACTIVITIES
Net income for common stock $ 440 $ 153 $ 429
Non-cash Items and Adjustments
Depreciation and amortization 552 529 521
Deferred income taxes and investment tax credits (56) 110 62
Preferred stock dividends 8 12 18
Gain on reacquired preferred stock 1 (10) --
Charges for investments and assets 39 53 147
Gain on sale of investments (13) -- (192)
Changes in Assets and Liabilities
Accounts receivable (187) (140) (86)
Accounts payable 69 45 23
Accrued taxes 20 (153) (14)
Fuel recovery 109 (37) (89)
Other (40) 164 56
-------- -------- --------
942 726 875
-------- -------- --------
INVESTING ACTIVITIES
Construction expenditures (492) (507) (521)
Acquisitions expenditures -- -- (1,394)
Disposition of plant (5) -- --
CSW Energy/CSW International projects (184) (382) (124)
Sale of National Grid assets -- -- 99
Cash proceeds from sale of investments 56 -- 690
Other (10) (15) (36)
-------- -------- --------
(635) (904) (1,286)
-------- -------- --------
FINANCING ACTIVITIES
Common stock sold 11 20 477
Proceeds from issuance of long-term debt 154 -- 437
SEEBOARD acquisition financing -- -- 350
Reacquisition/Maturity of long-term debt (182) (253) (239)
Redemption of preferred stock (28) (114) (1)
Trust Preferred Securites sold -- 323 --
Other financing activities (4) (3) 67
Change in short-term debt 202 414 (395)
Payment of dividends (378) (383) (376)
-------- -------- --------
(225) 4 320
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents -- (5) (56)
-------- -------- --------
Net Change in Cash and Cash Equivalents 82 (179) (147)
Cash and Cash Equivalents at Beginning of Year 75 254 401
======== ======== ========
Cash and Cash Equivalents at End of Year $ 157 $ 75 $ 254
======== ======== ========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $ 446 $ 396 $ 356
======== ======== ========
Income taxes paid $ 357 $ 301 $ 196
======== ======== ========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
2-44
CENTRAL AND SOUTH WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
CSW is a registered holding company under the Holding Company Act subject
to regulation by the SEC. The U.S. Electric Operating Companies are also
regulated by the SEC under the Holding Company Act.
The principal business of the U.S. Electric Operating Companies is the
generation, transmission, and distribution of electric power and energy. These
companies are subject to regulation by the FERC under the Federal Power Act and
follow the Uniform System of Accounts prescribed by the FERC. They are subject
to further regulation with regard to rates and other matters by state regulatory
commissions as follows: CPL and WTU are subject to the Texas Commission; PSO is
subject to the Oklahoma Commission, and SWEPCO is subject to the Arkansas
Commission, Louisiana Commission, Oklahoma Commission and Texas Commission.
The principal business of SEEBOARD is the distribution and supply of
electricity in Southeast England. SEEBOARD is subject to rate regulation by the
DGES.
In addition to electric utility operations, CSW has subsidiaries involved
in a variety of business activities. CSW Energy and CSW International pursue
cogeneration and other energy-related ventures. CSW Credit factors the accounts
receivable of affiliated and non-affiliated companies. C3 Communications pursues
telecommunications projects. CSW Leasing has investments in leveraged leases.
EnerShop offers energy-management services. CSW Energy Services pursued retail
energy markets outside of CSW's traditional service territory, until these
activities were discontinued in early 1999.
The more significant accounting policies of the CSW System are summarized
below.
Principles of Consolidation
The consolidated financial statements include the accounts of CSW and its
subsidiary companies. The consolidated financial statements for CPL, PSO and
SWEPCO include their respective capital trusts. All significant inter-company
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities along
with disclosure of contingent liabilities at the date of financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fixed Assets and Depreciation
U.S. Electric fixed assets are stated at the original cost of
construction, which includes the cost of contracted services, direct labor,
materials, overhead items and allowances for borrowed and equity funds used
during construction. SEEBOARD's fixed assets are stated at their original fair
market value which existed on the date of acquisition plus the original cost of
property acquired or constructed since the acquisition, less disposals.
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Provisions for depreciation of plant are computed using the straight-line
method, generally at individual rates applied to the various classes of
depreciable property. The annual average consolidated composite rates of the
Registrants are presented in the following table.
CSW CPL PSO SWEPCO WTU
--------------------------------------------------
1998 3.4% 3.0% 3.1% 3.3% 3.2%
1997 3.4% 3.0% 3.3% 3.2% 3.3%
1996 3.4% 2.9% 3.6% 3.2% 3.2%
CPL Nuclear Decommissioning of STP
At the end of STP's service life, decommissioning is expected to be
accomplished using the decontamination method, which is one of the techniques
acceptable to the NRC. Using this method, the decontamination activities occur
as soon as possible after the end of plant operations. Contaminated equipment is
cleaned and removed to a permanent disposal location, and the site is generally
returned to its pre-plant 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
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 December 31, 1998, the nuclear trust
balance was $66.0 million.
Electric Revenues and Fuel
The U.S. Electric Operating Companies record revenues based upon
cycle-billings. Electric service provided subsequent to billing dates through
the end of each calendar month are accrued for by estimating unbilled revenues
in accordance with industry standards.
CPL, SWEPCO and WTU recover retail fuel costs in Texas as a fixed
component of base rates whereby over-recoveries of fuel are payable to customers
and under-recoveries may be billed to customers after Texas Commission approval.
The cost of fuel is charged to expense as incurred, with resulting fuel
over-recoveries and under-recoveries recorded as regulatory assets and
liabilities. PSO recovers fuel costs in Oklahoma through service level fuel cost
adjustment factors, and SWEPCO recovers fuel costs in Arkansas and Louisiana
through automatic fuel recovery mechanisms. The application of these mechanisms
varies by jurisdiction. See ITEM 1. BUSINESS, FUEL RECOVERY - U.S. Electric and
NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS, for further information about
fuel recovery.
2-46
CPL, PSO and WTU recover fuel costs applicable to wholesale customers,
which are regulated by the FERC, through an automatic fuel adjustment clause.
SWEPCO recovers fuel costs applicable to wholesale customers through formula
rates.
CPL amortizes direct nuclear fuel costs to fuel expense on the basis of a
ratio of the estimated energy used in the core to the energy expected to be
derived from such fuel assembly over its life in the core. In addition to fuel
amortization, CPL also records nuclear fuel expense as a result of other items,
including spent fuel disposal fees assessed on the basis of net MWHs sold from
STP and DOE special assessment fees for decontamination and decommissioning of
the enrichment facilities on the basis of prior usage of enrichment services.
Accounts Receivable
CSW Credit purchases, without recourse, the billed and unbilled accounts
receivable of the U.S. Electric Operating Companies, certain non-affiliated
public utility companies and, prior to its sale by CSW in June 1996, Transok.
Regulatory Assets and Liabilities
For their regulated activities, the U.S. Electric Operating Companies
follow SFAS No. 71, which defines the criteria for establishing regulatory
assets and regulatory liabilities. Regulatory assets represent probable future
revenue to the company associated with certain costs which will be recovered
from customers through the ratemaking process. Regulatory liabilities represent
probable future refunds to customers. The regulatory assets are currently being
recovered in rates or are probable of being recovered in rates.
The unamortized asset balances are included in the table below.
CSW CPL PSO SWEPCO WTU
-------- ----------------------------------------------
(millions) (thousands)
As of December 31, 1998
Regulatory Assets
Deferred plant costs $ 497 $482,447 $-- $-- $14,910(3)
Mirror CWIP asset 257 256,702 -- -- --
Income tax related
regulatory assets, net 308 360,482 -- -- --
Deferred restructuring
and rate case costs 26 16,236 (1) -- -- 9,765(3)
OPEBs 2 -- 2,333 -- --
Under-recovered fuel costs 4 -- -- -- 3,980
Loss on reacquired debt 153 78,944 15,943 36,803 21,307
Fuel settlement 14 -- -- 13,746 (4) --
Other 10 9,159 -- -- 1,196
======== ==============================================
$1,271 $1,203,970 $18,276 $ 50,549 $51,158
======== ==============================================
Regulatory Liabilities
Refunds due customers $ 21 $ (498) $15,240 $ 7,239 $ (329)
Income tax related
regulatory
liabilities, net -- -- 35,818 4,931 12,088
======== ==============================================
$ 21 $ (498) $51,058 $ 12,170 $11,759
======== ==============================================
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CSW CPL PSO SWEPCO WTU
-------- -----------------------------------------------
(millions) (thousands)
As of December 31, 1997
Regulatory Assets
Deferred plant costs $503 $484,277 $ -- $ -- $18,637 (3)
Mirror CWIP asset 285 285,431 -- -- --
Income tax related
regulatory assets, net 329 390,149 -- -- --
Deferred restructuring
and rate case costs 36 24,049 (1) -- -- 12,369 (3)
OPEBs 3 -- 2,829 -- --
Under-recovered fuel costs 84 43,229 15,365 (2) 13,013 11,968
Loss on reacquired debt 166 84,070 16,882 39,873 24,710
Fuel settlement 16 -- -- 15,710 (4) --
Other 19 13,338 377 2,140 2,787
======== ===============================================
$1,441 $1,324,543 $35,453 $70,736 $70,471
======== ===============================================
Regulatory Liabilities
Refunds due customers $ 64 $ 63,713 $ -- $ -- $366
Income tax related
regulatory
liabilities, net -- -- 41,793 10,072 9,482
Other 1 1,205 -- -- --
======== ===============================================
$ 65 $ 64,918 $41,793 $10,072 $9,848
======== ===============================================
(1)Earning no return, amortized by the end of 2000.
(2)Earning no return, amortized over twelve month period, recalculated twice
each year.
(3)Earning no return, amortized through 2002.
(4)Earning no return, amortized by the end of 2006.
In accordance with orders of the Texas Commission, CPL and WTU deferred
carrying costs, as well as operating costs, depreciation and tax costs incurred
for STP and Oklaunion, respectively. These deferrals were for the period
beginning on the date when the plants began commercial operation until the date
the plants were included in rate base. CPL is amortizing and recovering these
deferred costs through rates over the life of the plant. WTU began amortizing
and recovering such costs over a seven year period beginning January 1, 1996,
prior to this date it was amortized over the life of the plant. In accordance
with Texas Commission orders, CPL previously recorded a Mirror CWIP asset, which
is being amortized over the life of STP. For further information regarding the
deferred plant costs at CPL and WTU, reference is made to NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS. For additional information regarding regulatory
accounting, reference is made to NOTE 18. NEW ACCOUNTING STANDARDS and MD&A,
RECENT DEVELOPMENTS AND TRENDS, Regulatory Accounting.
Goodwill Resulting from SEEBOARD Acquisition
The acquisition of SEEBOARD was accounted for as a purchase combination.
An allocation of the purchase price has been performed and is reflected in the
consolidated financial statements. The goodwill is being amortized on a
straightline basis over 40 years. The unamortized balance of the SEEBOARD
goodwill at December 31, 1998 was $1.4 billion. CSW continually evaluates
whether circumstances have occurred that indicate the remaining useful life of
goodwill may warrant revision.
Foreign Currency Translation
The financial statements of SEEBOARD U.S.A., which are included in CSW's
consolidated financial statements, have been translated from British pounds to
U.S. dollars in accordance with SFAS No. 52. All balance sheet accounts are
translated at the exchange rate at the end of the period and all income
statement items are translated at the average exchange rate for the applicable
period. At December 31, 1998 the current exchange rate was approximately
(pound)1.00=$1.66, and the average exchange rate for the twelve month period
ended December 31, 1998 was approximately (pound)1.00=$1.66. At December 31,
1997 the current exchange rate was approximately (pound)l.00=$1.65, and the
average exchange rate for the twelve month period ended December 31, 1997 was
2-48
approximately (pound)l.00=$1.58. At December 31, 1996 the current exchange rate
was approximately (pound)l.00=$1.71, and the average exchange rate for the
twelve month period ended December 31, 1996 was approximately (pound)1.00=$1.56.
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 20. SUBSEQUENT EVENT for information regarding CSW's investments
in Brazil.
Cash Equivalents
Cash equivalents are considered to be highly liquid instruments with a
maturity of three months or less. Accordingly, temporary cash investments and
advances to affiliates are considered cash equivalents.
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. See MD&A, RISK MANAGEMENT; NOTE 7.
FINANCIAL INSTRUMENTS; NOTE 18. NEW ACCOUNTING STANDARDS and NOTE 20. SUBSEQUENT
EVENT for additional information.
Securities Available for Sale
CSW accounts for its investments in equity securities in accordance with
SFAS No. 115. The investments have been designated as available for sale, and as
a result are stated at fair value. Unrealized holding gains and losses, net of
related taxes, are included in Accumulated Other Comprehensive Income on CSW's
Consolidated Balance Sheets. Information related to these securities available
for sale as of December 31, 1998 is presented in the following table.
Original Unrealized Holding
Cost Gains / (Losses) Fair Value
----------------------------------------
Securities available
for sale $110 $(44) $66
As of December 31, 1998, CSW International has 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 year-end
market value of the shares and foreign exchange rates, the value of the
investment at December 31, 1998 is $66 million. The reduction in the carrying
value of this investment has been reflected in Accumulated Other Comprehensive
Income in CSW's Consolidated Balance Sheets. Management views its investment in
Chile as a long-term investment strategy. Management will continue to closely
2-49
evaluate the changes in the South American economy and its impact on CSW
International's investment in the Chilean electric company.
Inventory
CPL, PSO and WTU utilize the LIFO method for the valuation of all fossil
fuel inventories. SWEPCO continues to utilize the weighted average cost method
pending approval of the Arkansas Commission to utilize the LIFO method. At
December 31, 1998, none of the U.S. Electric Operating Companies had LIFO
reserves. LIFO reserves are the excess of the inventory replacement cost over
the carrying amount on the balance sheet.
Comprehensive Income
Consistent with the requirements of SFAS No. 130, CSW discloses
comprehensive income. Comprehensive income is defined as the change in equity
(net assets) of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. It includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners. See NOTE 18. NEW ACCOUNTING STANDARDS.
Components of Other Comprehensive Income
The following table provides the components that comprise the balance
sheet amount in Accumulated Other Comprehensive Income.
Components 1998 1997 1996
----------------------------------------------------------------
(millions)
Foreign Currency Translation
Adjustment $34 $27 $34
Unrealized Losses on Securities (20) 1 (20)
Minimum Pension Liability (6) (5) (6)
---------------------------
$8 $23 $8
---------------------------
Segment Reporting
CSW has adopted SFAS No.131, which requires disclosure of select financial
information by business segment as viewed by the chief operating decision-maker.
See NOTE 18. NEW ACCOUNTING STANDARDS.
Reclassification
Certain financial statement items for prior years have been reclassified
to conform to the 1998 presentation. See NOTE 15. TRANSOK DISCONTINUED
OPERATIONS for information related to the classification of Transok activities.
2. LITIGATION AND REGULATORY PROCEEDINGS
Litigation Related to the Rights Plan and AEP Merger
Two lawsuits have been filed in Delaware state court seeking to enjoin the
AEP Merger. CSW and each of its directors have been named as defendants in both
cases. The first suit alleges that the Rights Plan, approved by the CSW Board of
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Directors on September 27, 1997 and which became effective after SEC approval
under the Holding Company Act on December 19, 1997, constitutes a "poison pill"
precluding acquisition offers and resulting in a heightened fiduciary duty on
the part of the CSW Board of Directors to pursue an auction-type sales process
to obtain the best value for CSW stockholders. The second suit alleges that the
AEP Merger is unfair to CSW stockholders in that it does not recognize the
underlying intrinsic value of CSW's assets and its future profitability. The
second suit also seeks an auction-type sale process. CSW believes that both
suits are without merit and intends to defend them vigorously.
CPL Rate Review - Docket No. 14965
In November 1995, CPL filed with the Texas Commission a request to
increase its retail base rates by $71 million. On October 16, 1997, the Texas
Commission issued the CPL 1997 Final Order. The CPL 1997 Final Order lowered the
annual retail base rates of CPL by approximately $19 million, or 2.5%, from
CPL's rate level existing prior to May 1996. The Texas Commission also included
a "Glide Path" rate methodology in the CPL 1997 Final Order pursuant to which
CPL's annual rates were reduced by $13 million beginning May 1, 1998 and will be
reduced an additional $13 million 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 also assigned a lower return on equity than
non-ECOM property; (ii) the Texas Commission's use of the "Glide Path" rate
reduction methodology applied on May 1, 1998 and to be applied on May 1, 1999;
and (iii) the $18 million of disallowed affiliate 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 reduction was
implemented in May 1998. 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 will be remanded to the Texas Commission. While CPL intends to
appeal 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.
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 December 31,
1998. The application of SFAS No. 71 is conditioned upon CPL's rates being set
based on the cost of providing service. In the event management concludes that
as a result of changes in regulation, legislation, the competitive environment,
or other factors, CPL, that all 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.
See MD&A - RATES AND REGULATORY MATTERS, CPL Rate Review - Docket No.
14965 for a discussion of the CPL 1997 Final Order.
CPL Deferred Accounting
By orders issued in 1989 and 1990, the Texas Commission authorized CPL to
defer certain STP Unit 1 and Unit 2 costs incurred between the commercial
operation dates of those units and the effective date of rates reflecting the
operation of those units. Upon appeal of the 1989 CPL order, and a related order
involving another utility, the Supreme Court of Texas in 1994 sustained deferred
accounting as an appropriate mechanism for the Texas Commission to use in
preserving the financial integrity of CPL, but remanded CPL's case to the Court
of Appeals to consider certain substantial evidence points of error not
previously decided by the Court of Appeals. On August 16, 1995, the Court of
Appeals rendered its opinion in the remand proceeding and affirmed the Texas
Commission's order in all respects.
2-51
By orders issued in October 1990 and December 1990, the Texas Commission
quantified the STP Unit 1 and Unit 2 deferred accounting costs and authorized
the inclusion of the amortization of the costs and associated return in CPL's
retail rates. These Texas Commission orders were appealed to the Travis County
District Court where the appeals are still pending. Language in the Supreme
Court of Texas' opinion in the appeal of the deferred accounting authorization
case suggests that the appropriateness of including deferred accounting costs in
rates charged to customers is dependent on a finding in the first case in which
the deferred STP costs are recovered through rates that the deferral was
actually necessary to preserve the utility's financial integrity. If in the
appeals of the October 1990 and December 1990 rate orders, the courts decide
that subsequent review under the financial integrity standard is required and
was not made in those orders, such rate orders would be remanded to the Texas
Commission for the purpose of entering findings applying the financial integrity
standard. Pending the ultimate resolution of CPL's deferred accounting issues,
CPL is unable to predict how its deferred accounting orders will ultimately be
resolved by the Texas Commission.
If CPL's deferred accounting matters are not favorably resolved, CSW and
CPL could experience a material adverse effect on their respective results of
operations and financial condition. While CPL's management is unable to predict
the ultimate outcome of these matters, management believes either that CPL will
receive approval of its deferred accounting amounts or that CPL will be
successful in renegotiation of its rate orders, so that there will be no
material adverse effect on CSW's or CPL's results of operation or financial
condition.
CPL Fuel Proceeding
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, as compared to
operation at an 83% capacity factor. 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, 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
2-52
50% of the reward by including 1/36, 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 Municipal Franchise Fee Litigation
In May 1996, the City of San Juan, Texas filed a purported class action in
Hidalgo County, Texas District Court on behalf of all cities served by CPL based
upon CPL's alleged underpayment of municipal franchise fees. The 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
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 CPL cities;
the cities have until April 5, 1999, to decide whether or not to participate in
the lawsuit as a class member.
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.
CPL Anglo Iron Litigation
In April 1998, CPL was sued by Anglo Iron in the United States District
Court for the Southern District of Texas, Brownsville Division, for claims
arising from the clean up of a site owned and operated by Anglo Iron in
Harlingen, Texas. Anglo Iron sought reimbursement pursuant to CERCLA and common
law contribution and indemnity for alleged response and clean up costs of
$328,139 and damages of $150,000 for "loss of fair market value" of the site. In
January 1999, the parties settled the case, and the case was dismissed with
prejudice by the court in February 1999. The settlement did not have a material
adverse impact on CSW's or CPL's consolidated results of operations or financial
condition.
CPL Sinton Landfill Litigation
CPL, along with over 30 others, is named as a defendant in the district
court in San Patricio County, Texas. The plaintiffs, approximately 500 current
and former landowners in the vicinity of a landfill site near Sinton, Texas,
each of whom alleges $10 million property damage and personal injury as a result
of alleged contamination from the site. Plaintiffs made a collective settlement
demand upon CPL for $1.1 million. In January, 1999, in exchange for a
non-material sum, CPL reached an agreement with Browning Ferris Industries,
2-53
Inc., the operator of the site, for Browning Ferris Industries, Inc. to
indemnify CPL for any judgment or settlement amount that CPL may owe to the
plaintiffs in this case.
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 Versus Texas Utilities Electric Company (Docket No.
17285)
A joint complaint filed by CPL and WTU with the Texas Commission asserted
that since January 1, 1997, Texas Utilities Electric Company 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, they 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 was allocated to the U.S. Electric Operating Companies. As a
result of this order the payment is recorded on CPL's and WTU's books as a
reduction to ERCOT transmission expense.
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 system. The agreement also establishes
a process for the U.S. Electric Operating Companies to allocate revenues
received under open access transmission tariffs. On August 7, 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.
PSO Rate Review
In July 1996, the Oklahoma Commission staff filed an application seeking a
review of PSO's earnings and in July 1997 recommended a rate reduction of $76.8
million for PSO.
On October 23, 1997, the Oklahoma Commission issued a final order
approving a stipulated agreement with parties to settle the rate inquiry. The
PSO 1997 Rate Settlement Agreement called for PSO to lower its retail base rates
beginning with the December 1997 billing cycle by approximately $35.9 million
annually, or a 5.3 percent decrease below the then current level of retail
rates. Part of the rate reduction included a reduction in annual depreciation
expense of approximately $10.9 million. In addition, the PSO 1997 Rate
Settlement Agreement resulted in PSO making a one-time $29 million refund to
customers in December 1997.
The PSO 1997 Rate Settlement Agreement also called for PSO to eliminate
or amortize before its next rate filing approximately $41 million in certain
deferred assets, approximately $26 million of which had been expensed in 1996.
The remaining $15 million of deferred assets, which included approximately $9
million of costs incurred for customer energy management incentive programs,
2-54
were written off in 1997. The financial impact of the PSO 1997 Rate Settlement
Agreement on PSO's 1997 results of operations were lower revenues of $31.5
million and lower expenses of $4.1 million which included the write-off of the
previously mentioned deferred assets.
The PSO 1997 Rate Settlement Agreement resulted in a material adverse
effect on PSO's results of operations for 1997 that will have a continuing
impact because of the rate decrease. However, it reduced significant risks for
PSO related to this regulatory proceeding and should allow PSO's rates to remain
competitive for the foreseeable future.
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. The first case to go to
trial is anticipated to begin in May 1999. Management believes that PSO has
defenses to the remaining complaints and intends to defend the suits vigorously.
Management believes that the remaining claims are covered by insurance.
Management also believes that the ultimate resolution of the remaining lawsuits
will not have a material adverse effect on CSW's or PSO's results of operations
or financial condition.
PSO Sand Springs/Grandfield, Oklahoma Sites
In 1989, PSO found PCB contamination in a Sand Springs, Oklahoma PCB
storage facility. The EPA-approved cleanup began in 1994. In 1996, the EPA filed
a complaint against PSO alleging that PSO failed to comply with provisions of
the Toxic Substances Control Act. The EPA alleged improper disposal of PCBs at
the Sand Springs site due to the length of time between discovery of the
contamination and the actual cleanup at the site. The complaint also alleged
failure to date PCB articles at a Grandfield, Oklahoma site. The total proposed
penalty, which was accrued by PSO in 1996, was $479,000. PSO settled all claims
in the suit by March 1998. The settlement did not have a material adverse effect
on CSW's or PSO's results of operations or financial condition.
SWEPCO Fuel Proceeding
In May 1997, SWEPCO filed with the Texas Commission an application to
reconcile fuel costs and implement a 12 month surcharge of fuel cost
under-recoveries. Because of the uncertainty as to when a surcharge may be
implemented, SWEPCO did not establish in its filing a proposed surcharge period
or a total surcharge amount, which would reflect interest through the entire
surcharge period. However, SWEPCO indicated that it had an under-recovered Texas
jurisdictional fuel cost balance of approximately $16.8 million, including
interest through December 1996. Included in the $16.8 million balance are fuel
related litigation expenses of $5.0 million and an interest return of $2.0
million on the unamortized balance of a fuel contract termination payment.
On December 8, 1997, SWEPCO and the other parties to the above
consolidated proceedings before the Texas Commission filed a settlement on all
issues except 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
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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 assigned to this proceeding, issued a proposal
for decision regarding the one outstanding issue, whether transmission
equalization payments should be included in eligible fuel expense. The proposal
for decision recommended that SWEPCO be allowed to include transmission
equalization expense in eligible fuel expense. On May 19, 1998, the Texas
Commission reversed the ALJ and did not allow SWEPCO to recover its transmission
equalization payments as a component of eligible fuel expense. This ruling
resulted in an earnings reduction of 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 drop the appeal if the AEP merger
settlement is approved and the merger is consummated.
SWEPCO Burlington Northern Transportation Contract
In January 1995, a state district court in Bowie County, Texas entered
judgment in favor of SWEPCO against Burlington Northern in a lawsuit regarding
rates charged under two rail transportation contracts for delivery of coal to
SWEPCO's Welsh and Flint Creek power stations. The court awarded SWEPCO
approximately $72 million that would have benefited customers, if collected,
representing damages for the period from April 27, 1989 through September 26,
1994, as well as post-judgment interest and attorneys' fees and granted certain
declaratory relief requested by SWEPCO. Burlington Northern appealed the state
district court's judgment to the Texarkana, Texas Court of Appeals and, in April
1996, that court reversed the judgment of the state district court. In October
1996, SWEPCO filed an application with the Supreme Court of Texas to grant a
writ of error to review and reverse the judgment of the Texarkana, Texas Court
of Appeals. In June 1997, the Supreme Court of Texas granted SWEPCO's
application for writ of error. Oral argument was held before the Supreme Court
of Texas in October 1997. On March 13, 1998, the Supreme Court of Texas affirmed
the judgment of the court of appeals. On April 7, 1998, SWEPCO filed a motion
for rehearing of the Supreme Court of Texas' decision. On June 5, 1998, the
motion for rehearing was denied and the court reaffirmed the judgment of the
court of appeals. SWEPCO does not plan additional litigation for this lawsuit.
No financial impact resulted from these proceedings other than the legal
expenses which were expensed as incurred.
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
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the claims against DHVM in the lawsuit to include a request that, if the court
agrees that DHMV has breached the lignite mining agreement that 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.
WTU Fuel Proceedings
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 was a
result of 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, discussed above. Parties filed
briefs in November 1998, and a proposal for decision from the ALJ was received
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
$100,000, or 0.03% of the amount requested. A Texas Commission decision is
expected by the end of the first quarter of 1999. Management is unable to
predict the outcome of the fuel proceeding.
Fuel Factor Filing
In March 1998, WTU filed with the Texas Commission an Application for
Authority to Implement an increase in fuel factors of $7.4 million, or 7.3%, on
an annual basis. Additionally, WTU proposed to implement a fuel surcharge of
$6.8 million, including accumulated interest over a six month period to collect
its under-recovered fuel costs. WTU implemented the revised fuel factors with
its June 1998 billing.
Other
The Registrants are party to various other legal claims, actions and
complaints arising in the normal course of business. Management does not expect
disposition of these matters to have a material adverse effect on the
Registrants' results of operations or financial condition.
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3. COMMITMENTS AND CONTINGENT LIABILITIES
Construction and Capital Expenditures
It is estimated that CSW, including the U.S. Electric Operating Companies,
SEEBOARD and other operations, will spend approximately $855 million in capital
expenditures (but excluding capital that may be required for acquisitions)
during 1999. Substantial commitments have been made in connection with these
programs.
CPL-$224 million PSO-$91 million SWEPCO-$108 million WTU-$51 million
Fuel and Related Commitments
To supply a portion of their fuel requirements, the U.S. Electric
Operating Companies have entered into various commitments for the procurement of
fuel.
SWEPCO Henry W. Pirkey Power Plant
In connection with the South Hallsville lignite mining contract for its
Henry W. Pirkey Power Plant, SWEPCO has agreed, under certain conditions, to
assume the obligations of the mining contractor. As of December 31, 1998, the
maximum amount SWEPCO believes it could potentially assume is $93 million.
However, the maximum amount may vary as the mining contractor's need for funds
fluctuates. The contractor's actual obligation outstanding at December 31, 1998
was $71 million.
SWEPCO South Hallsville Lignite Mine
As part of the process to receive a renewal of a Texas Railroad Commission
permit for lignite mining at the South Hallsville lignite mine and expansion
into the Marshall South Lignite Project area, SWEPCO has agreed to provide
guarantees of mine reclamation in the amount of $85 million. Since SWEPCO uses
self-bonding, the guarantee provides for SWEPCO to commit to use its resources
to complete the reclamation in the event the work is not completed by the third
party miner. The current cost to reclaim the mine is estimated to be
approximately $36 million.
Other Commitments and Contingencies
CPL Nuclear Insurance
In connection with the licensing and operation of STP, the owners have
purchased nuclear property and liability insurance coverage as required by law,
and have executed indemnification agreements with the NRC in accordance with the
financial protection requirements of the Price-Anderson Act.
The Price-Anderson Act, a comprehensive statutory arrangement providing
limitations on nuclear liability and governmental indemnities, is in effect
until August 1, 2002. The limit of liability under the Price-Anderson Act for
licensees of nuclear power plants is $8.92 billion per incident, effective as of
December 1997. The owners of STP are insured for their share of this liability
through a combination of private insurance amounting to $200 million and a
mandatory industry-wide program for self insurance totaling $8.92 billion. The
maximum amount that each licensee may be assessed under the industry-wide
program of self insurance following a nuclear incident at an insured facility is
$75.5 million per reactor, for anyone nuclear incident payable at $10 million
per year per reactor. An additional surcharge of five percent of the maximum may
be payable if the total amount of public claims and legal costs exceeds the
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limit. CPL and each of the other STP owners are subject to such assessments,
which CPL and the other owners have agreed will be allocated on the basis of
their respective ownership interests in STP. For purposes of these assessments,
STP has two licensed reactors. CPL owns 25.2% of each reactor.
The owners of STP currently maintain on-site decontamination liability and
property damage insurance in the amount of $2.75 billion provided by NEIL.
Policies of insurance issued by NEIL stipulate that policy proceeds must be used
first to pay decontamination and cleanup costs before being used to cover direct
losses to property. Under project agreements, CPL and the other owners of STP
will share the total cost of decontamination liability and property insurance
for STP, including premiums and assessments, on a pro rata basis, according to
each owners' respective ownership interest in STP.
CPL purchases, for its own account, a NEIL I Business Interruption and/or
Extra Expense policy. This insurance will reimburse CPL for extra expenses
incurred for replacement generation or purchased power as the result of a
covered accident that shuts down production at one or both of the STP Units for
more than 23 consecutive weeks. In the event of an outage which is the result of
the same accident, insurance will reimburse CPL up to 80 percent of the
recovery. The maximum amount recoverable for a single unit outage is $133.8
million for both Units 1 and 2. CPL is subject to an additional assessment of up
to $1.54 million for the current policy year in the event that insured losses at
a nuclear facility covered under the NEIL I policy exceed the accumulated funds
available under the policy. CPL renewed its current NEIL I Business Interruption
and/or Extra Expense policy on October 1, 1998.
SWEPCO Cajun Asset Purchase Proposal
Cajun filed a petition for reorganization under Chapter 11 of the United
States Bankruptcy Code on December 21, 1994 and is currently operating under the
supervision of the United States Bankruptcy Court for the Middle District of
Louisiana.
On March 18, 1998, SWEPCO, together with the Cajun Members Committee,
which currently represents 7 of the 12 Louisiana member distribution
cooperatives that are served by Cajun, filed the SWEPCO Plan in the bankruptcy
court. The SWEPCO Plan replaces plans filed previously by SWEPCO. Under the
SWEPCO Plan, a SWEPCO affiliate or subsidiary would acquire all of the
non-nuclear assets of Cajun, comprised of the two-unit Big Cajun I natural
gas-fired plant, the three-unit Big Cajun II coal-fired plant, and related
non-nuclear assets. The purchase price under the SWEPCO Plan is $940.5 million
in cash, subject to adjustment pursuant to the terms of the asset purchase
agreement proposed as part of the SWEPCO Plan. The SWEPCO Plan incorporates the
terms of a settlement between the RUS, Cajun Members Committee, Claiborne
Electric Cooperative, Inc. and SWEPCO. In addition, the SWEPCO Plan provides for
SWEPCO and the Cajun member cooperatives to enter into long-term power supply
agreements which will provide the Cajun member cooperatives with rate plan
options and market access provisions designed to ensure the long-term
competitiveness of the cooperatives. Eight cooperatives and Central Louisiana
Electric Company, Inc., successor to Teche Electric Cooperative, agreed to
purchase power from SWEPCO, if the bankruptcy court confirms SWEPCO's plan.
Two competing plans of reorganization for the non-nuclear assets of Cajun
were filed with the bankruptcy court. On September 25, 1998, Enron Capital and
Trade Resource Corporation, a subsidiary of Enron Corporation, withdrew its bid.
The trustee for Cajun supports the sole remaining competing bid of $1.19 billion
by Louisiana Generating LLC, a partnership of subsidiaries of Southern Energy,
Inc., Northern States Power Company and Zeigler Coal Holding Company.
Confirmation hearings in Cajun's bankruptcy case were completed in May 1998.
On August 11, 1998, the U.S. Fifth Circuit Court of Appeals overturned a
U.S. District Court for the Middle District of Louisiana ruling that
disqualified the SWEPCO Plan from being considered in the Cajun bankruptcy
reorganization process. The U.S. Fifth Circuit Court of Appeals said the U.S.
2-59
District Court for the Middle District of Louisiana erred in reversing the
bankruptcy court, which had originally had determined that $1 million in
assistance payments from SWEPCO to the Cajun Members Committee did not
constitute vote-buying and were legal. On October 30, 1998, the U.S. Fifth
Circuit Court of Appeals rejected requests for rehearing by the Cajun Trustee,
the RUS and others of its decision to overturn a U.S. District Court for the
Middle District of Louisiana ruling that disqualified the SWEPCO Plan from
competing in the Cajun bankruptcy reorganization process. On February 3, 1999,
the Cajun Trustee asked the United States Supreme Court to review the U.S. Fifth
Circuit Court of Appeals decision that reinstated the SWEPCO Plan in the
bankruptcy court.
On October 13, 1998, the trustee for Cajun sought an injunction preventing
the Louisiana Commission from acting on a rate case involving Cajun, contending
that the Louisiana Commission's involvement in the rate case was a violation of
the bankruptcy court's jurisdiction over Cajun's assets and thus by extension,
its rates. The bankruptcy court enjoined individual commissioners of the
Louisiana Commission from acting on issues related to possible changes in
wholesale electric rates of Cajun. The bankruptcy court dismissed the Louisiana
Commission as a defendant in the case, but permitted the action to continue
against the commissioners of the Louisiana Commission and the executive
secretary of the Louisiana Commission.
On February 11, 1999, the bankruptcy court issued a ruling that denied
confirmation of both the Louisiana Generating LLC reorganization plan and the
SWEPCO Plan. Although both plans were rejected, the bankruptcy court said its
ruling should provide guidance for the bidders to modify their existing plans
and a status conference has been scheduled for March 1999. No timetable for
modifications was set.
Louisiana Generating LLC reorganization plan was denied confirmation due
to issues related to power supply agreements with Cajun. SWEPCO and the Cajun
Members Committee are co-plaintiffs in litigation regarding a central issue in
the bankruptcy case, whether a competing plan supported by the Cajun trustee can
force the cooperatives to buy power for 25 years under the non-consensual
arrangements contained in that plan. The bankruptcy court ruled that the
cooperatives' existing supply agreements with Cajun cannot be assumed in the
manner proposed in the Louisiana Generating LLC reorganization plan.
The SWEPCO Plan was denied confirmation due to several technical issues
upon which the bankruptcy court ruled that the SWEPCO Plan did not meet the
requirements of the bankruptcy code. SWEPCO expects to modify the SWEPCO Plan
consistent with the bankruptcy court's direction and to continue to pursue the
acquisition of the non-nuclear assets of Cajun. The bankruptcy court has
scheduled a status conference for March 15, 1999 to determine the next step in
the process.
Consummation of a SWEPCO reorganization plan for Cajun 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 a SWEPCO reorganization plan for Cajun is
ultimately confirmed by the bankruptcy court, the $940.5 million required to
consummate the acquisition of Cajun's non-nuclear assets is expected to be
financed through a combination of external non-recourse borrowings and
internally generated funds. There can be no assurance that the bankruptcy court
will confirm a SWEPCO reorganization plan for Cajun or, if it is confirmed, that
federal and state regulators will approve it. As of December 31, 1998, SWEPCO
had deferred $11.9 million in costs related to the Cajun acquisition on its
consolidated balance sheet, which would be expensed if a SWEPCO reorganization
plan for Cajun was not ultimately successful.
SWEPCO Rental and Lease Commitments
SWEPCO has entered into various financing arrangements primarily with
respect to coal transportation and related equipment which are treated as
operating leases for rate-making purposes. At December 31, 1998, leased assets
of $45.7 million, less accumulated amortization of $41.4 million, were included
2-60
in Electric Utility Plant on the Consolidated Balance Sheets and at December 31,
1997, leased assets were $45.7 million, less accumulated amortization of $39.0
million.
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 more definitely
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.
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 within the
legislation's intent to allow the project to move forward.
SWEPCO / CPL Voda Petroleum Superfund Site
SWEPCO and CPL received correspondence from the EPA notifying SWEPCO and
CPL that they are PRPs to a cleanup action planned for the Voda Petroleum
Superfund Site located in Clarksville, Texas. SWEPCO and CPL conducted a records
review to compile documentation relating to SWEPCO's and CPL's past use of the
Voda Petroleum site. The matter was settled through a payment of $1,400 each by
SWEPCO and CPL.
SWEPCO Wilkes Power Plant Copper Limit Compliance
The EPA has issued Wilkes power plant, which is owned by SWEPCO, an
administrative order for wastewater permit violations related to copper limits.
The administrative order is for a show cause meeting only. Past and future
compliance activities, including activities that have been conducted to
determine the source of copper were presented by SWEPCO during this meeting,
which was held on August 13, 1998, which resulted in continued negotiations. 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)83 million, or $137 million, for costs
associated with its contract related to the London Underground transportation
system. In 1998, SEEBOARD, through its subsidiary, SEEBOARD Powerlink, signed a
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$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 payments cancelled 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 to
quantify the impact, if any, on the results of operations and financial
condition of CSW and/or SEEBOARD.
Diversified Electric Loans and Commitments
In June 1998, the 330 MW Phillips Sweeny cogeneration facility, an entity
50% owned by CSW Energy, obtained permanent project financing. The $149 million
of debt, with an effective interest rate of 7.4%, is unconditionally guaranteed
by the project and is non-recourse to CSW Energy and CSW. Concurrently, the
project repaid its outstanding note to CSW Energy for construction financing.
CSW Energy obtained the funds for this project from CSW's short-term borrowings
program, which were also repaid.
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. At
December 31, 1998, CSW Energy had spent approximately $81 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.
CSW International and its 50% joint venture partner, Scottish Power,
commenced construction of the South Coast Power project, a 400 MW combined cycle
gas turbine power station in Shoreham, United Kingdom. Commercial operation is
expected to begin in the year 2000. The partners will provide interim
construction financing with third party financing expected in the first quarter
of 1999. At December 31, 1998, CSW International had spent approximately $12
million, including development, construction and financing of their 50% share of
the total $320 million of estimated project costs.
CSW, CSW Energy and CSW International have provided letters of credit and
guarantees on behalf of independent power projects of approximately $254
million, $13 million, and $201 million, respectively, as of December 31, 1998.
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4. INCOME TAXES
CSW files a consolidated United States federal income tax return and
participates in a tax sharing agreement with its subsidiaries. Income tax
includes United States federal income taxes, applicable state income taxes and
SEEBOARD's United Kingdom corporation taxes. Total income taxes differ from the
amounts computed by applying the United States federal statutory income tax rate
to income before taxes for a number of reasons which are presented in the INCOME
TAX RATE RECONCILIATION table below. Information concerning income taxes,
including total income tax expense, the reconciliation between the United States
federal statutory tax rate and the effective tax rate and significant components
of deferred income taxes follow.
-------------------------------------------------------
INCOME TAX EXPENSE CSW CPL PSO SWEPCO WTU
-----------------------------------------------
1998 (millions) (thousands)
Included in Operating Expenses and Taxes
Current (1) $253 $128,942 $52,587 $64,463 $28,542
Deferred (1) (38) (8,253) (1,693) (11,850) (6,578)
Deferred ITC (2) (12) (3,858) (1,795) (4,631) (1,321)
-------------------------------------------------------
203 116,831 49,099 47,982 20,643
Included in Other Income and Deductions
Current 18 (2,204) (93) (1,868) (454)
-------------------------------------------------------
18 (2,204) (93) (1,868) (454)
-------------------------------------------------------
$221 $114,627 $49,006 $46,114 $20,189
-------------------------------------------------------
1997
Included in Operating Expenses and Taxes
Current (1) $47 $43,600 $14,543 $46,358 $11,765
Deferred (1) 117 35,263 8,498 (1,984) (954)
Deferred ITC (2) (13) (4,819) (2,278) (4,662) (1,321)
--------------------------------------------------------
151 74,044 20,763 39,712 9,490
Included in Other Income and Deductions
Current -- (4,271) (2,230) (1,962) (471)
Deferred (6) (779) (50) (260) --
--------------------------------------------------------
(6) (5,050) (2,280) (2,222) (471)
--------------------------------------------------------
$145 $68,994 $18,483 $37,490 $9,019
--------------------------------------------------------
1996
Included in Operating Expenses and Taxes
Current (1) $118 $46,588 $26,152 $33,904 $6,953
Deferred (1) 120 57,416 14,190 10,696 9,706
Deferred ITC (2) (14) (5,553) (2,784) (4,730) (1,321)
--------------------------------------------------------
224 98,451 37,558 39,870 15,338
Included in Other Income and Deductions
Current (1) 639 (895) (973) (406)
Deferred (39) (5,940) (15,518) (7,847) (3,988)
--------------------------------------------------------
(40) (5,301) (16,413) (8,820) (4,394)
Income Taxes for Discountinued Operations
(includes $72 resulting from the
gain on the sale) 78 -- -- -- --
--------------------------------------------------------
$262 $93,150 $21,145 $31,050 $10,944
--------------------------------------------------------
(1)Approximately $14 million, $30 million and $49 million of CSW's Current
Income Tax Expense was attributable to SEEBOARD U.S.A. operations and was
recognized as United Kingdom corporation tax expense for 1998, 1997 and 1996,
respectively. In addition, approximately $9 million, $7 million and $19
million of CSW's Deferred Income Tax Expense in 1998, 1997 and 1996,
respectively, was attributed to SEEBOARD U.S.A.
(2)ITC deferred in prior years are included in income over the lives of the
related properties.
2-63
--------------------------------------------------------
INCOME TAX RATE RECONCILIATION CSW CPL PSO SWEPCO WTU
------------------------------------------------
1998 (millions) (thousands)
Income before taxes attributable to:
Domestic operations $558
Foreign operations 112
--------
Income before taxes $670 $276,277 $125,849 $144,217 $58,004
Tax at U.S. statutory rate $235 $96,697 $44,047 $50,476 $20,301
Differences
Amortization of ITC (13) (3,858) (1,795) (4,631) (1,321)
Mirror CWIP 10 10,055 -- -- --
Non-deductible goodwill amortization 12 -- -- -- --
Foreign tax benefits (41) -- -- -- --
Adjustments 15 5,493 3,977 (2,526) (779)
Other 3 6,240 2,777 2,795 1,988
---------------------------------------------------------
$221 $114,627 $49,006 $46,114 $20,189
---------------------------------------------------------
Effective rate 33% 41% 39% 32% 35%
1997
Income before taxes attributable to:
Domestic operations $327
Foreign operations 147
--------
Income before taxes $474 $197,465 $64,689 $130,392 $30,480
Tax at U.S. statutory rate $166 $69,113 $22,641 $45,637 $10,668
Differences
Amortization of ITC (13) (4,819) (2,278) (4,662) (1,321)
Mirror CWIP 5 4,647 -- -- --
Non-deductible goodwill amortization 12 -- -- -- --
Foreign tax benefits (19) -- -- -- --
Adjustments (4) (1,361) (1,324) (633) (177)
Other (2) 1,414 (556) (2,852) (151)
----------------------------------------------------------
$145 $68,994 $18,483 $37,490 $9,019
----------------------------------------------------------
Effective rate 31% 35% 29% 29% 30%
1996
Income before taxes attributable to:
Domestic operations $562
Foreign operations 146
--------
Income before taxes $708 $240,201 $52,622 $97,605 $27,515
Tax at U.S. statutory rate $248 $84,070 $18,418 $34,162 $9,630
Differences
Amortization of ITC (14) (5,553) (2,784) (4,730) (1,321)
Mirror CWIP 5 4,584 -- -- --
Non-deductible goodwill amortization 13 -- -- -- --
Foreign tax benefits (18) -- -- -- --
Adjustments 10 5,127 201 1,544 1,467
Other 18 4,922 5,310 74 1,168
-----------------------------------------------------------
$262 $93,150 $21,145 $31,050 $10,944
-----------------------------------------------------------
Effective tax rate 37% 39% 40% 32% 40%
2-64
-----------------------------------------------------------
CSW CPL PSO SWEPCO WTU
-------------------------------------------------
DEFERRED INCOME TAXES (1) (millions) (thousands)
1998
Deferred Income Tax Liabilities
Depreciable utility plant $1,936 $812,335 $299,659 $409,779 $141,627
Deferred plant costs 174 168,856 -- -- 5,219
Mirror CWIP asset 90 89,846 -- -- --
Income tax related regulatory assets 224 165,263 10,086 37,738 11,072
Other 257 72,123 21,881 35,851 18,076
-----------------------------------------------------------
2,681 1,308,423 331,626 483,368 175,994
Deferred Income Tax Assets
Income tax related regulatory liability (117) (39,095) (23,940) (38,251) (15,303)
Unamortized ITC (96) (48,480) (15,226) (22,964) (9,309)
Alternative minimum tax carryforward (11) -- -- -- --
Other (75) -- (27,068) (28,357) (11,017)
-----------------------------------------------------------
(299) (87,575) (66,234) (89,572) (35,629)
-----------------------------------------------------------
Net Accumulated Deferred Income Taxes $2,382 $1,220,848 $265,392 $393,796 $140,365
-----------------------------------------------------------
Net Accumulated Deferred Income Taxes
Noncurrent $2,410 $1,221,561 $277,181 $398,664 $140,731
Current (28) (713) (11,789) (4,868) (366)
-----------------------------------------------------------
$2,382 $1,220,848 $265,392 $393,796 $140,365
-----------------------------------------------------------
DEFERRED INCOME TAXES (1)
1997
Deferred Income Tax Liabilities
Depreciable utility plant $1,912 $802,279 $291,547 $410,313 $144,690
Deferred plant costs 176 169,497 -- -- 6,523
Mirror CWIP asset 100 99,901 -- -- --
Income tax related regulatory assets 211 149,834 10,539 38,603 12,284
Other 375 147,513 36,836 36,237 20,651
-----------------------------------------------------------
2,774 1,369,024 338,922 485,153 184,148
Deferred Income Tax Assets
Income tax related regulatory liability (123) (40,552) (26,704) (40,916) (14,969)
Unamortized ITC (100) (49,830) (15,920) (24,673) (9,771)
Alternative minimum tax carryforward (27) (16,129) -- -- --
Other (72) (3,744) (35,188) (19,061) (9,859)
-----------------------------------------------------------
(322) (110,255) (77,812) (84,650) (34,599)
-----------------------------------------------------------
Net Accumulated Deferred Income Taxes $2,452 $1,258,769 $261,110 $400,503 $149,549
-----------------------------------------------------------
Net Accumulated Deferred Income Taxes
Noncurrent $2,432 $1,237,387 $258,848 $395,909 $149,346
Current 20 21,382 2,262 4,594 203
-----------------------------------------------------------
$2,452 $1,258,769 $261,110 $400,503 $149,549
-----------------------------------------------------------
(1)In 1997, the valuation reserve was reduced to $17 million due to lower
levels of excess foreign tax credits. In 1998, the valuation reserve was
increased to $145 million due to higher levels of excess foreign tax credits.
Other than excess foreign tax credits, CSW did not have other valuation
allowances recorded against other deferred tax assets at December 31, 1998
and 1997 due to a favorable earnings history.
CSW has not provided for U.S. federal income and foreign withholding taxes on
$75 million of non-U.S. subsidiaries' undistributed earnings as of December
31, 1998, because such earnings are intended to be reinvested indefinitely.
If these earnings were distributed, foreign tax credits should become
available under current law to reduce or eliminate the resulting U.S. income
tax liability.
2-65
5. BENEFIT PLANS
Pension Plans
Prior to June 30, 1997, CSW maintained a tax qualified, non-contributory
defined benefit pension plan covering substantially all CSW employees in the
United States. Benefits were based on employees' years of credited service, age
at retirement, and final average annual earnings with an offset for the
participant's primary Social Security benefit. The CSW board of directors
approved an amendment effective July 1, 1997, which converted the present value
of accrued benefits under the existing pension plan into a cash balance pension
plan. Under the cash balance formula, each participant has an account, for
recordkeeping purposes only, to which credits are allocated annually based on a
percentage of the participant's pay. The applicable percentage is determined by
age and years of vested service the participant has with CSW as of December 31
of each year. The fair value of the plan assets are measured as of September 30
of each year.
The purpose of the plan change is to continue to provide retirement income
benefits which are competitive both within the utility industry as well as with
other companies within the United States.
In addition, CSW has a non-qualified excess benefit plan. This plan is
available to all pension plan participants who are entitled to receive a pension
benefit from CSW which is in excess of the limitations imposed on benefits by
the Internal Revenue Code through the qualified plan.
As the plan sponsor, CSW will continue to reflect the costs of the pension
plan according to the provisions of SFAS No. 87 and allocate such costs to each
of the participating employers.
SFAS No. 132 was published in February 1998. SFAS No. 132 amended the
disclosure requirements of SFAS No. 87 and SFAS No. 88. The new disclosure
requirements under SFAS No. 132 are effective for CSW in 1998 and are currently
being implemented.
Pension plan assets consist primarily of common stocks and short-term and
intermediate-term fixed income investments.
The majority of SEEBOARD's employees joined a pension plan that is
administered for the United Kingdom's electricity industry. The assets of this
plan are held in a separate trustee-administered fund that is actuarially valued
every three years. SEEBOARD and its participating employees both contribute to
the plan. Subsequent to July 1, 1995, new employees were no longer able to
participate in that plan. Instead, two new pension plans were made available to
new employees, both of which are also separate trustee-administered plans.
Information about the separate pension plans (the U.S. plans and the
non-U.S. plan), including: (i) change in benefit obligation; (ii) change in plan
assets; (iii) reconciliation of funded status; (iv) amount recognized on balance
sheets; (v) additional information for pension plans with unfunded benefit
obligaitons; (vi) additional information for pension plans with unfunded
accumulated benefit obligations; (vii) components of net periodic benefit costs;
and (viii) assumptions used in accounting for the pension plan follow.
2-66
1998
-------------------------------------------
Pension/Cash Balance U.S. Plan
Retirement Plan
----------------------
Non- Non-
CSW Qualified Qualified U.S. Plan
------- --------- --------- ---------
(millions)
Change in benefit obligation
Benefit obligation at
beginning of year $1,978 $931 $24 $1,023
Service cost 36 21 1 14
Interest cost 137 68 1 68
Plan participants' contributions 3 -- -- 3
Amendments 58 -- -- 58
Foreign currency translation
adjustment 9 -- -- 9
Acquisition 7 -- -- 7
Actuarial gain 11 8 3 --
Benefits paid (128) (65) (1) (62)
-------------------------------------------
Benefit obligation at end of
year $2,111 $963 $28 $1,120
-------------------------------------------
Change in plan assets
Fair value of plan assets at
beginning of year $2,290 $1,109 $-- $1,181
Actual return on plan assets 143 (30) -- 173
Employer contributions 7 -- 1 6
Plan participants' contributions 3 -- -- 3
Foreign currency translation
adjustment 11 -- -- 11
Benefits paid (128) (65) (1) (62)
-------------------------------------------
Fair value of plan assets at
end of year $2,326 $1,014 $-- $1,312
-------------------------------------------
Reconciliation of Funded Status $214 $50 $(27) $191
Unrecognized net actuarial
loss/(gain) 26 149 11 (134)
Unrecognized prior service cost (77) (82) 1 4
Unrecognized transition
obligation 10 9 1 --
-------------------------------------------
Prepaid (accrued) benefit cost
before balance sheet adjustments $173 $126 $(14) $61
-------------------------------------------
Amounts Recognized in Balance Sheet
Prepaid benefit costs $188 $126 $ -- $62
Accrued benefit (liability)-smaller
of (accrued) benefit
cost and minimum (liability) (25) -- (25) --
Intangible asset 2 -- 2 --
Accumulated other comprehensive
income 8 -- 8 --
-------------------------------------------
Prepaid (accrued) benefit
cost before balance sheet
adjustments $173 $126 $(15) $62
-------------------------------------------
Other comprehensive expense
attributable to change in
additional minimum pension liability
recognition $ 1 $-- $1 $--
Weighted-average assumptions
as of December 31
Discount rate 6.75% 6.75% 5.50%
Expected return on plan assets 9.00% 9.00% 6.25%
Rate of compensation increase 4.96% 4.96% 3.50%
2-67
1997
-------------------------------------------
Pension/Cash Balance U.S. Plan
Retirement Plan
----------------------
Non- Non-
CSW Qualified Qualified U.S. Plan
------ ---------- --------- ---------
(millions)
Change in benefit obligation
Benefit obligation at
beginning of year $1,969 $922 $21 $1,026
Service cost 35 20 -- 15
Interest cost 141 65 2 74
Plan participants' contributions 3 -- -- 3
Amendments and other (85) (85) -- --
Foreign currency translation
adjustment (41) -- -- (41)
Acquisition 62 56 1 5
Actuarial gain 1 -- 1 --
Benefits paid (107) (47) (1) (59)
----------------------------------------------
Benefit obligation at end of
year $1,978 $931 $24 $1,023
----------------------------------------------
Change in plan assets
Fair value of plan assets at
beginning of year $2,071 $985 $-- $1,086
Actual return on plan assets 351 164 -- 187
Employer contributions 14 7 1 6
Plan participants' contributions 3 -- -- 3
Foreign currency translation
adjustment (42) -- -- (42)
Benefits paid (107) (47) (1) (59)
----------------------------------------------
Fair value of plan assets at
end of year $2,290 $1,109 $ -- $1,181
----------------------------------------------
Reconciliation of Funded Status $313 $178 $(23) $158
Unrecognized net actuarial
loss/(gain) (77) 12 9 (98)
Unrecognized prior service cost (92) (88) 1 (5)
Unrecognized transition
obligation 16 11 1 4
----------------------------------------------
Prepaid (accrued) benefit cost
before balance sheet adjustments $160 $113 $(12) $59
----------------------------------------------
Amounts Recognized in Balance Sheet
Prepaid benefit costs $172 $113 $-- $59
Accrued benefit(liability)-smaller
of (accrued) benefit cost and
minimum (liability) (22) -- (22) --
Intangible asset 3 -- 3 --
Accumulated other
comprehensive income 7 -- 7 --
----------------------------------------------
Prepaid (accrued) benefit
cost before balance sheet
adjustments $160 $113 $(12) $59
----------------------------------------------
Other comprehensive expense
attributable to change in
additional minimum pension
liability recognition $ 1 $-- $ 1 $--
Weighted-average assumptions
as of December 31
Discount rate 7.50% 7.50% 6.75%
Expected return on plan assets 9.00% 9.00% 7.25%
Rate of compensation increase 5.46% 5.46% 4.75%
2-68
Pension/Cash Balance Retirement Plan
Components of net periodic benefit costs
U.S. Plan
---------------------
Non- Non-
1998 CSW Qualified Qualified U.S. Plan
------ ---------- --------- ---------
Service cost $36 $21 $1 $14
Interest cost 137 67 2 68
Expected return on plan assets (175) (97) -- (77)
Amortizations of prior service costs (5) (6) -- --
Amortization of unrecognized
transition obligation 2 2 -- --
Recognized net actuarial loss -- -- -- --
------------------------------------------
Net periodic benefit cost $(5) $(13) $3 $5
CPL PSO SWEPCO WTU
--- --- ------ ---
(thousands)
Service cost $4,537 $3,485 $4,109 $2,352
Interest cost 14,693 11,283 13,302 7,614
Expected return on plan assets (21,107) (16,211) (19,111) (10,940)
Amortizations of prior service
costs (1,301) (999) (1,178) (674)
Amortization of unrecognized
transition obligation 328 252 297 170
Recognized net actuarial loss -- -- -- --
-----------------------------------------------
Net periodic benefit cost $(2,850) $(2,190) $(2,581) $(1,478)
U.S. Plan
---------------------
Non- Non-
1997 CSW Qualified Qualified U.S. Plan
------ ---------- --------- ---------
(millions)
Service cost $34 $20 $-- $14
Interest cost 139 64 2 73
Expected return on plan assets (173) (92) -- (81)
Amortizations of prior service costs (6) (6) -- --
Amortization of unrecognized
transition obligation 2 2 -- --
Recognized net actuarial loss 1 -- 1 --
------------------------------------------------
Net periodic benefit cost $(3) $(12) $3 $6
CPL PSO SWEPCO WTU
--- --- ------ ---
(thousands)
Service cost $4,602 $3,421 $4,260 $2,488
Interest cost 15,085 11,214 13,965 8,156
Expected return on plan assets (21,410) (15,892) (19,839) (11,597)
Amortizations of prior service
costs (1,301) (999) (1,178) (674)
Amortization of unrecognized
transition obligation 328 252 297 170
Recognized net actuarial loss -- -- -- --
------------------------------------------------
Net periodic benefit cost $(2,696) $(2,004) $(2,495) $(1,457)
As permitted, the amortization of any prior service cost is determined using a
straight-line amortization of the cost over the average remaining service period
of employees expected to receive benefits under the plan.
2-69
Pension/Cash Balance Retirement Plan
Components of net periodic benefit costs
U.S. Plan
---------------------
Non- Non-
1996 CSW Qualified Qualified U.S. Plan
------ ---------- --------- ---------
(millions)
Service cost $37 $22 $1 $14
Interest cost 137 69 1 67
Expected return on plan assets (158) (84) -- (74)
Amortizations of prior service
costs -- -- -- --
Amortization of unrecognized
transition obligation 2 2 -- --
Recognized net actuarial loss 1 -- 1 --
-----------------------------------------------
Net periodic benefit cost $19 $9 $3 $7
CPL PSO SWEPCO WTU
--- --- ------ ---
(thousands)
Service cost $5,367 $4,238 $4,891 $3,005
Interest cost 16,233 12,817 14,793 9,089
Expected return on plan assets (19,747) (15,590) (17,995) (11,056)
Amortizations of prior service
costs (135) (108) (123) (76)
Amortization of unrecognized
transition obligation 358 283 327 201
Recognized net actuarial loss -- -- -- --
-----------------------------------------------
Net periodic benefit cost $2,076 $1,640 $1,893 $1,163
As permitted, the amortization of any prior service cost is determined using a
straight-line amortization of the cost over the average remaining service period
of employees expected to receive benefits under the plan.
Additional Information for Plans Non-Qualified Plan
with Unfunded Benefit Obligations (thousands)
1998 1997
---------------- ----------------
Benefit obligation $27,379 $23,621
Plan assets at fair value -- --
Additional Information for Plans Non-Qualified Plan
with Unfunded Accumulated Benefit (thousands)
Obligations
1998 1997
---------------- ----------------
Projected benefit obligation $27,379 $23,621
Accumulated benefit obligation 25,137 22,193
Plan assets at fair value -- --
Post-retirement Benefits Other Than Pensions (U.S. Companies Only)
CSW, including each of the U.S. Electric Operating Companies, adopted SFAS
No. 106 effective January 1, 1993. The transition obligation established at
adoption is being amortized over twenty years, with fourteen years remaining.
Prior to 1993, these benefits were accounted for on a pay-as-you-go basis.
Pursuant to an order by the Oklahoma Commission, PSO established a regulatory
asset of approximately $5 million in 1993 for the difference between the
pay-as-you-go basis and the costs determined under SFAS No. 106. PSO is
recovering the amortization of this regulatory asset over a ten year period.
2-70
SFAS No. 132 was published in February 1998. Statement No.132 amended the
disclosure requirements of SFAS No. 106. The revised rules did not affect either
the measurement or recognition of benefit costs. The new disclosure requirements
under Standard 132 are effective for fiscal years beginning after December 15,
1997.
Information about the non-pension post-retirement benefit plan, including:
(i) change in benefit obligation; (ii) change in plan assets; (iii)
reconciliation of funded status; (iv) amount recognized on balance sheets; (v)
additional information for post-retirement plans with unfunded benefit
obligations; (vi) components of net periodic benefit costs; and (vii)
assumptions used in accounting for the post-retirement plan follow.
Post-retirement Benefits Other Than Pensions
U.S. Companies Only
1998 CSW CPL PSO SWEPCO WTU
--------- ------------------------------------
(millions) (thousands)
Benefit Obligations and Plan
Assets
Benefit obligation:
Retirees $170 $54,805 $46,700 $38,795 $22,958
Other fully eligible
participants 30 6,514 6,799 7,973 4,214
Other active participants 75 20,020 14,189 15,579 8,985
--------- ------------------------------------
$275 $81,339 $67,688 $62,347 $36,157
Plan Assets at Fair Value $164 $46,538 $42,728 $39,876 $21,475
Change in Accumulated Post-
Retirement Benefit Obligation
Benefit obligation at
beginning of year $241 $72,991 $61,434 $54,214 $32,516
Service Cost 8 2,201 1,616 1,781 1,132
Interest Cost 17 5,290 4,450 3,941 2,358
Amendments (5) (1,569) (1,322) (1,204) (717)
Benefit payments (15) (4,730) (3,984) (3,272) (2,134)
Plan participants' contributions 1 228 195 186 119
Actuarial gain 28 6,928 5,299 6,701 2,883
--------- ------------------------------------
Benefit Obligation at end of
year $275 $81,339 $67,688 $62,347 $36,157
Change in fair value of plan assets
Fair value of plan assets at
beginning of year $158 $44,168 $43,366 $39,630 $20,411
Actual return of plan assets 3 201 2,190 487 202
Employer contributions 17 6,671 961 2,845 2,877
Plan participants' contributions 1 228 195 186 119
Benefits Paid (15) (4,730) (3,984) (3,272) (2,134)
--------- ------------------------------------
Fair value of plan assets at
end of year $164 $46,538 $42,728 $39,876 $21,475
Reconciliation of Funded Status
Funded status end of year $(111) $(34,801) $(24,960)$(22,471)$(14,682)
Unrecognized:
Transition Obligation 126 40,608 35,400 27,535 17,147
Prior Service Cost -- -- -- -- --
(Gain) (15) (5,807) (10,440) (5,064) (2,465)
--------- ------------------------------------
Prepaid (accrued) benefit cost
before balance sheet
adjustments $ -- $ -- $ -- $ -- $ --
Amounts Recognized in Balance Sheet
Prepaid Benefit Cost $2 $19 $83 $121 $74
Accrued Benefit cost (2) (19) (83) (121) (74)
--------- ------------------------------------
Prepaid (accrued) benefit cost $ -- $ -- $ -- $ -- $ --
2-71
Post-retirement Benefits Other Than Pensions
U.S. Companies Only
1997 CSW CPL PSO SWEPCO WTU
--------- ------------------------------------
(millions) (thousands)
Benefit Obligations and Plan Assets
Benefit obligation:
Retirees $158 $51,426 $43,732 $34,906 $21,607
Other fully eligible participants 24 5,449 5,707 6,559 3,184
Other active participants 59 16,116 11,995 12,749 7,725
--------- ------------------------------------
$241 $72,991 $61,434 $54,214 $32,516
Plan Assets at Fair Value $159 $44,168 $43,366 $39,630 $20,411
Change in Accumulated Post-
Retirement Benefit Obligation
Benefit obligation at
beginning of year $236 $73,310 $62,059 $54,009 $33,135
Service Cost 8 2,076 1,694 1,771 1,120
Interest Cost 18 5,663 4,794 4,190 2,564
Amendments -- -- -- -- --
Benefit payments (10) (3,148) (2,836) (2,234) (1,387)
Plan participants' contributions -- 55 41 37 29
Actuarial gain (11) (4,965) (4,318) (3,559) (2,945)
--------- ------------------------------------
Benefit Obligation at end of
year $241 $72,991 $61,434 54,214 $32,516
Change in fair value of plan assets
Fair value of plan assets at
beginning of year $151 $32,424 $32,067 $28,570 $14,828
Actual return of plan assets 3 4,866 7,292 6,814 2,217
Employer contributions 18 9,972 6,803 6,442 4,723
Plan participants' contributions 1 55 41 37 29
Benefits Paid (15) (3,149) (2,837) (2,233) (1,386)
--------- ------------------------------------
Fair value of plan assets at
end of year $158 $44,168 $43,366 $39,630 $20,411
Reconciliation of Funded Status
Funded status end of year $(82) $(28,823) $(18,068)$(14,584)$(12,105)
Unrecognized:
Transition Obligation 135 43,508 37,928 29,502 18,372
Prior Service Cost -- -- -- -- --
(Gain) (53) (15,443) (19,018) (14,715) (6,503)
--------- ------------------------------------
Prepaid (accrued) benefit cost
before balance sheet
adjustments $ -- $(758) $842 $203 $(236)
Amounts Recognized in Balance Sheet
Prepaid Benefit Cost $1 $ -- $1,023 $330 $ --
Accrued Benefit cost (1) (758) (181) (127) (236)
--------- ------------------------------------
Prepaid (accrued) benefit cost $-- $(758) $842 $203 $(236)
As permitted, the amortization of any prior service cost is determined using a
straight-line amortization of the cost over the average remaining service period
of employees expected to receive benefits under the plan.
2-72
Post-retirement Benefits Other Than
Pensions
U.S. Companies Only
Components of Net Periodic Benefit Costs
1998 CSW CPL PSO SWEPCO WTU
--------- ------------------------------------
(millions) (thousands)
Service Cost $8 $2,201 $1,616 $1,781 $1,132
Interest cost 17 5,290 4,450 3,941 2,358
Expected Return on Plan
Assets (12) (3,237) (3,401) (3,387) (1,497)
Amortization of Unrecognized:
Transition Obligation 9 2,900 2,528 1,967 1,225
Prior Service Cost -- -- -- -- --
(Gain) (2) (555) (824) (629) (216)
--------- ------------------------------------
Total Net Period Benefit cost $20 $6,599 $4,369 $3,673 $3,002
1997
Service Cost $8 $2,076 $1,694 $1,771 $1,120
Interest cost 18 5,663 4,794 4,190 2,564
Expected Return on Plan
Assets (10) (2,739) (2,998) (2,787) (1,257)
Amortization of Unrecognized:
Transition Obligation 9 2,900 2,528 1,967 1,225
Prior Service Cost -- -- -- -- --
(Gain) (1) (162) (365) (181) --
--------- ------------------------------------
Total Net Period Benefit cost $24 $7,738 $5,653 $4,960 $3,652
1996
Service Cost $8 $2,077 $1,705 $1,810 $1,111
Interest cost 19 5,887 5,018 4,321 2,602
Expected Return on Plan
Assets (9) (2,255) (2,486) (2,268) (1,027)
Amortization of Unrecognized
Transition Obligation 9 2,900 2,528 1,967 1,225
Prior Service Cost -- -- -- -- --
Gain/(Loss) -- -- -- -- --
--------- -----------------------------------
Total Net Period Benefit cost $27 $8,609 $6,765 $5,830 $3,911
Total
CSW CPL PSO SWEPCO WTU
--------- -----------------------------------
1998 (millions) (thousands)
Effect of 1% Change in
Assumed Health
Care Cost Trend Rate
1% Increase
Service Cost Plus
Interest Cost $4 $1,093 $832 $889 $827
APBO 30 8,539 6,810 6,679 3,903
1% Decrease
Service Cost Plus
Interest Cost $(3) $(914) $(698) $(740) $(438)
APBO (26) (7,390) (5,923) (5,675) (3,370)
2-73
ASSUMPTIONS USED IN THE Tax Rate
ACCOUNTING FOR SFAS NO. 106 for
Discount Return on Taxable
Rate Plan Assets Trusts
1998 6.75% 9.00% 39.6%
1997 7.50% 9.00% 39.6%
1996 8.00% 9.50% 39.6%
Health care cost trend rates
1998 Average Rate of 6.5% grading down 0.50% per year to an ultimate
average rate of 5.00% in 2001.
1997 Average Rate of 7.0% grading down 0.50% per year to an ultimate
average rate of 5.00% in 2001.
1996 Average Rate of 9.0% grading down 0.75% per year to an ultimate
average rate of 5.25% in 2001.
Additional Information for Post-retirement Benefits Other
Plans with Unfunded Benefit Than Pensions
Obligations (millions)
1998 1997
-------------- ---------------
Benefit obligation $275 $241
Plan assets at fair value 164 159
Health and Welfare Plans
CSW provides medical, dental, group life insurance, dependent life
insurance, and accidental death and dismemberment insurance plans for
substantially all active CSW System employees in the United States. The total
contributions, recorded on a pay-as-you-go basis, for the years 1996 - 1998 are
listed in the following table.
CSW CPL PSO SWEPCO WTU
----------------------------------------
(millions)
1998 $35.6 $7.8 $6.2 $7.0 $4.1
1997 35.6 9.0 7.0 8.3 5.1
1996 28.4 7.0 5.5 6.5 4.0
Employer provided health care benefits are not common in the United
Kingdom due to the country's national health care system. Accordingly, SEEBOARD
does not provide health care benefits to the majority of its employees.
6. JOINTLY OWNED ELECTRIC UTILITY PLANT
The U.S. Electric Operating Companies are parties to various joint
ownership agreements with other non-affiliated entities. Such agreements provide
for the joint ownership and operation of generating stations and related
facilities, whereby each participant bears its share of the project costs. At
December 31, 1998, the U.S. Electric Operating Companies had undivided interests
in five such generating stations and related facilities as shown in the
following table.
SWEPCO SWEPCO
CPL Flint SWEPCO Dolet CSW(1)
STP Creek Pirkey Hills Oklaunion
Nuclear Coal Lignite Lignite Coal
Plant Plant Plant Plant Plant
---------------------------------------------------
($ millions)
Plant in service $2,336 $81 $439 $230 $400
Accumulated
depreciation $657 $49 $190 $91 $132
Plant capacity-MW 2,501 528 675 650 690
Participation 25.2% 50.0% 85.9% 40.2% 78.1%
Share of capacity-MW 630 264 580 262 539
2-74
(1)CPL, PSO and WTU have joint ownership agreements with each other and
other non-affiliated entities. Such agreements provide for the joint
ownership and operation of Oklaunion Power Station. Each participant
provided financing for its share of the project, which was placed in
service in December 1986. CPL's 7.8%, PSO's 15.6% and WTU's 54.7%
ownership interest represents CSW's 78.1% participation in the plant.
The statements of income reflect CPL's, PSO's and WTU's respective
portions of the operating costs of Oklaunion Power Station. The total
investments, including AFUDC, in Oklaunion Power Station for CPL, PSO
and WTU were $37 million, $81 million and $282 million, respectively,
at December 31, 1998. Accumulated depreciation was $12 million, $34
million and $86 million for CPL, PSO and WTU, respectively, at December
31,1998.
7. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the following
fair values of each class of financial instruments for which it is practicable
to estimate fair value. The fair value does not affect any of the liabilities
unless the issues are redeemed prior to their maturity dates.
Cash, temporary cash investments, accounts receivable, other financial
instruments and short-term debt
The fair value equals the carrying amount as stated on the balance sheets
due to the short maturity of those instruments.
Securities available for sale
The fair values, which are based on quoted market prices, equal the
carrying amounts as stated on the balance sheet as prescribed by SFAS No. 115.
See NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Long-term debt
The fair value of long-term debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates offered to CSW for
debt of the same remaining maturities.
Trust Preferred Securities
The fair value of the Trust Preferred Securities are based on quoted
market prices on the New York Stock Exchange.
Preferred stock subject to mandatory redemption
The fair value of preferred stock subject to mandatory redemption is
estimated based on quoted market prices for the same or similar issues or on the
current rates offered to CSW for preferred stock with the same or similar
remaining redemption provisions.
Long-term debt and preferred stock due within 12 months
The fair value of current maturities of long-term debt and preferred stock
due within 12 months are estimated based on quoted market prices for the same or
similar issues or on the current rates offered for long-term debt or preferred
stock with the same or similar remaining redemption provisions.
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CARRYING VALUE AND
ESTIMATED FAIR VALUE CSW CPL PSO SWEPCO WTU
-------------------------------------------------
(millions) (thousands)
Long-term debt
1998 carrying amount $3,785 $1,146,762 $368,121 $506,939 $282,211
fair value 4,025 1,223,502 389,220 546,450 301,894
1997 carrying amount 3,898 1,302,266 421,821 547,751 278,640
fair value 4,052 1,361,539 435,908 576,387 290,489
Trust Preferred Securities
1998 carrying amount 335 150,000 75,000 110,000 --
fair value 345 154,875 77,640 112,772 --
1997 carrying amount 335 150,000 75,000 110,000 --
fair value 344 153,375 78,000 112,750 --
Preferred stock subject
to mandatory redemption
1998 carrying amount -- -- -- -- --
fair value -- -- -- -- --
1997 carrying amount 26 -- -- 25,930 --
fair value 27 -- -- 26,809 --
Long-term debt and preferred
stock due within 12 months
1998 carrying amount 169 125,000 -- 43,932 --
fair value 169 125,000 -- 43,932 --
1997 carrying amount 32 28,000 -- 3,555 --
fair value 32 28,000 -- 3,555 --
Commodity Contracts
CSW utilizes commodity forward contracts which contain pricing and/or
volume terms designed to stabilize market risk associated with fluctuations in
the price of natural gas used in generation and electric energy sold under firm
commitments with certain of our customers.
In 1998, CSW did not utilize any contracts for commodities that would be
classified as a financial instrument under generally accepted accounting
principles, since physical delivery of natural gas and electricity may, and most
frequently does, occur pursuant to these contracts. These contracts are,
however, the major part of CSW's risk management program.
The table below provides information about the Company'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 $58
per MWH and the average contract price for forward sales is $80 per MWH.
2-76
Contractual commitments at December 31, 1998 are as follows:
Net Notional Fair Value of
Products Amount Fair Value of Assets Liabilities
----------------------------------------------------------------------------
(millions)
Swaps 6,510,000 MMbtu $-- $1
Forwards:
purchases 440,000 MWH 3 --
sales 292,800 MWH 1 --
Cross-currency swaps and SEEBOARD's electricity contracts for differences
The fair value of cross currency swaps reflect third-party valuations
calculated using proprietary pricing models. Based on these valuations, CSW's
position in these cross currency swaps represented an unrealized loss of $57
million at December 31, 1998. This unrealized loss is offset by unrealized gains
related to the underlying transactions being hedged. CSW expects to hold these
contracts to maturity. The fair value of SEEBOARD's contracts for differences is
not determinable due to the absence of a trading market.
DERIVATIVE CONTRACTS NOTIONAL AMOUNTS Notional Fair
AND ESTIMATED FAIR VALUES Amount Value
-------------------------
(millions)
Cross currency swaps
Maturities: 2001 and 2006 $400 $457
8. LONG-TERM DEBT
The CSW System's long-term debt outstanding as of the end of the last two
years is presented in the following table.
Maturities Interest Rates December 31,
From To From To 1998 1997
-----------------------------------------------------------------------------
(millions)
Secured bonds
1999 2025 5.25% 7.75% $1,824 $2,080
Unsecured bonds
2001 2030 3.33%(1) 8.88% 1,359 1,353
Notes and Lease Obligations
1999 2021 5.89% 9.75% 765 641
Unamortized discount (10) (10)
Unamortized cost of
Reacquired debt (153) (166)
-------------------------
$3,785 $3,898
-------------------------
(1) Variable rate
The mortgage indentures, as amended and supplemented, securing FMBs issued
by the U.S. Electric Operating Companies, constitute a direct first mortgage
lien on substantially all electric utility plant. The U.S. Electric Operating
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Companies may offer additional FMBs, medium-term notes and other securities
subject to market conditions and other factors.
CSW's year end weighted average cost of long-term debt was 7.3% for 1998
and 7.2% for both 1997 and 1996. For additional information about the U.S.
Electric Operating Companies' long term debt, see their Statements of
Capitalization in the Financial Statements.
Annual Requirements
Certain series of outstanding FMBs have annual sinking fund requirements,
which are generally 1% of the amount of each such series issued. These
requirements may be, and generally have been, satisfied by the application of
net expenditures for bondable property in an amount equal to 166-2/3% of the
annual requirements. Certain series of pollution control revenue bonds also have
sinking fund requirements. At December 31, 1998, the annual sinking fund
requirements and annual maturities (including sinking fund requirements) for all
long-term debt for the next five years are presented in the following table.
CSW CPL PSO SWEPCO WTU
-----------------------------------------------------------------
(millions) (thousands)
------------------------------------
Sinking fund
Requirements
1999 $1 $-- $-- $595 $--
2000 1 -- -- 595 --
2001 1 -- -- 595 --
2002 1 -- -- 595 --
2003 1 -- -- 595 --
Annual Maturities
1999 $169 $125,000 $-- $43,932 $--
2000 208 100,000 20,000 47,807 40,000
2001 421 -- 20,000 595 --
2002 151 115,000 -- 595 35,000
2003 206 50,000 100,000 55,595 --
Dividends
At December 31, 1998, 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 of the U.S. Electric Operating Companies at
December 31, 1998.
CPL-$739 million PSO-$145 million SWEPCO-$301 million WTU-$117 million
Reacquired Long-term Debt
In September 1998, PSO reacquired $25 million principal amount outstanding
of Series K and $30 million principal amount outstanding of Series L FMBs, in
their entirety, at call prices of 100 and 100.77, respectively. In September
1998, CPL reacquired $36 million principal amount outstanding of Series L FMBs,
in its entirety, at a call price of 100.53. No long-term debt was reacquired
prior to maturity during 1997.
Reference is made to MD&A, LIQUIDITY AND CAPITAL RESOURCES for further
information related to long-term debt, including new issues and reacquisitions
of long-term debt during 1998.
2-78
9. PREFERRED STOCK
The outstanding preferred stock of the U.S. Electric Operating Companies
as of the end of the last two years is presented in the following table.
Dividend Current
Rate December 31, Redemption Price
From To 1998 1997 From - To
--------------------------------------------
(millions)
Not subject to mandatory redemption
182,931 shares 4.00%-5.00% $19 $19 $102.75-109.00
1,600,000 shares Auction 160 160 $100.00
Issuance expenses/premiums (3) (3)
-------------
$176 $176
-------------
Subject to mandatory redemption
(none outstanding at
December 31, 1998) 6.95% $-- $27 $--
To be redeemed within one year -- (1)
-------------
$-- $26
-------------
Total authorized shares
6,405,000
All of the outstanding preferred stock is redeemable at the option of the
U.S. Electric Operating Companies upon 30 days notice at the current redemption
price per share. During 1997, SWEPCO redeemed $1.2 million pursuant to its
annual sinking fund requirement. During 1997, each of the U.S. Electrics
reacquired a significant portion of its outstanding preferred stock. As a result
of differences between the dividend rates on the reacquired securities and
prevailing market rates, CSW realized an overall gain of approximately $10
million on the transactions. This gain is shown separately, as Gain on
Reacquired Preferred Stock, on the Consolidated Statements of Income.
CPL
The dividends on CPL's $160 million auction and money market preferred
stocks are adjusted every 49 days, based on current market rates. The dividend
rates averaged 4.4%, 4.3% and 4.1% during 1998, 1997 and 1996, respectively.
SWEPCO
On April 1, 1998, SWEPCO called the remaining 274,010 shares of its $100
par value 6.95% preferred stock. SWEPCO used short-term debt to fund the
redemption.
For additional information about the U.S. Electric Operating Companies'
preferred stock, see their Statements of Capitalization in the Financial
Statements.
2-79
10. TRUST PREFERRED SECURITIES
The following Trust Preferred Securities issued by the wholly-owned
statutory business trusts of CPL, PSO and SWEPCO were outstanding at December
31, 1998. They are classified on the balance sheets as CPL, PSO or SWEPCO
Obligated, Mandatorily Redeemable Preferred Securities of Subsidiary Trusts
Holding Solely Junior Subordinated Debentures of CPL, PSO or SWEPCO,
respectively.
Amount Description of Underlying
Business Trust Security Units (millions) Debentures of Registrant
- -----------------------------------------------------------------------------------------------------------
CPL Capital I 8.00%, Series A 6,000,000 $150 CPL, $154.6 million, 8.00%, Series A
PSO Capital I 8.00%, Series A 3,000,000 75 PSO, $77.3 million, 8.00%, Series A
SWEPCO Capital I 7.875%, Series A 4,400,000 110 SWEPCO, $113.4 million, 7.875%, Series A
---------------------
13,400,000 $335
---------------------
Each of the business trusts will be treated as a subsidiary of its parent
company. The only assets of the business trusts are the subordinated debentures
issued by their parent company as specified above. In addition to the
obligations under their subordinated debentures, each of the parent companies
has also agreed to a security obligation which represents a full and
unconditional guarantee of its capital trust's obligation.
11. SHORT-TERM FINANCING
The CSW System uses short-term debt, primarily commercial paper, to meet
fluctuations in working capital requirements and other interim capital needs.
CSW has established a money pool to coordinate short-term borrowings for certain
subsidiaries and also incurs borrowings outside the money pool for other
subsidiaries. As of December 31, 1998, CSW had revolving credit facilities
totaling $1.0 billion to backup its commercial paper program. At December 31,
1998, CSW had $811 million outstanding in short-term borrowings. The maximum
amount of such short-term borrowings outstanding during the year, which had a
weighted average interest yield for the year of 5.8%, was $1.1 billion during
June 1998.
CSW Credit, which does not participate in the money pool, issues
commercial paper on a stand-alone basis. At December 31, 1998, CSW Credit had a
$1.0 billion revolving credit agreement that is secured by the assignment of its
receivables to back up its commercial paper program which had $749 million
outstanding. The maximum amount of such commercial paper outstanding during the
year, which had a weighted average interest yield for the year of 5.6%, was $1.0
billion during September 1998.
12. COMMON STOCK
CSW's basic earnings per share of common stock are computed by dividing
net income for common stock by the average number of common shares outstanding
for the respective periods. Diluted earnings per share reflect the potential
dilution that could occur if all options outstanding under CSW's stock incentive
plan were converted to common stock and then shared in the income for common
stock. CSW's basic and diluted earnings per share were the same for the years
1996 - 1998. CSW's dividends per common share reflect per share amounts paid for
each of the periods.
CSW can issue common stock, either through the purchase and reissuance of
shares from the open market or original issue shares, through the LTIP, a stock
option plan, PowerShare and Retirement Savings Plan. CSW began funding these
2-80
plans through open market purchases, effective April 1, 1997. Information
concerning common stock activity issued through the LTIP, the stock option plan,
PowerShare and the Retirement Savings Plan is presented in the following table.
1998 1997 1996
---------------------------------------------------------
Number of new shares issued
(millions) 0.4 0.8 2.9
Range of stock price for new
shares $25 5/8-$30 1/16 $21 1/4 - $25 5/8 $24 3/8 - $28 7/8
New common stock equity
(millions) $10 $20 $79
During February 1996, CSW sold 15,525,000 shares of CSW Common in a
primary stock offering and received net proceeds of approximately $398 million.
These proceeds were used to repay a portion of indebtedness incurred during the
acquisition of SEEBOARD.
13. STOCK-BASED COMPENSATION PLANS
CSW has a key employee incentive plan. This plan is accounted for under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized. Had compensation cost for this plan been determined consistent
with SFAS No. 123, pro forma calculations of CSW's and each of the U.S. Electric
Operating Companies' net income for common stock and earnings per share as
required by SFAS No. 123 would not have changed significantly from amounts
reported.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
CSW may grant options for up to 4.0 million shares of CSW common stock
under the stock option plan. Under the stock option plan, the option exercise
price equals the stock's market price on the date of grant. The grant vests over
three years, one-third on each of the three anniversary dates of the grant and
expires 10 years after the original grant date. CSW has granted 2.8 million
shares through December 31, 1998. A summary of the status of CSW's stock option
plan at December 31, 1998, 1997 and 1996 and the changes during the years then
ended is presented in the following table.
1998 1997 1996
---------------------------------------------------------------------------------------
Weighted Weighted Weighted
Shares Average Shares Average Shares Average
(thousands) Exercise Price (thousands) Exercise Price (thousands) Exercise Price
Outstanding at beginning
of year 1,902 $24 1,412 $26 1,564 $26
Granted -- -- 694 21 70 27
Exercised (337) 24 -- 22 (147) 24
Canceled (119) 24 (204) 28 (75) 27
---------- ---------- ---------
Outstanding at end
of year 1,446 24 1,902 24 1,412 26
Exercisable at end
of year 1,010 n/a 1,162 n/a 1,004 n/a
2-81
14. BUSINESS SEGMENTS
Effective December 31, 1998, CSW adopted SFAS No. 131. CSW's business
segments at December 31, 1998 included U.S. Electric (CPL, PSO, SWEPCO and WTU)
and U.K. Electric (SEEBOARD U.S.A.). Eight additional non-utility companies are
included with CSW in Other and Reconciling Items (CSW Energy, CSW International,
C3 Communications, EnerShop, CSW Energy Services, CSW Credit, CSW Leasing and
CSW Services). Gas Operations (Transok) were sold on June 6, 1996. See NOTE 15.
TRANSOK DISCONTINUED OPERATIONS for additional information. CSW's business
segment information is presented in the following tables.
U.S. U.K. Other and CSW
Electric Electric Reconciling Consolidated
-----------------------------------------
1998
Operating revenues $3,488 $1,769 $225 $5,482
Depreciation and amortization 399 95 27 521
Interest income 6 6 18 30
Interest expense 197 116 103 416
Operating income tax expense 235 1 (33) 203
Net income from equity method
subsidiaries (1) -- -- (1)
Income from continuing
operations 374 117 (51) 440
Total assets 8,998 3,032 1,714 13,744
Investments in equity method
subsidiaries 15 -- -- 15
Capital expenditures 313 106 107 526
1997
Operating revenues $3,321 $1,870 $77 $5,268
Depreciation and amortization 389 92 16 497
Interest income 8 12 -- 20
Interest expense 212 120 82 414
Operating income tax expense 144 31 (24) 151
Windfall profits tax -- (176) -- (176)
Net income from equity method
subsidiaries (1) -- -- (1)
Income from continuing
operations 289 117 (77) 329
Total assets 9,172 2,931 1,348 13,451
Investments in equity method
subsidiaries 15 -- -- 15
Capital expenditures 346 126 276 748
1996
Operating revenues $3,248 $1,848 $59 $5,155
Depreciation and amortization 362 88 14 464
Interest income 3 18 -- 21
Interest expense 224 116 65 405
Operating income tax expense 191 46 (13) 224
Windfall profits tax -- -- 132 132
Net income from equity method
subsidiaries -- -- -- --
Income from continuing
operations 262 103 (68) 297
Total assets 9,142 3,061 1,129 13,332
Investments in equity method
subsidiaries 10 -- -- 10
Capital expenditures 356 1,543 109 2,008
Products and Services
The U.S. Electric Operating Companies' products and services primarily consist
of the generation, transmission and distribution of electricity. The U.K.
Electric segment's primary lines of business are the supply and distribution of
electricity. CSW is currently developing computer systems to provide information
by product and services rather than by legal entity.
2-82
Geographic Areas
Revenues
-------------------------------------------------
United United Other CSW
States Kingdom Foreign Consolidated
-------------------------------------------------
(millions)
1998 $3,705 $1,769 $8 $5,482
1997 3,390 1,870 8 5,268
1996 3,616 1,848 1 5,465
Long-Lived Assets
United United Other CSW
States Kingdom Foreign Consolidated
-------------------------------------------------
(millions)
1998 $7,831 $2,530 $201 $10,562
1997 7,801 2,551 254 10,606
1996 7,682 2,623 72 10,377
15. TRANSOK DISCONTINUED OPERATIONS
On June 6, 1996, CSW sold Transok to Tejas. Accordingly, the results of
operations for Transok have been reported as discontinued operations and prior
periods have been restated for consistency.
As a wholly owned subsidiary of CSW, Transok operated as an intrastate
natural gas gathering, transmission, marketing and processing company that
provided natural gas services to the U.S. Electric Operating Companies,
predominantly PSO, and to other gas customers throughout the United States.
CSW sold Transok to Tejas for approximately $890 million, consisting of
$690 million in cash and $200 million in existing long-term debt that remained
with Transok after the sale. A portion of the cash proceeds was used to repay
borrowings incurred related to the SEEBOARD acquisition and the remaining
proceeds were used to repay commercial paper borrowings. CSW recorded an after
tax gain on the sale of Transok of approximately $120 million in 1996.
Transok's operating results for 1996 are summarized in the following table
(transactions with CSW have not been eliminated).
1996
---------
(millions)
Total revenue $362
Operating income before income
taxes 23
Earnings before income taxes 18
Income taxes (6)
---------
Net income from discontinued
operations $12
---------
2-83
16. PROPOSED AEP MERGER
On December 22, 1997, CSW and AEP announced that their boards of directors
had approved a definitive merger agreement for a tax-free, stock-for-stock
transaction creating a company with a total market capitalization of
approximately $28 billion at that time. At December 31, 1998, the total market
capitalization of the combined company would have been $28 billion ($15 billion
in equity; $13 billion in debt), and the combined company would have served 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. Based upon AEP's closing price immediately
prior to the merger announcement, this represented a premium of 20% over the CSW
closing price. At December 22, 1997, AEP would have issued approximately $6.6
billion in stock to CSW stockholders to complete the transaction. At December
31, 1998, AEP would have issued approximately $6.0 billion in stock to CSW
stockholders to complete the transaction. 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 1998, subject to continuing
evaluation of CSW's financial condition and earnings 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.
The companies anticipate net savings related to the merger of
approximately $2 billion over a 10-year period from the elimination of
duplication in corporate and administrative programs, greater efficiencies in
operations and business processes, increased purchasing efficiencies, and the
combination of the two work forces. At the same time, the companies will
continue their commitment to high quality, reliable service. Job reductions
related to the merger are expected to be approximately 1,050 out of a total
domestic workforce of approximately 25,000. The combined company will use a
combination of growth, reduced hiring and attrition to minimize the need for
employee separations. 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 restricted to specific agreed upon
projects or agreed upon amounts. In addition, prior to consummation of the
merger, CSW and its subsidiaries are restricted from: (i) issuing shares of
common stock other than pursuant to employee benefit plans; (ii) issuing shares
of preferred stock or similar securities other than to refinance existing
obligations or to fund permitted investment or capital expenditures; and (iii)
incurring indebtedness other than pursuant to existing credit facilities, in the
ordinary course of business or to fund permitted projects or capital
expenditures. These restrictions are not expected to limit the ability of CSW
and its subsidiaries to make investments and expenditures in amounts previously
budgeted. (The foregoing statements constitute forward-looking statements within
the meaning of Section 21E of the Exchange Act. Actual results may differ
2-84
materially from such projected information due to changes in the underlying
assumptions. See FORWARD-LOOKING INFORMATION).
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 benefits would 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. On July 15, the FERC approved a draft order
accepting the proposed transmission service agreements between the Ameren System
and PSO. The draft order confirms that PSO's 250 MW firm contract path is
available for AEP and CSW to meet the Holding Company Act's requirement that the
two systems operate on an integrated and coordinated basis. In November 1998,
the FERC issued an order setting issues for hearing. Hearings are scheduled to
begin on June 1, 1999. The FERC order indicated that the review of the proposed
merger would address the issues of competition, market power and customer
protection and instructed AEP and CSW to refile an updated market power study.
The updated market power study was filed in January 1999. CSW has filed a
proposed settlement with the FERC to sell 250 MWs of capacity in the Frontera
power plant project, two years after the AEP merger closes to respond to
market-power issues. 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 savings merger 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 orders are 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. AEP and CSW have proposed a regulatory plan in
Louisiana that provides for:
- Approximately $2.6 million in fuel cost savings to Louisiana customers of
CSW's SWEPCO subsidiary during the 10 years following completion of the
merger; and
- A commitment not to raise base rates above current levels prior to
January 1, 2002, for SWEPCO customers in Louisiana and a plan to share
with those customers approximately one-half of the savings allocated to
Louisiana related to the merger during the first 10 years following the
merger. Under this plan, approximately $26 million of these non-fuel
merger-related savings will be used to reduce future costs to SWEPCO's
Louisiana customers.
2-85
Hearings in Louisiana are expected to begin in the first quarter of 1999,
and a final order is expected in the second quarter of 1999.
Oklahoma
On August 14, 1998, AEP and CSW jointly filed a request with the Oklahoma
Commission for approval of their proposed merger. AEP and CSW have proposed a
regulatory plan in Oklahoma that provides for
- Approximately $11.8 million in fuel cost savings to Oklahoma customers
of CSW's PSO subsidiary during the 10 years following completion of the
merger; and
- A commitment not to raise base rates above current levels prior to
January 1, 2002, for PSO retail customers and to share approximately
one-half of the savings from synergies created by the merger during the
first 10 years following the merger. Under this plan, approximately
$78.6 million of these non-fuel merger-related savings will be used to
reduce future costs to PSO's retail customers.
On October 1, 1998, an Oklahoma Commission ALJ issued an oral ruling
recommending to the Oklahoma Commission that the merger filing be dismissed
without prejudice for lack of information regarding the potential impact of the
merger on the retail electric market in Oklahoma. The ruling was in response to
comments received from intervenors to the merger. A dismissal without prejudice
would allow AEP and CSW to submit an amended application with the added
information.
Subsequent meetings with the parties to the merger proceeding resulted in
an agreement on criteria for the additional studies. On October 21, 1998, the
ALJ approved these criteria, as well as plans by AEP and CSW to file an amended
application along with the additional studies.
An amended application was filed with the Oklahoma Commission on February
25, 1999. Submission of the amended application reset Oklahoma's 90-day
statutory time period for Oklahoma Commission action on the merger. All other
material in the written record in the merger case will be preserved since the
docket is not being dismissed. AEP and CSW anticipate that the Oklahoma
Commission will establish a procedural schedule that will result in a final
order in Oklahoma in the second quarter of 1999.
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. AEP and CSW
have proposed a regulatory plan in Texas that provides for:
- Approximately $29 million in fuel cost savings to Texas customers during
the 10-year period following completion of the merger; and
- A commitment to not raise base rates prior to January 1, 2002 for Texas
customers and a plan to share with those customers approximately
one-half of the savings allocated to Texas related to the merger during
the first 10 years following the merger. In Texas, approximately $183
million of the savings from synergies will be used to reduce future
costs to customers.
On July 2, 1998, the Texas Commission issued a preliminary order setting
forth the issues the Texas Commission will consider in the merger application.
In its preliminary order, the Texas Commission also determined that: (i) the
merger application was not a rate proceeding; (ii) restructuring issues should
not be addressed; and (iii) matters in the jurisdiction of other regulatory
bodies should not be addressed.
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AEP and CSW have reached a settlement in principle with the Texas Office
of Public Utility Counsel and several cities in Texas. The proposed settlement
provides for combined rate reductions totaling approximately $180 million over a
six-year period for CSW's electric operating company customers through two
separate rate riders. Both rate reduction riders become effective upon approval
of the settlement and completion of the merger.
The first rate reduction rider provides for $84.4 million in estimated net
merger savings to be credited to Texas customer bills. The reduction would come
from a net merger savings rate reduction rider over the six years following
completion of the merger with the aggregate rate reductions for customers of the
CSW Texas companies as follows:
- $52.7 million for CPL;
- $16.1 million for SWEPCO; and
- $15.6 million for WTU.
The second rate reduction rider will be implemented to resolve issues
associated with CPL, WTU and SWEPCO rate and fuel reconciliation proceedings in
Texas. The $95.6 million rate reductions over the six years following completion
of the merger include:
- $61.3 million for CPL;
- $19.9 million for SWEPCO; and
- $14.4 million for WTU.
CSW has agreed to withdraw the appeal of the CPL glide-path rate reduction
of $13.0 million implemented in May 1998, as well as the second glide-path rate
reduction of $13.0 million scheduled to take effect May 1999, if the settlement
is approved and the merger between AEP and CSW merger is completed.
In addition, as a part of the settlement proposal, CPL, SWEPCO and WTU
agree not to seek an increase in base rates prior to January 1, 2003. The Texas
Office of Public Utility Counsel and members of the Texas cities will not
initiate rate reviews prior to January 1, 2001.
The settlement proposal also provides for a sharing of off-system sales
margins on the wholesale electricity market after the effective date of the
merger. The proposed settlement also includes affiliate transaction standards
and provides for the maintenance of service quality for Texas customers.
Hearings in Texas are expected to begin in the second quarter of 1999, and
a final order is expected by the end of the third 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 on the condition that the merger is 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
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company benefits of the merger to AEP and CSW customers and shareholders. On
November 9, 1998, AEP and CSW filed an amendment to the application.
AEP and CSW plan to make other required federal merger filings with the
Federal Communications Commission and 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 Monopolies and Mergers Commission. CSW is unable to predict the 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 will prepare a merger application filing to
be made with the Kentucky Public Service Commission, which is expected to be
filed by April 15, 1999. Under the governing statute the Kentucky Public Service
Commission must act on the application within 60 days. Therefore this matter is
not expected to impact the timing of 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 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. The merger agreement will terminate on December 31, 1999 unless, in
certain circumstances, extended by either party as provided in the merger
agreement. There can be no assurance that the AEP merger will be consummated.
Merger Costs
As of December 31, 1998, CSW had deferred $26 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.
17. EXTRAORDINARY ITEM
In the general election held in the United Kingdom on May 1, 1997, the
United Kingdom's Labour Party won control of the government with a considerable
majority. Prior to the general election, the Labour Party had announced that if
elected, it would impose a windfall profits tax on certain industries in the
United Kingdom, including the privatized utilities, to fund a variety of social
improvement programs. On July 2, 1997, the one-time windfall profits tax was
introduced in the Labour Party's Budget and the legislation enacting the tax
subsequently was passed during the third quarter of 1997. Accordingly, during
the third quarter of 1997, SEEBOARD U.S.A. accrued, as an extraordinary item,
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(pound)109.5 million (or $176 million when converted at (pound)1.00=$1.61) for a
one-time, windfall profits tax enacted by the United Kingdom government.
The windfall profits tax was payable in two equal installments, due
December 1, 1997 and December 1, 1998. The tax was charged at a rate of 23% on
the difference between nine times the average profits after tax for the four
years following flotation in 1990, and SEEBOARD's market capitalization
calculated as the number of shares issued at flotation multiplied by the
flotation price per share.
18. NEW ACCOUNTING STANDARDS
SFAS No. 130
SFAS No. 130 is effective for fiscal year 1998 and was the basis of
preparation for the Consolidated Statements of Stockholders' Equity in this
report. The statement adds the requirement to present comprehensive income and
all of its components (revenues, expenses, gains and losses) in a full set of
financial statements, and this new statement must be displayed with the same
prominence given other financial statements. Comprehensive income is defined as
the change in equity (net assets) of a business enterprise during a period
except those resulting from investments by owners and distributions to owners.
SFAS No. 131
CSW adopted SFAS No. 131 for fiscal year 1998. The statement requires
disclosure of selected information about its reportable operating segments.
Operating segments are components of an enterprise that engage in business
activities that may earn revenues and incur expenses, for which discrete
financial information is available and is evaluated regularly by the chief
operating decision-maker within a company for making operating decisions and
assessing performance. Segments may be based on products and services,
geography, legal structure or management structure.
SFAS No. 132
SFAS No. 132 is effective for fiscal year 1998 and is reflected in NOTE 5.
BENEFIT PLANS. This statement standardizes the disclosure requirements for
pensions and OPEBs, requires additional information for changes in the benefit
obligations and fair value of plan assets and eliminates certain disclosure
requirements. Adoption of this statement did not have a material effect on the
Registrants' results of operations or financial condition.
SOP No. 98-5
SOP No. 98-5 is effective for fiscal years beginning after December 15,
1998. The statement requires entities to expense the costs of start-up
activities as incurred. SOP No. 98-5 broadly defines start-up activities to
include: (i) costs that are incurred before operations have begun; (ii) costs
incurred after operations have begun but before full productive capacity has
been reached; (iii) learning costs and non-recurring operating losses incurred
before a project is fully operational; and (iv) one-time activities related to
opening a new facility, introducing a new product or service, conducting
business in a new territory or with a new class of customer, and initiating a
new process in an existing operation.
CSW adopted SOP No. 98-5 in 1998. CSW Energy and CSW International
expensed $4.5 million and $1.5 million, after tax, respectively, of start-up
costs which had previously been capitalized.
SFAS No. 133
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999
(January 1, 2000 for calendar year entities). This statement replaces existing
pronouncements and practices with a single integrated accounting framework for
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derivatives and hedging activities and eliminates previous inconsistencies in
generally accepted accounting principles. The statement expands the accounting
definition of derivatives, which had focused on freestanding contracts (futures,
forwards, options and swaps) to include embedded derivatives and many commodity
contracts. All derivatives will be reported on the balance sheet either as an
asset or liability measured at fair value. Changes in a derivative's fair value
will be recognized currently in earnings unless specific hedge accounting
criteria is met. CSW has not yet quantified the impacts of adopting SFAS No. 133
on its financial statements and has not determined the timing or method of
adopting SFAS No. 133.
EITF Issue 98-10
In December 1998, the EITF reached consensus on Issue 98-10, Accounting
for Contracts Involved in Energy Trading and Risk Management Activities. EITF
Issue 98-10 is effective for fiscal years beginning after December 15, 1998.
EITF Issue 98-10 requires energy trading contracts to be recorded at fair value
on the balance sheet, with the changes in fair value included in earnings. In
reaching its consensus, the EITF distinguished between energy contracts entered
to generate a profit and energy contracts entered to provide for the physical
delivery of a commodity. Generally, CSW's energy contracts are entered into for
the physical delivery of energy. These contracts, therefore, do not meet the
definition of "trading activities" addressed by EITF Issue 98-10. Therefore,
adoption of EITF Issue 98-10 will not have a material impact on CSW's results of
operations or financial condition.
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19. QUARTERLY INFORMATION (UNAUDITED)
The following unaudited quarterly information includes, in the opinion of
management all adjustments necessary for a fair presentation of such amounts.
Information for quarterly periods is affected by seasonal variations in sales,
rate changes, timing of fuel expense recovery and other factors.
QUARTER ENDED 1998 1997
-----------------------------------------------------------------
March 31
Operating Revenues $1,257 $1,278
Operating Income 163 127
Income from Continuing Operations 60 25
Net Income for Common Stock 60 25
Basic and Diluted EPS from Continuing
Operations $0.28 $0.12
Basic and Diluted EPS $0.28 $0.12
June 30
Operating Revenues $1,344 $1,184
Operating Income 214 169
Income from Continuing Operations 107 83
Net Income for Common Stock 107 83
Basic and Diluted EPS from Continuing
Operations $0.50 $0.39
Basic and Diluted EPS $0.50 $0.39
September 30
Operating Revenues $1,581 $1,477
Operating Income 344 303
Income from Continuing Operations 233 196
Extraordinary Item -- (176)
Net Income for Common Stock 233 20
Basic and Diluted EPS from Continuing
Operations $1.10 $0.93
Basic and Diluted EPS from
Extraordinary Item $-- $(0.83)
Basic and Diluted EPS $1.10 $0.10
December 31
Operating Revenues $1,300 $1,329
Operating Income 145 136
Income from Continuing Operations 40 25
Net Income for Common Stock 40 25
Basic and Diluted EPS from Continuing
Operations $0.19 $0.11
Basic and Diluted EPS $0.19 $0.11
Total
Operating Revenues $5,482 $5,268
Operating Income 866 735
Income from Continuing Operations 440 329
Extraordinary Item -- (176)
Net Income for Common Stock 440 153
Basic and Diluted EPS from Continuing
Operations $2.07 $1.55
Basic and Diluted EPS from
Extraordinary Item $-- $(0.83)
Basic and Diluted EPS $2.07 $0.72
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20. SUBSEQUENT EVENT
Through December 31, 1998, CSW International has invested $80 million in
Vale, a Brazilian electric distribution company, 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 currency in a broad range against the
dollar. This resulted in a 40% devaluation of the Brazilian Real by the end of
January. Vale will be unfavorably impacted by the devaluation due primarily 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
of the purchase price paid for the shares ($80 million). As a result of the put
option arrangement, management has reached a preliminary conclusion 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. 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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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Central and South West
Corporation:
We have audited the accompanying consolidated balance sheets of Central
and South West Corporation (a Delaware corporation) and subsidiary companies as
of December 31, 1998 and 1997, and the related consolidated statements of
income, stockholders' equity and cash flows, for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits. We did not audit
the financial statements of CSW UK Finance Company (1998 and 1997 - which
includes CSW Investments) and CSW Investments (1996), which statements reflect
total assets and total revenues of 22 percent and 32 percent in 1998, 22 percent
and 35 percent in 1997 and 36 percent of total revenues in 1996, respectively,
of the consolidated totals. Those statements were audited by other auditors
whose reports have been furnished to us and our opinion, insofar as it relates
to the amounts included for those entities, is based solely on the reports of
the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Central and South West Corporation and subsidiary
companies as of December 31, 1998 and 1997, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Dallas, Texas
February 12, 1999
2-93
AUDITOR'S REPORT TO THE MEMBERS OF CSW UK FINANCE COMPANY
We have audited the consolidated balance sheets of CSW UK Finance Company
and subsidiaries as of 31 December 1998 and 1997 and the related consolidated
statement of earnings and statements of cash flows for the years then ended.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit
We conducted our audit in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CSW UK
Finance Company and subsidiaries at 31 December 1998 and 1997 and the results of
their operations and cash flows for the years then ended in conformity with
generally accepted accounting principles in the United Kingdom.
Generally accepted accounting principles in the United Kingdom vary in
certain significant respects from generally accepted accounting principles in
the United States. Application of generally accepted accounting principles in
the United States would have affected results of operations and shareholders'
equity as of and for the years ended 31 December 1998 and 1997 to the extent
summarised in Note 23 to the consolidated financial statements.
/s/ KPMG Audit Plc
KPMG Audit Plc
Chartered Accountants London, England
Registered Auditor 18 January 1999
2-94
AUDITOR'S REPORT TO THE MEMBERS OF CSW INVESTMENTS
We have audited the consolidated balance sheets of CSW Investments and
subsidiaries as of 31 December 1996 and the related consolidated statement of
earnings and statements of cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CSW
Investments and subsidiaries at 31 December 1996 and the results of their
operations and cash flows for the year then ended in conformity with generally
accepted accounting principles in the United Kingdom.
Generally accepted accounting principles in the United Kingdom vary in
certain significant respects from generally accepted accounting principles in
the United States. Application of generally accepted accounting principles in
the United States would have affected results of operations and shareholders'
equity as of and for the year ended 31 December 1996 to the extent summarised in
the notes to the consolidated financial statements.
/s/ KPMG Audit Plc
KPMG Audit Plc
Chartered Accountants London, England
Registered Auditor 22 January 1997
2-95
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and objectivity
of the consolidated financial statements of Central and South West Corporation
and subsidiary companies as well as other information contained in this Annual
Report. The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis and,
in some cases, reflect amounts based on the best estimates and judgments of
management giving due consideration to materiality. Financial information
contained elsewhere in this Annual Report is consistent with that in the
consolidated financial statements.
The consolidated financial statements have been audited by CSW's
independent public accountants who were given unrestricted access to all
financial records and related data, including minutes of all meetings of
stockholders, the board of directors and committees of the board. CSW and its
subsidiaries believe that representations made to the independent public
accountants during their audit were valid and appropriate. The reports of
independent public accountants are presented elsewhere in this report.
CSW, together with its subsidiary companies, maintains a system of
internal controls to provide reasonable assurance that transactions are executed
in accordance with management's authorization, that the consolidated financial
statements are prepared in accordance with generally accepted accounting
principles and that the assets of CSW and its subsidiaries are properly
safeguarded against unauthorized acquisition, use or disposition. The system
includes a documented organizational structure and division of responsibility,
established policies and procedures including a policy on ethical standards
which provides that the companies will maintain the highest legal and ethical
standards, and the careful selection, training and development of our employees.
Internal auditors continuously monitor the effectiveness of the internal
control system following standards established by the Institute of Internal
Auditors. Actions are taken by management to respond to deficiencies as they are
identified. The board, operating through its audit committee, which is comprised
entirely of directors who are not officers or employees of CSW or its
subsidiaries, provides oversight to the financial reporting process.
Due to the inherent limitations in the effectiveness of internal controls,
no internal control system can provide absolute assurance that errors will not
occur. However, management strives to maintain a balance, recognizing that the
cost of such a system should not exceed the benefits derived.
CSW and its subsidiaries believe that, in all material respects, its
system of internal controls over financial reporting and over safeguarding of
assets against unauthorized acquisition, use or disposition functioned
effectively as of December 31, 1998.
/s/ E.R. Brooks /s/ Glenn D. Rosilier /s/ Lawrence B. Connors
E. R. Brooks Glenn D. Rosilier Lawrence B. Connors
Chairman and Executive Vice President Controller
Chief Executive Officer and Chief Financial Officer
2-96
CENTRAL POWER AND LIGHT
COMPANY
2-97
SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended
December 31 is provided to highlight significant trends in the financial
condition and results of operations for CPL. Certain financial statement items
for prior years have been reclassified to conform to the most recent period
presented.
----------------------------------------------------
1998 (1) 1997 (1) 1996 (1) 1995 1994
(thousands except ratios)
INCOME STATEMENT DATA
Revenues $1,406,117 $1,376,282 $1,300,688 $1,073,469 $1,217,979
Net Income 161,650 128,471 147,051 206,447 205,439
Net Income for Common Stock 154,479 121,350 133,488 191,978 191,635
BALANCE SHEET DATA
Assets 4,657,245 4,813,310 4,828,263 4,881,136 4,822,699
Long-term obligations (2) 1,296,762 1,452,266 1,323,054 1,517,347 1,466,393
Capitalization ratios
Common stock equity 47% 47% 48% 45% 45%
Preferred stock 6 5 8 8 8
Trust Preferred Securities 5 5 -- -- --
Long-term debt 42 43 44 47 47
Ratio of earnings to fixed
charges 3.21 2.48 2.86 2.63 3.24
(SEC Method)
(1) See CENTRAL POWER AND LIGHT - RESULTS OF OPERATIONS for major factors
affecting earnings.
(2) Long-term obligations include long-term debt and Trust Preferred
Securities.
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CENTRAL POWER AND LIGHT COMPANY
RESULTS OF OPERATIONS
Reference is made to CPL's Consolidated Financial Statements, related
Notes to Consolidated Financial Statements and Selected Financial Data.
Referenced information should be read in conjunction with, and is essential to
understanding, the following discussion and analysis.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Net income for common stock increased $33.4 million to $154.7 million
during 1998 from $121.4 million in 1997. This increase was due primarily to
increased non-fuel revenues related to weather-related demand and the absence in
1998 of the provision for the CPL 1997 Final Order. The increase in net income
for common stock was partially offset by a reduction in base rates associated
with the CPL 1997 Final Order. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS
for more information related to the CPL 1997 Final Order.
Total electric operating revenues increased $29.8 million, or 2%, in 1998
as compared to 1997. This increase was mainly attributed to increased non-fuel
revenue of $91.6 million, which was a result of a 3% increase in weather related
MWH sales and the absence in 1998 of the $76.4 million provision for rate refund
in 1997. In addition, electric operating revenues increased due in part 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 versus Texas Utilities Electric Company (Docket No.17285).
The increase was partially offset by decreased fuel revenues of $30.8 million
and by lower base rates resulting from the CPL 1997 Final Order.
Fuel and purchased power expenses decreased approximately $27.1 million in
1998 as compared to 1997. Fuel expense decreased $10.7 million as a result of
lower average unit cost of fuel declining from $1.83 per MMbtu in 1997 to $1.59
per MMbtu in 1998 due to lower spot market natural gas prices. Purchased power
expenses decreased approximately 29% from $56.4 million in 1997 to $40.1 million
in 1998 due to decreases in economy energy purchases.
Other operating expenses were $260.8 million during 1998, a decrease of
$22.8 million when compared to 1997. The decrease is primarily due 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 versus Texas Utilities Electric Company (Docket No.
17285). Also contributing to the decrease is the absence in 1998 of
approximately $15 million write-off of previously capitalized energy efficiency
incentives, and rate case related expenses. Maintenance expenses increased $4.0
million due primarily to flood damage, power plant repairs and storm related
tree maintenance. Depreciation and amortization expenses increased $13.5
million, or 8%, in 1998 as compared to last year due primarily to the
accelerated recovery of ECOM property recorded in 1998 related to the CPL 1997
Final Order as well as increases in depreciable and amortizable plant. Partially
offsetting the increase in depreciation and amortization expenses was lower
depreciation rates on non-ECOM property related to the CPL 1997 Final Order.
Taxes, other than income decreased $12.0 million for 1998 due to a
decrease in Texas ad valorem taxes. Operating income taxes increased $42.8
million for the year compared to 1997 as a result of higher pre-tax income.
Other income and deductions decreased approximately $7.5 million due to
reduced interest income associated with lower levels of short-term investments
in 1998 as well as reduced non-operating taxes.
2-99
Interest charges decreased $9.1 million during 1998 when compared to 1997
primarily as a result of the maturity of CPL's $200 million Series BB, 6% FMBs
in October 1997 and $28 million Series J, 6-5/8%, FMBs that matured January 1,
1998; and the reacquisition of $36 million Series L 7% FMBs in September 1998.
See NOTE 8. LONG-TERM DEBT for additional information on the reacquisition of
long-term debt. The decrease was offset in part by increased distributions on
Trust Preferred Securities, which were outstanding for a portion of 1997.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Net income for common stock decreased to $121.4 million, or 9%, compared
to $133.5 million in 1996. The major reason for the decrease was the impact of
the CPL 1997 Final Order. This decrease was partially offset by an increase in
other income and deductions of $19.4 million, due primarily to the absence in
1997 of a one-time charge associated with certain investments for plant sites,
engineering studies and lignite reserves of $15.6 million, net of tax, recorded
in the second quarter of 1996. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS
for more information related to the CPL 1997 Final Order.
Total electric operating revenues increased $75.6 million, or 5.8%, in
1997 compared to 1996 due primarily to a 3% increase in retail MWH sales
resulting from increased customers and demand as well as higher fuel related
revenue due to higher fuel costs, as discussed below. Another factor that
contributed to the increase was a $41.5 million increase in transmission
revenues as a result of the January 1997 implementation of open access tariffs
in accordance with FERC Order No. 888 and the Texas Commission rules regarding
transmission access and pricing, offset by a decrease related to provisions for
refunds in 1997 and 1996 associated with the CPL rate case. The impact on net
income of the increase in transmission access revenues was offset by a
corresponding increase in transmission expense.
Fuel expense increased $55.7 million, or 16%, during 1997 as compared to
1996. The increase in fuel expense was due primarily to a 13% increase in the
average unit cost of fuel from $1.62 per MMbtu in 1996 to $ 1.83 per MMbtu in
1997. The increase in fuel costs reflects an increase in the spot market price
of natural gas partially offset by a decrease in the delivery cost of coal. Also
contributing to this increase was the absence in 1997 of a one-time $8.8 million
reduction in fuel expense recorded in the first quarter of 1996 in accordance
with the CPL 1996 Fuel Agreement. Purchased power expense decreased 5% from
$59.9 million in 1996 to $56.4 million in 1997 due primarily to decreased
economy energy purchases.
Other operating expense increased $52.1 million to $283.6 million in 1997
when compared to 1996. The increase is due primarily to an increase in
transmission operations expenses as a result of the January 1997 implementation
of open access tariffs in accordance with FERC Order No. 888 and the Texas
Commission rules regarding transmission access and pricing, the write-off of
previously deferred rate case expenses in accordance with the settlement in
principle of the rate case expense phase of CPL's Rate Review - Docket No. 14965
and the write-off of obsolete inventory of $3.8 million. The increase in other
operating expense was offset in part by reductions in pension expense, other
employee related expenses and the absence in 1997 of the write-off of a canceled
transmission project of $9.5 million. See NOTE 5. BENEFIT PLANS for additional
information related to changes in the pension plan. Maintenance expense
increased $6.7 million, or 12%, in 1997 as compared to 1996 due primarily to
higher steam and nuclear production and distribution overhead line expenses in
1997.
Depreciation and amortization expenses increased $18.5 million compared to
1996 due primarily to the impact of the CPL 1997 Final Order. Taxes, other than
income increased approximately $8.8 million during 1997 as compared to 1996 due
primarily to an increase in ad valorem and franchise taxes.
Other income and deductions increased $19.4 million from a loss of $11.1
million in 1996 to $8.2 million in 1997 due primarily to the absence in 1997 of
the one-time charge associated with certain investments for plant sites,
engineering studies and lignite reserves of $15.6 million, net of tax, recorded
in 1996. Also contributing to this increase was additional interest income in
1997 due primarily to a higher level of short-term investments. Interest and
other charges increased $3.7 million in 1997 due primarily to the new
distributions on Trust Preferred Securities of $7.7 million. For additional
2-100
information on these new securities see NOTE 10. TRUST PREFERRED SECURITIES.
Partially offsetting this increase was a decrease of $5.3 million in long-term
debt expense due primarily to the maturity of CPL's $200 million, Series BB, 6%
FMBs in October 1997 and refinancing activities in 1996.
2-101
CPL
Consolidated Statements of Income
Central Power and Light Company
- --------------------------------------------------------------------------------
For the Years Ended December 31,
---------------------------------------------------------
1998 1997 1996
---------------- --------------- ----------------
(thousands)
Electric Operating Revenues
Residential $ 527,081 $ 541,169 $ 528,916
Commercial 377,492 400,412 388,008
Industrial 309,543 330,481 308,186
Sales for resale 66,680 70,461 72,164
Other 125,321 33,759 3,414
---------------- --------------- ----------------
1,406,117 1,376,282 1,300,688
---------------- --------------- ----------------
Operating Expenses and Taxes
Fuel 385,944 396,707 340,962
Purchased power 40,062 56,475 59,562
Other operating 260,843 283,640 236,129
Maintenance 63,779 59,791 53,077
Depreciation and amortization 184,805 171,349 152,831
Taxes, other than income 70,927 82,909 74,029
Income taxes 116,831 74,044 98,451
---------------- --------------- ----------------
1,123,191 1,124,915 1,015,041
---------------- --------------- ----------------
Operating Income 282,926 251,367 285,647
---------------- --------------- ----------------
Other Income and Deductions
Charges for investments and plant development costs -- (2,060) (21,509)
Allowance for equity funds used during construction 51 1,724 427
Other (1,495) 3,563 4,636
Non-operating income taxes 2,204 5,050 5,301
---------------- --------------- ----------------
760 8,277 (11,145)
---------------- --------------- ----------------
Income Before Interest Charges 283,686 259,644 274,502
---------------- --------------- ----------------
Interest Charges
Interest on long-term debt 93,301 105,081 110,375
Distributions on Trust Preferred Securities 12,000 7,533 --
Interest on short-term debt and other 19,506 20,613 18,494
Allowance for borrowed funds used during construction (2,771) (2,054) (1,418)
---------------- --------------- ----------------
122,036 131,173 127,451
---------------- --------------- ----------------
Net Income 161,650 128,471 147,051
Less: Preferred stock dividends 6,901 9,523 13,563
Gain on reacquired preferred stock -- 2,402 --
---------------- --------------- ----------------
Net Income for Common Stock $ 154,749 $ 121,350 $ 133,488
================ =============== ================
The accompanying notes to consolidated financial statements as they relate to
CPL are an integral part of these statements.
2-102
CPL
Consolidated Statements of Retained Earnings
Central Power and Light Company
- --------------------------------------------------------------------------------
For the Years Ended December 31,
----------------------------------------------------
1998 1997 1996
--------------- -------------- ---------------
(thousands)
Retained Earnings at Beginning of Year $833,282 $868,932 $863,444
Net income for common stock 154,749 121,350 133,488
Deduct: Common stock dividends 249,000 157,000 128,000
--------------- -------------- ---------------
Retained Earnings at End of Year $739,031 $833,282 $868,932
=============== ============== ===============
The accompanying notes to consolidated financial statements as they relate to
CPL are an integral part of these statements.
2-103
CPL
Consolidated Balance Sheets
Central Power and Light Company
- --------------------------------------------------------------------------------
As of December 31,
----------------------------------
1998 1997
------------ ------------
(thousands)
ASSETS
Electric Utility Plant
Production $3,146,269 $3,106,576
Transmission 527,146 517,903
Distribution 1,090,175 1,021,759
General 298,352 295,974
Construction work in progress 67,300 77,390
Nuclear fuel 206,949 196,147
------------ ------------
5,336,191 5,215,749
Less - accumulated depreciation 2,072,686 1,891,406
------------ ------------
3,263,505 3,324,343
------------ ------------
Current Assets
Cash 5,195 --
Accounts receivable 51,056 61,311
Materials and supplies, at average cost 59,814 65,290
Fuel inventory 20,340 14,816
Under-recovered fuel costs -- 43,229
Accumulated deferred income taxes 713 --
Prepayments 2,952 2,595
------------ ------------
140,070 187,241
------------ ------------
Deferred Charges and Other Assets
Deferred STP costs 482,447 484,277
Mirror CWIP asset 256,702 285,431
Income tax related regulatory assets, net 360,482 390,149
Nuclear decommissioning trust 65,972 45,676
Other 88,067 96,193
------------ ------------
1,253,670 1,301,726
------------ ------------
$4,657,245 $4,813,310
============ ============
The accompanying notes to consolidated financial statements as they relate to
CPL are an integral part of these statements.
2-104
CPL
Consolidated Balance Sheets
Central Power and Light Company
- --------------------------------------------------------------------------------
As of December 31,
----------------------------------
1998 1997
------------ ------------
(thousands)
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock: $25 par value
Authorized shares: 12,000,000
Issued and outstanding shares: 6,755,535 $ 168,888 $ 168,888
Paid-in capital 405,000 405,000
Retained earnings 739,031 833,282
------------ -----------
Total Common Stock Equity 1,312,919 47% 1,407,170 47%
------------ ------------
Preferred stock 163,204 6% 163,204 5%
CPL-obligated, mandatorily redeemable preferred securities of
subsidiary trust holding solely Junior Subordinated
Debentures of CPL 150,000 5% 150,000 5%
Long-term debt 1,146,762 42% 1,302,266 43%
------------ ------------
Total Capitalization 2,772,885 100% 3,022,640 100%
------------ ------------
Current Liabilities
Long-term debt due within twelve months 125,000 28,000
Advances from affiliates 160,298 142,781
Accounts payable 86,998 72,170
Payable to Affiliates 38,331 11,990
Accrued taxes 46,855 13,558
Accumulated deferred income taxes -- 21,382
Accrued interest 27,036 28,379
Over-recovered fuel costs 9,135 --
Refund due customers -- 63,713
Other 18,819 14,551
------------ ------------
512,472 396,524
------------ ------------
Deferred Credits
Accumulated deferred income taxes 1,221,561 1,237,386
Investment tax credits 138,513 142,371
Other 11,814 14,389
------------ ------------
1,371,888 1,394,146
------------ ------------
$4,657,245 $4,813,310
============ ============
The accompanying notes to consolidated financial statements as they relate to
CPL are an integral part of these statements.
2-105
CPL
Consolidated Statements of Cash Flows
Central Power and Light Company
- --------------------------------------------------------------------------------
For the Years Ended December 31,
----------------------------------------------------
1998 1997 1996
--------------- -------------- ---------------
(thousands)
OPERATING ACTIVITIES
Net Income $161,650 $128,471 $147,051
Non-cash Items Included in Net Income
Depreciation and amortization 206,515 192,775 178,271
Deferred income taxes and investment tax credits (12,111) 29,666 45,923
Refund due customers (63,713) 20,447 43,266
Charges for investments and assets 18,669 2,061 21,374
Inventory reserve -- 3,834 717
Changes in Assets and Liabilities
Accounts receivable 10,255 (8,273) (7,852)
Fuel inventory (5,524) 645 11,011
Material and supplies 5,476 10,442 (4,620)
Accrued interest (1,343) (3,187) 1,176
Accounts payable 40,232 14,219 19,780
Accrued taxes 33,297 (50,649) 2,593
Fuel recovery 52,364 (16,931) (38,884)
Other deferred credits (2,575) 2,701 (2,856)
Other (4,311) 13,419 (6,672)
--------------- -------------- ---------------
438,881 339,640 410,278
--------------- -------------- ---------------
INVESTING ACTIVITIES
Construction expenditures (123,803) (126,693) (136,901)
Other (7,181) 1,185 (3,257)
--------------- -------------- ---------------
(130,984) (125,508) (140,158)
--------------- -------------- ---------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- -- 63,930
Retirement of long-term debt (28,000) -- (231)
Reacquisition of long-term debt (36,000) (200,000) (67,720)
Redemption of preferred stock -- (84,745) --
Proceeds from issuance of Trust Preferred Securities -- 144,706 --
Change in advances from affiliates 17,517 90,256 (123,809)
Payment of dividends (256,219) (167,648) (141,874)
--------------- -------------- ---------------
(302,702) (217,431) (269,704)
--------------- -------------- ---------------
Net Change in Cash and Cash Equivalents 5,195 (3,299) 416
Cash and Cash Equivalents at Beginning of Year -- 3,299 2,883
=============== ============== ===============
Cash and Cash Equivalents at End of Year $ 5,195 $ -- $ 3,299
=============== ============== ===============
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on Trust Preferred Securities) $ 99,239 $116,782 $117,974
=============== ============== ===============
Income taxes paid $ 94,245 $ 61,509 $ 44,082
=============== ============== ===============
The accompanying notes to consolidated financial statements as they relate to
CPL are an integral part of these statements.
2-106
CPL
Consolidated Statements of Capitalization
Central Power and Light Company
- --------------------------------------------------------------------------------
As of December 31,
--------------------------------
1998 1997
------------- -------------
(thousands)
COMMON STOCK EQUITY $ 1,312,919 $ 1,407,170
------------- -------------
PREFERRED STOCK
Cumulative $100 Par Value, Authorized 3,035,000 shares
Number of Shares Current
Series Outstanding Redemption Price
- ------------------------------------------------------
Not Subject to Mandatory Redemption
4.00% 42,048 $105.75 4,205 4,205
4.20% 17,476 $103.75 1,748 1,748
Auction Money Market 750,000 $100.00 75,000 75,000
Auction Series A 425,000 $100.00 42,500 42,500
Auction Series B 425,000 $100.00 42,500 42,500
Issuance Expense (2,749) (2,749)
------------- -------------
163,204 163,204
------------- -------------
TRUST PREFERRED SECURITIES
CPL-obligated, mandatorily redeemable
preferred securities of subsidiary
trust holding solely Junior
Subordinated Debentures of CPL, 8.00%,
due April 30, 2037 150,000 150,000
------------- -------------
LONG-TERM DEBT
First Mortgage Bonds
Series J, 6 5/8%, due January 1, 1998 -- 28,000
Series L, 7%, due February 1, 2001 -- 36,000
Series T, 7 1/2%,
due December 15, 2014 (Matagorda) * 111,700 111,700
Series AA, 7 1/2%,
due March 1, 2020 (Matagorda) * 50,000 50,000
Series CC, 7 1/4%, due October 1, 2004 100,000 100,000
Series DD, 7 1/8%, due December 1, 1999 25,000 25,000
Series EE, 7 1/2%, due December 1, 2002 115,000 115,000
Series FF, 6 7/8%, due February 1, 2003 50,000 50,000
Series GG, 7 1/8%, due February 1, 2008 75,000 75,000
Series HH, 6%, due April 1, 2000 100,000 100,000
Series II, 7 1/2%, due April 1, 2023 100,000 100,000
Series JJ, 7 1/2%, due May 1, 1999 100,000 100,000
Series KK, 6 5/8%, due July 1, 2005 200,000 200,000
Installment Sales Agreements - PCRBs *
Series 1993, 6%, due July 1, 2028 (Matagorda) 120,265 120,265
Series 1995, 6.10%,
due July 1, 2028 (Matagorda) 100,635 100,635
Series 1995, variable rate,
due November 1, 2015 (Guadalupe) 40,890 40,890
Series 1996, 6%, due June 1, 2020 (Red River) 6,330 6,330
Series 1996, 6 1/8%, due May 1, 2030 (Matagorda) 60,000 60,000
Unamortized Discount (4,114) (4,484)
Unamortized Costs of Reacquired Debt (78,944) (84,070)
Amount to be Redeemed Within One Year (125,000) (28,000)
------------- -------------
1,146,762 1,302,266
------------- -------------
TOTAL CAPITALIZATION $ 2,772,885 $ 3,022,640
============= =============
*Obligations incurred in connection with the sale by public authorities of
tax-exempt PCRBs.
The accompanying notes to consolidated financial statements as they relate to
CPL are an integral part of these statements.
2-107
CENTRAL POWER AND LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See CSW's NOTE 1.
2. LITIGATION AND REGULATORY PROCEEDINGS See CSW's NOTE 2.
3. COMMITMENTS AND CONTINGENT LIABILITIES See CSW's NOTE 3.
4. INCOME TAXES See CSW's NOTE 4.
5. BENEFIT PLANS See CSW's NOTE 5.
6. JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6.
7. FINANCIAL INSTRUMENTS See CSW's NOTE 7.
8. LONG-TERM DEBT See CSW's NOTE 8.
9. PREFERRED STOCK See CSW's NOTE 9.
10. TRUST PREFERRED SECURITIES See CSW's NOTE 10.
11. SHORT-TERM FINANCING See CSW's NOTE 11.
12. STOCK BASED COMPENSATION PLANS See CSW's NOTE 13.
13. NEW ACCOUNTING STANDARDS See CSW's NOTE 18.
2-108
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Central Power and Light Company:
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of Central Power and Light Company (a
Texas corporation and a wholly-owned subsidiary of Central and South West
Corporation) and subsidiary company as of December 31, 1998 and 1997, and the
related consolidated statements of income, retained earnings and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of Central Power and Light Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Central
Power and Light Company and subsidiary company as of December 31, 1998 and 1997,
and the results of their operations and cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Dallas, Texas
February 12, 1999
2-109
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and objectivity
of the consolidated financial statements of Central Power and Light Company and
subsidiary company as well as other information contained in this Annual Report.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles applied on a consistent basis and, in
some cases, reflect amounts based on the best estimates and judgments of
management, giving due consideration to materiality. Financial information
contained elsewhere in this Annual Report is consistent with that in the
consolidated financial statements.
The consolidated financial statements have been audited by CPL's
independent public accountants who were given unrestricted access to all
financial records and related data, including minutes of all meetings of
shareholders, the board of directors and committees of the board. CPL and its
subsidiary company believe that representations made to the independent public
accountants during their audit were valid and appropriate. The report of
independent public accountants is presented elsewhere in this report.
CPL, together with its subsidiary company, maintains a system of internal
controls to provide reasonable assurance that transactions are executed in
accordance with management's authorization, that the consolidated financial
statements are prepared in accordance with generally accepted accounting
principles and that the assets of the companies are properly safeguarded against
unauthorized acquisition, use or disposition. The system includes a documented
organizational structure and division of responsibility, established policies
and procedures including a policy on ethical standards which provides that CPL
will maintain the highest legal and ethical standards, and the careful
selection, training and development of our employees.
Internal auditors continuously monitor the effectiveness of the internal
control system following standards established by the Institute of Internal
Auditors. Actions are taken by management to respond to deficiencies as they are
identified. The board, operating through its audit committee, which is comprised
entirely of directors who are not officers or employees of CPL or its subsidiary
company, provides oversight to the financial reporting process.
Due to the inherent limitations in the effectiveness of internal controls,
no internal control system can provide absolute assurance that errors will not
occur. However, management strives to maintain a balance, recognizing that the
cost of such a system should not exceed the benefits derived.
CPL and its subsidiary believe that, in all material respects, their
system of internal controls over financial reporting and over safeguarding of
assets against unauthorized acquisition, use or disposition functioned
effectively as of December 31, 1998.
/s/ J. Gonzalo Sandoval /s/ R. Russell Davis
J. Gonzalo Sandoval R. Russell Davis
General Manager/President - CPL Controller - CPL
2-110
PUBLIC SERVICE COMPANY
OF OKLAHOMA
2-111
SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended
December 31 is provided to highlight significant trends in the financial
condition and results of operations for PSO. Certain financial statement items
for prior years have been reclassified to conform to the most recent period
presented.
----------------------------------------------------------
1998 (1) 1997 (1) 1996 (1) 1995 1994
(thousands, except ratios)
INCOME STATEMENT DATA
Revenues $780,159 $712,690 $735,265 $690,823 $740,496
Net Income 76,843 46,206 31,478 81,828 68,266
Net Income for Common Stock 76,630 50,053 30,662 81,012 67,450
BALANCE SHEET DATA
Assets 1,466,785 1,447,681 1,431,597 1,480,816 1,465,114
Long-term obligations (2) 443,121 496,821 420,301 379,250 402,752
Capitalization ratios
Common stock equity 52% 49% 52% 55% 52%
Preferred stock -- -- 2 2 2
Trust Preferred Securities 8 8 -- -- --
Long-term debt 40 43 46 43 46
Ratio of earnings to fixed
charges 4.21 2.68 2.45 4.32 4.03
(SEC Method)
(1) See PUBLIC SERVICE COMPANY OF OKLAHOMA - RESULTS OF OPERATIONS for major
factors affecting earnings.
(2) Long-term obligations includes long-term debt and Trust Preferred
Securities.
2-112
PUBLIC SERVICE COMPANY OF OKLAHOMA
RESULTS OF OPERATIONS
Reference is made to PSO's Consolidated Financial Statements, related
Notes to Consolidated Financial Statements and Selected Financial Data.
Referenced information should be read in conjunction with, and is essential to
understanding, the following discussion and analysis.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Net income for common stock increased 53% during 1998 to $76.6 million
from $50.1 million in 1997. The increase resulted primarily from higher
revenues, decreased transmission expenses and the absence in 1998 of the impact
of recording the effects associated with the outcome of the PSO 1997 Rate
Settlement Agreement. The increase was offset in part by the absence in 1998 of
the $4.2 million gain on the reacquisition of preferred stock recorded in 1997.
See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information
related to the PSO 1997 Rate Settlement Agreement.
Electric operating revenues were $780.2 million during 1998, a 9% increase
from $712.7 million for the same period in 1997. This increase was due primarily
to higher non-fuel revenues of $39.2 million and fuel-related revenues of $28.3
million. The increase in non-fuel revenues was due primarily to a 9% increase in
retail MWH sales resulting from warmer weather as well as the absence in 1998 of
a $29.0 million provision for rate refund. The increase in revenues was offset
in part by lower base rates resulting from the PSO 1997 Rate Settlement
Agreement and a decrease in transmission related revenues resulting from changes
to a transmission coordination agreement pending before the FERC. See NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS - Transmission Coordination Agreement. The
increase in fuel revenues was due primarily to higher fuel expense, as discussed
below.
Fuel expense increased $31.0 million, or 11%, during 1998 when compared to
1997 due primarily to a $43.3 million increase in the recovery of deferred fuel
costs and a 7% increase in generation due primarily to higher weather-related
demand. The increase in fuel expense was offset in part by lower average unit
fuel costs. The average unit cost of fuel declined from $1.98 per MMbtu in 1997
to $1.77 per MMbtu in 1998 due primarily to lower spot market natural gas and
coal prices. Purchased power expenses increased 11% to $57.2 million in 1998
from $51.6 million in 1997. This increase was due primarily to higher off-system
and emergency energy purchases associated with higher weather-related demand in
1998 and a plant outage in the first quarter of 1998, partially offset by lower
cogeneration purchases.
Other operating expenses were $109.4 million in 1998, a decrease of $26.5
million from $135.9 million in 1997. The decrease was due primarily to the
absence in 1998 of a write-off of previously capitalized energy efficiency
incentives and the write-off of rate case related expenses, both associated with
the aforementioned rate settlement agreement. Also contributing to the decline
in other operating expenses were lower transmission expenses resulting 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 Versus Texas Utilities Electric Company (Docket No.
17285). The decrease in other operating expenses was offset in part by
additional environmental expenses. Maintenance expenses increased 10% to $37.0
million in 1998 from $33.6 million in 1997. The increase was due primarily to
higher production and distribution maintenance activities.
Depreciation and amortization expense decreased $8.6 million, or 11%,
during 1998 when compared to the prior year. This decrease was due primarily to
lower depreciation rates and the absence in 1998 of a write-off of regulatory
assets, both resulting from the PSO 1997 Rate Settlement Agreement. This
decrease was offset in part by higher depreciable plant. Taxes, other than
income were $29.8 million in 1998, a 4% increase from $28.8 million in 1997 as a
result of higher ad valorem tax expenses. Operating income taxes were $49.1
million in 1998 compared to $20.8 million in 1997 due primarily to higher
pre-tax income in 1998.
2-113
Other income and deductions decreased $1.7 million in 1998 when compared
to 1997 primarily as a result of lower miscellaneous non-operating income.
Interest charges increased $0.9 million in 1998 when compared to the same period
in 1997 due primarily to a full year of distributions in 1998 on Trust Preferred
Securities offset in part by a decrease in long-term interest expenses in 1998
as a result of a reduction of long-term debt outstanding during 1998. See NOTE
8. LONG-TERM DEBT.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Net income for common stock increased to $50.1 million for the year ended
1997 from $30.7 million in 1996. The increase resulted primarily from the
absence in 1997 of a one-time charge for certain investments for plant sites,
engineering studies and lignite reserves of approximately $35.7 million, net of
tax, recorded in 1996 partially offset by the impact of recording the effects
associated with the outcome of the PSO 1997 Rate Settlement Agreement. See NOTE
2. LITIGATION AND REGULATORY PROCEEDINGS for additional information related to
the PSO 1997 Rate Settlement Agreement.
Electric operating revenues were $712.7 million during 1997, a 3% decrease
from $735.3 million for the same period in 1996. The decrease was due primarily
to a $29 million provision for rate refund established in September and paid in
December related to the PSO 1997 Rate Settlement Agreement. Partially offsetting
this decrease was an increase in transmission access and wheeling revenues.
Fuel expense decreased $11.4 million during 1997 compared to 1996 due
primarily to a 4% reduction in generation. Also contributing to this decrease
was a decline in the average unit cost of fuel from $2.04 per MMbtu in 1996 to
$1.98 per MMbtu in 1997. The decline in the average unit cost of fuel was due
primarily to utilizing lower cost coal in place of higher cost spot market
natural gas. Partially offsetting the decrease in fuel expense was a decline in
the amount of under-recovered fuel costs in 1997 when compared to 1996.
Purchased power expenses increased 25% to $51.6 million in 1997 from $41.2
million in 1996 as a result of increased purchases of economy energy along with
increased cogeneration purchases in 1997.
Other operating expenses increased $14.7 million, or 12%, to $135.9
million in 1997 when compared to 1996. The increase was due primarily to the
write-off of previously capitalized demand side management energy efficiency
incentives of $9.6 million, the write-off of $2.2 million of rate case related
expenses, both associated with the aforementioned rate settlement agreement, as
well as the write-off of $0.8 million of obsolete inventory. Operating expenses
were also affected by a decrease in pension related expenses. See NOTE 5.
BENEFIT PLANS for additional information related to changes in the pension plan.
Maintenance expenses decreased 13% to $33.6 million in 1997 from $38.5 million
in 1996. The decrease was due primarily to a $3.2 million write-down of
production inventory in 1996 and lower tree management expenses in 1997.
Depreciation and amortization expense increased $3.8 million, or 5%,
during 1997 when compared to the prior year. This increase was due primarily to
the write-off of $5.8 million of regulatory assets resulting from the PSO 1997
Rate Settlement Agreement, as well as an increase in depreciable assets, offset
in part by a decrease in depreciation expense of $5.2 million also attributable
to the agreement. Taxes, other than income were $28.8 million in 1997, a 6%
increase from $27.2 million in 1996 as a result of higher ad valorem tax expense
in 1997. Operating income taxes were $20.8 million in 1997 compared to $37.6
million in 1996 due primarily to lower pre-tax income in 1997.
Other income and deductions increased $37.2 million in 1997 when compared
to 1996 primarily as a result of the absence in 1997 of a one-time charge
associated with certain investments for plant sites, engineering studies and
lignite reserves of $35.7 million, net of tax, recorded in 1996.
Interest and other charges increased $2.5 million, or 7%, in 1997 when
compared to the same period in 1996 due primarily to the new distributions on
2-114
Trust Preferred Securities, partially offset by a decrease in short-term
interest expense as a result of a reduction of short-term debt outstanding
during 1997. For information on the new securities see NOTE 10. TRUST PREFERRED
SECURITIES.
2-115
PSO
Consolidated Statements of Income
Public Service Company of Oklahoma
- --------------------------------------------------------------------------------
For the Years Ended December 31,
-------------------------------------------
1998 1997 1996
------------ ------------ ------------
(thousands)
Electric Operating Revenues
Residential $ 329,058 $ 297,265 $ 299,550
Commercial 236,258 226,525 221,985
Industrial 162,773 161,974 157,509
Sales for resale 27,413 30,896 39,285
Other 24,657 (3,970) 16,936
------------ ------------ ------------
780,159 712,690 735,265
------------ ------------ ------------
Operating Expenses and Taxes
Fuel 309,969 278,976 290,408
Purchased power 57,222 51,619 41,194
Other operating 109,393 135,943 121,235
Maintenance 36,981 33,608 38,469
Depreciation and amortization 72,671 81,227 77,470
Taxes, other than income 29,816 28,778 27,194
Income taxes 49,099 20,763 37,558
------------ ------------ ------------
665,151 630,914 633,528
------------ ------------ ------------
Operating Income 115,008 81,776 101,737
------------ ------------ ------------
Other Income and Deductions
Allowance for equity funds used during construction 860 995 292
Charges for investments and plant development costs -- (123) (51,109)
Other (1,044) (1,503) (1,107)
Non-operating income taxes 93 2,280 16,413
------------ ------------ ------------
(91) 1,649 (35,511)
------------ ------------ ------------
Income Before Interest Charges 114,917 83,425 66,226
------------ ------------ ------------
Interest Charges
Interest on long-term debt 29,136 30,474 30,555
Distributions on Trust Preferred Securities 6,000 3,967 --
Interest on short-term debt and other 4,107 4,100 5,623
Allowance for borrowed funds used during construction (1,169) (1,322) (1,430)
------------ ------------ ------------
38,074 37,219 34,748
------------ ------------ ------------
Net Income 76,843 46,206 31,478
Less: Preferred stock dividends 213 364 816
Gain on reacquired preferred stock -- 4,211 --
------------ ------------ ------------
Net Income for Common Stock $ 76,630 $ 50,053 $ 30,662
============ ============ ============
The accompanying notes to consolidated financial statements as they relate to
PSO are an integral part of these statements.
2-116
PSO
Consolidated Statements of Retained Earnings
Public Service Company of Oklahoma
- --------------------------------------------------------------------------------
For the Years Ended December 31,
--------------------------------------------
1998 1997 1996
------------- ------------ ------------
(thousands)
Retained Earnings at Beginning of Year $136,996 $145,943 $150,281
Net income for common stock 76,630 50,053 30,662
Deduct: Common stock dividends 69,000 59,000 35,000
------------- ------------ ------------
Retained Earnings at End of Year $144,626 $136,996 $145,943
============= ============ ============
The accompanying notes to consolidated financial statements as they relate to
PSO are an integral part of these statements.
2-117
PSO
Consolidated Balance Sheets
Public Service Company of Oklahoma
- --------------------------------------------------------------------------------
As of December 31,
------------------------------------
1998 1997
---------------- ---------------
(thousands)
ASSETS
Electric Utility Plant
Production $ 913,083 $ 907,735
Transmission 378,719 375,111
Distribution 855,277 818,806
General 211,124 197,264
Construction work in progress 33,519 40,992
---------------- ---------------
2,391,722 2,339,908
Less - Accumulated depreciation 1,082,081 1,031,322
---------------- ---------------
1,309,641 1,308,586
---------------- ---------------
Current Assets
Cash 4,670 2,171
Accounts receivable 32,916 34,974
Materials and supplies, at average cost 33,006 32,211
Fuel inventory, at LIFO cost 16,441 11,427
Accumulated deferred income taxes 11,789 --
Prepayments and other 2,881 3,366
---------------- ---------------
101,703 84,149
---------------- ---------------
Deferred Charges and Other Assets 55,441 54,946
---------------- ---------------
$ 1,466,785 $ 1,447,681
================ ===============
The accompanying notes to consolidated financial statements as they relate to
PSO are an integral part of these statements.
2-118
PSO
Consolidated Balance Sheets
Public Service Company of Oklahoma
- --------------------------------------------------------------------------------
As of December 31,
-----------------------------------------
1998 1997
--------------- ----------------
CAPITALIZATION AND LIABILITIES (thousands)
Capitalization
Common stock: $15 par value
Authorized shares: 11,000,000 shares
Issued 10,482,000 shares and outstanding 9,013,000 shares $157,230 $157,230
Paid-in capital 180,000 180,000
Retained earnings 144,626 136,996
--------------- ----------------
Total Common Stock Equity 481,856 52% 474,226 49%
--------------- ------- ---------------- --------
Preferred stock 5,287 -- % 5,287 -- %
PSO-obligated, mandatorily redeemable preferred securities of
subsidiary trust holding solely Junior Subordinated
Debentures of PSO 75,000 8% 75,000 8%
Long-term debt 368,121 40% 421,821 43%
--------------- ------- ---------------- --------
Total Capitalization 930,264 100% 976,334 100%
--------------- ------- ---------------- --------
Current Liabilities
Advances from affiliates 15,892 4,874
Payables to affiliates 33,489 29,011
Accounts payable 52,888 55,179
Payables to customers 32,608 18,837
Accrued taxes 23,095 --
Accumulated deferred income taxes -- 2,262
Accrued interest 7,606 9,090
Other 6,599 4,178
--------------- ----------------
172,177 123,431
--------------- ----------------
Deferred Credits
Accumulated deferred income taxes 277,181 258,848
Investment tax credits 39,365 41,160
Income tax related regulatory liabilities, net 35,818 41,793
Other 11,980 6,115
--------------- ----------------
364,344 347,916
--------------- ----------------
$ 1,466,785 $ 1,447,681
=============== ================
The accompanying notes to consolidated financial statements as they relate to
PSO are an integral part of these statements.
2-119
PSO
Consolidated Statements of Cash Flows
Public Service Company of Oklahoma
- --------------------------------------------------------------------------------
For the Years Ended December 31,
---------------------------------------------
1998 1997 1996
------------- ------------ ------------
(thousands)
OPERATING ACTIVITIES
Net Income $ 76,843 $ 46,206 $ 31,478
Non-cash Items Included in Net Income
Depreciation and amortization 75,693 85,459 83,424
Deferred income taxes and investment tax credits (3,488) 6,169 (4,112)
Charges for investments and assets 4,159 12,803 50,854
Inventory reserve -- 838 3,150
Changes in Assets and Liabilities
Accounts receivable 17,297 (23,905) 6,888
Other investments and property (5,380) (5,682) (6,264)
Accounts payable 1,113 13,433 (5,878)
Accrued taxes 23,095 (12,306) (14,708)
Other deferred credits 5,865 (585) 1,078
Other (2,104) (776) (3,292)
------------- ------------ ------------
193,093 121,654 142,618
------------- ------------ ------------
INVESTING ACTIVITIES
Construction expenditures (68,897) (79,568) (83,509)
Other (8,271) (6,008) (8,596)
------------- ------------ ------------
(77,168) (85,576) (92,105)
------------- ------------ ------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- -- 51,744
Retirement of long-term debt -- -- (25,000)
Reacquisition of long-term debt (55,231) -- (13,040)
Reacquisition of preferred stock -- (10,329) --
Proceeds from issuance of Trust Preferred Securities -- 72,450 --
Change in advances from affiliates 11,018 (37,993) (27,643)
Payment of dividends (69,213) (59,514) (35,839)
------------- ------------ ------------
(113,426) (35,386) (49,778)
------------- ------------ ------------
Net Change in Cash and Cash Equivalents 2,499 692 735
Cash and Cash Equivalents at Beginning of Year 2,171 1,479 744
------------- ------------ ------------
Cash and Cash Equivalents at End of Year $ 4,670 $ 2,171 $ 1,479
============= ============ ============
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on Trust Preferred Securities) $ 37,772 $ 35,557 $ 32,488
============= ============ ============
Income taxes paid $ 33,712 $ 34,244 $ 30,353
============= ============ ============
The accompanying notes to consolidated financial statements as they relate to
PSO are an integral part of these statements.
2-120
PSO
Consolidated Statements of Capitalization
Public Service Company of Oklahoma
- --------------------------------------------------------------------------------
As of December 31,
------------------------------
1998 1997
------------- -------------
(thousands)
COMMON STOCK EQUITY $481,856 $474,226
------------- -------------
PREFERRED STOCK
(Cumulative $100 Par Value, Authorized 700,000
shares, redeemable at the option of PSO
upon 30 days notice)
Number Current
of Shares Redemption
Series Outstanding Price
- ---------------------------------------------
4.00% 44,640 $105.75 4,464 4,464
4.24% 8,069 $103.19 807 807
Premium 16 16
------------ -------------
5,287 5,287
------------ -------------
TRUST PREFERRED SECURITIES
PSO-obligated, mandatorily redeemable
preferred securities of subsidiary
trust holding solely Junior
Subordinated Debentures of PSO, 8.00%,
due April 30, 2037 75,000 75,000
------------- -------------
LONG-TERM DEBT
First Mortgage Bonds
Series K, 7 1/4%, due January 1, 1999 -- 25,000
Series L, 7 3/8%, due March 1, 2002 -- 30,000
Series S, 7 1/4%, due July 1, 2003 65,000 65,000
Series T, 7 3/8%, due December 1, 2004 50,000 50,000
Series U, 6 1/4%, due April 1, 2003 35,000 35,000
Series V, 7 3/8%, due April 1, 2023 100,000 100,000
Series W, 6 1/2%, due June 1, 2005 50,000 50,000
Medium-term Notes, 5.89%-6.43%,
due December 15, 2000-March 1, 2001 40,000 40,000
Installment sales agreement - PCRBs *
Series A, 5.9%, due December 1, 2007 (OEFA) 34,700 34,700
Series 1996, 6.0%,
due June 1, 2020 (Red River) 12,660 12,660
Unamortized discount (3,296) (3,657)
Unamortized costs of reacquired debt (15,943) (16,882)
------------- -------------
368,121 421,821
------------- -------------
TOTAL CAPITALIZATION $930,264 $976,334
============= =============
*Obligations incurred in connection with the sale by public authorities of
tax-exempt PCRBs.
The accompanying notes to consolidated financial statements as they relate to
PSO are an integral part of these statements.
2-121
PUBLIC SERVICE COMPANY OF OKLAHOMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See CSW's NOTE 1.
2. LITIGATION AND REGULATORY PROCEEDINGS See CSW's NOTE 2.
3. COMMITMENTS AND CONTINGENT LIABILITIES See CSW's NOTE 3.
4. INCOME TAXES See CSW's NOTE 4.
5. BENEFIT PLANS See CSW's NOTE 5.
6. JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6.
7. FINANCIAL INSTRUMENTS See CSW's NOTE 7.
8. LONG-TERM DEBT See CSW's NOTE 8.
9. PREFERRED STOCK See CSW's NOTE 9.
10. TRUST PREFERRED SECURITIES See CSW's NOTE 10.
11. SHORT-TERM FINANCING See CSW's NOTE 11.
12. STOCK BASED COMPENSATION PLANS See CSW's NOTE 13.
13. NEW ACCOUNTING STANDARDS See CSW's NOTE 18.
2-122
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Public Service Company of
Oklahoma:
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of Public Service Company of Oklahoma
(an Oklahoma corporation and a wholly-owned subsidiary of Central and South West
Corporation) and subsidiary companies, as of December 31, 1998 and 1997, and the
related consolidated statements of income, retained earnings and cash flows, for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of Public Service Company of Oklahoma's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Public
Service Company of Oklahoma and subsidiary companies as of December 31, 1998 and
1997, and the results of their operations and cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Dallas, Texas
February 12, 1999
2-123
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and objectivity
of the consolidated financial statements of Public Service Company of Oklahoma
and its subsidiary companies as well as other information contained in this
Annual Report. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis and, in some cases, reflect amounts based on the best estimates and
judgments of management, giving due consideration to materiality. Financial
information contained elsewhere in this Annual Report is consistent with that in
the consolidated financial statements.
The consolidated financial statements have been audited by PSO's
independent public accountants who were given unrestricted access to all
financial records and related data, including minutes of all meetings of
shareholders, the board of directors and committees of the board. PSO and its
subsidiaries believe that representations made to the independent public
accountants during their audit were valid and appropriate. The report of
independent public accountants is presented elsewhere in this report.
PSO, together with its subsidiary companies, maintains a system of
internal controls to provide reasonable assurance that transactions are executed
in accordance with management's authorization, that the consolidated financial
statements are prepared in accordance with generally accepted accounting
principles and that the assets of the companies are properly safeguarded against
unauthorized acquisition, use or disposition. The system includes a documented
organizational structure and division of responsibility, established policies
and procedures including a policy on ethical standards which provides that PSO
will maintain the highest legal and ethical standards, and the careful
selection, training and development of our employees.
Internal auditors continuously monitor the effectiveness of the internal
control system following standards established by the Institute of Internal
Auditors. Actions are taken by management to respond to deficiencies as they are
identified. The board, operating through its audit committee, which is comprised
entirely of directors who are not officers or employees of PSO or its
subsidiaries, provides oversight to the financial reporting process.
Due to the inherent limitations in the effectiveness of internal controls,
no internal control system can provide absolute assurance that errors will not
occur. However, management strives to maintain a balance, recognizing that the
cost of such a system should not exceed the benefits derived.
PSO and its subsidiaries believe that, in all material respects, their
system of internal controls over financial reporting and over safeguarding of
assets against unauthorized acquisition, use or disposition functioned
effectively as of December 31, 1998.
/s/ T.D. Churchwell /s/ R. Russell Davis
T. D. Churchwell R. Russell Davis
President - PSO Controller - PSO
2-124
SOUTHWESTERN ELECTRIC
POWER COMPANY
2-125
SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended
December 31 is provided to highlight significant trends in the financial
condition and results of operations for SWEPCO. Certain financial statement
items for prior years have been reclassified to conform to the most recent
period presented.
------------------------------------------------
1998 (1) 1997 (1) 1996 (1) 1995 1994
(thousands, except ratios)
INCOME STATEMENT DATA
Revenues $952,952 $939,869 $920,786 $836,705 $825,296
Net Income 98,103 92,902 66,566 117,114 105,712
Net Income for Common Stock 96,542 92,254 63,503 113,870 102,351
BALANCE SHEET DATA
Assets 2,049,520 2,094,746 2,099,156 2,116,716 2,079,207
Long-term obligations (2) 616,939 683,681 629,615 632,579 630,661
Capitalization ratios
Common stock equity 52% 51% 52% 51% 51%
Preferred stock 1 2 4 4 4
Trust Preferred Securities 8 8 -- -- --
Long-term debt 39 39 44 45 45
Ratios of earnings to fixed
charges 3.53 3.46 2.81 3.80 3.70
(SEC Method)
(1) See SOUTHWESTERN ELECTRIC POWER COMPANY - RESULTS OF OPERATIONS for major
factors affecting earnings.
(2) Long-term obligations includes long-term debt, preferred stock subject to
mandatory redemption and Trust Preferred Securities.
2-126
SOUTHWESTERN ELECTRIC POWER COMPANY
RESULTS OF OPERATIONS
Reference is made to SWEPCO's Consolidated Financial Statements, related
Notes to Consolidated Financial Statements and Selected Financial Data.
Referenced information should be read in conjunction with, and is essential in
understanding, the following discussion and analysis.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 AND 1997
Net income for common stock increased 5% during 1998 to $96.5 million from
$92.3 million in 1997. The increase resulted primarily from increased non-fuel
revenue and the absence in 1998 of certain operating expense charges in 1997.
Electric operating revenues increased $13.1 million, to $953.0 million in
1998 from $939.9 million in 1997. The increase was due primarily to higher
non-fuel revenues of $26.8 million resulting from a 5% increase in
weather-related MWH sales. The increase in electric operating revenues was
offset in part by a transmission service agreement adjustment related to the
final order in Texas Commission Docket No. 17285, a provision for rate refund of
$5.3 million primarily in connection with the annual determination of cost of
service formula rates for SWEPCO's wholesale customers and a $3.2 million
reduction in fuel revenues in accordance with a Texas Commission order in
SWEPCO's fuel reconciliation regarding transmission equalization expense
recovery. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU
Complaint Versus Texas Utilities Electric Company (Docket No. 17285). Electric
operating revenues were also affected by a decrease in fuel revenues of $1.3
million.
Fuel expense decreased $11.0 million for 1998 when compared to 1997 due
primarily to a decrease in average unit fuel costs for natural gas from $1.69
per MMbtu in 1997 to $1.63 per MMbtu in 1998 as a result of lower priced spot
market natural gas. The decrease in fuel expenses was offset in part as a result
of 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 Versus Texas Utilities Electric Company
(Docket No. 17285). Fuel expense was also affected by an increase in natural gas
generation associated with weather-related demand. Purchased power expense
increased $9.6 million for 1998 compared to 1997 due primarily to an increase in
economy energy purchases.
Other operating expenses decreased $16.7 million, or 11%, to $140.5
million during 1998 when compared to 1997. The decrease is 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 Versus Texas Utilities Electric Company (Docket No.
17285). The decrease was also affected by the absence in 1998 of costs in 1997
associated with a canceled transmission project of $10.2 million, the write-off
of previously capitalized energy efficiency incentives of $4.2 million and the
write-off of obsolete inventory of $1.2 million. The decrease was offset in part
by increased expenses in 1998 related to a transmission coordination agreement
currently pending before the FERC. See NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS - Transmission Coordination Agreement. Maintenance expenses
increased $7.2 million, or 16%, as a result of increased power station
maintenance, wind storm damage and additional tree-trimming maintenance
expenses. Depreciation and amortization expense increased $3.3 million, or 3%,
during 1998 when compared to 1997 due primarily to increases in depreciable and
amortizable plant. Operating income taxes increased $8.3 million, or 21%, as a
result of increased pre-tax income.
Other income and deductions decreased $1.6 million for 1998 compared to
1997 due primarily to the absence in 1998 of a $ 1.1 million, net of tax, gain
on the sale of lignite properties recorded in 1997.
2-127
Interest charges increased $4.6 million due primarily to distributions on
Trust Preferred Securities, which were outstanding for a portion of 1997.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1997 AND 1996
Net income for common stock increased 45% during 1997 to $92.3 million
from $63.5 million in 1996. The increase resulted primarily from the absence in
1997 of a one-time charge associated with certain investments for plant sites,
engineering studies and lignite reserves of $21.8 million, net of tax.
Electric operating revenues increased $19.1 million, or 2%, to $939.9
million in 1997 from $920.8 million in 1996. The increase was due primarily to
an increase in non-fuel revenue of $31.5 million, including $15.9 million in
non-fuel wholesale sales, as a result of increased retail customer usage and
customer growth, offset in part by a $12.4 million decrease in fuel revenue.
Fuel and purchased power expense decreased for 1997 when compared to 1996.
Fuel expense decreased $6.1 million, or 2%, due primarily to a decrease in
average unit fuel costs from $1.76 per MMbtu in 1996 to $1.69 per MMbtu in 1997,
which resulted from lower coal transportation charges as well as purchases of
lower priced spot market coal. A decrease in natural gas generation because of
its relatively higher cost per MMbtu also contributed to the lower fuel expense
for 1997. Purchased power expenses decreased $1.2 million, or 5%, during 1997
when compared to 1996 due primarily to a decrease in economy energy purchases.
Other operating expenses increased $15.6 million, or 11%, to $157.2
million during 1997 when compared to 1996. The increase is due primarily to
costs associated with a canceled transmission project of $10.2 million, the
write-off of previously capitalized energy efficiency incentives of $4.2 million
and the write-off of obsolete inventory of $1.2 million. Operating expenses were
also positively affected by a decrease in pension expenses. See NOTE 5. BENEFIT
PLANS for additional information related to changes in the pension plan.
Depreciation and amortization expense increased $3.7 million, or 4%, during 1997
when compared to 1996 due primarily to increases in depreciable plant. Taxes,
other than income, increased $5.6 million, or 11%, during 1997 when compared to
1996 due primarily to an increase in ad valorem taxes due to higher assessed
values and the expiration of a 10-year exemption on one of SWEPCO's power
plants.
Other income and deductions increased $25.2 million for 1997 compared to
1996 due primarily to a onetime charge associated with certain investments for
plant sites, engineering studies and lignite reserves of $21.8 million, net of
tax, recorded in 1996, and a $1.1 million, net of tax, gain on the sale of
lignite properties recorded in 1997.
Interest expense on long-term debt decreased $3.6 million due to
retirement of long-term debt in 1997. Interest expense on short-term debt
decreased $2.6 million resulting from decreased short-term debt outstanding.
Offsetting these decreases were the distributions on newly-issued Trust
Preferred Securities of $5.6 million. See NOTE 10. TRUST PREFERRED SECURITIES
for additional information on the new securities.
2-128
SWEPCO
Consolidated Statements of Income
Southwestern Electric Power Company
- --------------------------------------------------------------------------------
For the Years Ended December 31,
---------------------------------------------
1998 1997 1996
------------ ------------ ------------
(thousands)
Electric Operating Revenues
Residential $ 314,600 $ 289,723 $ 290,020
Commercial 197,737 192,115 189,954
Industrial 253,458 263,207 262,878
Sales for resale 139,869 146,916 134,836
Other 47,288 47,908 43,098
------------ ------------ ------------
952,952 939,869 920,786
------------ ------------ ------------
Operating Expenses and Taxes
Fuel 371,414 382,404 388,450
Purchased power 35,483 25,928 27,160
Other operating 140,460 157,188 141,542
Maintenance 51,219 44,038 43,742
Depreciation and amortization 98,479 95,228 91,566
Taxes, other than income 57,128 55,962 50,373
Income taxes 47,982 39,712 39,870
------------ ------------ ------------
802,165 800,460 782,703
------------ ------------ ------------
Operating Income 150,787 139,409 138,083
------------ ------------ ------------
Other Income and Deductions
Charges for investments and plant development costs -- (743) (29,700)
Allowance for equity funds used during construction 1,336 934 325
Other (753) 1,616 (623)
Non-operating income taxes 1,868 2,222 8,820
------------ ------------ ------------
2,451 4,029 (21,178)
------------ ------------ ------------
Income Before Interest Charges 153,238 143,438 116,905
------------ ------------ ------------
Interest Charges
Interest on long-term debt 39,233 40,440 44,066
Distributions on Trust Preferred Securities 8,662 5,582 --
Interest on short-term debt and other 8,591 5,736 8,381
Allowance for borrowed funds used during construction (1,351) (1,222) (2,098)
------------ ------------ ------------
55,135 50,536 50,349
------------ ------------ ------------
Net Income 98,103 92,902 66,556
Less: Preferred stock dividends 705 2,467 3,053
Gain/(Loss) on reacquired preferred stock (856) 1,819 --
------------ ------------ ------------
Net Income for Common Stock $ 96,542 $ 92,254 $ 63,503
============ ============ ============
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
2-129
SWEPCO
Consolidated Statements of Retained Earnings
Southwestern Electric Power Company
- --------------------------------------------------------------------------------
For the Years Ended December 31,
-----------------------------------------------
1998 1997 1996
------------- ------------- -------------
(thousands)
Retained Earnings at Beginning of Year $ 324,050 $ 321,801 $ 302,334
Net income for common stock 96,542 92,254 63,503
Loss on reacquisition of preferred stock -- (5) (36)
Deduct: Common stock dividends 120,000 90,000 44,000
------------- ------------- -------------
Retained Earnings at End of Year $ 300,592 $ 324,050 $ 321,801
============= ============= =============
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
2-130
SWEPCO
Consolidated Balance Sheets
Southwestern Electric Power Company
- --------------------------------------------------------------------------------
As of December 31,
------------------------------------
1998 1997
---------------- ---------------
(thousands)
ASSETS
Electric Utility Plant
Production $ 1,397,924 $ 1,391,676
Transmission 474,035 456,401
Distribution 916,293 870,378
General 321,136 311,323
Construction work in progress 48,523 51,665
---------------- ---------------
3,157,911 3,081,443
Less - Accumulated depreciation 1,317,057 1,225,865
---------------- ---------------
1,840,854 1,855,578
---------------- ---------------
Current Assets
Cash and temporary cash investments 4,444 2,298
Accounts receivable 40,430 81,507
Materials and supplies, at average cost 25,135 24,523
Fuel inventory 40,238 26,415
Under-recovered fuel costs -- 13,013
Accumulated deferred income taxes 4,869 --
Prepayments and other 16,651 13,678
---------------- ---------------
131,767 161,434
---------------- ---------------
Deferred Charges and Other Assets 76,899 77,734
---------------- ---------------
$ 2,049,520 $ 2,094,746
================ ===============
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
2-131
SWEPCO
Consolidated Balance Sheets
Southwestern Electric Power Company
- --------------------------------------------------------------------------------
As of December 31,
----------------------------------------
1998 1997
--------------- ---------------
CAPITALIZATION AND LIABILITIES (thousands)
Capitalization
Common stock: $18 par value
Authorized: 7,600,000 shares
Issued and outstanding: 7,536,640 shares $ 135,660 $ 135,660
Paid-in capital 245,000 245,000
Retained earnings 300,592 324,050
--------------- ---------------
Total Common Stock Equity 681,252 52% 704,710 51%
--------------- ---------------
Preferred stock
Not subject to mandatory redemption 4,707 4,709
Subject to mandatory redemption -- 25,930
--------------- ---------------
4,707 1% 30,639 2%
SWEPCO-obligated, mandatorily redeemable preferred securities
of subsidiary trust holding solely Junior Subordinated
Debentures of SWEPCO 110,000 8% 110,000 8%
Long-term debt 506,939 39% 547,751 39%
--------------- ------- --------------- -------
Total Capitalization 1,302,898 100% 1,393,100 100%
--------------- ------- --------------- -------
Current Liabilities
Long-term debt and preferred stock due within twelve months 43,932 3,555
Advances from affiliates 40,705 25,175
Accounts payable 73,507 73,582
Payables to affiliates 37,795 63,583
Customer deposits 13,316 14,359
Accrued taxes 23,189 12,884
Accumulated deferred income taxes -- 4,594
Accrued interest 14,275 13,425
Over-recovered fuel costs 5,378 --
Other 12,538 9,551
--------------- ---------------
264,635 220,708
--------------- ---------------
Deferred Credits
Accumulated deferred income taxes 398,664 395,909
Investment tax credits 62,213 66,845
Income tax related regulatory liabilities, net 4,931 10,072
Other 16,179 8,112
--------------- ---------------
481,987 480,938
--------------- ---------------
$ 2,049,520 $ 2,094,746
=============== ===============
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
2-132
SWEPCO
Consolidated Statements of Cash Flows
Southwestern Electric Power Company
- --------------------------------------------------------------------------------
For the Years Ended December 31,
-----------------------------------------------
1998 1997 1996
------------- ------------- -------------
(thousands)
OPERATING ACTIVITIES
Net Income $ 98,103 $ 92,902 $ 66,556
Non-cash Items Included in Net Income
Depreciation and amortization 104,047 100,015 101,204
Deferred income taxes and investment tax credits (16,481) (6,907) (1,881)
Charges for investments and assets 2,140 16,493 29,590
Inventory reserve -- 1,150 1,632
Changes in Assets and Liabilities
Accounts receivable 41,077 (13,367) (13,512)
Fuel inventory (13,823) 29,360 17,501
Accounts payable 260 24,374 12,253
Payables to affiliates (25,788) (5,125) 16,234
Accrued taxes 10,305 (12,357) (27)
Other current liabilities 2,987 (17,699) (3,076)
Fuel recovery 18,391 (3,893) (18,043)
Other 5,245 (4,458) (8,506)
------------- ------------- -------------
226,463 200,488 199,925
------------- ------------- -------------
INVESTING ACTIVITIES
Construction expenditures (83,120) (108,126) (92,737)
Other (5,202) (4,545) (7,510)
------------- ------------- -------------
(88,322) (112,671) (100,247)
------------- ------------- -------------
FINANCING ACTIVITIES
Proceeds from sale of long-term debt -- -- 79,346
Reacquisition of long-term debt -- -- (83,334)
Redemption of preferred stock (27,988) (16,043) (1,236)
Proceeds from issuance of Trust Preferred Securities -- 106,231 --
Retirement of long-term debt (2,354) (52,600) (3,901)
Change in advances from affiliates 15,530 (32,320) (43,734)
Payment of dividends (121,183) (92,666) (46,642)
------------- ------------- -------------
(135,995) (87,398) (99,501)
------------- ------------- -------------
Net Change in Cash and Cash Equivalents 2,146 419 177
Cash and Cash Equivalents at Beginning of Year 2,298 1,879 1,702
------------ ------------- -------------
Cash and Cash Equivalents at End of Year $ 4,444 $ 2,298 $ 1,879
============= ============= =============
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on Trust Preferred Securities) $ 50,341 $ 49,847 $ 53,231
============= ============= =============
Income taxes paid $ 57,977 $ 57,715 $ 35,549
============= ============= =============
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
2-133
SWEPCO
Consolidated Statements of Capitalization
Southwestern Electric Power Company
- --------------------------------------------------------------------------------
As of December 31,
-----------------------------------
1998 1997
--------------- ----------------
(thousands)
COMMON STOCK EQUITY $ 681,252 $ 704,710
--------------- ----------------
PREFERRED STOCK
Cumulative $100 Par Value, Authorized 1,860,000 shares
Number of Shares Current
Series Outstanding Redemption Price
- --------------------------------------------------------------------------------
Not Subject to Mandatory Redemption
5.00% 37,729 $109.00 3,773 3,775
4.65% 1,908 $102.75 191 191
4.28% 7,386 $103.90 739 739
Premium 4 4
--------------- ----------------
4,707 4,709
--------------- ----------------
Subject to Mandatory Redemption
6.95% -- -- -- 27,401
Issuance Expense -- (271)
Amount to be redeemed within one year -- (1,200)
--------------- ----------------
-- 25,930
--------------- ----------------
4,707 30,639
--------------- ----------------
TRUST PREFERRED SECURITIES
SWEPCO-obligated, mandatorily redeemable
preferred securities of subsidiary
trust holding solely Junior
Subordinated Debentures of
SWEPCO, 7.875%, due April 30, 2037 110,000 110,000
--------------- ----------------
LONG-TERM DEBT
First Mortgage Bonds
Series V, 7 3/4%, due June 1, 2004 40,000 40,000
Series W, 6 1/8%, due September 1, 1999 40,000 40,000
Series X, 7%, due September 1, 2007 90,000 90,000
Series Y, 6 5/8%, due February 1, 2003 55,000 55,000
Series Z, 7 1/4%, due July 1, 2023 45,000 45,000
Series AA, 5 1/4%, due April 1, 2000 45,000 45,000
Series BB, 6 7/8%, due October 1, 2025 80,000 80,000
1976 Series A, 6.20%,
due November 1, 2006 (Siloam Springs) * 6,085 6,230
1976 Series B, 6.20%,
due November 1, 2006 (Siloam Springs) * 1,000 1,000
Installment Sales Agreements - PCRBs *
1978 Series A, 6%,
due January 1, 2008 (Titus County) 14,420 14,420
1991 Series A, 8.2%,
due August 1, 2011 (Titus County) 17,125 17,125
1991 Series B, 6.9%,
due November 1, 2004 (Titus County) 12,290 12,290
Series 1992, 7.6%, due January 1, 2019 (DeSoto) 53,500 53,500
Series 1996, 6.1%, due April 1, 2018 (Sabine) 81,700 81,700
Railcar lease obligations 5,549 7,759
Unamortized discount and premium 1,005 955
Unamortized costs of reacquired debt (36,803) (39,873)
Amount to be redeemed within one year (43,932) (2,355)
--------------- ----------------
506,939 547,751
--------------- ----------------
TOTAL CAPITALIZATION $ 1,302,898 $ 1,393,100
=============== ================
*Obligations incurred in connection with the sale by public authorities of
tax-exempt PCRBs.
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
2-134
SOUTHWESTERN ELECTRIC POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See CSW's NOTE 1.
2. LITIGATION AND REGULATORY PROCEEDINGS See CSW's NOTE 2.
3. COMMITMENTS AND CONTINGENT LIABILITIES See CSW's NOTE 3.
4. INCOME TAXES See CSW's NOTE 4.
5. BENEFIT PLANS See CSW's NOTE 5.
6. JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6.
7. FINANCIAL INSTRUMENTS See CSW's NOTE 7.
8. LONG-TERM DEBT See CSW's NOTE 8.
9. PREFERRED STOCK See CSW's NOTE 9.
10. TRUST PREFERRED SECURITIES See CSW's NOTE 10.
11. SHORT-TERM FINANCING See CSW's NOTE 11.
12. STOCK BASED COMPENSATION PLANS See CSW's NOTE 13.
13. NEW ACCOUNTING STANDARDS See CSW's NOTE 18.
2-135
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Southwestern Electric Power
Company:
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of Southwestern Electric Power Company
(a Delaware corporation and a wholly-owned subsidiary of Central and South West
Corporation) and subsidiary company as of December 31, 1998 and 1997, and the
rated consolidated statements of income, retained earnings and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of Southwestern Electric Power Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Southwestern
Electric Power Company and subsidiary company as of December 31, 1998 and 1997,
and the results of their operations and cash flows for each of the three years
in the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Dallas, Texas
February 12, 1999
2-136
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and objectivity
of the consolidated financial statements of Southwestern Electric Power Company
and its subsidiary company as well as other information contained in this Annual
Report. The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis and,
in some cases, reflect amounts based on the best estimates and judgments of
management, giving due consideration to materiality. Financial information
contained elsewhere in this Annual Report is consistent with that in the
financial statements.
The financial statements have been audited by SWEPCO's independent public
accountants who were given unrestricted access to all financial records and
related data, including minutes of all meetings of shareholders, the board of
directors and committees of the board. SWEPCO and its subsidiary believe that
representations made to the independent public accountants during their audit
were valid and appropriate. The report of independent public accountants is
presented elsewhere in this report.
SWEPCO, together with its subsidiary, maintains a system of internal
controls to provide reasonable assurance that transactions are executed in
accordance with management's authorization, that the consolidated financial
statements are prepared in accordance with generally accepted accounting
principles and that the assets of the companies are properly safeguarded against
unauthorized acquisition, use or disposition. The system includes a documented
organizational structure and division of responsibility, established policies
and procedures including a policy on ethical standards which provides that
SWEPCO will maintain the highest legal and ethical standards, and the careful
selection, training and development of our employees.
Internal auditors continuously monitor the effectiveness of the internal
control system following standards established by the Institute of Internal
Auditors. Actions are taken by management to respond to deficiencies as they are
identified. The board, operating through its audit committee, which is comprised
entirely of directors who are not officers or employees of SWEPCO or its
subsidiary, provides oversight to the financial reporting process.
Due to the inherent limitations in the effectiveness of internal controls,
no internal control system can provide absolute assurance that errors will not
occur. However, management strives to maintain a balance, recognizing that the
cost of such a system should not exceed the benefits derived.
SWEPCO and its subsidiary believe that, in all material respects, their
system of internal controls over financial reporting and over safeguarding of
assets against unauthorized acquisition, use or disposition functioned
effectively as of December 31, 1998.
/s/ Michael H. Madison /s/ R. Russell Davis
Michael H. Madison R. Russell Davis
President - SWEPCO Controller - SWEPCO
2-137
WEST TEXAS UTILITIES COMPANY
2-138
SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended
December 31 is provided to highlight significant trends in the financial
condition and results of operations for WTU. Certain financial statement items
for prior years have been reclassified to conform to the most recent period
presented.
--------------------------------------------------
1998 (1) 1997 (1) 1996 (1) 1995 1994
(thousands, except ratios)
INCOME STATEMENT DATA
Revenues $424,953 $397,778 $377,057 $319,835 $342,991
Net Income 37,814 21,461 16,571 34,530 37,366
Net Income for Common Stock 37,710 22,402 16,307 34,266 36,914
BALANCE SHEET DATA
Assets 798,504 802,148 810,379 815,614 771,977
Long-term obligations 282,211 278,640 275,070 273,245 210,047
Capitalization ratios
Common stock equity 48% 48% 48% 49% 56%
Preferred stock -- -- 1 1 1
Long-term debt 52 52 51 50 43
Ratio of earnings to fixed
charges 3.33 2.21 2.05 2.63 3.37
(SEC Method)
(1) See WEST TEXAS UTILITIES COMPANY - RESULTS OF OPERATIONS for major factors
affecting earnings.
2-139
WEST TEXAS UTILITIES COMPANY
RESULTS OF OPERATIONS
Reference is made to WTU's Financial Statements, related Notes to
Financial Statements and Selected Financial Data. Referenced information should
be read in conjunction with, and is essential to understanding, the following
discussion and analysis.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Net income for common stock for 1998 was $37.7 million compared to $22.4
million for 1997, an increase of $15.3 million or 68%. The increase in net
income was due primarily to higher non-fuel revenue. This increase was partially
offset by higher maintenance expenses and income taxes. The increase in net
income was also offset in part by the absence in 1998 of the recognition of the
gain on reacquired preferred stock in 1997.
Electric operating revenues were $425.0 million for 1998, an increase of
$27.2 million, or 7%, when compared to the year ended 1997. This increase was
due primarily to an increase in fuel and non-fuel related revenues of $4.5
million and $22.7 million, respectively. The increase in non-fuel related
revenues was due primarily to a 4% increase in retail MWH sales resulting from
favorable weather-related demand. Included in non-fuel related revenues were
additional transmission related revenues resulting from changes to open access
tariff transmission and a transmission coordination agreement currently pending
before the FERC. Conversely, non-fuel related revenues were decreased by a
transmission service agreement adjustment related to the final order in Texas
Commission Docket No. 17285. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS -
Transmission Coordination Agreement and CPL and WTU Complaint Versus Texas
Utilities Electric Company (Docket No. 17285). The increase in fuel-related
revenues was attributable to higher fuel costs as discussed below.
Fuel expense increased to $122.8 million for 1998 from $119.2 million
compared to 1997 due primarily to a 6% increase in generation. The increase in
generation was due largely to a 4% increase in MWH sales. Partially offsetting
the increase was lower average unit cost of fuel. The average unit cost of fuel
declined from $1.98 per MMbtu in 1997 to $1.83 per MMbtu in 1998. This decline
in the average unit costs of fuel was due primarily to lower spot market natural
gas and coal prices. Purchased power expense declined $2.4 million, or 5%, for
1998 compared to 1997 as a result of decreased economy energy purchases.
Other operating expenses declined $3.9 million in 1998 when compared to
1997 resulting from a reduction in transmission expenses resulting 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 Versus Texas Utilities Electric Company (Docket No. 17285)
for additional information on the transmission service agreement. Additionally,
other operating expenses also decreased due to lower employee-related expenses.
The decrease was offset in part by higher production related expenses resulting
from the increased utilization of generating stations to meet increased
weather-related customer demand. Maintenance expenses rose $2.7 million from
1997 as a result of increased unplanned power plant maintenance activity.
Operating income taxes were $20.6 million for 1998 compared to $9.4
million in 1997 for an increase of $11.2 million as a result of higher pre-tax
income.
Other income and deductions increased $1.2 million due to an increase in
interest income on temporary cash investments, merchandise sales and
under-recovered fuel cost.
2-140
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1997 AND 1996
Net income for common stock increased 37% during 1997 to $22.4 million
from $16.3 million in 1996. The increase resulted primarily from the absence of
a one-time charge incurred in 1996 associated with certain investments for plant
sites, engineering studies, and lignite reserves of approximately $10.9 million,
net of tax, and the gain on reacquisition of preferred stock of $1.1 million
recognized in 1997.
Electric operating revenues increased $20.7 million, or 6%, in 1997 when
compared to 1996. The increase was due primarily to a $16.0 million increase in
transmission revenues as a result of the January 1997 implementation of open
access tariffs in accordance with FERC Order No. 888 and the Texas Commission
rules regarding transmission access and pricing. Also contributing to the
increase was a 4% increase in total MWH sales. The impact on net income of the
transmission revenues was offset by a corresponding increase of $17.2 million in
transmission expense related to these transmission activities. Also contributing
to the increase was $2.8 million in additional fuel revenues due to higher
purchased power expense as discussed below.
Fuel expense decreased $12.9 million, or 10%, for 1997 compared to 1996
due to lower-priced spot market coal and a 16% decrease in natural gas
generation. This decrease was also reflected by a decline in the average unit
cost of fuel to $1.98 per MMbtu in 1997 from $2.02 per MMbtu in 1996. Purchased
power expenses increased $18.7 million for 1997 as compared to 1996, primarily
as a result of additional economy purchases at a higher cost per MWH.
Other operating expense increased $26.7 million, or 40%, for 1997 compared
to 1996 due primarily to a $17.2 million increase in transmission expenses as a
result of the Texas Commission rules regarding transmission access and pricing.
Also contributing to the increase was a $5.2 million write-off of previously
capitalized demand side management energy efficiency incentives and the
write-off of obsolete inventory for $1.5 million. Partially offsetting the
increase in other operating expense was a decrease in pension expense for 1997
compared to 1996. See NOTE 5. BENEFIT PLANS for additional information related
to changes in the pension plan. Depreciation and amortization increased $1.8
million, or 4.6%, as a result of an increase in depreciable plant. Taxes, other
than income increased $1.3 million due to changes in ad valorem, local
franchise, and gross receipt taxes. Income taxes decreased $5.8 million in 1997
compared to 1996 due primarily to lower pre-tax income in 1997 and timing
differences.
Other income and deductions increased $11.4 million for 1997 compared to
1996 as a result of the absence in 1997 of a one-time charge incurred in 1996
associated with certain investments for plant sites, engineering studies, and
lignite reserves of $10.9 million, net of tax.
2-141
WTU
Statements of Income
West Texas Utilities Company
- --------------------------------------------------------------------------------
For the Years Ended December 31,
------------------------------------------------
1998 1997 1996
-------------- ------------- -------------
(thousands)
Electric Operating Revenues
Residential $ 134,204 $ 124,578 $ 124,214
Commercial 76,155 73,196 72,422
Industrial 51,715 56,928 52,375
Sales for resale 97,560 88,814 88,921
Other 65,319 54,262 39,125
-------------- ------------- -------------
424,953 397,778 377,057
-------------- ------------- -------------
Operating Expenses and Taxes
Fuel 122,836 119,158 132,034
Purchased power 48,131 50,493 31,803
Other operating 89,924 93,796 68,869
Maintenance 16,666 14,013 14,122
Depreciation and amortization 42,750 41,592 39,755
Taxes, other than income 24,638 24,669 23,402
Income taxes 20,643 9,490 15,338
-------------- ------------- -------------
365,588 353,211 325,323
-------------- ------------- -------------
Operating Income 59,365 44,567 51,734
-------------- ------------- -------------
Other Income and Deductions
Charges for investments and plant development costs -- -- (14,949)
Allowance for equity funds used during construction 678 227 423
Other 1,580 766 210
Non-operating income taxes 454 471 4,394
-------------- ------------- -------------
2,712 1,464 (9,922)
-------------- ------------- -------------
Income Before Interest Charges 62,077 46,031 41,812
-------------- ------------- -------------
Interest Charges
Interest on long-term debt 20,352 20,352 21,169
Interest on short-term debt and other 4,580 4,911 4,925
Allowance for borrowed funds used during construction (669) (693) (853)
-------------- ------------- -------------
24,263 24,570 25,241
-------------- ------------- -------------
Net Income 37,814 21,461 16,571
Less: Preferred stock dividends 104 144 264
Gain on Reaquired Preferred Stock -- 1,085 --
-------------- ------------- -------------
Net Income for Common Stock $ 37,710 $ 22,402 $ 16,307
============== ============= =============
The accompanying notes to financial statements as they relate to
WTU are an integral part of these statements.
2-142
WTU
Statements of Retained Earnings
West Texas Utilities Company
- --------------------------------------------------------------------------------
For the Years Ended December 31,
-----------------------------------------------
1998 1997 1996
------------- ------------- -------------
(thousands)
Retained Earnings at Beginning of Year $ 119,479 $ 123,077 $ 125,770
Net income for common stock 37,710 22,402 16,307
Deduct: Common stock dividends 40,000 26,000 19,000
------------- ------------- -------------
Retained Earnings at End of Year $ 117,189 $ 119,479 $ 123,077
============= ============= =============
The accompanying notes to financial statements as they relate to
WTU are an integral part of these statements.
2-143
WTU
Balance Sheets
West Texas Utilities Company
- --------------------------------------------------------------------------------
As of December 31,
------------------------------------
1998 1997
---------------- ---------------
(thousands)
ASSETS
Electric Utility Plant
Production $ 429,896 $ 417,849
Transmission 213,630 208,905
Distribution 382,373 363,911
General 108,878 104,026
Construction work in progress 11,805 14,154
---------------- ---------------
1,146,582 1,108,845
Less - Accumulated depreciation 473,503 441,281
---------------- ---------------
673,079 667,564
---------------- ---------------
Current Assets
Cash 2,093 811
Advances to affiliates -- 19,802
Accounts receivable 31,689 10,570
Materials and supplies, at average cost 14,191 14,246
Fuel inventory 13,186 12,471
Accumulated deferred income taxes 366 --
Under-recovered fuel costs 3,980 11,968
Prepayments and other 5,988 4,006
---------------- ---------------
71,493 73,874
---------------- ---------------
Deferred Charges and Other Assets
Deferred Oklaunion costs 14,910 18,637
Restructuring costs 7,079 8,966
Other 31,943 33,107
---------------- ---------------
53,932 60,710
---------------- ---------------
$ 798,504 $ 802,148
================ ===============
The accompanying notes to financial statements as they relate to WTU
are an integral part of these statements.
2-144
WTU
Balance Sheets
West Texas Utilities Company
- --------------------------------------------------------------------------------
As of December 31,
----------------------------------------
1998 1997
--------------- ---------------
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 117,189 119,479
--------------- ---------------
Total Common Stock Equity 256,639 48% 258,929 48%
--------------- ------- --------------- -------
Preferred stock 2,482 --% 2,483 --%
Long-term debt 282,211 52% 278,640 52%
--------------- ------- --------------- -------
Total Capitalization 541,332 100% 540,052 100
--------------- ------- --------------- -------
Current Liabilities
Advances from affiliates 4,573 --
Payables to affiliates 19,917 21,569
Accounts payable 31,473 29,522
Accrued taxes 10,031 11,375
Accumulated deferred income taxes -- 203
Accrued interest 4,125 4,525
Other 3,797 3,859
--------------- ---------------
73,916 71,053
--------------- ---------------
Deferred Credits
Accumulated deferred income taxes 140,731 149,346
Investment tax credits 26,597 27,918
Income tax related regulatory liabilities, net 12,088 9,482
Other 3,840 4,297
--------------- ---------------
183,256 191,043
--------------- ---------------
$ 798,504 $ 802,148
=============== ===============
The accompanying notes to financial statements as they relate to WTU
are an integral part of these statements.
2-145
WTU
Statements of Cash Flows
West Texas Utilities Company
- --------------------------------------------------------------------------------
For the Years Ended December 31,
--------------------------------------------
1998 1997 1996
------------- ------------ ------------
(thousands)
OPERATING ACTIVITIES
Net Income $ 37,814 $ 21,461 $ 16,571
Non-cash Items Included in Net Income
Depreciation and amortization 43,826 43,138 41,342
Deferred income taxes and investment tax credits (7,899) (2,275) 4,397
Charges for investments and assets 1,527 5,296 14,905
Inventory reserve -- 1,498 809
Changes in Assets and Liabilities
Accounts receivable (21,119) 13,553 4,800
Fuel inventory (715) 4,203 (2,848)
Accounts payable 1,952 (4,182) 584
Payables to affiliates (1,652) 7,991 5,334
Accrued taxes (1,344) (2,088) 281
Fuel recovery 7,988 (3,007) (11,917)
Other deferred credits (457) 13,284 (5,482)
Other (261) (3,626) 1,987
------------- ------------ ------------
59,660 95,246 70,763
------------- ------------ ------------
INVESTING ACTIVITIES
Construction expenditures (36,867) (31,817) (42,453)
Other (5,782) 261 (1,795)
------------- ------------ ------------
(42,649) (31,556) (44,248)
------------- ------------ ------------
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt -- -- 43,256
Reacquisition of long-term debt -- -- (45,639)
Redemption of preferred stock -- (2,724) --
Payment of dividends (40,104) (26,184) (19,198)
Change in advances from affiliates 4,573 (14,833) (4,987)
------------- ------------ ------------
(35,531) (43,741) (26,568)
------------- ------------ ------------
Net Change in Cash and Cash Equivalents (18,520) 19,949 (53)
Cash and Cash Equivalents at Beginning of Year 20,613 664 717
------------- ------------ ------------
Cash and Cash Equivalents at End of Year $ 2,093 $ 20,613 $ 664
============= ============ ============
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $ 17,250 $ 19,659 $ 20,248
============= ============ ============
Income taxes paid $ 29,533 $ 15,710 $ 6,295
============= ============ ============
The accompanying notes to financial statements as they relate to WTU
are an integral part of these statements.
2-146
WTU
Statements of Capitalization
West Texas Utilities Company
- --------------------------------------------------------------------------------
As of December 31,
------------------------------
1998 1997
------------- --------------
(thousands)
COMMON STOCK EQUITY $ 256,639 $ 258,929
------------- --------------
PREFERRED STOCK
Cumulative $100 Par Value, Authorized 810,000 shares
Number Current
of Shares Redemption
Series Outstanding Price
- -----------------------------------------
4.40% 23,675 $107.00 2,367 2,368
Premium 115 115
------------- --------------
2,482 2,483
------------- --------------
LONG-TERM DEBT
First Mortgage Bonds
Series P, 7 3/4%, due June 1, 2007 25,000 25,000
Series Q, 6 7/8%, due October 1, 2002 35,000 35,000
Series R, 7%, due October 1, 2004 40,000 40,000
Series S, 6 1/8%, due February 1, 2004 40,000 40,000
Series T, 7 1/2%, due April 1, 2000 40,000 40,000
Series U, 6 3/8%, due October 1, 2005 80,000 80,000
Installment Sales Agreements - PCRBs *
Series 1996, 6%, due June 1, 2020 (Red River) 44,310 44,310
Unamortized discount (792) (960)
Unamortized costs of reacquired debt (21,307) (24,710)
------------- --------------
282,211 278,640
------------- --------------
TOTAL CAPITALIZATION $ 541,332 $ 540,052
============= ==============
*Obligations incurred in connection with the sale by public authorities of
tax-exempt PCRBs.
The accompanying notes to financial statements as they relate to WTU
are an integral part of these statements.
2-147
WEST TEXAS UTILITIES COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See CSW's NOTE 1.
2. LITIGATION AND REGULATORY PROCEEDINGS See CSW's NOTE 2.
3. COMMITMENTS AND CONTINGENT LIABILITIES See CSW's NOTE 3.
4. INCOME TAXES See CSW's NOTE 4.
5. BENEFIT PLANS See CSW's NOTE 5.
6. JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6.
7. FINANCIAL INSTRUMENTS See CSW's NOTE 7.
8. LONG-TERM DEBT See CSW's NOTE 8.
9. PREFERRED STOCK See CSW's NOTE 9.
10. SHORT-TERM FINANCING See CSW's NOTE 11.
11. STOCK BASED COMPENSATION PLANS See CSW's NOTE 13.
12. NEW ACCOUNTING STANDARDS See CSW's NOTE 18.
2-148
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of West Texas Utilities Company:
We have audited the accompanying balance sheets and statements of
capitalization of West Texas Utilities Company (a Texas corporation and a
wholly-owned subsidiary of Central and South West Corporation) as of December
31, 1998 and 1997, and the related statements of income, retained earnings and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of West Texas Utilities
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of West Texas Utilities Company
as of December 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Dallas, Texas
February 12, 1999
2-149
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and objectivity
of the financial statements of West Texas Utilities Company as well as other
information contained in this Annual Report. The financial statements have been
prepared in conformity with generally accepted accounting principles applied on
a consistent basis and, in some cases, reflect amounts based on the best
estimates and judgments of management, giving due consideration to materiality.
Financial information contained elsewhere in this Annual Report is consistent
with that in the financial statements.
The financial statements have been audited by WTU's independent public
accountants who were given unrestricted access to all financial records and
related data, including minutes of all meetings of shareholders, the board of
directors and committees of the board. WTU believes that representations made to
the independent public accountants during their audit were valid and
appropriate. The report of independent public accountants is presented elsewhere
in this report.
WTU maintains a system of internal controls to provide reasonable
assurance that transactions are executed in accordance with management's
authorization, that the financial statements are prepared in accordance with
generally accepted accounting principles and that the assets of the companies
are properly safeguarded against unauthorized acquisition, use or disposition.
The system includes a documented organizational structure and division of
responsibility, established policies and procedures including a policy on
ethical standards which provides that WTU will maintain the highest legal and
ethical standards, and the careful selection, training and development of our
employees.
Internal auditors continuously monitor the effectiveness of the internal
control system following standards established by the Institute of Internal
Auditors. Actions are taken by management to respond to deficiencies as they are
identified. The board, operating through its audit committee, which is comprised
entirely of directors who are not officers or employees of WTU, provides
oversight to the financial reporting process.
Due to the inherent limitations in the effectiveness of internal controls,
no internal control system can provide absolute assurance that errors will not
occur. However, management strives to maintain a balance, recognizing that the
cost of such a system should not exceed the benefits derived.
WTU believes that, in all material respects, its system of internal
controls over financial reporting and over safeguarding of assets against
unauthorized acquisition, use or disposition functioned effectively as of
December 31, 1998.
/s/ Paul J. Brower /s/ R. Russell Davis
Paul J. Brower R. Russell Davis
General Manager/President - WTU Controller - WTU
2-150
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
CSW None.
CPL None.
PSO None.
SWEPCO None.
WTU None.
2-151
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS.
CSW has filed with the SEC its Proxy Statement relating to its 1999 Annual
Meeting of Stockholders. The information required by ITEM 10, other than with
respect to certain information regarding the executive officers of CSW which is
included in ITEM 1-BUSINESS, is hereby incorporated by reference herein from the
1999 CSW Notice Of Annual Meeting Of Stockholders and Proxy Statement.
(a) Directors of each of the U.S. Electric Operating Companies, together
with certain information with respect to each of them, are listed below. Ages
are as of March 1, 1999.
Name, Age, Principal Year
Occupation, Business Experience First Became
and Other Directorships Director
- --------------------------------------------------------------------------------
CPL
JOHN F. BRIMBERRY AGE - 66 1995
CEO of Professional Insurance Agents, Inc., Victoria, Texas.
E. R. BROOKS AGE - 61 1991
Chairman and CEO of CSW since 1991. Director of CSW and each
of its subsidiaries. President of CSW from 1991 to 1997.
Director of Hubbell, Inc., Orange, Connecticut. Trustee of
Baylor Health Care Center, Dallas, Texas and Hardin-Simmons
University, Abilene, Texas.
GLENN FILES AGE - 51 1996
Senior Vice President of CSW since 1996. President and CEO
of WTU from 1992 to 1996.
RUBEN M. GARCIA AGE - 67 1981
President and CEO of Modem Construction Inc. and Modem
Machine Shop, Inc., Laredo, Texas.
ALPHONSO R. JACKSON AGE - 53 1998
President of CSW-Texas since February 1998. Vice President
of CSW Energy, Inc., from 1996 to 1998. President and CEO of
The Housing Authority of the City of Dallas, Texas, from
1989 to 1996. Director of Chase Bank of Texas N.A., Dallas,
Texas. Director of Chase Bank of Texas, N.A., Houston,
Texas.
ROBERT A. McALLEN AGE - 64 1983
Robert A. McAllen, Insurance Agency, Weslaco, Texas.
3-1
Name, Age, Principal Year
Occupation, Business Experience First Became
and Other Directorships Director
- --------------------------------------------------------------------------------
PETE MORALES, JR. AGE - 58 1990
President of Morales Feed Lots, Inc., Devine, Texas.
H. LEE RICHARDS AGE - 65 1987
Chairman of the Board of Hygeia Dairy Company, Harlingen,
Texas.
J. GONZALO SANDOVAL AGE - 50 1992
General Manager/President of CPL since February 1998.
General Manager of CPL from 1996 to 1998. Vice President,
Operations and Engineering of CPL from 1993 to 1996.
GERALD E. VAUGHN AGE - 56 1993
Chairman for the STPNOC since its formation in September
1997. Vice President, Nuclear of CSW Services since 1994.
Vice President, Nuclear Affairs of CPL from 1993 to 1994.
Each of the directors and executive officers of CPL is elected to hold
office until the first meeting of CPL's Board of Directors after the 1999 Annual
Meeting of Stockholders. CPL's 1999 Annual Meeting of Stockholders is presently
scheduled to be held on April 8, 1999. All outside directors have engaged in
their principal occupations listed above for a period of more than five years,
unless otherwise indicated.
PSO
E. R. BROOKS AGE - 61 1991
Chairman and CEO of CSW since 1991. Director of CSW and each
of its subsidiaries. President of CSW from 1991 to 1997.
Director of Hubbell, Inc., Orange, Connecticut. Trustee of
Baylor Health Care Center, Dallas, Texas and Hardin-Simmons
University, Abilene, Texas.
T. D. CHURCHWELL AGE - 54 1996
President of PSO since 1996. Executive Vice President of WTU
from 1993 to 1996.
HARRY A. CLARKE AGE - 70 1972
General Partner and President of HAC Investments, Afton,
Oklahoma.
GLENN FILES AGE - 51 1996
Senior Vice President of CSW since 1996. President and CEO
of WTU from 1992 to 1996.
3-2
Name, Age, Principal Year
Occupation, Business Experience First Became
and Other Directorships Director
- --------------------------------------------------------------------------------
PAUL K. LACKEY, JR. AGE - 55 1992
Chief of Staff for the Governor of the State of Oklahoma
since 1997. Secretary of Health and Human Services,
Executive Director of the Office of Juvenile Affairs, State
of Oklahoma, from 1995 to 1997. Consultant, Flint
Industries, Inc., a construction, electronics manufacturing,
and environmental services company, Tulsa, Oklahoma, during
a portion of 1995. President, Flint Industries, Inc. from
1986 to 1995. Director of Bank South, Tulsa, Oklahoma.
PAULA MARSHALL-CHAPMAN AGE - 45 1991
President and CEO of Bama Companies, a baked goods products
company, Tulsa, Oklahoma.
WILLIAM R. McKAMEY AGE - 52 1993
General Manager of PSO since 1996. Vice President, Marketing
and Business Development of PSO from 1993 to 1996.
DR. ROBERT B. TAYLOR, JR. AGE - 70 1975
Dentist, Okmulgee, Oklahoma.
Each of the directors and executive officers of PSO is elected to hold office
until the first meeting of PSO's Board of Directors after the 1999 Annual
Meeting of Stockholders. PSO's 1999 Annual Meeting of Stockholders is presently
scheduled to be held on April 20, 1999. All outside directors have engaged in
their principal occupations listed above for a period of more than five years,
unless otherwise indicated.
SWEPCO
KAREN C. ADAMS AGE - 38 1996
General Manager of SWEPCO since 1996. Director of Regulatory
Services at CSW from 1995 to 1996. Administrative Director
of the El Paso Transition Team at CSW from 1993 to 1995.
E. R. BROOKS AGE - 61 1991
Chairman and CEO of CSW since 1991. Director of CSW and each
of its subsidiaries. President of CSW from 1991 to 1997.
Director of Hubbell, Inc., Orange, Connecticut. Trustee of
Baylor Health Care Center, Dallas, Texas and Hardin-Simmons
University, Abilene, Texas.
JAMES E. DAVISON AGE - 61 1993
President and CEO of Davison Terminal Services, Inc.
President and CEO of Davison Motor Company, Inc. President
and CEO of Davison Insurance Company, Inc. All of the above
entities are located in Ruston, Louisiana. Director of Bank
One, Louisiana, Baton Rouge, Louisiana.
3-3
Name, Age, Principal Year
Occupation, Business Experience First Became
and Other Directorships Director
- --------------------------------------------------------------------------------
GLENN FILES AGE - 51 1996
Senior Vice President of CSW since 1996. President and CEO
of WTU from 1992 to 1996.
DR. FREDERICK E. JOYCE AGE - 64 1990
President of Chappell-Joyce Pathology Association, P.A.,
Texarkana, Texas. President of Doctors Diagnostic
Laboratory, Inc., Texarkana, Texas. Director of New Boston
Bank Shares, Inc., New Boston, Texas. Director of Century
Bank, New Boston, Texas.
JOHN M. LEWIS AGE - 59 1997
Chairman and CEO of The Bank of Fayetteville, Fayetteville,
Arkansas.
WILLIAM C. PEATROSS AGE - 55 1990
President and CEO of United Title of Louisiana, Inc.
Director of Deposit Guaranty Bank. Both entities are located
in Shreveport, Louisiana.
MAXINE P. SARPY AGE - 59 1996
Vice President and Office Manager for Sarpy Medical Clinic,
Shreveport, Louisiana.
MICHAEL H. MADISON AGE - 50 1998
President of SWEPCO since April 1998. Programme Director of
SEEBOARD from 1996 to 1998. Vice President, Operations and
Engineering of SWEPCO from 1993 to 1996.
Each of the directors and executive officers of SWEPCO is elected to hold office
until the first meeting of SWEPCO's Board of Directors after the 1999 Annual
Meeting of Stockholders. SWEPCO's 1999 Annual Meeting of Stockholders is
presently scheduled to be held on April 14, 1999. All outside directors have
engaged in their principal occupations listed above for a period
of more than five years, unless otherwise indicated.
WTU
E. R. BROOKS AGE - 61 1991
Chairman and CEO of CSW since 1991. Director of CSW and each
of its subsidiaries. President of CSW from 1991 to 1997.
Director of Hubbell, Inc., Orange, Connecticut. Trustee of
Baylor Health Care Center, Dallas, Texas and Hardin-Simmons
University, Abilene, Texas.
PAUL J. BROWER AGE - 50 1991
General Manager/President of WTU since February 1998.
General Manager of WTU from 1996 to 1998. Vice President,
Marketing and Business Development of WTU from 1991 to 1996.
3-4
Name, Age, Principal Year
Occupation, Business Experience First Became
and Other Directorships Director
- --------------------------------------------------------------------------------
GLENN FILES AGE - 51 1996
Senior Vice President of CSW since 1996. President and CEO
of WTU from 1992 to 1996.
ALPHONSO R. JACKSON AGE - 53 1998
President of CSW-Texas since February 1998. Vice President
of CSW Energy, Inc., from 1996 to 1998. President and CEO of
The Housing Authority of the City of Dallas, Texas, from
1989 to 1996. Director of Chase Bank of Texas N.A., Dallas,
Texas. Director of Chase Bank of Texas, N.A., Houston,
Texas.
TOMMY MORRIS AGE - 64 1976
President of The Tommy Morris Agency, an independent
insurance and investment agency, Abilene, Texas.
DIAN G. OWEN AGE - 58 1994
Chairperson, Mansfeldt Investment Corporation, since 1997.
Chairperson, Dian Graves Owen Foundation, a general purpose
private foundation, since 1996. Consultant, Owen Healthcare,
Inc., a hospital pharmacy management services company from
1997 to present. Corporate Executive/Founder of Owen
Healthcare, Inc., from 1976 to 1997.
JAMES M. PARKER AGE - 68 1987
President and CEO of J. M. Parker and Associates, Inc., an
investment company, Abilene, Texas. Director of First
Financial Bankshares, Inc. and First National Bank of
Abilene, Abilene, Texas.
F. L. STEPHENS AGE - 60 1980
Chairman and CEO of Town & Country Food Stores, Inc., San
Angelo, Texas.
Each of the directors and executive officers of WTU is elected to hold office
until the first meeting of WTU's Board of Directors after the 1999 Annual
Meeting of Stockholders. WTU's 1999 Annual Meeting of Stockholders is presently
scheduled to be held on March 30, 1999. All outside directors have engaged in
their principal occupations listed above for a period of more than five years,
unless otherwise indicated.
3-5
(b) The following is a list of officers who are not directors of the
registrants, together with certain information with respect to each of them:
Year
Name, Age, Principal First Elected to
Occupation and Business Experience Present Position
- --------------------------------------------------------------------------------
U.S. Electric Operating Companies
WENDY G. HARGUS AGE - 41 1996
Treasurer of CSW, CPL, PSO, SWEPCO, WTU and CSW Services
since 1996. Controller of CSW from 1993 to 1996.
R. RUSSELL DAVIS AGE - 42 1994
Controller of CPL, PSO, WTU, SWEPCO and CSW Services since
1994.
CPL
BRENDA L. SNIDER AGE - 45 1996
Corporate Secretary of CPL since 1996. Manager of Planning
and Analysis at CPL since 1996. Senior Financial Consultant
at CPL from 1994 to 1996.
PSO
LINA P. HOLM AGE - 58 1997
Corporate Secretary and Executive Secretary to the President
of PSO since 1997. Executive Secretary to the President and
Assistant Corporate Secretary of PSO from 1992 to 1997.
SWEPCO
MARILYN S. KIRKLAND AGE - 51 1995
Corporate Secretary of SWEPCO since 1995. Executive
Administrator since 1997. Senior Executive Secretary to the
President, from 1992 to 1997.
WTU
MARTHA MURRAY AGE - 53 1992
Corporate Secretary of WTU since 1992.
3-6
ITEM 11. EXECUTIVE COMPENSATION.
Cash and Other Forms of Compensation
CSW
Information required by ITEM 11 with respect to CSW is hereby incorporated
by reference herein from the 1999 CSW Notice Of Annual Meeting Of Stockholders
and Proxy Statement.
The following table sets forth the aggregate cash and other compensation
for services rendered for the fiscal years of 1998, 1997 and 1996 paid or
awarded to the President of each of the U.S. Electric Operating Companies and
the Named Executive Officers as defined below.
Because of the functional restructuring undertaken by CSW during 1996,
certain of the Executive Officers of the U.S. Electric Operating Companies,
Messrs. Files, Bremer, Zemanek and Verret, are not actually employed by any of
the U.S. Electric Operating Companies. Instead, they are employed by CSW
Services and manage CSW business units and perform policy-making functions that
are integral to the U.S. Electric Operating Companies. Therefore, these
individuals are included in the Summary Compensation Table as Named Executive
Officers due to the functional perspective regarding the management of the
companies.
U.S. Electric Operating Companies
SUMMARY COMPENSATION TABLE
Long-Term Compensation
---------------------------------------------------------
Annual Compensation Awards Payouts
----------------------- -------------------- ---------------------------------
Other All
Annual Restricted Securities Other
Name and Compen- Stock Underlying LTIP Compen-
Principal Position Salary Bonus sation Award(s) Options/ Payouts sation
at Registrant Year ($) ($)(1) ($)(2) ($)(1)(3) SARs(#) ($)(4) ($)(5)
- -------------------- ---- ------- ------- ------- ----------- ---------- --------- ---------
Glenn Files 1998 392,307 125,000 10,753 -- -- 75,992 23,263
Senior Vice President 1997 374,999 143,099 8,534 -- 31,000 -- 23,757
of CSW Electric 1996 331,135 44,860 66,415 153,750 -- -- 23,992
Operations (2,4,5)
Richard H. Bremer 1998 328,154 48,642 2,499 -- -- 87,818 23,263
President of CSW 1997 307,462 99,993 4,648 -- 26,000 -- 21,357
Energy Services 1996 305,910 144,404 73,711 153,750 -- -- 21,742
business unit (2,4,5)
Robert L. Zemanek 1998 294,144 9,560 49,818 -- -- 81,702 23,263
President of CSW 1997 283,250 89,279 10,272 -- 24,000 -- 23,757
Energy Delivery 1996 283,250 176,863 6,500 153,750 -- -- 23,992
business unit (2,4,5)
Richard P. Verret 1998 270,038 50,953 1,833 -- -- 47,576 7,900
President of CSW 1997 251,230 83,390 2,083 -- 21,000 -- 7,953
Production 1996 236,154 84,788 6,055 89,688 -- -- 7,590
(4,5)
J. Gonzalo Sandoval 1998 138,115 8,110 -- -- -- 18,944 6,580
General Manager/
President of CPL(4)
T.D. Churchwell 1998 199,904 6,738 2,359 -- -- 37,942 7,900
President of PSO 1997 192,500 53,672 2,167 -- 13,000 -- 6,398
(2,4,5) 1996 192,500 24,097 79,730 38,438 -- -- 5,340
Michael H. Madison 1998 178,593 53,150 28,914 -- -- 18,944 7,900
President of SWEPCO
(2,4,5)
Paul Brower, 1998 138,115 2,874 15,136 -- -- 18,944 6,344
General Manager/
President of WTU(2,4)
(Notes are on the following page)
3-7
(1) Amounts in these columns are paid or awarded in a calendar year for
performance in a preceding year.
(2) The following are the perquisites and other personal benefits required to
be identified in respect of each Named Executive Officer. In 1998, Mr.
Zemanek was reimbursed $12,000 for a company automobile allowance and
$19,314 for moving expenses. In 1998, Mr. Madison was reimbursed $8,100 for
a company automobile allowance and $6,444 for moving expenses. In 1998, Mr.
Brower was reimbursed $8,542 for membership dues.
1996 Relocation Reimbursements
------------------------------------------------
Glenn Files $25,662
Richard H. Bremer 34,117
T.D. Churchwell 38,955
(3) Grants of restricted stock are administered by the Executive
Compensation Committee of the CSW Board of Directors, which has the
authority to determine the individuals to whom and the terms upon which
restricted stock grants, including the number of underlying shares, shall
be made. The awards reflected in this column were made in 1996 and have a
four-year vesting period with 25 percent of the stock vesting on each
anniversary date. Upon vesting, shares of CSW Common Stock are re-issued
without restrictions. The individuals receive dividends and may vote shares
of restricted stock, even before they are vested. The amount reported in
the Summary Compensation Table represents the market value of the shares at
the date of grant. As of December 31, 1998, the aggregate restricted stock
holdings of each of the Named Executive Officers are presented in the
following table.
Restricted
Stock Held Market Value at
At December 31, December 31,
Name 1998 1998
---------------------------------------------------------------
Glenn Files 5,808 $159,357
Richard H. Bremer 6,245 171,347
Robert L. Zemanek 6,019 165,146
Richard P. Verret 3,508 96,251
J. Gonzalo Sandoval 1,450 39,784
T. D. Churchwell 2,152 59,046
Michael H. Madison 1,450 39,784
Paul J. Brower 1,450 39,784
(4)The awards reflected in this column are the value of restricted shares paid
out under the LTIP in 1998. The awards have a two-year vesting period with 50
percent of the stock vesting on each anniversary date. Upon vesting, shares
of CSW Common Stock are re-issued without restrictions. The individual
receives dividends and may vote shares of restricted stock, even before they
are vested. The amount reported in the Summary Compensation Table represents
the market value of the shares at the date of grant.
(5)Amounts shown in this column consist of: (i) the annual employer matching
payments to CSW's Retirement Savings Plan; (ii) premiums paid per participant
for personal liability insurance; and (iii) average amounts of premiums paid
per participant in those years under CSW's memorial gift program. Under this
program, for certain executive officers, directors and retired directors from
the CSW System, CSW will make a donation in a participant's name to up to
three charitable organizations in an aggregate of $500,000, payable by CSW
upon such person's death. CSW maintains corporate-owned life insurance
policies to fund the program. The annual premiums paid by CSW are based on
pooled risks and averaged $15,363 per participant for 1998, $15,803 for 1997,
and $16,402 for 1996. In 1998, 1997 and 1996, Messrs. Bremer, Files and
Zemanek participated.
3-8
Option/SAR Grants
No stock options or appreciation rights were granted in 1998.
Option/SAR Exercises and Year-End Value Table
Shown below is information regarding option/SAR exercises during 1998 and
unexercised options/SARs at December 31, 1998 for the Named Executive Officers.
Aggregated Option/SAR Exercises in 1998
and Fiscal Year-End Option/SAR Values
Number of CSW Securities Value of Unexercised
Value Underlying Unexercised In-the-Money Options/SARs
Shares Acquired Realized Options/SARs at Year-End Options/SARs at Year-End
Name on Exercise(#) ($) Exercisable/Unexercisable Exercisable/Unexercisable(1)
- ------------------------------------------------------------------------------------------------------------
Glenn Files -- -- 33,986/20,677 83,564/138,211
Richard H. Bremer -- -- 36,998/17,334 72,493/115,921
Robert L. Zemanek -- -- 33,430/16,000 69,051/107,000
Richard P. Verret 17,190 73,557 3,135/14,000 (6,858)/93,625
J. Gonzalo Sandoval 4,010 10,524 2,916/-- (6,379)/--
T. D. Churchwell 4,333 28,977 9,268/8,667 9,238/57,961
Michael H. Madison 7,676 35,040 3,135/7,334 (6,858)/49,046
Paul J. Brower -- -- 7,145/-- 3,666/--
(1)Calculated based upon the difference between the closing price of CSW's
Shares on the New York Stock Exchange on December 31, 1998 ($27.4375 per
share) and the exercise price per share of the outstanding unexercisable and
exercisable options ($20.750, $24.813 and $29.625, as applicable).
Long-term Incentive Plan Awards in 1998
The following table shows information concerning awards made to the Named
Executive Officers during 1998 under the CSW LTIP.
Estimated Future Payouts under
Non-Stock Price Based Plans
--------------------------------
Performance
or
Other Period
Number of Until
Shares, Units Maturation
or Or Payout Threshold Target Maximum
Name Other Rights (1) ($) ($) ($)
- --------------------------------------------------------------------------------
Glenn Files 8,314 2 years -- 225,000 337,500
Richard H. Bremer 7,006 2 years -- 189,600 284,400
Robert L. Zemanek 6,280 2 years -- 169,950 254,925
Richard P. Verret 5,720 2 years -- 154,800 232,200
J. Gonzalo Sandoval -- 2 years -- - --
T. D. Churchwell 2,845 2 years -- 77,000 115,500
Michael H. Madison 2,439 2 years -- 66,000 99,000
Paul J. Brower -- 2 years -- -- --
(1) Vesting period for awards paid at end of three year cycle.
Payouts of these awards are contingent upon CSW's achieving a specified
level of total stockholder return, relative to a peer group of utility
companies, for a three-year period, or cycle, and exceeding a certain defined
minimum threshold. If the Named Executive Officer's employment is terminated
during the performance period for any reason other than death, total and
permanent disability or retirement, then the award is canceled. The CSW LTIP
contains a provision accelerating awards upon a change in control of CSW. If a
3-9
change in control of CSW occurs, all options and SARs become fully exercisable
and all restrictions, terms and conditions applicable to all restricted stock
are deemed lapsed and satisfied and all performance-based units are deemed to
have been fully earned, as of the date of the change in control. The CSW LTIP
also contains provisions designed to prevent circumvention of the above
acceleration provisions through coerced termination of an employee prior to a
change in control.
Retirement Plan
CSW maintains the Retirement Plan for eligible employees. In addition, CSW
maintains the SERP, a non-qualified ERISA excess plan, that primarily provides
benefits that cannot be payable under the Retirement Plan because of maximum
limitations imposed on such plans by the Internal Revenue Code. Under the cash
balance formula, each participant has an account for recordkeeping purposes
only, to which dollar amount credits are allocated annually based on a
percentage of the participant's pay. Pay for the Retirement Plan includes base
pay, bonuses, overtime, and commissions. The applicable percentage is determined
by the age and years of vesting service the participant has with CSW and its
affiliates as of December 31 of each year (or as of the participant's
termination date, if earlier). The following table shows the applicable
percentage used to determine dollar amount credits at the age and years of
service indicated.
Sum of Age plus
Years of Service Applicable Percentage
------------------------------------------------
less than 30 3.0%
30-39 3.5%
40-49 4.5%
50-59 5.5%
60-69 7.0%
70 or more 8.5%
As of December 31, 1998, the sum of age plus years of service of the Named
Executive Officers for the cash balance formula are as follows: Mr. Files, 78;
Mr. Bremer, 71; Mr. Zemanek, 75; Mr. Verret, 78; Mr. Sandoval, 74, Mr.
Churchwell, 74; Mr. Madison, 77; Mr. Brower, 71.
All dollar amount balances in the accounts of participants earn a fixed
rate of interest which is also credited annually. The interest rate for a
particular year is the average rate of return of the 30-year Treasury Rate for
November of the prior year. For 1998, the interest rate was 6.11%. For 1999, the
interest rate is 5.25%. Interest continues to be credited as long as the
participant's balance remains in the plan.
At retirement or other termination of employment, an amount equal to the
vested balance (including qualified and SERP benefit) then credited to the
account is payable to the participant in the form of an immediate or deferred
lump-sum or annuity. Benefits (both from the Retirement Plan and the SERP) under
the cash balance formula are not subject to reduction for Social Security
benefits or other offset amounts. The estimated annual benefit payable to each
of the Named Officers as a single life annuity at age 65 under the Retirement
Plan and the SERP is: Mr. Files, $233,016; Mr. Bremer, $180,955; Mr. Zemanek,
$200,710; Mr. Verret, $148,896; Mr. Sandoval, $81,802; Mr. Churchwell; $93,338;
Mr. Madison, $114,653; Mr. Brower, $67,063. These projections are based on the
following assumptions: (1) participant remains employed until age 65; (2) salary
used is base pay paid for calendar year 1998 assuming no future increases plus
bonus at 1998 target level; (3) interest credit at 5.25% for 1999 and future
years; and (4) the conversion of the lump-sum cash balance to a single life
annuity at normal retirement age is based on an interest rate of 5.25% and the
1983 Group Annuity Mortality Table, which sets forth generally accepted life
expectancies.
3-10
In addition, certain employees who were 50 or over and had completed at
least 10 years of service as of July 1, 1997, also continue to earn a benefit
using the prior pension formula. At commencement of benefits, Mr. Verret and Mr.
Churchwell have a choice of their accrued benefit using the cash balance formula
or their accrued benefit using the prior pension formula. Once the participant
selects either the earned benefit under the cash balance formula or the earned
benefit under the prior pension formula, the other earned benefit is no longer
available.
The table below shows the estimated combined benefits payable from both
the prior pension formula and the SERP based on retirement age of 65, the
average compensation shown, the years of credited service shown, continued
existence of the prior pension formula without substantial change and payment in
the form of a single life annuity.
Annual Benefits After
Specified Years of Credited Service
Average
Compensation 15 20 25 30 or more
----------------------------------------------------------------
$100,000 $25,050 $33,333 $41,667 $50,000
150,000 37,575 50,000 62,500 75,000
200,000 50,100 66,667 83,333 100,000
250,000 62,625 83,333 104,167 125,000
300,000 75,150 100,000 125,000 150,000
350,000 87,675 116,667 145,833 175,000
450,000 112,725 150,000 187,500 225,000
550,000 137,775 183,333 229,167 275,000
650,000 162,825 216,667 270,833 325,000
750,000 187,875 250,000 312,500 375,000
850,000 212,500 283,333 357,000 425,000
950,000 237,975 316,667 395,833 475,000
Benefits payable under the prior pension formula are based upon the
participant's years of credited service (up to a maximum of 30 years), age at
retirement, and covered compensation earned by the participant. The annual
normal retirement benefit payable under the prior pension formula and the SERP
are based on 1.67 percent of "Average Compensation" times the number of years of
credited service (reduced by no more than 50 percent of a participant's age 62
or later Social Security benefit). "Average Compensation" is covered
compensation for the prior pension formula and equals the average annual
compensation, reported as salary in the Summary Compensation Table, during the
36 consecutive months highest pay during the 120 months prior to retirement.
Respective years of credited service and ages, as of December 31, 1998,
for the following officers who continue to earn a benefit under the prior
pension formula are: Mr. Verret, 26 and 52, Mr. Churchwell, 20 and 54.
3-11
Meetings and Compensation
Those directors who are not also officers of CPL, PSO, SWEPCO and WTU
receive annual directors' fees and a fee of $300 plus expenses for each board or
committee meeting attended, as described below. They are also eligible to
participate in a deferred compensation plan. Under this plan such directors may
elect to defer payment of annual directors' and meeting fees until they retire
from the board or as they otherwise direct. The number of board meetings and
annual directors' fees are presented in the following table.
CPL PSO SWEPCO WTU
---------------------------------------------
Number of regular board meetings 4 4 4 4
Annual directors' fees $6,000 $6,000 $6,600 $6,000
Compensation Committee Interlocks and Insider Participation
No person serving during 1998 as a member of the Executive Compensation
Committee of the Board of Directors of CSW served as an officer or employee of
any Registrant during or prior to 1998. No person serving during 1998 as an
executive officer of the U.S. Electric Operating Companies serves or has served
on the compensation committee or as a director of another company whose
executive officers serve or has served as a member of the Executive Compensation
Committee of CSW or as a director of one of the U.S. Electric Operating
Companies.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
CSW
The information required by ITEM 12 is incorporated by reference herein
from the 1999 CSW Notice Of Annual Meeting Of Stockholders and Proxy Statement.
U.S. Electric Operating Companies
All of the outstanding shares of common stock of each of the U.S. Electric
Operating Companies, presented in the following table, is owned beneficially and
of record by CSW.
Company Shares Par Value
-------------------------------------------------
CPL 6,755,535 $25
PSO 9,013,000 15
SWEPCO 7,536,640 18
WTU 5,488,560 25
Security Ownership of Management
The following tables show securities beneficially owned as of December 31,
1998, by each director, the President, Executive Officers and all directors and
Executive Officers as a group for each of the U.S. Electric Operating Companies.
Share amounts shown in this table include options exercisable within 60 days
after December 31, 1998, restricted stock, CSW Common Stock credited to Thrift
Plus accounts and all other CSW Common Stock beneficially owned by the listed
persons.
3-12
Each of the U.S. Electric Operating Companies has one or more series of
preferred stock outstanding. As of December 31, 1998, none of the individuals
listed in the following tables owned any shares of preferred stock of any of the
U.S. Electric Operating Companies.
Beneficial Ownership as of December 31, 1998
CSW Common
Underlying
CSW Restricted Immediately
Common Stock Exercisable
Name (1) (2) (3) Options (3)
- ------------------------------------------------------------------------
CPL
John F. Brimberry 1,097 -- --
E. R. Brooks 139,579 16,307 65,175
Glenn Files 53,388 5,808 33,986
Ruben M. Garcia -- -- --
Robert A. McAllen 250 -- --
Pete Morales, Jr. -- -- --
H. Lee Richards 1,400 -- --
J. Gonzalo Sandoval 5,200 1,450 2,916
Gerald E. Vaughn 10,535 1,450 5,003
Wendy Hargus 12,966 1,450 8,983
Alphonso Jackson 3,783 443 3,333
R. Russell Davis 1,406 -- 1,406
Brenda L. Snider 620 -- --
-------------------------------------------
TOTAL 230,224 26,908 120,802
PSO
E. R. Brooks 139,579 16,307 65,175
T. D. Churchwell 13,462 2,152 9,268
Harry A. Clarke -- -- --
Glenn Files 53,388 5,808 33,986
Paul K. Lackey, Jr. -- -- --
Paula Marshall-Chapman -- -- --
William R. McKamey 17,589 1,450 3,323
Dr. Robert B. Taylor, Jr. -- -- --
Wendy Hargus 12,966 1,450 8,983
R. Russell Davis 1,406 -- 1,406
Lina P. Holm 682 -- --
-------------------------------------------
TOTAL 239,072 27,167 122,141
SWEPCO
Karen C. Adams 2,587 -- 880
E. R. Brooks 139,579 16,307 65,175
James E. Davison 14,000 -- --
Glenn Files 53,388 5,808 33,986
Dr. Frederick E. Joyce -- -- --
John M. Lewis -- -- --
William C. Peatross -- -- --
Maxine P. Sarpy 100 -- --
Michael H. Madison 9,723 1,450 3,135
Wendy Hargus 12,966 1,450 8,983
R. Russell Davis 1,406 -- 1,406
Marilyn S. Kirkland -- -- --
------------------------------------------
TOTAL 233,749 25,015 113,565
WTU
E. R. Brooks 139,579 16,307 65,175
Paul J. Brower 10,890 1,450 7,145
Glenn Files 53,388 5,808 33,986
Tommy Morris 2,000 -- --
Dian G. Owen -- -- --
James M. Parker -- -- --
F. L. Stephens 8,098 -- --
Alphonso Jackson 3,783 443 3,333
Wendy Hargus 12,966 1,450 8,983
R. Russell Davis 1,406 -- 1,406
Martha Murray 3,209 -- --
-------------------------------------------
TOTAL 235,319 25,458 120,028
(1)Beneficial ownership percentages are all less than one percent and therefore
are omitted.
(2)These individuals currently have voting power, but not investment power,
with respect to these shares.
(3)These shares are included in the CSW Common column.
3-13
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CSW
The information required by ITEM 13 is incorporated herein by reference
from the 1999 CSW Notice Of Annual Meeting Of Stockholders and Proxy Statement.
U.S. Electric Operating Companies
None.
3-14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report on this Form
10-K.
(1) Financial Statements.
Reports of Independent Public Accountants on the financial statements for
CSW and subsidiary companies, CPL, PSO, SWEPCO and WTU are listed under
ITEM 8 herein.
The financial statements filed as a part of this report for CSW and
subsidiary companies, CPL, PSO, SWEPCO and WTU are listed under ITEM 8
herein.
(2) Exhibits.
Exhibits for CSW, CPL, PSO, SWEPCO and WTU are listed in (c) Index to
Exhibits below.
(b) Reports on Form 8-K.
CSW and PSO
Date of earliest event reported: October 1, 1998
Date of report: October 9, 1998
Item 5. Other Events and Item 7. Financial Statements and Exhibits, reporting
the recommendation of an Oklahoma Commission administrative law judge to dismiss
the AEP and CSW merger application due to insufficient information.
CSW, CPL, PSO, SWEPCO and WTU
Date of earliest event reported: November 19, 1998
Date of report: December 7, 1998
Item 5. Other Events and Item 7. Financial Statements and Exhibits, reporting
the FERC's procedural schedule for the AEP and CSW merger application and a
proposed merger settlement with two intervenors in the Texas merger proceedings.
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.
4-1
CSW
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
10, 1999. The signature of the undersigned registrant shall be deemed to relate
only to matters having reference to such registrant and any subsidiaries
thereof.
CENTRAL AND SOUTH WEST CORPORATION
By: Lawrence B. Connors
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 10, 1999. The signature
of each of the undersigned shall be deemed to relate only to matters having
reference to the above named registrant and any subsidiaries thereof.
Signature Title
E. R. Brooks Chairman, CEO and Director
(Principal Executive Officer)
Glenn D. Rosilier Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
Lawrence B. Connors Controller
(Principal Accounting Officer)
*Molly Shi Boren Director
*Dr. Donald M. Carlton Director
*T. J. Ellis Director
*Joe H. Foy Director
*William R. Howell Director
*Dr. Robert W. Lawless Director
*James L. Powell Director
*Dr. Richard L. Sandor Director
*T. V. Shockley, III President, Chief Operating Officer and
Director
*Lawrence B. Connors, by signing his name hereto, does sign this document on
behalf of the persons indicated above pursuant to a power of attorney duly
executed by each such person.
*By: Lawrence B. Connors
Attorney-in-Fact
4-2
CPL
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
10, 1999. The signature of the undersigned registrant shall be deemed to relate
only to matters having reference to such registrant.
CENTRAL POWER AND LIGHT COMPANY
By: R. Russell Davis
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 10, 1999. The signature
of each of the undersigned shall be deemed to relate only to matters having
reference to the above named registrant.
Signature Title
J. Gonzalo Sandoval General Manager/President and
Director
(Principal Executive Officer)
R. Russell Davis Controller
(Principal Accounting and Financial
Officer)
*John F. Brimberry Director
*E. R. Brooks Director
*Glenn Files Director
*Ruben M. Garcia Director
*Alphonso R. Jackson Director
*Robert A. McAllen Director
*Pete Morales, Jr. Director
*H. Lee Richards Director
*Gerald E. Vaughn Director
*R. Russell Davis, by signing his name hereto, does sign this document on behalf
of the persons indicated above pursuant to a power of attorney duly executed by
each such person.
*By: R. Russell Davis
Attorney-in-Fact
4-3
PSO
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
10, 1999. The signature of the undersigned registrant shall be deemed to relate
only to matters having reference to such registrant.
PUBLIC SERVICE COMPANY OF OKLAHOMA
By: R. Russell Davis
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 10, 1999. The signature
of each of the undersigned shall be deemed to relate only to matters having
reference to the above named registrant.
Signature Title
T. D. Churchwell President and Director
(Principal Executive Officer)
R. Russell Davis Controller
(Principal Accounting and Financial
Officer)
*E. R. Brooks Director
*Harry A. Clarke Director
*Glenn Files Director
*Paul K. Lackey, Jr. Director
*Paula Marshall-Chapman Director
*William R. McKamey General Manager and Director
*Dr. Robert B. Taylor, Jr. Director
*R. Russell Davis, by signing his name hereto, does sign this document on behalf
of the persons indicated above pursuant to a power of attorney duly executed by
each such person.
*By: R. Russell Davis
Attorney-in-Fact
4-4
SWEPCO
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
10, 1999. The signature of the undersigned registrant shall be deemed to relate
only to matters having reference to such registrant.
SOUTHWESTERN ELECTRIC POWER COMPANY
By: R. Russell Davis
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 10, 1999. The signature
of each of the undersigned shall be deemed to relate only to matters having
reference to the above named registrant.
Signature Title
Michael H. Madison President and Director
(Principal Executive Officer)
R. Russell Davis Controller
(Principal Accounting and Financial
Officer)
*Karen C. Adams General Manager and Director
*E. R. Brooks Director
*James E. Davison Director
*Glenn Files Director
*Dr. Frederick E. Joyce Director
*John M. Lewis Director
*William C. Peatross Director
*Maxine P. Sarpy Director
*R. Russell Davis, by signing his name hereto, does sign this document on behalf
of the persons indicated above pursuant to a power of attorney duly executed by
each such person.
*By: R. Russell Davis
Attorney-in-Fact
4-5
WTU
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on March
10, 1999. The signature of the undersigned registrant shall be deemed to relate
only to matters having reference to such registrant.
WEST TEXAS UTILITIES COMPANY
By: R. Russell Davis
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated on March 10, 1999. The signature
of each of the undersigned shall be deemed to relate only to matters having
reference to the above named registrant.
Signature Title
Paul J. Brower General Manager/President and
Director
(Principal Executive Officer)
R. Russell Davis Controller
(Principal Accounting and Financial
Officer)
*E. R. Brooks Director
*Glenn Files Director
*Alphonso R. Jackson Director
*Tommy Morris Director
*Dian G. Owen Director
*James M. Parker Director
*F. L. Stephens Director
*R. Russell Davis, by signing his name hereto, does sign this document on behalf
of the persons indicated above pursuant to a power of attorney duly executed by
each such person.
*By: R. Russell Davis
Attorney-in-Fact
4-6
(c) Index to Exhibits.
The following exhibits indicated by an asterisk (*) preceding the exhibit
number are filed herewith. The balance of the exhibits have heretofore been
filed with the SEC, respectively, as the exhibits and in the file numbers
indicated and are incorporated herein by reference. The exhibits marked with a
plus (+) are management contracts or compensatory plans or arrangements required
to be filed herewith and required to be identified as such by ITEM 14 of Form
10-K. Reference is made to a duplicate list of exhibits being filed as a part of
this Form 10-K, which list, prepared in accordance with Item 102 of Regulation
S-T of the SEC, immediately precedes the exhibits being filed with this Form
10-K.
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession.
CSW and SWEPCO
1 Plan of Reorganization for Cajun Electric Power Cooperative, Inc.
submitted jointly by the Members Committee, SWEPCO and Gulf States
Utilities Company (incorporated herein by reference to CSW and
SWEPCO's Form 8-K dated April 19, 1996).
2 Amended Plan of Reorganization for Cajun Electric Power Cooperative,
Inc. submitted jointly by the Members Committee, SWEPCO and Entergy
Texas, Inc. (incorporated herein by reference to CSW and SWEPCO's
Form 8-K dated September 30, 1996).
3 Amended and Restated Joint Plan of Reorganization for Cajun Electric
Power Cooperative, Inc. submitted jointly by the Members Committee
and SWEPCO dated March 18, 1998. (incorporated herein by reference to
CSW and SWEPCO's Form 10-K dated December 31, 1997).
(3) Articles of Incorporation and Bylaws.
CSW
1 Certificate of Amendment to Second Restated Certificate of
Incorporation of CSW(incorporated herein by reference to Item 10,
Exhibit B-1.2 to the 1993 CSW annual report on Form U5S).
*2 Bylaws of CSW, as amended January 20, 1999.
CPL
3 Restated Articles of Incorporation Without Amendment, Articles of
Correction to Restated Articles of Incorporation Without Amendment,
Articles of Amendment to Restated Articles of Incorporation,
Statements of Registered Office and/or Agent, and Articles of
Amendment to the Articles of Incorporation (incorporated herein by
reference to Exhibit 3.1 to CPL's Form 10-Q dated March 31, 1997).
4 Bylaws of CPL, as amended (incorporated herein by reference to Exhibit
3.1 to CPL's Form 10-Q dated September 30, 1996, File No. 0-346).
PSO
5 Restated Certificate of Incorporation of PSO (incorporated herein by
reference to Exhibit B-3.1 of CSW's 1996 Form U5S, File No. 1-1443).
6 Bylaws of PSO, as amended (incorporated herein by reference to Exhibit
3.1 of PSO's Form 10-Q, dated March 31, 1998, File No. 0-343).
4-7
SWEPCO
7 Restated Certificate of Incorporation, as amended through May 6,
1997, including Certificate of Amendment of Restated Certificate of
Incorporation (both incorporated herein by reference to Exhibit 3.4
to SWEPCO's Form 10-Q dated March 31, 1997, File No. 1-3146).
8 Bylaws of SWEPCO, as amended (incorporated herein by reference to
Exhibit 3.3 to SWEPCO's Form 10-Q dated September 30, 1996, File No.
1-3146).
WTU
9 Restated Articles of Incorporation, as amended, and Articles of
Amendment to the Articles of Incorporation (both incorporated herein by
reference to Exhibit 3.5 to WTU's Form 10-K dated March 31, 1997, File
No. 0-340).
10 Bylaws of WTU, as amended (incorporated herein by reference to Exhibit
3.4 to WTU's Form 10-Q dated September 30, 1996, File No. 0-340).
(4) Instruments defining the rights of security holder, including indentures.
CSW
1 Rights Agreement dated as of December 22, 1997 between CSW and Central
and South West Services, Inc., as Rights Agent (incorporated herein by
reference to Exhibit 1 to CSW Form 8-A/A dated March 19, 1998, File No.
1-1443).
CPL
(a) Indenture of mortgage or deed of trust date November 1, 1943, executed
by CPL to the First National Bank of Chicago and Robert L. Grinnell as
trustee, as amended through October 1, 1977 (incorporated herein by
reference to Exhibit 5.01 in File No. 2-60712).
(b) Supplemental Indentures to the First Mortgage Indenture:
Dated File Reference Exhibit
September 1, 1978 2-62271 2.02
December 15, 1984 Form U-1, No. 70-7003 17
July 1, 1985 2-98944 4 (b)
May 1, 1986 Form U-1, No. 70-7236 4
November 1, 1987 Form U-1, No. 70-7249 4
June 1, 1988 Form U-1, No. 70-7520 2
December 1, 1989 Form U-1, No. 70-7721 3
March 1, 1990 Form U-1, No. 70-7725 10
October 1, 1992 Form U-1, No. 70-8053 10 (a)
December 1, 1992 Form U-1, No. 70-8053 10 (b)
February 1, 1993 Form U-1, No. 70-8053 10 (c)
April 1, 1993 Form U-1, No. 70-8053 10 (d)
May 1, 1994 Form U-1, No. 70-8053 10 (e)
July 1, 1995 Form U-1, No. 70-8053 10 (f)
(c) CPL-obligated, mandatorily redeemable preferred securities of
subsidiary trust holding solely Junior Subordinated Debentures of CPL.
4-8
2 Indenture, dated as of May 1, 1997, between CPL and the Bank of New
York, as Trustee (incorporated herein by reference to Exhibit 4.1 of
CPL's Form 10-Q dated March 31, 1997, File No. 0-346).
3 First Supplemental Indenture, dated as of May 1, 1997, between CPL and
the Bank of NewYork, as Trustee (incorporated herein by reference to
Exhibit 4.2 of CPL's Form 10-Q dated March 31, 1997, File No. 0-346).
4 Amended and Restated Trust Agreement of CPL Capital I, dated as of May
1, 1997, among CPL, as Depositor; the Bank of New York, as Property
Trustee; the Bank of New York (Delaware), as Delaware Trustee; and the
Administrative Trustee (incorporated herein by reference to Exhibit 4.3
of CPL's Form 10-Q dated March 31, 1997, File No. 0-346).
5 Guarantee Agreement, dated as of May 1, 1997, delivered by CPL for the
benefit of the holders of CPL Capital I's Preferred Securities
(incorporated herein by reference to Exhibit 4.4 of CPL's Form 10-Q dated
March 31, 1997, File No. 0-346).
6 Agreement as to Expenses and Liabilities, dated as of May 1, 1997,
between CPL and CPL Capital I (incorporated herein by reference to
Exhibit 4.5 of CPL's Form 10-Q dated March 31, 1997, File No. 0-346).
PSO
(a) Indenture dated July 1, 1945, as amended, of PSO (incorporated herein
by reference to Exhibit 5.03 in Registration No. 2-60712).
(b) Supplemental Indentures to the First Mortgage Indenture:
Dated File Reference Exhibit
June 1, 1979 2-64432 2.02
December 1, 1979 2-65871 2.02
March 1, 1983 Form U-1, No. 70-6822 2
May 1, 1986 Form U-1, No. 70-7234 3
July 1, 1992 Form S-3, No. 33-48650 4 (b)
December 1, 1992 Form S-3, No. 33-49143 4 (c)
April 1, 1993 Form S-3, No. 33-49575 4 (b)
June 1, 1993 Form 10-K, No. 0-343 4 (b)
February 1, 1996 Form 8-K, March 4, 1996, No. 0-343 4.01
February 1, 1996 Form 8-K, March 4, 1996, No. 0-343 4.02
February 1, 1996 Form 8-K, March 4, 1996, No. 0-343 4.03
(c) PSO-obligated, mandatorily redeemable preferred securities of
subsidiary trust holding solely Junior Subordinated Debentures of PSO.
7 Indenture, dated as of May 1, 1997, between PSO and the Bank of New
York, as Trustee (incorporated herein by reference to Exhibit 4.6 of
PSO's Form 10-Q dated March 31, 1997, File No. 0-343).
8 First Supplemental Indenture, dated as of May 1, 1997, between PSO and
the Bank of New York, as Trustee (incorporated herein by reference to
Exhibit 4.7 of PSO's Form 10-Q dated March 31, 1997, File No. 0-343).
9 Amended and Restated Trust Agreement of PSO Capital I, dated as of May
1, 1997, among PSO, as Depositor; the Bank of New York, as Property
4-9
Trustee; the Bank of New York (Delaware), as Delaware Trustee; and the
Administrative Trustee (incorporated herein by reference to Exhibit 4.8
of PSO's Form 10-Q dated March 31, 1997, File No. 0-343).
10 Guarantee Agreement, dated as of May 1, 1997, delivered by PSO for the
benefit of the holders of PSO Capital I's Preferred Securities
(incorporated herein by reference to Exhibit 4.9 of PSO's Form 10-Q
dated March 31, 1997, File No. 0-343).
11 Agreement as to Expenses and Liabilities, dated as of May 1, 1997,
between PSO and PSO Capital I (incorporated herein by reference to
Exhibit 4.10 of PSO's Form 10-Q dated March 31, 1997, File No. 0-343).
SWEPCO
(a) Indenture dated February 1, 1940, as amended through November 1, 1976
(incorporated herein by reference to Exhibit 5.04 in Registration No.
2-60712).
(b) Supplemental Indentures to the First Mortgage Indenture:
Dated File Reference Exhibit
August 1, 1978 2-61943 2.02
January 1, 1980 2-66033 2.02
April 1, 1981 2-71126 2.02
May 1, 1982 2-77165 2.02
August 1, 1985 Form U-1, No. 70-7121 4
May 1, 1986 Form U-1, No. 70-7233 3
November 1, 1989 Form U-1, No. 70-7676 3
June 1, 1992 Form U-1, No. 70-7934 10
September 1, 1992 Form U-1, No. 72-8041 10 (b)
July 1, 1993 Form U-1, No. 70-8041 10 (c)
October 1, 1993 Form U-1, No. 70-8239 10 (a)
(c) SWEPCO-obligated, mandatorily redeemable preferred securities of
subsidiary trust holding solely Junior Subordinated Debentures of
SWEPCO.
12 Indenture, dated as of May 1, 1997, between SWEPCO and the Bank of New
York, as Trustee (incorporated herein by reference to Exhibit 4.11 of
SWEPCO's Form 10-Q dated March 31, 1997, File No. 1-3146).
13 First Supplemental Indenture, dated as of May 1, 1997, between SWEPCO
and the Bank of New York, as Trustee (incorporated herein by reference
to Exhibit 4.12 of SWEPCO's Form 10-Q dated March 31, 1997, File No.
1-3146).
14 Amended and Restated Trust Agreement of SWEPCO Capital I, dated as of
May 1, 1997, among SWEPCO, as Depositor; the Bank of New York, as
Property Trustee; the Bank of New York (Delaware), as Delaware Trustee;
and the Administrative Trustee (incorporated herein by reference to
Exhibit 4.13 of SWEPCO's Form 10-Q dated March 31, 1997, File No.
1-3146).
15 Guarantee Agreement, dated as of May 1, 1997, delivered by SWEPCO for
the benefit of the holders of SWEPCO Capital I's Preferred Securities
(incorporated herein by reference to Exhibit 4.14 of SWEPCO's Form 10-Q
dated March 31, 1997, File No.
1-3146).
16 Agreement as to Expenses and Liabilities, dated as of May 1, 1997
between SWEPCO and SWEPCO Capital I (incorporated herein by reference
to Exhibit 4.15 of SWEPCO's Form 10-Q dated March 31, 1997, File No.
1-3146).
4-10
WTU
(a) Indenture dated August 1, 1943, as amended through July 1, 1973, of
WTU, incorporated herein by reference to Exhibit 5.05 in File No.
2-60712.
(b) Supplemental Indentures to the First Mortgage Indenture:
Dated File Reference Exhibit
May 1, 1979 2-63931 2.02
November 15, 1981 2-74408 4.02
November 1, 1983 Form U-1, No. 70-6820 12
April 15, 1985 Form U-1, No. 70-6925 13
August 1, 1985 2-98843 4 (b)
May 1, 1986 Form U-1, No. 70-7237 4
December 1, 1989 Form U-1, No. 70-7719 3
June 1, 1992 Form U-1, No. 70-7936 10
October 1, 1992 Form U-1, No. 72-8057 10
February 1, 1994 Form U-1, No. 70-8265 10
March 1, 1995 Form U-1, No. 70-8057 10 (b)
October 1, 1995 Form U-1, No. 70-8057 10 (c)
(10) Material contracts.
CSW
+1 Change in Control Agreement between CSW and E. R. Brooks.
+2 Change in Control Agreement between CSW and Thomas V. Shockley, III.
+3 Change in Control Agreement between CSW and Ferd. C. Meyer, Jr.
+4 Change in Control Agreement between CSW and Glenn D. Rosilier.
+5 Change in Control Agreement between CSW and Venita. McCellon-Allen.
+6 Change in Control Agreement between CSW and Thomas M. Hagan.
+7 Change in Control Agreement between CSW and Glenn Files.
+8 Change in Control Agreement between CSW and Robert L. Zemanek.
+9 Change in Control Agreement between CSW and Richard H. Bremer.
+10 Change in Control Agreement between CSW and Richard P. Verret.
+11 Change in Control Agreement between CSW and T. J. Ellis.
+12 Change in Control Agreement between CSW and Terry D. Dennis.
+13 Change in Control Agreement between CSW and Bruce Evans.
+14 Change in Control Agreement between CSW and Pete Churchwell.
+15 Change in Control Agreement between CSW and Michael D. Smith.
+16 Change in Control Agreement between CSW and Floyd Nickerson.
+17 Restricted Stock Plan for Central and South West Corporation
(incorporated herein by reference to Exhibit 10 (a) to CSW's 1990 Form
10-K, File No. 1-1443).
*+18 Central and South West System Special Executive Retirement Plan as
amended and restated effective July 1, 1997.
+19 Executive Incentive Compensation Plan for Central and South West System
(incorporated herein by reference to Exhibit 10 (c) to the
Corporation's 1990 Form 10-K, File No. 1-1443).
20 Central and South West Corporation Stock Option Plan (incorporated
herein by reference to Exhibit 10 (d) to the Corporation's 1990 Form
10-K, File No. 1-1443).
21 Central and South West Corporation Deferred Compensation Plan for
Directors (incorporated herein by reference to Exhibit 10 (e) to the
Corporation's 1990 Form 10-K, File No. 1-1443).
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+22 Central and South West Corporation 1992 Long-Term Incentive Plan
(incorporated herein by reference to Appendix A to the Central and
South West Corporation Notice of 1992 Annual Meeting of Shareholders
and Proxy Statement).
23 Agreement and Plan of Merger, dated as of December 21, 1997, by and
among American Electric Power Company, Inc.; a New York Corporation,
Augusta Acquisition Corporation, a Delaware Corporation and a
wholly-owned subsidiary of AEP; and Central and South West Corporation,
a Delaware Corporation (incorporated herein by reference to the 1998
Joint Proxy Statement, File No. 1-1443).
*+24 Central and South West Corporation Executive Deferred Savings Plan as
amended and restated effective as of January 1, 1997.
(12) Statements re computation of ratios.
CPL, PSO, SWEPCO and WTU
* 1 CPL's Statement re computation of Ratio of Earnings to Fixed Charges
for the five years ended December 31, 1998.
* 2 PSO's Statement re computation of Ratio of Earnings to Fixed Charges
for the five years ended December 31, 1998.
* 3 SWEPCO's Statement re computation of Ratio of Earnings to Fixed
Charges for the five year ended December 31, 1998.
* 4 WTU's Statement re computation of Ratio of Earnings to Fixed Charges
for the five years ended December 31, 1998.
* (13) Annual report to security holders.
CSW's 1998 Financial Report.
* (21) Subsidiaries of the registrant (CSW).
(23) Consent of experts and counsel.
CSW, CPL, PSO
* 1 CSW's Consent of Independent Public Accountants.
* 2 CSW UK Finance Company's Consent of Independent Public Accountants.
* 3 CPL's Consent of Independent Public Accountants.
* 4 PSO's Consent of Independent Public Accountants.
(24) Power of attorney.
CSW
* 1 Power of Attorney.
* 2 Power of Attorney.
* 3 Power of Attorney.
* 4 Power of Attorney.
* 5 Board Resolution Authorizing Power of Attorney.
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CPL
* 6 Power of Attorney.
* 7 Power of Attorney.
* 8 Power of Attorney.
* 9 Board Resolution Authorizing Power of Attorney.
PSO
* 10 Power of Attorney.
* 11 Power of Attorney.
* 12 Power of Attorney
* 13 Board Resolution Authorizing Power of Attorney.
SWEPCO
* 14 Power of Attorney.
* 15 Power of Attorney.
* 16 Power of Attorney.
* 17 Board Resolution Authorizing Power of Attorney
WTU
* 18 Power of Attorney.
* 19 Power of Attorney.
* 20 Power of Attorney.
* 21 Board Resolution Authorizing Power of Attorney.
(27) Financial Data Schedules.
CSW, CPL, PSO, SWEPCO and WTU
* 1 CSW's Financial Data Schedules.
* 2 CPL's Financial Data Schedules.
* 3 PSO's Financial Data Schedules.
* 4 SWEPCO's Financial Data Schedules.
* 5 WTU's Financial Data Schedules.
(d) Index to Financial Statement Schedules.
Other Schedules.
All other exhibits and schedules are omitted because of the absence of the
conditions under which they are required or because the required information is
included in the financial statements or related notes to financial statements.
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