ML17305B109
| ML17305B109 | |
| Person / Time | |
|---|---|
| Site: | Palo Verde  |
| Issue date: | 12/31/1989 |
| From: | Wiggs D EL PASO ELECTRIC CO. |
| To: | |
| Shared Package | |
| ML17305B105 | List: |
| References | |
| NUDOCS 9010170098 | |
| Download: ML17305B109 (176) | |
Text
El Paso Electric Company
\ pl' I989 Annual Report 90i0i70098 90i005 05000528 PDR ADOCK PDC
ANNUALMEETING OF SHAREHOLDERS All shareholders are invited to attend the Annual Meeting of Shareholders on Monday, May 21, 1990, at 10 a.m. El Paso time in the Airport Hilton, 2027 Airways Blvd., adjacent to El Paso International Airport.
Proxies for the meeting will be solicited by the Board of Directors in a communication to be mailed in mid-April. This Annual Report is not a part of such proxy solicitation and is not intended to be used as such.
Photography by Valarie Ec Arturo Enriquez, Vantage Point 1989
~ Obtain proper financing for the A LETTER Company's utility operations.
TO OUR ~ Focus on utility operations by SHAREHOLDERS divesting the Company of its non-utility investments.
~ Begin the restructuring of the Company's utility operations by April 3, 1990 icducing costs, consolidating jobs and increasing efficiency.
These goals have been accom-As I expected, 1989 was a tough plished.
year for the Company and its shareholders. But we also made In October 1989, the Company substantial progress by returning obtained a revolving credit facility the Company to its core utility from a syndicate of eight money-business. center banks. The facility, which now provides $ 150 million of borrowing capacity, is structured to meet the Company's projected cash needs through the scheduled expiration of the facility in May 1991. The Company must periodically issue long-tenn debt to reduce borrowings under the facility. This was first done in January 1990, when the Company sold $ 153 million of First Mortgage Bonds (11.1% Series due 2001).
'n late December 1989, we sold our investment in Commercial Federal Savings & Loan l
Association, and in January 1990,,
ft fp we sold our non-utility subsidiaries: Franklin Land &
Resources, Inc. and PasoTex David H. Wiggs, Jr. For the twelve months ended Corporation. These transactions Chairman of the Board, December 31, 1989, the net loss were supported by fairness President and Chief applicable to common stock (after opinions from our investment Executive Officer preferred dividend requirements bankers, and have been viewed of $ 11.8 million) was $ 117.6 favorably by the financial million. This consisted of a loss, community. Although the from discontinued operations of Company recorded a significant
$ 107.7 million and income from loss on these transactions, we will continuing operations of $ 1.9 now be able to focus on our utility million. operations.
When I was elected Chairman of We restructured the Company in the Board and Chief Executive mid-1989, eliminating approx-Officer in 1989, I established, as imately 200 staff positions and the first order of business, three reorganizing senior management.
short term objectives: Eight senior officers retired,
management layers were reduced, October 1989, William D. Skov keys to the ultimate success of our ~
and responsibilities were was appointed to a newly, created Company. Palo Verde must consolidated. We are continuing Board position, and Hector operate efficiently, and the to seek ways to cut costs and to Holguin was appointed to filla Company must be able to obtain increase operating efficiency. vacancy created by the June 1989 appropriate Texas rate relief, parti-resignation of former Chairman cularly with regard to including Three developments in 1989 had Evern R. Wall. John C. Schweitzer Palo Verde Unit 3 in rates.
an adverse impact on the and James A. Cardwell were Company. First, the rate order appointed this month to fillposi- While Palo Verde experienced by the Public Utility 'ssued tions created by the retirements of significant unscheduled outages in Commission of Texas in May directors Tad R. Smith and H. M. 1989, Units 2 and 3 have been 1989 on the second scheduled Daugherty, Jr. William L. Boyan restarted. Unit 2 is presently increase in base rates under the has been nominated to replace undergoing scheduled refueling Rate Moderation Plan was entirely retiring director Ben L. Ivey. and should return to service in inadequate. Messrs. Boyan, Holguin and Skov June. A request to the Nuclear willstand for election at the Regulatory Commission to restart Secondly, when federal regulators annual meeting. Unit 1 is scheduled to be made failed to approve a previously later this month. We expect that agreed upon $ 32 million sale to Later this year, I will ask the recent changes by the Operating Commercial Federal Savings & Board to appoint one or perhaps Agent in the management of Palo Loan Association of the . two new directors. Neither has Verde will improve operating Company's preferred stock been selected, but one willreplace performance.
investment in that Association, the Robert H. Cutler, who will retire Company was forced to accelerate after the annual meeting. The Nonetheless, operating and the sale of its non-utility other appointment, ifmade, willbe maintenance expenses at Palo investments. to a new Board position. Verde are substantially higher than Information on Messrs. Boyan, originally budgeted, creating Finally, the poor operating Cardwell, Holguin, Schweitzer and additional pressure on operating performance of the Palo Verde Skov is contained in the proxy margins and cash flow. These Nuclear Generating Station in statement for the 1990 Annual increased expenses must be 1989 contributed to increased Meeting. recovered in rates.
expenses and reduced operating margins. I believe we now have a In that regard, the Company has a foundation for restoring the Texas rate case in progress for the We made many difficult(and Company to profitability. We scheduled third increase in base sometimes unpopular) decisions in continue to be optimistic about our rates under the Rate Moderation 1989. But we also made service area and the prospects for Plan for Palo Verde Units 1 and 2.
substantial progress, and the growth. In 1989, native system We expect a decision from the Company is now prepared to face sales increased 5.0 percent to 4.5 Texas Commission this summer.
the challenges of operating an million megawatt hours. Total Later this year, the Compa'ny will electric utility in the 1990s. system sales increased 6.4 percent, file for the fourth scheduled Competition is increasing. Power and new customers increased by 3 increase under the Rate Modera-shortages threaten selected areas percent, after a 3 percent increase tion Plan and will request the of the country, while at the same in 1988. For the second time in'as inclusion of Palo Verde Unit 3 in time regulatory uncertainty and many years, the Company Texas rates. The Company is environmental concerns restrict achieved record peak demands. under increasing rate pressure new gene'rating capacity. These Total system peak in 1989 was from customers and regulators, issues must be addressed against 1,076 megawatts, a 7.4 percent but we are entitled to, and will the backdrop of increasingly increase over 1988. The aggressively seek the recovery of, difficultand cumbersome rate Company's native system peak of a fair return on our investment in making procedures. 916 megawatts was a 9 percent Palo Verde.
increase from the previous record To help us meet the challenge, I of 840 megawatts set in 1988. This The rate-making process is am very pleased to welcome five load growth is very encouraging. time-consuming and extremely new directors to the Board. In But in the long term, there are two expensive. The Company, of
course, pays all costs related to SECURITIES rate cases and must maintain a AND RECORDS sizeable staff to prepare cases and to respond to thousands of rate The common stock of El Paso case inquiries. While the Company Electric Company is traded in the is committed to working with its .
over-the-counter market and regulators and customers to quoted on the NASDAQ National minimize confiontation, to Market System. The ticker symbol expedite the rate-making process, for the common stock is ELPA.
and to develop innovative methods to lessen the impact of increased El Paso Electric and The Bank of rates, we arc equally committed to New York (BONY) act as co--
earning a proper return on your transfer agents and co-registrars investment. We will pursue this for the Company's common and return through the regulatory preferred stock. BONY maintains process, or ifnecessary, by appeal all shareholder records of the to the courts. Company.
'll
! The Company is prohibited from SHAREHOLDER paying dividends on its common stock by the terms of its revolving INFORMATION credit facility. Payment of dividends in the future will depend Shareholders may obtain informa-upon a number of factors, includ- tion relating to their share position, ing earnings and cash flow, which dividends, transfer requirements, in turn are functions of appropriate lost certificates, and other related rate relief. matters by telephoning BONY Shareholder Services at 1-800-524-4458.
I urge you to take a few minutes to supplement this general overview with a careful reading of the This service is available to all accompanying Form 10-K. While shareholders Monday through the Company has made significant Friday, 8:00 a.m. to 6:00 p.m.,
progress over the last year make Eastern Time. Shareholders also no mistake about it we ate still in may obtain this information by a very difficultperiod.
writing to:
Shareholder Services, BONY, Our Board and all Company 90 Washington Street, employees are working hard to New York, New York 10286.
meet the ongoing challenges. Wc are optimistic, and we are dedicat- SHAREHOLDER ed to returning our Company to INQUIRIES profitability.
Shareholders should direct Thank you for your support. questions about the activities and operating results of the Company Sincerely, to the Office of the Secretary, El Paso Electric, P.O. Box 982, El Paso, Texas 79960.
Ug, For toll-free telephone calls within Texas, the number is 1-800-524-David H. Wiggs, Jr. 1634. For toll-free telephone calls Chairman of the Board, President elsewhere in the United States, and Chief Executive Officer dial 1-800-351-1621.
BOARD William D. Skov
- Robert C. McNiel (12)
OF DIRECTORS Partner, Skov Farms, SK-Farms, Vice President-Customer Services, Paso Pork Producers, Chnt, Texas; New Mexico Division David H. Wiggs, Jr. (2) Chairman of the Board, First Chairman of the Board, President National Bank of Fabens, Texas Dean Jacobson (25) and Chief Executive Officer Assistant Vice President-OFFICERS Information Services Wilfred E. Binns (7)
President and Sole Shareholder, David H. Wiggs, Jr. (2) Pedro Serrano, Jr. (12)
Binns Construction & Realty, Chairman of the Board, President Assistant Vice President- "
Cruces, New Mexico
'as and Chief Executive Officer Energy Resource & Planning James A.'Cardwell
- William J. Johnson (12) Susanne M. Sickles (12)
President and Principal Senior Vice President-Financial Assistant Vice President-Shareholder, Crinco Investments, Group and Chief Financial Officer Employee Support Services Inc., El Paso, Texas (multi-business holding and William W. Royer (9) Guilleimo Silva, Jr. (10) investment company) Senior Vice Presidcnt- A'ssistant Secretary Special Projects Robert H. Cutler (20) Hermann Vogenbeck (16)
Chairman of the Board, Ignacio R. Tioncoso (20) Assistant Vice President-The Cutler Corp., El Paso, Texas Senior Vice Presidcnt- Power Generation (transportation and manufacturing) Operations Group 1>>
John Wacker (1)
Leonard A. Goodman, Jr. (11) Lawrence M. Downum, Jr. (30) Vice President-
'ssistant Chartered Life Underwriter/ Vice Presidcnt- Intcrnal Audit General Agent Emeritus, John Corporate Services Division Hancock Financial Services, John Whitacre (16)
El Paso, Texas Frederic E. Mattson (20) Assistant Vice President-Vice Prcsidcnt- Operations 'ystems Hector Holguin
- H Power Supply Division Chief Executive Officer, () Years of Service Accugraph Corp., El Paso, Texas Eduardo A. Rodriguez (8)
~ Mr. Skov and Mr. Holguin were (computer-aided design software) Secretary and General Counsel appointed to the Board of Ben L. Ivey (20) Julius F. Bates, Jr. (17) Directors in October 1989.
Farming, El Paso, Texas Vice President- Mr. Schweitzer and Mr. Cardwell Customer Services, Texas were appointed to the Board of Josefina A. Salas-Porras (11) Division Directors effective April 1990.
Educator, El Paso, Texas (consultant in second language and Russell G. Gibson A complete copy of the multicultural training) Controller Company's 1989 Form 10-K report, filed with the Securities John C. Schweitzer
- Gary R. Hedrick (12) and Exchange Commission, Managing Partner, Continental Treasurer including Financial Statements Properties Company, and Financial Statement Austin, Texas John C. Home (17) schedules, will be provided to (real estate and investments) Vice Presidcnt- shareholders without charge Transmission System Division upon written request to:
Tom C. Simpson (7) Eduardo A. Rodriguez, President and Principal James A. Mayhew (10) Secretary, El Paso Electric Shareholder, Simpson Farms, Inc., Vice President- Company, Post, Office Box 982, Las Cruces, New Mexico Rates and Regulatory Affairs El Paso, Texas 79960.
c SECURITIES AiND E<XCHANGE COiMidISSION Washington, D.C. 20549 FOrm 10-K (Mark One) 0 ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1989 OR p, TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE< SECURITIES EXCHANGE ACT OF 1934 (NO FEE RE<QUIRED)
For the transition period from to Commission file number 0-296 El Paso Electric Company (Exact name of registrant as specified in its charter)
Texas 74-0607870 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
303 North Oregon Street, El Paso, Texas 79901 (Address of principal executive ofBces) (Zip Code)
Registrant's telephone number, including area code: 915-543-5711 None of the Registrant's Securities is Registered Pursuant to Section 12(b) of the Act Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE (Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter pe'riod that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO V
<.As of February 28, 1990, the aggregate market value of the voting stock held by non-affiliates of the registrant was $ 307,132,004.
As of February 28, 1990, there were outstanding 35>85,932 shares of common stock, no par value.
DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for the annual meeting of its shareholders to be held on May 21, 1990 are incorporated by reference into Part III of this report.
DEFINITIONS The following abbreviations or acronyms used in this report are defined below:
Abbreviations
~AC C Tcnns AFUDC. Allowance for Funds Used During Construction AIP . Arizona Interconnection Project APS . Arizona Public Service Company Common Plant or Common Facilities. Facilities at or related to the Palo Verde Station that are cominon to all thre'e Palo Verde Units Company El Paso Electric Company CWIP Construction Work in Progress FERC Federal Energy Regulatory Commission FL&R or Franklin or Franklin Land .. Franklin Land & Resources, Inc., a former subsidiary of the Company Four Corners. Four Corners Project or Four Corners Plant IID. Imperial Irrigation District, an irrigation district in Southern California KV Kilovolt KW . Mega'watt(s)
Kilowatt(s)
KWH Kilowatt-hour(s)
MW.
MWH Megawatt-hour(s)
NASDAQ National Association of Securities Dealers Automated Quotations System New Mexico Commission.... New Mexico Public Service Commission NRC Nuclear Regulatory Commission Palo Verde Station or Palo Verde Project or Palo Verde or PVNGS..... Palo Verde Nuclear Generating Station PasoTex . PasoTex.Corporation, a former subsidiary of the Company PNM Public Service Company of New Mexico RCF. Credit Agreement dated as of October 26, 1989, as amended, among El Paso Electric Company, each of the Banks signatory thereto, and Chemical Bank, as Agent Bank SFAS . Statement of Financial Accounting Standards Texas Commission ... Public Utility Commission of Texas TNP. Texas-New Mexico Power Company
TABLE OF CONTENTS PART I Item ~Deec i eric ~PC c I Business 2 Properties 24 3 Legal Proceedings 4 Submission of Matters to a Vote of Security Holders 26 PART II 5 . Market for Registrant's Common Equity and Related Stockholder Matters 6 Selected Financial Data . 28 7 Management's Discussion and Analysis of Financial Condition and Results of Operations.
8 Financial Statements and Supplementary Data 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. -76 PART IIIand PART IV The information set forth in Part III and Part IV has been omitted from this Annual Report to Shareholders.
PART I Item 1. Business General The Company was incorporated in Texas in 1901. Its principal business is the generation and distribution of electricity through an interconnected system to approximately 239,000 customers in El Paso, Texas and in an area in the Rio Grande Valley in West Texas and Southern New Mexico. The Company's principal executive offices are located at 303 North Oregon Street, El Paso, Texas 79901 (telephone 915-543-5711).
The Company's service area extends approximately 110 miles northwesterly from El Paso to the Caballo Dam in New Mexico and approximately 120 miles southeasterly, from El Paso to Van Horn, Texas. The service area has an estimated population of 743,000, including approximately 605,000 people in the metropolitan area of El Paso. Copper smelting and refining, oil refining, garment manufacturing, cattle raising and agriculture are important industries in El Paso, which is also an important transportation and distribution center. At December 31, 1989, the Company's largest retail customers included a copper refinery, 'a smelter, and a" steel fabricator in El Paso, and important military installations, namely the U.S. Army Air Defense Center at Ft. Bliss in El Paso and the White Sands Missile Range and Holloman Air Force Base in New Mexico.
The Company's major franchises are with the cities of El Paso, Texas and Las Cruces, New Mexico, such franchises expiring in 2001 and 1993, respectively. The franchises contain no express renewal provisions. Although the City of Las Cruces is currently reviewing alternative sources, and the City of El Paso has approved the formation of a task force to study the City's options with respect to possible municipal ownership of the Company's properties, the Company believes, but has no assurance, that both franchises will be renewed.
During 1989, approximately 63% of the Company's operating revenues were derived from Texas, 19% from New Mexico and 18% from FERC wholesale custom'ers. Sales to (i) residential customers, (ii) small commercial and industrial customers, (iii) large commercial and industrial customers and (iv) public authorities accounted for approximately 35%, 34%, 12% and 19%, respectively, of the Company's operating revenues from retail sales. In 1989, IID, a wholesale customer, accounted for 11.6% of operating revenues. No retail customer accounted for more than 3% of operating revenues.
The effect of seasonal sales by'uarter are insignificant to the Company's annual operating revenues, but the third quarter of each calendar year traditionally contributes more than 27% of annual revenues due to the climate in the Company's service area. See Note 0 of Notes to Consolidated Financial Statements.
The Company attained an all-time total system peak load of 1,076 MW on June 20, 1989. In 1988, the Company's total system peak load was 1,002 MW. In 1989 and 1988, the native system peak load was 916 MW and 840 MW, respectively. The Company periodically makes long-range projections of system peak load and estimates future sources of power that may be used to supply the system requirements.
The projected annual peak load growth rate for the Company's service area during the 1990-1999 time period is approximately 3%.
The Company had 1,032 employees as of December 31, 1989. Approximately 28% of the employees are covered by a collective bargaining agreement that expires in February'1991.
Prior to January 17, 1990, the Company had, in addition to its electric utility operations, various subsidiaries which engaged in unregulated, non-utility businesses. During 1989, the Company decided to discontinue and to dispose of its non-utility operations. The final disposition transaction occurred on January 17, 1990. See "Non-Utility Operations" and Note P of Notes to 'Consolidated Financial Statements.
Regulation Texas. The rates and services of the Company in Texas municipalities are regulated by those municipalities and in unincorporated areas by theTexas Commission. The Texas Commission.has exclusive de novo appellate jurisdiction to review municipal orders and ordinances regarding rates and services, and its decisions are subject to judicial review.
Nero Mexico. The New Mexico Commission has authority over the Company's rates and services in New Mexico, the issuance of securities by the Company and other matters affecting the operations of the Company.
FERC. The Company is subject to regulation by the FERC in certain matters, including rates for wholesale power sales and the issuance of securities. In addition, Congress has enacted energy legislation which, among other things, establishes national standards for consideration by, state regulatory agencies in determining utility rates and imposes other requirements on the operations of utilities, including the Company. Under certain circumstances, the FERC may order interconnection, wheeling and pooling.
NHC. The Palo Verde Station is subject to the jurisdiction of the Nuclear Regulatory Commission
("NRC"), which has authority to issue permits and licenses and to regulate nuclear facilities in order to protect the health and safety of the public from radiation'hazards and to conduct environmental reviews pursuant to the National Environmental Policy Act. Before any nuclear power plant can become operational, an operating license from the NRC is required. The NRC has granted facility operating licenses for Unit 1, Unit 2 and Unit 3 for terms of forty years each beginning'December 31, 1984, December 9, 1985 and March 25, 1987, respectively. See "Construction Program Palo Verde Station" and "Facilities Palo Verde Station."
Texas Rate Matters Rate Moderation Plan Palo Verde Units I and 2. On March 30, 1988, in Docket 7460, the Texas Commission adopted a rate moderation plan which provides for the inclusion in Texas rates, on a phase-in basis, of the Texas jurisdictional portion of the Company's investment in Palo Verde Unit 1 and the Company's lease payments in its sales and leasebacks of its interest in Palo Verde Unit 2 and one-third of Common Plant to the extent of the book value of the plant sold and leased back (which is approximately 83% of such lease payments). The Texas Commission's order was based upon a stipulated settlement entered in October 1987 among the Company, the staff of the Texas Commission and certain industrial customers. The stipulation and the Texas Commission's final order settled all issues regarding prudence of construction of Palo Verde Units 1 and 2 and Common Facilities and all issues involving the prudence of the Company's decisions to make the investment it made in the Palo Verde Project and which resulted in the continuation of that investment, except, as to Unit 3 only, decisional prudence relating to events occurring after the 1978 issuance by the Texas Commission of a Certificate of Convenience and Necessity for the Palo Verde Project. See discussion below regarding the planned Unit 3 rate case. As part of the, stipulated settlement, the Company recorded in the third quarter of 1987 a regulatory disallowance of approximately $ 38.3 million (824.4 million after tax). The disallowance amounted to less than 2% of the Compan'y's total investment in Palo Verde. The stipulation also settles all issues of excess capacity relating to Units 1 and 2 for the duration oF the 10-year rate moderation plan, and the Texas Commission has indicated that it will not consider excess capacity issues relating to Units 1 and 2 during such time period.
The Texas Commission adopted the rate moderation plan by unanimous vote, over the objections of the City of El Paso and two other intervenors representing public entities. Those parties appealed the Texas Commission's order to state district court in Travis County, Texas, where the district court upheld the order of the Texas Commission. The decision of the District Court was appealed by the City of El Paso and the two other intervenors to the Court of Appeals for the 3rd Judicial District at Austin, Texas. A ruling on such appeal is expected later this year. Management anticipates that the Texas Commission's order will be upheld.
The Texas Commission's order in Docket 7460 limits the Company to specified base rate (cash) increases during the Brst four years of the plan. The plan requires that the Company file rate cases annually to establish the Company's revenue requirements and resulting right to the base rate increase. To the extent the Company's base revenue requirements recognized by the Texas Commis-xceed t}ie base rate increase provided for the period, the unrecovered revenue requirements are sion excee deferred for collection in later years of the plan. The rate moderation plan, which is explicitly inten ec to comply with SFAS No. 92, Regulated Enterprises Accounting for Phase-In Plans, requires all revenue deferrals to be recovered within the 10-year term of the plan, The Company is, under the plan, entitled to additional base rate increases for years subsequent to the scheduled fourth increase, if necessary, to recover all such deferrals during such time period. The Company has indicated in its rate Bling for the scheduled third base rate increase that such additional cash increases will be necessary.
See discussion below regarding Docket 9165.
The Texas Commission's order in Docket 7460 provided for the first scheduled base rate increase of approximately $ 21 million. The new rates went into effect in April 1988, and the order provided for the deferral for future recovery of approximately $ 25 million.
In October 1988, the Company filed with the Texas Commission for the scheduled second base rate increase under the rate moderation plan (Docket 8363). The Company requested an increase of approximately'$39 million in base revenues. In May 1989, the Texas Commission entered its final order in the case which granted, effective June 1989, the scheduled second cash increase in base revenues of approximately $ 7.3 million and the deferral of approximately $ 7.4 million.
The approximate $ 24.3 million ordered reduction in the revenue deferrals requested by the Company resulted from, principally (1) adjustments made by the Texas Commission which reduce d rate base by $ 61 million, the major components of such reduction being the disallowance of certain operating costs previously deferred under accounting deferral orders issued by the Texas Commission (which disallowance resulted in the after-tax write-off of $ 15 million in the erst quarter of 1989),
disallowance of the Company's requested cash working capital levels, removal from rate base of the unamortized balance of Docket 7460 prudence case expenses (which will be considered for recovery in rates in the separate docket described below under "Rate Case Expenses Incurred in Docket 7460")
and the one-time offsetting of rate base by deferred taxes associated with the portion of Palo Verde Unit 3 sold and leased back by the Company in December 1987; (2) the Texas Commission's setting the Company's rate'of return on common equity at 12.4% as opposed to the Company's requested 14.0%;
(3) various operating expenses being reduced or eliminated, totaling approximately $ 6.4 million; and (4) tax ramifications of- the foregoing resulting in a compounding of the reductions.
The Company, as well as certain parties adverse to the Company in the case, appealed the Texas Commission's order in Docket 8363 to state district court in Travis County, Texas. A decision on the appeal is not expected before the end of 1990. The Company has contested the bulk of the adjustments d b the Texas Commission and believes there are justiBed grounds for its appeal. However, as is the case in any appeal from a decision of thc Texas Commission, judicial review is generally limite i dto to a determination of whether substantial evidence exists to support the Texas Commission's order and whether the Texas Commission acted within its statutory authorization and not arbitrarily in reaching its decision. The outcome of the appeal of the case cannot presently be determined.
In late November 1989, the Company filed with the Texas Commission for the third scheduled base rate increase of 3.5% (Docket 9165). In the filing, the Company seeks an increase in base revenues of approximately $ 33.9 million, consisting of an approximate $ 7.1 million cash increase and an approximate $ 26.8 million in phase-in deferrals. As an alternative calculation of the third scheduled base rate increase, the Company requested a cash base rate increase of approximatelyq$ 13.1 million, wi'th thee balance of its requested increase in base revenues of approximately $ 20.8 million to be d e ferreed , in to correct a problem which has arisen in the operation of the rate moderation p ann
'n order r
involving the average unit rate paid by customers. The cash increases in base revenues originaall y
'i 1 pro'ected projec under'he rate moderation plan were projected on the basis of expected average unit rates to
be achieved from forecasted Texas sales. Due to unanticipated shifts in usage among customers and customer groups, the average unit rates for sales has not reached the projected levels. As a consequence, the Company's cash revenues have not reached levels commensurate with the growth in sales that has occurred, which will contribute to the need for additional increases in base rates after the scheduled fourth increase in order to recover all deferred revenues within the 10-year term of the rate moderation plan.
In March 1990, the City of El Paso, in response to the Company's filing, ordered a $ 6.9 million reduction in the Company's base revenues, which, if ordered by the Texas Commission, would, combined with the scheduled cash increase in base rates, result in an amortization of the deferrals ordered in Dockets 7460 and 8363 by a corresponding amount. The City's order has been appealed to the Texas Commission. The staff of the Texas Commission has recommended an approximate
$ 17.5 million increase in the Company's base revenues, consisting of a 57.1 million cash increase and a
$ 10.4 increase in revenue deferrals. The staff has not yet made its recommendation on approximately (R.R million of rate case expenses in this Docket, which were requested in the Company's filing. See "Rate Case Expenses Incurred in Docket 7460." Although the staff recommended rejection of the Company's alternative filing with respect to the average unit rate problem, the staff indicated its agreement that additional base rate increases would be required under the rate moderation plan to recover the phase-in deferrals.
Hearings before the Texas Commission commenced in early March 1990. New rates resulting from the Company's filing in Docket 9165 are expected to be effective by August 1990.
The Company's filing in Docket 9165 does not involve the major issues in Docket 8363 relating to the adjustments made by the Texas Commission with respect to deferred operating costs. The issues in Docket 9165 relate principally to return on equity, operations and maintenance expenses (particularly at Palo Verde), deferred taxes and recovery of certain restructuring costs incurred by the Company.
The Company believes that it is entitled to the rate relief sought in Docket 9165, including its alternative filing with respect to the average unit rate problem. The Company would, as it has in the past with respect to previous orders of the Texas Commission, appeal to state district court ifthe Texas Commission were to order insufficient rate relief in this Docket. The outcome of the case cannot presently be determined.
The Company's present plan is to file in the third quarter of 1990 for the fourth scheduled base rate increase under the Docket 7460 rate moderation plan. The scheduled base rate increase under the plan is 3.5% New rates resulting from the filing should be in effect by summer 1991.
Palo Verde Unit 3 Inclusion in Texas Rates. Although Palo Verde Unit 3 began commercial operation in January 1988, the Unit cannot satisfy Texas Commission criteria for in-service status, and thereby qualify for eligibility for 'inclusion in Texas rates, until the AIP transmission facilities, construction of which was completed in December 1989, are energized for operation at a required minimum capacity level. For a description of AIP, see "Facilities Palo Verde Station."
Utilization of the AIP transmission line can occur only with the consent of the Operating Agent of the Southwest New Mexico Transmission System ("SWNMTS"), who can, in that capacity, unilaterally determine the conditions under which power can be transmitted oyer the AIP line. Public Service Company of New Mexico ("PNM") is presently acting as, operating agent under the SWNMTS.
Disputes have arisen between the Company and PNM regarding transmission rights and capabilities in the southern and northern New Mexico transmission systems, and PNM has refused to transfer operating agent status under the SWNMTS to the Company, as required under the SWNMTS agreement upon completion of construction of AIP. As a result of these disputes, the Company in early March 1990 sued PNM in the United States District Court for the Western District of Texas for wrongful refusal to permit the Company its full AIP transmission capability.
On March 30, 1990, the Company reached an agreement in principle with PNM to submit to binding arbitration the entitlement of the parties to the transmission rights and capabilities in dispute.
The agreement in principle provides for the energization, pending arbitration, of AIP no later than
April 9, 1990, at the required level of capacity necessary for Unit 3 to meet the Texas Commission's in-service criteria and provides for the Company to become Operating Agent of SWNMTS upon receipt of the decision of the arbitrators. The Company will accrue a payable to PNM, based upon the purchase of a specified amount of wheeling capacity from PNM, which must be paid only if the arbitrators rule in favor ofPNM. Each of the Company and PNM will appoint one arbitrator, and the two of them will select a third arbitrator. The agreement in principle calls for the execution of a definitive agreement between the parties by April 6, 1990, at which time the Company's lawsuit will be dismissed. A decision of the arbitrators is scheduled by the end of 1990.
The Company expects a favorable outcome in the arbitration. An unfavorable outcome would not affect the in-service status of Unit'3, and there are alternatives available to the Company, in the event of an unfavorable outcome, to meet its transmission capability requirements not met through the southern New Mexico transmission system, of which AIP is a part.
In September 1989, the Company Bled an application with the Texas Commission for an accounting order that would allow the Company to defer and capitalize substantially all Unit 3 operating costs (excluding fuel) and to accrue a carrying charge on its ownership interest in Unit 3 from the date Unit 3 satisfies the Texas in-service criteria until the Texas Commission issues its rate order on Unit 3. The Company's application for the accounting order was consolidated with Docket 9165 described above. The staff of the Texas Commission has recommended that the Texas Commission grant the accounting order. The Company expects the Texas Commission to grant the requested accounting order. If, however, the Texas Commission refused to grant the accounting order, the Company will be required to expense the Unit 3 operating costs beginning with the date that Unit 3 meets the Texas in-service criteria.
Until Unit 3 qualifies for in-service status in Texas, the Texas jurisdictional portion of Unit 3 will be accounted for, as it has been since the Unit went into commercial operation, as plant under construction. The Company, therefore, has been capitalizing, since the Unit went into commercial operation in January 1988, the Texas jurisdictional portion of the costs of owning, operating and maintaining Unit'3. During the year ended December 31, 1989, the Company capitalized a total of
$ 51.1 million to construction work-in-progress related to the Texas jurisdictional portion of Unit 3, consisting of $ 12.7 million of operation and maintenance costs; $ 15.9 million of lease expense attributable to the portion of Unit 3 sold and leased back; g2.4 million of property and other taxes; and
$ 20.1 million of AFUDC. Since January 1988 through December 31, 1989, the aggregate of such costs capitalized is $ 85.9 million. The Company's total investment in the Texas jurisdictional portion of Unit 3 at December 31, 1989, net of the portion sold and leased back, was $ 216.0 million.
The Company plans to file with the Texas Commission in the third quarter of 1990 for rate treatment of the Texas jurisdictional portion of the Company's investment in Palo Verde Unit 3, including the lease payments in the Company's sales and leasebacks of 40% of its interest in Unit 3. The Company expects the Texas Commission's Bnal order on the Unit 3 case in the late Brst quarter of 1991, with rates reflecting the outcome of the case to be effective in the summer of 1991.
At present, management believes that inclusion of Unit 3 in Texas rates will probably involve some form of phase-in or rate moderation plan. Either a separate plan for the Unit 3 costs or a revised combined plan, including the Company's investment in Palo Verde Units 1, 2 and 3, are possible. As the Company has only one set of rate tariffs, however, some merger of the plans into a single set of rates will be necessary.
Although issues relating to the prudence of construction costs directly attributable to Unit 3 are not included in the construction prudence issues resolved by the rate moderation plan for Units 1 and 2 and are therefore open for decision in the Unit,3 case, the Company does not expect a material disallowance of Unit 3 costs on the basis of construction imprudence. In March 1989, Ernst L.
Whinney, a national accounting firm, which oversaw the prudence audit of the Palo Verde Station ordered by the Arizona Corporation Commission in the exercise of its regulatory authority over Arizona Public Service Company, the Operating Agent for Palo Verde, released its audit report. The
report identified approxim'ately 860 million, excluding AFUDG and property taxes, for the entire Palo Verde Project which Ernst h Whinney contends were unreasonable. Of this amount, the Company's share would be approximately $ 9.5 million (which is less'than the write-off recorded by the Company in connection with the adoption of the Docket 7460 rate moderation plan see discussion above under "Rate Moderation Plan Palo Verde Units 1 and 2"). Neither the Company nor the Operating Agent accepts the Ernst R Whinney contentions as to the unreasonableness of the Palo Verde construction costs. The audit report also identified certain areas that were found to exceed the standard of reasonableness and to have a positive impact on the Palo Verde Project, including built-in separation of electrical equipment, design replication of the three Palo Verde Units, certain aspects of the regulatory (licensing) management function, and certain labor and contractual arrangements. The report estimated that the potential direct cost savings of the identified areas in which performance exceeded the standard of reasonableness were approximately $ 300 million for the entire project (excluding AFUDC and property taxes), of which the Company's share would be approximately 847.4 million.
Decisional prudence issues relating to Unit 3 were not resolved in Docket 7460, insofar as such issues relate to events occurring after the Texas Commission's November 1978 issuance of a Certificate of Convenience and Necessity for Palo Verde. In Docket 7460, the Texas Commission acknowledged the prudence of the Company's decision-making through the issuance of the Certificate of Conve-nience and Necessity for Palo Verde. The Company believes that it will be able to demonstrate in the Unit 3 case the prudence of the Company's decisions regarding the level of its Palo Verde participation after 1978 and does not expect any material disallowance on the grounds of decisional imprudence.
The Company believes that the primary concern with respect to inclusion of the Company's full investment in Unit 3 in Texas rates will relate to issues of excess capacity. Such issues are resolved with respect to Units 1 and 2 under the rate moderation plan for the 10-year term of the plan. The Company believes that proper regulatory treatment recognizes that the construction and addition to utility plant of generating capacity, particularly large investments such as the Company's investment in Palo Verde, cannot exactly be matched to increases in load requirements and that a period of an acceptable level of excess capacity must be anticipated and accepted. Claims of excess in the Company's generating capacity continue to be weakened by the load growth experienced by the Company. If any excess generating capacity were to be found by the Texas Commission relating to Unit 3, the Company believes the amount of any resulting exclusion from rate base would probably be temporary and would be restored to rate base in future rate proceedings to permit full recovery of substantially all of the Texas jurisdictional portion of the Company's investment in Unit 3.
The Company believes that it is entitled to recover in full the Texas jurisdictional portion of the Company's Unit 3 investment and a fair return thereon. If the Company were denied adequate and timely rate relief sufficient to recover the investment and a fair return thereon, the Company would resort to the courts for the rate relief to which it believes it is entitled. The ultimate outcome of the case cannot, however, presently be determined. Failure to receive sufficient inclusion in Texas rates of the Company's Unit 3 investment, on a timely basis, would increase the Company's external financing requirements and could adversely affect access to the capital markets at reasonable cost. An adverse regulatory decision by the Texas Commission with respect to the Company's investment in Unit 3 which, in the judgment of the lending banks under the RCF, causes the Company's revenues to be insufficient to assure its ongoing viability or its access to capital markets or its ability to repay its obligations, constitutes an event of default under the RCF. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources."
Fuel Reconciliation Case. In June 1989, the Company filed an application with the. Texas Commis-sion to reconcile its fuel expenses and revenues for the period August 1985 through March 1989. The reconciliation is required by Texas Commission rules and final order in Docket 7460. The Company's filing requests an additional $ 900,000 in fuel revenues for the reconciliation period. The City of El Paso, in response to the Company's filing, recommended that the Company be ordered to refund approximately $ 14.3 million in previously recovered fuel expenses. The staff of the Texas Commission
has recommended a refund of approximately $ 10.2 million. Hearings before the Hearing Examiner appointed by the Texas Commission have been completed, and a Hearing Examiner's report an
'he recommendation d is expecte d in outcome oi this matter prior t o th e issu h it has, in accor ance wi i thee rules that overcollected fuel expenses during the ance of the Company's fuel
'tl expense e near
'nce ru e ear future.
of u
the four-year recoveries Although the Company is unable to assess the of the Hearing Examiner's report, the Company believes Texas Commission, made all refunds to customers reconciliation would not be period and justified. The that any materia Company has mers oof isa made ow-no provision for any fuel refunds in the Bnancial statements included in this report.
Rate Case Expenses Incurred in Docket 7460. The approximate $ 11.4 million of expenses incurred by the Company in connection wi'th th e Do c ket 7460 rate case were severed from the issues ruled upon were assigned to a new docket for consideration. Th e C 'as by the Texas C Commission in th a t D oc ket a lied for the immediate and e and a
recovery proposed of approximately $ 5 million of these expenses that the balance of the expenses,, attributable to through a surcharge to customers has d h f D k t 7460 be amortized and recovered in rates over the useful life of the Palo Verde Units. The staff of the Texas Commission has recommended that the Company be allowe owed of to recover all of the expenses, without interest, amortized over the useful life of the Units. The City El Paso has recommended a disallowance of approximately $ 7.4 million of the prudence expenses.
Although hearings in this case were completed in November 1988, no Hearing Examiner's report as b Th C ts a ruling from the Texas Commission by summer 1990. The costs are included as a deferred charge in the accompanying consolidated balance sheet. Althoughi the t e Com ompanyan expects to recover the costs, most likely in accordance with the Company's proposed method for recovery, an assessmen t o f th e ou tcome of the case cannot be made prior to the issuance of the Hearing Examiner's report.
Texas Recognition of Palo Verde Sales and Leasebacks. The Company sold and leased back its entire interest in Palo Verde Unit 2 and one-third of Common Plant in transactions completed in August 1986 and December 1986. The Company also sold and leased back approximately 40% of its interest in alo Verde Unit 3 in December 1987. See Note E of Notes to Consolidated Financial Statements. The d 1'l T Commission rules was required to report the Unit 2 and Unit 3 sales and leasebacks to the Texas Commission for a determination by the Commission as to w et er t e transactions were in the public interest. In its Docket 7460 order and a separate order issued in August 1989 the Texas Commission found the Unit 2 and Unit 3 sales and leasebacks, respective y, to e in t e pu bl'ic in t eres.t. Thee rulings ru i have no current ratemaking impact, but do insure tha, in ie' c
' with thee Unit 3 sa 1 es an d 1 ease b ac k s, the Commission will consider those transactions in connection wi Company's request for rate treatment of its investment in Unit 3. The City o aso appea e e Commission s or d er wit respec t t o the Unit 3 transactions to state district court in Travis County, Texas. The h appea is nott expec t e d t o b e ru 1 ruled upon this year. Management believes that the court will wi uphold the Commission's order. The finding on the Unit 2 sales and leasebacks is a part of the City s appeal of the Docket 7460 order.
Perfonnance Standards for Pnlo Verde Texas. In June 1989, the Company Bled an application with the Texas Commission to establish, performance standards in its Texas jurisdiction for the operation of the Palo Verde Units. The performance standards proposed by the Company correspond to the performance stan d ar d s for th e P a lo Verde Units currently in effect with the New Mexico
' New'Mexico service area. See "New Mexico Rate Matters" below.
C ommission for the'e Company's o e Company's application to establish Texas performance standards has been 'd consolidated d with wi thee Company's rate filing in Docket 9165 (see discussion above).
Texas Recooeng of Fuel Expenses. In its Texas jurisdiction, the Company recovers its fuel expenses
l and purchased power costs pursuant to a fuel factor set by the Texas Commission in each genera rate request filed by the Company. The Texas Commission has the authority to order proceedings "F
f h See "Fue 1R econciiliation f onc'ling the Company's fuel revenues against actual fuel expenses.
ase aabove. As a result of the unscheduled outages of the Pa o er e ni s ia ion Case" xcess oof the amount "of in 1989 the Company'ncurred and is incurring replacement power costs in excess 7
fuel revenues provided by the Company's fuel factors. Although the Company believes it is entitled to and will recover its actual Texas fuel costs, the Company is unable, at this time, to predict the ultimate financial or regulatory impact of the unscheduled outages. See "Facilities Palo Verde Station."
New Mexico Rate Matters In March 1987, the New Mexico Commission adopted a rate moderation plan which provides for the regulatory treatment of the New Mexico jurisdictional portion of the Company's investment in all three Units at Palo Verde. The New Mexico Commission's order was based upon a stipulated settlement among the Company, the staff of the New Mexico Commission and certain intervenors. The New Mexico plan, among other things, provides for the full inclusion in rate base of the Company's investment in Unit 1 and one-third of common plant and recovery as cost of service of the Company's lease payments on the Unit 2 sales and leasebacks to the extent of the book value of plant sold and leased back. The Company agreed, as part of the plan, that it would not request inclusion in New Mexico rates of the New Mexico jurisdictional portion. of the Company's investment in Unit 3, one-third of common plant and certain related transmission facilities (aggregating $ 54.2 million) or any Unit 3 operating expenses. The plan also provided for increases in rates of 3% on a total cents per kilowatt hour basis in 1987, and two additional 3% increases in base rates in 1988 and 1989. The plan settled as far as the New Mexico jurisdiction is concerned all construction and decisional prudence issues relating to the Company's investment in Palo Verde and settled excess capacity issues through 1993.
Similar to the Texas plan for Units 1 and 2 (Docket 7460 described above), the New Mexico plan provides that, to the extent the Company's base revenue requirements determined by the New Mexico Commission exceed the base rate increase provided for the period, the unrecovered revenue requirements are deferred for collection in later years of the plan. However, the New Mexico plan presently provides that all deferred revenues not recovered prior to December 31, 1994 are not to be recovered through New Mexico rates. SFAS No. 92, which governs accounting for rate phase-in plans, was not in existence at the time of the adoption of the New Mexico plan. As a result of the New Mexico plan provision that deferrals not recovered prior to December 31, 1994 will not be recovered in rates, the New Mexico plan does not comply with SFAS No. 92. The Company has Bled an New'exico application with the New, Mexico Commission to amend the plan to bring it into compliance with SFAS No. 92 and believes that such amendment will be approved by the New Mexico Commission. A.hearing on the application is scheduled in mid-June 1990. If the New Mexico plan is not amended to comply with SFAS No. 92, the Company would be required to write-offapproximately $ 5.5 million of recorded phase-in deferrals and discontinue reporting for financial statement purposes the unrecovered revenue requirements deferred for collection under the plan.
Effective November 1987, the New Mexico Commission ordered the first scheduled rate increase under the New Mexico plan. The order provided for an increase in base revenues of approximately
$ 5.0 million, consisting of approximately $ 1.8 million cash increase in base rates and approximately
$ 3.2 million deferred revenues.
In November 1987, the Company filed for the second scheduled base rate increase under the New Mexico plan. The Company requested an increase in base revenues of approximately $ 5.5 million. The New Mexico plan limited the base rate increase to approximately $ 1.7 million, with the balance of the Company's requested increase in base revenues to be deferred. The New Mexico Commission's final order in the case, which was issued based upon a stipulated settlement on revenue requirements, allowed the Company an increase in base rates of approximately $ 1.5 million and provided for the capitalization of approximately $ 1.2 million of fuel expense as a cost of service deferral. No additional deferred revenues were provided under the stipulation or order. Rates based upon the order were effective November 1988.
In July 1989, the Company filed with the New Mexico Commission for the third and final scheduled base rate increase under the plan. The Company requested an increase in base revenues of
approximately $ 8.5 million, consisting of an increase in base rates of approximately $ 1.8 million and deferral of approximately $ 6.7 million. A stipulated'settlement of the case was reached in February 1990 which provides for an increase in base revenue of approximately $ 2.5 million, consisting o an increase in base rates of approximately $ 1,8 million and deferral of approximately $ 0.7 million. T e Company expec t s th e New C ew Mexico Commission to issue its final order approving the stipulated settlement in April 1990, with new rates to be effective in May 1990.
The Company will be required to recover the New Mexico jurisdictional portion of the Company's investment in Unit 3, which is deregulated under the New Mexico rate moderation plan, through off-system sales in the economy energy market. Market prices for economy energy sales have not been in recent years and are not presently at levels needed by the Company to recover the New Mexico portion of the Company's current operating expenses related to Unit 3, including lease payments.
However, the Company believes that over the useful life of Unit 3, based upon its current forecast, o plant operating costs and performance, power needs of other utilities.and alternative fuel prices, t e Company will be able to recover the New Mexico portion of its Unit 3 costs through such sales o power. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
The Company is subject to performance standards in its New Mexico jurisdiction for the operation of the Palo Verde Units. The standards measure performance on the basis of the three Units being d as a single generating, station and involve the use of designated levels of capacity actors (t e ratio of actual generation to maximum possible generation). Ifthe annual capacity factor of the s a i exceeds the maximum standard (which is 75% capacity), the Company is entitled to a monetary reward based upon the additional fuel costs avoided, calculated with reference to the Company's weighted average fuel and purchased power costs (other than Four Corners, Palo Verde and purchases from Southwestern Public Service Company), If the annual capacity factor falls below the minimum standard (60% capacity), the Company is penalized based upon the additional fuel costs incurred using the same formula. If annual performance falls between the minimum and maximum standards, no consequences result.
Due to the unscheduled outages at Palo, Verde during 1989 (see",Facilities Palo Verde Station" below), the Company recorded at December 31, 1989 an estimated, performance penalty of approxi-mately $ 3.0 million based upon the requirements of the iNew Mexico performance standards. Under those standards, the New Mexico Commission has the right to re-evaluate whether Palo Verde Units 1 and 2 should continue to be included in New Mexico rates. Although the Company is unab e at t is time to predict the ultimate Bnancial or regulatory impact of the unscheduled outages at Palo Verde during 1989, the Company believes that, because Units 2 and 3 have been restarted and a request to t e NRC to restart Unit 1 is expected in April of 1990, the New Mexico Commission will not exclude any o the Company's investment in Palo Verde Units 1 and 2 from New Mexico rates. See "Facilities , Palo Verde Station" for'information on the outages at Palo Verde.
In its New Mexico jurisdiction, the Company recovers its fuel expenses and purchased power costs through a fuel factor set by the New Mexico Commission. The New Mexico rate moderation plan requires that the fuel factor be fixed each year during the term of the plan. On January 31; 1990, t e Company Bled a request for a new fuel factor in its New Mexico jurisdiction. The requested fuel factor reflected the estimated penalty of $ 3.0 million recorded by the Company under the New Mexico performance standards as well as a request by the Company to recover during 1990 approximate y
$ 2.0 million of under-recovered fuel expenses in New Mexico. Hearings will commence this summer, and the Company expects the New Mexico Commission to issue an order a of d bby t hee fall o 1990.
FERC Rate Matters The Company's rates for wholesale power sales and transmission services are subject to regulation by the FERC. The Company's sales for wholesale power make up a significant portion o t e Company's operating revenues. During both 1989 and 1988, approximately 18% of the Company's ec ric operating revenues resulted from such sales, respectively. Rate tariffs currently applicable to e lectric certain FERC jurisdictional customers contain appropriate fuel and purchased power cost adjustme t
provisions designed to recover the Company'0 fuel and purchased power costs. Two FERG customers have fixed fuel factors approved under FERC tariffs for'which no fuel reconciliation is made. Although rates to wholesale customers require FERC approval, the Company and its wholesale customers usually establish such rates through negotiations subject to such FERC approval.
The Company has a rate settlement agreement with IID which is based upon a long-term firm power sales agreement providing for the sale of 100 megawatts of firm capacity to IID beginning in 1987 and continuing through April 2002. In addition, the agreement calls for contingent capacity of 50 megawatts to be made available to IID beginning in 1992 and continuing through April 2002. The terms of the settlement agreement generally'provide for sales prices designed to fully recover the scheduled costs over the life of the agreement. The sales prices are generally level throughout the term of the agreement and to the extent that they do not fully recover costs scheduled in the contract, revenues and a return are accrued for subsequent collection. Amounts accrued under the terms of the agreement were $ 7,340,000, $ 7,632,000 and $ 1,510,000 in 1989, 1988 and 1987, respectively. The agreement with IID settles any possible issue of the prudence of the construction costs of Palo Verde and of excess generating capacity.
The Company has a rate settlement agre'ement with TNP which is based upon a revised iirm power sales agreement with TNP. As part of the settlement of the rate increase request, the Company and TNP settled an arbitration with respect to the contractual level of reserve demand under the Company's prior sales agreement with TNP. The revised firm power sales agreement with TNP provides for firm power sales to TNP ranging from 43 megawatts to'79 megawatts, beginning in 1987 and continuing through 2002, with negotiated demand charge rates for such power.
Construction Program The Company's estimated construction costs for 1990 through 1993 set forth in the table below are approximately $ 202.6 million in cash and approximately $ 16.2 million in related AFUDC, net, of deferred tax. The estimated costs were prepared as of March 5, 1990. For a number of reasons, actual costs may vary from the construction program estimates set'orth below. Such estimates are reviewed and modified from time to time to reflect changed conditions.
1990 1991 1992 1993 (In thousands)
Production:
Palo Verde Station(l) . $ 29,000 $ 21,300 $ 18,700 $ 19,500 Palo Verde Deferied Costs(2) 4,500 0 0 0 Other . 1,600 3,600 2,100 2,200 Transmission 0 1,300 4,400 2,300 Distribution . 21,600 24,000 21,400 16,100 General Plant 1,200 1,200 3,300 3,300 AFUDC:(3)
Palo Verde Station(2) . 8,200 2,300 2,200 2,100 Other . 1,800 1,200 1,600 1,100 Deferred Tax on AFUDC(4)............ ~1,400) ~500) ~1,300) ~1,100)
Total ............... $ 66,500 $ 54,400 $ 52,400 $ 45,500 (1) Does not include acquisition costs for nuclear fuel. See "Energy Sources Nuclear Fuel."
(2) Includes the Texas jurisdictional costs of owning, operating and maintaining Unit 3, which the Company will continue to capitalize until Unit 3 meets present Texas in-service criteria.
Subsequent to the Unit 3 in-service date for Texas ratemaking purposes, the Company anticipates deferring the Texas jurisdictional costs of owning, operating and maintaining Unit 3, which are expected to aggregate approximately $ 14.9 million 'and $ 13.0 million for '1990 and 1991, respec-tively, pursuant to an accounting deferral order that the Company requested from the Texas 10
Commission. See "Regulation Texas Rate Matters Palo Verde Unit 3 Inclusion in Texas Rates." ~
(3)" AFUDC has been calculated using an estimated accrual of 10.87%.
(4) Deferred tax is provided on the borrowed portion of AFUDC through 1991 and on total AFUDC beginning in 1992 to comply with the Company's adoption of SFAS 96 and will effectively reduce plant to a net amount for ratemaking and depreciation purposes.
Net utility plant at December 31, 1984 was 81,421,591,000. Gross additions to plant, including CWIP, for the Bve years ended December 31, 1989, totaled 8813,035,000 (the largest portion of which
,was $ 558,887,000 for PVNGS). Net utility plant at December 31, 1989 (which reflects the sales of plant in the Palo Verde sale and leaseback transactions), was 81,348,975,000 (including capitalized'nuclear fuel of approximately 847,114,000 leased from a nuclear fuel trust). See "Energy Sources Nuclear Fuel."
The Company does not expect to c'onstruct additional base load generating facilities during this century. 0 Palo Verde Station The Company has a 15.8% interest in the three 1,270 MW nuclear generating units and Common Plant at the Palo Verde Station near Phoenix, Arizona (owned as to Unit 1 and approximately 60% of Unit 3, and leased as to Unit 2 and approximately 40% of Unit 3). The participants in Palo Verde include the Company and six other utilities: Arizona Public Service Company ("APS"), Southern California Edison Company, Public Service Company of New Mexico, Southern California Public Power Authority, Salt River Project Agricultural Improvement and Power District and the Los Angeles Department of Water and Power. Participants share costs and generating entitlements in the same proportion as their percentage interests in the generating units. APS serves as Operating Agent for the Palo Verde Station. In February 1977 and November 1978, respectively, the New Mexico Commission and the Texas Commission issued Certiflcates of Convenience and Necessity for the Company's participation in Palo Verde Station.
The table below sets forth the actual costs incurred by the Company through December 31, 1989, for the construction of PVNGS (including the cost of start-up and testing and the Company's share of the cost of related switchyard and transmission facilities), and the Company's estimate of the cumulative cost of construction through the completion of PVNGS. The table includes capitalized ownership, operating and maintenance expenses related to the Texas jurisdictional portion of Unit 3, but does not include the Company's share of the estimated cost of nuclear fuel. See "Energy Sources Nuclear Fuel." The table also does not reflect a regulatory disallowance write-off of approximately $ 38.3 million. The estimated costs were prepared as of March 5, 1990. See "Regulation."
Actual Costs Estimated Cumulative Costs Throu h December 31, 1989 1990 1991 1999 Nuclear Plant . 1,044,000 1,077,500 1,098,800 1,117,500 Related AFUDC . 532,400 540,600 542,900 545,100 Transmission Lines. 18,800',300 18,800 18,800 18,800 Related AFUDC....... 8,300 8,300 8,300 Deferred Tax on AFUDC. ~109,200) ~110,300) ~110,600) '~111,300)
Total .... 81,494,300 $ 1.534 900 $ 1,558,200 $ 1,578 400 The above table includes approximately 8653.4 million in aggregate book value of the undivided interests involved in the Unit 2 and Unit 3 sale and leaseback transactions in which the related leases are accounted for as operating leases. Such book value no longer appears as an asset of the Coinpany.
11
Sales and Leasebacks. In August and December 1986, the Company sold and leased back all of its 15.8% undivided interest in Unit 2 and one-third of its interest in certain Common Plant at Palo Verde for approximately $ 684.4 million cash. In December 1987, the Company sold and leased back approximately 40% of its undivided 15.8% interest in Unit 3 for approximately $ 250 million cash. For a description of the terms and provisions of these transactions, see Note E of Notes to Consolidated Financial Statements.
Facilities As described below, the Company currently has a net generating capacity of 1,497 MW, consisting of 246 MW at Rio Grande, 478 MW at Newman, 69 MW at Copper, an entitlement of 104 MW. from Four Corners Units 4 and 5 and an entitlement of 600 MW from Palo Verde Units 1, 2 and 3.
Palo Verde Station For information regarding the Company's interest in the Palo Verde Station, see "Regulation" and "Construction Program." For a description of nuclear fuel acquisition, see "Energy Sources Nuclear Fuel."
Operation of each of the three Palo Verde Units requires an operating license from the NRC. Full power operating licenses for Units 1, 2 and 3 were issued by the NRC in June 1985, April 1986 and November 1987, respectively. The full power operating licenses, each valid for a period of approxi-mately 40 years, authorize APS to operate the three Palo Verde Units at full power.
All three Palo Verde Units were out of service for substantial periods during 1989. Unit 3 and Unit 1 experienced unscheduled outages on March 3, 1989 and March 5, 1989, respectively, and Unit 2 was removed from service for testing by APS on March 15, 1989. In March 1989, the NRC iss'ued confirmatory action letters requiring APS to'ake certain corrective actions and to receive NRC approval before restarting any of the Palo Verde units. APS placed'Units 3 and 1 in their scheduled refueling outages on March 8, 1989 and April 8, 1989, respectively, With NRC approval, APS restarted Unit 2 on June 29, 1989 (although the unit experienced subsequent outages during the year) and Unit 3 on January 21, 1990. On February 24, 1990, APS placed Unit 2 in its second refueling outage, which is scheduled to continue approximately'00 days. APS is undertaking corrective actions relating to Unit 1 and it is currently estimated that APS will request NRC approval to restart the Unit during April of 1990. Because of the present uncertainties regarding the timing of NRC approval, the restart date for Unit 1 cannot currently be predicted.
Hl As a result of the unscheduled outages of the Palo Verde Units, the Company is incurring replacement power costs in excess of the amount of fuel revenues provided by the Company's fuel factors. See "Regulation Texas Hate Matters Texas Recovery of Fuel Expenses" and "Regula-tion New Mexico Rate Matters." The Company's total undercollection of fuel revenues at Decem-ber 31, 1989 was approximately $ 10 million. The Company has deferred, and will continue to defer, any undercollections resulting from the Palo Verde outages in accordance with procedures governing recovery of fuel expenses in its regulatory jurisdictions. Although the Company believes it is entitled to and will recover its actual fuel costs, net of the New Mexico performance standard penalty'discussed under "Regulation New Mexico Rate Matters," the Company is unable, at this time, to predict the ultimate financial or regulatory impact of the unscheduled outages.
On April 19, 1989, the manufacturer of the Control Element Assembly Drive Mechanisms of all three Palo Verde Units notified the NHC of a potential safety concern related to multiple Control Element Assembly ("CEA") "slip or drop events." APS has implemented interim precautionary measures in the event of multiple CEA slips or drops, and APS and the manufacturer are currently developing a plan to quantify risks and consequences associated with a double CEA slip or drop event at Palo Verde, to provide guidance for operator actions following such an event, and to correct the cause of such event. APS and the manufacturer are also evaluating permanent corrective actions.
By letter dated June 29, 1989, the NRC informed APS that it would conduct a Diagnostic E l t'on of Palo Verde in order for NRC senior management to review the results of previous inspection reports and performance indicators. The NRC delivered the evaluation report to AP Sb y letter dated March 16, 1990. The report stated that the evaluation team found that Palo Verde had several substantial management, organizational and technical problems caused by a number of long-standing deffciencies. The report concluded that the root causes for Palo Verde's performance prooblems p re (1) insuScient technical and management depth to support the start-up and operation emswwere f th ee-unit facility (2) during start-up management and technical resources were focusedd on th e next unit to go on line at the expense of the operational units, resulting in a backlog of technica an programmatic issues, and (3) a 1987 Palo Verde management reorganization which compounded, th 'than improved management deffciencies. The report also stated that the evaluation team observed several positive attributes and strengths at Palo Verde. Overall the team concluded that APS had a good understanding of the major performance problems affecting Palo Verde and that recent management changes combined with numerous initiatives under way were beginning to show progress in resolving known management issues. On or before May 15, 1990, APS must provide the NRC with a summary of an integrated action plan addressing the issues raised in'he report.
The NRC is also currently evaluating possible enforcement action relating to (i) alleged violations of NRC regulations in connection with the reactor start-up of Palo Verde Unit 1 on May 14, 1988 and (ii) an alleged lack of timeliness of corrective actions with respect to controls over locked high-radiation areas at Palo Verde. The facts upon which the alleged violations are based were reported to the NRC by APS, the Palo Verde Operating Agent. ~
The Company has completed construction of a new 345 KV, 313-mile transmission line and associated substation equipment, known as the "Arizona Interconnection Project" or "AIP," which will serve a number of purposes, including providing access to the Company's full generation en t'tlement i emen ssharear to the Palo Verde Units. The transmission line originates at the Springervi e Generating Station in Springerville, Arizona, and terminates at the Company's Rio Grande Power P 1 ant n in Dona Ana County, New Mexico (northwest of El Paso). In addition to enabling the Company to access its full generation entitlement share in Palo Verde, AIP will enable the Company to import low cost energy from the Arizona and New Mexico power grid, enhance the Company's transmission system reliability, better equip the Company to meet future strategic generating resource mix requirements and further enable the Company to benefft from economy energy purchases. See "Regulation Texas Rate Matters Palo Verde Unit 3 Inclusion in Texas Rates."
Assured supplies of water are important both to the Company (for its generating plants) and to its customers. However, conflicting claims to limited amounts of water in the southwestern United States have resulted in numerous court actions in recent years.
In connection with the construction and operation of Palo Verde, APS, as Operating Agent, h as entered into contracts with certain municipalities granting the right to purchase effluen for cooling purposes at Palo Verde. The validity of the primary effluent contract has been challenged in a suit Sled by the Salt River Pima-Maricopa Indian Community (the "Community" ) against the United States Department of the Interior (the Federal agency alleged to have jurisdiction over the use of such effluen) and additional defendants, including APS and the Company. The portion of the action challenging the effluent contract has been stayed while the Community litigates its claims against the Department of the Interior and other defendants for wrongful exclusion from SRP, a Federa reclamation project. On October Rl, 1988, federal legislation was enacted conforming to the require.
ments of a proposed settlement. that would terminate this case without affecting the validity of the primary effluent contract. Certain contingencies, however, remain to be performed before t e ettlement is Bnalized and the suit is dismissed. Among these contingencies are the appropriation of signiffcant funds by Congress and the Arizona legislature and approval by the court in the Lower Giila Watershed litigation (see below). The Company is unable to predict when, or if, the contingencies wi be satisffed so that the settlement will become effective.
13
A summons served on APS in early 1986 required all water claimants iri 'the Lower Gila Hiver Watershed in Arizona to assert any claims to water on or before January 20, 1987, in an action pending in Maricopa County Superior Court. Palo Verde is located within the geographic area subject to the summons, and the rights of the Palo Verde participants to the use of groundwater and efBuent at Palo Verde are potentially at issue in this action. APS, as Operating Agent, filed claims that dispute the Court's jurisdiction over the Palo Verde participants'roundwater rights and their contractual rights to e81uent relating to Palo Verde and, alternatively, seek confirmation of such rights. No trial date has been set in this matter.
Although the foregoing matters remain subject to further evaluation, APS, as Operating Agent for Palo Verde, has advised the Company that APS expects that the described litigation will not have a materially adverse impact on the operation of the Palo Verde generating units..
The Palo Verde participants have insurance for public liability payments resulting from nuclear energy hazards to the full limit of liability under Federal law. This potential liability is covered by primary liability insurance provided by commercial insurance carriers in the amount of $ 200 million and'the balance by an industry-wide retrospective assessment program. The maximum assessment per reactor under the retrospective assessment program for each nuclear incident is approximately $ 66 million, subject to an annual limit of $ 10 million per incident. Based upon the Company's 15.8%
interest in the three Palo Verde units, the Company's maximum potential assessment per incident is approximately $ 3L3 million, with an annual payment limitation of $ 4.74 million. The insureds under this liability insurance include the Palo Verde participants and "any other person or organization with respect to his legal responsibility for damage caused by the nuclear energy hazard."
The Palo Verde participants maintain "all risk" (including nuclear hazards) insurance for nuclear property damage to, and decontamination of, property at Palo Verde in the aggregate amount of $ 2.035 billion, a-substantial portion of which must first be applied to decontamination. The Company has also secured insurance against portions of any increased cost of generation or purchase of power resulting from the accidental outage of any of the three Palo Verde Units if such outage exceeds 21 weeks. The Palo Verde outages during 1989 and the current outage of Palo Verde Unit 1 are not covered by this insurance.
For information regarding the obligations of the Company to plan and fund, over the service life of Palo Verde, its share of the estimated costs to decommission Palo Verde, see Note D of Notes to Consolidated Financial Statements. The Company believes that all costs associated with nuclear plant decommissioning will be recoverable through rates.
Four Corners Project The Company has an undivided 7% interest in Units 4 and 5 at Four Corners located in northwestern New Mexico. Each of the coal-burning generating units has a 739 MW capability. For emergencies each Unit is rated at 784 MW. Both units are located adjacent to a surface-mined supply of coal and are jointly owned by the Company, APS (which is the Operating Agent for Four Corners),
Tucson Electric Power Company, PNM, Southern California Edison Company and Salt Hiver Project Agricultural Improvement and Power District. The Company's entitlement of 104 MW is used for the Company's base load to the maximum extent possible.
The Four Corners Plant is located on land held under easements from the Federal Government and also under a lease from the Navajo Indian Tribe (the "Tribe"), the enforcement of which might require Congressional consent. The risk with respect to the enforcement of these easements and of the lease is not deemed by the Company to be material. The Company is dependent; however, in some measure upon the willingness and ability of the Tribe to protect these properties and honor its commitments. Certain of the transmission lines and almost all of the contracted coal sources for the Four Corners Plant are located on the Tribe's reservation. E 14
On October 30, 1989, oral argument was heard by the Navajo Supreme Court regarding the issue of the enforceability of the APS anti-nepotism policy at the Four Corners Plant, for which APS is the Operating Agent. This matter was appealed to the Navajo Supreme Court by APS from a February 10, 1987 decision of the OHice of the Navajo Labor Relations Board (the "Board" ) enjoining APS from enforcing its anti-nepotism policy at tlie Four Corners Plant. APS believes that a March 1985 letter agreement between it and the Tribe governs employment relations at the plant, rather than the Navajo Preference in Employment Act adopted by the Navajo Tribal Council in August 1985 and used by the Board as the basis for its decision. The letter agreement provides, among other things, that APS shall determine qualifications for employment and promotion at the plant. Ifnecessary, APS will consider an appeal to Federal District Court. The Company cannot currently predict the ultimate outcome of this matter.
The participants in Four Corners are defendants in a suit filed by the State of New Mexico in March 1975 in state district court in New Mexico, against the United States of America, the City of Farmington, New Mexico, the Secretary of the Interior as Trustee for the Navajo and other Indian tribes, and certain other defendants. The suit seeks adjudication of the water rights of the San Juan River Stream System in New Mexico, which, among other things, supplies the water used at Four Corners. No trial date has been set in this matter. An agreement reached with the Tribe in 1985 provides that if the Four Corners Plant loses a portion of its rights in the adjudication, the Tribe will provide sufilcient water from its allocation to offset the loss.
The Company owns a 230-mile, 345 KV transmission line from Newman to Albuquerque, New Mexico, at which point the Company's entitlement from Four Corners is delivered from 150 miles of transmission lines owned by PNM. This 345 KV transmission line regularly carries power from Four Corners and provides a major interconnection with the other five participants in Four Corners. The Company also owns an undivided interest in a 200-mile, 345 KV transmission line from Newman across southern New Mexico to Greenlee, Arizona. In addition, the Company has completed construction of the AIP transmission line from Springerville, Arizona to Diablo substation located in Sunland Park, New Mexico near the Rio Grande power station. See discussion above under "Palo Verde Station."
These lines provide interconnections with Tucson Electric Power Company to provide transmission for the Company's entitlements from Four Corners and Palo Verde and also provide added stability, flexibility and reliability to the Company's system.
Rio Grande Power Station Rio Grande, located in New Mexico adjacent to the city of El Paso, consists of three steam-electric generating units which have an aggregate capability of 246 MW when operating entirely on natural gas.
When interstate natural gas at the station is curtailed, the units operate primarily on fuel oil, which increases operating and maintenance expenses. See "Energy Sources."
Newman Power Station Newman, located in El Paso, consists of three steam-electric units with an aggregate capability of 266 MW and one combined-cycle unit with a capability of 212 MW. The units regularly operate on If natural gas, but are also capable of operating on fuel oil. they were to operate entirely on fuel oil, operating and maintenance costs would increase and capacities w'ould be lower. See "Energy Sources."
Copper Power Station Copper, consisting of a 69 MW combustion turbine capable of operating on fuel oil or natural gas and used for peaking purposes, was placed in service in June 1980 on a leased site in El Paso. The station has been classified under the Fuel Use Act as an existing facility, which allows the station to burn natural gas. Since such classification, the station has operated primarily on intrastate natural gas.
See "Energy Sources Natural Gas."
15
Environmental Matters Units 4 and 5 of the Four Corners Plant have operated for several years under variances granted by the New Mexico Environmental Improvement Board relating to the emission of nitrogen oxides.
The most recent variances were granted on December 18, 1987, to allow adequate time for the installation of additional equipment intended to achieve compliance with existing emissions limitations without adverse operational impacts. Installation of additional equipment on Unit 4 was completed prior to the expiration of the variance, and monitoring by APS, the Operating Agent for Four Corners, indicates that Unit 4 is now operating in compliance with existing emissions limitations. A variance was granted through September 30, 1991 for Unit 5. The Company estimates that its share of costs relating to the installation of additional equipment will be immaterial.
Revisions to environmental laws and regulations continue to be proposed and adopted at Federal, state and local levels. The EPA may also adopt regulations to deal with visibility impairment resulting from regional haze. Amendments to the Clean Air Act have been introduced which are intended to address problems of "acid rain," toxic air pollutants and the nonattainment of national ambient air quality standards. Along with other members of the electric utility industry, the Company is continuing its involvement before the United States Congress, state legislatures and federal and state regulatory agencies concerning revisions to environmental laws and regulations. The Company cannot accurately predict at this time the financial and operational impacts resulting from such revisions.
Energy Sources General Since 1985, the Company's energy mix has generally consisted of natural gas, coal and purchased power. Beginning in 1986, uranium became a part of the Company's energy mix, decreasing the importance of purchased power. This, in combination with lower natural gas costs, resulted in decreases in the Company's average yearly system energy cost. The following table lists the percentage contribution of coal, gas, uranium and purchased power to the total energy mix of the Company and the average cost to the Company in cents per KWH.
Coal Gas Uranium Purchase Power Percent oF Average Percent of Avcragc Percent oF Average Percent of Average En sny hc* cost EoosnE xcost hhEnx E sxy std* cost ExsoE ttttx cost 11% 1.024 28% 3.814 % e 61% 2.804 13 14 1.01 1.04 30 32 2.36 7 .98 50'.30 42'.04 2.10 12 .96 13 1.00 30 2.21 40 1.06 17 2.47 12 1.05 48 2.09 17 .99 23 2.37
'rior to rate making treatment of the Company's investment in Palo Verde as described in "Regulation," the Company included under purchased power the major portion of energy generated by Palo Verde.
For a discussion of the recovery by the Company of its fuel costs, either in base rates or through fuel adjustment clauses, see "Regulation Texas Rate Matters Texas Recovery of Fuel Expenses,"
"New Mexico Rate Matters" and "FERC Rate Matters."
The Company's local generating units are subject to the requirements of the Fuel Use Act, as amended (the "FUA"). Under such Act, the Company may continue to burn natural gas in its existing generating units for the life of the units, subject to compliance with a United States Department of Energy ("DOE") approved energy conservation plan filed by the Company originally in 1982 with the final update filed in 1988. Currently, under Section 712, the Company is required to file annual statements of its compliance with its conservation, plan. The Company will continue its conservation programs in the areas of customer assistance, public information and operating efFiciency.
16
Natur'al Gas The Company is supplied with natural gas from both interstate and intrastate pipeline systems.
The interstate pipeline owned by El Paso Natural Gas Company ("EPNG") provides the Company's Rio Grande Station with spot natural gas and/or contract commodity gas. Meridian Oil Transportation
("MoTrans") supplies the Company's Newman and Copper Stations with a firm natural gas supply made up of both intrastate and spot natural gas purchases.
In 1989, the Company's interstate natural gas requirements consisted solely of spot natural gas supplied by various supplie'rs. Negotiations continue on the Company's commodity gas contract with EPNG which terminated in December 1987. Given the numerous regulatory issues EPNG currently has
'ending before the FERC, the Company and EPNG expect to reach a new agreement in 1990. In the interim, EPNG continues to transport spot natural gas for the Company pursuant to transportation agreements with EPNG, and provides commodity gas (as required) to the Company under the original Certiflcate of Service flie with the FERC.
The intrastate natural gas requirements at Copper and Newman are supplied and transported pursuant to an intrastate natural gas contract with MoTrans. In addition, interstate natural gas can be supplied to Newman units 1, 2, 3 and 4, which allows for a back-up natural gas supply when operational constraints on the intrastate gas system dictate the need for an alternate fuel supply. In December 1989, the Company's intrastate natural gas contract with MoTrans terminated. The Company and MoTrans are currently Bnalizing a new five-year contract to supply the Company's intrastate gas requirements. It is expected that the new contract will be flnalized early in 1990. The new agreement will provide the Company continuing flexibility in scheduling its natural gas requirements while allowing for the maximization of the use of inexpensive economy purchase power and generation from its remote resources Four Corners and Palo Verde.
During 1989, the Company experienced supply curtailments on its interstate and intrastate natural gas system due to pipeline pressure problems caused by severe winter weather conditions in various parts of the nation. The impacts of the curtailments were minimal because the Company was able to shift load to other generating plants or purchase off-system power. The Company does not expect any signiflcant curtailments during 1990 with respect to either interstate or jntrastate gas supplies.
Coal The Company believes that the Four Corners Plant has sufflcient reserves of low sulfur coal (the sulfur content of which is currently running at 0.8%) committed to the plant to continue operating it for its useful life. In 1989, average prices paid for coal supplied from reserves dedicated under the existing contract at Four Corners were relatively steady, although applicable contract clauses permit escalations under certain conditions. In addition, major price changes from time to time result from contract renegotiations. APS purchases all of the coal which fuels the Four Corners Plant from a coal supplier with a long-term lease of coal'reserves owned by the Tribe.
Nuclear Fuel The fuel cycle for Palo Verde is comprised of the following stages: (1) the mining and milling of uranium ore to produce uranium concentrates; (2) the conversion of uranium concentrates to uranium hexaflouride; (3) the enrichment of uranium hexaflouride; (4) the fabrication of fuel assemblies; (5) the utilization of fuel assemblies in reactors; and (6) the storage of spent fuel and the disposal thereof. Arrangements have been made to obtain quantities of uranium concentrate anticipated to be sufBcient, if certain contract options are exercised, to meet operational requirements through 1997.
Spot purchases on the open market will be made as appropriate in lieu of any uranium which might be obtained pursuant to the contract options. The Palo Verde participants have contracted for all conversion services required through 1992. The Palo Verde participants have also contracted for a significant portion of conversion services required in 1993 and 1994, with options to contract for the remaining requirements in 1993 and 1994 and for all of the requirements in 1995 and 1996. The Palo 17
Verde participants, including the Company, have an enrichment services contract with DOE that obligates DOE to furnish the enrichment services required for the operation of the three Palo Verde units over a term expiring in November 2014, with the annual option to terminate each year of the contract separately with ten years'otice, 'which option APS exercised in 1989 for the year 1999, on behalf of the Palo Verde participants. In addition, existing contracts will provide fuel assembly fabrication services for at least ten years from the operation date of each Palo Verde unit and, if options are exercised, for approximately fifteen additional years.
Spent fuel storage facilities at Palo Verde have sufficient capacity to store all fuel expected to be discharged from normal operation of all of the Palo Verde units through at least the year 2003.
Pursuant to the Nuclear Waste Policy Act of 1982 (as amended in 1987, the "Act"), DOE is obligated to accept and dispose of all spent nuclear fuel and other high-level radioactive wastes generated by all domestic power reactors. The NRC, pursuant to the Act, also re'quires operators of nuclear power reactors to enter into spent fuel disposal contracts with DOE. APS, on behalf of itself and the other Palo Verde participants, has executed a spent fuel disposal contract with DOE. The Act also obligates DOE to develop the facilities necessary for the permanent disposal of all spent fuel generated and to be generated by domestic power reactors and to have the first such facility in operation by 1998 under prescribed procedures. In November 1989, DOE reported that such permanent disposal facility will not be in operation until 2010, seven years later than previously reported. As a result, under DOE's current criteria for shipping allocation rights, Palo Verde would begin spent fuel shipments to DOE disposal facility in 2017. The Company believes that alternative interim spent fuel storage methods will be available for use by Palo Verde until DOE's scheduled shipments from'Palo Verde begin.
Pursuant to the Participation Agreement among the participants in the Palo Verde Station, the Company has an undivided interest in nuclear fuel purchased and to be purchased in connection with the operation of Units 1, 2 and 3 of the Palo Verde Station. The Company has a nuclear fuel purchase commitment with an independent trust. The trust's financing is based upon a letter of credit with a three-year term which is annually extended by one year if notice to the contrary is not given to the tru'st by the issuing bank. The issuing bank has given notice of non-extension, and, as a result, the letter
'f credit is currently scheduled to expire on January 8, 1993. The trust purchases nuclear fuel and incurs all costs in connection with the acquisition of the fuel and related materials for use by the Company at Palo Verde. The Company has the option of either purchasing the fuel from the trust or purchasing the heat generated by the fuel at prices established to reimburse the trust for all the costs incurred in connection with acquisition of the fuel. The Company is required to elect one of these options for each batch of nuclear fuel. The Company has elected the heat purchase option as the basis for payment for the first fuel loads as well as the first fuel reloads for Palo Verde Units 1, 2 and 3 and presently intends to elect the heat purchase option as the basis for payment for future fuel reloadings.
Quarterly heat payments at the established prices began in the fir'st quarter of 1986 for Palo Verde Unit 1, the first quarter of 1987 for Unit 2 and the second quarter of 1988 for Unit 3. At December 31, 1989, the aggregate investment of the trust in such nuclear fuel and related materials was approxi-mately $ 87,700,000, including approximately $ 48,500,000 for fuel loaded at Palo Verde Units 1, 2 and 3.
Preferred Stock Tax Indemnity In July 1989, the two corporations which are the beneficial owners, of the Company's 11.375%
preferred stock, aggregate par value $ 50 million, notified the Company that the IRS had proposed to disallow those holders the dividends received deduction taken by them on their 1985 income tax returns with respect to the dividends they received on that stock. At the same time the IRS also made the same proposed disallowance to the beneficial owners of a number of preferred stock issues of other utilities. Under an agreement the Company entered into on issuance of the shares in 1984, the Company has agreed to indemnify the beneficial owners for loss of the dividends received deduction by reason of IRS action. The beneficial owners are contesting the proposed disallowance as required by the agreement. 14 18
In January 1990, the beneficial owners provided the Company a schedule of indemnity payments that would be due if the IRS were to prevail. By the owners'alculation, an indemnity payment of
$ 28,637,989.29 for additional taxes, penalties and interest to September 30, 1989 ($
31,362,852 if interest is extended to December 31, 1990) would be due for all dividends paid from January 1, 1985, through October 1, 1989, and additional indemnity payments with respect to dividends due thereafter, paid as the quarterly dividends are paid, would total $ 6,848,697. Under the indemnity agreement, the owners can require the Company to escrow, during the pendency'of the IRS contest, the indemnity payments that would be owing if the IRS prevails, because the Company's First Mortgage Bonds are not rated at specified levels. To date the owners have not required an escrow. The escrow, if established, would be invested for the account of the Company.
Under the Company's interpretation of the indemnity agreement, it requires the Company to make indemnity payments, assuming the IRS prevails, only for dividends paid after the Company received, in July 1989, notice of the proposed IRS action, and therefore, ifany escrow is required, the Company would be obligated to escrow indemnity payments only for the October 1, 1989, dividend and each quarterly dividend thereafter as it is paid. Ifthe Company's interpretation is sustained, then, depending on how a dispute is resolved on the tax rate to be used in determining the indemnity payments, the indemnity payment or earlier escrow deposit would be $ 795,985, by the Company's calculation, or $ 1,304,826, by the owners'alculation, for the additional tax, penalty and interest to December 31, 1990, with respect to the October 1989, dividend, and for the dividends paid thereafter, the indemnity payment or escrow deposit for each dividend would decrease as the preferred stock is redeemed according to its terms ($ 10 million a year from July 1990, to final redemption in July 1994),
and would total, over the 42-month period, $ 6,422,136 by the Company's calculation, or $ 6,848,698 by the owners'alculation. Counsel to the Company believes that the beneficial owners are more likely to prevail than the IRS on the proposed disallowance of the dividends received deduction, and also believes that, if the IRS does prevail, there is substantial support for the Company's position that it is not obligated to indemnify for past dividends. If the IRS were to prevail, the Company believes its dividend and indemnity payments would be deductible as interest paid for federal income tax purposes.
Since these indemnity payments, even under the Company's interpretation, would increase the Company's pre-tax cost by more than 50 basis points, the indemnity agreement gives the Company the right to redeem all of the shares for par plus any indemnity payments due, at any time through the third dividend payment after conclusion of the IRS contest. The Company's present intention, which may change, is not to seek repurchase of the shares before conclusion of the tax contest.
Even ifthe IRS does not prevail, the Company still must make indemnity payments to the owners for additional taxes they must pay by reason of the reduction in the dividends received deduction by the Tax Reform Act of 1986 and the Revenue Act of 1987. The owners and the Company, however, do not agree on how these payments are to be calculated. By the owners'alculation, an indemnity payment of $ 1,695,718 is due for past dividends through October 1, 1989, and the indemnity payments for each dividend thereafter would be from $ 109,872, decreasing to $ 21,974 and totalling $ 1,208,593. By the Company's calculation, an indemnity of $ 487,048 would be due for past dividends, and the continuing indemnity would be from $ 52,251 down to $ 10,450 as each dividend is paid, totalling
$ 574,767. These indemnity payments would reduce any payments due on account of the IRS prevailing on its proposed total disallowance of the dividends received deduction.
19
Arizona Tax Matters By Notice of Proposed Correction of Income Tax dated February 9, 1990, the Arizona Department of Revenue (the "ADR"), in connection with an audit examination of the taxable years 1984 through 1987, informed the Company that the ADR has determined that the gains from the sales of the Company's interest in Palo Verde Units 2 and 3 are allocable to Arizona for state income tax purposes th grounds that the Units constitute non-business assets with a situs in Arizona, resulting, according to the ADR, in a proposed de6ciency assessment, including related interest and penalties, o f approximately $ 39.5 million. The Company believes Palo Verde Units 2 and 3 constituted business assets at the time of the respective sales, and, in accordance with Arizona law, it apportioned, rather than allocated, the corresponding gains in paying the Arizona income tax on the transactions.
The proposed deficiency by the ADR is not a final administrative deterinination, and additional informal discussions on the issue will be conducted prior to a formal hearing. The Company believes th t th ADR will not prevail in its proposed determination and does not expect to incur any material liability in respect thereof. The Company will litigate any issues not satisfactorily resolved throug hi the administrative process.
As part of its revenue budgeting process, the Arizona state legislature is considering legislation which would, if adopted, increase the Company's Arizona property taxes. Several proposals have been introduced. Although the Company expects that some form of. legislation will result, it cannot e determined at this time what the legislation will provide, when it will be adopted, if it is, or what the magnitude of the increase in the Company's Arizona property taxes would be. The Company expects that any such tax increase could be recovered in rates.
Executive OIBcers of the Registrant Current Position and Name ~Ac Business Experience David H. Wiggs, Jr.. 42 Chairman of the Board since June 1989; Chief Executive OScer since March 1989; President and a Director since January 1988; Chief Operating Ofhcer from January 1988 to March 1989; for more than 5 years prior to January 1988, chief regulatory legal counsel and shareholder in Kemp, Smith, Duncan 8 Hammond, El Paso, Texas.
William J. Johnson .. 48 Senior Vice President since January 1988; Chief Financial OIBcer since December 1986; for more than five years prior to January 1988, served in various executive capacities with the Company.
William W. Royer Senior Vice President since January 1990 and from January 1988 through October 1988; for more than five years prior to January 1988, served in various executive capacities with the Company; President, Franklin Land from March 1989 to January 1990; President, Triangle Electric Supply Company, El Paso, Texas (see Item 3) from October 1988 to Marcli 1989.
Ignacio R. Troncoso 43 Senior Vice President since January 1988; for more than five years prior thereto, Vice President.
Lawrence M. Downum, Jr.... 51 Vice President since 1983.
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Current Position ond Name ~Ae Business Experience Gary R, Hedrick .. 35 Treasurer since February 1988; Assistant Vice President, Fi-nance since February 1990; Vice President, Treasurer and Chief Financial Officer of PasoTex from December 1986 to February 1988; Treasurer of Franklin Land from November 1986 to February 1988; for more than 5 years prior to November 1986, served in various managerial and supervi-sory capacities with the Company.
Eduardo A. Rodriguez 34 Corporate Secretary since February 1989; General Counsel since February 1988; for more than five years prior to February 1988, served in various managerial and supervisory capacities with the Company.
Russell G. Gibson .. 37 Controller since September 1989; for more than 5 years prior thereto, partner and member, Coopers & Lybrand (certified public accountants).
Julius F. Bates... 40 Vice President since June 1989; for more than five years prior thereto, served in various managerial and supervisory capac-ities with the Company.
John C. Horne .. Vice President since August 1989; for more than five years prior thereto, served in various managerial and supervisory capacities with the Company.
Robert C. McNiel Vice President since December 1989; for more than five years prior thereto, served in various managerial and supervisory capacities with the Company.
Frederic E. Mattson 45 Vice President since June 1989; for more than five years prior thereto, served in various managerial and supervisory capac-ities with the Company.
James A. Mayhew Vice President Rates since August 1989; for more than five years prior thereto, served in various managerial and super-visory capacities with the Company.
The executive oScers of the Company are elected no less often than annually and serve at the discretion of the Board of Directors.
Non-Utility Operations t During 1989, the Company decided to discontinue all of the non-utility operations conducted through the Company's principal subsidiaries, FL&R and PasoTex. FLOWER had primarily been engaged in real estate operations in downtown El Paso and other investment activities. PasoTex had engaged through subsidiaries in a variety of non-utility activities, including specialty steel manufacturing, oil country'tubular goods end-finishing and marketing, and furniture and accessory manufacturing.
The decision to discontinue these operations reQects the Company's plan to return its operations exclusively to its core utility business. That plan and the timing and nature of the dispositions of the non-utility operations and investments were impacted by a number of factors, including the cash requirements of such operations, regulatory, contractual and financing restrictions applicable to the Company, the value and future prospects for the discontinued operations, the timing and amount of federal income tax benefits associated with the disposition of the operations and the impact of the discontinued operations on the consolidated financial results of the Company.
In late December 1989, PasoTex sold its $ 60 million preferred stock investment in Commercial Federal Savings and Loan Association, Omaha, Nebraska. The Commercial Federal investinent, which was written o6'by the Company in its entirety under provisions recorded in the 1989 third and fourth quarters due to Commercial Federal's failure to meet regulatory capital requirements and continue paying dividends, was sold by PasoTex to an independent third party corporation, whose principals are experienced in the thrift industry, for a nominal amount of cash plus a 82 million non-recourse purchase money note. All principal and interest on the purchase money note is due on November 30, 1994, but mandatory prepayments are required based upon a percentage of the purchaser's net cash flow. The preferred stock was pledged to secure the payment of the purchase money note and is held by an independent escrow agent. As additional consideration in the transaction, PasoTex received a warrant to purchase 49.5% of the then outstanding shares of common stock of the third party purchaser (although shares purchased would be non-voting) for an aggregate consideration of approximately
$ 500,000. The warrant may be exercised from time to time, in whole or in part, until December 30, 1996. The warrant may be assigned, subject to applicable securities laws. The transaction was supported by a fairness opinion from an, investment banking firm retained by PasoTex. The note and
'arrant received by PasoTex in the sale were transferred to the Company prior to the sale of Paso Tex and Franklin in January 1990.
Also in late December 1989, PasoTex surrendered its 50% common equity interest in Westwood Lighting Group, Inc., a lamp manufacturer, back to Westwood without consideration.
The disposition of the Commercial Federal preferred stock and the surrender of the Westwood common stock resulted in current federal income tax benefits of approximately 818.6 million'nd 82.3 million, respectively.
On January 17, 1990, the Company sold all of the capital stock of FLRR and its 35% stock ownership of PasoTex (which was owned 65% by FL&R) to an unrelated third party special purpose corporation, whose managers have substantial experience in the ownership and operations of diverse business enterprises. The Company received as consideration in the transaction the note and warrant received by PasoTex in the disposition of the Commercial Federal investment. The Company transferred at closing of the transaction approximately $ 3 million to PasoTex for working capital purposes and agreed to transfer approximately $ 5 million to FLRR no later than July 15, 1990, to be applied against the obligations of FLRR under its mortgage debt relating to a hotel owned in El Paso.
As a result of the sale of FLRR, the Company's indirect liability for FLRR's $ 9,756,000 borrowings under the Rio Grande Resources Trust will become a direct liability of the Company. The stock purchase agreement relating to the transaction provides for an indemnity payment, estimated at approximately $ 1,800,000, from the Company to the purchaser to compensate for certain Federal income tax investment tax credit recapture liability which may be incurred upon FLRR's eventual sale of the hotel. The indemnity payment is contingent upon certain tax elections which the purchaser is entitled to make with respect to the sale of FLRR and PasoTex. The consideration for the transaction was based upon the combined values of FLRR and PasoTex. The transaction was supported by a fairness opinion from the Company's financial advisor, a nationally recognized investment banking firm.
The loss on the sale of Franklin and PasoTex will generate federal income tax benefits of approximately $ 18 million.
The Company's final divestiture of its non-utility operations and investments in 1990 has been reflected in discontinued operations in its 1989 financial statements.
See Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Non-Utility Operations."
Utility Operating Statistics December 31, 1989 .1988 1987 Operating Revenues (In thousands):
Retail:
Residential 122,598 $ 112,957 103,232 Commercial and industrial, small 117,272 105,166 95,766 Commercial and industrial, large 42,250 35,'575 32,976 Sales to public authorities 63,886 57,240 51,493 Provision for refund. 62 (1,641) (3,019)
Other. 2,438 4,891 1,573 348,506 314,188 282,0R1 Wholesale:
Sales for resale . 77,742 67,919 55,242 Total operating revenues ...... 8 426,248 8 382,107 8 337,263 Number of customers (End of year):
Residential 214,664 209,550 204,102 Commercial and industrlal, small 21,762 21,069 20,582 Commercial and industrial, large 52" 39 41 Other. 2,659 2,543 2,505 Total 239,137 233,201 227,230 Average annual use and revenue per r esidential customer:
KWH 6,124 6,025 5,846 Revenue $ 577.60 8 546.13 $ 511.48 Average revenue per KWH:
Residential 9.43C 9.07C 8.75C Commercial and industrial, small . 8.08 7.5R 7.28 Commercial and industrial,. large ~ .. 5.53 5.10 5.19 Energy supplied, net, KWH (In thousands):
Generated 4,753,236 4,904,854 3,186,967 Purchased and interchanged . 1,446,063 969,793 2,264,955
. Total 6,199,299 5,874,647 5,451,922 Energy sales, KWH (In thousands):
Retail:
Residential 1,299,768 1,246,081 1,179,812 Commercial and industrial, small . 1,450,817 1,397,913 1,316,198 Commercial and industrial, large . 763,650 697,758 635,448 Sales to public authorities . 947,948 908,238 860,852 4,462,183 4,249,990 3,992,310 Wholesale:
Sales for resale 1,411,16R 1,271,366 1,087,444 Total sales: 5,873,345 5,521,356 5,079,754 Losses and company use. 325,954 353,291 372.168 Total 6,199,299 5,874,647 5,451,922 Native system:
Peak load, KW 916,000 840,000 820,000 Net generating capacity for peak, KW 1,497,000 1,497,000 1,297,000 Load factor . 61.0% 63.0% 61.5%
Total system:
Peak load, KW 1,076,000 1,002,000 975,000 Net generating capacity for peak, KW 1,497,000 1,497,000 1,297,000 Load factor . 67.0% 67.3%%uo 64.4%
Item 2. Properties The principal properties of the Company are described in Item 1 of this report, and such descriptions are incorporated herein by reference thereto. Transmission lines are located either on private rights-of-way, easements or on streets or highways by public consent. Reference is made to Note J of Notes to Consolidated Financial Statements for information regarding encumbrances against the principal properties of the Company and its subsidiaries.
Item 3. Legal Proceedings First Service Life Litigation Pending Actions Involving the Company's Collateral. On September 26, 1988, the Company filed a declaratory judgment action in the 345th Judicial District Court, Travis County, Texas, against First Service Life Insurance Company, a life insurance company organized under the laws of the Cayman Islands ("First Service" ), and R. B. Ashworth, as Conservator for the affairs of First Service under the Texas Insurance Code (the "Conservator" ), for a determination that (i) the Company has legal, valid, duly perfected and enforceable security interests in certain collateral granted to the Company by First Service to secure annuitie's purchased by the Company from First Service, the present balance of which is approximately $ 20 million (the Company's original annuity investment purchased from First Service being $ 70 million); and (ii) that events of default have occurred under the collateral security documents pertaining to such annuities which entitle the Company to enforce such security interests.
In late May 1988, the Company notified First Service that First Service was in default under the annuities and the collateral agreements and that the Company intended to enforce its security interests. The Conservator, who was appointed by the Texas Commissioner of Insurance in early June 1988, notified the Company that First Service might not be in default, expressed doubt as to the validity and enforceability of the security interests held by the Company and demanded that the Company return to the Conservator all of the collateral and desist and refrain from proceeding with enforcement of the security interests and other interference with the conservatorship and the conservatorship proceedings.
On September 29, 1988, the Conservator, in conjunction with his answer and denial of the Company's declaratory judgment action, countersued the Company on behalf of First Service and two aSliated corporations, First Service Life, a Turks and Caicos corporation ("FSL"), and Knickerbocker Life Insurance Company ("Knickerbocker"), for actual damages of at least $ 50 million, plus punitive damages of at least $ 300 million. The Conservator's counterclaim seeks (i) a temporary and permanent injunction against the Company's enforcement'f its security interests in the collateral, (ii) an accounting from the Company as to all payments and transfers of property to the Company from First Service with respect to the Company's annuities, (iii) a declaratory judgment that the Company's security interests are illegal and unenforceable under the Texas Insurance Code and that the sale and purchase of the annuities was an illegal transaction under the Texas Insurance Code by a company doing insurance business in Texas without authorization, and (iv) disgorgement by the Company of all payments received on its annuities and all collateral therefor. The counterclaim alleges several causes of action against the Company including principally fraud, conversion and breach of duty of good faith and fair dealing (based upon an alleged affiliate or "insider" relationship between the Company and First Service) ~
On December 1, 1988, a receiver (the "Receiver" ) was appointed for First Service by the 53rd Judicial District Court of Travis County, Texas, and on December 13, 1988, the Receiver in his capacity for First Service was substituted as a party for the Conservator in the above-described litigation. On January 18, 1989, the Receiver was appointed as receiver for FSL as well. The Conservator remains a party to the above-described litigation in its capacity as conservator for Knickerbocker.
Although only preliminary discovery has been conducted, the Company's legal counsel, Small, Craig 8r Werkenthin, P.C., Austin, Texas, has reviewed the basic facts of the case with management and other parties familiar with various aspects of the transactions involved in the litigation, examined
documents and records of the Company and other parties which relate to such transactions, and evaluated the allegations against the Company made in the counterclaim. Based upon its preliminary evaluation and investigation of the case to date, and subject to the results of discovery, counsel believes that it is more likely than not that the outcome of the litigation will be favorable to the Company.
The Company believes that the Company's security interests in the collateral are valid and enforceable, and the'Company intends to recover amounts owed to it on the annuities through
. enforcement of its rights to 'the collateral. The Company strongly denies the allegations of the counterclaim, believes the counterclaim is without merit and intends to vigorously defend against it.
Upon reevaluation of the collateral, the Company recorded at June 30, 1989 a provision for loss on the investment of $ 7 million. The Company has made no provision for loss for the effects if any, of the ultimate outcome of the litigation. Effective April, 1988 the Company discontinued the accrual of interest income on the annuities.
Claims bp Annuitants. On October 16, 1989, the case of Pedro Meneses, et al. o'. Maury Page Kemp, et aL, Civil Action No. EP-89-CA-37H, was filed in the Western District of Texas, El Paso Division (the "Lawsuit"). The plaintiffs in the Lawsuit include most of the holders of annuities from First Service (the "Annuitants"). The defendants include the beneficial principal shareholders and officers and directors of First Service and Knickerbocker; certain afBliated companies of the principal beneficial shareholders of First Service and Knickerbocker, the, Company and its former subsidiaries, PasoTex and Franklin Land; the accounting Brm of Coopers L Lybrand; the law firm of Kemp, Smith, Duncan R Hammond, which serves as general counsel to the Company; and two individual attorneys who are shareholders in such Brm, one of whom is a former director of the Company. The Lawsuit, as amended, alleges that the defendants violated the Racketeer Influenced and Corrupt Organization Act
("RICO" ), conspired to violate RICO, violated the Federal and Texas securities laws, committed common law fraud, civil conspiracy to defraud, violations of the Texas Deceptive Trade Practices Act and violations of the Texas Insurance Code and violated certain provisions of the Texas Penal Code relating to theft, false statements to obtain property or credit, fraud in insolvency, receiving deposit, premium or investment in a failing Bnancial institution, commercial bribery and misapplication of Bduciary property or property of a financial institution. The claims made against the Company and its former subsidiaries are based upon allegations that the Company controlled and/or conspired with First Service.
The plaintiffs are seeking damages in the amount of their lost annuities, plus interest, multiplica-tion of actual damages, punitive and exemplary damages, and attorneys fees and costs. The complaint in the Lawsuit alleges sales of annuities to the plaintiffs in excess of $ 9 million, and the total claim for damages exceeds 859 million.
The Company vigorously denies any liability in respect of the Lawsuit and believes that all related claims are without merit. Based upon the limited evaluations and investigation of Small, Craig 5t Werkenthin, P.C., Austin, Texas, the Company's legal counsel in connection with the pending litigation, such counsel believes that it is more likely than not that the ultimate outcome of the Lawsuit will be favorable to the Company.,
The Lawsuit names as a defendant Billye E. Bostic, formerly an executive ofBcer of the Company, who is entitled to indemnity under the Company's charter, bylaws and other applicable agreements to the same extent as indemnification is afforded by the Company to all of its officers and directors with
, respect to service on boards of directors of other companies. Mr. Bostic has advised the Company that he denies any liability in respect of the Lawsuit and believes that the claims asserted against him therein are without merit. Mr. Bostic is represented by counsel separate from the Company's counsel.
There are numerous parties who purchased annuities from Knickerbocker, not included within the group of the Annuitants, who may assert additional claims similar in nature to the claims asserted by the Annuitants, against the Company. These claims, if asserted, could result in additional suits against the Company.
Suit Against Directors of First Service. On February 3, 1989, the Receiver filed suit in the 345th Judicial District Court, Travis County, Texas, against certain individuals who were alleged to be directors of First Service and/or FSL, including Mr. Bostic.
The Receiver alleges that First Service engaged in the sale of annuities in Texas without authorization to do so and that such actions constituted illegal insurance transactions under the Texas Insurance Code. The Receiver further alleges that the alleged illegal sale of annuities by First Service constitutes a breach by the directors of First Service of their fiduciary duty to exercise due care in the management oF the affairs of First Service and/or FSL and resulted in unspecified losses to First Service. The suit seeks actual damages of at least $ 33 million and, in addition, exemplary damages of at least double the actual damages. No significant discovery has been conducted at this time.
Mr. Bostic has advised the Company that he denies that he served as a dire'ctor of First Service or FSL during the period of the alleged activities complained of, denies any liability in respect of the Receiver's suit and intends to vigorously defend against it. Mr. Bostic is represented by counsel separate from the Company's counsel in the First Service litigation. Mr. Bostic is entitled to indemnity with respect to the Receiver's suit to the extent indemnification is afforded by the Company to all of its ofilcers and directors with respect to service on certain outside boards.
Because no significant discovery has been conducted, counsel for Mr. Bostic is unable to express an opinion as to the ultimate outcome of the suit. No provision for an indemnity payment, if any, is included in the 1989 consolidated financial statements.
Other Legal Proceedings Information regarding legal proceedings relating to Palo Verde, Four Corners, rates and regula-tion, environmental matters, preferred stock tax indemnities and certain Arizona tax matters is described under the subcaptions "Regulation," "Facilities," "Environmental Matters," "Preferred Stock Tax Indemnities" and "Arizona Tax Matters" under "Business" in Item 1 of this report and is incorporated herein by reference thereto.
Item 4. Submission of Matters to a Vote of Security Holders Not applicable.
PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's Common Stock is traded in the over-the-counter market and quoted on the NASDAQ National Market System. The high and low sale prices for the Company's Common Stock, as reported by NASDAQ, and the quarterly dividends per share paid by the Company, for the periods during 1988 and 1989 indicated below, were as follows:
Sale Price iiigh Low Dividends 1988 First Quarter. $ 16% $ 13% $ 0.38 Second Quarter .
'6% 14'A 0.38 Third Quarter 16% 15% 0.38 Fourth Quarter. 16% 13'A 0.38 1989 First Quarter. 15% 11 0.38 Second Quarter . 11%
6'Fs Third Quarter 7Fe Fourth Quarter. 10 7'5 At February 28, 1990, there were 33,305 holders of record of the Company's Common Stock.
The terms of the RCF entered into by the Company in October 1989 (see "Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources" ) prohibit the Company from declaring or paying any dividends with respect to its Common Stock.
In addition, the Company's Restated Articles of Incorporation and the First Mortgage Indenture and certain of the supplemental indentures relating to various series of First Mortgage Bonds contain restrictions as to the payment of dividends on the Common Stock of the Company. At December 31, 1989, the retained earnings available for dividends on the Common Stock under the most restrictive of those provisions was approximately $ 54,940,000.
Item 6. Selected Financial Data As of and for the years ended December 31:
1989 1988 1987 1988 198$
(In thousands except per share data)
Operating revenues .......... 426,248 $ 382>107 $ 337,263 $ 318,262 S 346>278 Operating income ........... 56,551 81,533 92,592 89,126 90,294 Income from continuing operations before cumulative effect of change in accounting method...... 1,956 $ 63,877 $ 47,431 S 98,715 S 113,071 Income (loss) from continuing operations before cumulative effect of change in accounting method per weighted average shares of common stock............. (0.28) 1.48 0.98 2.41 2.88 Dividends declared per share of common stock .......... 0.38 1.52 1.52 1.52 1.49 Total assets ................. 1,769,518 1,799,949 2,275,573 2,194,418 1,919,060 Additions to utility plant, net of allowance for equity funds used for construction .............. 125,644 79,845 61,246 136,598 169,437 Long-term, financing and capital lease obligations and preferred stock redemption required....... S 810,788 $ 687589 S 888,328 S 947,631 $ '971,228 See "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 for a discussion of certain of the information in the foregoing table.
4 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations For the year ended December 31, 1989 and 1988, continuing operations generated income of
$ 1,956,000 and $ 63,877,000, respectively, and discontinued operations generated losses of $ 107,789,000 and $ 39,508,000, respectively. As more fully discussed in "Results of Operations" in this section, the principal factors contributing to the significant decrease in income from continuing operations in 1989 were: (1) an increase in operating expenses, primarily related to Palo Verde, in excess of an increase in operating revenues, of $ 24,982,000; (2) regulatory disallowances of $ 16,178,000, net of tax benefits and (3) reduced investment income of $ 19,462,000. The regulatory disallowance resulted from, and the increase in operating revenues was negatively affected by, the Texas Commission's 1989 rate order in Docket 8363.
The Company has disposed of its non-utility investments and operations (see "Non-Utility Operations" below). Future results of the Company's operations, accordingly, will be significantly affected by the actions of the Company's principal regulatory bodies.
The Company has rate moderation plans in place in both its Texas and New Mexico jurisdictions.
In late November 1989, the Company filed with the Texas Commission for the third scheduled base rate increase under the Texas plan, seeking an increase in base revenues of $ 33.9 million. Hearings before the Texas Commission are underway, and new rates resulting from the filing are expected to be efFective by August 1990. In addition, the Company plans to file for the fourth scheduled base rate
increase under the plan in the third quarter of 1990. New rates resulting from the filing should be in effect by summer 1991.
The Company filed in July 1989 with the New Mexico Commission for the third and final scheduled base rate increase pursuant to the New Mexico rate moderation plan. The Company requested an increase in base revenues of approximately $ 8.5 million. A stipulated settlement of the case provides for an increase in base revenues of $ 2.5 million. New rates are expected to be effective in May 1990.
Higher operation and maintenance expenses during 1989 at Palo Verde adversely affected results from continuing operations in 1989 and, such increased expenses, together with higher fuel and purchased power costs, increased the Company's external financing requirements. During 1989, the Palo Verde units performed at an average 23% of capacity compared to 71% in 1988. IfPalo Verde does not operate at satisfactory levels, future operations would be adversely impacted to the extent that any resulting increased costs are not recovered in rates. The Company believes that 1989 was a year of adjustment and correction for Palo Verde, and that the units will perform at satisfactory levels.
However, continued satisfactory operation will require operation and maintenance expenditure levels at or above those incurred during 1989. The Company expects to be able to recover such costs in rates.
The Company plans to file with the Texas Commission in the third quarter of 1990 for rate treatment of the Texas jurisdictional portion of the Company's investment in Palo Verde Unit 3, including the lease payments in the Company's sales and leasebacks of 40% of its interest in Unit 3. The Company expects the Texas Commission's final order on the Unit 3 case in the late first quarter of 1991, with rates refiecting the outcome of the case to be effective in the summer of 1991. The'timing and method of inclusion of the Company's Unit 3 investment in Texas rates will significantly affect results of operations, beginning in 1991. Failure to receive sufficient inclusion in Texas rates of the investment, on a timely basis, would increase the'Company's external financing requirements and could adversely affect access to the capital markets at reasonable cost. The Company believes that it is entitled to recover its Unit 3 investment and a fair return thereon, but the ultimate outcome of the case cannot be predicted.
The New Mexico portion of the Company's Unit 3 investment, including the Unit 3 lease payments, is deregulated under the New Mexico rate moderation plan. The Company, therefore, is required to recover the investment through off-system sales in the economy energy market. Although the Company believes that over the useful life of Unit 3 the Company will be able to recover the investment, market prices for economy energy sales have not been in recent years and are not presently at levels needed by the Company to recover the New Mexico portion of the Company's current operating expenses related to Unit 3, including lease payments. Such market conditions will continue to affect the Company's results of operations.
The less than full inclusion in Texas and New Mexico rates of the Company's annual lease expense on its Unit 2 sales and leasebacks, and the exclusion of the New Mexico portion of the Unit 3 lease expense from New Mexico rates (an aggregate of approximately $ 12.1 million before tax), will continue to adversely affect results of operations.
For more detail regarding the above information, see Part I, Item 1, "Business Regulation".
Liquidity and Capital Resources The Company expects to externally finance its cash requirements not met through cash generated from operations. Those requirements include construction expenditures and, until the Company's base rates provide for current recovery of the Company's cost of service:and return on investment, operating and capital costs deferred pursuant to rate moderation plans, operating and capital costs related to the Texas jurisdictional portion of Palo Verde Unit 3, payments of long-term debt and preferred stock maturities and redemptions. See Part I, Item 1, "Business Regulation."
The Company's estimated external financing requirements for 1990 are $ 242 million, of, which
$ 153 million was completed on January 26, 1990. Proceeds were used to reduce borrowings then outstanding under the RCF (see discussion below). Proceeds from the balance of the required financings, $ 89 million, combined with cash on hand and internal cash generation (together estimated at 846.5 million), will be used to meet the Company's 1990 estimated construction expenditures of
$ 53.4 million, payments of ion'g-term debt and preferred stock maturities and redemptions of
$ 48.5 million and estimated regulatory deferrals and Palo Verde Unit 3 capitalized costs of
$ 33.6 million.
During 1991 and 1992, the Company expects to incur construction expenditures of $ 51.4 million and 849.9 million, respectively. Payments of long-term 'debt and preferred stock maturities and redemptions aggregate approximately $ 95.6 million and $ 59.1 million, respectively. Cash requirements in 1991 and 1992 for regulatory deferrals will be dependent upon future levels of rate relief obtained.
In October 1989, the'Company obtained a revolving credit facility (herein, the "RCF") from a syndicate of money center banks which provides for borrowings by the Company from time to time through May 31, 1991, the initial termination date of the RCF, of up to $ 150 million outstanding at any one time. The May 31, 1991 termination date of the RCF, which is set with reference to the expected timing of the Texas Commission's order on the Company's Unit 3 rate, case, may be extended, subject to the consent of the lending banks, for successive. one-year periods.
The RCF requires the Company to issue, for purposes of repaying borrowings thereunder, 8270 million of long-term debt through the period expiring March 31, 1991, including at least
$ 100 million of long-term debt by January 31, 1990. On January 26, 1990, the Company issued and sold, in a private placement to institutional investors, $ 153 million of First Mortgage Bonds, 11.10% Series Due 2001, the proceeds of which were applied, as required, to reduction of borrowings outstanding under the RCF. $ 47 million of the balance of the (270 million of long-term debt issuances required under the RCF is required to be issued no later than December 31, 1990, leaving $ 70 million of required long-term debt issuance by March 31, 1991.
The RCF is secured by first and second mortgage bonds of the Company in an aggregate principal amount equal to the committed amount of the RCF. The RCF requires that the Company meet certain fixed charge and maintenance of equity ratios, maintain specified long-term debt issuance capacity and meet certain maintenance of collateral value tests. The terms of the RCF prohibit the Company from declaring or paying any dividend with respect to its common stock.
$ 104 million was available for borrowing under the RCF at March 30, 1990.
The Company intends to use borrowings under the RCF and the required long'-term debt issuances to meet its external financing requirements through May 31, 1991. The Company believes that it will be able to issue and sell the long-term debt required to be issued and sold under the terms of the RCF. The Company will require an extension of the RCF or its replacement with a similar facility to meet financing requirements beyond May 31, 1991. The RCF includes as an event of default an adverse regulatory decision by the Texas Commission with regard to'the Company's investment in Unit 3 which, in the judgment of the lending banks, causes the Company's revenues to be insufficient to assure (1) the Company's ongoing viability, (2) its access to capital markets or (3) its ability to refinance or repay its obligations when due. Although the Company believes that it is entitled to recover its Unit 3 investment and a fair return thereon, the ultimate outcome of the case cannot be predicted. Failure to receive sufficient inclusion in Texas rates of the Unit 3 investment, on a timely basis, would increase the Company's external financing requirements and could adversely afFect access to the capital markets at reasonable cost. See Part I, Item 1, "Business Regulation Texas Rate Matters Palo Verde Unit 3 Inclusion in Texas Rates."
In addition to the borrowings available under the RCF, the Company has limited short-term borrowing availability under the credit facility supporting the independent trust established to meet the Company's nuclear fuel requirements at Palo Verde. At March 30, 1990, the Company had $ 22.1 million of borrowings available to it under such credit facility.
30
Financing Restrictions Short-term borrowings by the Company are limited to levels approved by the FERC. The FERC has approved short-term borrowings by the Company, including borrowings under the RCF and the nuclear fuel trust credit facility, of up to 8200 million through December 31, 1991.
The RCF restricts the Company's incurrence of indebtedness, other than under the RCF, to (1) borrowings up to a specified level under the nuclear fuel trust credit facility and commercial paper backed by the RCF (in which case the amount available to the Company under the RCF is reduced by the amount of commercial paper outstanding) (2) indebtedness which is unsecured, or junior in right of security to the RCF, and which does not require principal amortization prior to the then termination date of the RCF, (3) scheduled long-term financing by the Company, including the long-term financings required under the RCF, and (4) refundings, renewals, extensions and replacements of maturing indebtedness.
The letter of credit agreements providing for the letters of credit which the Company caused to be issued to the equity participants in the Company's sale and leaseback transactions involving Palo Verde Units 2 and 3, and one other bank credit agreement, were renegotiated contemporaneously with the closing of the RCF. These letter of credit agreements and the bank credit agreement, as amended, require the Company to meet the same maintenance of equity and fixed charge ratios required to be met under the RCF. The transaction documents for the Palo Verde Unit 2 sales and leasebacks were also renegotiated and amended contemporaneously with the closing of the RCF. The incurrence of debt restrictions in those transaction documents have been suspended for so long as complying letters of credit remain in effect. With respect to all but one of the eight equity participants in the Unit 2 sales and leasebacks, complying letters of credit must be maintained through at least December 31, 1999.
One equity participant in the Unit 2 sales and leasebacks is entitled to letter of credit support for its equity investment throughout the lease term. The Company expects to be able to maintain complying letters of credit in'effect as required under the amended documents, and, therefore, does not expect the Unit 2 incurrence of debt restrictions to impact its external financing capability.
Other Restrictions Restated Articles of Incorporation; Mortgage Indentnres. The Company's Restated Articles of Incorporation provide that, unless consented to by the holders of preferred stock, additional shares of preferred stock may not be issued unless certain tests are met with re'spect to (i) net earnings of the Company available for preferred dividends, (ii) after-tax earnings available for interest, amortization and preferred dividends and (iii) the sum of junior stock capital and, if the Company so elects, surplus. The most restrictive of said tests, (i) above, would not have permitted the issuance of any new shares of preferred stock at December 31, 1989. It is not expected that the Company will be able to satisfy the preferred stock issuance tests in 1990.
In addition, the Company's Restated Articles of Incorporation provides that, unless consented to by the holders of preferred stock, the aggregate of unsecured long-term debt shall not exceed 10% of the total of the Company's outstanding secured debt, capital and surplus. At December 31, 1989, the Company would have been permitted to issue approximately $ 62.3 million in additional unsecured long-term debt.
The Company's First Mortgage Indenture permits the issuance of additional first mortgage bonds to the extent of 60% of the value of unfunded net additions to the Company's utility property, provided net earnings available for interest during a recent twelve-month period were at least twice the annual interest requirements on all bonds to be outstanding and on all prior lien debt. At December 31, 1989, unfunded net additions totaled $ 453.5 million, which was sufficient, with the inclusion of $ 0.5 million in bond credits (after giving effect to the $ 153 million 11.10% Series due 2001), to permit the issuance of approximately $ 272.6 million principal amount of new bonds. Presently, the Company cannot issue first mortgage bonds on the basis of property additions because earnings are insufficient to meet the net earnings test of the Indenture. However, the Indenture also permits the issuance of first mortgage bonds based upon currently unfunded first mortgage bonds, without, under certain circumstances, being required to meet the net earnings test. The RCF is presently secured by $ 50 million of first 31
mortgage bonds and $ 100 million of second mortgage bonds. The RCF provides that, as the Company issues and sells first mortgage bonds to meet the long-term financing requirements of the RCF, the RCF banks are to release first mortgage bonds then held as collateral in the amount needed by the Company for the proposed long-term financing, which bonds, under the Indenture, constitute additional unfunded first mortgage bonds. The Company would use such additional unfunded first mortgage bonds as the basis for the issuance of any first mortgage bonds issued to meet the long-term financing requirements of the RCF. As the RCF banks release first mortgage bonds from their collateral, the amount of second mortgage bonds held by the banks as collateral increases correspond-ingly, so that at all times the RCF is secured by a combination of first and second mortgage bonds or second mortgage bonds only.
The Company's Second Mortgage Indenture permits the issuance of additional second mortgage bonds on the basis of 40% of the value of unfunded net additions to the Company's utility property.
The indenture also permits the issuance of second mortgage bonds based on currently unfunded second mortgage bonds. At December 31, 1989, unfunded net additions totaled $ 161.4 million, which was sufilcient, with the inclusion of $ 20 million in bond credits, to permit the issuance of approximately
$ 84.5 million principal amount of new bonds.
Results of Operations The following comparisons of results for 1989 to 1988 and l988 to 1987 should be read in conjunction with the above information concerning factors expected to affect future results of operations.
The primary reasons for increases (decreases) in results of operations for the year ended December 31, 1989 compared to the year ended December 31, 1988 and the year ended December 31, 1988 compared to the year ended December 31, 1987 are as follows:
Operating Revenues:
The Company continued to experience increases in electric sales and customer growth in its service area during 1989. Native system sales increased from 4,249,990 megawatt-hours of electricity in 1988 to 4,462,183 megawatt-hours in 1989, an increase of 5.0%. Total system sales increased 6.4% in 1989 compared with 1988. Customers were added to the Company's service area at an annual rate of approximately 3% in both 1988 and 1989. The Company achieved record peak demands in 1989, recording an all-time total system peak load of 1,076 megawatts on June 20, 1989, which was a 7.4%
increase over 1988's record peak of 1,002 megawatts. The Company's 1989 native system peak demand of 916 megawatts, which was also a new record, was a 9.0% increase from the previous record of 840 megawatts set in 1988. The projected annual peak load growth rate for the Company's service area during the 1990-1999 time period is approximately 3%.
Base revenues increased for 1989 over 1988 approximately $ 26,100,000, due primarily to an increase in KWH sales (volume) to all three jurisdictions and an increase in base revenues resulting from rate increases for Texas, effective April 1988 and May 1989, and for New Mexico, effective in November 1988. Base revenues increased for 1988 over 1987 approximately 842,500,000, due primarily to an increase in KWH sales (volume) to all three jurisdictions and an increase in base revenues resulting from rate increases for Texas and New Mexico which were effective in April 1988 and November 1987, respectively. Base revenues from wholesale customers were 844,932,000,'$41,327,000 and $ 38,242,000 in 1989, 1988 and 1987, respectively.
Fuel revenues increased in 1989 compared to 1988 and 1988 compared to 1987 by approximately
$ 18,000,000 and $ 2,300,000, respectively, due to an increase in fuel and purchased and interchanged power costs and an increase in KWH sales (volume) to all jurisdictions.
Operating Expenses:
Decreased operating performance at the Palo Verde Nuclear Generating Station during 1989 resulted in increases in operating and maintenance costs. Signi6cant improvements and a number of changes have been made at the plant which are expected to improve its operating performance.
However, continued satisfactory operation will require operation and maintenance expenditure levels at or above those incurred during 1989. The Company expects to be able to recover such costs in rates.
See discussion above in this Item 7 and Part I, Item 1, "Facilities Palo Verde Station."
Fuel expense and purchased and interchanged power increased. in 1989 over 1988 approximately
$ 18,800,000 due to a change in energy mix and an increase in KWH sales (volume). The prolonged Palo Verde outages resulted in a decrease in volume of lower cost nuclear fuel consumed and a decrease in economy sales of electricity to others and forced increases in the volume of natural gas consumed and purchases of electricity. Purchases of electricity from other utilities were approximately $ 38,900,000 and $ 19,600,000 in 1989 and 1988, respectively. The increase in costs was partially offset by a decrease in the amount of Palo Verde power accounted for as purchased power due to the extended outage in 1989 at Palo Verde Unit 3, which is currently accounted for as purchased power, and due to placing Units 1 and 2 in service in May 1988 for rate re'cognition purposes in the Company's Texas jurisdiction.
The increase was also offset by a decrease in the average cost of natural gas and purchased power. See Part I, Item 1, "Energy Sources General."
The decrease in fuel expense and purchased power of $ 1,400,000 in 1988 over 1987 was a result of a change in energy mix and an increase in KWH sales (volume). The 1988 level of Palo Verde Operations resulted in increased usage of nuclear fuel and a decrease in the amount of electricity purchases and also increased the amount of economy sales of electricity. The Company also increased usage of natural gas. The decrease was partially offset by the increased average cost of nuclear fuel and natural gas and the amount of Palo Verde power accounted for as purchased power due to placing Units 1 and 2 in service in May 1988.
Other operating expense and maintenance expense increased in 1989 over 1988 and 1988 over 1987 due to the timing of inclusion of the Palo Verde Units in rates and increased costs at Palo Verde. Palo Verde Unit 1 was included in rates in May 1988 in the Company's Texas jurisdiction. The lease payments associated with Palo Verde Unit 2 were included in rates in May 1988 in the Company's Texas jurisdiction and November 1987 in the New Mexico jurisdiction, and Unit 3 and related lease payments were excluded from rates in the New Mexico jurisdiction and included in the FERC jurisdiction in January 1988. Prior to inclusion in rates in the respective jurisdictions and subsequent to in-service dates, the operating and maintenance expenses associated with each Unit were deferred and capitalized. The effects of the timing of inclusion in rates of these Units is reflected in the table below.
l989 1988 1987 (In <ha sa d0 Palo Verde costs $ 137,406 $ 121,169 $ 70,594 Palo Verde costs deferred and capitalized. ~28,408) ~42,085) ~50,997) 108,998 79,084 20,297 Phase-in plan deferrals. (9,030) (16,366) (529)
Other non Palo Verde costs 76,255 73,644 68,199 Total operating costs expensed $ 176,223 $ 136,362 887,967 Increased Palo Verde costs for the year ended December 31, 1989 are net of approximately
$ 4.6 million of Texas jurisdictional costs incurred as a result of the Palo Verde outages which have been deferred. Phase-in plan deferrals decreased in 1989 from 1988 as a result of the impact of the Texas rate case implemented in May 1988 (See Part I, Item 1, "Regulation Texas Rate Matters Rate Moderation Plan Palo Verde Units 1 and 2").
33
Depreciation and Amortization Expenses:
Depreciation expense increased in 1989 over 1988 due to depreciating the Texas jurisdictional portion of Palo Verde Units 1 and 2 and Common Plant beginning with their inclusion in rates in May 1988. Depreciation increased in 1988 over 1987 due to depreciating the Texas jurisdictional portion of Palo Verde Unit 1 and Common Plant beginning in May 1988 and the New Mexico and FERC jurisdictional portion of Palo Verde Unit 3 beginning in February 1988.
Amortization expense increased in 1989 over 1988 due to amortization of Palo Verde deferred costs beginning in May 1988 and November 1988 for Texas and New Mexico, respectively, along with an increased deferred cost balance subject to amortization as of June 1989 for Texas in conjunction with the inclusion of the amortization of"such deferred assets as a part of cost of service under the respective rate moderation plans. Amortization expense increased in 1988 over 1987 due to amortiza-tion of a New Mexico deferred debit effective January 1988 and Palo Verde deferred costs beginning in May 1988 and November 1988 for Texas and New Mexico, respectively.
AFUDC:
AFUDC increased in 1989 compared to 1988 due to an increase in the cumulative construction balance accruing AFUDC generally associated, with Unit 3 in Texas. AFUDC decreased in 1988 compared to 1987 because of the sale of approximately 40% of Palo Verde Unit 3 in December 1987, which resulted in decreased cumulative construction and Palo Verde deferred cost balances accruing AFUDC. Additionally, AFUDC decreased due to discontinuing accounting recognition of allowance for equity funds on Palo Verde deferred costs related to Units 1 and 2 pursuant to SFAS No. 92.
Phase. in Plan Deferred Return:
Phase-in plan deferred return decreased in 1989 compared to 1988 due to the discontinuance of deferred return on the Texas jurisdictional portion of Palo Verde deferred costs beginning in May 1989 due to the Texas Commission's rate order (see Part I, Item 1, "Regulation Texas Rate Matters Rate Moderation Plan Palo Verde Units 1 and 2") when the deferred balances were included in Texas rate base and a decrease in the return rate, partially offset by an increase in rate moderation plan deferred revenues accruing return as a result of the Company's rate moderation plans in Texas and New Mexico. Phase-in plan deferred return increased in 1988 compared to 1987 due to phase-in plan deferrals accruing return in 1988 with no comparable amount in 1987.
Investment Income:
Investment income decreased in 1989 compared to 1988 due to unrealized losses on the Company's investment in annuities (see Part I, Item 3, "First Service Life Litigation") and decreased average investment balances. Investment income increased in 1988 compared to 1987 due to a higher average investment return and increased income related to an investment in a partnership partially offset by decreased average investment balances.
Other Income, Net:
Other income, net, decreased in 1989 compared to 1988 as a result of a provision for an expected performance penalty incurred by the Company under the Palo Verde performance standards in its New Mexico jurisdiction. Other income, net, increased in 1988 compared to 1987 due to decreased depreciation on plant held for future use which was fully depreciated in May 1988.See Note B for a discussion of Palo Verde performance standards.
Interest on Long-Term and Financing and Capital Lease Obligations:
Interest on long-term and financing and capital lease obligations decreased in 1989 over 1988 due principally to the redemption in May 1989 of the 12%% Series First Mortgage Bonds, the redemption in July 1989 of the 14'k% Series First Mortgage Bonds, the redemption in November 1989 of thc 14%
Series First Mortgage Bonds and decreased interest on the nuclear fuel lease obligation. Interest on long-term and financing and capital lease obligations decreased in 1988 over 1987 due principally to 34
the early redemption of the 16.20% Series First Mortgage Bonds in February 1988 and the redemption of a floating rate note in the first quarter of 1988.
Other Interest Expense:
Other interest expense increased in 1989 over 1988 due to an increase in the average short-term debt outstanding and the average short-term debt rate. The increase was partially offset by a lack of interest expense on accumulated provision for rate refund related to the Company's Texas rate case which concluded in 1988, with no comparable expense in 1989 and a decrease in the interest on fuel overrecovery. Other interest expense decreased in 1988 over 1987 due to margin interest, incurred in 1987 with no comparable expense in 1988 and a decrease in the interest on fuel overrecovery and the average short-term debt outstanding.
Interest Capitalized and Deferred:
Interest capitalized decreased in 1989 over 1988 due to the interest capitalized on the Texas portion of Unit 1 in 1988 with no comparable interest capitalized in 1989 and decreased interest capitalized related to nuclear fuel lease obligation due to,a decreased average nuclear fuel balance.
Interest capitalized increased in 1988 over 1987 due to the capitalized interest on Palo Verde deferred and increased interest related to nuclear fuel lease obligation and an increase in interest deferred 'osts on a portion of a financing obligation relating to one sale and leaseback transaction involving Palo Verde Unit 2.
See Note A of Notes to Consolidated Financial Statements regarding the effect of SFAS No. 96, "Accounting for Income Taxes."
Effects of Inflation:
In contrast to the analysis of increases in base revenues included at the beginning of "Results of Operations," it is sometimes difficult, in the case of operation and maintenance expenses, to distinguish between effects of volume increases and rises in unit costs (which, for purposes of this discussion, are all attributed to inflationary pressures).
Price changes in fuel costs are passed through to certain FERC customers pursuant to fuel cost adjustment provisions. Fuel price changes in the Company's Texas and New Mexico jurisdictions and two FERC customers require fuel reconciliation hearings for the over or under recovery of fuel costs.
There are a number of other major expense items such as maintenance costs, payroll costs and other operating costs that are beyond the scope of the fuel reconciliation hearings and the fuel cost adjustment provisions. Inflationary pressures on these items have given rise to earnings attrition between general rate increases. See "Regulation" in Part I, Item l.
Non.Utility Operations:
On January 17, 1990 the Company sold all of the capital stock of its subsidiary, Franklin Land R Resources, Inc., and the Company's 35% stock ownership of PasoTex Corporation (which is owned 65%
by FLRR). The results for the twelve months ended December 31, 1989 and 1988 include provisions for loss of approximately 858,165,000 and 835,954,000, respectively, which includes income tax credits of approximately $ 9,650,000 and $ 18,522,000, respectively. The provision for loss includes a provision of approximately $ 7,669,000 and 811,520,000, respectively, for expected operating losses during the phase-out period of the discontinued operations. In addition, the Company recorded a loss of approximately 841,440,000, net of tax benefits of approximately $ 18,560,000, for the year ended December 31, 1989 in connection with the sale of its preferred stock investment in Commercial Federal Savings and Loan" Association in December 1989. The disposition of its non-utility operations reflects the Company's plan to return its operations exclusively to its core utility business. The Company's final divestiture of its non-utility operations and investments in 1990 has been reflected as discontinued operations. See "Non-UtilityOperations" in Part 1, Item 1 and Note P of Notes to Consolidated Financial Statements..
t
Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIALSTATEMENTS
~Pa e Independent Auditors'eport 37 Consolidated Balance Sheets at December 31, 1989 and 1988. 38 Consolidated Statements of Income (Loss) for the years ended December 31, 1989, 1988 and 1987 . 40 Consolidated Statements of Retained Earnings for the years ended December 31, 1989, 1988 and 1987 . 41 Consolidated Statements of Cash Flows for the years ended December 31, 1989, 1988 and 1987 . 4R Notes to Consolidated Financial, Statements . 43 36
INDEPENDENT AUDITORS'REPORT.
The Shareholders and Board of Directors El Paso Electric Company:
We have audited the accompanying consolidated balance sheets of El Paso Electric Company and Subsidiaries as of December 31, 1989 and 1988, and the related consolidated statements of income (loss); retained earnings and cash flows for each of the years in the three-year period ended December 31, 1989. 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 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 ove'rail financial statement presentation. We believe that our audits provide a reasona-ble basis for our opinion.
In our opinion, the consolidated financial statements" referred to above present fairly, in all material respects, 'the financial position of El Paso Electric Company and Subsidiaries as of Decem-ber 31, 1989 and 1988, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1989 in conformity with generally accepted accounting principles.
As more fully discussed in Note B to the Consolidated Financial Statements, uncertainties, exist with respect to the outcome of various regulatory matters including the recoverability through Texas regulation of the Company's investment in Unit 3 of Palo Verde Nuclear Generating Station. The ultimate outcome of these matters cannot presently be determined. Accordingly, no provision for any loss that may ultimately be required upon resolution of these matters has been made in the accompanying consolidated financial statements.
As discussed in Note I of Notes to Consolidated Financial Statements, the Company is a
'efendant in two related lawsuits and, pursuant to indemnity provisions, is contingently liable with respect to another related lawsuit in which a former executive oScer of the Company is one of the defendants. The ultimate outcome of such litigation cannot presently be determined. Accordingly, no provision for any liability that may result upon adjudication of any of the lawsuits has been made in the accompanying consolidated financial statements.
As discussed in Note A of Notes to Consolidated Financial Statements, the Company changed its method of accounting for unbilled revenues in 1987.
KPMG PEAT MARWICK El Paso, Texas March 30, 1990 37
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS December 31, 1989 1988 (In thousands)
Utilityplant (Notes B, D and E):
Electric plant in service . $ 1,190,333 $ 1,150,233 Less accumulated depreciation and amortization 233,240 201,547 Net plant in service .. 957,093 948,686 Construction work in progress . 344,768 258,076 Nuclear fuel un'der capital leases net of amortization of $ 73,920,000 and $ 78,599,000, respectively.... 47,114 54,081 Net utility plant 1.348,975 1,260,843 Non-utility property, at cost net of accumulated depreciation 5,371 4,552 Current assets:
Cash<<and temporary investments 28,370 124 Other short-term investments (Note F) . 100,903 Accounts receivable,'principally trade, net . 44,251 45,196 Inventories. 33,678 ."
31,854 Federal income taxes refundable (Note K) . 29,328 Net undercollection of fuel revenues 10,127 Prepayments and other" 18,638 '8,683
,Total current assets ., 164,392 206,760 Long-term contract receivable (Note B) 16,482 9 142 Net assets of discontinued operations (Note P) 97 062 Deferred charges and other assets:
Palo Verde deferred costs (Note B) . 95,533 122,384 Phase-in plan deferrals (Note B) ............ 52,759 34,642 Other (Note, G) . 86,006 64,564
'Total deferred charges and other assets .. 234,298 221,590 Total assets $ 1,769,518 '1,799,949 See accompanying notes to consolidated financial statements.
38
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS CAPITALIZATIONAND LIABILITIES December 31, 1989 1988 (In thousands)
Capitalization (Notes E, H, I and J):
Common stock, no par value, 40,000,000 shares authorized. Issued and outstanding 35,201,267 and 35,075,309 shares, respectively....... 337,176 $ 335,767 Retained earnings. 67,133 198,131 Common stock equity '404,309 533,898 Preferred stock, cumulative, no par value, 2,000,000 shares authorized:
Redemption required . 100,710 108,460 Redemption not required 14,198 14,198 Long-term obligations . 590,686 454,908 Financing and capital lease obligations. 119,392 124,221 Total capitalization 1,229,295 1,235,685 Current liabilities:
Current maturities of long-term and Bnancing and capital lease obligations (Note J) . 49,100 134,126 Notes payable, commercial paper and revolving credit facility (Note C) 46,756 15,000 Accounts payable, principally trade 21,583 15,364 Taxes accrued (Note K) . 21,186 8,260 Interest accrued . 15,758 15,781 Other 43,761 30,842 Total current liabilities 198,144 219,373 Deferred credits and other liabilities:
Accumulated deferred income taxes (Note K) . 59,983 32,457 Accumulated deferred investment tax credit (Note K)................ 96,352 127,129 Deferred gain on sales and leasebacks (Note E) 175,633 182,806 Other . 10,111 2,499 Total deferred credits and other liabilities 342,079 344,891 Commitments and contingencies (Notes B, D, E, L and M)
Total capitalization and liabilities ............. $ 1,769,518 $ 1,799,949 See accompanying notes to consolidated Bnancial statements.
39
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS'Ol INCOME (LOSS)
For the years ended December 312 1989, 1988 and 1987 (In thousands ex'cept per share data) 1989 1988 1987 Operating revenues S 426,248 8382,107 8337,263 Operating expenses:
Operations:
Fuel SO,G07 72,187 51,297 Purchased and interchanged power . 34,261 23,917 46,199 114,868 96,104 97,496 Other 159,G35 132,533 74,250 Maintenance 25,G18 20,195 14,246 Depreciation and amortization 41,949 34,254 21,162 Phase-in plan deferrals (Note B) (9,030) (16,36G) (529)
Taxes:
Federal income taxes (Note K) . 1,531 8,317 15,775 Other 4 35,126 25,537 22,271 3G9,697 300.574 244,671 Operating income .. 5G.551 81,533 92,592 Other income (deductions):
Allowance for equity funds used during construction 12,578 13,065 31,941 Phase-in plan deferred return (Note B) . 10,513 12,603 Regulatory disallowance (Note B) (22,229) (38,323)
Investment income (Note F) . 1,093 20,555 13,489 Other, net (8,034) (2,630) (2,963)
Federal income taxes applicable to other income (Note K):
Regulatory disallowance G,051 13,937 Other (4,054) (9.313) (1,933)
~4,002) 34,RSO 16,148 Income before interest charges 52.409 115,813 108,740 Interest charges (credits):
Interest on long-term and financing and capital lease obligations.............. 63,025 69,199 77,884 Other interest 11,010 12,732 Interest capitalized and deferred (G,R03) (6,849)
Allowance for borrowed funds used during construction ~)7.3)9) (22.458) 50,513 51,936 61,309 Income from continuing operations before cumulative efFect of change in accounting method . 1,95G 63,877 47,431 Discontinued operations (Note P):
Loss from discontinued operations, net of income tax credits of S1,731, S6,490 and S8,263, respectively (8,184) (3,554) '6,663)
Provision for loss on disposal of operations, fncludingprovision of S7,669 and S11,520 for operating losses during phase-out period, net of income tax credits of S28,210 and S18,52R, respectively . (99,G05) (35.954)
(107.789) ~39.508) ~6,663)
Income (loss) before cumulative eiFect of change in accounting method....... ~..... (105,833) 24,3G9 40,768 Cumulative effect of change in accounting method (Note A) . 4,240 Net income (loss) . (105,833) 24,369 45,008 Preferred stock dividend requirements. 11,812 12,259 12,89R Net income (loss) applicable to common stock. 8 (117,645) S 12.110 S 3R,116 Net income (loss) per weighted average shares of common stock:
Income (loss) from continuing operations before cumulative effect of change In accounting method 0 I0.20 S 1.48 S 0.98 Discontinued operations I (1.13) (0.19)
Cumulative effect of change in accounting method . 0.12 Total . 0~3.35) 8 0.35 S 0.91 See accompanying notes to consolidated Bnancial statements.
40
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF RETAINED EARNINGS For the years ended December 31, 1989, 1988 and 1987 (In thousands except per share data) 1989 iosv Retained earnings at beginning of year $ 198,131 $ 239,320 $ 264,016 Add<
Net income (loss) . ~105,833) 24,369 45,008 92,298 263,G89 309,024 Deduct:
Cash dividends:
Preferred stock 11,812 12,259 12,892 Common stock .. 13,353 53,254 53,795 Capital stock expense . 45 165 Purchase of Company common stock 2,852 25,165 65 558 69.704 Retained earnings at end of year . 8 67,133 $ 198,131 $ 239,320 Dividends declared per share of common stock............. $ 0.38 $ 1.52 $ 1.52.
Weighted average number of common shares outstanding ... 35,1G5,514 35,029,975 35,422,043 See accompanying notes to consolidated financial statements.
41
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1989, $ 988 and 1987 1989 1988 1987 (In thousands)
Cash Flows From Operating Activities:
Income from continuing operations after cumulative effect of change in accounting method $ 1,956 8 G3,877 $ 51,G71 Adjustments for non-cash items from operating activities:
Depreciation and amortization 28,381 R4,191 18,997 Amortization of nuclear fuel 12,156 22,527 4,368 Deferred income taxes and investment tax credit, net. 16,341 14,G10 25,280 Allowance for equity funds used during construction . (12,578) (13,065) (31,941)
Regulatory disallowance 22,229 38,323 Other operating activities S,G53 (5,648)
Loss from discontinued operations (107,789) (39,508)
Adjustments for non-cash items from discontinued operations:
Write down of discontinued segment 120,14G 42,95G Provision for deferred income taxes and investment tax credit, net........... (20,945) (18,522)
Provision for losses during phase-out period 7,669 11,520 Accounts receivable 945 (7,895) (1,115)
Inventories . (1,745) (610) 229 Federal income taxes refundable (29,328)
Net undercollection of fuel revenues (10,127)
Prcpayments and other current assets ~............
~
3,590 Long-term contract receivable.
Net assets of discontinued operations I5',860I 6,074 Accounts payable 7,720 (2,4G5 8,80G Taxes accrued 11,401 (16,SIR (73,391 Interest accrued . (23I (4,388 (841 Other current liabilities. (4,000 (728 11,133 Other dcfcrrals (12,726) 12,719 16,241 Palo Verde deferred costs 1,902 24,G26 m,534 Phase. in plan deferrals . ~19.145) 29.348 ~5,294 Net cash provided by (used for) operating activities. 15,895 (1,801) (73,315)
Cash Flows From Investing Activities:
Additions to utility plant. (138,222) (92,910) (93,187)
Allowance for equity funds used during construction Additions to non-utility property
., 12,578 (966) 13,065 (14,738) 31,941 Non-utility acquisitions, nct of cash received . <43',609I Proceeds from sale of investments 5,551 39,776 Purchase of long-term investments (5,000) (57,GOG)
Proceeds from sales and leascbacks 250,000 Sale of nuclear fuel in process to trust Other investing activities 1,213 2,470 (3,173)
Net cash provided by (uscd for) investing activities ...................... ~125,397) ~9I,562) 144,296 Cash Flows From Financing Activities:
Proceeds from long. term obligations 168,358 1G,5G7 Redemption and repurchase of securities (7,750I (R,150 Dividends paid . (25,165 (65,513 Redemption of long-term obligations (122,007) 153,5R7 (137,293)
Net increase (decrease) in short-term obligations 22,000 104,229 140,006 Other flnancing activities 1,409 (S59 1,317 Net cash provided by (used for) financing activities . 3G,845 (309,711) (49,175)
Nct increase (decrease) in cash and temporary investments . (72,657) (403,074) 21,80G Cash and temporary investments at beginning of year . 101,0R7 504,101 482.'R95 Cash and temporary investments at end of year . $ 28,370 $ 101,027 $ 504,101 Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Income taxes 387 $ 19,427 $ 50,088 Interest on borrowed money from continuing operations. G2,273 63,G78 72,777 Non-cash transactions:
Capitalization of nuclear fuel and related obligation . 20,084 43,87R For the purposes of this statement, all temporary cash investments with a maturity of three months or less are considered cash equivalents.
See accompanying notes to consolidated Bnancial statements.
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS A. Summary of Significant Accounting Policies General El Paso Electric Company (the Company) maintains its accounts in accordance with the Uniform System of Accounts prescribed for electric utilities by the FERC. The subsidiaries are not regulated companies. The Company reports its regulated utility operations pursuant to SFAS No. 71 Account-ing for the Effects of Certain Types of Regulations, as amended.
J Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries.
See Note P. All significant intercompany balances and transactions have been eliminated in consolidation.
Utility Plant and Non-utility Property Utilityplant and non-utility property are stated at original cost and depreciation is provided on a straight-line basis at annual rates which will amortize the undepreciated cost of depreciable property over the estimated remaining service lives. The average annual depreciation rate used by the Company for utility plant other than the Palo Verde Station was 3.17% in 1989, and 3.43% in 1988 and 1987. The average annual depreciation rate for the portions of the Palo Verde Station for which the Company is providing depreciation was 2.50% for New Mexico and FERC jurisdictions in 1989, 1988 and 1987 and 2.62% for the Texas jurisdictional portion which began in April 1988.
The Company charges the cost of repairs and minor replacements to the appropriate operating expense accounts and capitalizes the cost of renewals and betterments. The cost of depreciable utility plant retired or sold and the cost of removal, less salvage, are charged to accumulated depreciation.
The Company is amortizing nuclear fuel under the units of heat production method.
Decommissioning cost for the Company's interest in the PVNGS are charged to depreciation expense and are being deposited in external trust funds until the decommissioning of the facility takes place.
AFUDC The Company's applicable regulatory bodies, FERC, the New Mexico Commission and the Texas Commission, generally provide for the capitalizing of AFUDC, which is defined as an amount which includes the net cost during a period of construction of borrowed funds used for construction purposes plus a reasonable rate on other funds when so used. While AFUDC results in an increase in the cost of utility plant under construction, with a corresponding increase in income, it is not current cash income. AFUDC, net of certain tax effects, is normally recovered in cash over the service life of utility plant in the form of increased revenue collected as a result of higher depreciation expense. The Company records AFUDC during the construction period of utility plant.
The amount of AFUDC is determined by applying an accrual rate to the balance of certain CWIP and deferred costs. In this connection, the FERC has promulgated procedures for the computation (a prescribed formula) of the accrual rate. The weighted average accrual rate was 10.5%, 11.1% and 11.4%
for 1989, 1988 and 1987, respectively. The Company compounds AFUDC on major construction projects semiannually. Prior to May 1988, certain amounts of CWIP had been allowed in the Company's rate base or had been made the basis of extraordinary cash rate relief, and the appropriate amounts had been excluded from the CWIP balance used as a base for calculating AFUDC.
43
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
Change in Accounting hfethod Prior to January 1, 1987, the Company recognized utility revenues when billed. To provide a better matching of the Company's revenues from kilowatt-hour sales with the related costs, effective January 1, 1987, the Company changed its method of accounting to record estimated revenues from sales of electricity for services provided subsequent to monthly billing cycle dates but prior to the end of the accounting period. The cumulative effect of this accounting change as of January 1, 1987, net of income taxes of $ 2,827,000, increased net income and net income per share for the year ended December 31, 1987 by $ 4,240,000 and 8.12, respectively. The pro forma effect on net income for the year ended December 31, 1987 of applying the new method of accounting retroactively is not material.
Fuel Cost Adjustment Provisions, The Company's Texas and New Mexico retail customers are presently being billed under fixed fuel factors approved by the Texas Commission and the New Mexico Commission. The Company's Texas and New Mexico fuel factors are set in the Company's general rate case or Commission ordered fuel reconciliation. In the Texas jurisdiction and New Mexico jurisdiction, the Company's fixed fuel factor is subject to reduction if the utility materially over-recovers its allowable fuel costs under its existing fuel factor. (See Note B).
Rate tarifFs currently applicable to certain FERC jurisdictional customers contain appropriate fuel and purchased power cost adjustment provisions designed to recover the Company's fuel and purchased power costs. Two FERC customers have fixed fuel factors approved under FERC tariffs for which no fuel reconciliation is made.
Federal Income Taxes and Investment Tax Credits Deferred income taxes are provided as a result of timing differences in reporting income and expense items for financial statement and income tax purposes.
With respect to investment tax credit generated by the Company, such investment tax credit utilized is deferred and amortized to income, once such related properties are considered "opera-tional" by the Company's regulatory authorities, over the estimated average remaining useful lives of the Company's fixed assets directly or indirectly involved in the generation and transmission of electricity.
Statement of Financial Accounting Standards No. 96, "Accounting for Income Taxes", was issued by the Financial Accounting Standards Board in December 1987. Statement 96 requires a change from the deferred method to the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred income taxes are recognized for the tax conse-quences of "temporary differences" by applying enacted statutory tax rates applicable to future years to difFerences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. Statement 96, as amended, is effective for fiscal years beginning after December 15, 1991.
The Company estimates that adoption of Statement 96 will result in a reduction in the balance of accumulated deferred income tax liability and the creation of a liability to the Company's ratepayers for the effect on regulated assets and liabilities of the reduction of the Federal statutory income tax rate from 46% to 34% as provided for by the Tax Reform Act of 1986. This reduction in accumulated deferred income taxes will be partially offset by the effect of new temporary differences resulting from Statement 96, such as allowance for equity funds used during construction and accumulated deferred investment tax credits. The portion of the regulated liability created by Statement 96 relating to certain temporary difFerences (i.e.-accelerated depreciation) will be recorded as long-term and be amortized
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued) over the remaining life of the assets giving rise to the temporary difference. With respect to its non regulated assets and liabilities, the Company estimates the adoption of SFAS 96 will require an increase in the balance of accumulated deferred income tax liability. Such adjustment is presently estimated to be" approximately $ 16 million.
The Company may recognize the cumulative effect of a change in accounting principle upon adoption of SFAS 96 or restate prior period financial statements to conform to the provisions of the statement. The Company has not decided when it will implement SFAS 96 and has not decided upon the method of adoption.
Reclassification Certain amounts in the consolidated financial statements for 1988 and 1987 have been reclassified to conform with the 1989 presentation.
B. Rate Matters I
Texas. The rates and services of the Company in Texas municipalities are regulated by those municipalities and in unincorporated areas by the Texas Commission. The Texas Commission has exclusive de novo appellate jurisdiction to review'unicipal orders and ordinances regarding rates and services, and its decisions are subject to judicial review.
Neio Mexico. The New Mexico Commission has authority over the Company's rates and services in New Mexico, the issuance of securities by the Company and other matters affecting the operations of the Company.
FERC. The Company is subject to regulation by the FERC in certain matters, including rates for wholesale power sales and the issuance of securities. In addition,'Congress has enacted energy legislation which, among other things, establishes national standards for consideration by state regulatory agencies in determining'utility rates and imposes other requirements on the operations of utilities, including the Company'. Under certain circumstances, the FERC may order interconnection, wheeling and pooling.
NRC. The Palo Verde Station is subject to the jurisdiction of the Nuclear Regulatory Commission
("NRC"), which has authority to issue permits and licenses and to regulate nuclear facilities in order to protect the health and safety of the public from radiation hazards and to conduct environmental reviews pursuant to the National Environmental Policy Act. Before any nuclear power plant can become operational, an operating license from the NRC is required. The NRC has granted facility operating licenses for Unit 1, Unit 2 and Unit 3 for terms of forty years each beginning December 31, 1984, December 9, 1985 and March 25, 1987, respectively. See Note D.
Rate Moderation Plan Palo Verde Units 1 and 2. On March 30, 1988, in Docket 7460, the Texas Commission adopted a rate moderation plan which provides for the inclusion in Texas rates, on a phase-in basis, of the Texas jurisdictional portion of the Company's investment in Palo Verde Unit 1 and the Company's lease payments in its sales and leasebacks of its interest in Palo Verde Unit 2 and one-third of Common Plant to the extent of the book value of the plant sold and leased back (which is approximately 83% of such lease payments). The Texas Commission's order was'based upon a stipulated settlement entered in October 1987 among the Company, the staff of the Texas Commission and certain industrial customers. The stipulation and the Texas Commission's final order settled all issues regarding prudence of construction of Palo Verde Units 1 and 2 and Common Facilities and all 45
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued) issues involving the prudence of the Company's decisions to make the investment it made in the Palo Verde Project and which resulted in the continuation of that investment, except, as to Unit 3 only, decisional prudence relating to events occurring after the 1978 issuance by the Texas Commission of a Certificate of Convenience and Necessity for the Palo Verde Project. See discussion below regarding the planned Unit 3 rate case. As part of the stipulated settlement, the Company recorded in the third quarter of 1987 a regulatory disallowance of approximately $ 38.3 million ($ 24.4 million after tax). The disallowance amounted to less than 2% of the Company's total investment in Palo Verde. The stipulation also settles all issues of excess capacity relating to Units 1 and 2 for the duration of the 10-year rate moderation plan, and the Texas Commission has indicated that it will not consider excess capacity issues relating to Units 1 and 2 during such time period.
The Texas Commission adopted the rate moderation plan by unanimous vote, over the objections of the City of El Paso and two other intervenors representing public entities. Those parties appealed the Texas Commission's order to state district court'in Travis County, Texas, where the district court u'pheld the order of the Texas Commission. The decision of the District Cburt was appealed by the City of El Paso and the two other intervenors to the Court of Appeals for the 3rd Judicial District at Austin, Tex'as. A ruling on such appeal is expected later this year. Management anticipates that the Texas Commission's order will be upheld. ~
g P
The Texas Commission's order in Docket 7460 limits the Company to specified base rate (cash) increases during the first four years of the plan. The plan requires that the Company file rate cases annually to establish the Company's revenue requirements and resulting right to the base rate increase. To the extent the Company's base revenue requirements recognized by the Texas Commis-sion exceed the base rate increase provided for the period, the unrecovered revenue requirements are deferred for collection in later years of the plan. The rate moderation plan, which is explicitly intended to comply with SFAS No. 92, Regulated Enterprises Accounting for Phase-In Plans, requires all revenue deferrals to be recovered within the 10-year term of the plan. The Company is, under the plan, entitled to additional base rate increases for years subsequent to the scheduled fourth increase, if necessary, to recover all such deferrals during such time period. The Company has indicated in its rate filing for the scheduled third base rate increase that such additional cash increases will be necessary.
See discussion below regarding Docket 9165.
The Texas Commission's order in Docket 7460 provided for the first scheduled base rate increase of approximately $ 21 million. The new rates went into effect in April 1988, and the order provided for the deferral for future recovery of approximately $ 25 million.
In October 1988, the Company filed with the Texas Commission for the scheduled second base rate increase under the rate moderation plan (Docket 8363). The Company requested an increase of approximately $ 39 million in base revenues. In May 1989, the Texas Commission entered its final order in the case which granted, effective June 1989, the scheduled second cash increase in base revenues of approximately $ 7.3 million and the deferral of approximately $ 7.4 million.
The approximate $ 24.3 million ordered reduction in the revenue deferrals requested by the Company resulted from, principally (1) adjustments made by the Texas Commission which reduced rate base by $ 61 million, the major components of such reduction being the disallowance of certain operating costs previously deferred under accounting deferral orders issued by the Texas Commission (which disallowance resulted in the after-tax write-off of $ 15 million in the first quarter of 1989),
disallowance of the Company's requested cash working capital levels, removal from rate base of the unamortized balance of Docket 7460 prudence case expenses (which will be considered for recovery in rates in the separate docket described below under "Rate Case Expenses Incurred in Docket 7460")
and the one-time offsetting of rate base by deferred taxes associated with the portion of Palo Verde Unit 3 sold and leased back by the Company in December 1987; (2) the Texas Commission's setting the 46
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
Company's rate of return on common equity at 12.4% as opposed to the Company's requested 14.0%;
(3) various operating expenses being reduced or eliminated, totaling approximately $ 6.4 million; and (4) tax ramifications of the foregoing resulting in a compounding of the reductions.
The Company, as well as certain parties adverse to the Company in the case, appealed the Texas Commission's order in Docket 8363 to state district court in Travis County, Texas. A decision on the appeal is not expected before the end of 1990. The Company has contested the bulk of the adjustments made by the Texas Commission and believes there are justified grounds for its appeal. However, as is the case in any appeal from a decision of the Texas Commission, judicial review is generally limited.to a determination of whether substantial evidence exists to support the Texas Commission's order and whether the, Texas Commission acted within its statutory authorization and not arbitrarily in reaching its decision. The outcome of the appeal of the case cannot presently be determined.
In late November 1989, the Company Bled with the Texas Commission for the third scheduled base rate increase of 3.5% (Docket 9165). In the fling, the Company seeks an increase in base revenues of approximately $ 33.9 million, consisting of an approximate $ 7.1 million cash increase and an approximate $ 26.8 million in phase-in deferrals. As an alternative calculation of the third scheduled base rate increase, the Company requested a cash base rate increase of approximately $ 13.1 million, with the balance of its requested increase in base revenues of approximately $ 20.8 million to be deferred, in order to correct a problem which has arisen in the operation of the rate moderation plan involving the average unit rate paid by customers. The cash increases in base revenues originally projected under the rate moderation plan were projected on the basis of expected average unit rates to be achieved from forecasted Texas sales. Due to unanticipated shifts in usage among customers and customer groups, the average unit rates for sales has not reached the projected levels. As a consequence, the Company's cash revenues have not reached levels commensurate with the growth in sales that has occurred, which will contribute to the need for additional increases in base rates after the scheduled fourth increase in order to recover all deferred revenues within the 10-year term of the rate moderation plan.
In March 1990, the City of El Paso, in response to the Company's fling, ordered a $ 6.9 million reduction in the Company's base revenues, which, if ordered by the Texas Commission, would, combined with the scheduled cash increase in base rates, result in an amortization of the deferrals ordered in Dockets 7460 and 8363 by a corresponding amount. The City's order has been appealed to the Texas Commission. The staff of the Texas Commission has recommended an approximate
$ 17.5 million increase in the Company's base revenues, consisting of a $ 7.1 million cash increase and a
$ 10.4 increase in revenue deferrals. The staff has not yet made its recommendation on approximately
$ 2.2 million of rate case expenses in this Docket, which were requested in the Company's filing. See "Rate Case Expenses Incurred in Docket 7460." Although the staff recommended rejection of the Company's alternative filing with respect to the average unit rate problem, the staff indicated its agreement that additional base rate increases would be required under the rate moderation plan to recover the phase-in deferrals.
Hearings before the Texas Commission commenced in early March 1990. New rates resulting from the Company's fling in Docket 9165 are expected to be effective by August 1990.
The Company's fling in Docket 9165 does not involve the major issues in Docket 8363 relating to the adjustments made by the Texas Commission with respect to deferred operating costs. The issues in Docket 9165 relate principally to return on equity, operations and maintenance expenses (particularly at Palo Verde),'eferred taxes and recovery of certain restructuring costs incurred by the Company.
The Company believes that it is entitled to the rate relief sought in Docket 9165, including its alternative fling with respect to the average unit rate problem. The Company would, as it has in the past with respect to previous orders of the Texas Commission, appeal to statedistrict court ifthe Texas 47
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
Commission were to order insuScient rate relief in this Docket. The outcome of the case cannot presently be determined.
The Company's present plan is to file in the third quarter of 1990 for the fourth scheduled base rate increase under the Docket 7460 rate moderation plan. The scheduled base rate increase under the plan is 3.5%. New rates resulting from the filing should be in effect by summer 1991.
Palo Verde Unit 3 Inclusion in Texas Rates. Although Palo Verde Unit 3 began commercial operation in January 1988, the Unit cannot satisfy Texas Commission criteria for in-service status, and thereby qualify for eligibility for inclusion in Texas rates, until the AIP transmission facilities, construction of which was completed in December 1989, are energized for operation at a required minimum capacity level.
Utilization of the AIP transmission line can occur only with the consent of the Operating Agent of the Southwest New Mexico Transmission System ("SWNMTS"), who can, in that capacity, unilaterally determine the conditions under which power can be transmitted over the AIP line. Public Service Company of New Mexico ("PNM") is presently acting as operating agent under the SWNMTS.
Disputes have arisen between the Company and PNM regarding transmission rights and capabilities in the southern and northern New Mexico transmission systems, and PNM has refused to transfer operating agent status under 'the SWNMTS to the Company, as required under the SWNMTS agreement upon completion of construction of AIP. As a result of these disputes, the Company in early March 1990 sued PNM in the United States District Court for the Western District of Texas for wrongful refusal to permit the Company its full AIP transmission capability.
On March 30, 1990, the Company reached an agreement in principle with PNM to submit to binding arbitration the entitlement of the parties to the transmission rights and capabilities in dispute.
Th'e agreement in principle provides for the energization, pending arbitration, of AIP no later than April 9, 1990, at the required level of capacity necessary for Unit 3 to meet the Texas Commission's in-service criteria and provides for the Company to become Operating Agent of SWNMTS upon receipt of the decision of the arbitrators. The Company will accrue a payable to PNM, based upon the purchase of a specified amount of wheeling capacity from PNM, which must be paid only if the arbitrators rule in favor of PNM. Each of the Company and PNM will appoint one arbitrator, and the two of them will select a third arbitrator. The agreement in principle, calls for the execution of a definitive agreement between the parties by April 6, 1990, at which time the Company's lawsuit will be dismissed. A decision of the arbitrators is scheduled by the end of 1990.
The Company expects a favorable outcome in the arbitration. An unfavorable outcome would not affect the in-service status of Unit 3, and there are alternatives available to the Company, in the event of an unfavorable outcome, to meet its transmission capability requirements not met through the southern New Mexico transmission system, of which AIP is a part.
In September 1989, the Company filed an application with the Texas Commission for an accounting order that would allow the Company to defer and capitalize substantially all Unit 3 operating costs (excluding fuel) and to accrue a carrying charge on its ownership interest in Unit 3 from the date Unit 3 satisfies the Texas in-service criteria until the Texas Commission issues its rate order on Unit 3. The Company's application for the accounting order was consolidated with Docket 9165 described above. The staff of the Texas Commission has recommended that the Texas Commission grant the accounting order. The Company expects the Texas Commission to grant the requested accounting order. If, however, the Texas Commission refused to grant the accounting order, the Company will be required to expense the Unit 3 operating costs beginning with the date that Unit 3 meets the Texas in-service criteria.
48
EL PASO ELECTRIC COiVIPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
Until Unit 3 qualifies for in-service status in Texas, the Texas jurisdictional portion of Unit 3 will be accounted for, as it has been since the Unit went into commercial operation, as plant under construction. The Company, therefore, has been capitalizing, since the Unit went into commercial operation in January 1988, the Texas jurisdictional portion of the costs of owning, operating and maintaining Unit 3. During the year ended December 31, 1989, the Company capitalized a total of
$ 51.1 million to construction work-in-progress related to the Texas jurisdictional portion of Unit 3, consisting of $ 12.7 million of operation and maintenance costs; '$15.9 million of lease expense attributable to the portion of Unit 3 sold and leased back; 82.4 million of property and other taxes; and
$ 20.1 million of AFUDC. Since January 1988 through December 31, 1989,'he aggregate of such costs capitalized is $ 85.9 million. The Company's total investment in the Texas jurisdictional portion of Unit 3 at December 31, 1989, net of the portion sold and leased back, was $ 216.0 million.
The'Company plans to file with the Texas Commission in the third quarter of 1990 for rate treatment of the Texas jurisdictional portion of the Company's investment in Palo Verde Unit 3, including the lease payments in the Company's sales and leasebacks of 40% of its interest in Unit 3. The Company expects the Texas Commission's final order on the Unit 3 case in the late first quarter of 1991, with rates reflecting the outcome of the case to be effective in the summer of 1991.
At present, management'believes that inclusion of Unit 3 in Texas rates will probably involve some form of phase-in or rate moderation plan. Either a separate plan for the Unit 3 costs or a revised combined plan, including the Company's investment in Palo Verde Units 1, 2 and 3, are possible. As the Company has only one set of rate tariffs, however, some merger of the plans into a single set of rates will be necessary.
Although issues relating to the prudence of construction costs directly attributable to Unit 3 are not included in the construction prudence issues resolved by the rate moderation plan for Units 1 and 2 and are therefore open for decision in the Unit 3 case, the Company does not expect a material disallowance of Unit 3 costs on the basis of construction imprudence. In March 1989, Ernst R Whinney, a national accounting firm, which oversaw the prudence audit of the Palo Verde Station ordered by the Arizona Corporation Commission in the exercise of its regulatory authority over Arizona Public Service Company, the Operating Agent for Palo Verde, released its audit report. The report identified approximately $ 60 million, excluding AFUDC and property taxes, for the entire Palo Verde Project which Ernst L Whinney contends were unreasonable. Of.this amount, the Company's share would be approximately $ 9.5 million (which is less than the write-off recorded by the Company in connection with the adoption of the Docket 7460 rate moderation plan see discussion above under "Rate Moderation Plan Palo Verde Units 1 and 2"). Neither the Company nor the Operating Agent accepts the Ernst R Whinney contentions as to the unreasonableness of the Palo Verde construction costs. The audit report also identified certain'areas that were found to exceed the standard of reasonableness and to have a positive impact on the Palo Verde Project, including built-in separation of electrical equipment, design replication of the three Palo Verde Units, certain aspects of the regulatory (licensing) management function, and certain labor and contractual arrangements. The report estimated that the potential direct cost savings of the identified areas in which performance exceeded the standard of reasonableness were approximately $ 300 million for the entire project (excluding AFUDC and property taxes), of which the Company's share would be approximately
$ 47.4 million.
Decisional prudence issues relating to Unit 3 were not resolved in Docket 7460, insofar as such issues relate to events occurring after the Texas Commission's November 1978 issuance of a Certificate of Convenience and Necessity for Palo Verde. In Docket 7460, the Texas Commission acknowledged the prudence of the Company's decision-making through the issuance of the Certificate of Conve-nience and Necessity for Palo Verde. The Company believes that it will be able to demonstrate in the 49
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
Unit 3 case the prudence of the Company's decisions regarding the level of its Palo Verde participation after 1978 and does not expect any material disallowance on the grounds of decisional imprudence.
The Company belieyes that the primary concern with respect to inclusion of the Company's full investment in Unit 3 in Texas rates will relate to issues of excess capacity. Such issues are resolved with respect to Units 1 and 2 under the rate moderation plan for the 10-year term of the plan. The Company believes that proper regulatory treatment recognizes that the construction and addition to utility plant of generating capacity, particularly large investments such as the Company's investment in Palo Verde, cannot exactly be matched to increases in load requirements and that a period of an acceptable level of excess capacity must be anticipated and accepted. Claims of excess in the Company's generating capacity continue to be weakened by the load growth experienced by the Company. If any excess generating capacity were to be found by the Texas Commission relating to Unit 3, the Company believes the amount of any resulting exclusion from rate base would probably be temporary and would be restored to rate base in future rate proceedings to permit full recovery of substantially all of the Texas jurisdictional portion of the Company's investment in Unit 3.
The Companybelieves that it is entitled to recover in full the Texas jurisdictional portion of the Company's Unit 3 investment and a,fair return thereon, If the Company were denied adequate and timely rate relief sufficient to recover the investment and a fair return thereon, the Company would resort to the courts for the rate relief to which it believes it is entitled. The ultimate outcome of the case cannot, however, presently be determined. Failure to receive sufficient inclusion in Texas rates of the Company's Unit 3 investment, on a timely basis, would increase the Company's external financing requirements and could adversely affect access to the capital markets at reasonable cost. An adverse regulatory decision by the Texas Commission with respect to the Company's investment in Unit 3 which, in the judgment of the lending banks under the RCF, causes the Company's revenues to be insufficient to assure its ongoing viability or its access to capital markets or its ability to repay'ts obligations, constitutes an event of default under the RCF. See Note C.
Fuel Reconciliation Case. In June 1989, the Company filed an application with the Texas Commis-sion to reconcile its fuel expenses and revenues for the period August 1985 through March 1989. The reconciliation is required by Texas Commission rules and final order in Docket 7460, The Company's filing requests an additional $ 900,000 in fuel revenues for the reconciliation period. The City of El Paso, in response to the Company's filing, recommended that the Company be ordered to refund approximately $ 14.3 milliori.in previously recovered fuel expenses. The staff of the Texas Commission has recommended a refund of approximately $ 10.R million. Hearings before the Hearing Examiner appointed by the Texas Commission have been completed, and a Hearing Examiner's report and recommendation is expected in the near future. Although the Company is unable to assess the outcome of this matter prior to the issuance of the Hearing Examiner's report, the Company believes that it has, in accordance with the rules of the Texas Commission, made all refunds to customers of overcollected fuel expenses during the four-year reconciliation period and that any material disallow-ance of the Company's fuel expense recoveries would not be justified. The Company has made no provision for any fuel refunds in the accompanying financial statements.
Rate Case Expenses Incurred in Docket 7460. The approximate $ 1L4 million of expenses incurred by the Company in connection with the Docket 7460 rate case were severed from the issues ruled upon by the Texas Commission in that Docket and were assigned to a new docket for consideration. The Company has applied for the immediate recovery of approximately $ 5 million of these expenses through a surcharge to customers and has proposed that the balance of the exphnses, attributable to the prudence phase of Docket 7460, be amortized and recovered in rates over'the useful life of the Palo Verde Units. The staff of the Texas Commission has recommended that the'Company be allowed to recover all of the expenses, without interest, amortized over the useful life of the Units. The City of 50
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
El Paso has recommended a disallowance of approximately $ 7.4 million of the prudence expenses.
Although hearings in this case were completed in November 1988, no Hearing Examiner's report has been issued. The Company expects a ruling from the Texas Commission by summer 1990. The costs are included as a deferred charge in the accompanying consolidated balance sheet. Although the Company expects to recover the costs, most likely in accordance with the Company's proposed method for recovery, an assessment of the outcome oF the case cannot be made prior to the issuance of the Hearing Examiner's report.
Texas Recognition of Palo Verde Snles and Leasebacks. The Company sold and leased back its entire interest in Palo Verde Unit'2 and one-third of Common Plant in transactions completed in August 1986 and December 1986. The Company also sold and leased back approximately 40% of its interest in Palo Verde Unit 3 in December 1987. See Note E. The Company, under applicable Texas Commission rules, was required to report the Unit 2 and Unit 3 sales and leasebacks to the Texas Commission, for a determination by the Commission as to whether the transactions were in the public interest. In its Docket 7460 order and a separate order issued in August 1989, the Texas Commission found the Unit 2 and Unit 3 sales and leasebacks, respectively, to be in the public interest. The rulings have no current ratemaking impact:, but do insure that, in the case of the Unit 3 sales and leasebacks, the Commission will consider those transactions in connection with the Company's request for rate treatment of its investment in Unit 3. The City of El Paso appealed the Commission's order with respect to the Unit 3 transactions to state district court in Travis County, Texas. The appeal is not expected to be ruled upon this year. Management believes that the court will uphold the Commission's order. The finding on the Unit 2 sales and leasebacks is a part'f the City's appeal of the Docket 7460 order.
Perfonnance Standards for Palo Verde Texns. In June 1989, the Company filed an application with the Texas Commission to establish performance standards in its Texas jurisdiction for the operation of the Palo Verde Units. The performance standards proposed by the Company correspond to the perfor'mance standards for the Palo Verde Units currently in effect with the New Mexico Commission for the Company's New Mexico service area. See "New Mexico Rate Matters" below. The Company's application to establish Texas performance standards has been consolidated with the Company's rate Gling in Docket 9165 (see discussion above).
Texas Recover of Fuel Expenses. In its Texas jurisdiction, the Company recovers its fuel expenses and purchased power costs pursuant to a fuel factor set by the Texas Commission in each general rate request Gled by the Company. The Texas Commission has the authority to order proceedings periodically for the purpose of reconciling the Company's fuel revenues against actual fuel expens'es.
See "Fuel Reconciliation Case" above. As a result of the unscheduled outages of the Palo Verde Units in 1989, the Company incurred and is incurring replacement power costs in excess of the amount of fuel revenues provided by the Company's fuel factors. Although the Company believes it is entitled to and will recover its actual Texas fuel costs, the Company is unable, at this time, to predict the ultimate financial or regulatory impact of the unscheduled outages. See Note D.
Neiv Mexico In March 1987, the New Mexico Commission adopted a rate moderation plan which provides for the regulatory treatment of the New Mexico jurisdictional portion of the Company's investment in all three Units at Palo Verde. The New Mexico Commission's order was based upon a stipulated settlement among the Company, the staff of the New Mexico Commission and certai'n intervenors. The New Mexico plan, among other things, provides for the full inclusion in rate base of the Company's investment in Unit 1 and one-third of common plant and recovery as cost of service of the Company's lease payments on the Unit 2 sales and leasebacks to the extent of the book value of plant sold and leased back. The Company agreed, as part of the plan, that it would not request inclusion in New I
51
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
Mexico rates of the New Mexico jurisdictional portion of the Company's investment in Unit 3, one-third of common plant and certain related transmission facilities (aggregating $ 54.2 million) or any Unit 3 operating expenses. The plan also provided for increases in rates of 3% on a total cents per kilowatt hour basis in 1987, and two additional 3% increases in base rates in 1988 and 1989. The plan settled as far as the New Mexico jurisdiction is concerned all construction and decisional prudence issues relating to the Company's investment in Palo Verde and settled excess capacity issues through 1993.
Similar to the Texas plan for Units 1 and 2 (Docket 7460 described above), the New Mexico plan provides that, to the extent the Company's base revenue requirements determined by the New Mexico Commission exceed the base rate increase provided for the period, the unrecovered revenue requirements are deferred for collection in later years of the plan. However, the New Mexico plan presently provides that all deferred revenues not recovered prior to December 31, 1994 are not to be recovered through New Mexico rates. SFAS No. 92, which governs accounting for rate phase-in plans, was not in existence at the time of the adoption of the New Mexico plan. As a result of the New Mexico plan provision that deferrals not recovered prior to December 31, 1994 will not be recovered in New Mexico rates, the New Mexico plan does not comply with SFAS No. 92. The Company has Bled an application with the New Mexico Commission to amend the plan to bring it into compliance with SFAS No. 92 and believes that such amendment will be approved by the New Mexico Commission. A hearing on the application is scheduled in mid-June 1990. If the New Mexico plan is not amended to comply with SFAS No. 92, the Company would be required to write-off approximately $ 5.5 million of recorded phase-in deferrals and discontinue reporting for Bnancial statement purposes the unrecovered revenue requirements deferred for collection under the plan.
Effective November 1987, the New Mexico Commission ordered the first scheduled rate increase under the New Mexico plan. The order provided for an increase in base revenues of approximately
$ 5.0 million, consisting of approximately $ 1.8 million cash increase in base rates and approximately 83.2 million deferred revenues.
In November 1987, the Company Bled for the second scheduled base rate increase under the New Mexico plan. The Company requested an increase in base revenues of approximately $ 5.5 million. The New Mexico plan limited the base rate increase to approximately $ L7 million, with the balance of the Company's requested increase in base revenues to be deferred. The New Mexico Commission's final order in the case, which was issued based upon a stipulated settlement on revenue requirements, allowed the Company an increase in base rates of approximately $ L5 million and provided for the capitalization of approximately $ 1.2 million of fuel expense as a cost of service deferral. No additional deferred revenues were provided under the stipulation or order. Rates based upon the order were effective November 1988.
In July 1989, the Company Bled with the New Mexico Commission for the third and final scheduled base rate increase under the plan. The Company requested an increase in base revenues of approximately $ 8.5 million, consisting of an increase in base rates of approximately $ 1.8 million and deferral of approximately $ 6.7 million. A stipulated settlement of the case was reached in February 1990 which provides for an increase in base revenue of approximately $ 2.5 million, consisting of an increase in base rates of approximately $ 1.8 million and deferral of approximately $ 0.7 million. The Company expects the New Mexico Commission to issue its final order approving the stipulated settlement in April 1990, with new rates to be effective in May 1990.
The Company will be required to recover the New. Mexico jurisdictional portion of the Company's investment in Unit 3, which is deregulated under the New Mexico rate moderation plan, through off-system sales in the economy energy market. Market prices for economy energy sales have not been in recent years and are not presently at levels needed by the Company to recover the New Mexico 52
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued) portion of the Company's current operating expenses related to Unit 3, including lease payments.
However, the Company believes that over. the useful life of Unit 3, based. upon its current forecast of plant operating costs and performance, power needs of other utilities and alternative fuel prices, the Company will be able to recover the New Mexico portion of its Unit 3 costs through such sales of power.
The Company is subject to performance standards in its New Mexico jurisdiction for the operation of the Palo Verde Units. The standards measure performance on the basis of the three Units being viewed as a single generating station and involve the use of designated levels of capacity factors (the ratio of actual generation to maximum possible generation). Ifthe annual capacity factor of the station exceeds the maximum standard (which is 75% capacity), the Company is entitled to a monetary reward based upon the additional fuel costs avoided, calculated with reference to the Company's weighted average fuel and purchased power costs (other than Four Corners, Palo Verde and purchases from Southwestern Public Service Company). If the annual capacity factor falls below the minimum standard (60% capacity), the Company is penalized based upon the additional fuel costs incurred using the same formula. If annual performance falls between the minimum and maximum standards, no consequences result.
Due to the unscheduled outages at Palo Verde during 1989, the Company recorded at Decem-ber 31, 1989 an estimated performance perialty of ap'proximately $ 3.0 million based 'upon the requirements of the New Mexico performance standards. Under those standards, the New Mexico Commission has the right to re-evaluate whether Palo Verde Units 1 and 2 should continue to be included in New Mexico rates. Although the Company is unable at this time to predict the ultimate financial or regulatory impact of the unscheduled outages at Palo Verde during 1989, the Company believes that, because Units 2 and 3 have been restarted and a request to the NRC to restart Unit 1 is expected in April of 1990, the New Mexico Commission will not exclude any of the Company's investment in Palo Verde Units 1 and 2 from New Mexico rates.
In its:New Mexico jurisdiction, the Company recovers its fuel expenses and purchased power costs through a fuel factor set by the New Mexico Commission. The New'exico rate moderation plan requires that the fuel factor be fixed each year during the term of the plan. On January 31, 1990, the Company filed a request for a new fuel factor in its New Mexico jurisdiction. The requested fuel factor reflected the estimated penalty of $ 3.0 million recorded by the Company under the New Mexico performance standards as well as a request by the Company to recover during 1990 approximately
$ 2.0 million of under-recovered fuel expenses in New Mexico. Hearings will commence this summer, and the Company expects the New Mexico Commission to issue an order by the'fall of 1990.
, The Company's rates for wholesale power sales and transmission services are subject to regulation by the FERC. The Company's sales for wholesale power make up a significant portion of the Company's operating revenues. During both 1989'and 1988, approximately 18% of the Company's electric operating revenues resulted from such sales, respectively. Rate tariffs currently applicable to certain FERC jurisdictional customers contain appropriate fuel and purchased power cost adjustment provisions designed to recover the" Company's fuel and purchased power costs. Two FERC customers have fixed fuel factors approved under FERC tariffs for which no fuel reconciliation is made. Although rates to wholesale customers require FERC approval, the Company and its wholesale customers usually establish such rates through negotiations subject to such FERC'approval.
The Company has a rate settlement agreement with IID which is based upon a long-term firm power sales agreement providing for the sale of 100 megawatts of firm capacity to IID beginning in 53
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued) 1987 and continuing through April 2002. In addition, the agreement calls for contingent capacity of 50 megawatts to be made available to IID beginning in 1992 and continuing through April 2002. The of the settlement agreement generally provide for sales prices designed to fully recover the 'erms scheduled costs over the life of the agreement. The sales prices are generally level throughout the term of the agreement and to the extent that they do not fully recover scheduled costs in the contract, revenues and a return are accrued for subsequent collection. Amounts accrued under the terms of the agreement were $ 7,340,000, $ 7,632,000 and $ 1,510,000 in 1989, 1988 and 1987, respectively. The agreement with IID settles any possible issue of the prudence of the construction costs of Palo Verde and of excess generating capacity.
The Company has a rate settlement agreement with TNP which is based upon a revised firm power sales agreement with TNP. As part of the settlement of the rate increase request, the Company and TNP settled an arbitration with respect to the contractual level of reserve demand under the Company's prior sales agreement with TNP. The revised firm power sales agreement with TNP provides for firm power sales to TNP ranging from 43 megawatts to 79 megawatts, beginning in 1987 and continuing through 2002, with negotiated demand charge rates for such power.
C, Liquidity The Company expects to externally finance its cash requirements not met through cash generated from operations. Those requirements include construction expenditures and, until the Company's base rates provide for 'current recovery of the Company's cost of service and return on investment, operating and capital costs deferred pursuant to rate moderation plans, operating and capital costs related to the Texas jurisdictional portion of Palo Verde Unit 3, payments of long-term debt and preferred stock maturities and redemptions. See Note B.
The Company's estimated external financing requirements for 1990 are $ 242 million, of which
$ 153 million was completed on January 26, 1990. Proceeds were used to reduce borrowings then outstanding under the RCF (see discussion below). Proceeds from the balance of the required financings, $ 89 million, combined with cash on hand and internal cash generation (together estimated at $ 46.5 million), will be used to meet the Company's 1990 estimated construction expenditures of
$ 53.4 million, payments of long-term debt and preferred stock maturities and redemptions of
$ 48.5 million and estimated regulatory deferrals and Palo Verde Unit 3 capitalized costs of
$ 33.6 million.
During 1991 and 1992, the Company expects to incur construction expenditures of $ 51.4 million and $ 49.9 million, respectively. Payments of long-term debt and preferred stock maturities and redemptions aggregate approximately $ 95.6 million and $ 59.1 million, respectively. Cash requirements in 1991 and 1992 for regulatory deferrals will be dependent upon future levels of rate relief obtained.
In October 1989, the Company obtained a revolving credit facility (herein, the "RCF") from a of money center banks which provides for borrowings by the Company from time to time 'yndicate through May 31, 1991, the initial termination date of the RCF, of up to $ 150 million outstanding at any one time. The May 31, 1991 termination date of the RCF, which is set with reference to the expected timing of the Texas Commission's order on the Company's Unit 3 rate case, may be extended, subject to the consent of the lending banks, for successive one-year periods.
The RCF requires the Company to issue, for purposes of repaying borrowings thereunder,
$ 270 million of long-term debt through the period expiring March 31, 1991, including at least
$ 100 million of long-term debt by January 31, 1990. On January 26, 1990, the Company issued and sold, in a private placement to institutional investors, $ 153 million of First Mortgage Bonds, 1L10% Series Due 2001, the proceeds of which were applied, as required, 'to reduction of borrowings outstanding under the RCF. $ 47 million of the balance of the $ 270 million of long-term debt issuances required 54
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued) the RCF is required to be issued no later than December 31, 1990, leaving $ 70 million of
'nder required long-term debt issuance by, March 31, 1991.
The RCF is secured by first and second mortgage bonds of the Company in an aggregate principal amount equal'to the committed amount of the RCF. The RCF requires that the Company meet certain fixed charge and maintenance of equity ratios, maintain specified long-term debt issuance capacity and meet certain maintenance of collateral value tests. The terms of the RCF prohibit the Company from declaring or paying any dividend with respect to its common stock.
$ 104 million was available for borrowing under the RCF at March 30, 1990. '
t The Company intends to use borrowings under the RCF and the required long-term debt issuances to meet its external Bnancing requirements through May 31, 1991. The Company believes that it will be able to issue and sell the long-term debt required to be issued and sold under the terms of the RCF. The Company will require an extension of the RCF or its replacement with a similar facility to meet Bnancing requirements beyond May 31,,1991. The RCF includes as an event of default an adverse regulatory decision by the Texas Commission with regard to the Company's investment in Unit 3 which, in the judgment of the lending banks, causes the Company's revenues to be insufilcient to assure (1) the Company's ongoing viability, (2) its access to capital markets or (3) its ability to refinance or repay its obligations when due. Although the Company believes that it. is entitled to recover its Unit 3 investment and a fair return thereon, the ultimate outcome of the case cannot be predicted. Failure to receive sufficient inclusion in Texas rates of the Unit 3 investment, on a timely basis, would increase the Compa'ny's external Bnancing requirements and could adversely affect access to the capital markets at reasonable cost. See Note B."
In addition to the borrowings available under the RCF, the Comp'any'has limited short-term borrowing availability under the credit facility supporting the independent trust established to meet the Company's nuclear fuel requirements at Palo Verde. At March 30, 1990, the Company had $ 22.1 million of borrowings available to it under such credit facility.
Financing Restrictions1
, Short-term borrowings by the Company are limited to levels approved by the FERC. The FERC has approved short-term borrowings by the Company, including borrowings under the RCF and fuel trust credit facility, of up to $ 200 million through December 31, 1991.
the'uclear The HCF restricts the Company's incurrence of indebtedness, other than under the HCF, to (1) borroivings up to a specified level under the nuclear fuel trust credit facility and commercial paper backed by the RCF (in which case the amount available to the Company under the RCF is reduced by the amount of commercial paper outstanding) (2) indebtedness which is unsecured, or junior in right of security to the RCF, and which does not require principal amortization prior to the then termination date of the RCF, (3) scheduled long-term financing by the Company,'ncluding the long-,
term Bnancings required under the RCF, and (4) refundings, renewals, extensions and replacements of maturing indebtedness.
The letter of credit agreements providing for the letters of. credit which the Company caused to be issued to the equity participants in the Company's sale and leaseback transactions involving Palo Verde Units 2 and 3, and one other bank credit agreement, were renegotiated contemporaneously with the closing of the RCF. These letter of credit agreements and the bank credit agreement, as amended, require the Company to meet the same maintenance of equity and fixed charge ratios required to be met under the RCF. The transaction documents for the Palo Verde Unit 2 sales and leasebacks were also renegotiated and amended contemporaneously with the closing of the HCF. The incurrence of debt restrictions in those transaction documents have been suspended for so long as complying letters 55
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued) of credit remain in efFect. With respect to all but one of the eight equity participants in the, Unit 2 sales and leasebacks, complying letters of credit must be maintained through at least December 31, 1999.
One equity participant in the Unit 2 sales and leasebacks is entitled to letter of credit support for its e'quity investment throughout the lease term. The Company expects to be able to maintain complying letters of credit in efFect as required under the amended documents, and, therefore, does not expect the Unit 2 incurrence of debt restrictions'to impact its external Bnancing capability.
Other Restrictions Restated Articles of Incorporation; Mortgage Indentures. The Company's Restated Articles of Incorporation provide that, unless consented to by the holders of preferred stock, additional shares of preferred stock may not be issued unless certain tests are met with respect to (i) net earnings of'the Company available for preferred dividends, (ii) after-tax earnings available for interest, amortization and preferred dividends and (iii) the sum of junior stock capital and, if the Company so elects, surplus. The'most restrictive of said tests, (i) above, would not have permitted the issuance of any new shares of preferred stock at December 31, 1989. It is not expected that the Company will be able to satisfy the preferred stock issuance tests in 1990.
In addition, the Company's Restated Articles of Incorporation provides that, unless consented to by the holders of preferred stock, the aggregate of unsecured long-term debt shall not exceed 10% of the total of the Company's outstanding secured debt, capital and surplus. At December 31, 1989, the Company would have been permitted to issue approximately $ 62.3 million in additional unsecured long-term debt.
The Company's First Mortgage Indenture permits the issuance of additional Brst mortgage bonds to the extent of 60% of the value of unfunded net additions to the Company's utility property, provided net earnings available for interest during a recent twelve-month period we'e at least twice the annual interest requirements on all bonds to be outstanding and on all prior lien debt. At December 31, 1989, unfunded net additions totaled $ 453.5 million, which was sufficient, with the inclusion of $ 0.5 million in bond credits (after giving efFect to the $ 153 million 11.10% Series due 2001), to permit the issuance of approximately $ 272.6 million principal amount of new bonds. Presently, the Company cannot issue first mortgage bonds on the basis of property additions because earnings are insufficient 'to meet the ne't earnings test of the Indenture. However, the Indenture also permits the issuance of first mortgage bonds based upon currently unfunded Brst mortgage bonds, without, under certain circumstances, being required to meet the net earnings test. The RCF is presently secured by $ 50 million oF first mortgage bonds and $ 100 million of second mortgage bonds. The RCF provides that, as the Company issues and sells Brst mortgage bonds to meet the long-term financing requirements of the RCF, the RCF banks are to release an amount of first mortgage bonds then held as collateral in the amount needed by the Company for the proposed long-term Bnancing, which bonds, under the Indenture, constitute additional unfunded first mortgage bonds. The Company would use such additional unfunded first mortgage bonds as the basis for the issuance of any first mortgage bonds issued to meet the long-term Bnancing requirements of the RCF. As the RCF banks release first mortgage bonds from their collateral, the amount of second mortgage bonds held by the banks as collat'eral increases correspondingly, so that at all times the RCF is secured by a combination of first and second mortgage bonds or second mortgage bonds only.
The Company's Second Mortgage Indenture permits the issuance of additional second mortgage bonds on the basis of 40% of the value of unfunded net additions to the Company's utility property.
The indenture also permits, the issuance of second mortgage bonds based on currently unfunded second mortgage bonds. At December 31, 1989, unfunded net additions totaled $ 161.4 million, which was sufficient, with the inclusion of $ 20 million in bond credits, to permit the issuance of approximately
$ 84.5 million principal amount of new bonds.
56
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
D. Palo Verde Nuclear Generating Station The Company has expended $ L49 billion (including $ 431 million of AFUDC net of deferred taxes) through December 31, 1989 for its 15.8% interest in the three 1,270 MW nuclear generating units which comprise the Palo Verde Station, which is located near Phoenix, Arizona. At December 31, 1989, Units 1, 2 and 3 were complete and in commercial operation. See Note B for information on the Company's treatment of the Texas jurisdictional portion of Palo Verde Unit 3.
A summary of the Company's investment in Palo Verde Station and of other jointly owned utility plant, excluding fuel, is as follows:
Electric Plant Accuinulatcd Construction 9'ork in Service ~Dc red 0o in Pro ess December 31, 1989:
Palo Verde Station .... $ 656,416,000 0 (40,290,000), $ 228,228,000-Other 125,090,000 ~89.780,000) 5,660,000 December 31, 1988:
Palo Verde Station .. 8632,808,000 8 (25,371,000) $ 185,865,000 Other 125,423,000 ~R4,805,000) 2,510,000 4
The Company's investment, at cost, in the Palo Verde Station in the amount of $ 884,644,000 at December 31, 1989 excludes amounts which represent the book value of the Company's investment in Palo Verde Station which was sold and leased back during 1986 and 1987 and'for which the related leases are accounted for as operating leases. See Note E for information regarding such transactions and the Company's lease obligations relating thereto. Additionally, the Company's investment, at cost, in the Palo Verde Station is net of a regulatory disallowance in the amount of $ 38,323,000. (See Note B).
All three Palo Verde Units were out of service for substantial periods during 1989. Unit 3 and Unit 1 experienced unscheduled outages on March 3, 1989 and March 5, 1989, respectively, and Unit 2 was removed from service for testing by APS on March 15, 1989. In March 1989, the NRC issued confirmatory action letters requiring APS to take certain corrective actions and to receive NRC approval before restarting any of the Palo Verde units. APS placed Units 3 and 1 in their scheduled refueling outages on March 8, 1989 and April 8, 1989, respectively.
With NRC approval, APS restarted Unit 2 on June 29, 1989 (although the unit experi'enced subsequerit outages during the year) and Unit 3 on January 21, 1990. On February 24, 1990, APS placed Unit 2 in its second refueling outage, which is scheduled to continue approximately 100 days. APS is undertaking corrective actions relating to Unit 1 and it is currently estimated that APS will request NRC approval to restart the Unit during April of 1990. Because of the present'uncertainties regarding the timing of NRC approval, the restart date for Unit 1 cannot currently be predicted.
As a result, of the unscheduled outages of the Palo Verde Units, the Company is incurring replacement power costs in excess of the amount of fuel revenues provided by the Company's fuel factors. (See Note B). The Company's total undercollection of fuel revenues at December 31, 1989 was approximately $ 10 million. The Company has deferred, and will continue to defer, any undercollec-tions resulting from the Palo Verde outages in accordance with procedures governing recovery of fuel expenses in its regulatory jurisdictions. Although the Company believes it is entitled to and will recover its actual fuel costs, net of the New Mexico performance standard penalty discussed in Note B, the Company is unable, at this time, to predict the ultimate financial or regulatory impact of the unscheduled outages.
57.
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
Decommissioning and'Spent Nuclear Fuel The Company is required to plan and fund its share'of the estimated costs to decommission Palo Verde, including the portion'sold and leased back. The Company has'assessed the'requirements for the funding of such decommissioning and has determined, based upon an independent study, that the Company will have to fund approximately $ 120 million (stated in 1989 dollars) for decommissioning of Palo Verde. The Company will fund decommissioning 'over the estimated service life (approximately 40 years) for the portion of its owned interest in Palo Verde and over the term of the related leases (27 to 29 years) for the sold and leased back portions of Palo Verde. The Company has establisJied funds which, as approved, provide for current deductibility up to 40 years for Federal income tax purposes of some or'all o'f the amounts funded. The Company believes that all costs associated with nuclear plant decommissioning will be recoverable through rates.
The Company is currently funding its share of the obligation for spent nuclear fuel costs associated with Palo Verde through payments" to the operating agent of Palo Verde of one dollar per gross MWH generated as prescribed by the Department of Energy. II E. Sale and Leaseback Transactions In August and December 1986 and December 1987, the Company consummated ten separate sale and leaseback transactions involving all of its 15.8% undivided interest in'Palo Verde Unit 2, one-third of- its undivided interest in certain Common Plant at Palo Verde and approximately 40% of its undivided interest in Unit 3. The Company remains responsible, under the terms of the leases, for all operating and maintenance costs, decommi'ssioning costs, nuclear fuel costs,'nd other related operating costs of the leased-back facilities.
The aggregate consideration received by the Company in the sale and leaseback transactions was,
$ 934.4 million ($ 684.4 million in 1986 and $ 250.0 million in 1987). The proceeds from the transactions, which were based upon'appraised fair market value, exceeded the cost; of the 'assets sold by 8194.0 million, which amount has been deferred and is being amortized into income ovet" the primary terms of the leases.'Nine of the ten transactions are accounted for as operating leases; one transaction (sales pr'ice of $ 87.4 million), with an afllliate of a federal savings and loan association is accounted for as a flnancing transaction. During 1987, the Company acquired $ 60 million of newly issued, floating rate exchangeable preferred stock of the savings and loan association, which was subsequently disposed of at a total loss during December 1989. (See Note P.) Additionally, an afflliate of the savings and loan association received placement fees aggregating approximately $ 3.7 million in connection with the ten sale and leaseback transactions and the preferred stock transaction.
Leases related to Unit 2 and Common Plant expire in October 2013, while leases related to Unit 3 expire in January 2017. All of the leases contain certain renewal op'tions and provide for repurchase options, at fair market value", at the termination of the lease. Additionally, all of the leases provide that upon the occurrence of specifled events of loss or deemed loss events, as defined, the Company is obligated to pay the related equity investor an amount in cash which, primarily because of certain tax consequences, may exceed the equity investor's unrecovered equity investment. Upon payment of such amount and assumption of the debt portion of the purchase price of the undivided interest, the undivided interest will be transferred to the Company. Approximately 20% of the aggregate purchase price of the undivided interests sold in the sale and leaseback transactions was provided by the equity investors,, with the balance being provided through the issuance of non-recourse debt by the lessor/purchasers. Additionally, the Company has agreed to indemnify the lessors in certain against certain losses, including the loss of certain tax beneflts, resulting from specifled events.
circum-'tances 58
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
The lease payments attributable to Unit 2, to the extent of the book value of the plant sold and leased back, plus all related taxes ("book breakeven") are being recovered through rates. On August 2, 1989, the Texas Commission found the Unit 3 sale and leaseback transactions to be in the public interest. The action has no current ratemaking ramiBcations, but does ensure that the transaction will be considered when the Texas Commission addresses the inclusion of Palo Verde Unit 3 in rates. (See Note B). Lease payments attributable to the portion of Unit 3 sold and leased back which has been deregulated by the New Mexico jurisdiction will have to be recovered through economy off-systems sales of electricity. (See Note B). The balance of the lease payments (approximately $ 19.3 million per year) are not subject to recovery from ratepayers. During 1989, 1988 and 1987, lease expense under the leases accounted for as operating leases amounted'o $ 85,670,000, $ 83,891,000 and $ 40,919,000, respectively, of which $ 16,041,000, $ 26,315,000 and $ 26,164,000, respectively, was deferred and capitalized. Future minimum annual rental payments required under such leases are as follows (in thousands):
Year ending December 31, 1990 82,627 1991 82,627 1992 SR,627 1993 82,627 1994 S2.627 Thereafter 1,616,775 F. Other Short-Term Investments As of December 31, 1989 the Company had sold all of its short-term investments. Other short-term investments for 1988 are generally stated at their lower of cost or market and consisted primarily of dividend capture funds and mortgage-backed securities and are reported net of current market valuation allowance of $ 2,061,000. Included in other short-term investments was an investment in a partnership, which was carried at market value of $ 53,848,000 in 1988.
Gross unrealized gains were $ 6,082,000 and gross unrealized losses were $ 1,257,000 in 1988, Net realized losses on investments included in the determination of net income were $ 1,389,000,
$ 4,014,000 and $ 12,039,000 for 1989, 1988 and 1987, respectively. The cost of the 'securities sold was based on the actual cost of each such security at the time of sale.
G. Deferred Charges and Other Assets Other deferred charges and other assets consisted of the following at December 31:
1989 1988 Rate case costs . $ 16,716 $ 15,723 Corporate restructuring costs . '1,294 415 Financing and transaction costs 16,12R 15,156 Annuities 12,342 19,34R Palo Verde outage costs 4,574 Other . 14,958 13,928
$ 86,006 $ 64,564 59
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS , (Continued)
H. Common Stock Changes in common stock are as follows:
Common Stock Shares Amount (In thousands)
Balance December 31, 1986 35,510,138 $ 338,800 Issuances of Common Stock:
1987 88,042 1,482 1988 103,129 1,468 1989 125,958 1,409 Purchase of Common Stock:,
1987 ~626.000) ~5,983)
Balance December 31, 1989 35,201,267 $ 337,176 The Company has various employee stock benefit plans. Shares of common stock reserved for issuance under these stock plans were 1,676,951 at December 31, 1989.
I. Preferred Stock Preferred Stock, Redemption Required Following is a summary of issued and outstanding preferred stock, redemption required:
Optional Itedcmption Dccembcr 31, Price Pcr Shaie at 1989 1988 December 31, Shares Amount Shares Amount 1989 (In thousands) (In thousands)
$ 10.75 Dividend 60,000 $ 6,000 64,000 $ 6,400 $ 105.250
$ 8.44 Dividend 103,600 10,360 109,600 10,960 104.220
$ 8.95 Dividend 97,500 9,750 105,000 10,500 104.480
$ 9.50 Dividend 46,000 4,600 56,000 5,600 100.000
$ 10.125 Dividend 200,000 20,000 250,000 25,000 103.375
$ 11.375 Dividend 500.000 50,000 500,000 50,000 105.220 1,007,100 8100,710 1,084,600 8108,460 Each series of preferred stock, redemption required, is entitled to the benefits of its respective annual sinking fund which requires redemptions of a specified number of shares or a percentage of outstanding shares. The sinking fund redemption price on all series is $ 100 per share plus accrued dividends.
Each series, other than the $ 10.75 series, is redeemable at the option of the Company at various stated redemption prices. Optional redemptions are also generally restricted as to the, timing of redemption when such redemptions are part of or in anticipation of any refunding involving the issue of indebtedness or preferred stock having an effective interest cost or effective dividend cost of less than the stated dividend rate of each preferred stock series.
Sinking fund requireinents for each of the above series are cumulative and, in the event they are not satisfied at any redemption date, the Company is restricted from paying any dividends on its 60
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDA'I'ED FINANCIALSTATEMENTS (Continued) common stock (other than dividends on common stock or other class of stock ranking junior to the preferred stock as to dividends or assets).
The aggregate amounts of the'above preferred stock required to be retired for each of the next Bve years are as follows (in thousands):
1990 $ 21,350 1991 16,750 1992 16,750 1993 16,750 1994 11,750 Redemptions of preferred stock, redemption required were as follows:
Shares Amount (In thousands)
Balance at December 31, 1986 . 1,157,100 $ 115,710 Redemption of Preferred Stock, Dividend . (4,000) (400)
Redemption of Preferred Stock, $ 8.44 Dividend .. (12,000) (1,200)
Redemption of Preferred Stock, $ 8.95 Dividend .. (15,000) (1,500)
Redemption of Preferred Stock,'10.75
$ 9.50 Dividend .. ~00.000) ~0.000)
Balance at December 31, 1987 . 1,106,100 110,610 Redemption of Preferred Stock, $ 10.75 Dividend . (4,000) (400)
Redemption of Preferred Stock, $ 8.44 Dividend .. (6,000) (600)
Redemption of Preferred Stock, $ 8.95 Dividend .. (7,500) (750)
Redemption of Preferred Stock, $ 9.50 Dividend .. ~4000) ~400)
Balance at December 31, 1988 . 1,084,600 108,460 Redemption of Preferred Stock, $ 10.75 Dividend ......... (4,000) (400)
Redemption of Preferred Stock, $ 8.44 Dividend .......... (6,000) (600)
Redemption of Preferred Stock, $ 8.95 Dividend .......... (7,500) (750)
'Redemption of Preferred Stock, $ 9.50 Dividend .......... (10,000) (1,000)
Redemption of Preferred Stock, $ 10.125 Dividend ........ ~50,000) ~5,000)
Balance at December 31, 1989 . 1,007,100 $ 100,710 Preferred Stock, Redemption not Required Following ts a summary of preferred stock issued and outstanding at December 31, 1989 which is not redeemable except at the option of. the Company:
Optional Redemption Price Per Shares Amount Sharo (fn thousands)
$ 4.50 Dividend 15,000 $ 1,534 $ 109.00
$ 4.12 Dividend 15,000 1,506 103.98
$ 4.72 Dividend 20,000 2,001 104.00
$ 4.56 Dividend 40,000 4,000 100.00
$ 8.24 Dividend 52,450 5,157 103.40 142,450 $ 14,198 All preferred stock issues (redemption required and redemption not required) are entitled in preference to common stock, to $ 100 per share plus accrued dividends, upon involuntary liquidation.
61
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
All issues are entitled to an amount per share equal to the applicable optional redemption price plus accrued dividends, upon voluntary liquidation.
J. Long-Term and Financing and Capital Lease Obligations Outstanding long-term and Bnancing and capital lease obligations are as follows:
Redemption Price at December 31, December 31,
~1989 (I 1989 1988 (In thousands)
Lon -Term Obli ations:
First Mortgage Bon s(2):
4%% Series, issued 1962, due 1992 100.41% $ 10,385 $ 10,385 6%% Series, issued 1968, due 1998. 101.87 24,800 24,800 7A% Series, issued 1971, due 2001 103.39 15,838 15,838 9% Series, issued 1974, due 2004. 104.11 20,000 20,000 10%% Series, issued 1975, due 2005. 105.91 15,000 15,000 8'A% Series, issued 1977, due 2007 105.13 25,000 25,000 9.95% Series, issued 1979, due 2004 105.81 19,685 20,748 Series, issued 1984, due 1989(10)................
'4%%
25,000 14% Series, issued 1984, due 1989(10)................ 50,000 13'A% Series, issued 1984, due 1994.......... 29,500 29,500 IP/~% Series, issued 1984, due 1989(10)................ 22,000 Borrowings outstanding pursuant to RCF (see Note C) reilnanced on January 26, 1990 with 11.10% Series, due 2001. 153,000 Pollution Control Bonds(3) (4):
Secured by Second Mortgage, Bonds(2):
Variable rate bonds, due 2014, net of $ 1,499,000 and $ 7,936,000, respectively, on deposit with trustee 62,001 '55,564 Variable rate refunding bonds, due 2014, net of $ 25,000 and
$ 2,109,000, respectively, on deposit with trustee 37,075 34,991 Variable rate refunding bonds, due 2015 . 59,235 59,235 Unsecured:
Variable rate, refunding bonds, due 2013, net of $ 3,482,000 and
$ 4,574,000, respectively, on deposit with trustee. 32,323 31,231 Floating rate notes secured by Second Mortgage Bonds(2) (5):
Due 1991 . 70,000 70,000 Balance forward $ 573,842 $ 509,292 62
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
December 31, 1989 1988 (19 199 nn dn}
Balance forward $ 573,842 $ 509,292 Promissory notes:
Unsecured (6):
Due 1990 to 1992 ($ 20,000,000 due in 1990) . 45,000 45,000 Total long-term obligations . 618,842 554,292 Financin and Ca ital Lease Obli ations:
Financing o igation, Pa o Ver e Unit 2 ($ 1,055,000 due in 1990) (7) .. 81,394 81,888 Turbine lease ($ 1,438,000 due in 1990) (8) . 11,675 11,306 Nuclear fuel ($ 19,644,000 due in 1990) (9) . 48,460 "
67,090 Total financing and capital lease obligations 141 529 160,264 Total long-term and financing and capital lease obligations..... 760,371 714,576 Amounts due within one year:
Current maturities............ (49,100) (134,126)
Unamortized discount and premium ~1,193} ~1,321 }
$ 710,078 $ 579,129 (1) The premiums reflected in the redemption prices continue at reduced amounts in future years, finally resulting in each case in redemption at par in the final year prior to maturity.
(2) Substantially all of the Company's utility plant is subject to a lien under the Indenture of Mortgage securing the Company's First Mortgage Bonds and a lien under the Indenture of Mortgage securing the Company's Second Mortgage Bonds.
The First Mortgage Indenture securing its First Mortgage Bonds provides for sinking and improvement funds. Except as otherwise noted, the Company is required to make annual
,payments to the, trustee equivalent to 1%, $ 1,115,000 at December 31, 1989, of the greatest aggregate principal amount of such series outstanding prior to a specified date. The Company has generally satisfied the 1% requirements for such series by relinquishing the right to use a net amount of additional property for the issuance of bonds or by purchasing bonds in the open market and expects to continue these practices. With respect to the 9.95% series, commencing in April 1985 the Company is required to make annual cash payments to the trustee equivalent to 4.25%, of the greatest aggregate principal amount of such series'outstanding at any one time prior to a specified date, $ 1,063,000 in 1989 and 1988; the cash payments must be applied to redeem bonds of the 9.95% series at 100% of the principal amount thereof. With respect to the 13.25%
series, commencing in April 1990, the Company is required to make annual cash payments to the trustee equivalent to 20%, of the greatest aggregate principal amount of such series outstanding at any one time prior to a specified date; the cash payments must be applied to redeem bonds of the 13.25% series at 100% of the principal amount thereof.
In accordance with certain provisions of the First Mortgage Indenture, payments of cash dividends on common stock are restricted to an amount equal to retained earnings accumulated after December 31, 1966, plus $ 4,100,000. Retained earnings in the amount of approximately
$ 54,940,000 are unrestricted as to the payment of cash dividends at December 31, 1989. However, under the RCF, the Company is restricted from declaring or paying any common stock dividends.
The Second Mortgage Bonds have been issued to secure the three variable rate pollution control bond issues due 2014 and 2015, as well as the floating rate note issue due in 1991.
63
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
(3) The funds on deposit with a trustee at December 31, 1989 represent a portion of the proceeds from pollution control revenue bonds and accumulated related interest income, which are to be disbursed as needed to pay the cost of acquiring, constructing, reconstructing, improving, maintaining or furnishing the pollution control facilities financed.
(4) These bonds are supported by long-term irrevocable letters of credit issued by banks. (See Note L). The bonds bear interest at various rates (5.5% to 6.4% during 1989) which will cause the bonds to have a market value which approximates, as nearly as possible, their par value. The bonds may be required to be repurchased at the holder's option and are subject to mandatory r'edemption upon the occurrence of certain events and are redeemable at the option of the Company under certain circumstances.
(5) The interest rate on the note due 1991 is to be determined using the bank's prime rate, a CD or Eurodollar rate. Pursuant to an interest swap agreement, the interest rate is 10.08%
(6) One unsecured note due 1990 is fixed (approximately 10.49%) pursuant to the terms of an interest-rate exchange agreement with the lending bank. One unsecured note due 1992 is floating rate, 9.25% at December 31, 1989.
(7) In December 1986, the Company entered into a financing obligation related to one sale and leaseback transaction involving Palo Verde Unit 2. (See Note E). Semiannual payments, including interest (using an assumed interest rate of 9.01%), which began in July 1987, are
$ 4,181,000, with the last payment of $ 2,091,000 due in July 2013.
(8) In 1980 the Company leased a turbine and certain other related equipment from the trust-lessor for a twenty-year period, with renewal options for up to seven more years. Semiannual lease payments, including interest, which began in January 1982, are $ 719,000 through January 1991, and $ 861,000 thereafter to July 2000. The effective annual interest rate implicit in this lease is calculated to be 9.6% A gain to the Company related to the sale of the turbine to the trust in the amount of $ 2,343,000 is being amortized to income oyer the term of the lease.
(9) The Company enters into lease arrangements with an independent trust with respect to nuclear fuel loadings into Units 1, 2 and 3 at Palo Verde Station. The Company accounts for the leases as capital leases and, accordingly, has recorded'obligations which have balances of $ 12,594,000 for Unit 1, $ 15,658,000 for Unit 2 and $ 20,208,000 for Unit 3 at December 31, 1989 (interest rate of 9.4% at December 31, 1989). Quarterly lease payments made are based on units of heat production.
(10) During 1989, the 12.75% series bonds, in the amount of $ 22,000,000, the 14.5% series bonds, in the amount of $ 25,000,000 and the 14% series bonds, in the amount of 850,000,000 were redeemed in May, August and November, respectively.
Scheduled maturities of long-term and financing and capital lease obligations and sinking fund requirements at December 31, 1989 are as follows (in thousands):
1990 . 8 50,215 1991 . 102,805 1992 . 51,160 1993 . 12,519 1994 . 35,345 Nuclear fuel is reloaded in the units approximately every three years at which time the related capital lease obligation is recorded. The table above includes scheduled maturities, within that three-4 64
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued) year cycle, of obligations existing at December 31, 1989 and does not reflect future fuel loadings and related obligations and maturities.
K. Federal Income Taxes The provisions (credits) for deferred Federal income taxes, which arise from the timing differ-ences between flnancial and tax reporting are as follows:
Years Ended December 31, 1989 1988 1987 (In thousands)
Tax effect of:
Operating income:
Depreciation differences . $ 17,554 8 11,834 S 8,507 Deferred fuel revenues . 3,819 1,318 3,901 Provisions for rate refunds . 1,306 4,733 (777)
Allowance for borrowed funds................ 5,537 2,624 8,983 Taxes capitalized 480 1,126 3,953 Nuclear fuel expense differences.............. (4) (5,324) (6,477)
Deferred and capitalized Palo Verde operation and maintenance expenses ................. 8,763 14,532 25,528 Sale and leaseback transactions............... 2,760 2,310 (54,027)
Deferred revenues 3,058 6,322 212 Alternative minimum tax deferred ....-........ 1,066 (3,168)
Prudency audit costs 2,845 Offset of deferred tax credits due to tax net operating losses (9,911) (27,681)
Other 3,120 (1,622) (7,772)
Other income:
Regulatory disallowance . ~ (6,051) (13,937)
Return on deferred costs. 1,772 3,955 Other 2,938 3,262 2,231 Investment income (3,978) 959 (7)
Change in accounting method . 2,827 Total deferred taxes . $ 35,074 8 15,180 ~26,855) 65
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED F9INANCIALSTATEMENTS (Continued)
The detail of Federal income taxes by component are as follows:
Years Ended December 31, 1989 1988 1981 (I 19 89 dS)
Current income taxes:
Operating . $ (20,206) $ 2,736 $ 28,882 Other income 1,350 1,137 ~5,125)
Total. ~18,856) 3,873 23,757 Deferred income taxes:
Operating . 40,393 7,004 (17,969)
Other income:
Regulatory disallowance:
Plant costs. (584) (13,937)
Deferred costs...................... (5,467)
Other 732 8,176 2,224 Change in accounting method 2,827 Total 35,074 15,180 I26,855)
Charge (beneilt) equivalent to investment tax credit:
Operating (15,389) 1,351 8,336 Other income, 1,972 4,834 Total ~13,417) 1,351 13,170 Amortization of investment tax credit:
Operating (3,267) (2,774) (3,474)
Other income Total ~3,267) ~2,774) ~3,474)
Total Federal income tax expense (benefit).... ~$
'66) . $ 17,630 $ 6,598 Federal income tax provisions diifer from amounts computed by applying the statutory rate of 34%
in 1989 and 1988, and 40% in 1987 to book income from continuing operations before Federal income, taxes. Detail is as follows:
Years'Ended December 31, 1989 1988 1987 (In thousands)
Tax computed at statutory rate $ 506 $ 27,712 $ 20,481 (Decreases) increases due to:
Allowance for equity funds used during construction ... (4,276) (4,442) (12,776)
Amortization of equity funds used during construction .. 3,126 1,258 552 Dividends received not subject to Federal income tax .. (716) (2,333) (3,187)
ITC Amortization (3,267) (2,859) (1,877)
Amortization of excess deferred taxes (1,297) (722) (698)
Investment valuation adjustment 2,380 Provision for other taxes . 3,881 Other ~803) ~984) 4,103 Total Federal income tax expense (beneBt).............. ~$ 466) $ 17.630 $ 6,598 Effective Federal income tax rate . ~31.33)% 21.63% 12.89%
66
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
The Company has a tax net operating loss carryforward of 857,409,000 from 1988. This loss carryforward expires in the year 2003. For financial statement purposes, net deferred tax credits aggregating approximately 818,827,000 have been eliminated as of December 31, 1989 based upon their expected amortization during the carryforward period. Upon realization of the tax benefits of the net operating loss carryforward in subsequent periods, the amounts eliminated from deferred tax credits will be reinstated. Additionally, as a result of the carryback of tax operating and capital losses generated in 1989, the Company has investment tax credit carryforwards of $ 16,055,000 which expire in 2001.
At December 31, 1989, the cumulative net amount of income tax timing difFerences on which deferred income taxes have not been provided approximated $ 12,200,000.
The consolidated Federal income tax returns of the Company for the years 1983 through 1987 are curreritly under examination by the IRS. The Company believes that adequate provisions have been made through December 31, 1989 for additional tax that" may be due, if any.
L, Commitments and Contingencies Construction commitments for the Company subsequent to December 31,,1989, total approxi-mately $ 103,400,000, which includes AFUDC (net of related deferred tax) in the amount of 811,000,000.
The Company has a nuclear fuel purchase commitment with an independent trust (Rio Grande Resources Trust) which is not reflected in the Company's balance sheets. The amount of such commitment at December 31, 1989 was $ 39,300,000. The Company has elected and intends to continue to elect to purchase the heat produced from the fuel in the trust as the basis for payment for fuel loadings. The trust has a line of credit of $ 125,000,000, of which $ 124,500,000 was drawn at December 31, 1989. The trust's financing is based upon a letter of credit with a three-year term which is annually extended by one year if notice to the contrary is not given to the trust by the issuing bank.
The issuing bank has given notice of non-extension and, as a result, the letter of credit is currently scheduled to expire on January 8, 1993.
The, Company had letters of credit outstanding of approximately $ 513 million at December 31, 1989 in support of certain debt agreements and lease arrangements.
First Service Life Litigation Pending Actions Involving the Company's Collateral. On September 26, 1988, the Company filed a declaratory judgment action in the 345th Judicial District Court, Travis County, Texas, against First Service Life Insurance Company, a life,.insurance company organized under the laws of the Cayman Islands ("First Service" ), and R. B. Ashworth, as Conservator for the affairs of First Service under the Texas Insurance Code (the "Conservator" ), for a determination that (i) the Company has legal, valid, duly perfected and enforceable security interests in certain collateral granted to the Company by First Service to secure annuities purchased by the Company from First Service, the present balance of which is approximately $ 20 million (the Company's original annuity investment purchased from First Service being $ 70 million); and ('ii) that events of default have occurred under the collateral security documents pertaining to such annuities which entitle the Company to enforce such security interests.
In late May 1988, the Company notified First Service that First Service was in default under the annuities and the collateral agreements and that the Company intended to enforce its security interests. The Conservator, who was appointed by the Texas Commissioner of Insurance in early June 1988, notified the Company that First Service might not be in default, expressed doubt as to the validity and enforceability of the security interests held by the Company and demanded that the Company return to the Conservator all of the collateral and desist and refrain from proceeding with 67
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMEHTS (Continued)
'enforcement of the security interests and other interference with the conservatorship and the conservatorship proceedings.
On September 29, 1988, the Conservator, in conjunction with his answer and denial of the Company's declaratory judgment action, countersued the Company on behalf of First Service and two aSliated corporations, First Service Life, a Turks and Caicos corporation ("FSL"), and Knickerbocker Life Insurance Company ("Knickerbocker"), for actual damages of at least 850 million, plus punitive damages of at least $ 300 million. The Conservator's counterclaim seeks (i) a temporary and permanent injunction against the Company's enforcement of its security interests in the collateral, (ii) an accounting from the Company as to all payments and transfers of property to the Company fr'om First Service with respect to the Company's annuities, (iii) a declaratory judgment that the Company's security interests are illegal and unenforceable under the Texas Insurance Code and that the sale and purchase of the annuities was an illegal transaction under, the Texas Insurance Code by a company doing insurance business in Texas without authorization, and (iv) disgorgement by the Company of all payments received on its annuities and all collateral therefor. The counterclaim alleges several causes of action against the Company including principally fraud, conversion and breach of duty of good faith and fair dealing (based upon an alleged afBliate or "insider" relationship between the Company and First Service) ~
On December 1, 1988, a receiver (the "Receiver" ) was appointed for First Service by the 53rd Judicial District Court of Travis County, Texas, and on December 13, 1988, the Receiver in his capacity for First Service was substituted as a party for the Conservator in the above-described litigation. On January 18, 1989, the Receiver was appointed as receiver for FSL as well. The Conservator remains a party to the above-described litigation in its capacity as conservator for Knickerbocker.
Although only preliminary discovery has been conducted, the Company's legal counsel, Small, Craig R Werkenthin, P.C., Austin, Texas, has reviewed the basic facts of the case with management and other parties familiar with various aspects of, the transactions involved in the litigation, examined documents and records of the Company and other parties which relate to such transactions, and evaluated the allegations against the Company made in the counterclaim. Based upon its preliminary evaluation and investigation of the case to date, and subject to the results of discovery, counsel believes that it is more likely than not that the outcome of the litigation will be favorable to the Company.
The Company believes that the Company's security interests in the collateral are valid and the Company intends to recover amounts owed to it on the annuities through and'nforceable, enforcement of its rights to the collateral. The Company strongly denies the allegations of the counterclaim, believes the counterclaim is without merit and intends to vigorously defend against it.
Upon reevaluation of the collateral, the Company recorded at'June 30, 1989 a provision for loss on the investment of $ 7 million. The Company has made no provision for loss for the effects, if any, of the ultimate outcome of the litigation. Effective April, 1988 the Company discontinued the accrual of interest income on the annuities.
Claims by Annuitants. On October 16, 1989, the case of Pedro Meneses, et al. o. Maundy Page Kemp, et al., Civil Action No. EP-89-CA-37H, was filed in the Western Distri'ct of Texas, El Paso Division (the "Lawsuit"). The plaintiffs in the Lawsuit include most of the holders of annuities from First Service (the "Annuitants"). The defendants include the beneficial principal shareholders and. ofBcers and directors of First Service and Knickerbocker; certain afBliated companies of the principal beneBcial shareholders of First Service and Knickerbocker, the Company and its former subsidiaries, PasoTex and Franklin Land; the accounting Brm of Coopers R Lybrand; the law firm of Kemp, Smith, Duncan R Hammond, which serves as general counsel to the Company; and two individual attorneys who are shareholders in such Brm, one of whom is a former director of the Company. The Lawsuit, as amended, 68,
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued) alleges that the defendants violated the'acketeer Influenced and Corrupt Organization Act
("RICO" ), conspired to violate RICO, violated the Federal and Texas securities laws, committed common law fraud, civil conspiracy to defraud, violations of the Texas Deceptive Trade Practices Act and violations of the Texas Insurance Code and violated certain provisions of the Texas Penal Code relating to theft, false statements to obtain property or credit, fraud in insolvency, receiving deposit, premium or investment in a failing Bnancial institution, commercial bribery and misapplication of fiduciary property or property of a Bnancial institution. The claims made against the Company and its former subsidiaries are based upon allegations that the Company controlled and/or conspired with First Service.
, The plaintiffs are seeking damages in the amount of their lost annuities, plus interest, multiplica-tion of actual damages, punitive and exemplary damages, and attorneys fees and costs. The complaint in the Lawsuit alleges sales of annuities to the plaintiffs in excess of $ 9 million, and the total claim for damages exceeds $ 59 million.
The Company vigorously denies any liability in respect of the Lawsuit and believes that all related claims are without merit. Based upon the limited evaluations and investigation of Small, Craig R Werkenthin, P.C., Austin, Texas, the Company's legal counsel in connection with the pending litigation, such counsel believes that it is more likely than not that the ultimate outcome of the Lawsuit will be favorable to the Company.
The Lawsuit names as a defendant Billye E. Bostic, formerly an executive officer of the Company, who is entitled to indemnity under the Company's charter, bylaws and other applicable agreements to the same extent as indemnification is afforded by the Company to all of its officers and directors with respect to service on boards of directors of other companies. Mr. Bostic has advised the Company that he denies any liability in respect of the Lawsuit and believes that the claims asserted against him therein are without merit, Mr. Bostic is represented by counsel separate from the Company's counsel.
There are numerous parties who purchased annuities from Knickerbocker, not included within the group of the Annuitants, who may assert additional claims similar in nature to the claims asserted by the Annuitants, against the Company. These claims, if asserted, could result in additional suits against the Company.
Suit Against Directors of First Service. On February 3, 1989, the Receiver Bled suit in the 345th Judicial District Court, Travis County, Texas, against certain individuals who were alleged to be directors of First Service and/or FSL, including Mr. Bostic.
I The Receiver alleges that First'Service engaged in the sale of annuities in Texas without authorization to do so and that such actions constituted illegal insurance transactions under the Texas Insurance Code. The Receiver further alleges that the alleged illegal sale of annuities by First Service constitutes a breach by the directors of First Service of their fiduciary duty to exercise due care in the management of the affairs of First Service and/or FSL and resulted in unspecified losses to First Service. The suit seeks actual damages of at least $ 33 million and, in addition; exemplary damages oE at least double the actual damages. No significant discovery has been conducted at this time.
Mr. Bo'stic has advised the Company that he denies that he served as a director of First Service or FSL during the period of the alleged activities complained of, denies any liability in respect of the Receiver's suit and intends to vigorously defend against it. Mr. Bostic is represented by counsel separate from the Company's counsel in the First Servic'e litigation. Mr. Bostic is entitled to in'demnity with respect to the Receiver's suit to the extent indemnification is afforded by the Company to all of its officers and directors with respect to service on certain outside boards.
69
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
Because no significant discovery has been conducted, counsel for Mr. Bostic is unable to express an opinion as to the ultimate outcome of the suit. No provision for an indemnity payment, if any, is included in the 1989 consolidated financial statements.
Palo Verde Liability and Insurance Matters The Palo Verde participants have insurance for public liability payments resulting from nuclear energy hazards to the full limit of liability under Federal law. This potential liability's covered by primary liability insurance provided by commercial insurance carriers in the amount of $ 200 million and the balance by an industry-wide retrospective assessment program. The maximum assessment per reactor under the retrospective assessment program for each nuclear incident is approximately $ 66 million, subject to an annual limit of $ 10 million per incident. Based upon the Company's 15.8%
interest in the thr'ee Palo Verde units, the Company's maximum potential assessment per incident is approximately $ 31.3 million, with an annual payment limitation of $ 4.74 million. The insureds under this liability insurance include the Palo Verde participants and "any other person or organization with respect to his legal responsibility for damage caused by the nuclear energy hazard."
The Palo Verde participants maintain "all risk" (including nuclear hazards) insurance for nuclear property damage to, and decontamination of, property at Palo Verde in the aggregate amount of $ 2.035 billion, a substantial portion of which must first be applied to decontamination. The Company has also secured insurance against portions of any increased cost of generation or purchase of power resulting from the accidental outage of any of the three Palo Verde Units ifsuch outage exceeds 21 weeks. The Palo Verde outages during 1989 and the current outage of Palo Verde Unit 1 are not covered by this insurance.
Arizona Tax Matters By Notice of Proposed Correction of Income Tax dated February 9, 1990, the Arizona Department of Revenue (the "ADR"), in connection with an audit examination of the taxable years 1984 through 1987, informed the Company that the ADR has determined that the gains from the sales of the Company's interest in Palo Verde Units 2 and 3 are allocable to Arizona for state income tax purposes on the grounds that the Units constitute non-business assets with a situs in Arizona, resulting, according to the ADR, in a proposed deficiency assessment, including related interest and penalties, of approximately $ 39.5 million. The Company believes Palo Verde Units 2 and 3 constituted business assets at the time of the respective sales, and, in accordance with Arizona law, it apportioned, rather than allocated, the corresponding gains in paying the Arizona income tax on the transactions.
The proposed deficiency by the ADR is not a final administrative determination, and additional informal discussions on the issue will be conducted prior to a formal hearing. The Company believes that the ADR will not prevail in its proposed determination and does not expect to incur any material liability in respect thereof.'he Company will litigate any issues not satisfactorily resolved through the administrative process.
Preferred Stock Tax Indemnity In July 1989, the two corporations which are the beneficial owners of the Company's 11.375%
preferred stock, aggregate par value $ 50 million, notified the Company that the IRS had proposed to disallow those holders the dividends received deduction taken by them on their 1985 income tax returns with respect to the dividends they received on that stock. At the same time the IRS also made the same proposed disallowance to the beneficial owners of a number of preferred stock issues of other utilities. Under an agreement the Company entered into on issuance of the shares in 1984, the Company has agreed to indemnify the beneficial owners for loss of the dividends received deduction 70
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued) by reason of IRS action. The beneficial owners are contesting the proposed disallowance as required by the agreement.
In January 1990, the beneficial owners provided the Company a schedule of indemnity payments that would be due if the IRS were to prevail. By the owners'alculation, an indemnity payment of
$ 28,637,989.29 for additional taxes, penalties and interest to September 30, 1989 ($ 31,362,852 ifinterest is extended to December 31, 1990) would be due for all dividends paid from January 1, 1985, through October 1, 1989, and additional indemnity payments with respect to dividends due thereafter, paid as the quarterly dividends are paid, would total 86,848,697. Under the indemnity agreement, the owners can require the Company to escrow, during the pendency of the. IRS contest, the indemnity payments that would be owing if the IRS prevails, because the Company's First Mortgage Bonds are not rated at specified levels. To date the owners have not required an escrow. The escrow, if established, would be invested for the account of the Company.
Under the Company's interpretation of the indemnity agreement, it requires the Company to make indemnity payments, assuming the IRS prevails, only for dividends paid after the Company received, in July 1989, notice of the proposed IRS action, and therefore, if any escrow is required, the Company would be obligated to escrow indemnity payments only for the October 1, 1989, dividend and each quarterly dividend thereafter as it is paid. Ifthe Company's interpretation is sustained, then, depending on how a dispute is resolved on the tax rate to be used in determining the indemnity payments, the indemnity payment or earlier escrow deposit would be $ 795,985, by the Company's calculation, or $ 1,304,826, by the owners'alculation, for the additional tax, penalty and interest to December 31, 1990, with respect to the October 1989, dividend, and for the dividends paid thereafter, the indemnity payment or escrow deposit for each dividend would decrease as the preferred stock is redeemed according to its terms ($ 10 million a year from July 1990, to final redemption in July 1994),
and would total, over the 42-month period, $ 6,422,136 by the Company's calculation, or $ 6,848,698 by the owners'alculation. Counsel to the Company believes that the beneficial owners are more likely to prevail than the IRS on the proposed disallowance of the dividends received deduction, and also believes that, if the IRS does prevail, there is substantial support for the Company's position that it is not obligated to indemnify for past dividends. If the IRS were to prevail, the Company believes its dividend and indemnity payments would be deductible as interest paid for federal income tax purposes.
Since these indemnity payments, even under the Company's interpretation, would increase the Company's pre-tax cost by more than 50 basis points, the indemnity agreement gives the Company the right to redeem all of the shares for par plus any indemnity payments due, at any time through the third dividend payment after conclusion of the IRS contest. The Company's present intention, which may change, is not to seek repurchase of the shares before conclusion of the tax contest.
Even if the IRS does not prevail, the Company still must make indemnity payments to the owners for additional taxes they must pay by reason of the reduction in the dividends received deduction by the Tax Reform Act of 1986 and the Revenue Act of 1987. The owners and the Company, however, do not agree on how these payments are to be calculated. By the owners'alculation, an indemnity payment of $ 1,695,718 is due for past dividends through October 1, 1989, and the indemnity payments for each dividend thereafter would be from $ 109,872, decreasing to $ 21,974 and totalling $ 1,208,593. By the Company's calculation, an indemnity of $ 487,048 would be due for past dividends, and the continuing indemnity would be from 052,251 down to $ 10,450 as each dividend is paid, totalling
$ 574,767. These indemnity payments would reduce any payments due on account of the IRS prevailing on its proposed total disallowance of the dividends received deduction.
71
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES, NOTES TO CONSOLIDATED FINANCIALSTATE1MENTS (Continued) ',
M. Pension Plans The Company's Retirement Income Plan for Employees of El Paso Electric Company (the plan) covers employees who have completed one year of service with the Company. The plan is a noncontributory defined benefit plan. Upon retirement or death of a vested plan participant, assets of the plan are used to purchase an annuity contract with an insurance company. Contributions from the Company are based on the amounts required to be funded under provisions of the plan as actuarially calculated. The assets of the plan consist primarily of fixed income instruments.
The Company's Supplemental Retirement and Survivor Income Plan for Key Employees (SERP) is a non-qualified, non-funded pension plan which covers certain key employees of the Company. The pension cost for the SERP is based on substantially the same actuarial methods and economic assumptions as those used for the defined benefit plan.
Net periodic pension cost under SFAS No. 87 Employers Accounting for Pensions is made up of the components listed below as determined using the projected unit credit actuarial cost method. For prior years, the Company's net periodic cost was determined using the aggregate actuarial cost method.
Net periodic pensiori cost for these plans for 1989, 1988 and 1987 (in thousands):
December" 31, 1989 1988 198j Service cost for benefits earned during the period ........... $ 1,361 8 1,249 0 1,386 Interest cost on projected benefit obligation ..... 3,811 3,138 2,898 Actual return on plan assets......... (3,422) (1,597) (208)
Net amortization and deferral 1.550 ~205) ~1,035)
Net periodic pension cost . $ 3,300 8 2,585 8 2,441 The assumed annual discount rates used in determining the net periodic pension cost were 8.25%,
8.75% and 8% for 1989, 1988 and 1987, respectively.
The pension cost includes amortization of unrecognized transition obligations over a fifteen-year period beginning in 1987.
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO, CONSOLIDATED FINANCIALSTATEMENTS '(Continued)
The funded status of the plans and amount recognized in the Company's balance sheets at December 31, 1989 and 1988 are presented below (in thousands):
December 31, 1989 1988 Retircmcnt Retirement Income Income Plan SERP Plan SERP Actuarial present value of benefit obligations:
Vested benefit obligation ~832,079) ~35,938) ~$ 25.437) ~82 528)
Accumulated benefit obligation............. ~$ 33.305) ~86,041) ~$ 27,164) ~$ 3,075)
Projected benefit obligation.........,...... 9 (44,523) 8(7,354) 8(37,653) 8(4,547)
Plan assets at fair value 32,129 32,145 Projected benefit obligation in excess of plan assets (12,394) (7>354) (5,508) (4,547)
Unrecognized net loss from past experience... 1,947 3,356 51 3,023 Unrecognized prior service cost ............. (258) (310)
Unrecognized transition obligation .. '......... 4,899 603 5,415 724 Adjustment required to recognize minimum liability ... '.'. ~2,388)
Accrued pension liability. ~85,546) ~86.041) ~$ . 42) ~81,110)
During 1989, in connection with the Company's general workforce reduction a retirement window plan was established for participants in the Retirement Income Plan and SERF. The window plan resulted in net losses of, approximately 85,512,000 and 81,992,000 for the Retirement Income Plan and SERP, respectively. The net losses have been deferred for recovery in rates.
Actuarial assumptions used in determining the actuarial present value of projected benefit obligation are as follows:
1989 1988 Discount 'rate 7.75% 8.25%
Rate of increase in compensation levels. 7.00% 7.00%
Expected long-term rite of return on plan assets 8.00% 8.00%
N. Franchises and Significant Customer Franchises The Company's major franchises are with the cities of El Paso, Texas and Las Cruces, New Mexico, such franchises expiring in 2001 and 1993, respectively. The franchises contain no express renewal provisions. Although the City of Las Cruces is currently reviewing alternative sources, and the City'of El Paso has approved the formation of a.task force to study the City's options with respect to possible municipal ownership of the Company's properties, the Company believes, but has no assurance.,that both franchises will be renewed.
Significant Customer In 1989 and 1988, Imperial Irrigation District, a wholesale customer, accounted fo'r approximately 849,584,000 and 843,395,000, or 11.6% and 11.4%, respectively, of utility operating revenue.
73
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
O. Selected Quarterly Financial Data (Unaudited) 1989 uartcrs 1988 uarlers 1st 2nd 3rd 4th 1st 2nd 3rd 4th (In thousands of dollars except for pcr sharc data)
Operating revenues(1) ... $ 95,286 $ 109,331 $ 118,711 $ 102,920 $ 89,539 $ 92,862 $ 107,913 $ 91,793 Operating income 13,593 13,257 R2,191 7,510 21,221 19,697 R4,276 16,339 Net Income (loss) (5,720) (30,038) (3) (21,875) (3) (48,200) (3) 16,997 18,473 21,191 (32,292) (2)
Net income (loss) applicable to common stock (8,759) (33,063) 24i776) (51 047) 13 923 15I398 18,117 (35,328)
Net Income (loss) per share of common stock (0.25) (0.94) (0.70) (1.46) 0.40 0.44 0.52 (1.01)
(1) The selected quarterly financial data for operating revenues differs from that presented in the Company's quarterly reports on Form 10-Q due to the exclusion of non-utility revenues as a result of the discontinuance of the non-utility operations.
(2) The decline in net income during the fourth quarter of 1988 as compared to the third quarter of 1988 was primarily due to the Company's decision to discontinue all of its real estate investment operations. The Company made provisions for the expected losses on the sale of the real estate investments, including provisions for expected operating losses during the phase-out period of those investments, (3) The decline in net income during the last three quarters of 1989 was primarily due to the Company's decision to discontinue its remaining non-utility operations. The Company made provisions for the expected losses on the sale, including provisions for expected operating losses during the phase-out period. In December 1989 and January 1990, the Company sold all of its non-utility operations, (See Note P).
P. Discontinued Operations During 1989, the Company decided to discontinue all of the non-utility operations conducted through the Company's principal subsidiaries, FLRR and PasoTex. FLRR had primarily been engaged in real estate operations in downtown El Pa'so and other investment activities. PasoTex had engaged through subsidiaries in a variety of non-utility activities, including specialty steel manufacturing, oil country tubular goods end-finishing and marketing, and furniture and accessory manufacturing.
The decision to discontinue these operations reflects the Company's plan to return its operations exclusively to its core utility business. That plan and the timing and nature of the dispositions of the non-utility operations and investments were impacted by a number of factors, including the cash requirements of such operations, regulatory, contractual and financing restrictions applicable to the Company, the value and future prospects for the discontinued operations, the timing and amount of federal income tax benefits associated with the disposition of the operations and the impact of the discontinued operations on the consolidated financial results of the Company.
In late December 1989, PasoTex sold its $ 60 million preferred stock investment in Commercial Federal Savings and Loan Association, Omaha, Nebraska. The Commercial Federal investment, which was written off by the Company in its entirety under provisions recorded in the 1989 third and fourth quarters due to Commercial Federal's failure to meet regulatory capital requirements and continue'aying dividends, was sold by PasoTex to an independent third party corporation, whose principals are experienced in the thrift industry, for a nominal amount of cash plus a 82 million non-recourse 74
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued) purchase money note. All principal and interest on the, purchase money note is due on November 30, 1994, but mandatory prepayments are required based'upon a percentage of the purchaser's net cash How. The preferred.,stock was pledged'to secure the payment of the purchase money note and is held by an independent escrow agent. As additional consideration in the transaction, PasoTex received a warrant to purchase 49.5% of the then outstanding shares of common stock of the third party purchaser (although shares purchased would be non-voting)" for an aggregate consideration of approximately
$ 500,000. The warrant may be exercised from time to time, in whole or in part, until December 30, 1996. The warrant may be assigned, subject to applicable securities laws. The transaction was supported by a fairness opinion from an investment banking firm retained by PasoTex. The note and warrant received by PasoTex in the sale were transferred to the Company prior to the sale of PasoTex and Franklin in January 1990.
Also in late December 1989, PasoTex surrendered its 50% common equity interest in Westwood Lighting Group, Inc., a lamp manufacturer, back to Westwood without consideration.
The disposition of the Commercial Federal preferred stock and the surrender of the Westwood common stock resulted in current Federal income tax benefits of approximately $ 18.6 million and
$ 2.3 million, respectively.
On January 17, 1990, the Company sold all of the capital stock of FLRR and its 35% stock ownership of PasoTex (which was owned 65% by FLRR) to an unrelated third party special purpose corporation, whose managers have substantial experience in the ownership and operations of diverse business enterprises. The Company received as consideration in the transaction the note and warrant received by PasoTex in the disposition of the Commercial Federal investment. The Company transferred at closing of the transaction approximately $ 3 million to PasoTex for working capital purposes and agreed to transfer approximately $ 5 million to FLRR no later than July 15, 1990, to be applied against the obligations of FLRR under its mortgage debt relating to a hotel owned in El Paso.
As a result of the sale of FLRR, the Company's indirect liability for FLRR's $ 9,756,000 borrowings under the Rio Grande Resources Trust will become a direct liability of the Company. The stock purchase agreement relating to the transaction provides for an indemnity payment, estimated at approximately $ 1,800,000, from the Company to the purchaser to compensate for certain Federal income tax investment tax credit recapture liability which may be incurred upon FLRR's eventual sale of the hotel. The indemnity payment is contingent upon certain tax elections which the purchaser is entitled to make with respect to the sale of FLRR and PasoTex. The consideration for the transaction was based upon the combined values of FLRR and PasoTex. The transaction was supported by a fairness opinion from the Company's financial advisor, a nationally recognized investment banking firm.
The loss on the sale of Franklin and PasoTex will generate Federal income tax benefits of approximately $ 18 million.
The results for the twelve months ended December 31, 1989 and 1988 include provisions for loss of approximately $ 58,165,000 and $ 35,954,000, respectively, which includes income tax credits of approxi-mately $ 9,650,000 and $ 18,522,000, respectively. The provision for loss includes a provision of approximately $ 7,669,000 and $ 11,520,000, respectively, for expected operating losses during the phase-out period of the discontinued operations. Included in provision for loss for the twelve months ended December 31, 1989 was a provision for loss of approximately $ 7,169,000 related to the operations discontinued in 1988 including additional expected operating losses during the phase-out period of
$ 2,169,000. In addition, the Company recorded a loss of approximately $ 41,440,000, net of tax benefits of approximately $ 18,560,000, for the year ended December 31, 1989 in connection with the sale of its preferred stock investment in Commercial Federal Savings and Loan Association in December 1989.
75
EL PASO"ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
Operating results of discontinued opera'tions have been reclassified from'amounts previously reported and have been reported separately in the consolidated income statements. Revenues of discontinued operations were $ 250,602,000, $ 268,635,000 and $ 113,667,000 in 1989, 1988 and 1987, respectively.
Interest paid on borrowed money related to discontinued operations was approximately
$ 16,162,000, $ 14,240,000 and $ 10,653,000, for the twelve months ended December 31, 1989, 1988 and 1987,-respectively.
Item 9; Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable.
PART IIIand PART IV The information set forth in Part III and Part IV has been omitted from this Annual Report to Shareholders.
76
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~ Palo Verde Nuclear Generating Station Q Hoover Uprating Project
~ Member Agencies
5outhern California public power utilities have a proud tradition of providing quality electric service to their customers. As part of this continuing tradition, the Imperial Irrigation District and the municipalities of Anaheim, Azusa, Banning, Burbank, Colton, Glendale, Los Angeles, Pasadena, Riverside, and Vernon have joined together to comprise the Southern California Public Power Authority (SCPPA) as a vehicle for financing generation and transmission projects. Formed in 1980, SCPPA
'has gained a high level of acceptance in the financial community and has issued approximately $ 5.5 billion in bonds and notes, including refunding issues.
The public power members of SCPPA together serve more than 1.7 million customers and have a combined non-coincidental peak requirement of 7,183 megawatts. While there is much diversity among member utilities in terms of size, load growth patterns, and customer mix, SCPPA has proven to be effective in financing projects which economically meet power requirements of all members.
OFFICERS (M 9 Ececutive Director President Vice President Secretory Assistant Secretory Arthur T. Devine Gale A, Drews W.E. Cameron Eldon A. Cotton George R. Spencer former Assistant Gly Electricol Utility Director of Public Assistant General Manager ~ Gvc1 Engineer for Power Attorney. Gty of los Angeles Director Service Power (ontracts Electrical Engineer los Gty of (olton Glendafe Public Service los Angeles Department of los Angeles Deportment of Angeles Department of Deportment Water and Power Water and Power Water and Power
MESSAGE FROM THE PRESIDENT AND EXECUTIVE DIRECTOR The Southern California Public Power Authority continued to play an instrumental role in the efforts of Southern California public power utilities to provide high quality service to utility customers in 1988-1989.
In addition to substantial progress on the Mead-Phoenix Project during the year, planning was accomplished on the Mead-Adelanto, the Palo Verde-Devers Transmission Line and the Utah-Nevada Transmission Projects.
Membership in SCPPA is one of several ways in which participating public power utilities are looking to the future to maintain a standard of excellence in serving their customers. Our member utilities have taken the lead to serve customers in more ways than only supplying power. This report describes the characteristics of individual member cities and many of the service achievements of SCPPA members.
Public power utilities are non-profit and customer owned. Therefore, the benefits derived from SCPPA and other service achievements cannot be divided into utility benefits and utility customer benefits. These benefits are one and the same since our customers are the utility.
We want to thank the staff and the Board of Directors for their hard work, dedication and professionalism in making SCPPA one of the premier financing organizations in the United States.
Gale A. Drews, Arthur T. Devine, President Fxecttti ve Director
MEMBER CITIES From the power base of the Pacific most successful of these efforts is the Rim, Los Angeles, to the industrial town "off-peak" program which encourages of Vernon, with only 30 residential cus- customers to use their air conditioners, tomers, SCPPA member cities provide pool and spa motors, and other appliances power to an end-user population of more during off-peak times. Customers are than 3.5 million. rewarded for participating in such energy SCPPA member cities use a wide conservation programs by a rebate, which variety of power sources to provide their appears as a credit on their bills.
customers with reliable service and the Anaheim also provides discounted lowest cost energy possible. Through "lifeline" rates for senior citizens, the their association with the SCPPA and handicapped, and those on life-support through their own efforts, the member systems.
cities are able to include as sources for Partly through Anaheim's association their power: the lntermountain with SCPPA, its energy rates are 23%
Generating Station, entitlemcnts in the lower than rates in nearby communities, Hoover Power Plant, Palo Verde Nuclear and the Public Utilities Department is Generating Station, purchases from the continuing to seek the lowest cost Bonneville Power Administration, the energy supplies for the future. To this San Onofre Nuclear Generating Station end, the Anaheim Public Utilities Units 2 and 3, Western Systems Power Department has been working on many Pool, oil- and gas-fired generation in the projects with SCPPA member cities, Gordon W. Hoyt General Manager Los Angeles Basin, and purchases from including a joint transmission line that Anohcim PoMc Urtirlcs other western utilities. would bring in more power from the Department Anaheim, (ohfcvvdt Together, SCPPA member cities had states of Nevada and Utah. Anaheim is Mr. Hoyt H o native (ohfor total 1989 energy sales of over 30 million also financing and constructing a new nioq, origholly from honh megawatt-hours. combustion-turbine generator that is Monica. Hc earned his B.S. ot scheduled to start operating in 1991.
thc University of Texas ondis a registered professional Anaheim As one of the fastest Anaheim is dedicated to providing engineer in the state ol (oh.
f<<nicx Mr. Heyt storied fds growing population centers in the United the perfect mix of low-cost power and carccr h pohhc otihtics in States, the community of Anaheim community services.
1941, spcnchng 13 yeas vdth pocihc Gos B tfcdric, continues to look forward in helping meet
'before going hnorfc for Anohchs h I pfi4. He hos the energy needs of this unique com- Azusa "Everything from A to Z in the hdd aliis carcnt position for munity. Known the world over as the USA" is Azusa's city slogan, and the Joseph Hsa 25 years.
home of Disneyland and other popular Utilities Department is taking that slogan P.
Urhry Director tourist attractions, Anaheim is also home to heart both in long-term power goals (tryo!Arrrsa to over 96,000 other customers from and in the services offered to its resi-Aroso, (ahlorndr the California Angels baseball team to dential and industrial customers. A native ol Sna, hh Hsa received his B.S. h the average homeowner. By participating in joint transmission dcdrhd enghccring from One way the Public Utilities De- line projects with fellow SCPPA members the University ol Nehrosho adiso rcgistcrcd partment better serves all its customers, and by looking for other long-term power professional cnghecr h large and small, is by sending a copy of purchase contracts, Azusa is determined the dotes of Nchrosha ad (ohforw. Hc moved to its newsletter called "Currents" as a to have as many options possible to (ohfarva h1933 ad hot heen the Oircdor of billing insert. This publication informs supply energy and power to its citizens. Uthties in Arosa cver customers of the energy conservation New sources of power are just one shee.
programs available in their city and how way to improve service to customers, to take advantage of them. One of the
conservation is another. The Azusa not only from summer to winter but day to Utilities Department has instituted a night. Banning's temperature can slide streetlight conservation plan changing from a high of 120 to a low near freezing all the old mercury vapor streetlights in- in one 24-hour period. To help customers to power-saving sodium vapor models. cope with these extremes, the utility In this dry inland area, the deep-water provides special lifeline rates, at a base of well pumps also work hard; and Azusa is 250 kilowatts in winter to 500 in summer making sure these are all reconditioned for the entire community.
to work at maximum efficiency. Another large community undertaking For those customers interested in is Banning's new hydro project which was learning more on conservation, the completed in August 1989. This project Utilities Department provides free ed- utilizes water from natural flows to ucation materials including brochures provide power to the city.
and slide shows. Special discounted A new development in the commu-rates are offered to "total electric" homes. nity will provide 4,500 new homes in As with other SCPPA member cities, Banning new homes and customers that Ronafd V. 5lasst Gcncrnf Manager Azusa's main long-term energy goal is to will require the full services of an efficient Berhork Ptibh'(Scrrirc negotiate contracts for new energy power company. Luckily for Banning Deportment Barbers; totfernkr projects and continue to acquire the best residents, their public utility has its eyes A nogive (atifornhrV Mc 5tossi options to provide energy service toward the future and plans to continue the rmeived his 8.5. h efertrkd to its citizens. tradition of providing low-cost energy and cnghccrhg from 5oa Jose 5tate Umvcrsity. Hc added to high-quality community services.
Banning As the gateway to his cbxofiw by ottcnigng bc Uriversity of 5ovbcrn California's Colorado Desert, Banning is Burbank When customers of the (aMcrnki cornhg fob an k5. h cfcctrkd cajinecrhg a fast-growing community with fast- Burbank Public Service Department call md an MBA. Mr. 5tossi worked rn o prhdpd growing energy needs. To meet the the power company to ask that a efcdrkd cnghccr for bc aty power requirements, Banning's Public representative visit their home, it is not of gvrbonk before assvming his rvrrenl posithn in1988.
Utilities Department has instituted a because something has gone wrong. They Timothy Dempsey number of building and conservation are just using one of the new "energy pvhgr Uryrics Dpertor Gty of Banning programs to serve its customers. audit" services provided free of charge. A Banning, rogfornio These programs include a new utility representative will survey the resi-Mr. Dcrnpsey began his ter ccr pumped-storage project, joint projects dence or place of business and provide tips hrniihties m a gncmonh Hcw York h 1981. After corning with fellow SCPPA member cities, and a on how to use energy more efficiently his 85. inindvstrid safety transition to generating during off-peak aiding in conservation and saving the from 5on Diego 5totc, he then went cn to few srhod ot hours to displace the high cost of peak- customer money.
Western 5tote University h time generation. Burbank is a city of 91,000 residents 5an Diego. Mr. Dempsey managed on energy raop m Conservation is important in desert and is home to many a major movie and Woshhgtcn state before towns, and Banning is no exception. To television studios and aerospace firms. All jYiingftie gannhg vtfii6es as Director h1987. meet its energy conservation objectives, of these customers keep Burbank's power the City of Banning has converted the demands high, and the Public Service city streetlights from the old mercury Department is moving its programs into vapor models to power-saving sodium the future to make sure the energy needs of vapor models. They have also been the community are met.
upgrading the voltage level of their A new system to monitor system distribution system, which will conserve conditions and do remote switching, energy. startup, and shutdown is in place, provid-Banning's location in the high desert ing improved reliability and the ability to means a huge variance in temperatures, address outages more promptly.
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In addition to providing "lifeline" weatherization, residential energy audit rates for low-income seniors and the and a community-wide information handicapped, the Burbank Public Service program as well as a California Energy Department co-sponsors fund raisers in Commission efficiency program to reduce association with the International energy costs in municipal operations. By Brotherhood of Electrical Workers that focusing on energy efficiency in new benefit the burn ward in a local hospital. municipal construction projects as well as In response to the growing concern for existing customers, Colton is com-over air pollution in the Los Angeles mitted to using energy resources in a Basin, Burbank uses several transmis- prudent andefficient manner.
sion lines to bring in off-system energy from outside sources. By reducing the Glendale With Glendale's central bus-total generation in the Los Angeles iness district undergoing a comprehensive Basin, the residents benefit both redevelopment effort, the Glendale Public economically and in terms of improved Service Department is standing ready to Gate A. Draws air quality. serve the existing and new Cferrruof Urd'ry Dirertor customers'nergy Gtyof (alton needs.
Coirort Colilornio Colton Located 55 miles east of Los The large growth in apartment house, Born ht Kansas, Mr. Draws was Angeles, Colton is a rapidly growing condominiums, and commercial building W.t. (ameron rdscrf oa a farm aruf ebuoterf Director ol Polk SeNirc ht his home state prior to community of over 37,000 residents. market has added over 10,000 new 6leufolc Pohfu Scrrue empioymcnt with thc Colton has been known as the "Hub City" customers in the last five years. To meet Department Utittics Deportment of (dtan Gleruto/e Cok'fornio Ityears ogo. As electric utyrty for more than a century, as it was the added energy needs, Glendale is also
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brcrtor for thc past 13 years, hc has fest (dton's of tts own rcsorurcs to meal its rastomcrs'c<<fs.
located on the main line of three major railroads. It is also the meeting point for three major interstate highways.
working jointly with SCPPA members in a comprehensive study of transmission line projects to bring in low-cost power from Utah, Arizona and Nevada.
Mr. (arnefonn rdduating his 4gth year of govcrmnent service. He rerdvof his B.S.
from Washington State Udvcrstty hcfore renttndng Colton has experienced a recent to University of Southern population boom as has much of San Glendale is replacing its older over- (difornia for hts ttLA. in pohru ebiYieotton. Ma Bernardino County. Its energy require- head distribution facility with a more mod- (amerce has hccn wnh thc fecvhrfc pahitr Service ments have matched this growth which ern underground system, improving the Dopa@neat struc 1 gli.
has made resource procurement and community's appearance in the process.
energy efficiency major factors in the Many of the employees of the Utility's planning efforts. Glendale Public Service Department are The Utilityreached a new peak active in civic projects, bringing the Public power requirement of 47.2 megawatts Service Department 's pledge to provide during the year, while sales totaled over the most reliable service at a "reasonable 179,000 megawatt-hours for the same cost" to the heart of the community.
period. New powercontracts from the California Department of Water Los Angeles A leader in both conser-Resources, City of Pasadena and Pacific vation and consumer-oriented projects, the Gas and Electric further reduces depen- Los Angeles Department of Water and dence on purchases from Southern Power (DWP) is a model for many California Edison. Other resources in- utilities across the country.
clude Palo Verde Nuclear Generation The community involvement of the Station, Hoover Power Plant and DWP is wide-ranging and touches all lay-economy energy purchases. ers of the customer base. Los Angeles was The Utility initiated several new first to institute a Senior Citizen Lifeline energy programs for customers during the Program, which provides low-cost energy year, including load management, to seniors and the handicapped. It has an
innovative program that educates schools their trademarked phrase, the Depart-on energy conservation; ifthe school is ment will start its door-to-door energy- and able to save 10% off its regular bill, the water-use surveys in November 1989.
school district rebates 5% of the money Utilityservice personnel will visit area saved to the school. A $ 5,000 scholar- homes and conduct comprehensive energy-S ship with the stated goal of encouraging and water-use surveys. Later the customer r women and minorities to pursue engi- is provided with a computer. printout with tfdon A. Cotton neering is given to 13 area universities suggested modifications and improve-As&ant Ccnerof Monoger ~
Peer each year. DWP's community out- ments that can result in a "Lite Bill".
los Angeles Deportment o/
reach program provides a liaison to The Pasadena Water and Power Water ond Power Gty ol los Angeles between 50 and 100 community groups Department also gives an annual scholar-los Angeles, (ogfornia such as the NAACP and Southern ship to a local high school student, up to Ortghogy from(crdrj, California Businessman's Association to $ 4,000 per year for four years. Financially Oklahoma, Nlr. (ottca earned lis 8.S. in civil cngheering help these groups solve their water and disadvantaged students have been able to from San fore Stote Unrvers'ty. power issues. pursue engineering studies at UCLA, tte htcc attended University of Sovtiwrn (ohfornto, cerning Because of the importance of the California Polytechnic Institute, and David C. Pfvmh CcncroIMonogcr his ccrtificote h pvMic area's air quality, DWP consumer con- Howard University in Washington, D.C., Posodcno Water ond Power odrmntstroAin ond t(S. in civil cnginccring. Nlr. (otton hegon servation programs receive great em- thanks to this scholarship. Department Posodenrc (agfornio lis career with the tos Angeles phasis. DWP issued over $ 4 million in Pasadena had been a growing com-Depmtment ol Water cnd After receiving fis 85. in Power h l96S and wos named energy-incentive programs this year munity for over a century, as evidenced by cnghecring from Aritcna Assistant general Nlcrroger.
alone. These incentives were offered in the city's celebration of the 100th anniver- Shtc Univcnity, Mr. Pfvah Power h ttovemher l988.
hcgan his work h pvhrrc its thermal storage program, high-effi- sary of the Tournament of Roses in January a@ties in 1910 h Phocrix, ciency heat pump program, and lighting- 1989. However, a commercial growth- Arimna. hsectqoenntfy, hc received his M6A from ASU h efficiency improvement program. In control initiative was recently passed, 1918. ttc worked briefly lor addition to the incentive programs, DWP which may impact the growth of energy a cnasvftant ond rnonaged a vtgity h tongmonh (cfcrodo, provides energy audits free of charge to use as well. Even with the rate of future hcfcre coning to Pasadena h customers, surveying their homes and growth limited, the Pasadena Water and 1981.
businesses, and suggesting ways for them Power Department has been concen-to reduce energy use. trating on the upgrading of systems and DWP is working with many of the plans for increased energy efficiency to SCPPA member cities on transmission better its available resources.
line projects bringing in power from This year Pasadena Water and Power outside sources without increasing the Department conducted a feasibility study pollutants in the basin. It is planning on for the life extension of the Broadway repowering existing Harbor Generating Power Plant, a three-unit facility that units with combined cycle units to supplies about 40% of Pasadena's power.
increase efficiency and reduce air pol- Repowering these units will help Pasadena lution. Within the next three years, keep pace with the growing demand of its DWP plans to begin its COSO Geo- customers.
thermal Project, using steam from the earth to generate electricity another Riverside Riverside recently implemen-pollution free energy source. ted an innovative assistance program, the "SHARE Program". When customers re-Pasadena The Pasadena Water and ceive their bill, they can check off a box Power Department has gone "lite" and round it up by a dollar or two. This introducing its "Lite-BillProgram" to program provides money to elderly and customers. Having received permission low-income customers who cannot afford from the Miller Brewing Company to use to pay the utility deposit. The utility pays
the administrative costs of the program, toward the future, not only in its major and the rest is a customer-helping- building projects, but also in its plans for customer program. customer service as well.
In the hot climate of Riverside, a With several building projects, the r
D Thermal Energy Storage Program Imperial Irrigation District is busy indeed.
encourages customers to install air- Among the projects are a new $ 5 million BiH O. (arnahan conditioning systems that are more ef- substation, an 11-1/4-mile extension of Puhfic Utilties Dicctor Riverside Pu@r Usiptes ficient and shifts energy use to off-peak existing transmission lines, upgrading an Department hours. This program also educates existing substation, upgrading the El Riversih, Cohyornio commercial customers about the benefits Centro Switching Station, and upgrading Alter earnhB his B.S. in dedrkd entincerinB fran of running large equipment during the the distribution system to provide power (olorodo 5tote Udvcisity, ffr. off-peak hours. for a new fashion mall in Indio. With all (ornohen pursued a car en in Kenneth S. Holler hcf<<e The Riverside Public Utilities this activity, it is easy to see why Imperial Assistoot Power putdic uthitics )Howe hccaninB thc utitries Department is meeting its goal of reliable is also building a new operations center Coorheffo Power Divisicn manpa in Fort (el' fmperhf frripotion Distrkt (obrodo. Hc jYire! Riverdde service at a low cost. In a recent survey, headquarters for the utility in the Coachella imperial, Cdi/cvn'e PuhBc Utiisies os oircdor in customers rated the Department high in area.
f986. A native ol fincfoy, Chio, Ati.
all service categories. This was accom- There is also plenty of activity when it Hoter caned ha 85. h plished without raising electric rates since comes to its customer services. Free-of- electrica enttrwcring froin Chio Hathern Uriversity. He 1984; in fact, beginning July 1, 1989, charge energy surveys are done for cus- is a Bccnscd cfatikd customers received a 7% reduction in tomers upon request. After an in-home cnpheci h the state of (etdania adiohedkc their bills. survey, the utility provides a computer (cekhgmpcrid OMd h printout showing ways to cut costs in that 1985.
Vernon The city of Vernon was particular home, including weather-founded in 1905, a 5.06- square mile area stripping, use of different appliances, planned from its inception as an industrial water heater blankets, etc. Another service city. In fact, the Vernon Light and Power provides customers who install energy-Department has over 2,000 commercial saving air conditioners with rebates on customers but only 30 residential their bill.
Bruce V. Malkenhorst of Upht customers! One particularly far-reaching program Executive Director and Power Ciiyol Vernon Since the Department's biggest effort is the utility's energy use survey every Veroorc Colilomi'o is keeping rates as low as possible, it is two years, 5% of all customers are sur-participating with fellow SCPPA member veyed for information on home construc-Ate ttolkenhorst is a aortic ol thc tos Anpefes ace ad cities on transmission projects that will tion, appliances, and energy use so that the receivedhis BA from Woodhuiy Uriverdty in bring low-cost power to the participating utility can enhance the precision of service Burhonk. Hc hot hecn the cities. Vernon recently hired an energy needs in the future. By really pinpointing Oircdor of UBht erd Power fic thc hst cipht yaws end h conservation specialist who works with potential problem areas now, the utility is oho shanti odmin'eater. customers, inspects their plants, and effectively planning how to reduce the N.htdkcnhord is pleased to hah a positionihcic hc ccm makes energy-saving recommendations area's load in cost-effective ways.
assist costs h controhnB cnaBy fa his constituents.
free of charge. The Coachella Power Division's The Department recently installed a commitment to its community shows up in Supervisory Control and Data Acquisition its nationally-recognized electrical safety System, which enables more efficient program, currently being demonstrated to system monitoring from one central police and fire departments, service clubs, location. schools, and churches.
Imperial Irrigation District The Coachella Power Division of the Imperial Irrigation District is on a rapid march 10
Free energy audits for residential customers as well as those in the commercial and indus-trial sectors are pro-vided by several SCPPA members.
AUTHORITYOPERATIONS Palo Verde Nuclear Generating Converter Station where the direct current Station SCPPA has a 5.91-percent is changed back to alternating current.
interest in the Palo Verde Nuclear Members receiving power over the Generating Station and receives up to 216 system will use it to meet load growth, megawatts (based on the licensed reactor reduce purchases from Edison, and to thermal power level per unit of 1,221 displace Los Angeles based oil- and gas-megawatts). fired generation.
With three units on line, this station, SCPPA's four refunding sales total-which is located about 50 miles west of ing approximately $ 1.3 billion will Phoenix, Arizona, has a current capacity produce a gross debt savings over the life of approximately 3,810 megawatts. A net of the project of approximately $ 745 annual output of more than 23 million million.
megawatt-hours is projected from Palo Los Angeles manages and operates Verde by the early 1990's. the project which is owned by the Ten member agencies have contracted Intermountain Power Agency, a political with SCPPA for entitlement in Palo Verde. subdivision of the State of Utah. A total The station's output will be used to meet of 36 utilities in Utah, California, and increases in demand, to replace purchased Nevada have power entitlements in the power, and to displace oil- and gas-fired IGS.
generation in the Los Angeles Basin.
Additional savings for participating Hoover Uprating Project The Hoover members were created when SCPPA took Power Plant is now over 50 years old.
advantage of lower interest rates by The U.S. Bureau of Reclamation took issuing approximately $ 1.5 billion in over operation of the plant in 1986 and is refunding bonds. Over the life of the in the process of uprating Hoover's 17 project, this will result in a gross debt original generators.
savings of about $ 286 million. Six SCPPA members have contracted The Palo Verde Nuclear Generating with the Authority to furnish their share Station is managed by Arizona Public of the uprating costs and to help with the Service Company, with the switchyard uprating. SCPPA has issued approxi-portion operated by the Salt River Project. mately $34.4 million in bonds to finance these costs.
Southern Transmission System Six The project is scheduled for com-SCPPA members receive power via the pletion in 1992 and will increase Southern Transmission System. While Hoover's capacity from 1,450 megawatts the distribution to members is local, the to 1,903 megawatts. Uprated units are source of the power is 488 miles away at returned to service immediately and the Intermountain Generating Station participating members have begun (IGS) in Utah. It is comprised of two coal- receiving energy and capacity entitle-fueled generating units with a combined ments. As more units are completed, a capacity of 1,600 megawatts of alternat- full entitlement of 94 megawatts is ing current. An adjacent converter station expected in 1992 for those members changes the electricity to direct current. participating through SCPPA.
The &00-kilovoltSouthern Transmission The increase is made possible by System carries the direct current over the installation of modern stator windings and mountains to the Adelanto 'esert and turbine impellers and the upgrading 12
of various auxiliary equipment. Replace-ment of existing transformer banks will increase plant efficiency. Additional plant improvements include consolidation of control rooms and modernization to provide for automatic and remote control.
Mead-Phoenix Transmission Projeer-The feasibility of constructing, owning, and operating a 500-kilovolt alternating-current transmission line between Boulder City, Nevada, and the Phoenix, Arizona area is being studied by SCPPA and other agencies.
In addition to SCPPA, Salt River Project, M-S-R Public Power Agency, and Western Area Power Administration are participating in the study project. The 240-mile transmission line could be converted to a direct-current system at a future date.
It is estimated that this facility, ifbuilt, would be in service in the mid-1990s.
Ten SCPPA members bene-7fg fit from power produced at the Palo Verde ffuciear Generating Station.
-- ~'rc',
Uprating of the units at Hoover Power Plont will result in additional capacity entitlements to six SCPPA members.
Adelanto Converter Station is the western terminus of the Southern Transmission System.
13
REPORT OF INDEPENDENT ACCOUNTANTS August 25, 1989 To the Board of Directors of Southern California Public Power Authority In our opinion, the accompanying combined balance sheet and the related combined statements of operations and of cash flows present fairly, in all material respects, the financial position of the Southern California Public Power Authority (Authority) at June 30, 1989 and 1988, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Authority's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and per-form the audits 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 disclo-sures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
In our opinion, the accompanying separate balance sheets and the related separate statements of cash flows of the Authority's Palo Verde Project, Southern Transmission System Project, Hoover Uprating Project and Mead-Phoenix Project, and the separate statements of operations of the Palo Verde Project, Southern Transmission System Project and Hoover Uprating Project present fairly, in all material respects, the financial position of each of the Projects at June 30, 1989, and their cash flows and the results of operations of the Palo Verde Project, Southern Transmission System Project and Hoover Uprat-ing Project for the year, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Authority's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We believe that our audits provide a reasonable basis for the opinion expressed above.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental financial information, as listed in the accompanying index, is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
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SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY COMBINED BALANCESHEET (In thousands)
June 30, l989 Palo Southern Hoover Mead-Verde Transmlsslon Uprating Pltoenir June 30, l988 Project System Project Project Proj ect Total Total ASSETS Utilityplant Production. $ 600,778 $ 600;778 $ 600,458 Transmission 6,008 $ 661,255 667,263 662,761 General 186 18,857 19,043 18,805 606,972 680,112 1,287,084 1,282,024 Less Accumulated dcprcciation... 56,180 57,272 113,452 72,288 550,792 622,840 1,173,632 1,209,736 Construction work in progress......... 3,569 4,287 $ 12,999 20,855 15,540 Nuclear fuel, at amortized cost....... 26,428 26,428 31,330 Net utility plant . 580,789 627,127 12,999 1,220,915 1,256,606 Special funds Investments 110,678 95,927 $ 18,747 1,089 226,441 260,146 Advance to Intermountain Power Agency. 20,161 20,161 20,161 Advances for capacity and energy, net . 10,218 10,218 6,009 Interest receivable 1,630 1,174 292 3,096 3 323 Cash and cash equivalents........... 107,672 63,295 5,640 65 176,672 141,737 219,980 180,557 34,897 1,154 436,588 431,376 Accounts receivable . 3,635 547 4,182 836 Materials and supplies ................ 6,859 6,859 6,528 Costs recoverable from future billings to participants 58,587 80,807 (1,004) 138,390 114,648 Deferred costs Unamortized debt expenses, less accumulated amortization of $ 46,363 and $ 36,164 in 1989 and 1988........ 228,150 174,258 1,107 403,515 373,600 Other deferred costs ................ 864 864 1,309 229,014 174,258 1,107 404,379 374,909
$ 1,098,864 $ 1,063,296 $ 35,000 $ 14,153 $ 2,211,313 $ 2,184,903 LIABILITIES Long-term debt . $ 1,043,540 $ 1,014,443 $ 34,296 $ 100 $ 2,092,379 $ 2,061,937 Current liabilities Long-term debt due within one year.... 14,370 5,825 20,195 29,403 Accrued interest. 36,219 37,259 689 1 74,168 77,224 Accounts payable and accrued expenses . 4,735 5,769 15 4 10,523 16,339 55,324 48,853 704 5 104,886 122,966 Advances from participants ..... 14,048 14,048 Commitments and contingencies .
$ 1,098,864 $ 1,063,296 $ 35,000 $ 14,153 $ 2,211,313 $ 2,184,903 lire aeompanyintt notes are an intettral pan of ttrese financial statements.
16
SOUTHERN CALIFORNIAPUBLIC POPOVER AUTHORITY COMBINED STATEMENT OF OPERATIONS (In thousands)
Year ended June 30, l989 Southern Palo Transmission Hoover Year ended Venle System Upmtlng June 30, Project Project Project Total l988 Operating revenues Sales of electric energy $ 110,164 $ 2,760 $ 112,924 $ 88,358 Sales of transmission services $ 94,769 94,769 82,332 Total operating revenues 110,164 94,769 2,760 207,693 170,690 Operating expenses Nuclear fuel expenses 10,628 10,628 9,042 Other operation 19,635 8,137 1,127 28,899 23,194 Maintenance . 5,518 3,205 8,723 9,547 Depreciation . 17,427 19,207 36,634 33,564 Decommissioning 5,699 5,699 4,652 Expense charged to project during construction........ (520)
Total operating expenses 58,907 30,549 1,127 90,583 79,479 Operating income 51,257 64,220 1,633 117,110 91,211 Investment income . 18,239 10,784 2,033 31,056 35,060 Income before debt expenses. 69,496 75,004 3,666 148,166 126,271 Debt cxpenscs Interest on debt 85,116 84,035 2,757 171,908 173,308 Allowance for borrowed funds used during construction . (16,699)
Total debt expenses . 85,116 84,035 2,757 171,908 156,609 Costs recoverable from future billings to participants...... $ (15,620) $ (9,031) $ 909 $ (23,742) $ (30,338)
The aeenmpanyins nenea ate an integral pan of eheae nnaneul uatememu 17
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY COMBINED STATEMENT OF CASH FLOWS (In thousands)
Year ended June 30, l989 Palo Southern Hoover Mead- Year ended Verde Transmission Uprating Phoenix June 30, l988 Project System Project Project Project Total Total Cash flows from operating activities:
Costs recoverable from future billings to participants $ (15,620) $ (9,031) $ 909 $ (23,742) $ (30,338) ~
Adjustments to arrive at net cash provided by operating activities:
Depreciation . 26,955 19,207 46,162 41,119 Decommissioning................. 5,699 5,699 4,652 Amortization of debt costs........... 12,017 9,125 54 21,196 17,692 Changes in current assets and liabilities:
Interest receivable ............... 574 (319) (28) 227 1,900 Accounts receivable.............. (2,799) (547) (3,346) 4,751 Materials and supplies............ (331) (331) (6,528)
Other assets 15 15 (198)
Accrued interest................. (1,354) (1,352) (2,706) 119 Accounts payable and accrued expenses . (7,582) 1,767 (5,808) (1,994)
Net cash provided by operating activities... 17,574 18,850 942 37,366 31,175 Cash flows from investing activities:
Payments for construction of facility ...... (7,781) (7,990) (15,771) (39,197)
Advances for capacity of energy, net ...... (4,209) (4,209) (2,945)
Payments for feasibility study............ $ (703) (703) (1,061)
Purchases of investments............... (101,134) (61,515) (10,248) (4,818) (177,715) (285,881)
Proceeds from sale of investments........ 130,015 63,748 12,085 5,572 211,420 311,526 Refund from Intermountain Power Agency . 820 Net cash provided by (used for) investing activities 21,100 (5,757) (2,372) 51 13,022 (16,738)
Cash flows from financing activities:
Proceeds from sale of refunding bonds .... 185,200 156,050 341,250 Payment for bond issue costs............ (4,325) (2,457) (6,782)
Payment for defeasance of revenue bonds .. (180,827) (153,739) (334,566)
Payment for principal of long-term debt.... (13,095) (2,260) (14,048) (29,403)
Proceeds from advances from participants .. 14,048 14,048 Net cash used for financing activities...... (13,047) (2,406) (15,453)
Net increase (decrease) in cash and cash equivalents. 25,627 10,687 (1,430) 51 34,935 14,437 Cash and cash equivalents at beginning of year 82,045 52,608 7,070 14 141,737 127,300 Cash and cash equivalents at end of year..... $ 107,672 $ 63,295 $ 5,640 $ 65 $ 176,672 $ 141,737 Supplemental disclosure of cash flow information:
Cash paid during the year for interest (net of amount capitalized).............. $ 73,871 $ 72,906 $ 2,757 $ $ 149,534 $ 138,306 The accompanying noses are an inrcgrai pan et shese fimanciai sraremenrs.
18
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY NOTES 'IO FINANCIALSTATEMENTS NOTE A Organization and purpose:
Hoover Upraung Project The Authority and six participants Southern California Public Power Authority (Authority), a entered into an agreement dated as of March 1, 1986, pursuant public entity organized under the laws of the State of Cali- to which each participant assigned its entitlement to capacity fornia, was formed by a Joint Powers Agreement dated as of and associated firm energy to the Authority in return for the November I, 1980 pursuant to the Joint Exercise of Powers Act Authority's agreement to make advance payments to the United of the State of California. The Authority's participant member- States Bureau of Reclamation (USBR) on behalf of such partici-ship consists of ten Southern California cities and one public pants. Construction is scheduled for completion by September district of the State of California. The Authority was formed 1992. The Authority will have an 18.68% interest in the con-for the purpose of planning, financing, developing, acquiring, tingent capacity of the Hoover Uprating Project. Several constructing, operating and maintaining projects for the gener- "uprated" generators of the Hoover Uprating Project com-ation and transmission of electric energy for sale to its partici- menced commercial operations during June 1987.
pants. The Joint Powers Agrecmcnt has a term of fiftyyears.
The members have the following participation percentages Mead-Phoenix Project The Authority has also studied the in the Authority's interest in the four projects: feasibility of constructing the proposed Mead-Phoenix Project, Southern a transmission line from Arizona to Nevada. The Authority's Palo I?snsmtssion i looser Mead- present interest in the Mead-Phoenix Project is 9375%. The Participant Verde Srstem Vprating Phoenix feasibility study is substantially complete and present plans call City of Los Angeles 67.0% 59.5% 61.2%o for the Authority to decide whether to continue with the project City of Anaheim 17.6 42.6% 15.0 in fiscal year 1990.
City of Riverside 5.4 10.2 31.9 6.0 Imperial Irrigation District 6.5 NOTE B Summary of signiTicant accounting policies:
City of Vernon 4.9 3.0 The financial statements of the Authority are presented in con-City of Azusa 1.0 4.2 .6 formity with generally accepted accounting principles, and City of Banning 1.0 2.1 .6 substantially in conformity with accounting principles pre-City of Colton 1.0 3.2 .6 scribed by the Federal Energy regulatory Commission and the City of Burbank 4.4 4.5 16.0 5.0 California Public Utilitics Commission. The Authority is not City of Glendale 4.4 2.3 5.0 subject to regulations of such commissions.
City of Pasadena 4.4 5.9 3.0 100.0% 100.0%
Utilityplant All expenditures, including general administra-100.0%o 100.0%o Palo Verde Project The Authority, pursuant to an assignment tive and other overhead expenses, payments-in-aid of construc-agrecmcnt dated as of August 14, 1981 with the Salt River Pro-tion, interest net of related investment income, deferred cost amortization and the fair value of test power generated and ject Agricultural Improvement and Power District, purchased delivered to the participants are capitalized as utility plant con-a 5.91% interest in the Palo Verde Nuclear Generating Station struction work in progress until a facility begins commercial (PVNGS), a 3,810 megawatt nuclear-fueled generating station near Phoenix, Arizona, and a 6.55% share of the right to use operation.
certain portions of the Arizona Nuclear Power Project Valley The Authority's share of costs associated with PVNGS is Transmission System (collectively, the Palo Verde Project). As included as utility plant. Depreciation expense is computed of July I, 1981, ten participants had entcrcd into power sales using the straight-line method based on the estimated service contracts with the Authority to purchase the Authority's share life of thirty-five years. Nuclear fuel is amortized and charged to expense on thc basis of actual thermal energy produced rela-of PVNGS capacity and energy. Units I, 2 and 3 of the Palo Verde Project began commercial operation in January and tive to total thermal energy expected to be produced over the September 1986, and January 1988, respcctivcly.
life of the fuel. Under the provisions of the Nuclear Waste Policy Act of 1982, the Authority is charged one mill pcr kilowatt-hour on its share of electricity produced by PVNGS.
Southern Transmission Sysrein Project The Authority, The Authority records this charge as a current year expense.
pursuant to an agreement dated as of May I, 1983 with the The costs associated with STS are included as utility plant.
Intermountain Power Agency (IPA), has agreed to make Depreciation expense is computed using the straight-line payments-in-aid of construction to IPA to defray all the costs method based on the estimated service lives, principally of acquisition and construction of the Southern Transmission thirty-five years.
System Project (STS), a transmission line which will provide for the transmission of energy from the Intermountain Power Project (IPP) in Utah to Southern California. The Authority Advances for capacity and energy Advance payments to entered into an agreement also dated as of May 1, 1983 with six USBR for the uprating of the 17 generators at the Hoover of its participants pursuant to which each member assigned its Power Plant are included in advances for capacity and energy.
entitlement to capacity of STS to the Authority in return for the These advances are being reduced by USBR billings to partici-Authority's agreement to make payments-in-aid of construc- pants for energy and capacity.
tion to IPA. STS commenced commercial operations in July 1986; The Department of Water and Power of the City of Los Nuclear decommissioning Decommissioning of PVNGS is Angeles, a member of the Authority, has served as project projected to start sometime after 2027. The Authority is provid-manager and operating agent of IPP. ing for its share of thc estimated future decommissioning costs 19
over the life of the nuclear power plant through annual charges June 30, to expense. 1989 1988 A Nuclear Decommissioning Fund has been established. Carry tng Carrying project Value xfarket Value xfarket The deposits to the fund plus the interest earnings on the fund balances are expected to be sufficient to pay the Authority's Palo Verde $ 219,980 $ 225,200 $ 223,808 $ 231,600 share of the decommissioning costs. Southern Transmission Deferred costs Deferred costs are shown net of accumulated System Hoover Uprating 180,557 34,897 180,400 34,800 171,784 33,927 171,100 33,600 amortization. Unamortized debt issue costs, including the cost Mead-Phoenix 1,154 1,200 1,857 1,900 of refunding, are amortized over the terms of the respective $ 436,588 $ 441,600 $ 431,376 $ 438,200 issues. Other deferred costs are amortized generally over five years.
Palo Verde Project The special funds required by the Bond Indenture contain balances, in thousands, as follows:
hie>esuneurs Investments include United States Government June 30, and governmental agency securities and repurchase agree-1989 1988 ments which are collateralized by such securities. These investments are stated at amortized cost, which in general is Construction Fund Initial Facilitics Account $ 49,415 $ 48,666 not in excess of market. As discussed in Note C, all of the Debt Service Fund investments are restricted as to their use. 63,733 63,780 Debt Service Account Debt Service Reserve Account 90,217 90,050 Cash and cash equivalents Cash and cash equivalents Bond Anticipation Note Fund 30 30 include cash and all investments with maturitics less than Revenue Fund 353 421 ninety days. Operating Fund 5,644 11,155 Reserve and Contingency Fund 10,588 9,706 Revenues Revenues consist of billings to participants for the Total Special Funds $ 219,980 $ 223,808 sales of electric energy and of transmission service in accord-ance with the participation agreements. Generally, revenues Southern Transmission System Project The special funds are fixed at a level to recover all operating and debt service required by the Bond Indenture contain balances, in thousands, costs over the commercial life of the plant. (See Note F). as follows:
June 30, Debr expenses Debt expenses include interest on debt, and 1989 1988 the amortization ofbond discounts, debt issue and refunding Construction Fund costs. Initial Facilities Account $ 5,309 $ 10,310 Debt Service Fund NOTE C Special funds: Debt Service Account 43,548 41,086 The Bond Indentures for three of the four projects require the Debt Service Reserve Account 88,948 89,079 Revenue Fund I following special funds to be established to account for the Authority's receipts and disbursements. The moneys and Openting Fund 6,8 14 7,239 General Reserve Fund 15,777 3,908 investments held in these funds are restricted in use to the purposes stipulated in the bond indentures. A summary of Total S pccial Funds $ 160,396 $ 151,623 these funds follows:
At June 30, 1989 and 1988, the Authority had non-interest Ptsnd iield by Purpose bearing advances outstanding to IPA of $ 20,161,000.
Construction Trustee To disburse funds for the acquisition and Hoover Uprau'ng Project The special funds required by the construction of the Project Bond Indenture contain balances, in thousands, as follows:
Debt Trustee To pay interest and principal related to the June 30, Service Revenue Bonds 1989 1988 Revenue Trustee To initially receive all revenues and disburse Advance Payments Fund $ 19,947 $ 23,244 them to other funds Revenue Fund 7 Operating Trustee To pay operating expenses Operating Working Capital Fund 400 340 Reserve and Trustee To pay capital improvements and make up Debt Service Fund Contingency deficiencies in other funds and, in the case Debt Service Account 710 714 of the Palo Verde Project, accumulate funds Debt Service Reserve Account 3,615 3,620 for decommissioning Total Special Funds $ 24,679 $ 27,918 General Trustee To make up any deficiencies in other funds Reserve At June 30, 1989 and 1988, the Authority had non-interest Advance Trustee To disburse funds for the cost of acquisition bearing advances to USBR of $ 10,218,000 and $ 6,009,000, Payments of capacity respectively.
Mead-Phoenix Project At June 30, 1989 and 1988, the bal-Special funds, in thousands, were as follows: ance in the Development Fund was $ 1,154,000 and $ 1,857000, respectively, of which substantially all were invested in securi-ties of the United States Government.
20
NOTE D Long-term debt: and $ 12,100,000 in 1994. The average interest rate on outstand-Palo Verde Project To finance the purchase and construc- ing debt during fiscal years 1989 and 1988 was 74% and 77%,
tion of the Authority's share of the Palo Verde Project, the respectively.
Authority issued Power Project Revenue Bonds pursuant to the Authority's Indenture of Trust dated as of July 1, 1981 (Bond Hoover Upraring Project To finance advance payments to Indenture), as amended and supplemented. Reference is made USBR for application to the costs of the Hoover Uprating Pro-to the Combined Schedule of Long-Term Debt at June 30, 1989 ject, the Authority issued Hydroelectric Power Project Reve-for details related to outstanding bonds. nue Bonds pursuant to the Authority's Indenture of Trust dated The Bond Indenture provides that the Revenue Bonds shall as of March 1, 1986 (Bond Indenture). Reference is made to the be special, limited obligations of the Authority payable solely Combined Schedule of Long-Term Debt at June 30, 1989 for from and sccurcd solely by (1) proceeds from the sale of details related to the outstanding bonds.
bonds; (2) all revenues, incomes, rents and receipts attribu- The Bond Indenture provides that the Revenue Bonds shall table to the Palo Verde Project (see Note E) and interest on all bc special, limited obligations of the Authority payable solely moneys or securities (other than in the Construction Fund) from and secured solely by (1) the proceeds from the sale of the held pursuant to the Bond Indenture; and (3) all funds estab- bonds; (2) all revenues from sales of energy to participants (see lished by the Bond Indenture (excluding the Decommissioning Note E); (3) interest or other receipts derived from any moneys Account in the Reserve and Contingency Fund); subject to the or securities held pursuant to the Bond Indenture; and (4) all provisions of the Palo Verde Project Bond Indenture providing funds established by the Indenture of Trust (except for the for the application thereof. Interim Advance Payments Account in the Advance Payment All outstanding Power Project Revenue Term Bonds, at Fund); subject to the provisions of the Bond Indenture provid-the option of the Authority, are subject to redemption prior ing for the application thereof.
to maturity. Alloutstanding Hydroelectric Power Project Revenue Term The Bond Indenture requires mandatory sinking fund instal- Bonds, at the option of the Authority, are subject to redemption ments to be made beginning in fiscal year 1998 for the 1982 prior to maturity.
Series A Bonds, 1999 for the 1982 Series B Bonds and the 1983 The Bond Indenture requires mandatory sinking fund instal-Series A Bonds, 2001 for the 1984 Series A Bonds and the 1985 ments to be made beginning in fiscal year 2002 for the 1986 Series A Bonds, 2003 for the 1986 Series A Bonds, the 1986 Scrics A Bonds. The next scheduled principal maturity for the Series B Bonds and the 1987 Series A Bonds and 2005 for the Hoover Uprating Project is $ 490,000 in 1994. The average 1985 Series B Bonds and 1989 Series A Bonds. Scheduled interest rate on outstanding debt during fiscal years 1989 and principal maturities for the Palo Verde Project during the five 1988 was 8.0%.
fiscal years following June 30, 1989 are $ 14,370,000 in 1990, Thc Authority estimates that the total financing requirements
$ 15,255,000 in 1991, $ 16,325,000 in 1992, $ 17,530,000 in 1993 for its interest in the Hoover Uprating Project will approximate and $ 18,860,000 in 1994. The average interest rate on outstand- $ 34 million, substantially all of which will be expended for ing debt during fiscal years 1989 and 1988 was 70% and 7.2%, payments for capacity and associated firm energy and the respectively. acquisition of entitlemcnts to capacity.
Southern Transmission System Project To finance payments-Mead-Phoenix Project The Authority borrowed $ 14,148,000 in-aid of construction to IPA for construction of STS, the to finance the feasibility study and development costs of the Authority issued Transmission Project Revenue Bonds pur- Mead-Phoenix Project. During April 1988, thc Authority suant to thc Authority's Indenture of Trust dated as of May 1, adopted a note retirement plan. The plan involved voluntary 1983 (Bond Indenture), as amended and supplemented. Refer- payments by each participant of its proportionate share of ence is made to the Combined Schedule of Long-Term Debt the liability with respect to the loan. During thc year ended at June 30, 1989 for details related to the outstanding bonds. June 30, 1989, the Authority received from the participants The Bond Indenture provides that the Revenue Bonds shall $ 14,048,000 retiring all the notes but $ 100,000. These receipts
~ be special, limited obligations of the Authority payable solely are shown as Advances from Participants. Authority man-from and secured solely by (1) proceeds from the sale of agement anticipates repaying these advances during fiscal bonds; (2) all revenues, incomes, rents and receipts attributable 1991 or later.
to STS (see Note E) and interest on all moneys or securities (other than in the Construction Fund) held pursuant to the Refiwding bonds During fiscal year 1989, the proceeds from Bond Indenture; and (3) all funds established by the Bond the sale of $ 295,005,000 of Power Project Refunding Bonds Indenture; subject to the provisions of the Bond Indenture werc used to advance refund $ 187635,000 of previously issued providing for the application thereof. bonds and the proceeds from the sale of $ 239,320,000 of NOTE D Transmission Project Revenue Bonds were issued to refund Long-term debt: (continucd)
$ 147,995,000 of previously issued bonds. In connection there-All outstanding Transmission Project Revenue Term Bonds, at the option of the Authority, are subject to redemption prior with, the net proceeds of the refunding bonds have been invested in securities of the United States Government, the to maturity.
principal and interest from which willbe sufficient to fund thc The Bond Indenture requires mandatory sinking fund instal-remaining principal, interest and call premium payments on ments to be made beginning in fiscal year 2000 for the 1984 the refunded bonds until the stated first call dates of the respec-Series A Bonds, 2001 for the 1984 Series B Bonds and the 1985 tive issues. Accordingly, all amounts related to the refunded Series A Bonds, 2003 for the 1986 Series A Bonds, 2002 for bonds have been removed from the balance sheets and the the 1986 Series B Bonds, and 2007 for the 1988 Series A cost of refunding the debt is included in unamortized debt Bonds. Scheduled principal maturities for STS during the five expenses. At June 30, 1989 the aggregate amount of debt fiscal years following June 30, 1989 are $ 5,825,000 in 1990, considered to be extinguished was $ 2,210,680,000.
$ 9,890,000 in 1991, $ 10,545,000 in 1992, $ 11,295,000 in 1993 21
NOTE E Power sales and transmission service contracts: Nuclear fuel amortization The Authority has sold its entitlement to the output of the Palo and decommissioning 11,327 6,810 18,137 Verde Project pursuant to power sales contracts with ten parti- Interest expense 6,214 (3) 6,211 cipants (see Note A). Under the terms of the contracts, the Bond requirements included in billings to participants:
participants are entitled to power output from the Palo Verde Investment income, Nuclear Generating Station and are obligated to make pay- operations and ments on a "take or pay" basis for their proportionate share of maintenance, net (23,533) (6,731) (30,267) operating and maintenance expenses and debt service on Power Cost of'acquisition of Project Revenue Bonds and other debt, whether or not the Palo capacity STS (11,750) (11,750)
Verde Project or any part thcrcof has been completed, is oper- Reduction in debt ating or operable, or its output is suspended, interfered with, service due to reduced or curtailed or terminated. The contracts expire in excess construction 40,999 40,999 2030 and, as long as any Power Project Revenue Bonds are Principal repayments (15,355) (20, 195) (35,550)
Other (1,476) (1,868) (3,341) outstanding, cannot be terminated or amended in any manner which will impair or adversely affect the rights of the $ 114,648 $ 23,742 $ 138,390 bondholders.
The Authority has entered into transmission service con-NOTE>> G Commitments and contingencies:
tracts with six participants of STS (see Note A). Under the As a participant in the PVNGS, the Authority could be subject terms of the contracts, the participants arc entitled to transmis- to assessment of retroactive insurance premium adjustments in sion service utilizing STS and are obligated to make payments the event of a nuclear incident at the PVNGS or at any other on a "take or pay" basis for their proportionate share of opera- licensed reactor in the United States.
ting and maintenance expenses and debt service on Transmis- The Authority is involved in various legal actions. In the sion Project Revenue Bonds and other debt, whether or not opinion of management, the outcome of such litigation or STS or any part thereof has been completed, is operating or claims will not have a material effect on the financial position operablc, or its service is suspended, interfered with, reduced of the Authority or the respective separate projects.
or curtailed or terminated. The contracts expire in 2027 and, as long as any Transmission Project Revenue Bonds are outstand-ing, cannot be terminated or amended in any manner which SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY will impair or adversely affect the rights of the bondholders. INDEX TO SUPPLEMENTAL FINANCIALINFORMATION In March 1986, the Authority entered into power sales con-tracts with six participants of thc Hoover Uprating Project (see Combined Schedule of Long-Term Debt at June 30, 1989 Note A). Under thc terms of the contracts, the participants are entitled to capacity and associated firm energy of the Hoover Palo Verde Project Uprating Project and are obligated to make payments on a Supplemental Balance Sheet at June 30, 1989 and 1988.
"take or pay" basis for their proportionate share of operating Supplemental Statement of Operations for the Years Ended and maintcnancc expenses and debt service whether or not the June 30, 1989 and 1988.
Hoover Uprating Project or any part thereof has been com- Supplemental Statement of Cash Flows for the Years Ended pleted, is operating or is operable, or its service is suspended, June 30, 1989 and 1988.
interfered with, reduced or curtailed or terminated in whole or Supplemental Schedule of Rcccipts and Disbursements in in part. The contracts expire in 2018 and, as long as the Hydro- Funds Required by the Bond Indenture for the Year Ended electric Power Project Revenue Bonds arc outstanding, cannot June 30, 1989.
be terminated or amcndcd in any manner which will impair or Southern Transmission Systent Project adversely affect thc rights of the bondholders. Supplemental Balance Shcct at June 30, 1989 and 1988.
Supplemental Statcmcnt of Operations for the Years Ended NOTE F Costs recoverable from future billings June30, 1989and 1988.
to participants: Supplemental Statement of Cash Flows for the Years Ended Billings to participants are designed to recover "costs" as June 30, 1989 and 1988.
defined by the power sales and transmission service agree- Supplemental Schedule of Receipts and Disbursements in ments. The billings are structured to systematically provide for Funds Required by the Bond Indenture for the Year Ended debt service requirements, operating funds and reserves in June 30, 1989.
accordance with these agreements. Those expenses, according Hoover Uprating Project to generally accepted accounting principles (GAAP), which Supplemental Balance Sheet at June 30, 1989 and 1988.
are not included as "costs" are deferred to such periods as they Supplemental Statement of Operations for the Years Ended are intended to be rccovercd through billings. June 30, 1989 and 1988.
Costs recoverable from future billings to participants are Supplemental Statement of Cash Flows for the Years Ended comprised of the following: June 30, 1989 and 1988.
June 30, Fiscal 1989 June 30, Supplemental Schedule of Receipts and Disbursements in l988 hcihiiy l989 Funds Required by the Bond Indenture for the Year Ended GAAP items not included in June 30, 1989.
billings to participants: Mead-Phoenix Project Depreciation of plant $ 63,521 $ 36,634 $ 100,155 Amortization of bond dis- Supplemental Balance Sheet at June 30, 1989 and 1988.
count, debt issue costs, Supplemental Statement of Cash Flows for the Years Ended and cost of refunding 32,951 20,845 53,796 June 30, 1989 and 1988.
22
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY COMBINED SCHEDULE OF LONG-TERM DEBT ATJUNE 30, 1989 (In thousands)
EPeetive Date of Interest Maturity on Series Sale Rate July I Total Palo Verde Project Revenue and Refunding Bonds 1982A 8/13/82 10.9% 1989 to 2017 $ 13,795 1982B 11/12/82 7.7% 1989 to 2017 37,115 1983A 4/ 8/83 8.8% 1989 to 2017 15,610 1984A 7/18/84 10.3% 1990 to 2004 12,315 1985A 5/22/85 8.7% 1989 to 2014 10,415 1985B 7/ 2/85 9.1% 1989 to 2017 38,465 1986A 3/13/86 8.2% 1989 to 2015 79,050 1986B 12/16/86 7.2% 1989 to 2017 353,675 1987A 2/11/87 6.9% 1989 to 2017 348,955 1989A 2/15/89 7.2% 1989 to 2015 295,005 1,204,400 Southern Transmission System Project Revenue and Refunding Bonds 1984A 2/ 9/84 9.3% 1990 to 2004 29,790 1984B 10/17/84 10.2% 1990 to 2000 11,610 1985A 8/15/85 8.9% 1989 to 2021 16,940 1986A 3/18/86 8.0%o 1989 to 2021 371,365 1986B 4/29/86 7.5% 1989 to 2023 478,105 1988A 11/22/88 7.2% 1989 to 2015 239,320 1,147,130 Hoover Uprating Project Revenue Bonds .......... 1986A 8/13/86 8. 1% 1993 to 2017 34,435 Mead-Phoenix Bank Loan. 100 Total Principal Amount. 2,386,065 Less: Unamortized Bond Discount Palo Verde Project Revenue and Refunding Bonds 146,490 Southern Transmission System Project Revenue and Refunding Bonds. 126,862 Hoover Uprating Power Project Revenue Bonds 139 Total Unamortized Bond Discount 273,491 Total Long-Term Debt Less Unamortized Bond Discount. 2,112,574 Long-Term Debt Due Within One Year 20,195 Bonds u hieh hase been refunded are eaauded from this sehedute. $ 2,092,379 23
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY PALO VERDE PROJECT SUPPLEMENTAL BALANCESHEET (In thousands)
June 30, 1989 1988 ASSETS Utilityplant Production. $ 600,778 $ 600,458 Transmission 6,008 5,988 General 186 81 606,972 606,527 Less Accumulated depreciation 56,180 34,224 550,792 572,303 Construction work in progress . 3,569 2,028 Nuclear fuel, at amortized cost 26,428 31,330 Net utility plant . 580,789 605,661 Special funds Investments 110,678 139,559 Interest receivable 1,630 2,204 Cash and cash equivalents. 107,672 82,045 219,980 223,808 Accounts receivable . 3,635 836 Materials and supplies 6,859 6,528 Costs recoverable from future billings to participants 58,587 42,967 Deferred costs Unamortized debt expenses, less accumulated amortization of
$ 24,106 and $ 18,643 in 1989 and 1988 . 228,150 210,841 Other deferred costs 864 1,309 229,014 212,150
$ 1,098,864 $ 1,091,950 LIABILITIES Long-term debt $ 1,043,540 $ 1,028,965 Current liabilities Long-term debt due within one year . 14,370 13,095 Accrued interest. 36,219 37,573 Accounts payable and accrued expenses . 4,735 12,317 55,324 Commitments and contingencies 62,985'1,091,950
$ 1,098,864 24
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY PALO VERDE PROJECT SUPPLEMENTAL STATEMENT OF OPERATIONS (In thousands)
Year ended June 30, 1989 1988 Operating revenues Sales of clcctric energy. $ 110,164 $ 85,828 Operating expenses Nuclear fuel 10,628 9,042 Other operation 19,635 13,313 Maintenance 5,518 6,388 Dcprcciation 17,427 13,589 Decommissioning. 5,699 4,652 Expense charged to projects during construction. (520)
Total operating expenses 58,907 46,464 Operating income Invcstmcnt income
..................... 51,257 39,364 18,239 11,072 Income before debt expenses.................... 69,496 50,436 Debt expenses Interest on debt . 85,116 84,033 Allowance for borrowed funds used during construction. (16,699)
Total debt expenses . 85,116 67,334 Costs recoverable from future billings to participants S (15,620) $ (16,898)
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY PALO VERDE PROJECT SUPPLEMENTAL STATEMENT OF CASH FLOWS (In thousands)
Year ended June 30, 1989 1988 Cash flows from operating activities:
Costs recoverable from future billings to participants. S (15,620) $ (16,898)
Adjustments to arrive at net cash provided by operating activities:
Depreciation 26,955 21,144 Decommissioning 5,699 4,652 Amortization of debt costs. 12,017 10,818 Changes in current assets and liabilities:
Interest receivable 574 (451)
Accounts receivable......... (2,799) 2,023 Materials and supplies . (331) (6,528)
Other assets 15 (198)
Accrued interest (1,354) 119 Accounts payable and accrued expenses .................. (7,582) (1,952)
Net cash provided by operating activities 17,574 12,729 Cash flows from investing activities:
Payments for construction of facility. (7,781) (13,890)
Purchases of investments. (101,134) (141,956)
Proceeds from sale of investments . 130,015 160,638 Net cash provided by investing activities. 21,100 4,792 Cash flows from financing activities:
Proceeds from sale of refunding bonds. 185,200 Payment for bond issue costs. (4,325)
Payment for defeasance of revenue bonds (180,827)
Payment for principal of long-term debt . (13,095)
Net cash used for financing activities . (13,047)
Nct increase in cash and cash equivalents 25,627 17,521 Cash and cash equivalents at beginning of year . 82,045 64,524 Cash and cash equivalents at end of year S 107,672 S 82,045 Supplemental disclosure of cash flow information: .
Cash paid during the year for interest (nct of amount capitalized) S 73,871 S 58,328 25
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY PALO VERDE PROJECT SUPPLEMENTAL SCHEDULE OF RECEIPTS AND DISBURSEMENTS IN FUNDS REQUIRED BY THE BOND INDENTURE Year Ended June 30, 1989 (In thousands)
Construction Fund initial Debt Bond Reserve dt Facilities Sem'ce Anticipation Revenue Operating Contingency Account Fund Note Fund Fund Fund Fund Total Balance at June 30, 1988 ............. $ 47,767 $ 154,374 $ 29 $ 418 $ 11,057 $ 9,683 $ 223,328 Additions Bond and note proceeds............ 2,250 (92) 2,158 Investment earnings............... 4,384 13,069 2 164 854 846 19,319 Transfer of investment earnings...... 6 (13,554) (2) 15,241 (854) (839) (2)
Revenue from power sales.......... 101,670 101,670 Distribution of revenues............ 84,835 (113,902) 25,106 3,961 Other income . 10 76 86 Transfer for interest payment........ 102,906 102,906 Transfer of investments ............ 672 3,259 (2,844) (1,087)
(I)
Miscellaneous transfers............ (1,090) 661 (398) 605 221 Total 6,232 191,084 (69) 24,700 4 189 226 136 Deductions Construction expenditures.......... 2,621 2,506 5,127 Operating expenditures ............ 22 333 5,678 776 23,109 5,678 Fuel cost Payment of principal .............. 13,095 13,095 177,667 Interest paid 177,667 Property tax 76 1,995 2,071 Financing costs............ 2,208 2,208 Interest paid on investment purchases . 263 273 115 10 661 Premium paid on investment purchases Loss on sale of investment.......... 7 Total 5,171 191,035 30,121 3,299 229,626 Balance at June 30, 1989 ............. $ 48,828 $ 154,423 $ 29 $ 349 $ 5,636 $ 10,573 $ 219,838 This schedule summarizes the receipts and disbursements in funds required under the bond indenture and has been prepared from the trust statements. The balances in the funds consist of cash and investmcnts at original cost. These balances do not include accrued interest receivable of $ 1,630 and $ 2,204 at June 30, 1989 and 1988, nor do they include total amortized net investment premiums of $ 1,488 and $ 1724 at June 30, 1989 and 1988.
26
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY SOUTHERN TRANSMISSION SYSTEM PROJECT SUPPLEMENTAL BALANCESHEET (In thousands)
June 30, 1989 1988 Utilityplant Transmission . $ 661,255 $ 656,773 General . 18,857 18,724 680,112 675,497 Less Accumulated depreciation. 57,272 38,064 622,840 637,433 Construction work in progress 4,287 912 Nct utility plant 627,127 638,345 Special funds Investments 95,927 98,160 Advance to Intermountain Power Agency 20,161 20,161 Interest receivable 1,174 855 Cash and cash equivalents. 63,295 52,608 180,557 171,784 Accounts receivable . 547 Costs recoverable from future billings to participants 80,807 71,776 Deferred costs Unamortized debt expenses, less accumulated amortization of
$ 21,539 and $ 16,910 in 1989 and 1988 174,258 161,546
$ 1,063,296 $ 1,043,451 LIABILITIES Long-term debt. $ 1,014,443 $ 998,578 Current liabilities Long-term debt due within onc year . 5,825 2,260 Accrued interest. 37,259 38,611 Accounts payable and accrued expenses 5,769 4,002 48,853 44,873 Commitments and contingencies
$ 1,063,296 $ 1,043,451 SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY SOUTHERN TRANSMISSION SYSTEM PROJECT SUPPLEMENTAL STATEMENT OF OPERATIONS (In thousands)
Year enrled June 30, 1989 1988 Operating revenues Sales of transmission services $ 94,769 $ 82,332 Operating expenses Other operation. 8,137 8,750 Maintenance . 3,205 3,159 Depreciation. 19,207 19,975 Total operating expenses . 30,549 31,884 Operating income 64,220 50,448 Investment income 10,784 19,996 Income before debt expenses. 75,004 70,444 Debt cxpcnse Interest on debt 84,035 83,979 Costs recoverable from future billings to participants $ (9,031) $ (13,535) 27
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY SOUTHERN TRANSMISSION SYSTEM PROJECT SUPPLEMENTAL STATEMENT OF CASH FLOWS (In thousands)
Year ended June 30, j989 J988 Cash flows from operating activities:
Costs recoverable from future billings to participants. $ (9,031) $ (13,535)
Adjustments to arrive at net cash provided by operating activities:
Depreciation 19,207 19,975 Amortization of debt costs. 9,125 6,820 Changes in current assets and liabilities:
Interest receivable . (319) 2,113 Accounts receivable (547) 2,662 Accrued interest (1,352)
Accounts payable and accrued expenses 1,767 774 Net cash provided by operating activities . 18,850 18,809 Cash flows from investing activities:
Payments for construction of facility (7,990) (25,307)
, Purchases of investments. (61,515) (133,287)
Proceeds from sale of investments . 63,748 133,657 Refund from Intermountain Power Agency. 820 Net cash used for investing activities . (5,757) (24,117)
Cash flows from financing activities:
Proceeds from sale of refunding bonds. 156,050 Payment for bond issue costs. (2,457)
Payment for defeasance of revenue bonds. (153,739)
Payment for principal of long-term debt (2,260)
Net cash used for financing activities. (2,406)
Net increase (decrease) in cash and cash equivalents 10,687 (5,308)
Cash and cash equivalents at beginning of year 52,608 57,916 Cash and cash equivalents at end of year . $ 63,295 $ 52,608 Supplemental disclosure of cash flow information:
Cash paid during the year for interest (net of amount capitalized) $ 72,906 $ 77,221 28
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY SOUTHERN TRANSMISSION SYSTEM PROJECT SUPPLEMENTAL SCHEDULE OF RECEIPTS AND DISBURSEMENTS IN FUNDS REQUIRED BY THE BOND INDENTURE Year Ended Junc 30, I989 (In thousands)
Construction Funil-initial Dcln General Facilitics Senice Revenue Operating Resene Account Fiind Fiitul Fioid Fund Total Balance at June 30, 1988 $ 10,096 $ 129,132 $ $ 7,230 $ 3,834 $ 150,292 Additions Bond and note interest received........ 518 518 Investment earnings. 910 8,835 241 570 587 11,143 Revenue from transmission sales....... 94,534 94,534 Transfer of investments 1,788 (912) (876)
Transfer of investment earnings ....... (8,684) 9,740 (522) (534)
Transfer of funds . (1,863) (3,893) (5,756)
Distribution of revenue 79,102 (103,603) 11,816 12,685 Transfer for interest payment.......... 91,578 91,578 Other receipts 2,393 2,393 Total 1,440 169,244 11,864 11,862 194,410 Deductions Payments-in-aid of construction....... 6,192 6,192 Operating expenditures 12,306 12,306 Principal payment 2,260 2,260 Intcrcst paid . 164,484 164,484 Interest paid on investmcnt purchases... 31 153 48 62 294 Premium paid on investment purchases . 11 2 3 16 Total 6,234 166,899 12,354 65 185,552 Balance at June 30, 1989. $ 5,302 $ 131,477 $ $ 6,740 $ 15,631 $ 159,150 This schedule summarizes the receipts and disbursements in funds required under the bond indenture and has been prepared from the trust statements. The balances in the funds consist of cash and investments at original cost. Thcsc balances do not include accrued interest receivable of $ 1,174 and $ 855 at June 30, 1989 and 1988, nor do they include total amortized net investment discounts of $ 72 and $477 at June 30, 1989 and 1988.
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY HOOVER UPRATING PROJECT SUPPLEMENTAL BALANCESHEET (In thousands)
June 30, l989 l988 ASSETS Special funds Investmcnts . $ 18,747 $ 20,584 Advances for capacity and energy, net 10,218 6,009 Interest receivable 292 264 Cash and cash equivalents 5,640 7,070 34,897 33,927 Billings to participants in excess of costs recoverable (1,004) (95)
Deferred costs Unamortized debt expenses, less accumulated amortization of $ 155 and $ 102 in 1989 and 1988 .. 1,107 1,159
$ 35,000 $ 34,991 LIABILITIES Long-term debt $ 34,296 $ 34,294 Current liabilities Accrued intcrcst . 689 689 Accounts payable and accrued expenses . 15 8 704 697 Commitments and contingencies...
$ 35,000 $ 34,991 29
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY HOOVER UPRATING PROJECT SUPPLEMENTAL STATEMENT OF OPERATIONS (In thousands)
Year ended June 30, 1989 1988 Operating revenues Sales of electric energy . $ 2,760 $ 2,530 Operating expenses Capacity charges 391 235 Energy charges. 596 652 Other operation 140 244 Total operating expenses 1,127 1,131 Operating income 1,633 1,399 Investment income.... 2,033 3,992 Income before debt expenses 3,666 5,391 Debt expense Interest on debt. 2,757 5,296 Billings to participants in excess of costs recoverable $ 909 $ 95 SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY HOOVER UPRATING PROJECT SUPPLEMENTAL STATEMENT OF CASH FLOWS (In thousands)
Year enrleel Junc 30, 1989 1988 Cash flows from operating activities:
Billings to participants in excess of costs recoverable $ 909 $ 95 Adjustments to arrive at net cash provided by (used for) operating activities:
Amortization of debt costs. 54 54 Changes in current assets and liabilities:
Interest receivable (28) 238 Accounts receivable... 66 Accounts payable and accrued expenses . (816)
Net cash provided by (used for) operating activities. 942 (363)
Cash flows from investing activities:
Advances for capacity and energy, net (4,209) (2,945)
Purchases of investments. (10,248) (6,159)
Proceeds from sale of investments 12,085 11,685 Net cash (used for) provided by investing activities . (2,372) 2,581 Cash flows from financing activities:
Net (decrease) increase in cash and cash equivalents . (1,430) 2,218 Cash and cash equivalents at beginning of year . 7,070 4,852 Cash and cash equivalents at end of year $ 5,640 $ 7,070 Supplemental disclosure of cash flow information: .
Cash paid during the year for interest (net of amount capitalized) . $ 2,757 $ 2,757 30
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY HOOVER UPRATING PROJECT SUPPLEMENTAL SCHEDULE OF RECEIPTS AND DISBURSEMENTS IN FUNDS REQUIRED BY THE BOND INDENTURE Year Ended June 30, 1989 (In thousands)
Interim Operating Debt Adhrtnce rtdvance Itbrtdng Debt Serhice Payments Payments Revenue Ghpttal Service Reserve Fimd Fund Fund Fund Account Account Total Balance at June 30, 1988. $ 19,754 $ 4,081 $ $ 340 $ 714 $ 3,624 $ 28,513 Additions Investment earnings 1,758 204 3 37 46 295 2,343 Transfer of investment earnings........ 518 (204) (3) 30 (46) (295)
Sales 2,760 2,760 Transfer of sales receipts. (2,753) 2,753 Transfer of investments. (4,699) 4,699 Miscellaneous transfers. 3,258 (3,258)
Total. 835 1,441 67 2,753 5,103 Deductions Advances for capacity and energy....... 5,195 5,195 Administrative expenditures........... 135 135 Interest paid. 2,757 2,757 Interest paid on investmcnt purchases.... 20 7 27 Premium paid on investment purchases .. 425 425 Total. 580 5,195 7 2,757 8,539 Balance at June 30, 1989......... $ 20,009 $ 327 $ 400 $ 710 $ 3,624 $ 25,077 This schedule summarizes the receipts and disbursements in funds required under the bond indenture and has been prepared from thc trust statements. Thc balances in the funds consist of cash and investments at original cost. These balances do not include accrued intcrcst rcccivable of $ 292 and $ 264 at June 30, 1989 and 1988, nor do they include total amortized nct investment premiums of $ 690 and $ 858 at June 30, 1989 and 1988.
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY MEAD-PHOENIXPROJECT SUPPLEMENTAL BALANCESHEET (In thousands)
June 30, I989 I988 ASSETS Utilityplant Construction work in progress. $ 12,999 $ 12,600 Special funds Investmcnts 1,089 1,843 Cash and cash equivalents 65 14 1,154 1,857 Deferred charges Unamortized debt expenses, less accumulated amortization of $ 563 and $509 in 1989 and 1988.. 54
$ 14,153 $ 14,511 LIABILITIES Long-term debt $ 100 $ 100 Current liabilities Long-term debt due within onc year . 14,048 Accrued interest I 351 Accounts payablc and accrued expenses 4 12 5 14,411 Advances from participants 14,048 Commitmcnts and contingencies.
$ 14,153 $ 14,511 31
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY MEAD-PHOENIX PROJECT SUPPLEMENTAL STATEMENT OF CASH FLOWS (tn thousands)
Year ended June 30, 1989 1988 Cash flows from operating activities: ..
Cash flows from investing activities:
Payments for feasibility study (703) (1,061)
Purchases of investments. (4,818) (4,479)
Proceeds from sale of investments 5,572 ',546 Net cash provided by investing activities. 51 6 Cash flows from financing activities:
Payment of long-term debt (14,048)
Proceeds from advances from participants . 14,048 Net cash provided by financing activities Net increase in cash and cash equivalents . 51 6 Cash and cash equivalents at beginning of year . 14 8 Cash and cash equivalents at end of year S 65 $ 14 Supplemental disclosure of cash flow information: .
Cash paid during the year for interest (net of amount capitalized) 32
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PUBLIC SEIIVICE Technical assistance from the Los Angeles Depart-ment of Water and Power played a meaningful role in rebuilding two communitics struck by natural disaster in the autumn of 1989.
A team of 18 distribution workers and two superin-tendents flew to Puerto Rico on September 27 to help with repairs on that island's power system in the wake of devastation from Hurricane Hugo. The crews worked for two weeks under the direction of the Puerto Rico Electric Power Authority.
Three weeks later, the DIP dispatched two giant cir-cuit breakers via truck to Santa Cruz, near the epicen-ter of the 7.1 magnitude earthquake that shook much of the San Francisco Bay area on Oct. 17, helping to restore power to beleaguered residents.
At the same time, a crew of water utility workers and an engineer-adviser werc sent to a rural system outside of Santa Cruz to assist in getting that community's water system back into operation.
Both the Puerto Rico and Santa Cruz assistance efforts were carried out under cooperative agreements with utility industry councils.
FR 0 M T H E 8 0 A R D 0 F lVA T E R AND P 0 IV E R C 0 M i1I I S S I 0 N E R S We are pleased to present this 88th annual report of the Department of Water and Power for thc fiscal year 1988-89, reviewing 12 months of challenge and achievement. The decade of thc 1990s promises new challenges for the public utility industry, which has undergone significant changes over the last 10 years. This report details the many ways the DWP is preparing to meet those challenges.
As a financial and cultural capital on the Pacific Rim, Los Angeles depends morc than ever on ample supplies of quality water and reliable electrical power to survive and prosper. Providing those resources, as well as encouraging water conservation and energy efficiency, is a responsibility the DWP gladly accepts.
The job of providing water and electric power to this large and diverse commu-nity requires the dedication and commitment of thousands of people who make up the DWP family. As ahvays, we are in their debt.
Once again, we owc a large measure of our success to the support and leader-ship of thc Mayor and City Council, as well as the other elected City officials and City departments.
Rick J. Caruso Prcsidcnt
COBIIsARATIVE HIGHLIGHTS Water POH et'%us
%%us Increase Increase Year cndcd June 30 1989 l988 (Dccrcasc) 1989 1988 (Decrease)
Service Caltons in billions Kilowatt hours in billions Sales 208 1 203 6 2 2o%%d 21.9 21.1 3.8/o Customers average number (thousands) 640 6 637 8 0 4o%%d 1,325.3 1,304.6 1.6%
Financial In millions In millions Revenue'" 3 306.7 8 259.7 18.1%%uo 81,734.6 $ 1,588.1 9.2%
Operating costs'" 206.0 172.4 19.5 /o 1,301.2 1,191.7 9.2%
Net income 42.3 34.4 23.0'Yo 193.4 175.6 10.1'Yo Payments to City of Los Angeles 12.9 12.4 4.0% 78.5 70.2 11.8%
Capital expenditures 118.1 97.8~ 20.8% 336.2 317.3~ 6.0%
Net utility plant 1,202.0 1,114.7 7.8% 3,523.9 3,324.9 6.0%
Capitalization equity and long-tenn debt 1,250.3 1,172.5 6.6o/o 3,626.1 3,444.7 5.3%
'"Includes ot benin come-net
'bEreiudi ng depreciation crpense
~Restated due to change in accounting method
WATER AND POWER DOLLAR WATER REVENUE DOLLAR IN CENTS WATER EXPENDITURE DOLLAR IN CENTS 22 FP Pp 55 37 1 Other 4 Payments to thc City 2 Fire Hydrant rentals 8 Ret'uement Plan costs related to operations 5 Governmental 12 Capital improvements 37 Residential 16 Debt service costs 55 Commercial and intlustrial 19 Purchased water and energy 19 Other operating expenses 22 Operating salaries and wages POWER REVENUE DOLLAR IN CENTS POWER EXPENDITURE DOLLAR IN CENTS 2 3 i.s pg 31 Pg~
53 13 2 Street lighting 4 Retirement Plan costs rclatcd to operations 3 Other 5 PaymentstothcCity 14 industrial 9 Debt scrvicc costs 28 Residential 11 Capital improvements 53 Commercial 12 Operating salaries and wagcs ---
13 Other operating expenses 15 Fuel 31 Purchased energy
Ft INTRODUCTION "Accommodating our customers, large and small, wi 11 he the, measure, ofour in the 1990s, "says Norman L<. Nichols, General Manager and Chief 'uccess L'ngineer ofthe Department of Water and Power. "We view the next decade as a dress rehearsal for the 21st Century. "
These words capture the essence of the utility sector's New Age, an cra in which deregulation and competition will forge profound changes in an industry
'ong known for its predictability. Three strategic concepts underpin the DWP's response to the new era:
~ Increased efficiency and cost containment.
~ Realistic rate structures.
~ Cornmitrnent to excellent service.
On the next several pages, this Annual Report reviews some of thc ways the Department of Water and Power is pre-paring for the challenges ahead. These examples symbolize the ncw spirit of service shared by thc DWP's more than 11,000 employees.
~ V
TIIE DEPARTMENT IN IIRIEF The Los Angeles Department of Water and Power supplies water and electricity to the approximately 3.4 million residents of the nation's second largest city. As the largest municipally owned utility in the nation, DWP has more than 11,000 employees serving a 465-square-mile area ranging from the San Gabriel Moun-tains to the Pacific Ocean. It began municipal distribution of water in 1902 and electricity in 1916.
As a proprietary agency of the Los Angeles City government, the DWP receives no tax support. Its operations arc financed entirely by the sale of water and electricity. Revenue bonds are its main source of external financing.
The DWP is administered by the Board of Water and Power Commissioners, whose five members are appointed by the tl'layor and confirined by the City Council for terms of five years. The Board establishes water and electric rates, subject to approval by the City Council.
I) El'ARTllENT OF WATElt AND POWER Norman E. Nichols Gcncral illanagcr and Chief Engineer Eldon A. Cotton Assistant General iWanagcr- Porrcr Duane L. Gcorgcson Assistant General Manager IVatcr Daniel lV. AVatcrs Assistant Gcncral Manager External and Organizational Services Norman J. Powers Chief Financial OAiccr
,0 j DIP CUSTOMERS Tomorrotv's most successful utilities tvi 11 be those that provide the highest quality service. To remain a leader in its industry, the DWP is putting netv emphasis on this element of its business.
k On the next several pages are four exam-C ples. As these case studies show, innova-tion and flexibilitylie at the heart of a good service-oriented operation finding new ways to do the job better...
~ In Northridge, a DWP account execu-tive smooths the way for a major cus-tomer's future expansion.
~ In Eastern Los Angeles, another DWP representative helps a large central market keep its customers happy.
~ Large customers near Griffith Park con-sider a switch to reclaimed water.
~ Home builders everywhere learn the advantages of heat pumps.
In these and a thousand other ways, the DWP is building a new service culture to greet the 21st Century."
DWP C U S T 0 Ill E It S With thc emergence of thc Pacific Rim as a major economic and cultural arena, Los Angeles has become a gateway for hundreds of thousands of new arrivals making it thc most interna-tionalized of all U.S. cities.
As the community has become multilingual and cross-cultural, Department of Water and Power services have adapted accordingly with bilingual phone and field personnel, with customer materials now printed in several languages and training programs designed to accommodate a variety of ethnic and cultural backgrounds.
The influx of newcomers to Los Angeles has been accompanied by a rapid growth in ethnic cntcrprise, with special utility service needs that can bc complicated by language barriers. A four-person bilingual team within the DWP's Major Accounts Group works with managers of Hispanic businesses like El Mercado, the bustling Hispanic marketplace in Eastern Los Angeles. iVith more than 60 vendors doing a total annual business of over 810 million, it is a major consumer of electricity and water, and as such warrants its own account executive from the DWP's Major Accounts Group.
"Any establishment this big needs special attention," says Fred Herrera, the account execu-tive for El Mcrcado. "Power reliability is critical for merchants who must keep their products refrigerated. iVater quality is essential for vendors serving the public. But there are hundreds of other needs." Herrera's command of Spanish is an important adjunct to his technical exper-tise. Although the general manager of El Mercado, Pedro Rosado, is also bilingual, many of the employees there are proficient only in Spanish.
"Having someone available to us who knows our situation, knows the utility business and is fluent in Spanish is a real benefit," says Rosado, who has managed El Mcrcado for 12 years.
"In this case, I guess you could say the DWP speaks our language in more ways than one."
Philip llcnglcr Rudolph )larris l.ine Patrol ttcchanic Electrical Distribution DWP 'tlechanic/DWP
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D lV P C US T 0 ilt E R S A growing Los Angeles has traditionally solved its water needs through "supply-side" measures by importing from water-rich areas to the north and east. As environmental concerns intensify, however, the emphasis has shifted to "demand side" solutions.
Today, thc DWP is looking toward the newest horizon in water resource management reclaiming and recycling "used" water for irrigation and for recharging thc underground water table.
Under joint programs of the City's Department of Recreation and Parks and the Department of Public Works, reclaimed water is already used to irrigate two Griffith Park golf courses, and it will soon be watering 1,400 recreational acres in the Scpulvcda Dam Basin. Now the DWP hopes to find customers for this water in the private sector.
"Large water users are very interested in this opportunity," says Steve Ott, an engineer/
planner for the Greenbelt Project of the DWP. "As supplies of fresh water get tighter, they know deliveries of reclaimed water won't be cut off."
A DWP marketing team under Saturo Matsuda has approached four closely clustered com-panies with heavy irrigation needs (Forest Lawn and Mt. Sinai Memorial Parks, Lakeside Country Club and Universal City) as prospects for the Greenbelt Reclaination Project.
"We'e under a lot of pressure during drought periods," says Jack Clough, Vice President of Architecture and Engineering for the Forest Lawn Company, which has more than 100 acres of lawn to irrigate at its Hollywood Hills Memorial Park. "The Greenbelt Project may be our answer."
Matsuda's marketing team has been working with Clough and his counterparts at the other prospect firms for about six months. They hope to have an agreement by early 1990, and reclaimed Greenbelt water could start llowing as early as thc summer of 1990.
Matsuda sees this as a good start, but adds: "We'e just scratching the surface."
Ricbanl Zubiate Rebecca Rosenfeltt Senior Water Utility Assistant District Clerk Wartier/DWP DKVP 12
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gV DWP C US T 0 ilI E R S While no two DWP customers are exactly alike, all share one thing in common: When they turn on an electrical switch or water faucet, they expect something good to happen.
This expectation prompted the Department of Water and Power carly in 1988 to institute its Major Accounts Group (MAG), to serve the special needs of thc DWP's 1,500 largest customers, for whom reliability of service is critical. These customers account for around 33 percent of DWP's total power demand.
Burgeoning California State University in Northridge, with a student population of 30,000 and growing, is an example of a major DWP account. And in a couple of years CSUN will be even bigger, thanks to an ambitious expansion program now under way.
New buildings inevitably mean new demands for water and power, and Susan Smith, a 17-year DltVP employee and the executive in charge of thc CSUN account, is responsible for seeing that these needs are met. Though she handles many other major accounts (including L.A. International Airport), CSUN has been getting thc lion's share of her time lately.
"Right now, their needs are pretty great," says Smith, whose optimism is a major asset in hcr work, "so this is where my priorities belong. These problclns can't wait."
Among the needs CSUN has put before Smith are three new industrial stations, box car-size units that DWP has been asked to install on the campus in thc next 18 months. These units lower the voltage of incoming power to make it compatible with the university's system.
It's her responsibility to put the CSUN development team in touch with the right people at DIP to get this done, then to follow through and make sure everything comes together.
"We'e moving our project along generally on schedule," says CSUN Director of Facilities Planning, Steven C. Lohr. "Sue Smith is one of the people helping us keep it there."
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D lV P C US T0 i1I E R S Part of the new environment facing public utilitics in the 1990s is a stronger emphasis on marketing the products and services they provide. The DWP has moved boldly into this arena with its new Heat Pump Group.
Heat pumps, first introduced in the early 1950s, work on the same principle as room air conditioners, which transfer warmth from thc interior to the outdoors. But heat pumps work both directions, extracting warmth from outside air (even when it seems cold) to heat inside spaces in winter, and reversing the process during hot weather.
Heat pumps have become more efficient in recent years, and their costs have gone down. As a result, the DWP in 1987 began promoting their use as a substitute for conventional heating and cooling units, especially for small spaces. The program provides financial incentives for builders and homeowners who equip new buildings, or retrofit old ones. Again, service is the key.
"We have to make the builder or homeowner aware of the advantages over conventional heating and air conditioning," says Steve iilatsuda, Director of the DWP Heat Pump Group.
"People like their flexibility, convenience and clean operation." So far, the DWP has paid out more than 84 million in incentives to contractors for installing some 25,000 units in thc DWP service area.
"Thc program has done wonders for DWP in the marketplace," says Dan S. Palmer, a partner in G.H. Palmer Associates, a Brentwood development company that installed heat pumps in a 760-unit project completed in 1989. "The DWP really pulled with us. Wc're very pleased."
So, evidently, are other people. The program has been steadily accelerating since its incep-tion, to the extent that sales during the second quarter of 1989 exceeded sales for the entire first year of the program.
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OPERATIONS OVERVIEW Another year of below-average precipitation in Southern California, the watersheds of the Colorado and Sacramento Rivers and Eastern Sierra Nevada gave new urgency to conservation efforts by the Depart-ment of Water and Power in 1988-89.
The third shortfall in Sierra snowmelt in as many years lowered water deliverics from the Los Angeles Aqueduct to 70 percent of the 20-year average. Electrical production from the Aqueduct was down 21 percent from the previous year. Colorado River water and power production were also lower.
These reductions were made up through additional purchases of water from the Metropolitan Water Dis-trict and of electrical power from out-of-state generating facilities. These purchases resulted in higher costs that had to be passed on to DWP customers.
In all, the DWP Water System supplied approximately 208.1 billion gallons to some 640,572 customers in 1988-89, compared with 203.6 billion gallons and 637,793 customers in the previous year. The record year for water use was 1986-87, when the DWP sold more than 210 billion gallons.
The Power System in fiscal 1988-89 sold 21.9 thousand gigawatt-hours of electricity to around 1,325,300 customers (both new highs), compared with 21.1 thousand gigawatt-hours and 1,305,000 customers in 1987-88.
In February 1989, Norman E. Nichols was confirmed as General Manager and Chief Engineer, replacing Paul H. Lane, who retired after 40 years'ervice. Mr. Nichols'eplacement as Assistant General Manager Power is Eldon A. Cotton.
lVAT E R S Y S T E ili H I G H L I G II T S Major developments occurred this year in two long-standing legal issues surrounding DWP water rights in the Owens Valley and at Mono Lake. The Inyo County Board of Supervisors and the DWP Board have given preliminary approval to an environmental protection plan that clears thc way for implementing a long-term Owens Valley underground water management plan.
An El Dorado County superior court granted a petition for a preliminary injunction sought by the National Audubon Society and Mono Lake Committee. The injunction granted through March 3, 1990, halts DWP diversions of water from the Mono Basin until the water level at Mono Lake rises to 6,377 feet.
Replacing the water the City will lose from this injunction, along with lost electricity generated by Mono Basin runoff, will require increased water imports from the Sacramento Delta and will cost Los Angeles consumers around 815 million annually.
Improvements in water quality continued last year, with the new Los Angeles Aqueduct Filtration Plant dischargin'g water with average turbidity more than 500 percent better than state standards. More than two-thirds of the City's total water demand goes through this plant. Levels of trichloroethylene in San Fernando Valley groundwater also showed improvement in 1988-89, falling to a level nearly five times better than regulatory requirement.
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OPERATIONS OVEltVIEiV Work has begun on environmental impact studies in connection with improving water quality at ten open reservoirs in the City to help meet expected tighter federal and state standards. Planned improvements at several of the reservoirs have met with local community resistance, and legislation to restrict such an action was passed by the state lcgislaturc but vetoed by the Governor.
More than $ 30 million was invested last year in improvements to some 95 miles of the DWP's vast underground water delivery system (infrastructure). This work consisted of cement-lining 65 miles of small distribution mains and replacing over 30 miles of deteriorated mains to improve water quality and public fire protection.
Design of the Greenbelt Project, which wiH distribute reclaimed water for irrigation by large private cus-tomers around Griffith Park, moved toward completion in 1989-90 (see page 12).
Over a million low-flow shower heads and toilet tank water bags have been distributed free to homeowners in the DWP's continuing efforts at encouraging water conservation.
Meanwhile, Phase I of the City's water conservation ordinance, which restricts usc of water for such pur-poses as driveway and sidewalk cleaning, remains in effect. Beginning July 1989 a 10 percent surcharge will apply to commercial and industrial customers who fail to comply with the City's sewer flow reduction ordinance.
A new $ 2 million aeration tower for treating ground water from DWP wells in the San Fernando Valley was completed in March 1989. The facility employs new technology developed jointly by the DWP and UCLA.
The average water bill in Los Angeles increased around $ 2.35 pcr month in 1988-89 because of higher costs of purchased water and a 9.2 percent revenue increase that became effective in October 1988.
iVATER SYSTEM FACTS IN BRIEF Year enaerl June 30 l989 l988 Usc of IVatcr Average Los Angeles population served 3,427,000 3,388,000 Average daily use per capita (gallons) 181.2 180.8 Water sales for fiscal year (billion gallons) 208.1 203.6 Maximum daily demand (million gallons) 833.1 841.0 Water Supply (in cubic feet pcr second)
Local supply 188.3 166.9 DWP Aqueduct 451.9 573.6 Metropolitan Water District (California Aqueduct and Colorado River Aqueduct) 319.2 207.7 Gross supply 959.4 948.2 Diversion from (to) local storage 1.5 (0.3)
Net supply to distribution systems 960.9 947.9
DiVP POWE It S Y STEM II IG II LIGHTS The Power System completed several steps in 1988-89 to improve service and increase the reliability of electrical supplies to its customers.
The Scattergood Generating Station in Playa del Rey received approval from the South Coast Air Quality Management District (SCAQMD) to operate its Unit 3 at the full 460-megawatt capacity, a 24-percent increase from its original permit limit. Until testing is completed, however, the unit will continue to operate at 358 megawatts. DWP overall power capability was 7,093 megawatts on June 30, 1989, 0.71 percent above the prior year.
A 8171 million expansion of the Sylmar converter station, the Southern California "gateway" for power from the Pacific Intertie system, was completed in 1989. This allows the DWP and its partners in the Intertie to increase the amount of electricity they can receive from the Pacific Northwest by more than 50 percent.
Major electrical customers of the DWP are the focus of a new Major Accounts Group formed within the Power System last year as an outgrowth of thc System's long-range plan completed in 1988. The new unit will provide a wide range of customized services to nearly 1,500 accounts responsible for about a third of the City's power revenues. (See page 7.)
Release of the SCAQMD's plan and ncw rules affecting boiler emissions for cleaning up Southern California air pollution held signiTicant implications for thc DWP. The plan calls for major changes in the way power is produced and used in the Los Angeles Basin, including widespread use of electric vehicles by the year 2000.
The plan also calls for major nitrogen oxides (NOx) emission reductions from power plants, while facilitating the rcpowering of existing facilities. The 240-megawatt Harbor Repowering Project was an outgrowth of this plan.
Because the Southern California Gas Company demands exceeded supply, natural gas for electrical gen-eration in the Los Angeles Basin was curtailed during three periods totalling 165 days in 1988-89. It was the first year in which curtailments occurred during summer months. Because of the cutbacks, the DWP burned an extra 1,725,000 barrels of low-sulfur fuel oil to meet demand.
The Power System continues to emphasize conservation and eflicient energy use with programs such as the City's mandatory curtailment ordinance, which saved an estimated 1,475 gigawatt-hours (six percent of demand) in 1988-89. The DWP also offers financial incentives to encourage customers'sc of efficient appliances and lighting systems, heat pumps (page 20) and thermal energy storage units.
27
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OPERATIONS OVERVIEW Meanwhile, the DWP's record on air quality continued to improve, with NOx emissions averaging 83 per-cent below levels recorded 20 years ago. DWP power plants now account for only approximately one tenth of one percent of total air emissions in the Basin. Emissions from employee vehicles have also been reduced through an active ride-sharing effort at the DWP.
Development of safe, efficient electric vehicles remains a DWP priority. Six preproduction copies of the electric "G-Van," developed by General Motors and two other companies, willjoin the DWP vehicle fleet sometime this year. And, in cooperation with thc Mayor and City Council, the DWP issued a request for proposal for 10,000 electric vehicles as a stimulus to commercial introduction, with deliveries beginning in 1990. Currently, 19 proposals have been received and are being evaluated.
To meet higher costs of purchased fuel and electric power, electric revenue increases of 4.4 percent (about 81.42 per month per average residential customer) were approved by the City Council and became effective in October 1988.
POWER SYSTEM FACTS IN BRIEF Year ended June 30 1989 1988 Power Use Domestic customers 1,135,017 1,116,806 Commercial customers 168,031 165,229 Industrial customers 19,370 19,740 Allothers 2,864 2,828 Total customers all classes 1,325,282 1,304,603 Sales to ultimate consumers kilowatt. hours 21,460,324,000 20,936,158,000 Sales to other utilities kilowatt-hours 437,311,000 169,800,000 Average annual kilowatt-hours pcr domestic customer 5,181 5,029 Status of System Utilityplant (less accumulated provision for depreciation) 3 3,523,937,000 3,324,924,000 Generating Stations Net dependable capability, kilowatts 7,280,000' 7,280,000*
'ncluded purchased capacity; does not deduct short tenn sales ofescess capacity.
29
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0 P ER AT I 0 NS 0 V E It V I E iv EXTERNAL AND ORGANIZATIONALSERVICES EOS became a focal point in 1988-89 for the DWP's new accent on customer services, with new programs and systems to increase customer convenience and access to information.
A major objective has been to reduce response time on incoming calls to the DWP, which averaged about 193,000 pcr month last year, up nearly a third from 1987-88. Despite this increase, thc response time was below 20 seconds on 62 percent of the calls.
Delinquent accounts are being reduced under programs introduced or expanded in 1988-89. An Essen-tial Public Utility Ordinance and Lien Asscssmcnt Program are two tools the DWP uses in this effort. The former program continues service where property owners, not tenants, are delinquent on utility bills. More than 810 million has been collected to date under thc Lien Assessment Program, where unpaid balances are added to delinquent customers'roperty tax bills. Bills considered uncollectible were cut $ 450,000 last year.
Recognizing the special vulnerability of older customers, the DWP instituted its "Serving Our Seniors" (SOS) program last year. Under thc program, DWP personnel watch for signs of seniors in distress.
When a problem is found, DWP personnel report it to thc City's Department of Aging for follow-up.
Other community involvement activities in 1988-89 included an audio and video production on earth-quake preparedness, along with a bilingual earthquake pamphlet, that were distributed to homeowners and organizations throughout the area.
The DWP's school safety program has reached more than 100,000 students since 1984 with information on electric safety. It was furthered last year with on-site demonstrations to more than 2,000 pupils a month in the L'os Angeles Unified School District, private and parochial schools.
The 75th anniversary of the opening of the Los Angeles Aqueduct was marked with an event recreating the original opening ceremonies in 1913. A'ttended by civic leaders and well covered by the press, the event used period costumes and vintage autos to recapture the spirit of the original.
Significant strides were made during 1988-89 in the area of affirmative action. Minorities and/or women now occupy one third of all "officials and administrators" positions and half of all professional positions in the DWP. Programs to build minority representation throughout the organization are continuing.
A four-year decline in lost-workday injuries continued last year, with a 6.8-percent reduction. This repre-sents a 36-percent reduction over the last four years. Extensive training of field personnel on handling encounters with customers'ets resulted in a 40-percent decline in dog bites suffered by DWP personnel.
The second phase of a computerized management support system has just been completed, giving one-third of DWP management access to a wide range of computer services, including electronic mail and numerous data bases. This instant access to information improves DWP efficiency and productivity.
31
CITY OF I,OS ANGEI.ES DEPARTi!ENT OF WATER AND POWER FINANCIAL REVIEW Operations for fiscal year 1988-89 resulted in an increase of 3.8 percent in sales of electric energy and a 2.2 percent increase in water sales.
Operating revenues of the Department's Water and Power Systems totaled more than 82.0 billion, a gain of $ 189 million over the previous fiscal year. Thc Power System accounted for $ 146 million of the increase, primarily due to higher energy costs billed to customers, thc increase in sales mcntioncd above and the effect of the October 1988 revenue increase of 4.0 percent. The Water System added 843 million to thc total, mostly from higher purchased water and energy costs billed to customers, the increase in sales mentioned above and the effect of the October 1988 revenue increase of 9.2 percent.
Higher Water System operating revenues resulted in net income of 842 million, up 24 percent from 1987-88s total of 834 million.
A total of 8118 million was spent by the Water System on capital construction, most of which went towards the improvement of the water distribution and supply system, as well as water quality programs.
The operating rcvcnuc of thc Power System increased by 9.3 percent from 1987-88, to a total of $ 1.7 billion.
Net income amounted to 3193 million, or 10 percent above the 8176 million in the previous fiscal year.
The Power System invested $ 336 million in capital construction for the year. Major expenditures werc additions and modifications to the electrical distribution and transmission facilities.
Total assets of the Department at June 30, 1989, were approximately 85.6 billion. Of this amount,
$ 4.2 billion was recorded in the Power System and the remainder in the Water System.
FINANCING ACTIVITIES During the year, the Power System sold onc issue of $ 100 million revenue bonds at the interest rate of 7.36 percent. The Water System sold onc issue of 350 million revenue bonds at the interest rate of 7.22 percent.
Outstanding bonds, notes and revenue certificates at Junc 30, 1989, totaled 81.74 billion for the Power Sys-tem and 8400 million for thc Water System. Both systems met their maturing payments on bonds and notes.
COSTS AND TRANSFERS In accordance with its basic fiscal policy, the Department pays all costs of operation, debt service and part of the cost of capital improvements from current revenues. The remainder of thc cost of capital improvements is met through sales of revenue bonds or notes and from contributions in aid of construction.
Besides meeting all costs of operation from current revenues, the Department paid morc than $ 91 million into the Reserve Fund of the City in support of general City government.
Approximately 86 percent of that amount came from the Power Revenue Fund. Operations of the Water and Power Systems are entirely self-supporting and no financial obligation or tax burden is placed on thc citizens of Los Angeles.
33
CITY OF LOS ANGELFS DEPARTMENT OF WATFlt AND POWEtt REPORT OF MANAGEAIENT The management of the Department of Water and Power of the City of Los Angeles is responsible for the integrity of the financial statements and the other related financial data contained in this Annual Report. The financial statements and accompanying footnotes which follow werc prepared by the Department in accordance with generally accepted accounting principles applied on a consistent basis. Where necessary, thc linancial information provided in this report include amounts based on the best estimates and judgments of management.
Thc Department maintains a system of internal accounting control that is delineated to provide reasonable assur-ance that assets are safeguarded from loss or unauthorized use and that the pecuniary records properly reflect the authorized transactions of the Department. This system is supported by written policics and procedures, organization structures that assign appropriate division of responsibility, the selection and training of qualiTied personnel and is augmented by programs of internal audits. Management recognizes that there are inherent limitations in the effective-ness ol'any internal control system based upon thc recognition that the cost of such systcrns should not exceed the benefits to be derived. The Department bclievcs that its system of internal accounting control appropriately balances this cost-benefit relationship.
The Department's financial statements have been audited by Price Waterhouse and Simpson & Simpson, Certified Public Accountants, in accordance with generally accepted auditing standards. Their audit included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating thc overall financial statement prep-aration. Additionally, the independent accountants review the Department's quarterly financial information. A review is substantially less in scope than an audit in accordance with generally accepted auditing standards and, accordingly, the independent accountants do not express an opinion on the quarterly financial information. The independent accountants meet regularly with management to discuss their audit and their findings as to the integrity of thc flnancial statements and the adequacy of the internal controls.
The Board of Water and Power Commissioners is responsible for reviewing the Department's financial reports and monitoring accounting practices. The Board, composed of commissioners who are not officer or employees of the Department, receives and reviews the reports submitted by the independent accountants.
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CITY OF LOS ANGEI.ES DEPARTMENT OF WATER AND POWER WATER SYSTEM STATEMENT OF INCOME (ln Thousands) Year ended Junc 30 1989 1988 1987 Operating Revenues Residential 8110,069 5 94,525 8 92,436 Commercial and industrial 166,558 142,456 135,163 Other 23,621 20,051 20,775 Total operating revenues 300,248 257,032 248,374 Operating Expenses Purchased water 44,988 31,072 26,765 Purchased energy 12,991 11,613 8,806 Other operating expenses 109,627 95,443 87,634 Maintenance 38,424 34,243 28,691 Depreciation 32,814 30,584 26,586 Total operating expenses 238,844 202,955 178,482 Operating Income 61,404 54,077 69,892 Loss on Abandonmcnt of Chatsworth Reservoir (10,675)
Other Income and Expenses, Net 6,477 2,685 4,524 Income before debt expenses 67,881 56,762 63,741 Debt Expenses Interest on debt 27,556 23,749 22,039 Allowance for borrowed funds used during construction (2,006) (1,380) ~(2,939 Total debt expenses 25,550 22,369 19,100 Net Income 3 42,331 3 34,393 3 44,641 STATEMENT OF RETAINED INCOME REINVESTED IN THE BUSINESS (In Thousands) Year cndcd June 30 1989 1988 1987 Balance at beginning of year $ 464,500 8442,526 $ 409,186 Net income for the year 42,331 34,393 44,641 506,831 476,919 453,827 Less Payments to the reserve fund of the City 12,852 12,419 11,301 Balance at end of year 5493,979 3464,500 3442,526 The accompanying notes are an integral part of thcsc financial statements.
35
CITY OF LOS ANGELES DEPARTAIENT OF WATER AND POWER WATER SYSTEM BALANCE SHEET (In Thousands) Juno 30 I988 Assets UtilityPlant, at original cost Source of water supply 243,355 236,592 Pumping 53,499 48,969 Purification 139,947 132,699 Distribution 1,105,323 1,022,138 General 122,252 110,029 1,664,376 1,550,427
'Less Accumulated depreciation 542,259 510,225 1,122,117 1,040,202 Construction work in progress 79,947 74,526 Net utility plant 1,202,064 1,114,728 Current Assets Cash and investments 89,091 84,329 Customer and other accounts rcccivable 54,166 54,772 Accrued unbillcd revenue 29,056 21,671
'aterials and supplies, at average cost 16,112 15,489 Prepayrnents and other current assets 11,539 14,906 Total current assets 199,964 191,167 Total utility plant and assets 51,402,028 81,805,895 Capitalization and Liabilities Capitalization Equity Retained income rcinvested in the business 493,979 8 464,500 Contributions in aid of construction 376,599 357,829 870,578 822,329 Long-term debt 379,724 350,188 Total capitalization 1,250,302 1,172,517 Current Liabilities Long-terin debt due within one year 20,180 20,270 Accrued interest 9,432 7,752 Accounts payable and accrued expenses 83,472 69,544 Customer deposits 38,642 35,812 Total current liabilities 151,726 133,378 Commitments and Contingencies Total capitalization and liabilities 51,402,028 51,805,895 The accompanying notes are an integral part of these linancial statements.
CITY OF I.OS ANGE!.ES DEPARTMENT OF WATER AND POWER WATER SYSTEM STATEMENT OF GAS H FLOWS (In Thousantls) Year ended June 30 1989 l988 1987 Cash Flows From Operating Activities:
Net income 42,331 8 34,393 8 44,641 Adjustmcnts to reconcile net income to net cash provided by operating activities:
Dcprcciation 32,814 30,584 26,586 Loss on Abandonmcnt of Chatsworth Reservoir 10,675 Allowance for borrowed funds used during construction (2,006) (1,380) (2,939)
Changes in current assets and liabilities:
Customer and other accounts receivable 606 (9,252) (10,511)
Accrued unbilled revenue (7,385) 3,983 (7,764)
Materials and supplies (623) (999) (1,067)
Prepayments and other current assets 3,367 (65) 1,026 Accrued interest 1,680 1,287 (281)
Accounts payablc and accrued expenses 13,928 97 2,574 Customer deposits 2,830 1,571 6,414 Nct cash provided by operating activities 87,542 60,219 69,354 Cash Flows From Financing Activities:
Sale of revenue bonds 49,500 84,626 Contributions in aid of construction 18,770 31,878 23,005 Reduction of long-term debt (20,054) (19,327) (19,248)
Payments to the reserve fund of the City (12,852) (12,419) (11,301)
Net cash provided by (used in) financing activities 35,364 '4,758 (7,544)
Cash Flows From Investing Activities:
Expenditures for plant and equipment (118,144) (97,784) (91,673)
Cash and Invcstmcnts:
Net increase (decrease) 4,762 47,193 (29,863)
Beginning of year 84,329 37,136 66,999 End of year 8 89,091 8 84,329 8 37,136 Supplemental disclosure of cash flow information:
Cash paid during the year for interest 32,223 8 28,820 8 28,233 Thc aceornpanyins notes are an inteSral part of these linancial statements.
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CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER WATER SYSTEM NOTES TO FINANCIAL STATEMENTS Note A Summary of Significant Accounting Policies The Department The Department of Water and Power of the City of Los Angeles exists under and by virtue of the City Charter enacted in 1925 as a separate proprietary agency of the City. Thc Water System is responsible for the quality and distribution of water for sale in the City.
Financial statement presentation The financial statements of the Water System are presented in conformity with generally accepted accounting principles, and substantially in conformity with the uniform system of accounts prescribed by the California Public Utilitics Commission except for the method of accounting for contributions in aid of construction described below. The Department is not subject to regulations of such commission.
Utility plant The cost of additions to utility plant and replacements of retired units of property are capitalized.
Costs include labor, materials and allocated indirect charges such as engineering, supervision, transportation and construction equipment, retirement plan contributions, and certain administrative and general expenses. The cost of repairs and minor replacements are charged to appropriate maintenance accounts. The original cost of property retired, plus removal cost, less salvage, is charged to accumulated depreciation.
Cash and investments The Department's cash is deposited with the City Treasurer who invests the funds in short-term securities under the City Treasurer's pooled investment program, whereby available funds of the City and its independent operating departments are invested on a combined basis. These investments are valued at cost, which approximates market. At June 30, 1989 and 1988, cash and investments include $ 6 million and $ 4 million, respectively, of restricted balances related to bond redemption and interest funds and self-insurance fund.
Contributions in aid of construction Under the provisions of the City Charter, amounts received from customers and others for constructing utility plant are combined with retained income reinvested in the business to represent equity for purposes of computing the Water System's borrowing limits. Accordingly, contributions in aid of construction are shown in the accompanying balance sheet as an equity account and are not offset against utility plant.
Revenues Revenues consist of billings to customers for water consumption and include amounts resulting from a purchased water and energy cost adjustment formula designed to permit the full recovery of purchased water and energy costs. The Department projects these costs to establish the cost recovery component of customer billings and any diffcrcnce between billed and actual costs, resulting in over- or under-recovery of purchased water and energy costs, is adjusted in subsequent billings.
The Water System recognizes purchased water and energy costs in the period incurred and accrues for estimated unbilled revenues for water sold but not billed at the end of a fiscal year.
The Water System's rates are established by a rate ordinance which is approved by the City Council. The Water System sells water to other Departments of the City at regular rates provided in the ordinance.
Depreciation Depreciation expense is computed by the straight-line method based on estimated service lives.
Depreciation provision as a percentage of average depreciable utility plant in service was 2.5 /o, 2.4/o and 2.4/o for fiscal years 1989, 1988 and 1987, respectively.
Debt expenses Debt premium, discount and issue expenses are deferred and amortized to expense over thc lives of the related issues.
Allowance for funds used during construction (AFUDC) AFUDC represents the costofborrowed funds used for the construction of new facilities. AFUDC is capitalized as part of the cost of utility plant and is credited to income as a reduction of debt expenses, but does not represent cash earnings. The average AFUDC rates were 8.1 /o, 8.4/o and 9.49o for fiscal years 1989, 1988 and 1987, respectively.
38
Note 8 Loss on Abandonment of Chatsworth Reservoir From 1969 to 1972, the Water System incurred costs totaling 810.7 million to enlarge and improve the Chatsworth Reservoir. Following the 1971 earthquake in the Los Angeles area, thc State of California enacted more stringent safety standards for earth lilled dams which would have required the rcplacemcnt of the Chatsworth Reservoir Dams at significant additional costs prior to refilling. During 1987, the Water System completed various studies and con-cluded that the additional costs of upgrading the dams and complying with increased water quality standards pre-cluded rcfilling thc reservoir. Therefore, the project was formally abandoned, resulting in a utility plant write-offof
$ 10.7 million as of June 30, 1987.
Note C Long-Term Debt Long-term debt outstanding at June 30, 1989, consisted of revenue bonds and notes due seriaHy in varying annual amounts through 2028. Interest rates, which vary among individual maturities, averaged approximately 7.4s/o at June 30, 1989 and 1988. The reventte bonds generally are callable ten years after issuance. Scheduled annual principal maturities during thc five years succeeding June 30, 1989 are $ 20 million, 812 million, $ 12 million, $ 13 million and
$ 13 million, respectively.
Note D Shared Operating Expenses The Water System shares certain administrative functions with the Dcpartmcnt's Power System. Generally, the costs of these functions are allocated on the basis of benefits provided to the Systems.
Operating expenses shared with the Power System werc 8251 million, $ 256 million and $ 235 million for fiscal years 1989, 1988 and 1987, respectively, of which $ 85 million, $ 89 million and $ 82 million were allocated to the Water System.
Note E Employee Benefits The Department has a funded contributory retirement, disability and death benefit insurance plan covering substan-tially all of its employees. Plan benefits are generally based on years of service, age at retirement and the employees'ighest 12 consecutive months of salary before retirement. The Department funds retirement plan costs on a level premium actuarial method as determined by the plan's independent actuary. For funding purposes, prior service costs relating to the plan are amortized generally over a 30-year period ending June 30, 2003.
In fiscal year 1988, the Department adopted the provisions of Statement of Financial Accounting Standards No. 87, "Employers'ccount for Pensions!'he adoption of this statement did not materially affect the Department's results of operations. As required by the new standard, retirement cost is determined using the projected unit credit actuarial cost method. Total benefit plan costs for fiscal years 1989 and 1988 for the Water System include the following (amounts in millions):
19S9 19SS Service cost ('i 10 3 11 Interest cost 41 38 Actual return on plan assets (61) (10)
Nct amortization and deferral 39 (11)
Nct retircmcnt plan cost 29 28 Disability and death benefit plan costs and administrative expenses 5 4 Total benclit plan costs S34 $ 32 39
CITY OF I.OS ANGEI.ES DEPARTMENT OF WATER AND POWElt WATER SYSTEM NOTES TO FINANCIAL STATEMENTS The Water System was allocated 24/o of the plan's total costs for fiscal year 1987 amounting to ()33 million.
The following schedule reconciles the funded status of the plan with amounts reported in the financial statements (amounts in millions):
Junc 30. June 30, 19S9 1988 Actuarial present value of benefit obligations:
Vested benefits $ 481 $ 411 Non-vested benefits 1 2 Accumulated benefit obligation 482 413 Projected future compensation level 95 72 Projected bcncfit obligation 577 485 Plan assets at fair value 432 367 Projected benefit obligation in excess of plan assets 145 118 Unrecognized nct gain and effects of changes in assumptions (26) 8 Unrecognized nct obligation at July 1, 1987 being recognized over 15 years (94) (101)
Accrued pension liability S 25 25 The increase in the projected benefit obligation was primarily attributablc to a decrease in the discount rate from 8.25 lo in fiscal year 1988 to 7.75 lo in fiscal year 1989. The assumed rate of increase in future compensation levels was 6.0 lo in both years. The long-term rate of return on plan assets was 8.0 lo in both 1989 and 1988. Plan assets consist primarily of corporate and government bonds, common stocks, mortgage-backed securities and short-term investments.
In addition to the retirement plan, tlie Department provides certain health care benefits to active and retired employees. Health care costs are expenscd as paid under a self'-insured plan. Thc cost of providing such benefits to retired employees amounted to $ 2 million, 83 million and S2 million for fiscal years 1989, 1988 and 1987, respectively.
Note F Commitnicnts and Contingcncics Payments to the reserve fund of the City Under the provisions of the City Charter, the Water System trans-fers funds at its discretion to the reserve fund of thc City. Such payments are not in lieu of taxes and are rccordcd as distributions of retained income. The Department expects to make payments of 815 million in fiscal year 1990 from the Water System to thc rcscrve fund of the City.
Litigation A number of claims and suits arc pending against thc Department for alleged damages to persons and property and for other alleged liabilities arising out of its operations. In the opinion of management, any ultimate liability which may arise from these actions will not materially affect the Water System's financial position as of June 30, 1989.
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CITY OF I,OS ANGEI,ES DEPART'EIENT OF WATER AND POWER REPORT OF INDEPENDENT ACCOUNTANTS August 28, 1989 To the Board of Water and Power Commissioners Department of Water and Power City of Los Angeles In our opinion, the accompanying balance sheet and the related statements of income, retained income reinvested in the business and cash flows present fairly, in all material respects, the financial position of the Water System of the Department of Water and Power of the City of Los Angeles at Junc 30, 1989 and 1988, and the results of its opera-tions and its cash flows for each of the three years in the period ended June 30, 1989, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Department's management; our responsibility is to express an opinion on these financial statements based on our audits. Wc conducted our audits of these statements in accordance with generally accepted auditing standards which 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 state-ments, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for thc opinion expressed above.
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CITY OF I.OS ANGEI.ES DEPARTh1ENT OF WATER AND POWER P 0WER S Y S T E ili S TAT E M E N T 0 F IN C 0 ME IIn Thousands) Year ended Junc 30 1989 1988 1987 Operating Revenues Residential 484,591 430,696 4y 388,730 Commercial and industrial 1,162,027 1,085,557 963,151 Other 69,703 53,775 51,560 Total operating revenues 1,716,321 1,570,028 1,403,441 Operating Expenses Fuel for generation 253,576 228,499 219,944 Purchased power 534,462 470,957 355,975 Other operating expenses 364,394 339,219 307,960 Maintenance 148,742 153,062 147,673 Depreciation 136,954 124,004 115,629 Total operating expenses 1,438,128 1,315,741 1,147,181 Operating Income 278,193 254,287 256,260 Other Income and Expenses, Net 18,257 18,037 19,754 Income before debt expenses 296,450 272,324 276,014 Debt Expenses Interest on debt 110,289 102,437 96,926 Allowance for borrowed funds used during construction (7,268) (5,674) (7,759)
Total debt expenses 103,021 96,763 89,167 Net Income 8 198,429 8 175,561 8 186,847 STATEMENT OF RETAINED INCOi)IE REINVESTED IN THE BUSINESS IIn Thousands) Year ended Junc 30 1989 1988 1987 Balance at beginning of year S1,785,701 81,680,322 81,561,388 Net income for the year 193,429 175,561 186,847 1,979,130 1,855,883 1,748,235 Less Payments to the reserve fund of the City 78,502 70,182 67,913 Balance at cnd of year 51,900,628 81,785,701 81,680,822 Thc accompanyins notes are an inteSral part of these linancial statements.
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CITY OF LOS ANGEI.ES DEPARTSIENT OF WATER AND POWER POWER SYSTEBI BALANCE SHEET (In Thousan Js) June 30 1989 1938 Assets UtilityPlant, at original cost Production 81,756,070 81,749,777 Transmission 641,473 561,178 Distribution 2,005,735 1,845,703 General 320,030 284,625 4,723,308 4,441,283 Less Accumulated depreciation 1,458,485 1,356,344 3,264,823 3,084,939 Construction work in progress 241,729 215,435 Nuclear fuel, at amortized cost 17,385 24,550 Nct utility plant 3,523,937 3,324,924 Current Assets Cash and investments 143,183 179,170 Customer nnd other accounts receivable, less $ 2,400 and $ 2,500 allowance for losses 169,084 143,310 Receivable from Intermountain Power Agency 49,573 Accrued unbilled revenue 94,576 88,782 (Materials and supplies, at average cost 85,061 74,663 Fuel inventory 60,721 56,123 Prcpaymcnts and other current assets 27,663 37,776 Total current assets 629,861 579,824 Total utility plant and assets 34,153,798 33,904,748 Capitalization and Liabilities Capitalization Equity Retained income rcinvested in thc business $ 1,900,628 81,785,701 Contributions in aid of construction 123,041 104,825 2,023,669 1,890,526 Long-term debt 1,602,469 1,554,170 Total capitalization 3,626,138 3,444,696 Current Liabilities Long-term debt duc within one year 51,930 53,545 Revenue certificates 90,000 90,000 Accrued interest 36,526 30,648 Accounts payable and accrued expenses 238,036 212,380 Over-recovered energy costs 47,687 57,552 Extension and other deposits 13,908 15,927 Deferred credit Intermountain Power Agency 49,573 Total current liabilities 527,660 460,052 Commitincnts and Contingencies Total capitalization and liabilities 34,153,798 33,904,748 Thc accompanying notes are an integral part of these financial statements.
GlTY Of LOS ANGELES DEPARTMENT Of WATER AND POWER P 0WER S Y S T E ill S TAT E ihI E N T 0F C A S H F LO W S (in Thousands) Year ended Junc 30 1989 1988 1987 Cash Flows From Operating Activities:
Net income 8 193,429 8 175,561 8 186,847 Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 136,954 124,004 115,629 Amortization of nuclear fuel 7,527 7,516 5,936 Allowance for borrowed fund used during construction (7,268) (5,674) (7,759)
Changes in current assets and liabilities:
Customer and other accounts receivable (25,774) (3,023) (244)
Receivable from Intermountain Power Agency (49,573)
Accrued unbilled revenue (5,794) (4,247) (806)
Materials and supplies (10,398) (11,654) (1,189)
Fuel inventory (4,598) 9,774 (4,078)
Dcfcrred energy costs 8,928 17,856 Prepayments and other current assets 10,113 (7,509) (18,659)
Accrued interest 5,878 4,191 (47)
Accounts payable and accrued expenses 25,656 (30,593) (72,546)
Over-recovered energy costs (9,865) (15,644) 3,935 Extension and other deposits (2,019) (3,750) 2,228 Deferred credit Intcrmountain Power Agency 49,573 Net cash provided by operating activities 313,841 247,880 227,103 Cash Flows From Financing Activities:
Sale of revenue bonds 99,527 198,108 Sale of advance refunding bonds 47,312 Contributions in aid of construction 18,216 13,473 6,644 Reduction of long-term debt (52,843) (67,223) (60,835)
Amount deposited in escrow account and offset against advance refunding bonds (47,312)
Payments to the reserve fund of the City (78,502) (70,182) (67,913)
Net cash provided by (used in) financing activities (13,602) 74,176 (122,104)
Cash Flows From Investing Activities:
Expenditures for plant and cquipmcnt (336,226) (317,316) (303,360)
Cash and Investments:
Nct increase (decrease) (35,987) 4,740 (198,361)
Beginning of year 179,170 174,430 372,791 End of year 3 143,183 3 179,170 $ 174,430 Supplemental disclosure of cash flow information:
Cash paid during the year for interest 8 105,602 8 100,435 S 98,358 The accompanying notes are an integral part of thcsc iinancial statements.
CITY OF LOS ANCELES DEPARTMENT OF Wh'rER AND POWER POWER SYSTEM NOTES TO FINANCIAL STATEMENTS Note A Summary of Significant Accounting Policics The Department The Department of Water and Power of the City of Los Angeles exists under and by virtue of the City Charter enacted in 1925 as a separate proprietary agency of thc City. The Power System is responsible for the generation, transmission and distribution of electric power for sale in the City.
Financial statement presentation- The financial statements of thc Power System arc presented in conformity witE> generally accepted accouiiting principles, and substantially in conformity with tlie uniform system of accounts prescribed by the Federal Energy Regulatory Commission and the California Public Utilities Commission except for the method of accounting for contributions in aid of construction described below. The Department is not subject to regulations of such coinmissions.
Utility plant The cost of additions to utility plant and replacements of retired units of property are capitalized.
Costs include labor, materials and allocated indirect charges such as engineering, supervision, transportation and construction equipment, retirement plan contributions, and certain administrative and general expenses. The cost of repairs and minor replacements are charged to appropriate maintenance accounts. The original cost of property retired, plus removal cost, less salvage, is charged to accumulated depreciation.
Nuclear fuel- Nuclear fuel is amortized and charged to Fuel for Generation in the Statement of Income on the basis of actual thermal energy produced relative to total thermal energy expected to be produced over the life of the fuel. Under the provisions of thc Nuclear i~Vastc Policy Act of 1982, the federal government assumed responsibility for thc future disposal of spent nuclear fuel.
Nuclear decommissioning Decommissioning of the Palo Verde Nuclear Generating Station, in which the Power Systcin has an ownership interest, is projected to start sometime after 2022. Based upon a study performed by an independent engineering firm, the Department's share of the estimated decommissioning costs is 835 million in 1986 dollars. Decominissioning costs are charged as part of depreciation expense over the life of the nuclear power plant.
A Nuclear Decommissioning Fund has been established and the Power System is setting aside funds for its sharc of the estimated future decommissioning costs.
Cash and investments- Thc Department's cash is deposited with thc City Treasurer who invests thc funds in short-term securities under the City Treasurer's pooled investment program, whereby available funds of the City and its independent operating departments are invested on a combined basis. These investments are valued at cost, which approximates market. At June 30, 1989 and 1988, cash and investments include 818 million and 812 million, respectively, of restricted balances relating to bond redemption and interest funds, self-insurance fund and nuclear decommissioning fund.
Fuel inventory Coal inventories are stated at average cost. Fuel oil inventories are stated at cost, using the last-in, first-out method.
Contributions in aid of construction Under the provisions of thc City Charter, amounts received from customers and others for constructing utility plant arc combined with retained income reinvested in the business to represent equity for purposes of computing the Power System's borrowing limits. Accordingly, contributions in aid of construction are shown in the accompanying balance sheet as an equity account and are not offset against utility plant.
Revenues Revenues consist of billings to customers for consumption of electric energy and include amounts resulting from an energy cost adjustment formula designed to permit the full recovery of energy costs. The Depart-rncnt projects these costs to establish the energy cost recovery component of customer billings and any difference
CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER POWER SYSTEM NOTES TO FINANCIAL STATEMENTS between billed and actual energy costs, resulting in over- or under-recovery of energy costs, is adjusted in subse-quent billings.
The Power System recognizes energy costs in the period incurred and accrues for estimated unbilled revenues for energy sold but not billed at the end of a fiscal year.
The Power System's rates are established by a rate ordinance which is approved by the City Council. The Power System sells electric energy to other Departments of the City at regular rates provided in the ordinance.
Depreciation Depreciation expense is computed by the straight-line method for all major projects completed after July 1, 1973 and for all OAice and shop structures, related furniture and equipment, and transportation and construction equipment. Depreciation for facilities completed prior to this date is computed by the 5% sinking fund method based on estimated service lives. Depreciation provision as a percentage of average depreciable utility plant in service was 3.2% for each of the 1989, 1988 and 1987 fiscal years.
Debt expenses Debt premium, discount and issue expenses are deferred and amortized to expense over the lives of the related issues.
Allowance for funds used during construction (AFUDC) AFUDC represents the costofborrowed funds used for the construction of new facilitics. AFUDC is capitalized as part of the cost of utility plant and is credited to income as a reduction of debt expenses, but does not represent cash earnings. The average AFUDC rates were 7.6%, 7.9% and 8.8% for fiscal years 1989, 1988 and 1987, respectively.
Note 8 Receivable and DeFerred Credit Intcrmountain Power Agency As of July 1, 1988, an amendment to an Intcrmountain Power Agency (IPA) bond resolution provided for the use of surplus construction funds from the Intermountain Power Project. As a member participant of this project, the Department's share of such surplus funds totaled $ 110 inillion at July 1, 1988, to be received over a three to four year period. At Junc 30, 1989, the Department had a receivable from IPA of 850 million which represented a deferred credit for use as a future reduction of purchased power expense.
Note C Revenue Certificates At June 30, 1989 and 1988, the average interest rate of revenue certificates payablc was 6.4% and 4.9% with vari-ous maturities of up to 130 and 242 days, respectively. Thc Department has an unsecured standby line of credit of v)90 million which may be used ifthe certificates cannot be refinanced as they mature.
Note D Jointly-Owned Utility Plant The Power System has an undivided interest in several electrical generating stations and transmission systems which are jointly-owned with other utilities. Each project participant is responsible for financing its share of construction and operating costs. The following schedule shows the Power System's investment in each jointly-owned utility plant as included in the balance sheet at June 30, 1989 (dollar amounts in millions):
Fiant in Service Ownership Aceumutated Work In Interest Depreciation Progress Palo Verde Nuclear Generating Station (Note H) 5.7% 3490 3 31 810 Navajo Stcam Generating Station 21.2% 180 71 5 Mohave Coal Gcncrating Station 20.0% 75 23 9 Pacific Intertie DC Transmission System 40.0% 161 14 Other transmission systems Various 72 15 1 3978 $ 154 $ 25 46
The Power System will incur certain minimum operating costs on thc jointly-owned facilitics, regardless of the amount of energy gencratcd or thc ability to take delivery of its sharc of energy generated. The proportionate share of these expenses is included in the appropriate categories of operating expenses.
Note E Long-Term Debt Long-term debt outstanding at June 30, 1989, consisted of rcvcnue bonds duc serially in varying annual amounts through 2029. Interest rates, which vary among individual maturities, averaged approximately 6.8% and 6.7% at June 30, 1989 and 1988, respectively. The revenue bonds generally are callable ten years after issuance. Scheduled annual principal maturities during the five years succeeding June 30, 1989 are $ 52 million, $ 53 million, $ 55 million,
$ 56 million and 858 million, respectively.
In fiscal year 1987, thc Power System sold advance refunding bonds totaling $ 48 million. Until the bonds to be refunded are called, interest on the advance ret'unding bonds is payablc from interest earned on securities of the United States government purchased out of the proceeds of the sales and held in escrow accounts with Citibank, N.A.,
New York. At June 30, 1989, $ 48 million of these escrow accounts have been offset against the advance refunding bonds in the accompanying balance sheet (during fiscal year 1989 there werc no refunded bonds redeemed). After the monies in the escrow accounts are applied to redeem the bonds to bc called, principally through 1994, interest on the advance refunding bonds will be payable from Power System revenues.
Note F Shared Operating Expenses The Power System shares certain administrative functions with thc Department's SVater System. Generally, the costs of these functions are allocated on the basis of bcnelits provided to the Systems.
Operating expenses shared with the AVater System werc 8251 million, 8256 million and 8235 million for fiscal years 1989, 1988 and 1987, rcspectivcly, of which $ 166 million, $ 167 million and 8153 million were allocated to the Power System.
Note G Employee Benefits The Department has a funded contributory retirement, disability and death benefit insurance plan covering substan-tially all of its employees. Plan benelits are generally based on years of service, age at retirement and the employees'ighest 12 consecutive months of salary before retirement. The Department funds retirement plan costs on a level pre-mium actuarial method as detcrinincd by the plan's independent actuary. For funding purposes, prior service costs relating to the plan are amortized generally over a 30-year period ending June 30, 2003.
In fiscal year 1988, the Department adopted the provisions of Statement of Financial Accounting Standards No. 87, "Employers'ccounting for Pensions!'he adoption of this statement did not materially affect the Depart-ment's results of operations. As rcquircd by the ncw standard, retirement cost is determined using the projected unit credit actuarial cost inethod. Total benefit plan costs for liscal years 1989 and 1988 for the Power System include the following (amounts in millions):
l989 t9ss Service cost 3 33 3 35 Intcrcst cost 130 120 Actual return on plan assets (194) '(31)
Nct amortization and dcfcrral 122 (37)
Nct rctircmcnt plan cost 91 87 Disability and death benefit plan cost and adrninistrativc expenses 13 12 Total benefit plan costs $ 104 3 99 The Power System was allocated 76% of thc plan's total costs for fiscal year 1987 amounting to $ 102 million.
CITY OF I.OS ANGEI.ES DEPARTMENT Of WATER AND POWER POWER SYSTEAI NOTES TO FINANCIAL STATEMENTS The following schedule reconciles the funded status of the plan with amounts reported in the financial statements (amounts in millions): June 30, Junc 30, 19S9 )938 Actuarial present value of benefit obligations:
Vcstc'd benefits $ 1,527 3 1,300 Non-vested benefits t 5 Accumulated benefit obligation 1,528 1,305 Projected future compensation lcvcl 300 227 Projected benefit obligation 1,828 1,532 Plan assets at fair value 1,368 1,163 Projected bcncfit obligation in excess of plan assets 460 369 Unrecognized net gain an>ens Rn Aqueduct System %
hlcCullough 0>>ens Gorge NaYsJO
'I Power Plan Switching Station Generating California Station aqueduct Projectl ISttstc Water t'\ Sylmar DC AC Comcrter
(/
/g O>>e Line Gorgo Ttransm don I'
Hoorer Dam Power Plant Stolon $ / stead Switching
~)J.,i) I Station Castalc Po>>ef Plait il/t Et Dorado SubStation ARIZONA Loa Angeks . Ioharc I Generating Arear Phoenix A Valley GeneratingStation I Station Area A Scattergood Generattng Station A Haynes Generaung Section Palo Verde A Harbor Generating Station Generating Station Water System Power Supply Generating facilities in other western states are playing larger roles in the City's power supply. Water, also imported from hundreds of miles away, is brought to L.A. by aqueduct to serve the needs of thc 3.4 million population.
INFORMATION OF INTEREST IVater Power Thc amount of water consumed er,eryseconrf in America's first electrical power for street light-tl c City nfl sAng<<le. o Id lillamcdium- ing was gcncratcd by the California Electric sized swimming pool. Light Company of San Francisco in 1879.
The first water meter in Los Angeles was The lirst clcetricity sold to private customers installed at a winery near the corner of Macy was generated by the Edison Electric Illumin-Street and Mission Road in 1889. ating Campany in 1882.
Los Angeles'argest body of water in terms of It would take thc physical labor of cvcry adult surface area is thc Los Angeles Reservoir in male in California working steadily from 9 to 5 Mission Hills, covering 176.1 acres. to produce as much energy as thc DIP delivers in an hour.
Los Angeles'argest body of water in terms of volume is Lower Stone Cmiyon Reservoir above Peak electrical demand in Los Angeles last year Bel Air, Ital(ling 3.4 billion gallons. occurred an September 6, 1988, when 4,991 Peak daily water demmid in the City of Los megawatts werc delivered.
Angeles last year occurred on August 22, The DIP owns, jointly or with partners, nearly 1988, when 833 million gallons werc delivered. 300,000 power poles.
Annual rainfall in Los Angeles over the Inst Cables used to carry DIP electricity, ifjoined decade has ranged from a high of more than cnd to cnd, would reach from coast to coast 30 inches in 1982-83 to a law af less than morc than five times.
10 inches in 1980-81.
The typical residential clcctric bill in Los Daily per capita ivater consmnption here over Angeles last year was around $ 35.43 per the last decade has ranged from a high of month.
around 190 gallons in 1984-85 to a low of The DIP maintains nearly 3,500 portable and less tlmn 170 gallons in 1978-79.
mobile radio transmitters, nearly 1,500 individ-The lirst water works system in America was ual pagcrs mid 123 telephane switchboards, in built in Boston, Mass. in 1652. order to communicate effectively and provide eAicient customer services.
The first municipal water system in I~s Angeles was established in 1854.
Prolonged drought conditions in 1930 cut water flow through the Los Angeles Aqueduct to just over 50 percent of normal, thc lowest level ever recorded.
The highest single day usage of water in Los Angeles 923 million gallons occurred on Junc 16, 1981.
For additional copies contact: Public Affairs Division, Room 1514, PO. Box lll, Los Angeles, CA 90051, Tclcphone 213 481 6414 lOml l.90