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 PDR ADOCK 05000528 PDC
ANNUALMEETING OF SHAREHOLDERS Allshareholders are invited to attend the Annual Meeting of Shareholders on Monday, May 21, 1990, at 10 a.m. El Paso time in the AirportHilton, 2027 Airways Blvd., adjacent to El Paso International Airport.
Proxies for the meeting willbe 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
A LETTER TO OUR SHAREHOLDERS April3, 1990
As I expected, 1989 was a tough year for the Company and its shareholders.
But we also made substantial progress by returning the Company to its core utility business.
~ Obtain proper financing for the Company's utilityoperations.
~ Focus on utilityoperations by divesting the Company of its non-utility investments.
~ Begin the restructuring ofthe Company's utilityoperations by icducing costs, consolidating jobs and increasing efficiency.
These goals have been accom-plished.
In October 1989, the Company obtained a revolving credit facility from a syndicate ofeight money-center banks.
The facility, which now provides $ 150 millionof borrowing capacity, is structured to meet the Company's projected cash needs through the scheduled expiration of the facilityin 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 millionof First Mortgage Bonds (11.1% Series due 2001).
DavidH. Wiggs, Jr.
Chairman ofthe Board, President and Chief Executive Officer l
ft fp For the twelve months ended December 31, 1989, the net loss applicable to common stock (after preferred dividend requirements of $11.8 million)was $ 117.6 million. This consisted of a loss, from discontinued operations of
$ 107.7 millionand income from continuing operations of $ 1.9 million.
'n late December 1989, we sold our investment in Commercial Federal Savings &Loan Association, and in January 1990,,
we sold our non-utility subsidiaries: Franklin Land &
Resources, Inc. and PasoTex Corporation.
These transactions were supported by fairness opinions from our investment bankers, and have been viewed favorably by the financial community. Although the Company recorded a significant loss on these transactions, we will now be able to focus on our utility operations.
When I was elected Chairman of the Board and Chief Executive Officer in 1989, I established, as the first order of business, three short term objectives:
We restructured the Company in mid-1989, eliminating approx-imately 200 staff positions and reorganizing senior management.
Eight senior officers retired,
management layers were reduced, and responsibilities were consolidated.
We are continuing to seek ways to cut costs and to increase operating efficiency.
Three developments in 1989 had an adverse impact on the Company. First, the rate order
'ssued by the Public Utility Commission ofTexas in May 1989 on the second scheduled increase in base rates under the Rate Moderation Plan was entirely inadequate.
Secondly, when federal regulators failed to approve a previously agreed upon $32 millionsale to Commercial Federal Savings &
Loan Association ofthe Company's preferred stock investment in that Association, the Company was forced to accelerate the sale of its non-utility investments.
Finally, the poor operating performance of the Palo Verde Nuclear Generating Station in 1989 contributed to increased expenses and reduced operating margins.
We made many difficult(and sometimes unpopular) decisions in 1989. But we also made substantial progress, and the Company is now prepared to face the challenges of operating an electric utilityin the 1990s.
Competition is increasing. Power shortages threaten selected areas ofthe country, while at the same time regulatory uncertainty and environmental concerns restrict new gene'rating capacity. These issues must be addressed against the backdrop of increasingly difficultand cumbersome rate making procedures.
To help us meet the challenge, I am very pleased to welcome five new directors to the Board. In October 1989, WilliamD. Skov was appointed to a newly, created Board position, and Hector Holguin was appointed to filla vacancy created by the June 1989 resignation of former Chairman Evern R. Wall. John C. Schweitzer and James A. Cardwell were appointed this month to fillposi-tions created by the retirements of directors Tad R. Smith and H. M.
Daugherty, Jr.
WilliamL. Boyan has been nominated to replace retiring director Ben L. Ivey.
Messrs. Boyan, Holguin and Skov willstand for election at the annual meeting.
Later this year, I willask the Board to appoint one or perhaps
. two new directors. Neither has been selected, but one willreplace Robert H. Cutler, who willretire after the annual meeting. The other appointment, ifmade, willbe to a new Board position.
Information on Messrs. Boyan, Cardwell, Holguin, Schweitzer and Skov is contained in the proxy statement for the 1990 Annual Meeting.
I believe we now have a foundation for restoring the Company to profitability. We continue to be optimistic about our service area and the prospects for growth. In 1989, native system sales increased 5.0 percent to 4.5 millionmegawatt hours. Total system sales increased 6.4 percent, and new customers increased by 3 percent, after a 3 percent increase in 1988. For the second time in'as many years, the Company achieved record peak demands.
Total system peak in 1989 was 1,076 megawatts, a 7.4 percent increase over 1988. The Company's native system peak of 916 megawatts was a 9 percent increase from the previous record of 840 megawatts set in 1988. This load growth is very encouraging.
But in the long term, there are two keys to the ultimate success ofour
~
Company.
Palo Verde must operate efficiently, and the Company must be able to obtain appropriate Texas rate relief, parti-cularly with regard to including Palo Verde Unit 3 in rates.
While Palo Verde experienced significant unscheduled outages in 1989, Units 2 and 3 have been restarted. Unit 2 is presently undergoing scheduled refueling and should return to service in June. A request to the Nuclear Regulatory Commission to restart Unit 1 is scheduled to be made later this month. We expect that recent changes by the Operating Agent in the management ofPalo Verde willimprove operating performance.
Nonetheless, operating and maintenance expenses at Palo Verde are substantially higher than originally budgeted, creating additional pressure on operating margins and cash flow. These increased expenses must be recovered in rates.
In that regard, the Company has a Texas rate case in progress for the scheduled third increase in base rates under the Rate Moderation Plan for Palo Verde Units 1 and 2.
We expect a decision from the Texas Commission this summer.
Later this year, the Compa'ny will filefor the fourth scheduled increase under the Rate Modera-tion Plan and willrequest the inclusion ofPalo Verde Unit 3 in Texas rates. The Company is under increasing rate pressure from customers and regulators, but we are entitled to, and will aggressively seek the recovery of, a fair return on our investment in Palo Verde.
The rate-making process is time-consuming and extremely expensive.
The Company, of
course, pays all costs related to rate cases and must maintain a sizeable staff to prepare cases and to respond to thousands of rate case inquiries. While the Company is committed to working with its regulators and customers to minimize confiontation, to expedite the rate-making process, and to develop innovative methods to lessen the impact of increased rates, we arc equally committed to earning a proper return on your investment.
We willpursue this return through the regulatory process, or ifnecessary, by appeal to the courts.
'll The Company is prohibited from paying dividends on its common stock by the terms of its revolving credit facility. Payment of dividends in the future willdepend upon a number of factors, includ-ing earnings and cash flow, which in turn are functions of appropriate rate relief.
I urge you to take a few minutes to supplement this general overview with a careful reading ofthe accompanying Form 10-K. While the Company has made significant progress over the last year make no mistake about it we ate still in a very difficultperiod.
Our Board and all Company employees are working hard to meet the ongoing challenges.
Wc are optimistic, and we are dedicat-ed to returning our Company to profitability.
Thank you for your support.
Sincerely, Ug, David H. Wiggs, Jr.
Chairman of the Board, President and Chief Executive Officer SECURITIES ANDRECORDS The common stock ofEl Paso Electric Company is traded in the over-the-counter market and quoted on the NASDAQNational Market System. The ticker symbol for the common stock is ELPA.
El Paso Electric and The Bank of New York (BONY) act as co--
transfer agents and co-registrars for the Company's common and preferred stock. BONY maintains all shareholder records of the Company.
SHAREHOLDER INFORMATION Shareholders may obtain informa-tion relating to their share position, dividends, transfer requirements, lost certificates, and other related matters by telephoning BONY Shareholder Services at 1-800-524-4458.
This service is available to all shareholders Monday through Friday, 8:00 a.m. to 6:00 p.m.,
Eastern Time. Shareholders also may obtain this information by writing to:
Shareholder Services, BONY, 90 Washington Street, New York, New York 10286.
SHAREHOLDER INQUIRIES Shareholders should direct questions about the activities and operating results of the Company to the Office ofthe Secretary, El Paso Electric, P.O. Box 982, El Paso, Texas 79960.
For toll-free telephone calls within Texas, the number is 1-800-524-1634. For toll-free telephone calls elsewhere in the United States, dial 1-800-351-1621.
BOARD OF DIRECTORS David H. Wiggs, Jr. (2)
Chairman of the Board, President and Chief Executive Officer Wilfred E. Binns (7)
President and Sole Shareholder, Binns Construction &Realty,
'as Cruces, New Mexico James A.'Cardwell
- President and Principal Shareholder, Crinco Investments, Inc., El Paso, Texas (multi-business holding and investment company)
Robert H. Cutler (20)
Chairman of the Board, The Cutler Corp., El Paso, Texas (transportation and manufacturing) 1>>
Leonard A. Goodman, Jr. (11)
Chartered Life Underwriter/
General Agent Emeritus, John Hancock Financial Services, El Paso, Texas Hector Holguin
- Chief Executive Officer, Accugraph Corp., El Paso, Texas (computer-aided design software)
Ben L. Ivey (20)
Farming, El Paso, Texas Josefina A. Salas-Porras (11)
Educator, El Paso, Texas (consultant in second language and multicultural training)
John C. Schweitzer
Tom C. Simpson (7)
President and Principal Shareholder, Simpson Farms, Inc.,
Las Cruces, New Mexico WilliamD. Skov
- Partner, Skov Farms, SK-Farms, Paso Pork Producers, Chnt, Texas; Chairman of the Board, First National Bank of Fabens, Texas OFFICERS David H. Wiggs, Jr. (2)
Chairman of the Board, President and Chief Executive Officer William J. Johnson (12)
Senior Vice President-Financial Group and Chief Financial Officer WilliamW. Royer (9)
Senior Vice Presidcnt-Special Projects Ignacio R. Tioncoso (20)
Senior Vice Presidcnt-Operations Group Lawrence M. Downum, Jr. (30)
Vice Presidcnt-Corporate Services Division Frederic E. Mattson (20)
Vice Prcsidcnt-Power Supply Division Eduardo A. Rodriguez (8)
Secretary and General Counsel Julius F. Bates, Jr. (17)
Vice President-Customer Services, Texas Division Russell G. Gibson Controller Gary R. Hedrick (12)
Treasurer John C. Home (17)
Vice Presidcnt-Transmission System Division James A. Mayhew (10)
Vice President-Rates and Regulatory Affairs Robert C. McNiel (12)
Vice President-Customer
- Services, New Mexico Division Dean Jacobson (25)
Assistant Vice President-Information Services Pedro Serrano, Jr. (12)
Assistant Vice President-Energy Resource &Planning Susanne M. Sickles (12)
Assistant Vice President-Employee Support Services Guilleimo Silva, Jr. (10)
A'ssistant Secretary Hermann Vogenbeck (16)
Assistant Vice President-Power Generation John Wacker (1)
'ssistant Vice President-Intcrnal Audit John Whitacre (16)
Assistant Vice President-
'ystems Operations H
() Years of Service
~ Mr. Skov and Mr. Holguin were appointed to the Board of Directors in October 1989.
Mr. Schweitzer and Mr. Cardwell were appointed to the Board of Directors effective April 1990.
A complete copy of the Company's 1989 Form 10-K report, filed with the Securities and Exchange Commission, including Financial Statements and Financial Statement schedules, willbe provided to shareholders without charge upon written request to:
Eduardo A. Rodriguez, Secretary, El Paso Electric Company, Post, Office Box 982, 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,
Commission 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 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 IIIof this report.
DEFINITIONS The following abbreviations or acronyms used in this report are defined below:
Abbreviations
~AC C
Tcnns AFUDC.
AIP APS Common Plant or Common Facilities.
Company CWIP FERC FL&R or Franklin or Franklin Land..
Four Corners.
IID.
KV KW.
KWH MW.
MWH NASDAQ New Mexico Commission....
NRC Palo Verde Station or Palo Verde Project or Palo Verde or PVNGS.....
PasoTex PNM RCF.
SFAS.
Texas Commission...
TNP.
Allowance for Funds Used During Construction Arizona Interconnection Project Arizona Public Service Company Facilities at or related to the Palo Verde Station that are cominon to all thre'e Palo Verde Units El Paso Electric Company Construction Work in Progress Federal Energy Regulatory Commission Franklin Land & Resources, Inc., a former subsidiary of the Company Four Corners Project or Four Corners Plant Imperial Irrigation District, an irrigation district in Southern California Kilovolt Kilowatt(s)
Kilowatt-hour(s)
Mega'watt (s)
Megawatt-hour(s)
National Association of Securities Dealers Automated Quotations System New Mexico Public Service Commission Nuclear Regulatory Commission Palo Verde Nuclear Generating Station PasoTex.Corporation, a former subsidiary of the Company Public Service Company of New Mexico 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 Statement of Financial Accounting Standards Public UtilityCommission of Texas Texas-New Mexico Power Company
Item I
Business TABLE OF CONTENTS PART I
~Deec i
eric
~PC c 2
Properties 3
Legal Proceedings 4
Submission of Matters to a Vote of Security Holders 24 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 IIIand 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 ofEl 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 willbe 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 ofsystem peak load and estimates future sources ofpower 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 ofDecember 31, 1989. Approximately 28% ofthe 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 ofits 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 ofthe 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 willbe 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-sion excee xceed t}ie base rate increase provided for the period, the unrecovered revenue requirements are deferred for collection in later years ofthe plan. The rate moderation plan, which is explicitlyinten 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 willbe necessary.
See discussion below regarding Docket 9165.
The Texas Commission's order in Docket 7460 provided for the first scheduled base rate increase ofapproximately $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 willbe 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 ofthe adjustments d
b the Texas Commission and believes there are justiBed grounds for its appeal. However, as is i dto the case in any appeal from a decision of thc Texas Commission, judicial review is generally limite 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 of3.5% (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 e
'th the balance of its requested increase in base revenues of approximately
$20.8 million to be 1 n d f ed 'n order to correct a problem which has arisen in the operation of the rate moderation p an e erre
, in r
'i all involving the average unit rate paid by customers. The cash increases in base revenues origina y pro'ected under'he rate moderation plan were projected on the basis ofexpected average unit rates to projec
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 filingin Docket 9165 are expected to be effective by August 1990.
The Company's filingin 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 filingwith respect to the average unit rate problem. The Company would, as it has in the past with respect to previous orders ofthe 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 filingshould 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 ofthe 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 ofconstruction ofAIP. 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
April9, 1990, at the required level ofcapacity 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 willappoint 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 April6, 1990, at which time the Company's lawsuit willbe 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 ofUnit'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 ofthe 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 willbe 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 ofUnit 3 sold and leased back; g2.4 million ofproperty 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 of40% ofits 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 ofUnit 3 in Texas rates willprobably 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 willbe 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-offrecorded 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 willbe able to demonstrate in the Unit 3 case the prudence ofthe Company's decisions regarding the level ofits 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 willrelate to issues ofexcess capacity. Such issues are resolved with respect to Units 1 and 2 under the rate moderation plan for the 10-year term ofthe plan. The Company believes that proper regulatory treatment recognizes that the construction and addition to utilityplant ofgenerating 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 ofan 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. Ifany 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. Ifthe 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 recommendation is expecte in e near u
d d 'he ear future. Although the Company is unable to assess the outcome oi this matter prior o e issu t
th 'nce of the Hearing Examiner's report, the Company believes mers of that it has, in accor ance wi i e ru e h ', '
'tl the rules of the Texas Commission, made all refunds to customers o
overcollected fuel expenses during the four-year reconciliation period and that any materia isa ow-ance of the Company's fuel expense recoveries would not be justified. The Company has made 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 millionofexpenses incurred by the Company in connection wi e
c
'th th Do ket 7460 rate case were severed from the issues ruled upon h
by the Texas Commission in a
oc e a
C th t D ket and were assigned to a new docket for consideration. T e C 'as a
lied for the immediate recovery of approximately
$5 million of these expenses through a surcharge to customers and has proposed that the balance of the expenses,, attributable to d
h f D k t 7460 be amortized and recovered in rates over the useful life of the owed Palo Verde Units. The staff of the Texas Commission has recommended that the Company be allowe to recover all ofthe expenses, without interest, amortized over the useful life of the Units. The City of 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 h the Com an included as a deferred charge in the accompanying consolidated balance sheet. Althoug i t e ompany expects to recover the costs, most likely in accordance with the Company's proposed method for recovery, an assessmen o
e ou t f th tcome of the case cannot be made prior to the issuance of the Hearing Examiner's report.
Texas Recognition ofPalo Verde Sales and Leasebacks. The Company sold and leased back its entire interest in Palo Verde Unit 2 and one-third ofCommon 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 ic in eres.
e ru i bl' t
- t. The rulings have no current ratemaking impact, but do insure tha, in ie c with the Unit 3 sa es an ease ac s,
1 d
1 b
k the Commission will consider those transactions in connection wi e
Company's request for rate treatment of its investment in Unit 3. The City o aso appea e e
Commission s or er wit respec o
d t t the Unit 3 transactions to state district court in Travis County, will Texas. The appea is not expec e o
e ru h
1 t
t d t b
ruled upon this year. Management believes that the court 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 ar s
or e
a d
d f th P lo Verde Units currently in effect with the New Mexico C
f the Company's New'Mexico service area. See "New Mexico Rate Matters" below.
e ommission or
'e o
'd d with the Company's application to establish Texas performance standards has been consolidated wi e
Company's rate filing in Docket 9165 (see discussion above).
Texas Recooeng ofFuel 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 genera rate request filed by the Company.
The Texas Commission has the authority to order proceedings
l f h
f onc'ling the Company's fuel revenues against actual fuel expenses.
' "F 1R iliation Case" above. As a result of the unscheduled outages of the Pa o er e ni s See "Fue econci ia ion ase a
xcess of the amount "of in 1989 the Company'ncurred and is incurring replacement power costs in excess o
7
fuel revenues provided by the Company's fuel factors. Although the Company believes it is entitled to and willrecover 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 ofthe 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 ofthe adoption ofthe New Mexico plan. As a result ofthe New Mexico plan provision that deferrals not recovered prior to December 31, 1994 willnot be recovered in New'exico 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 willbe approved by the New Mexico Commission. A.hearing on the application is scheduled in mid-June 1990. Ifthe New Mexico plan is not amended to comply with SFAS No. 92, the Company would be required to write-offapproximately $5.5 million ofrecorded 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 ofapproximately $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 C
t th New Mexico Commission to issue its final order approving the stipulated Company expec s
e ew settlement in April 1990, with new rates to be effective in May 1990.
The Company willbe 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 ofFinancial Condition and Results ofOperations."
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 ofthe 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 Aprilof1990, the New Mexico Commission willnot 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 willcommence this summer, and the Company expects the New Mexico Commission to issue an order by t e a
o d
b he fall of 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 e ec ric lectric operating revenues resulted from such sales, respectively. Rate tariffs currently applicable to 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 ofthe 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 ofthe settlement ofthe 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.
1991 1992 1993 (In thousands)
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 Production:
Palo Verde Station(l)
Palo Verde Deferied Costs(2)
Other Transmission Distribution.
General Plant AFUDC:(3)
Palo Verde Station(2)
Other Deferred Tax on AFUDC(4)............
Total...............
$29,000 4,500 1,600 0
21,600 1,200 8,200 1,800
~1,400)
$66,500
$21,300 0
3,600 1,300 24,000 1,200 2,300 1,200
~500)
$54,400
$18,700 0
2,100 4,400 21,400 3,300 2,200 1,600
~1,300)
$52,400
$ 19,500 0
2,200 2,300 16,100 3,300 2,100 1,100
~1,100)
$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 3Inclusion 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 willeffectively 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 ofwhich
,was $558,887,000 for PVNGS). Net utilityplant at December 31, 1989 (which reflects the sales ofplant 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 ofMarch 5, 1990. See "Regulation."
Actual Costs Estimated Cumulative Costs Throu h December 31, 1989 1990 1991 1999 Nuclear Plant Related AFUDC.
Transmission Lines.
Related AFUDC.......
Deferred Tax on AFUDC.
Total....
1,044,000 532,400 18,800',300
~109,200) 81,494,300 1,077,500 540,600 18,800 8,300
~110,300)
$1.534 900 1,098,800 542,900 18,800 8,300
~110,600) 1,117,500 545,100 18,800 8,300
'~111,300)
$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 ofits 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 ofnuclear fuel acquisition, see "Energy Sources Nuclear Fuel."
Operation ofeach ofthe 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 willcontinue 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 willrecover its actual fuel costs, net ofthe 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 Sb inspection reports and performance indicators. The NRC delivered the evaluation report to AP 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 pro emsw re p oblems were (1) insuScient technical and management depth to support the start-up and operation d
h f
th ee-unit facility (2) during start-up management and technical resources were focused on t e next unit to go on line at the expense of the operational units, resulting in a backlog oftechnica 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 APS observed several positive attributes and strengths at Palo Verde. Overall the team concluded that 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 i emen s ar t'tlement share to the Palo Verde Units. The transmission line originates at the Springervi e
1 n Generating Station in Springerville, Arizona, and terminates at the Company's Rio Grande Power P ant in Dona Ana County, New Mexico (northwest of El Paso). In addition to enabling the Company to access its fullgeneration entitlement share in Palo Verde, AIP willenable 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 ofwater 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, as h
entered into contracts with certain municipalities granting the right to purchase effluen for cooling purposes at Palo Verde. The validity ofthe 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 Gi a il Watershed litigation (see below). The Company is unable to predict when, or if, the contingencies wi be satisffed so that the settlement willbecome 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 ofgroundwater 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 liabilityinsurance 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 ofwhich must first be applied to decontamination. The Company has also secured insurance against portions of any increased cost of generation or purchase ofpower 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.
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 willbe 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 ofthese easements and ofthe 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 willconsider 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 ifthe 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 KVtransmission 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, flexibilityand reliability to the Company's system.
Rio Grande Power Station Rio Grande, located in New Mexico adjacent to the city ofEl Paso, consists of three steam-electric generating units which have an aggregate capability of246 MWwhen 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 natural gas, but are also capable of operating on fuel oil. Ifthey 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 ofadditional 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 willbe 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 visibilityimpairment resulting from regional haze. Amendments to the Clean AirAct 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.
General Energy Sources 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 followingtable 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 hhEnxxcost E
sxy std*
cost ExsoE ttttx cost 11%
1.024 28%
3.814
e 61%
2.804 13 1.01 30 2.36 7
.98 50'.30 14 1.04 32 2.10 12
.96 42'.04 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 ofenergy 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 willbe flnalized early in 1990. The new agreement will provide the Company continuing flexibility in scheduling its natural gas requirements while allowing for the maximization ofthe 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 millingof uranium ore to produce uranium concentrates; (2) the conversion ofuranium 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 willbe made as appropriate in lieu ofany 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 facilityin operation by 1998 under prescribed procedures. In November 1989, DOE reported that such permanent disposal facilitywillnot 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 ifnotice to the contrary is not given to the tru'st by the issuing bank. The issuing bank has given notice ofnon-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 ofnuclear 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 ofpreferred stock issues ofother 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 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 $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 ifthe 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, ifestablished, 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, ifthe IRS does prevail, there is substantial support for the Company's position that it is not obligated to indemnify for past dividends. Ifthe 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 ofthe IRS prevailing on its proposed total disallowance of the dividends received deduction.
19
Arizona Tax Matters By Notice of Proposed Correction ofIncome 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,f according to the ADR, in a proposed de6ciency assessment, including related interest and penalties, o 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 willbe conducted prior to a formal hearing. The Company believes th t th ADR willnot prevail in its proposed determination and does not expect to incur any material h
liabilityin respect thereof. The Company willlitigate any issues not satisfactorily resolved throug i the administrative process.
As part of its revenue budgeting process, the Arizona state legislature is considering legislation which would, ifadopted, 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 willprovide, when it willbe adopted, ifit 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 Business Experience
~Ac 42 Name David H. Wiggs, Jr..
William J. Johnson..
48 William W. Royer 43 Ignacio R. Troncoso Lawrence M. Downum, Jr....
51 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.
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.
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.
Senior Vice President since January 1988; for more than five years prior thereto, Vice President.
Vice President since 1983.
20
Name Gary R, Hedrick..
Eduardo A. Rodriguez Russell G. Gibson..
Julius F. Bates...
John C. Horne..
Robert C. McNiel Frederic E. Mattson James A. Mayhew
~Ae 35 34 37 40 45 Current Position ond Business Experience 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.
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.
Controller since September 1989; for more than 5 years prior thereto, partner and member, Coopers &Lybrand (certified public accountants).
Vice President since June 1989; for more than five years prior thereto, served in various managerial and supervisory capac-ities with the Company.
Vice President since August 1989; for more than five years prior thereto, served in various managerial and supervisory capacities with the Company.
Vice President since December 1989; for more than five years prior thereto, served in various managerial and supervisory capacities with the Company.
Vice President since June 1989; for more than five years prior thereto, served in various managerial and supervisory capac-ities with the Company.
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-UtilityOperations t
During 1989, the Company decided to discontinue all of the non-utility operations conducted through the Company's principal subsidiaries, FL&Rand 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 utilitybusiness. 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. Allprincipal 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% ofthe then outstanding shares ofcommon stock ofthe 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 liabilitywhich 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 ofFLRR 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."
Operating Revenues (In thousands):
Retail:
Residential Commercial and industrial, small Commercial and industrial, large Sales to public authorities Provision for refund.
Other.
UtilityOperating Statistics 1989 122,598 117,272 42,250 63,886 62 2,438 December 31,
.1988 112,957 105,166 35,'575 57,240 (1,641) 4,891 1987 103,232 95,766 32,976 51,493 (3,019) 1,573 Wholesale:
Sales for resale Total operating revenues......
Number of customers (End of year):
Residential Commercial and industrlal, small Commercial and industrial, large Other.
Total Average annual use and revenue per r KWH Revenue Average revenue per KWH:
Residential Commercial and industrial, small Commercial and industrial,. large
~..
Energy supplied, net, KWH (In thousands):
Generated Purchased and interchanged
.Total Energy sales, KWH (In thousands):
Retail:
Residential Commercial and industrial, small Commercial and industrial, large Sales to public authorities esidential customer:
Wholesale:
Sales for resale Total sales:
Losses and company use.
Total Native system:
Peak load, KW Net generating capacity for peak, KW Load factor Total system:
Peak load, KW Net generating capacity for peak, KW Load factor 348,506 77,742 314,188 67,919 282,0R1 55,242 214,664 21,762 52" 2,659 239,137 6,124 577.60 209,550 21,069 39 2,543 233,201 6,025 8
546.13 204,102 20,582 41 2,505 227,230 5,846 511.48 9.43C 8.08 5.53 9.07C 7.5R 5.10 8.75C 7.28 5.19 4,753,236 1,446,063 6,199,299 4,904,854 969,793 3,186,967 2,264,955 5,874,647 5,451,922 1,299,768 1,450,817 763,650 947,948 4,462,183 1,411,16R 5,873,345 325,954 6,199,299 1,246,081 1,397,913 697,758 908,238 1,179,812 1,316,198 635,448 860,852 4,249,990 3,992,310 1,271,366 5,521,356 353,291 5,874,647 1,087,444 5,079,754 372.168 5,451,922 916,000 1,497,000 61.0%
840,000 1,497,000 63.0%
820,000 1,297,000 61.5%
1,076,000 1,497,000 67.0%
1,002,000 1,497,000 67.3%%uo 975,000 1,297,000 64.4%
8 426,248 8
382,107 8
337,263
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 ofFirst 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 ofproperty 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 ofaction against the Company including principally fraud, conversion and breach ofduty ofgood 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 ofTravis 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 ofthe 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 ifany, 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 ofPedro 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 LLybrand; the law firm ofKemp, Smith, Duncan R Hammond, which serves as general counsel to the Company; and two individual attorneys who are shareholders in such Brm, one ofwhom is a former director ofthe 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 liabilityin respect ofthe 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 ofthe Lawsuit willbe 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 ofdirectors ofother 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 oftheir 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 ofat 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 ofFirst 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, ifany, 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.
Second Quarter Third Quarter Fourth Quarter.
1989 First Quarter.
Second Quarter Third Quarter Fourth Quarter.
15%
11 11%
6'Fs 7Fe 10 7'5 0.38
$ 16%
$ 13%
$0.38
'6%
14'A 0.38 16%
15%
0.38 16%
13'A 0.38 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
$54,940,000.
Item 6. Selected Financial Data As of and for the years ended December 31:
Operating revenues..........
Operating income...........
Income from continuing operations before cumulative effect of change in accounting method......
Income (loss) from continuing operations before cumulative effect of change in accounting method per weighted average shares of common stock.............
Dividends declared per share of common stock..........
Total assets.................
Additions to utilityplant, net of allowance for equity funds used for construction..............
Long-term, financing and capital lease obligations and preferred stock redemption required.......
198$
1989 1988 1987 1988 (In thousands except per share data) 426,248 382>107 337,263 318,262 S
346>278 56,551 81,533 92,592 89,126 90,294 1,956 63,877 47,431 S
98,715 S
113,071 (0.28) 1.48 0.98 2.41 2.88 0.38 1.52 1.52 1.52 1.49 1,769,518 1,799,949 2,275,573 2,194,418 1,919,060 125,644 79,845 61,246 136,598 169,437 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 ofan 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 filingare 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 filingshould 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 willrequire 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 of40% ofits interest in Unit 3. The Company expects the Texas Commission's final order on the Unit 3 case in the late first quarter of1991, 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 willsignificantly affect results ofoperations, beginning in 1991. Failure to receive sufficient inclusion in Texas rates ofthe 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 ofthe 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 ofapproximately $ 12.1 millionbefore tax), willcontinue to adversely affect results of operations.
For more detail regarding the above information, see Part I, Item 1, "Business Regulation".
Liquidityand 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 willbe 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 ofthe 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 millionoflong-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 ofthe 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 ofequity 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 willbe 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 ofdefault 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 facilityand commercial paper backed by the RCF (in which case the amount available to the Company under the RCF is reduced by the amount ofcommercial 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 ofcredit remain in effect. With respect to all but one ofthe 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 ofIncorporation 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 willbe 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 of60% ofthe value ofunfunded net additions to the Company's utilityproperty, 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 millionin bond credits (after giving effect to the $153 million 11.10% Series due 2001), to permit the issuance of approximately $272.6 millionprincipal amount ofnew 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 millionin bond credits, to permit the issuance ofapproximately
$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 ofelectricity in 1988 to 4,462,183 megawatt-hours in 1989, an increase of5.0%. 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 willrequire 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 KWHsales (volume). The prolonged Palo Verde outages resulted in a decrease in volume oflower cost nuclear fuel consumed and a decrease in economy sales of electricity to others and forced increases in the volume ofnatural 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 KWHsales (volume). The 1988 level ofPalo 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 ofnuclear 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 ofthe timing of inclusion in rates of these Units is reflected in the table below.
Palo Verde costs Palo Verde costs deferred and capitalized.
Phase-in plan deferrals.
Other non Palo Verde costs Total operating costs expensed l989 1988 (In <ha sa d0
$137,406
$121,169
~28,408)
~42,085) 108,998 79,084 (9,030)
(16,366) 76,255 73,644
$176,223
$136,362 1987
$70,594
~50,997) 20,297 (529) 68,199 887,967 Increased Palo Verde costs for the year ended December 31, 1989 are net of approximately
$4.6 millionofTexas jurisdictional costs incurred as a result ofthe Palo Verde outages which have been deferred. Phase-in plan deferrals decreased in 1989 from 1988 as a result ofthe impact ofthe 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 ofPalo 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 ofthe 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
'osts and increased interest related to nuclear fuel lease obligation and an increase in interest deferred 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 ofoperation 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 ofPasoTex 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 ofapproximately $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 ofapproximately 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 ofits 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 INDEXTO CONSOLIDATED FINANCIALSTATEMENTS Independent Auditors'eport Consolidated Balance Sheets at December 31, 1989 and 1988.
Consolidated Statements of Income (Loss) for the years ended December 31, 1989, 1988 and 1987 Consolidated Statements of Retained Earnings for the years ended December 31, 1989, 1988 and 1987 Consolidated Statements of Cash Flows for the years ended December 31, 1989, 1988 and 1987 Notes to Consolidated Financial, Statements
~Pa e 37 38 40 41 4R 43 36
INDEPENDENT AUDITORS'REPORT.
The Shareholders and Board of Directors El Paso Electric Company:
We have audited the accompanying consolidated balance sheets ofEl 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 ofthe years in the three-year period ended December 31, 1989. These consolidated financial statements are the responsibility ofthe 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 ofmaterial 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 liabilitythat may result upon adjudication ofany ofthe 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 BALANCESHEETS ASSETS December 31, 1989 1988 (In thousands)
Utilityplant (Notes B, D and E):
Electric plant in service Less accumulated depreciation and amortization Net plant in service..
Construction work in progress
" Nuclear fuel un'der capital leases net of amortization of $73,920,000 and $78,599,000, respectively....
Net utilityplant Non-utilityproperty, at cost net of accumulated depreciation
$1,190,333 233,240 957,093 344,768 47,114 1.348,975 5,371
$1,150,233 201,547 948,686 258,076 54,081 1,260,843 4,552
, Current assets:
Cash<<and temporary investments Other short-term investments (Note F).
Accounts receivable,'principally trade, net Inventories.
Federal income taxes refundable (Note K).
Net undercollection of fuel revenues Prepayments and other"
,Total current assets.,
Long-term contract receivable (Note B)
Net assets of discontinued operations (Note P)
Deferred charges and other assets:
Palo Verde deferred costs (Note B)
Phase-in plan deferrals (Note B)............
Other (Note, G)
'Total deferred charges and other assets..
28,370 44,251 33,678 29,328 10,127 18,638 124 100,903 45,196
." 31,854
'8,683 95,533 52,759 86,006 234,298 122,384 34,642 64,564 221,590 164,392 206,760 16,482 9 142 97 062 Total assets
$1,769,518
'1,799,949 See accompanying notes to consolidated financial statements.
38
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCESHEETS CAPITALIZATIONAND LIABILITIES 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.......
Retained earnings.
Common stock equity Preferred stock, cumulative, no par value, 2,000,000 shares authorized:
Redemption required Redemption not required Long-term obligations.
Financing and capital lease obligations.
Total capitalization Current liabilities:
Current maturities of long-term and Bnancing and capital lease obligations (Note J).
Notes payable, commercial paper and revolving credit facility (Note C)
Accounts payable, principally trade Taxes accrued (Note K).
Interest accrued Other Total current liabilities Deferred credits and other liabilities:
Accumulated deferred income taxes (Note K).
Accumulated deferred investment tax credit (Note K)................
Deferred gain on sales and leasebacks (Note E)
Other Total deferred credits and other liabilities Commitments and contingencies (Notes B, D, E, L and M)
Total capitalization and liabilities.............
December 31, 1989 1988 (In thousands) 337,176 67,133
'404,309 100,710 14,198 590,686 119,392 1,229,295 335,767 198,131 533,898 108,460 14,198 454,908 124,221 1,235,685 49,100 46,756 21,583 21,186 15,758 43,761 198,144 134,126 15,000 15,364 8,260 15,781 30,842 219,373 59,983 96,352 175,633 10,111 342,079 32,457 127,129 182,806 2,499 344,891
$ 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)
Operating revenues Operating expenses:
Operations:
Fuel Purchased and interchanged power.
Other Maintenance Depreciation and amortization Phase-in plan deferrals (Note B)
Taxes:
Federal income taxes (Note K).
Other 4
Operating income..
Other income (deductions):
Allowance for equity funds used during construction Phase-in plan deferred return (Note B).
Regulatory disallowance (Note B)
Investment income (Note F).
Other, net Federal income taxes applicable to other income (Note K):
Regulatory disallowance Other Income before interest charges Interest charges (credits):
Interest on long-term and financing and capital lease obligations..............
Other interest Interest capitalized and deferred Allowance for borrowed funds used during construction Income from continuing operations before cumulative efFect of change in accounting method Discontinued operations (Note P):
Loss from discontinued operations, net of income tax credits of S1,731, S6,490 and S8,263, respectively 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 Income (loss) before cumulative eiFect of change in accounting method....... ~.....
Cumulative effect of change in accounting method (Note A).
Net income (loss).
Preferred stock dividend requirements.
Net income (loss) applicable to common stock.
Net income (loss) per weighted average shares of common stock:
Income (loss) from continuing operations before cumulative effect of change In accounting method Discontinued operations Cumulative effect of change in accounting method Total 1989 S 426,248 SO,G07 34,261 114,868 159,G35 25,G18 41,949 (9,030) 1,531 35,126 3G9,697 5G.551 12,578 10,513 (22,229) 1,093 (8,034)
G,051 (4,054)
~4,002) 52.409 63,025 11,010 (G,R03)
~)7.3)9) 50,513 1,95G (8,184)
(99,G05)
(107.789)
(105,833)
(105,833) 11,812 8 (117,645) 0 I0.20 I
0~3.35) 1988 1987 8382,107 8337,263 72,187 23,917 96,104 132,533 20,195 34,254 (16,36G) 8,317 25,537 300.574 81,533 51,297 46,199 97,496 74,250 14,246 21,162 (529) 15,775 22,271 244,671 92,592 13,065 12,603 20,555 (2,630)
(9.313) 34,RSO 115,813 69,199 51,936 63,877 31,941 (38,323) 13,489 (2,963) 13,937 (1,933) 16,148 108,740 77,884 12,732 (6,849)
(22.458) 61,309 47,431 (3,554)
'6,663)
(35.954)
~39.508) 24,3G9 24,369 12,259 S 12.110
~6,663) 40,768 4,240 45,008 12,89R S 3R,116 S
1.48 S
0.98 (1.13)
(0.19) 0.12 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 Add<
Net income (loss)
~105,833) 24,369 45,008
$198,131
$239,320
$264,016 Deduct:
Cash dividends:
Preferred stock Common stock..
Capital stock expense Purchase of Company common stock 92,298 11,812 13,353 263,G89 12,259 53,254 45 309,024 12,892 53,795 165 2,852 Retained earnings at end of year Dividends declared per share of common stock.............
Weighted average number of common shares outstanding...
25,165 65 558 69.704 8 67,133
$198,131
$239,320 0.38 1.52 1.52.
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 Cash Flows From Operating Activities:
Income from continuing operations after cumulative effect of change in accounting method Adjustments for non-cash items from operating activities:
Depreciation and amortization Amortization of nuclear fuel Deferred income taxes and investment tax credit, net.
Allowance for equity funds used during construction Regulatory disallowance Other operating activities Loss from discontinued operations Adjustments for non-cash items from discontinued operations:
Write down of discontinued segment Provision for deferred income taxes and investment tax credit, net...........
Provision for losses during phase-out period Accounts receivable Inventories.
Federal income taxes refundable Net undercollection of fuel revenues
~
Prcpayments and other current assets ~............
Long-term contract receivable.
Net assets of discontinued operations Accounts payable Taxes accrued Interest accrued Other current liabilities.
Other dcfcrrals Palo Verde deferred costs Phase. in plan deferrals Net cash provided by (used for) operating activities.
Cash Flows From Investing Activities:
Additions to utilityplant.
Allowance for equity funds used during construction.,
Additions to non-utility property Non-utility acquisitions, nct of cash received Proceeds from sale of investments Purchase of long-term investments Proceeds from sales and leascbacks Sale of nuclear fuel in process to trust Other investing activities Net cash provided by (uscd for) investing activities......................
Cash Flows From Financing Activities:
Proceeds from long.term obligations Redemption and repurchase of securities Dividends paid Redemption of long-term obligations Net increase (decrease) in short-term obligations Other flnancing activities Net cash provided by (used for) financing activities Nct increase (decrease) in cash and temporary investments Cash and temporary investments at beginning of year Cash and temporary investments at end of year.
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Income taxes Interest on borrowed money from continuing operations.
Non-cash transactions:
Capitalization of nuclear fuel and related obligation.
1989 1988 1987 (In thousands) 28,381 12,156 16,341 (12,578) 22,229 S,G53 (107,789) 120,14G (20,945) 7,669 945 (1,745)
(29,328)
(10,127)
I5',860I 7,720 11,401 (23I (4,000 (12,726) 1,902
~19.145) 15,895 (138,222) 12,578 (966) 1,213
~125,397) 168,358 (7,750I (25,165 (122,007) 22,000 1,409 3G,845 (72,657) 101,0R7
$ 28,370 R4,191 22,527 14,G10 (13,065)
(5,648)
(39,508) 42,95G (18,522) 11,520 (7,895)
(610) 3,590 6,074 (2,4G5 (16,SIR (4,388 (728 12,719 24,G26 29.348 (1,801)
(92,910) 13,065 (14,738) 5,551 (5,000) 2,470
~9I,562) 1G,5G7 (R,150 (65,513 153,5R7 104,229 (S59 (309,711)
(403,074) 504,101
$ 101,027 18,997 4,368 25,280 (31,941) 38,323 (1,115) 229 8,80G (73,391 (841 11,133 16,241 m,534
~5,294 (73,315)
(93,187) 31,941
<43',609I 39,776 (57,GOG) 250,000 (3,173) 144,296 (137,293) 140,006 1,317 (49,175) 21,80G 482.'R95
$504,101 387 G2,273
$ 19,427 63,G78 20,084
$ 50,088 72,777 43,87R 1,956 8 G3,877
$ 51,G71 For the purposes ofthis 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 utilityoperations 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.
UtilityPlant and Non-utilityProperty Utilityplant and non-utility property are stated at original cost and depreciation is provided on a straight-line basis at annual rates which willamortize the undepreciated cost of depreciable property over the estimated remaining service lives. The average annual depreciation rate used by the Company for utilityplant 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 ofthe facilitytakes 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 ofconstruction ofborrowed 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 ofcertain tax effects, is normally recovered in cash over the service life ofutility 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 ofAFUDC is determined by applying an accrual rate to the balance ofcertain 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 ofelectricity for services provided subsequent to monthly billingcycle dates but prior to the end of the accounting period. The cumulative effect of this accounting change as ofJanuary 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 ofapplying the new method ofaccounting 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 ifthe 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 ofexisting assets and liabilities. Statement 96, as amended, is effective for fiscal years beginning after December 15, 1991.
The Company estimates that adoption ofStatement 96 willresult in a reduction in the balance of accumulated deferred income tax liabilityand the creation of a liabilityto 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 willbe 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 ofthe regulated liabilitycreated by Statement 96 relating to certain temporary difFerences (i.e.-accelerated depreciation) willbe 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 ofSFAS 96 willrequire an increase in the balance ofaccumulated 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 willimplement 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 ofthe 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 ofthe 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 ofthe plan. The rate moderation plan, which is explicitlyintended 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 filingfor the scheduled third base rate increase that such additional cash increases willbe 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 willbe 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 ofthe 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 of3.5% (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 ofexpected 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 ofthe 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 filingshould 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 ofthe AIP transmission line can occur only with the consent ofthe 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 ofconstruction ofAIP. As a result ofthese 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 April9, 1990, at the required level ofcapacity 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 willappoint 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 April6, 1990, at which time the Company's lawsuit willbe 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 ofthe 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 willbe 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 COiVIPANYAND 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 ofUnit 3 sold and leased back; 82.4 million ofproperty 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 of40% ofits 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 ofUnit 3 in Texas rates willprobably 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-offrecorded 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 ofa 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 willbe able to demonstrate in the 49
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS(Continued)
Unit 3 case the prudence ofthe Company's decisions regarding the level ofits 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 willrelate 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 ofthe plan. The Company believes that proper regulatory treatment recognizes that the construction and addition to utilityplant ofgenerating 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. Ifany 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, Ifthe 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.inpreviously 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 millionof 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 ofthe expenses, without interest, amortized over the useful life ofthe 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 ofPalo Verde Snles and Leasebacks. The Company sold and leased back its entire interest in Palo Verde Unit'2 and one-third ofCommon 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 willuphold 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 ofFuel 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 willrecover 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 ofthe 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 ofservice 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 ofthe adoption ofthe New Mexico plan. As a result ofthe 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 willbe approved by the New Mexico Commission. A hearing on the application is scheduled in mid-June 1990. Ifthe New Mexico plan is not amended to comply with SFAS No. 92, the Company would be required to write-offapproximately $5.5 millionofrecorded 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 ofapproximately $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 willbe required to recover the New. Mexico jurisdictional portion ofthe 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 ofthe 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 willcommence 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
'erms of the settlement agreement generally provide for sales prices designed to fully recover the scheduled costs over the life ofthe 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 ofthe agreement were
$7,340,000,
$7,632,000 and
$1,510,000 in 1989, 1988 and 1987, respectively.
The agreement with IIDsettles 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 ofthe 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 willbe dependent upon future levels of rate relief obtained.
In October 1989, the Company obtained a revolving credit facility (herein, the "RCF") from a
'yndicate of money center banks which provides for borrowings by the Company from time to time through May 31, 1991, the initial termination date ofthe 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 millionoflong-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)
'nder 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 ofthe Company in an aggregate principal amount equal'to the committed amount ofthe RCF. The RCF requires that the Company meet certain fixed charge and maintenance ofequity 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 willbe 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 ofdefault 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 Restrictions 1
, 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'uclear fuel trust credit facility, of up to $200 million through December 31, 1991.
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 facilityand 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 ofthe RCF. These letter ofcredit 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) ofcredit remain in efFect. With respect to all but one ofthe 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 ofIncorporation provide that, unless consented to by the holders ofpreferred 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, ifthe Company so elects, surplus. The'most restrictive ofsaid 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 willbe 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 of60% ofthe value ofunfunded net additions to the Company's utilityproperty, 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 millionin bond credits (after giving efFect to the $153 million 11.10% Series due 2001), to permit the issuance of approximately $272.6 millionprincipal amount ofnew 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 millionin bond credits, to permit the issuance ofapproximately
$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 millionofAFUDC net ofdeferred taxes) through December 31, 1989 for its 15.8% interest in the three 1,270 MWnuclear 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:
December 31, 1989:
Palo Verde Station....
Other December 31, 1988:
Palo Verde Station..
Other Electric Plant in Service
$656,416,000 125,090,000 8632,808,000 125,423,000 Accuinulatcd
~Dc red 0o 0 (40,290,000),
~89.780,000) 8 (25,371,000)
~R4,805,000)
Construction 9'ork in Pro ess
$228,228,000-5,660,000
$185,865,000 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 ofthe 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 Aprilof 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 offuel 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 offuel expenses in its regulatory jurisdictions. Although the Company believes it is entitled to and will recover its actual fuel costs, net ofthe 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 willhave 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 ofits owned interest in Palo Verde and over the term ofthe 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 ofthe 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 willbe 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 circum-'tances against certain losses, including the loss of certain tax beneflts, resulting from specifled events.
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 1991 1992 1993 1994 Thereafter 82,627 82,627 SR,627 82,627 S2.627 1,616,775 F. Other Short-Term Investments As ofDecember 31, 1989 the Company had sold all ofits 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:
Rate case costs Corporate restructuring costs Financing and transaction costs Annuities Palo Verde outage costs Other 1989
$ 16,716
'1,294 16,12R 12,342 4,574 14,958
$86,006 1988
$ 15,723 415 15,156 19,34R 13,928
$64,564 59
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS,(Continued)
H. Common Stock Changes in common stock are as follows:
Shares Common Stock Amount Balance December 31, 1986 Issuances of Common Stock:
1987 1988 1989 Purchase of Common Stock:,
1987 Balance December 31, 1989 35,510,138 88,042 103,129 125,958
~626.000) 35,201,267 (In thousands)
$338,800 1,482 1,468 1,409
~5,983)
$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
$10.75 Dividend
$ 8.44 Dividend
$ 8.95 Dividend
$ 9.50 Dividend
$10.125 Dividend
$11.375 Dividend 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) 60,000 6,000 64,000 6,400
$ 105.250 103,600 10,360 109,600 10,960 104.220 97,500 9,750 105,000 10,500 104.480 46,000 4,600 56,000 5,600 100.000 200,000 20,000 250,000 25,000 103.375 500.000 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 1991 1992 1993 1994
$21,350 16,750 16,750 16,750 11,750 Redemptions of preferred stock, redemption required were as follows:
Shares Amount Balance at December 31, 1986 Redemption of Preferred Stock, Redemption of Preferred Stock, Redemption of Preferred Stock, Redemption of Preferred Stock, Balance at December 31, 1987 Redemption of Preferred Stock, Redemption of Preferred Stock, Redemption of Preferred Stock, Redemption of Preferred Stock, Balance at December 31, 1988.
Redemption of Preferred Stock, Redemption of Preferred Stock, Redemption of Preferred Stock,
'Redemption of Preferred Stock, Redemption of Preferred Stock, Balance at December 31, 1989
'10.75 Dividend
$8.44 Dividend..
$8.95 Dividend..
$9.50 Dividend..
$ 10.75 Dividend
$8.44 Dividend..
$8.95 Dividend..
$9.50 Dividend..
$10.75 Dividend.........
$8.44 Dividend..........
$8.95 Dividend..........
$9.50 Dividend..........
$10.125 Dividend........
1,157,100 (4,000)
(12,000)
(15,000)
~00.000) 1,106,100 (4,000)
(6,000)
(7,500)
~4000) 1,084,600 (4,000)
(6,000)
(7,500)
(10,000)
~50,000) 1,007,100 (In thousands)
$115,710 (400)
(1,200)
(1,500)
~0.000) 110,610 (400)
(600)
(750)
~400) 108,460 (400)
(600)
(750)
(1,000)
~5,000)
$100,710 Preferred Stock, Redemption not Required Following ts a summary ofpreferred stock issued and outstanding at December 31, 1989 which is not redeemable except at the option of.the Company:
Optional Redemption Price Per Sharo Shares Amount (fn thousands)
$4.50 Dividend
$4.12 Dividend
$4.72 Dividend
$4.56 Dividend
$8.24 Dividend 15,000 15,000 20,000 40,000 52,450 142,450
$ 1,534 1,506 2,001 4,000 5,157
$14,198
$109.00 103.98 104.00 100.00 103.40 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)
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,
~1989 (I December 31, 1989 1988 (In thousands)
Lon -Term Obli ations:
First Mortgage Bon s(2):
4%% Series, issued 1962, due 1992 6%% Series, issued 1968, due 1998.
7A% Series, issued 1971, due 2001 9% Series, issued 1974, due 2004.
10%% Series, issued 1975, due 2005.
8'A% Series, issued 1977, due 2007 9.95% Series, issued 1979, due 2004
'4%%
Series, issued 1984, due 1989(10)................
14% Series, issued 1984, due 1989(10)................
13'A% Series, issued 1984, due 1994..........
IP/~% Series, issued 1984, due 1989(10)................
Borrowings outstanding pursuant to RCF (see Note C) reilnanced on January 26, 1990 with 11.10% Series, due 2001.
100.41%
101.87 103.39 104.11 105.91 105.13 105.81
$ 10,385 24,800 15,838 20,000 15,000 25,000 19,685
$ 10,385 24,800 15,838 20,000 15,000 25,000 20,748 25,000 50,000 29,500 22,000 29,500 153,000 All issues are entitled to an amount per share equal to the applicable optional redemption price plus accrued dividends, upon voluntary liquidation.
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 Variable rate refunding bonds, due 2014, net of $25,000 and
$2,109,000, respectively, on deposit with trustee Variable rate refunding bonds, due 2015 Unsecured:
Variable rate, refunding bonds, due 2013, net of $3,482,000 and
$4,574,000, respectively, on deposit with trustee.
Floating rate notes secured by Second Mortgage Bonds(2) (5):
Due 1991 Balance forward 62,001 37,075 59,235
'55,564 34,991 59,235 31,231 70,000 32,323 70,000
$573,842
$509,292 62
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIALSTATEMENTS (Continued)
Balance forward Promissory notes:
Unsecured (6):
Due 1990 to 1992 ($20,000,000 due in 1990)
Total long-term obligations Financin and Ca ital Lease Obli ations:
Financing o igation, Pa o Ver e Unit 2 ($ 1,055,000 due in 1990) (7)..
Turbine lease
($1,438,000 due in 1990) (8).
Nuclear fuel ($ 19,644,000 due in 1990) (9).
Total financing and capital lease obligations Total long-term and financing and capital lease obligations.....
Amounts due within one year:
Current maturities............
Unamortized discount and premium 45,000 45,000 618,842 554,292 81,394 11,675 48,460 81,888 11,306 67,090 141 529 160,264 760,371 714,576 (49,100)
~1,193}
$710,078 (134,126)
~1,321 }
$579,129 December 31, 1989 1988 (19 199 nn dn}
$573,842
$509,292 (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 ofsuch 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 ofsuch 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 willcause 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 ofthe 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 1991 1992 1993 1994 8 50,215 102,805 51,160 12,519 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 (In thousands) 1987
$ 17,554 3,819 1,306 5,537 480 (4) 8 11,834 1,318 4,733 2,624 1,126 (5,324) 14,532 2,310 6,322 (3,168) 8,763 2,760 3,058 1,066 2,845 (9,911)
(27,681) 3,120 (1,622)
~
(6,051) 1,772 3,955 2,938 3,262 (3,978) 959
$35,074 8 15,180 Tax effect of:
Operating income:
Depreciation differences Deferred fuel revenues Provisions for rate refunds Allowance for borrowed funds................
Taxes capitalized Nuclear fuel expense differences..............
Deferred and capitalized Palo Verde operation and maintenance expenses.................
Sale and leaseback transactions...............
Deferred revenues Alternative minimum tax deferred....-........
Prudency audit costs Offset of deferred tax credits due to tax net operating losses Other Other income:
Regulatory disallowance Return on deferred costs.
Other Investment income Change in accounting method Total deferred taxes S
8,507 3,901 (777) 8,983 3,953 (6,477) 25,528 (54,027) 212 (7,772)
(13,937) 2,231 (7) 2,827
$~26,855) 65
EL PASO ELECTRIC COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED F9INANCIALSTATEMENTS(Continued)
The detail of Federal income taxes by component are as follows:
Years Ended December 31, 1989 1988 1981 (I
19 89 dS)
Current income taxes:
Operating Other income Total.
Deferred income taxes:
Operating Other income:
Regulatory disallowance:
Plant costs.
Deferred costs......................
Other Change in accounting method Total Charge (beneilt) equivalent to investment tax credit:
Operating Other income, Total Amortization of investment tax credit:
Operating Other income Total Total Federal income tax expense (benefit)....
40,393 7,004 (17,969)
(584)
(5,467) 732 8,176 35,074 15,180 (13,937) 2,224 2,827 I26,855)
(15,389) 1,972 1,351
~13,417) 1,351 8,336 4,834 13,170 (3,267)
~3,267)
~$
'66).
(2,774)
(3,474)
~2,774)
~3,474)
$17,630
$ 6,598
$ (20,206)
$ 2,736
$28,882 1,350 1,137
~5,125)
~18,856) 3,873 23,757 Federal income tax provisions diifer from amounts computed by applying the statutory rate of34%
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, Tax computed at statutory rate (Decreases) increases due to:
Allowance for equity funds used during construction...
Amortization of equity funds used during construction..
Dividends received not subject to Federal income tax..
ITC Amortization Amortization of excess deferred taxes Investment valuation adjustment Provision for other taxes Other Total Federal income tax expense (beneBt)..............
Effective Federal income tax rate 1989 1988 (In thousands) 506
$27,712 (4,276)
(4,442) 3,126 1,258 (716)
(2,333)
(3,267)
(2,859)
(1,297)
(722) 2,380 3,881
~803)
~984)
~$
466)
$ 17.630
~31.33)%
21.63%
1987
$20,481 (12,776) 552 (3,187)
(1,877)
(698) 4,103
$ 6,598 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 ofDecember 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, ifany.
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 ofcredit with a three-year term which is annually extended by one year ifnotice 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 ofFirst 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 ofat 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 ofproperty 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 ofall payments received on its annuities and all collateral therefor. The counterclaim alleges several causes ofaction against the Company including principally fraud, conversion and breach ofduty ofgood 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 ofTravis 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'nforceable, 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 ofthe 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, ifany, 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 ofPedro 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 ofCoopers R Lybrand; the law firm ofKemp, Smith, Duncan R Hammond, which serves as general counsel to the Company; and two individual attorneys who are shareholders in such Brm, one ofwhom is a former director ofthe 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 liabilityin respect ofthe 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 willbe 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 ofdirectors ofother 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 ofFirst 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 millionand, 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 ofFirst 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 ofits 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, ifany, is included in the 1989 consolidated financial statements.
Palo Verde Liabilityand 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 liabilityinsurance 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 ofwhich 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 ofIncome 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 willbe conducted prior to a formal hearing. The Company believes that the ADR willnot prevail in its proposed determination and does not expect to incur any material liabilityin respect thereof.'he Company willlitigate 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 ofpreferred stock issues ofother 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 ifthe 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 ifthe 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, ifestablished, 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, ifthe IRS does prevail, there is substantial support for the Company's position that it is not obligated to indemnify for past dividends. Ifthe 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 052,251 down to $10,450 as each dividend is paid, totalling
$574,767. These indemnity payments would reduce any payments due on account ofthe 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.
Service cost for benefits earned during the period Interest cost on projected benefit obligation.....
Actual return on plan assets.........
Net amortization and deferral Net periodic pension cost Net periodic pensiori cost for these plans for 1989, 1988 and 1987 (in thousands):
December" 31, 1989 1988
$ 1,361 8 1,249 3,811 3,138 (3,422)
(1,597) 1.550
~205)
$ 3,300 8 2,585 198j 0 1,386 2,898 (208)
~1,035) 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 Retircmcnt Income Plan SERP 1988 Retirement Income Plan SERP Actuarial present value of benefit obligations:
Vested benefit obligation Accumulated benefit obligation.............
Projected benefit obligation.........,......
Plan assets at fair value Projected benefit obligation in excess of plan assets Unrecognized net loss from past experience...
Unrecognized prior service cost.............
Unrecognized transition obligation.. '.........
Adjustment required to recognize minimum liability... '.'.
Accrued pension liability.
~832,079)
~$ 33.305) 9 (44,523) 32,129
~35,938)
~86,041) 8(7,354)
~$ 25.437)
~$ 27,164) 8(37,653) 32,145
~82 528)
~$ 3,075) 8(4,547)
(12,394)
(7>354) 1,947 3,356 (258) 4,899 603 (5,508) 51 5,415 (4,547) 3,023 (310) 724
~2,388)
~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:
Discount 'rate Rate of increase in compensation levels.
Expected long-term rite of return on plan assets 1989 1988 7.75%
8.25%
7.00%
7.00%
8.00%
8.00%
N. Franchises and Significant Customer Franchises The Company's major franchises are with the cities ofEl 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 willbe 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 1st 2nd 3rd 4th 1st 2nd (In thousands of dollars except for pcr sharc data) uarlers 3rd 4th Operating revenues(1)...
Operating income Net Income (loss)
Net income (loss) applicable to common stock Net Income (loss) per share of common stock
$95,286 13,593 (5,720)
$92,862 19,697 18,473 (8,759)
(33,063) 24i776)
(51 047) 13 923 15I398 (0.25)
(0.94)
(0.70)
(1.46) 0.40 0.44
$ 109,331
$ 118,711
$ 102,920
$89,539 13,257 R2,191 7,510 21,221 (30,038) (3)
(21,875) (3)
(48,200) (3) 16,997
$ 107,913 R4,276 21,191 18,117 0.52
$ 91,793 16,339 (32,292) (2)
(35,328)
(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 ofnon-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 utilitybusiness. 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 offby 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. Allprincipal 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% ofthe then outstanding shares ofcommon stock ofthe 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 ofPasoTex 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 ofFLRR 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 liabilitywhich 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 ofapproxi-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
SERVICE AREA COMPANYLINES MAJOR 0 DISTRIBUTION STATIONSk GENERATING STATIONS To Albuquerque Four Corners, N.M.
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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 Arthur T. Devine former Assistant Gly Attorney. Gty of los Angeles Electrical Engineer los Angeles Department of Water and Power President Gale A, Drews Electricol Utility Director Gty of (olton Vice President W.E. Cameron Director of Public Service Glendafe Public Service Deportment Secretory Eldon A. Cotton Assistant General Manager
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Power los Angeles Department of Water and Power Assistant Secretory George R. Spencer Gvc1 Engineer for Power (ontracts los Angeles Deportment of Water and Power
MESSAGE FROM THE PRESIDENT ANDEXECUTIVEDIRECTOR 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 utilitycustomers 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 utilitybenefits and utilitycustomer 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, President Arthur T. Devine, Fxecttti ve Director
MEMBER CITIES Gordon W. Hoyt General Manager Anohcim PoMc Urtirlcs Department Anaheim, (ohfcvvdt Mr. Hoyt H o native (ohfor nioq, origholly from honh Monica. Hc earned his B.S. ot thc University of Texas ondis a registered professional engineer in the state ol (oh.
f<<nicx Mr. Heyt storied fds carccr h pohhc otihtics in 1941, spcnchng 13 yeas vdth pocihc Gos B tfcdric,
'before going hnorfc for Anohchs h Ipfi4. He hos hdd aliis carcnt position for 25 years.
From the power base of the Pacific Rim, Los Angeles, to the industrial town ofVernon, with only 30 residential cus-tomers, SCPPA member cities provide power to an end-user population ofmore than 3.5 million.
SCPPA member cities use a wide variety ofpower sources to provide their customers with reliable service and the lowest cost energy possible.
Through their association with the SCPPA and through their own efforts, the member cities are able to include as sources for their power: the lntermountain Generating Station, entitlemcnts in the Hoover Power Plant, Palo Verde Nuclear Generating Station, purchases from the Bonneville Power Administration, the San Onofre Nuclear Generating Station Units 2 and 3, Western Systems Power Pool, oil-and gas-fired generation in the Los Angeles Basin, and purchases from other western utilities.
Together, SCPPA member cities had total 1989 energy sales of over 30 million megawatt-hours.
Anaheim As one of the fastest growing population centers in the United States, the community ofAnaheim continues to look forward in helping meet the energy needs of this unique com-munity. Known the world over as the home of Disneyland and other popular tourist attractions, Anaheim is also home to over 96,000 other customers from the California Angels baseball team to the average homeowner.
One way the Public Utilities De-partment better serves all its customers, large and small, is by sending a copy of its newsletter called "Currents" as a billing insert. This publication informs customers of the energy conservation programs available in their city and how to take advantage of them. One of the most successful of these efforts is the "off-peak" program which encourages customers to use their air conditioners, pool and spa motors, and other appliances during off-peak times. Customers are rewarded for participating in such energy conservation programs by a rebate, which appears as a credit on their bills.
Anaheim also provides discounted "lifeline"rates for senior citizens, the handicapped, and those on life-support systems.
Partly through Anaheim's association with SCPPA, its energy rates are 23%
lower than rates in nearby communities, and the Public Utilities Department is continuing to seek the lowest cost energy supplies for the future. To this end, the Anaheim Public Utilities Department has been working on many projects with SCPPA member cities, including a joint transmission line that would bring in more power from the states of Nevada and Utah. Anaheim is also financing and constructing a new combustion-turbine generator that is scheduled to start operating in 1991.
Anaheim is dedicated to providing the perfect mix of low-cost power and community services.
Azusa "Everything from A to Z in the USA" is Azusa's city slogan, and the Utilities Department is taking that slogan to heart both in long-term power goals and in the services offered to its resi-dential and industrial customers.
By participating in joint transmission line projects with fellow SCPPA members and by looking for other long-term power purchase contracts, Azusa is determined to have as many options possible to supply energy and power to its citizens.
New sources of power are just one way to improve service to customers, Joseph P. Hsa UrhryDirector (tryo!Arrrsa Aroso, (ahlorndr Anative ol Sna, hh Hsa received his B.S. h dcdrhd enghccring from the University ol Nehrosho adiso rcgistcrcd professional cnghecr h the dotes of Nchrosha ad (ohforw. Hc moved to (ohfarva h1933 ad hot heen the Oircdor of Uthties in Arosa cver shee.
Timothy Dempsey pvhgr Uryrics Dpertor Gty ofBanning Banning, rogfornio Mr. Dcrnpsey began his ter ccr hrniihties m a gncmonh Hcw Yorkh 1981. After corning his 85. inindvstrid safety from 5on Diego 5totc, he then went cn to few srhod ot Western 5tote University h 5an Diego. Mr. Dempsey managed on energy raop m Woshhgtcn state before jYiingftiegannhg vtfii6es as Director h1987.
conservation is another.
The Azusa Utilities Department has instituted a streetlight conservation planchanging all the old mercury vapor streetlights in-to power-saving sodium vapor models.
In this dry inland area, the deep-water well pumps also work hard; and Azusa is making sure these are all reconditioned to work at maximum efficiency.
For those customers interested in learning more on conservation, the Utilities Department provides free ed-ucation materials including brochures and slide shows.
Special discounted rates are offered to "total electric" homes.
As with other SCPPA member cities, Azusa's main long-term energy goal is to negotiate contracts for new energy projects and continue to acquire the best options to provide energy service to its citizens.
BanningAs the gateway to California's Colorado Desert, Banning is a fast-growing community with fast-growing energy needs.
To meet the power requirements, Banning's Public Utilities Department has instituted a number of building and conservation programs to serve its customers.
These programs include a new pumped-storage project, joint projects with fellow SCPPA member cities, and a transition to generating during off-peak hours to displace the high cost of peak-time generation.
Conservation is important in desert towns, and Banning is no exception.
To meet its energy conservation objectives, the City of Banning has converted the city streetlights from the old mercury vapor models to power-saving sodium vapor models. They have also been upgrading the voltage level of their distribution system, which willconserve energy.
Banning's location in the high desert means a huge variance in temperatures, not only from summer to winter but day to night. Banning's temperature can slide from a high of 120 to a low near freezing in one 24-hour period. To help customers cope with these extremes, the utility provides special lifeline rates, at a base of 250 kilowatts in winter to 500 in summer for the entire community.
Another large community undertaking is Banning's new hydro project which was completed in August 1989. This project utilizes water from natural flows to provide power to the city.
A new development in the commu-nity willprovide 4,500 new homes in Banningnew homes and customers that willrequire the fullservices of an efficient power company. Luckilyfor Banning residents, their public utilityhas its eyes toward the future and plans to continue the tradition ofproviding low-cost energy and high-quality community services.
Burbank When customers of the Burbank Public Service Department call the power company to ask that a representative visit their home, it is not because something has gone wrong. They are just using one of the new "energy audit" services provided free of charge. A utilityrepresentative willsurvey the resi-dence or place of business and provide tips on how to use energy more efficiently aiding in conservation and saving the customer money.
Burbank is a city of 91,000 residents and is home to many a major movie and television studios and aerospace firms. All of these customers keep Burbank's power demands high, and the Public Service Department is moving its programs into the future to make sure the energy needs of the community are met.
A new system to monitor system conditions and do remote switching, startup, and shutdown is in place, provid-ing improved reliability and the ability to address outages more promptly.
Ronafd V. 5lasst Gcncrnf Manager Berhork Ptibh'(Scrrirc Deportment Barbers; totfernkr A nogive (atifornhrV Mc 5tossi rmeived his 8.5. h efertrkd cnghccrhg from 5oa Jose 5tate Umvcrsity. Hc added to his cbxofiw by ottcnigng bc Uriversity of 5ovbcrn (aMcrnki cornhg fob an k5. h cfcctrkd cajinecrhg md an MBA. Mr. 5tossi worked rn o prhdpd efcdrkd cnghccr for bc aty of gvrbonk before assvming his rvrrenl posithn in1988.
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Gate A. Draws Cferrruof Urd'ry Dirertor Gtyof(alton Coirort Colilornio Born ht Kansas, Mr. Draws was rdscrf oa a farm aruf ebuoterf ht his home state prior to empioymcnt with thc Utittics Deportment of (dtan Ityears ogo. As electric utyrty brcrtor for thc past 13 years, hc has fest (dton's~ of tts own rcsorurcs to meal its rastomcrs'c<<fs.
In addition to providing "lifeline" rates for low-income seniors and the handicapped, the Burbank Public Service Department co-sponsors fund raisers in association with the International Brotherhood of Electrical Workers that benefit the burn ward in a local hospital.
In response to the growing concern over air pollution in the Los Angeles Basin, Burbank uses several transmis-sion lines to bring in off-system energy from outside sources.
By reducing the total generation in the Los Angeles Basin, the residents benefit both economically and in terms of improved air quality.
Colton Located 55 miles east of Los Angeles, Colton is a rapidly growing community of over 37,000 residents.
Colton has been known as the "Hub City" for more than a century, as it was located on the main line of three major railroads. It is also the meeting point for three major interstate highways.
Colton has experienced a recent population boom as has much of San Bernardino County. Its energy require-ments have matched this growth which has made resource procurement and energy efficiency major factors in the Utility'splanning efforts.
The Utilityreached a new peak power requirement of 47.2 megawatts during the year, while sales totaled over 179,000 megawatt-hours for the same period. New powercontracts from the California Department of Water Resources, City of Pasadena and Pacific Gas and Electric further reduces depen-dence on purchases from Southern California Edison. Other resources in-clude Palo Verde Nuclear Generation Station, Hoover Power Plant and economy energy purchases.
The Utilityinitiated several new energy programs for customers during the year, including load management, weatherization, residential energy audit and a community-wide information program as well as a California Energy Commission efficiency program to reduce energy costs in municipal operations.
By focusing on energy efficiency in new municipal construction projects as well as for existing customers, Colton is com-mitted to using energy resources in a prudent andefficient manner.
Glendale With Glendale's central bus-iness district undergoing a comprehensive redevelopment effort, the Glendale Public Service Department is standing ready to serve the existing and new customers'nergy needs.
The large growth in apartment house, condominiums, and commercial building market has added over 10,000 new customers in the last five years. To meet the added energy needs, Glendale is also workingjointly with SCPPA members in a comprehensive study of transmission line projects to bring in low-cost power from Utah, Arizona and Nevada.
Glendale is replacing its older over-head distribution facilitywith a more mod-ern underground system, improving the community's appearance in the process.
Many of the employees of the Glendale Public Service Department are active in civic projects, bringing the Public Service Department 's pledge to provide the most reliable service at a "reasonable cost" to the heart of the community.
Los Angeles A leader in both conser-vation and consumer-oriented projects, the Los Angeles Department of Water and Power (DWP) is a model for many utilities across the country.
The community involvement of the DWP is wide-ranging and touches all lay-ers of the customer base.
Los Angeles was first to institute a Senior Citizen Lifeline Program, which provides low-cost energy to seniors and the handicapped.
It has an W.t. (ameron Director olPolk SeNirc 6leufolc Pohfu Scrrue Department Gleruto/e Cok'fornio Mr. (arnefonn rdduating his 4gth year of govcrmnent service.
He rerdvof his B.S.
from Washington State Udvcrstty hcfore renttndng to University of Southern (difornia for hts ttLA.in pohru ebiYieotton. Ma (amerce has hccn wnh thc fecvhrfc pahitr Service Dopa@neat struc 1 gli.
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tfdon A. Cotton As&ant Ccnerof Monoger ~
Peer los Angeles Deportment o/
Water ond Power Gtyollos Angeles los Angeles, (ogfornia Ortghogy from(crdrj, Oklahoma, Nlr. (ottca earned lis 8.S. in civilcngheering from San fore Stote Unrvers'ty.
tte htcc attended University of Sovtiwrn (ohfornto, cerning his ccrtificote h pvMic odrmntstroAin ond t(S. in civil cnginccring. Nlr. (otton hegon lis career with the tos Angeles Depmtment ol Water cnd Power h l96S and wos named Assistant general Nlcrroger.
Power h ttovemher l988.
innovative program that educates schools on energy conservation; ifthe school is able to save 10% offits regular bill, the school district rebates 5% of the money saved to the school. A $5,000 scholar-ship with the stated goal of encouraging women and minorities to pursue engi-neering is given to 13 area universities each year.
DWP's community out-reach program provides a liaison to between 50 and 100 community groups such as the NAACP and Southern California Businessman's Association to help these groups solve their water and power issues.
Because of the importance ofthe area's air quality, DWP consumer con-servation programs receive great em-phasis.
DWP issued over $4 millionin energy-incentive programs this year alone. These incentives were offered in its thermal storage program, high-effi-ciency heat pump program, and lighting-efficiency improvement program. In addition to the incentive programs, DWP provides energy audits free of charge to customers, surveying their homes and businesses, and suggesting ways for them to reduce energy use.
DWP is working with many of the SCPPA member cities on transmission line projects bringing in power from outside sources without increasing the pollutants in the basin. It is planning on repowering existing Harbor Generating units with combined cycle units to increase efficiency and reduce air pol-lution. Within the next three years, DWP plans to begin its COSO Geo-thermal Project, using steam from the earth to generate electricity another pollution free energy source.
Pasadena The Pasadena Water and Power Department has gone "lite" introducing its "Lite-BillProgram" to customers.
Having received permission from the MillerBrewing Company to use their trademarked phrase, the Depart-ment willstart its door-to-door energy-and water-use surveys in November 1989.
Utilityservice personnel willvisit area homes and conduct comprehensive energy-and water-use surveys.
Later the customer is provided with a computer. printout with suggested modifications and improve-ments that can result in a "LiteBill".
The Pasadena Water and Power Department also gives an annual scholar-ship to a local high school student, up to
$4,000 per year for four years. Financially disadvantaged students have been able to pursue engineering studies at UCLA, California Polytechnic Institute, and Howard University in Washington, D.C.,
thanks to this scholarship.
Pasadena had been a growing com-munity for over a century, as evidenced by the city's celebration of the 100th anniver-sary of the Tournament of Roses in January 1989. However, a commercial growth-control initiative was recently passed, which may impact the growth ofenergy use as well. Even with the rate of future growth limited, the Pasadena Water and Power Department has been concen-trating on the upgrading of systems and plans for increased energy efficiency to better its available resources.
This year Pasadena Water and Power Department conducted a feasibility study for the life extension of the Broadway Power Plant, a three-unit facilitythat supplies about 40% of Pasadena's power.
Repowering these units willhelp Pasadena keep pace with the growing demand of its customers.
Riverside Riverside recently implemen-ted an innovative assistance program, the "SHARE Program". When customers re-ceive their bill, they can check offa box and round it up by a dollar or two. This program provides money to elderly and low-income customers who cannot afford to pay the utilitydeposit. The utilitypays David C. Pfvmh CcncroIMonogcr Posodcno Water ond Power Department Posodenrc (agfornio After receiving fis 85. in cnghecring from Aritcna Shtc Univcnity, Mr. Pfvah hcgan his work h pvhrrc a@ties in 1910 h Phocrix, Arimna. hsectqoenntfy, hc received his M6Afrom ASU h 1918. ttc worked briefly lor a cnasvftant ond rnonaged a vtgityh tongmonh (cfcrodo, hcfcre coning to Pasadena h 1981.
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D BiH O. (arnahan Puhfic Utilties Dicctor Riverside Pu@r Usiptes Department Riversih, Cohyornio Alter earnhB his B.S. in dedrkd entincerinB fran (olorodo 5tote Udvcisity, ffr.
(ornohen pursued a car en in putdic uthitics hcf<<e hccaninB thc utitries manpa in Fort (el' (obrodo. Hc jYire!Riverdde PuhBc Utiisies os oircdor in f986.
Bruce V. Malkenhorst Executive Director ofUpht and Power CiiyolVernon Veroorc Colilomi'o Ate ttolkenhorst is a aortic ol thc tos Anpefes ace ad receivedhis BA from Woodhuiy Uriverdty in Burhonk. Hc hot hecn the Oircdor of UBht erd Power fic thc hst cipht yaws end h oho shanti odmin'eater.
N.htdkcnhord is pleased to hah a positionihcic hc ccm assist h controhnB cnaBy costs fa his constituents.
the administrative costs of the program, and the rest is a customer-helping-customer program.
In the hot climate of Riverside, a Thermal Energy Storage Program encourages customers to install air-conditioning systems that are more ef-ficient and shifts energy use to off-peak hours. This program also educates commercial customers about the benefits of running large equipment during the off-peak hours.
The Riverside Public Utilities Department is meeting its goal of reliable service at a low cost. In a recent survey, customers rated the Department high in all service categories.
This was accom-plished without raising electric rates since 1984; in fact, beginning July 1, 1989, customers received a 7% reduction in their bills.
Vernon The city of Vernon was founded in 1905, a 5.06-square mile area planned from its inception as an industrial city. In fact, the Vernon Light and Power Department has over 2,000 commercial customers but only 30 residential customers!
Since the Department's biggest effort is keeping rates as low as possible, it is participating with fellow SCPPA member cities on transmission projects that will bring low-cost power to the participating cities. Vernon recently hired an energy conservation specialist who works with customers, inspects their plants, and makes energy-saving recommendations free ofcharge.
The Department recently installed a Supervisory Control and Data Acquisition System, which enables more efficient system monitoring from one central location.
toward the future, not only in its major building projects, but also in its plans for customer service as well.
With several building projects, the Imperial Irrigation District is busy indeed.
Among the projects are a new $5 million substation, an 11-1/4-mile extension of existing transmission lines, upgrading an existing substation, upgrading the El Centro Switching Station, and upgrading the distribution system to provide power for a new fashion mall in Indio. With all this activity, it is easy to see why Imperial is also building a new operations center headquarters for the utilityin the Coachella area.
There is also plenty of activity when it comes to its customer services.
Free-of-charge energy surveys are done for cus-tomers upon request.
After an in-home survey, the utilityprovides a computer printout showing ways to cut costs in that particular home, including weather-stripping, use of different appliances, water heater blankets, etc. Another service provides customers who install energy-saving air conditioners with rebates on their bill.
One particularly far-reaching program is the utility's energy use survey every two years, 5% of all customers are sur-veyed for information on home construc-tion, appliances, and energy use so that the utilitycan enhance the precision of service needs in the future. By really pinpointing potential problem areas now, the utilityis effectively planning how to reduce the area's load in cost-effective ways.
The Coachella Power Division's commitment to its community shows up in its nationally-recognized electrical safety program, currently being demonstrated to police and fire departments, service clubs, schools, and churches.
Kenneth S. Holler Assistoot Power )Howe Coorheffo Power Divisicn fmperhf frripotionDistrkt imperial, Cdi/cvn'e A native ol fincfoy, Chio, Ati.
Hoter caned ha 85. h electrica enttrwcring froin Chio Hathern Uriversity. He is a Bccnscd cfatikd cnpheci h the state of (etdania adiohedkc (cekhgmpcrid OMdh 1985.
Imperial Irrigation DistrictThe 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 Station SCPPA has a 5.91-percent interest in the Palo Verde Nuclear Generating Station and receives up to 216 megawatts (based on the licensed reactor thermal power level per unit of 1,221 megawatts).
With three units on line, this station, which is located about 50 miles west of Phoenix, Arizona, has a current capacity of approximately 3,810 megawatts.
A net annual output of more than 23 million megawatt-hours is projected from Palo Verde by the early 1990's.
Ten member agencies have contracted with SCPPA for entitlement in Palo Verde.
The station's output willbe used to meet increases in demand, to replace purchased power, and to displace oil-and gas-fired generation in the Los Angeles Basin.
Additional savings for participating members were created when SCPPA took advantage of lower interest rates by issuing approximately $ 1.5 billion in refunding bonds. Over the lifeof the project, this willresult in a gross debt savings of about $286 million.
The Palo Verde Nuclear Generating Station is managed by Arizona Public Service Company, with the switchyard portion operated by the Salt River Project.
Southern Transmission System Six SCPPA members receive power via the Southern Transmission System.
While the distribution to members is local, the source of the power is 488 miles away at the Intermountain Generating Station (IGS) in Utah. It is comprised of two coal-fueled generating units with a combined capacity of 1,600 megawatts of alternat-ing current. An adjacent converter station changes the electricity to direct current.
The &00-kilovoltSouthern Transmission System carries the direct current over the
'esert and mountains to the Adelanto Converter Station where the direct current is changed back to alternating current.
Members receiving power over the system willuse it to meet load growth, reduce purchases from Edison, and to displace Los Angeles based oil-and gas-fired generation.
SCPPA's four refunding sales total-ing approximately $ 1.3 billionwill produce a gross debt savings over the life of the project of approximately $745 million.
Los Angeles manages and operates the project which is owned by the Intermountain Power Agency, a political subdivision of the State of Utah. A total of 36 utilities in Utah, California, and Nevada have power entitlements in the IGS.
Hoover Uprating Project The Hoover Power Plant is now over 50 years old.
The U.S. Bureau of Reclamation took over operation of the plant in 1986 and is in the process ofuprating Hoover's 17 original generators.
Six SCPPA members have contracted with the Authority to furnish their share of the uprating costs and to help with the uprating. SCPPA has issued approxi-mately $34.4 million in bonds to finance these costs.
The project is scheduled for com-pletion in 1992 and willincrease Hoover's capacity from 1,450 megawatts to 1,903 megawatts.
Uprated units are returned to service immediately and participating members have begun receiving energy and capacity entitle-ments. As more units are completed, a fullentitlement of94 megawatts is expected in 1992 for those members participating through SCPPA.
The increase is made possible by installation of modern stator windings 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 ofconstructing, 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.
7fg Ten SCPPA members bene-fitfrom 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 ofDirectors of Southern California Public Power Authority In our opinion, the accompanying combined balance sheet and the related combined statements of operations and ofcash flows present fairly, in all material respects, the financial position ofthe Southern California Public Power Authority (Authority) at June 30, 1989 and 1988, and the results ofits operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles.
These financial statements are the responsibility ofthe Authority's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits ofthese 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 ofmaterial 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 ofcash flows ofthe Authority's Palo Verde Project, Southern Transmission System Project, Hoover Uprating Project and Mead-Phoenix Project, and the separate statements ofoperations ofthe Palo Verde Project, Southern Transmission System Project and Hoover Uprating Project present fairly, in all material respects, the financial position ofeach ofthe Projects at June 30, 1989, and their cash flows and the results ofoperations ofthe 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 ofthe Authority's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits ofthese 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 ofmaterial 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 ofadditional analysis and is not a required part ofthe basic financial statements.
Such information has been subjected to the auditing procedures applied in the audits ofthe 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.
15
ASSETS Palo Verde Project SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY COMBINEDBALANCESHEET (In thousands)
Southern Transmlsslon System Project June 30, l989 Hoover Uprating Project Mead-Pltoenir Proj ect Total June 30, l988 Total Utilityplant Production.
Transmission General Less Accumulated dcprcciation...
Construction work in progress.........
Nuclear fuel, at amortized cost.......
Net utilityplant Special funds Investments Advance to Intermountain Power Agency.
Advances for capacity and energy, net Interest receivable Cash and cash equivalents...........
600,778 6,008 186 606,972 56,180 550,792 3,569 26,428 580,789 110,678 1,630 107,672 219,980 661,255 18,857 680,112 57,272 622,840 4,287 627,127 20,161 1,174 63,295 180,557 10,218 292 5,640 34,897 95,927
$ 18,747
$ 12,999 600;778 667,263 19,043 1,287,084 113,452 1,173,632 20,855 26,428 1,089 65 1,154 226,441 20,161 10,218 3,096 176,672 436,588 12,999 1,220,915 600,458 662,761 18,805 1,282,024 72,288 1,209,736 15,540 31,330 1,256,606 260,146 20,161 6,009 3 323 141,737 431,376 Accounts receivable Materials and supplies................
Costs recoverable from future billings to participants Deferred costs Unamortized debt expenses, less accumulated amortization of$46,363 and $36,164 in 1989 and 1988........
Other deferred costs................
3,635 6,859 58,587 547 80,807 (1,004) 228,150 864 229,014 174,258 174,258 1,107 1,107
$35,000
$ 1,098,864
$ 1,063,296 4,182 6,859 836 6,528 138,390 114,648 403,515 864 373,600 1,309 374,909 404,379
$ 14,153
$2,211,313
$2,184,903 LIABILITIES Long-term debt.
Current liabilities Long-term debt due within one year....
Accrued interest.
Accounts payable and accrued expenses Advances from participants.....
Commitments and contingencies
$ 1,043,540
$ 1,014,443
$34,296 100
$2,092,379
$2,061,937 14,370 36,219 4,735 55,324 5,825 37,259 5,769 48,853 689 15 704 1
4 5
14,048 20,195 74,168 10,523 104,886 14,048 29,403 77,224 16,339 122,966
$ 1,098,864
$ 1,063,296
$35,000
$ 14,153
$2,211,313
$2,184,903 lireaeompanyintt notes are an intettral pan ofttrese financial statements.
16
SOUTHERN CALIFORNIAPUBLIC POPOVER AUTHORITY COMBINEDSTATEMENTOF OPERATIONS (In thousands)
Year ended June 30, l989 Palo Venle Project Southern Transmission System Project Hoover Upmtlng Project Total Year ended June 30, l988 Operating revenues Sales ofelectric energy Sales oftransmission services Total operating revenues Operating expenses Nuclear fuel expenses Other operation Maintenance Depreciation Decommissioning Expense charged to project during construction........
Total operating expenses Operating income Investment income Income before debt expenses.
Debt cxpenscs Interest on debt Allowance for borrowed funds used during construction Total debt expenses Costs recoverable from future billings to participants......
$ 110,164 110,164 10,628 19,635 5,518 17,427 5,699 58,907 51,257 18,239 69,496 85,116 85,116
$ (15,620)
$94,769 94,769 8,137 3,205 19,207 30,549 64,220 10,784 75,004 84,035 84,035
$ (9,031)
$2,760 2,760 1,127 1,127 1,633 2,033 3,666 2,757 2,757 909
$ 112,924 94,769 207,693
$ 88,358 82,332 170,690 10,628 28,899 8,723 36,634 5,699 90,583 117,110 31,056 148,166 171,908 171,908 9,042 23,194 9,547 33,564 4,652 (520) 79,479 91,211 35,060 126,271 173,308 (16,699) 156,609
$ (23,742)
$ (30,338)
The aeenmpanyins nenea ate an integral pan of eheae nnaneul uatememu 17
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY COMBINEDSTATEMENTOF CASH FLOWS (In thousands)
Year ended June 30, l989 Palo Verde Project Southern Transmission System Project Hoover Uprating Project Mead-Phoenix Project Total Year ended June 30, l988 Total Cash flows from operating activities:
Costs recoverable from future billings to participants Adjustments to arrive at net cash provided by operating activities:
Depreciation Decommissioning.................
Amortization ofdebt costs...........
Changes in current assets and liabilities:
Interest receivable...............
Accounts receivable..............
Materials and supplies............
Other assets Accrued interest.................
Accounts payable and accrued expenses Net cash provided by operating activities...
Cash flows from investing activities:
Payments for construction of facility......
Advances for capacity ofenergy, net......
Payments for feasibility study............
Purchases ofinvestments...............
Proceeds from sale ofinvestments........
Refund from Intermountain Power Agency Net cash provided by (used for) investing activities Cash flows from financing activities:
Proceeds from sale ofrefunding bonds....
Payment for bond issue costs............
Payment for defeasance ofrevenue bonds..
Payment for principal oflong-term debt....
Proceeds from advances from participants..
Net cash used for financing activities......
Net increase (decrease) in cash and cash equivalents.
Cash and cash equivalents at beginning ofyear Cash and cash equivalents at end ofyear.....
Supplemental disclosure ofcash flow information:
Cash paid during the year for interest (net ofamount capitalized)..............
$ (15,620)
(9,031) 909
$ (23,742)
$ (30,338)
~
26,955 5,699 12,017 574 (2,799)
(331) 15 (1,354)
(7,582) 17,574 (7,781)
(101,134) 130,015 19,207 9,125 (319)
(547)
(1,352) 1,767 18,850 (7,990)
(61,515) 63,748 54 (28) 942 (4,209)
(10,248) 12,085 (703)
(4,818) 5,572 46,162 5,699 21,196 227 (3,346)
(331) 15 (2,706)
(5,808) 37,366 (15,771)
(4,209)
(703)
(177,715) 211,420 41,119 4,652 17,692 1,900 4,751 (6,528)
(198) 119 (1,994) 31,175 (39,197)
(2,945)
(1,061)
(285,881) 311,526 820 21,100 (5,757)
(2,372) 51 13,022 (16,738) 185,200 (4,325)
(180,827)
(13,095)
(13,047) 25,627 82,045 156,050 (2,457)
(153,739)
(2,260)
(2,406) 10,687 52,608 (1,430) 7,070 (14,048) 14,048 51 14 341,250 (6,782)
(334,566)
(29,403) 14,048 (15,453) 34,935 141,737 14,437 127,300 73,871 72,906 2,757
$ 149,534
$ 138,306
$ 107,672 63,295 5,640 65
$ 176,672
$ 141,737 The accompanying noses are an inrcgrai pan et shese fimanciai sraremenrs.
18
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY NOTES 'IO FINANCIALSTATEMENTS NOTE AOrganization and purpose:
Southern California Public Power Authority (Authority), a public entity organized under the laws ofthe State ofCali-fornia, was formed by a Joint Powers Agreement dated as of November I, 1980 pursuant to the Joint Exercise ofPowers Act ofthe State ofCalifornia. The Authority's participant member-ship consists often Southern California cities and one public district ofthe State ofCalifornia. The Authority was formed for the purpose ofplanning, financing, developing, acquiring, constructing, operating and maintaining projects for the gener-ation and transmission ofelectric energy for sale to its partici-pants. The Joint Powers Agrecmcnt has a term offiftyyears.
The members have the followingparticipation percentages in the Authority's interest in the four projects:
Southern I?snsmtssion ilooser Mead-Participant Srstem Vprating Phoenix Palo Verde City of Los Angeles CityofAnaheim City of Riverside Imperial Irrigation District City of Vernon City ofAzusa City ofBanning CityofColton City ofBurbank City ofGlendale Cityof Pasadena 67.0%
5.4 6.5 4.9 1.0 1.0 1.0 4.4 4.4 4.4 59.5%
61.2%o 17.6 42.6%
15.0 10.2 31.9 6.0 4.5 2.3 5.9 3.0 4.2
.6 2.1
.6 3.2
.6 16.0 5.0 5.0 3.0 100.0%o 100.0%
100.0%
100.0%o Palo Verde Project The Authority, pursuant to an assignment agrecmcnt dated as ofAugust 14, 1981 with the Salt River Pro-ject Agricultural Improvement and Power District, purchased a 5.91% interest in the Palo Verde Nuclear Generating Station (PVNGS), a 3,810 megawatt nuclear-fueled generating station near Phoenix, Arizona, and a 6.55% share ofthe right to use certain portions ofthe Arizona Nuclear Power Project Valley Transmission System (collectively, the Palo Verde Project). As ofJuly I, 1981, ten participants had entcrcd into power sales contracts with the Authority to purchase the Authority's share ofPVNGS capacity and energy. Units I, 2 and 3 ofthe Palo Verde Project began commercial operation in January and September 1986, and January 1988, respcctivcly.
Southern Transmission Sysrein ProjectThe Authority, pursuant to an agreement dated as ofMay I, 1983 with the Intermountain Power Agency (IPA), has agreed to make payments-in-aid ofconstruction to IPA to defray all the costs ofacquisition and construction ofthe Southern Transmission System Project (STS), a transmission line which willprovide for the transmission ofenergy from the Intermountain Power Project (IPP) in Utah to Southern California. The Authority entered into an agreement also dated as of May 1, 1983 with six ofits participants pursuant to which each member assigned its entitlement to capacity ofSTS to the Authority in return for the Authority's agreement to make payments-in-aid ofconstruc-tion to IPA. STS commenced commercial operations in July 1986; The Department ofWater and Power ofthe City ofLos Angeles, a member ofthe Authority, has served as project manager and operating agent ofIPP.
Hoover Upraung Project The Authority and six participants entered into an agreement dated as ofMarch 1, 1986, pursuant to which each participant assigned its entitlement to capacity and associated firmenergy to the Authority in return for the Authority's agreement to make advance payments to the United States Bureau ofReclamation (USBR) on behalf ofsuch partici-pants. Construction is scheduled for completion by September 1992. The Authority willhave an 18.68% interest in the con-tingent capacity ofthe Hoover Uprating Project. Several "uprated" generators ofthe Hoover Uprating Project com-menced commercial operations during June 1987.
Mead-Phoenix Project The Authority has also studied the feasibility ofconstructing the proposed Mead-Phoenix Project, a transmission line from Arizona to Nevada. The Authority's present interest in the Mead-Phoenix Project is 9375%. The feasibility study is substantially complete and present plans call for the Authority to decide whether to continue with the project in fiscal year 1990.
NOTE BSummary ofsigniTicant accounting policies:
The financial statements ofthe Authority are presented in con-formity with generally accepted accounting principles, and substantially in conformity with accounting principles pre-scribed by the Federal Energy regulatory Commission and the California Public UtiliticsCommission. The Authority is not subject to regulations ofsuch commissions.
UtilityplantAllexpenditures, including general administra-tive and other overhead expenses, payments-in-aid ofconstruc-tion, interest net ofrelated investment income, deferred cost amortization and the fair value of test power generated and delivered to the participants are capitalized as utilityplant con-struction work in progress until a facilitybegins commercial operation.
The Authority's share ofcosts associated with PVNGS is included as utilityplant. Depreciation expense is computed using the straight-line method based on the estimated service lifeofthirty-fiveyears. Nuclear fuel is amortized and charged to expense on thc basis ofactual thermal energy produced rela-tive to total thermal energy expected to be produced over the lifeofthe fuel. Under the provisions ofthe Nuclear Waste Policy Actof 1982, the Authority is charged one millpcr kilowatt-hour on its share ofelectricity produced by PVNGS.
The Authority records this charge as a current year expense.
The costs associated with STS are included as utilityplant.
Depreciation expense is computed using the straight-line method based on the estimated service lives, principally thirty-fiveyears.
Advances forcapacity and energy Advance payments to USBR for the uprating ofthe 17 generators at the Hoover Power Plant are included in advances for capacity and energy.
These advances are being reduced by USBR billings to partici-pants for energy and capacity.
Nuclear decommissioning Decommissioning ofPVNGS is projected to start sometime after 2027. The Authority is provid-ing for its share ofthc estimated future decommissioning costs 19
over the lifeofthe nuclear power plant through annual charges to expense.
A Nuclear Decommissioning Fund has been established.
The deposits to the fund plus the interest earnings on the fund balances are expected to be sufficient to pay the Authority's share ofthe decommissioning costs.
Deferred costs Deferred costs are shown net ofaccumulated amortization. Unamortized debt issue costs, including the cost ofrefunding, are amortized over the terms ofthe respective issues. Other deferred costs are amortized generally over five years.
hie>esuneurs Investments include United States Government and governmental agency securities and repurchase agree-ments which are collateralized by such securities. These investments are stated at amortized cost, which in general is not in excess ofmarket. As discussed in Note C, all ofthe investments are restricted as to their use.
Cash and cash equivalents Cash and cash equivalents include cash and all investments with maturitics less than ninety days.
Revenues Revenues consist ofbillings to participants for the sales ofelectric energy and oftransmission service in accord-ance with the participation agreements.
Generally, revenues are fixed at a level to recover all operating and debt service costs over the commercial lifeofthe plant. (See Note F).
Debr expenses Debt expenses include interest on debt, and the amortization ofbond discounts, debt issue and refunding costs.
NOTE CSpecial funds:
The Bond Indentures for three ofthe four projects require the followingspecial funds to be established to account for the Authority's receipts and disbursements.
The moneys and investments held in these funds are restricted in use to the purposes stipulated in the bond indentures. A summary of these funds follows:
Ptsnd iield by Purpose Construction Trustee To disburse funds for the acquisition and construction ofthe Project Debt Trustee To pay interest and principal related to the Service Revenue Bonds Revenue Trustee To initiallyreceive all revenues and disburse them to other funds Special funds, in thousands, were as follows:
Operating Trustee To pay operating expenses Reserve and Trustee To pay capital improvements and make up Contingency deficiencies in other funds and, in the case ofthe Palo Verde Project, accumulate funds for decommissioning General Trustee To make up any deficiencies in other funds Reserve Advance Trustee To disburse funds for the cost ofacquisition Payments ofcapacity 1989 June 30, 1988 project Carry tng Value xfarket Carrying Value xfarket Palo Verde Southern Transmission System Hoover Uprating Mead-Phoenix
$219,980
$225,200
$223,808
$231,600 180,557 180,400 171,784 171,100 34,897 34,800 33,927 33,600 1,154 1,200 1,857 1,900
$436,588
$441,600
$431,376
$438,200 Palo Verde Project The special funds required by the Bond Indenture contain balances, in thousands, as follows:
June 30, 1989 1988 Construction Fund Initial Facilitics Account Debt Service Fund Debt Service Account Debt Service Reserve Account Bond Anticipation Note Fund Revenue Fund Operating Fund Reserve and Contingency Fund Total Special Funds
$ 49,415
$ 48,666 63,733 90,217 30 353 5,644 10,588
$219,980 63,780 90,050 30 421 11,155 9,706
$223,808 Southern Transmission System Project The special funds required by the Bond Indenture contain balances, in thousands, as follows:
June 30, 1989 1988 Construction Fund Initial Facilities Account Debt Service Fund Debt Service Account Debt Service Reserve Account Revenue Fund Openting Fund General Reserve Fund Total S pccial Funds 5,309
$ 10,310 43,548 88,948 6,8 14 15,777
$ 160,396 41,086 89,079 I
7,239 3,908
$ 151,623 At June 30, 1989 and 1988, the Authority had non-interest bearing advances outstanding to IPA of$20,161,000.
Hoover Uprau'ng Project The special funds required by the Bond Indenture contain balances, in thousands, as follows:
June 30, 1989 1988
$ 19,947
$23,244 7
400 340 Mead-Phoenix Project AtJune 30, 1989 and 1988, the bal-ance in the Development Fund was $ 1,154,000 and $ 1,857000, respectively, ofwhich substantially all were invested in securi-ties ofthe United States Government.
Advance Payments Fund Revenue Fund Operating Working Capital Fund Debt Service Fund Debt Service Account 710 714 Debt Service Reserve Account 3,615 3,620 Total Special Funds
$24,679
$27,918 AtJune 30, 1989 and 1988, the Authority had non-interest bearing advances to USBR of $ 10,218,000 and $6,009,000, respectively.
20
NOTE DLong-term debt:
Palo Verde Project To finance the purchase and construc-tion ofthe Authority's share ofthe Palo Verde Project, the Authority issued Power Project Revenue Bonds pursuant to the Authority's Indenture ofTrust dated as ofJuly 1, 1981 (Bond Indenture), as amended and supplemented.
Reference is made to the Combined Schedule ofLong-Term Debt at June 30, 1989 for details related to outstanding bonds.
The Bond Indenture provides that the Revenue Bonds shall be special, limited obligations ofthe Authority payable solely from and sccurcd solely by (1) proceeds from the sale of bonds; (2) all revenues, incomes, rents and receipts attribu-table to the Palo Verde Project (see Note E) and interest on all moneys or securities (other than in the Construction Fund) held pursuant to the Bond Indenture; and (3) all funds estab-lished by the Bond Indenture (excluding the Decommissioning Account in the Reserve and Contingency Fund); subject to the provisions ofthe Palo Verde Project Bond Indenture providing for the application thereof.
Alloutstanding Power Project Revenue Term Bonds, at the option ofthe Authority, are subject to redemption prior to maturity.
The Bond Indenture requires mandatory sinking fund instal-ments to be made beginning in fiscal year 1998 for the 1982 Series A Bonds, 1999 for the 1982 Series B Bonds and the 1983 Series A Bonds, 2001 for the 1984 Series A Bonds and the 1985 Series A Bonds, 2003 for the 1986 Series A Bonds, the 1986 Series B Bonds and the 1987 Series A Bonds and 2005 for the 1985 Series B Bonds and 1989 Series A Bonds. Scheduled principal maturities for the Palo Verde Project during the five fiscal years followingJune 30, 1989 are $ 14,370,000 in 1990,
$ 15,255,000 in 1991, $ 16,325,000 in 1992, $ 17,530,000 in 1993 and $ 18,860,000 in 1994. The average interest rate on outstand-ing debt during fiscal years 1989 and 1988 was 70% and 7.2%,
respectively.
and $ 12,100,000 in 1994. The average interest rate on outstand-ing debt during fiscal years 1989 and 1988 was 74% and 77%,
respectively.
Hoover Upraring Project To finance advance payments to USBR for application to the costs ofthe Hoover Uprating Pro-ject, the Authority issued Hydroelectric Power Project Reve-nue Bonds pursuant to the Authority's Indenture ofTrust dated as ofMarch 1, 1986 (Bond Indenture). Reference is made to the Combined Schedule ofLong-Term Debt at June 30, 1989 for details related to the outstanding bonds.
The Bond Indenture provides that the Revenue Bonds shall bc special, limited obligations ofthe Authority payable solely from and secured solely by (1) the proceeds from the sale ofthe bonds; (2) all revenues from sales ofenergy to participants (see Note E); (3) interest or other receipts derived from any moneys or securities held pursuant to the Bond Indenture; and (4) all funds established by the Indenture ofTrust (except for the Interim Advance Payments Account in the Advance Payment Fund); subject to the provisions ofthe Bond Indenture provid-ing for the application thereof.
Alloutstanding Hydroelectric Power Project Revenue Term Bonds, at the option ofthe Authority, are subject to redemption prior to maturity.
The Bond Indenture requires mandatory sinking fund instal-ments to be made beginning in fiscal year 2002 for the 1986 Scrics A Bonds. The next scheduled principal maturity for the Hoover Uprating Project is $490,000 in 1994. The average interest rate on outstanding debt during fiscal years 1989 and 1988 was 8.0%.
Thc Authority estimates that the total financing requirements for its interest in the Hoover Uprating Project willapproximate
$34 million, substantially all ofwhich willbe expended for payments for capacity and associated firmenergy and the acquisition ofentitlemcnts to capacity.
Southern Transmission System Project To finance payments-in-aid ofconstruction to IPA for construction ofSTS, the Authority issued Transmission Project Revenue Bonds pur-suant to thc Authority's Indenture ofTrust dated as ofMay 1, 1983 (Bond Indenture), as amended and supplemented.
Refer-ence is made to the Combined Schedule ofLong-Term Debt at June 30, 1989 for details related to the outstanding bonds.
The Bond Indenture provides that the Revenue Bonds shall
~
be special, limited obligations ofthe Authority payable solely from and secured solely by (1) proceeds from the sale of bonds; (2) all revenues, incomes, rents and receipts attributable to STS (see Note E) and interest on all moneys or securities (other than in the Construction Fund) held pursuant to the Bond Indenture; and (3) all funds established by the Bond Indenture; subject to the provisions ofthe Bond Indenture providing for the application thereof.
NOTE DLong-term debt: (continucd)
Alloutstanding Transmission Project Revenue Term Bonds, at the option ofthe Authority, are subject to redemption prior to maturity.
The Bond Indenture requires mandatory sinking fund instal-ments to be made beginning in fiscal year 2000 for the 1984 Series A Bonds, 2001 for the 1984 Series B Bonds and the 1985 Series A Bonds, 2003 for the 1986 Series A Bonds, 2002 for the 1986 Series B Bonds, and 2007 for the 1988 Series A Bonds. Scheduled principal maturities for STS during the five fiscal years followingJune 30, 1989 are $5,825,000 in 1990,
$9,890,000 in 1991, $ 10,545,000 in 1992, $ 11,295,000 in 1993 21 Mead-Phoenix Project The Authority borrowed $ 14,148,000 to finance the feasibility study and development costs ofthe Mead-Phoenix Project. During April 1988, thc Authority adopted a note retirement plan. The plan involved voluntary payments by each participant ofits proportionate share of the liabilitywith respect to the loan. During thc year ended June 30, 1989, the Authority received from the participants
$ 14,048,000 retiring all the notes but $ 100,000. These receipts are shown as Advances from Participants. Authority man-agement anticipates repaying these advances during fiscal 1991 or later.
Refiwding bonds During fiscal year 1989, the proceeds from the sale of$295,005,000 ofPower Project Refunding Bonds werc used to advance refund $ 187635,000 ofpreviously issued bonds and the proceeds from the sale of$239,320,000 of Transmission Project Revenue Bonds were issued to refund
$ 147,995,000 ofpreviously issued bonds. In connection there-with, the net proceeds ofthe refunding bonds have been invested in securities ofthe United States Government, the principal and interest from which willbe sufficient to fund thc remaining principal, interest and call premium payments on the refunded bonds until the stated first call dates ofthe respec-tive issues. Accordingly, all amounts related to the refunded bonds have been removed from the balance sheets and the cost ofrefunding the debt is included in unamortized debt expenses. AtJune 30, 1989 the aggregate amount ofdebt considered to be extinguished was $2,210,680,000.
NOTE FCosts recoverable from future billings to participants:
Billings to participants are designed to recover "costs" as defined by the power sales and transmission service agree-ments. The billings are structured to systematically provide for debt service requirements, operating funds and reserves in accordance with these agreements.
Those expenses, according to generally accepted accounting principles (GAAP), which are not included as "costs" are deferred to such periods as they are intended to be rccovercd through billings.
Costs recoverable from future billings to participants are comprised ofthe following:
June 30, Fiscal 1989 l988 hcihiiy June 30, l989 GAAP items not included in billings to participants:
Depreciation ofplant Amortization ofbond dis-count, debt issue costs, and cost ofrefunding
$ 63,521
$ 36,634
$ 100,155 32,951 20,845 53,796 NOTE EPower sales and transmission service contracts:
The Authority has sold its entitlement to the output ofthe Palo Verde Project pursuant to power sales contracts with ten parti-cipants (see Note A). Under the terms ofthe contracts, the participants are entitled to power output from the Palo Verde Nuclear Generating Station and are obligated to make pay-ments on a "take or pay" basis for their proportionate share of operating and maintenance expenses and debt service on Power Project Revenue Bonds and other debt, whether or not the Palo Verde Project or any part thcrcof has been completed, is oper-ating or operable, or its output is suspended, interfered with, reduced or curtailed or terminated. The contracts expire in 2030 and, as long as any Power Project Revenue Bonds are outstanding, cannot be terminated or amended in any manner which willimpair or adversely affect the rights ofthe bondholders.
The Authority has entered into transmission service con-tracts with six participants ofSTS (see Note A). Under the terms ofthe contracts, the participants arc entitled to transmis-sion service utilizing STS and are obligated to make payments on a "take or pay" basis for their proportionate share ofopera-ting and maintenance expenses and debt service on Transmis-sion Project Revenue Bonds and other debt, whether or not STS or any part thereof has been completed, is operating or operablc, or its service is suspended, interfered with, reduced 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 willimpair or adversely affect the rights ofthe bondholders.
In March 1986, the Authority entered into power sales con-tracts with six participants ofthc Hoover Uprating Project (see Note A). Under thc terms ofthe contracts, the participants are entitled to capacity and associated firmenergy ofthe Hoover Uprating Project and are obligated to make payments on a "take or pay" basis for their proportionate share ofoperating and maintcnancc expenses and debt service whether or not the Hoover Uprating Project or any part thereof has been com-pleted, is operating or is operable, or its service is suspended, interfered with, reduced or curtailed or terminated in whole or in part. The contracts expire in 2018 and, as long as the Hydro-electric Power Project Revenue Bonds arc outstanding, cannot be terminated or amcndcd in any manner which willimpair or adversely affect thc rights ofthe bondholders.
Nuclear fuel amortization and decommissioning Interest expense Bond requirements included in billings to participants:
Investment income, operations and maintenance, net Cost of'acquisition of capacity STS Reduction in debt service due to excess construction Principal repayments Other 11,327 6,214 6,810 18,137 (3) 6,211 (23,533)
(6,731)
(30,267)
(11,750)
(11,750) 40,999 40,999 (15,355)
(20, 195)
(35,550)
(1,476)
(1,868)
(3,341)
$ 114,648
$ 23,742
$ 138,390 SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY INDEXTO SUPPLEMENTALFINANCIALINFORMATION Combined Schedule of Long-Term Debt at June 30, 1989 Palo Verde Project Supplemental Balance Sheet at June 30, 1989 and 1988.
Supplemental Statement ofOperations for the Years Ended June 30, 1989 and 1988.
Supplemental Statement ofCash Flows for the Years Ended June 30, 1989 and 1988.
Supplemental Schedule of Rcccipts and Disbursements in Funds Required by the Bond Indenture for the Year Ended June 30, 1989.
Southern Transmission Systent Project Supplemental Balance Shcct at June 30, 1989 and 1988.
Supplemental Statcmcnt ofOperations for the Years Ended
- June30, 1989and 1988.
Supplemental Statement of Cash Flows for the Years Ended June 30, 1989 and 1988.
Supplemental Schedule ofReceipts and Disbursements in Funds Required by the Bond Indenture for the Year Ended June 30, 1989.
Hoover Uprating Project Supplemental Balance Sheet at June 30, 1989 and 1988.
Supplemental Statement ofOperations for the Years Ended June 30, 1989 and 1988.
Supplemental Statement ofCash Flows for the Years Ended June 30, 1989 and 1988.
Supplemental Schedule ofReceipts and Disbursements in Funds Required by the Bond Indenture for the Year Ended June 30, 1989.
Mead-Phoenix Project Supplemental Balance Sheet at June 30, 1989 and 1988.
Supplemental Statement ofCash Flows for the Years Ended June 30, 1989 and 1988.
NOTE>> GCommitments and contingencies:
As a participant in the PVNGS, the Authority could be subject to assessment ofretroactive insurance premium adjustments in the event ofa nuclear incident at the PVNGS or at any other licensed reactor in the United States.
The Authority is involved in various legal actions. In the opinion ofmanagement, the outcome ofsuch litigation or claims willnot have a material effect on the financial position ofthe Authority or the respective separate projects.
22
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY COMBINEDSCHEDULE OF LONG-TERM DEBT ATJUNE 30, 1989 (In thousands)
Palo Verde Project Revenue and Refunding Bonds Southern Transmission System Project Revenue and Refunding Bonds Series 1982A 1982B 1983A 1984A 1985A 1985B 1986A 1986B 1987A 1989A 1984A 1984B 1985A 1986A 1986B 1988A Date of Sale 8/13/82 11/12/82 4/ 8/83 7/18/84 5/22/85 7/ 2/85 3/13/86 12/16/86 2/11/87 2/15/89 2/ 9/84 10/17/84 8/15/85 3/18/86 4/29/86 11/22/88 EPeetive Interest Rate 10.9%
7.7%
8.8%
10.3%
8.7%
9.1%
8.2%
7.2%
6.9%
7.2%
9.3%
10.2%
8.9%
8.0%o 7.5%
7.2%
Maturityon July I 1989 to 2017 1989 to 2017 1989 to 2017 1990 to 2004 1989 to 2014 1989 to 2017 1989 to 2015 1989 to 2017 1989 to 2017 1989 to 2015 1990 to 2004 1990 to 2000 1989 to 2021 1989 to 2021 1989 to 2023 1989 to 2015 Total 13,795 37,115 15,610 12,315 10,415 38,465 79,050 353,675 348,955 295,005 1,204,400 29,790 11,610 16,940 371,365 478,105 239,320 1,147,130 Hoover Uprating Project Revenue Bonds..........
Mead-Phoenix Bank Loan.
Total Principal Amount.
Less: Unamortized Bond Discount Palo Verde Project Revenue and Refunding Bonds Southern Transmission System Project Revenue and Refunding Bonds.
Hoover Uprating Power Project Revenue Bonds Total Unamortized Bond Discount Total Long-Term Debt Less Unamortized Bond Discount.
Long-Term Debt Due Within One Year Bonds u hieh hase been refunded are eaauded from this sehedute.
1986A 8/13/86
- 8. 1%
1993 to 2017 34,435 100 2,386,065 146,490 126,862 139 273,491 2,112,574 20,195
$2,092,379 23
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY PALO VERDE PROJECT SUPPLEMENTALBALANCESHEET (In thousands)
ASSETS June 30, 1989 1988 Utilityplant Production.
Transmission General Less Accumulated depreciation Construction work in progress Nuclear fuel, at amortized cost Net utilityplant Special funds Investments Interest receivable Cash and cash equivalents.
Long-term debt Current liabilities Long-term debt due within one year.
Accrued interest.
Accounts payable and accrued expenses LIABILITIES Commitments and contingencies Accounts receivable Materials and supplies Costs recoverable from future billings to participants Deferred costs Unamortized debt expenses, less accumulated amortization of
$24,106 and $ 18,643 in 1989 and 1988.
Other deferred costs 600,778 6,008 186 606,972 56,180 550,792 3,569 26,428 580,789 110,678 1,630 107,672 219,980 3,635 6,859 58,587 228,150 864 229,014
$ 1,098,864
$ 1,043,540 14,370 36,219 4,735 55,324
$ 1,098,864 600,458 5,988 81 606,527 34,224 572,303 2,028 31,330 605,661 139,559 2,204 82,045 223,808 836 6,528 42,967 210,841 1,309 212,150
$ 1,091,950
$ 1,028,965 13,095 37,573 12,317 62,985'1,091,950 24
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY PALO VERDE PROJECT SUPPLEMENTALSTATEMENTOF OPERATIONS (In thousands)
Year ended June 30, 1989 1988 Operating revenues Sales ofclcctric energy.
Operating expenses Nuclear fuel Other operation Maintenance Dcprcciation Decommissioning.
Expense charged to projects during construction.
Total operating expenses Operating income.....................
Invcstmcnt income Income before debt expenses....................
Debt expenses Interest on debt Allowance for borrowed funds used during construction.
Total debt expenses Costs recoverable from future billings to participants
$ 110,164
$ 85,828 10,628 19,635 5,518 17,427 5,699 58,907 51,257 18,239 69,496 85,116 85,116 9,042 13,313 6,388 13,589 4,652 (520) 46,464 39,364 11,072 50,436 84,033 (16,699) 67,334 S (15,620)
$(16,898)
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY PALO VERDE PROJECT SUPPLEMENTALSTATEMENTOF CASH FLOWS (In thousands)
Year ended June 30, 1989 1988 Cash flows from operating activities:
Costs recoverable from future billings to participants.
Adjustments to arrive at net cash provided by operating activities:
Depreciation Decommissioning Amortization ofdebt costs.
Changes in current assets and liabilities:
Interest receivable Accounts receivable.........
Materials and supplies Other assets Accrued interest Accounts payable and accrued expenses..................
Net cash provided by operating activities Cash flows from investing activities:
Payments for construction of facility.
Purchases ofinvestments.
Proceeds from sale ofinvestments Net cash provided by investing activities.
Cash flows from financing activities:
Proceeds from sale ofrefunding bonds.
Payment for bond issue costs.
Payment for defeasance ofrevenue bonds Payment for principal oflong-term debt.
Net cash used for financing activities Nct increase in cash and cash equivalents Cash and cash equivalents at beginning ofyear Cash and cash equivalents at end ofyear Supplemental disclosure ofcash flowinformation:
Cash paid during the year for interest (nct ofamount capitalized) 26,955 5,699 12,017 574 (2,799)
(331) 15 (1,354)
(7,582) 17,574 21,144 4,652 10,818 (451) 2,023 (6,528)
(198) 119 (1,952) 12,729 (7,781)
(101,134) 130,015 21,100 (13,890)
(141,956) 160,638 4,792 185,200 (4,325)
(180,827)
(13,095)
(13,047) 25,627 82,045 S 107,672 S
73,871 17,521 64,524 S
82,045 S
58,328 S (15,620)
$ (16,898) 25
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY PALO VERDE PROJECT SUPPLEMENTALSCHEDULE OF RECEIPTS ANDDISBURSEMENTS IN FUNDS REQUIRED BYTHE BOND INDENTURE Year Ended June 30, 1989 (In thousands)
Construction Fund initial Debt Facilities Sem'ce Account Fund Bond Anticipation Revenue Note Fund Fund Operating Fund Reserve dt Contingency Fund Total Balance at June 30, 1988.............
Additions Bond and note proceeds............
Investment earnings...............
Transfer ofinvestment earnings......
Revenue from power sales..........
Distribution ofrevenues............
Other income Transfer for interest payment........
Transfer ofinvestments............
Miscellaneous transfers............
Total Deductions Construction expenditures..........
Operating expenditures............
Fuel cost Payment ofprincipal..............
Interest paid Property tax Financing costs............
Interest paid on investment purchases Premium paid on investment purchases Loss on sale ofinvestment..........
Total Balance at June 30, 1989.............
2,250 4,384 6
10 672 (1,090) 6,232 (92) 13,069 (13,554) 84,835 102,906 3,259 661 191,084 2
(2) 164 15,241 101,670 (113,902)
(2,844)
(398)
(69) 854 (854) 25,106 76 (1,087) 605 24,700 2,158 846 19,319 (839)
(2) 101,670 3,961 86 102,906 221 (I) 4 189 226 136 2,621 76 2,208 263 13,095 177,667 273 22 333 5,678 1,995 115 2,506 776 10 5,127 23,109 5,678 13,095 177,667 2,071 2,208 661 5,171
$48,828 191,035
$ 154,423
$29 7
30,121 3,299 349
$ 5,636
$ 10,573 229,626
$219,838
$47,767
$ 154,374
$29 418
$ 11,057
$ 9,683
$223,328 This schedule summarizes the receipts and disbursements in funds required under the bond indenture and has been prepared from the trust statements. The balances in the funds consist ofcash and investmcnts at original cost. These balances do not include accrued interest receivable of$ 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 SUPPLEMENTALBALANCESHEET (In thousands)
June 30, 1989 1988 Utilityplant Transmission General Less Accumulated depreciation.
Construction work in progress Nct utility plant Special funds Investments Advance to Intermountain Power Agency Interest receivable Cash and cash equivalents.
Long-term debt.
Current liabilities Long-term debt due within onc year.
Accrued interest.
Accounts payable and accrued expenses LIABILITIES Commitments and contingencies Accounts receivable Costs recoverable from future billings to participants Deferred costs Unamortized debt expenses, less accumulated amortization of
$21,539 and $ 16,910 in 1989 and 1988 661,255 18,857 680,112 57,272 622,840 4,287 627,127 95,927 20,161 1,174 63,295 180,557 547 80,807 174,258
$ 1,063,296
$ 1,014,443 5,825 37,259 5,769 48,853 656,773 18,724 675,497 38,064 637,433 912 638,345 98,160 20,161 855 52,608 171,784 71,776 161,546
$ 1,043,451 998,578 2,260 38,611 4,002 44,873
$ 1,063,296
$ 1,043,451 SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY SOUTHERN TRANSMISSION SYSTEM PROJECT SUPPLEMENTALSTATEMENTOF OPERATIONS (In thousands)
Year enrled June 30, 1989 1988 Operating revenues Sales oftransmission services Operating expenses Other operation.
Maintenance Depreciation.
Total operating expenses Operating income Investment income Income before debt expenses.
Debt cxpcnse Interest on debt Costs recoverable from future billings to participants
$94,769 8,137 3,205 19,207 30,549 64,220 10,784 75,004 84,035
$ (9,031)
$ 82,332 8,750 3,159 19,975 31,884 50,448 19,996 70,444 83,979
$(13,535) 27
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY SOUTHERN TRANSMISSION SYSTEM PROJECT SUPPLEMENTALSTATEMENTOF CASH FLOWS (In thousands)
Year ended June 30, j989 J988 Cash flows from operating activities:
Costs recoverable from future billings to participants.
Adjustments to arrive at net cash provided by operating activities:
Depreciation Amortization ofdebt costs.
Changes in current assets and liabilities:
Interest receivable Accounts receivable Accrued interest Accounts payable and accrued expenses Net cash provided by operating activities.
Cash flows from investing activities:
Payments for construction of facility
, Purchases ofinvestments.
Proceeds from sale ofinvestments Refund from Intermountain Power Agency.
Net cash used for investing activities Cash flows from financing activities:
Proceeds from sale ofrefunding bonds.
Payment for bond issue costs.
Payment for defeasance ofrevenue bonds.
Payment for principal oflong-term debt Net cash used for financing activities.
Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning ofyear Cash and cash equivalents at end ofyear Supplemental disclosure ofcash flow information:
Cash paid during the year for interest (net ofamount capitalized) 19,207 9,125 (319)
(547)
(1,352) 1,767 18,850 19,975 6,820 2,113 2,662 774 18,809 (7,990)
(61,515) 63,748 (5,757)
(25,307)
(133,287) 133,657 820 (24,117) 156,050 (2,457)
(153,739)
(2,260)
(2,406) 10,687 52,608 63,295 (5,308) 57,916 52,608 72,906 77,221 (9,031)
$ (13,535) 28
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY SOUTHERN TRANSMISSION SYSTEM PROJECT SUPPLEMENTALSCHEDULE OF RECEIPTS ANDDISBURSEMENTS IN FUNDS REQUIRED BYTHE BOND INDENTURE Year Ended Junc 30, I989 (In thousands)
Construction Funil-initial Dcln Facilitics Senice Account Fiind Revenue Fiitul Operating Fioid General Resene Fund Total Balance at June 30, 1988 Additions Bond and note interest received........
Investment earnings.
Revenue from transmission sales.......
Transfer ofinvestments Transfer ofinvestment earnings.......
Transfer of funds Distribution ofrevenue Transfer for interest payment..........
Other receipts Total Deductions Payments-in-aid ofconstruction.......
Operating expenditures Principal payment Intcrcst paid.
Interest paid on investmcnt purchases...
Premium paid on investment purchases Total Balance at June 30, 1989.
910 (1,863) 2,393 1,440 518 8,835 1,788 (8,684)
(3,893) 79,102 91,578 169,244 241 94,534 (912) 9,740 (103,603) 570 (522) 587 (876)
(534) 518 11,143 94,534 (5,756) 11,816 12,685 91,578 2,393 11,862 194,410 11,864 6,192 31 11 6,234
$ 5,302 2,260 164,484 153 2
166,899
$ 131,477 12,306 48 12,354
$ 6,740 62 3
65
$ 15,631 6,192 12,306 2,260 164,484 294 16 185,552
$ 159,150
$ 10,096
$ 129,132
$ 7,230
$ 3,834
$ 150,292 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 ofcash 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 $477 at June 30, 1989 and 1988.
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY HOOVER UPRATING PROJECT SUPPLEMENTALBALANCESHEET (In thousands)
ASSETS l989 June 30, l988 Special funds Investmcnts Advances for capacity and energy, net Interest receivable Cash and cash equivalents Long-term debt Current liabilities Accrued intcrcst.
Accounts payable and accrued expenses LIABILITIES Commitments and contingencies...
Billingsto participants in excess ofcosts recoverable Deferred costs Unamortized debt expenses, less accumulated amortization of$ 155 and $ 102 in 1989 and 1988..
$ 18,747 10,218 292 5,640 34,897 (1,004) 1,107
$35,000
$34,296 689 15 704
$35,000
$20,584 6,009 264 7,070 33,927 (95) 1,159
$34,991
$34,294 689 8
697
$34,991 29
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY HOOVER UPRATING PROJECT SUPPLEMENTALSTATEMENTOF OPERATIONS (In thousands)
Year ended June 30, Operating revenues Sales ofelectric energy Operating expenses Capacity charges Energy charges.
Other operation Total operating expenses Operating income Investment income....
Income before debt expenses Debt expense Interest on debt.
Billings to participants in excess ofcosts recoverable 1989
$2,760 391 596 140 1,127 1,633 2,033 3,666 2,757 909 1988
$2,530 235 652 244 1,131 1,399 3,992 5,391 5,296 95 SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY HOOVER UPRATING PROJECT SUPPLEMENTALSTATEMENTOF CASH FLOWS (In thousands)
Year enrleel Junc 30, 1989 1988 Cash flows from operating activities:
Billings to participants in excess ofcosts recoverable Adjustments to arrive at net cash provided by (used for) operating activities:
Amortization ofdebt costs.
Changes in current assets and liabilities:
Interest receivable Accounts receivable...
Accounts payable and accrued expenses Net cash provided by (used for) operating activities.
Cash flows from investing activities:
Advances for capacity and energy, net Purchases ofinvestments.
Proceeds from sale ofinvestments Net cash (used for) provided by investing activities.
Cash flows from financing activities:
Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning ofyear Cash and cash equivalents at end ofyear Supplemental disclosure ofcash flow information:
Cash paid during the year for interest (net ofamount capitalized) 909 54 (28) 942 (4,209)
(10,248) 12,085 (2,372)
(1,430) 7,070 5,640 2,757 95 54 238 66 (816)
(363)
(2,945)
(6,159) 11,685 2,581 2,218 4,852 7,070 2,757 30
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY HOOVER UPRATING PROJECT SUPPLEMENTALSCHEDULE OF RECEIPTS ANDDISBURSEMENTS IN FUNDS REQUIRED BYTHE BOND INDENTURE Year Ended June 30, 1989 (In thousands)
Adhrtnce Payments Fimd Interim rtdvance Payments Fund Revenue Fund Operating Itbrtdng Debt Ghpttal Service Fund Account Debt Serhice Reserve Account Total Balance at June 30, 1988.
Additions Investment earnings Transfer ofinvestment earnings........
Sales Transfer ofsales receipts.
Transfer ofinvestments.
Miscellaneous transfers.
Total.
Deductions Advances for capacity and energy.......
Administrative expenditures...........
Interest paid.
Interest paid on investmcnt purchases....
Premium paid on investment purchases..
Total.
Balance at June 30, 1989.........
1,758 518 (4,699) 3,258 835 204 (204) 4,699 (3,258) 1,441 3
(3) 2,760 (2,753) 37 46 295 2,343 30 (46)
(295) 2,760 2,753 67 2,753 5,103 135 20 425 580
$20,009 5,195 5,195 327 2,757 7
7 2,757
$400 710
$3,624 5,195 135 2,757 27 425 8,539
$25,077
$ 19,754
$4,081
$340 714
$3,624
$28,513 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 ofcash 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 SUPPLEMENTALBALANCESHEET (In thousands)
Utilityplant Construction work in progress.
Special funds Investmcnts Cash and cash equivalents ASSETS Long-term debt Current liabilities Long-term debt due within onc year Accrued interest Accounts payablc and accrued expenses LIABILITIES Advances from participants Commitmcnts and contingencies.
Deferred charges Unamortized debt expenses, less accumulated amortization of$563 and $509 in 1989 and 1988..
June 30, I989
$ 12,999 1,089 65 1,154
$ 14,153 100 I
4 5
14,048 I988
$ 12,600 1,843 14 1,857 54
$ 14,511 100 14,048 351 12 14,411
$ 14,153
$ 14,511 31
SOUTHERN CALIFORNIAPUBLIC POWER AUTHORITY MEAD-PHOENIXPROJECT SUPPLEMENTALSTATEMENTOF CASH FLOWS (tn thousands)
Cash flows from operating activities:..
Year ended June 30, 1989 1988 Cash flows from investing activities:
Payments for feasibility study Purchases ofinvestments.
Proceeds from sale ofinvestments Net cash provided by investing activities.
Cash flows from financing activities:
Payment oflong-term debt Proceeds from advances from participants Net cash provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning ofyear Cash and cash equivalents at end ofyear Supplemental disclosure ofcash flow information:
Cash paid during the year for interest (net ofamount capitalized)
(703)
(4,818) 5,572 51 (14,048) 14,048 51 14 S
65 (1,061)
(4,479)
',546 6
6 8
14 32
I JCNIIl
~)~)h1~
Vi)'>
Ill,ll
)l!, ld3L Ik P,.+'Q0 II.
C~f~l','tLl'C)'
QapIe 11l I 11 II I II(f.
,11'I lI '
II j 5 l
'I*M f
PUBLIC SEIIVICE Technical assistance from the Los Angeles Depart-ment ofWater 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 ofdevastation from Hurricane Hugo. The crews worked for two weeks under the direction ofthe 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 ofwater utilityworkers and an engineer-adviser werc sent to a rural system outside ofSanta 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 utilityindustry councils.
F R 0 M T H E 8 0 A R D 0 F lVAT E R A N D 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 ofWater and Power for thc fiscal year 1988-89, reviewing 12 months ofchallenge and achievement. The decade ofthc 1990s promises new challenges for the public utilityindustry, 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 ofquality 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 ofproviding water and electric power to this large and diverse commu-nity requires the dedication and commitment of thousands ofpeople who make up the DWP family. As ahvays, we are in their debt.
Once again, we owc a large measure ofour success to the support and leader-ship ofthc Mayor and City Council, as well as the other elected City officials and City departments.
Rick J. Caruso Prcsidcnt
COBIIsARATIVE HIGHLIGHTS Year cndcd June 30 1989 Water
%%us Increase l988 (Dccrcasc) 1989 POHet'%us Increase 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 utilityplant 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 FP 22 Pp
55 37 1 Other 2 Fire Hydrant rentals 5 Governmental 37 Residential 55 Commercial and intlustrial 4 Payments to thc City 8 Ret'uement Plan costs related to operations 12 Capital improvements 16 Debt service costs 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 pg i.s 31 Pg~
53 2 Street lighting 3 Other 14 industrial 28 Residential 53 Commercial 13 4 Retirement Plan costs rclatcd to operations 5 PaymentstothcCity 9 Debt scrvicc costs 11 Capital improvements 12 Operating salaries and wagcs ---
13 Other operating expenses 15 Fuel 31 Purchased energy
INTRODUCTION Ft "Accommodating our customers, large and small, wi11 he the, measure, ofour
'uccess in the 1990s, "says Norman L<. Nichols, General Manager and Chief 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 utilitysector'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 ofWater 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 ofWater and Power supplies water and electricity to the approximately 3.4 millionresidents ofthe nation's second largest city. As the largest municipally owned utilityin 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 ofwater 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 ofwater and electricity. Revenue bonds are its main source of external financing.
The DWP is administered by the Board ofWater 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
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DIP CUSTOMERS Tomorrotv's most successful utilities tvi11 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.
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On the next several pages are four exam-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 GriffithPark 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."
D W P 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 ofall U.S. cities.
As the community has become multilingual and cross-cultural, Department ofWater 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 ofethnic and cultural backgrounds.
The influxof newcomers to Los Angeles has been accompanied by a rapid growth in ethnic cntcrprise, with special utilityservice 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 ofover 810 million, it is a major consumer ofelectricity 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 ofother needs." Herrera's command ofSpanish is an important adjunct to his technical exper-tise. Although the general manager ofEl 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 utilitybusiness 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 l.ine Patrol ttcchanic DWP Rudolph )larris Electrical Distribution
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D lV P C U S 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 ofthe City's Department of Recreation and Parks and the Department ofPublic Works, reclaimed water is already used to irrigate two GriffithPark golfcourses, and it willsoon 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 ofthe DWP. "As supplies offresh water get tighter, they know deliveries ofreclaimed 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 ofpressure during drought periods," says Jack Clough, Vice President ofArchitecture and Engineering for the Forest Lawn Company, which has more than 100 acres oflawn 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 Senior Water Utility Wartier/DWP Rebecca Rosenfeltt Assistant District Clerk DKVP 12
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D W P C U S 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 ofWater and Power carly in 1988 to institute its Major Accounts Group (MAG), to serve the special needs ofthc DWP's 1,500 largest customers, for whom reliability ofservice 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 of30,000 and growing, is an example ofa major DWP account. And in a couple ofyears CSUN willbe 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 ofher 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 ofincoming 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 followthrough and make sure everything comes together.
"We'e moving our project along generally on schedule," says CSUN Director ofFacilities Planning, Steven C. Lohr. "Sue Smith is one of the people helping us keep it there."
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D lV P C U S T 0 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 ofthe advantages over conventional heating and air conditioning," says Steve iilatsuda, Director ofthe DWP Heat Pump Group.
"People like their flexibility,convenience and clean operation." So far, the DWP has paid out more than 84 millionin 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.
liarry Junco Electrical Conduit Mechanic/DWP Linda Sawlsvillo Senior Clerk Typist DWP 20
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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 ofWater 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 ofwater from the Metropolitan Water Dis-trict and ofelectrical 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 billiongallons to some 640,572 customers in 1988-89, compared with 203.6 billiongallons and 637,793 customers in the previous year. The record year for water use was 1986-87, when the DWP sold more than 210 billiongallons.
The Power System in fiscal 1988-89 sold 21.9 thousand gigawatt-hours ofelectricity 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 LI G IITS 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 ofSupervisors 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 ofwater from the Mono Basin until the water level at Mono Lake rises to 6,377 feet.
Replacing the water the City willlose from this injunction, along with lost electricity generated by Mono Basin runoff, willrequire increased water imports from the Sacramento Delta and willcost 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 ofthe City's total water demand goes through this plant. Levels oftrichloroethylene 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 millionwas invested last year in improvements to some 95 miles of the DWP's vast underground water delivery system (infrastructure). This work consisted ofcement-lining 65 miles ofsmall 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 GriffithPark, moved toward completion in 1989-90 (see page 12).
Over a millionlow-flowshower 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 ofthe City's water conservation ordinance, which restricts usc ofwater for such pur-poses as driveway and sidewalk cleaning, remains in effect. Beginning July 1989 a 10 percent surcharge willapply to commercial and industrial customers who fail to comply with the City's sewer flow reduction ordinance.
A new $2 millionaeration tower for treating ground water from DWP wells in the San Fernando Valley was completed in March 1989. The facilityemploys new technology developed jointly by the DWP and UCLA.
The average water billin Los Angeles increased around $2.35 pcr month in 1988-89 because ofhigher costs ofpurchased water and a 9.2 percent revenue increase that became effective in October 1988.
iVATER SYSTEM FACTS IN BRIEF Year enaerl June 30 Usc ofIVatcr Average Los Angeles population served Average daily use per capita (gallons)
Water sales for fiscal year (billiongallons)
Maximum daily demand (milliongallons) l989 3,427,000 181.2 208.1 833.1 l988 3,388,000 180.8 203.6 841.0 Water Supply (in cubic feet pcr second)
Local supply DWP Aqueduct Metropolitan Water District (California Aqueduct and Colorado River Aqueduct)
Gross supply Diversion from (to) local storage Net supply to distribution systems 188.3 451.9 319.2 959.4 1.5 960.9 166.9 573.6 207.7 948.2 (0.3) 947.9
DiVP POWE It S Y STEM IIIGII LIGHTS The Power System completed several steps in 1988-89 to improve service and increase the reliabilityof electrical supplies to its customers.
The Scattergood Generating Station in Playa del Rey received approval from the South Coast AirQuality Management District (SCAQMD) to operate its Unit 3 at the full460-megawatt capacity, a 24-percent increase from its original permit limit. Untiltesting is completed, however, the unit willcontinue 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 ofelectricity they can receive from the Pacific Northwest by more than 50 percent.
Major electrical customers of the DWP are the focus ofa new Major Accounts Group formed within the Power System last year as an outgrowth ofthc System's long-range plan completed in 1988. The new unit willprovide a wide range ofcustomized services to nearly 1,500 accounts responsible for about a third ofthe City's power revenues.
(See page 7.)
Release ofthe 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 ofelectric vehicles by the year 2000.
The plan also calls for major nitrogen oxides (NOx) emission reductions from power plants, while facilitating the rcpowering ofexisting facilities. The 240-megawatt Harbor Repowering Project was an outgrowth ofthis 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 ofthe cutbacks, the DWP burned an extra 1,725,000 barrels oflow-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 ofdemand) in 1988-89. The DWP also offers financial incentives to encourage customers'sc ofefficient 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 ofone percent oftotal air emissions in the Basin. Emissions from employee vehicles have also been reduced through an active ride-sharing effort at the DWP.
Development ofsafe, efficient electric vehicles remains a DWP priority. Six preproduction copies ofthe 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 ofpurchased fuel and electric power, electric revenue increases of4.4 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 Power Use Domestic customers Commercial customers Industrial customers Allothers 1989 1,135,017 168,031 19,370 2,864 1988 1,116,806 165,229 19,740 2,828 Total customers all classes 1,325,282 1,304,603 Sales to ultimate consumers kilowatt.hours Sales to other utilitieskilowatt-hours Average annual kilowatt-hours pcr domestic customer 21,460,324,000 437,311,000 5,181 20,936,158,000 169,800,000 5,029 Status ofSystem Utilityplant (less accumulated provision for depreciation)
Generating Stations Net dependable capability, kilowatts 3 3,523,937,000 7,280,000' 3,324,924,000 7,280,000*
'ncluded purchased capacity; does not deduct short tenn sales ofescess capacity.
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0 P E R AT I 0 N S 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 ofthe calls.
Delinquent accounts are being reduced under programs introduced or expanded in 1988-89. An Essen-tial Public UtilityOrdinance 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 utilitybills. 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 ofolder customers, the DWP instituted its "Serving Our Seniors" (SOS) program last year. Under thc program, DWP personnel watch for signs ofseniors in distress.
When a problem is found, DWP personnel report it to thc City's Department ofAging 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 ofthe opening ofthe 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 ofthe original.
Significant strides were made during 1988-89 in the area ofaffirmative action. Minorities and/or women now occupy one third ofall "officialsand administrators" positions and halfofall 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 offield 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 ofDWP management access to a wide range ofcomputer 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 of3.8 percent in sales ofelectric energy and a 2.2 percent increase in water sales.
Operating revenues ofthe Department's Water and Power Systems totaled more than 82.0 billion, a gain of$ 189 millionover the previous fiscal year. Thc Power System accounted for $ 146 millionofthe increase, primarily due to higher energy costs billed to customers, thc increase in sales mcntioncd above and the effect ofthe October 1988 revenue increase of4.0 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 ofthe October 1988 revenue increase of9.2 percent.
Higher Water System operating revenues resulted in net income of842 million, up 24 percent from 1987-88s total of834 million.
A total of8118 million was spent by the Water System on capital construction, most ofwhich went towards the improvement ofthe 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 millionin the previous fiscal year.
The Power System invested $336 millionin capital construction for the year. Major expenditures werc additions and modifications to the electrical distribution and transmission facilities.
Total assets ofthe Department at June 30, 1989, were approximately 85.6 billion. Ofthis 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 millionrevenue bonds at the interest rate of7.36 percent. The Water System sold onc issue of350 millionrevenue bonds at the interest rate of7.22 percent.
Outstanding bonds, notes and revenue certificates at Junc 30, 1989, totaled 81.74 billion for the Power Sys-tem and 8400 millionfor 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 ofoperation, debt service and part ofthe cost ofcapital improvements from current revenues. The remainder of thc cost ofcapital improvements is met through sales ofrevenue bonds or notes and from contributions in aid ofconstruction.
Besides meeting all costs ofoperation from current revenues, the Department paid morc than $91 million into the Reserve Fund ofthe City in support ofgeneral City government.
Approximately 86 percent ofthat amount came from the Power Revenue Fund. Operations ofthe Water and Power Systems are entirely self-supporting and no financial obligation or tax burden is placed on thc citizens ofLos Angeles.
33
CITY OF LOS ANGELFS DEPARTMENT OF WATFlt AND POWEtt REPORT OF MANAGEAIENT The management ofthe Department ofWater and Power ofthe City ofLos 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 followwerc 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 ofmanagement.
Thc Department maintains a system ofinternal 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 ofthe Department. This system is supported by written policics and procedures, organization structures that assign appropriate division ofresponsibility, the selection and training ofqualiTied personnel and is augmented by programs ofinternal audits. Management recognizes that there are inherent limitations in the effective-ness ol'any internal control system based upon thc recognition that the cost ofsuch systcrns should not exceed the benefits to be derived. The Department bclievcs that its system ofinternal 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 ofthc flnancial statements and the adequacy ofthe internal controls.
The Board ofWater and Power Commissioners is responsible for reviewing the Department's financial reports and monitoring accounting practices. The Board, composed ofcommissioners who are not officer or employees of the Department, receives and reviews the reports submitted by the independent accountants.
34
CITY OF LOS ANGEI.ES DEPARTMENT OF WATER AND POWER WATER SYSTEM STATEMENT OF INCOME (ln Thousands)
Operating Revenues Residential Commercial and industrial Other Total operating revenues Year ended Junc 30 1989 8110,069 166,558 23,621 300,248 1988 5 94,525 142,456 20,051 257,032 1987 8 92,436 135,163 20,775 248,374 Operating Expenses Purchased water Purchased energy Other operating expenses Maintenance Depreciation Total operating expenses Operating Income Loss on Abandonmcnt of Chatsworth Reservoir Other Income and Expenses, Net Income before debt expenses 44,988 12,991 109,627 38,424 32,814 238,844 61,404 6,477 67,881 31,072 11,613 95,443 34,243 30,584 202,955 54,077 2,685 56,762 26,765 8,806 87,634 28,691 26,586 178,482 69,892 (10,675) 4,524 63,741 Debt Expenses Interest on debt Allowance for borrowed funds used during construction Total debt expenses 27,556 (2,006) 25,550 23,749 (1,380) 22,369 22,039
~(2,939 19,100 Net Income 3 42,331 3 34,393 3 44,641 STATEMENT OF RETAINED INCOME REINVESTED IN THE BUSINESS (In Thousands)
Balance at beginning ofyear Net income for the year Year cndcd June 30 1989
$464,500 42,331 1988 8442,526 34,393 1987
$409,186 44,641 Less Payments to the reserve fund ofthe City Balance at end ofyear 506,831 12,852 476,919 12,419 453,827 11,301 5493,979 3464,500 3442,526 The accompanying notes are an integral part ofthcsc financial statements.
35
CITY OF LOS ANGELES DEPARTAIENT OF WATER AND POWER WATER SYSTEM BALANCE SHEET (InThousands)
Assets Juno 30 I988 UtilityPlant, at original cost Source ofwater supply Pumping Purification Distribution General
'Less Accumulated depreciation 243,355 53,499 139,947 1,105,323 122,252 1,664,376 542,259 236,592 48,969 132,699 1,022,138 110,029 1,550,427 510,225 Construction work in progress Net utilityplant 1,122,117 79,947 1,040,202 74,526 1,202,064 1,114,728 Current Assets Cash and investments Customer and other accounts rcccivable Accrued unbillcd revenue
'aterials and supplies, at average cost Prepayrnents and other current assets Total current assets 89,091 54,166 29,056 16,112 11,539 199,964 84,329 54,772 21,671 15,489 14,906 191,167 Total utilityplant and assets 51,402,028 81,805,895 Capitalization and Liabilities Capitalization Equity Retained income rcinvested in the business Contributions in aid ofconstruction 493,979 376,599 8
464,500 357,829 Long-term debt Total capitalization 870,578 379,724 822,329 350,188 1,250,302 1,172,517 Current Liabilities Long-terin debt due within one year Accrued interest Accounts payable and accrued expenses Customer deposits Total current liabilities 20,180 9,432 83,472 38,642 151,726 20,270 7,752 69,544 35,812 133,378 Commitments and Contingencies Total capitalization and liabilities 51,402,028 51,805,895 The accompanying notes are an integral part ofthese 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 Adjustmcnts to reconcile net income to net cash provided by operating activities:
Dcprcciation Loss on Abandonmcnt ofChatsworth Reservoir Allowance for borrowed funds used during construction Changes in current assets and liabilities:
Customer and other accounts receivable Accrued unbilled revenue Materials and supplies Prepayments and other current assets Accrued interest Accounts payablc and accrued expenses Customer deposits 32,814 (2,006) 30,584 (1,380) 26,586 10,675 (2,939) 606 (7,385)
(623) 3,367 1,680 13,928 2,830 (9,252) 3,983 (999)
(65) 1,287 97 1,571 (10,511)
(7,764)
(1,067) 1,026 (281) 2,574 6,414 42,331 8 34,393 8 44,641 Nct cash provided by operating activities 87,542 60,219 69,354 Cash Flows From Financing Activities:
Sale ofrevenue bonds Contributions in aid ofconstruction Reduction oflong-term debt Payments to the reserve fund ofthe City Net cash provided by (used in) financing activities 49,500 18,770 (20,054)
(12,852) 35,364 84,626 31,878 (19,327)
(12,419)
'4,758 23,005 (19,248)
(11,301)
(7,544)
Cash Flows From Investing Activities:
Expenditures for plant and equipment (118,144)
(97,784)
(91,673)
Cash and Invcstmcnts:
Net increase (decrease)
Beginning ofyear End ofyear 4,762 84,329 8
89,091 47,193 37,136 8 84,329 (29,863) 66,999 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 ofthese linancial statements.
37
CITY OF LOS ANGELES DEPARTMENT OF WATER AND POWER WATER SYSTEM NOTES TO FINANCIAL STATEMENTS Note ASummary of Significant Accounting Policies The Department The Department ofWater and Power ofthe City of Los Angeles exists under and by virtue of the City Charter enacted in 1925 as a separate proprietary agency ofthe City. Thc Water System is responsible for the quality and distribution ofwater for sale in the City.
Financial statement presentation The financial statements ofthe Water System are presented in conformity with generally accepted accounting principles, and substantially in conformity with the uniform system ofaccounts prescribed by the California Public UtiliticsCommission except for the method ofaccounting for contributions in aid ofconstruction described below. The Department is not subject to regulations ofsuch commission.
Utilityplant The cost ofadditions to utilityplant and replacements ofretired units ofproperty 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 ofrepairs and minor replacements are charged to appropriate maintenance accounts. The original cost ofproperty 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 ofthe City and its independent operating departments are invested on a combined basis. These investments are valued at cost, which approximates market. AtJune 30, 1989 and 1988, cash and investments include $6 millionand $4 million, respectively, ofrestricted balances related to bond redemption and interest funds and self-insurance fund.
Contributions in aid of construction Under the provisions ofthe City Charter, amounts received from customers and others for constructing utilityplant are combined with retained income reinvested in the business to represent equity for purposes ofcomputing 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 utilityplant.
Revenues Revenues consist ofbillings to customers for water consumption and include amounts resulting from a purchased water and energy cost adjustment formula designed to permit the fullrecovery ofpurchased water and energy costs. The Department projects these costs to establish the cost recovery component ofcustomer billings and any diffcrcnce between billed and actual costs, resulting in over-or under-recovery ofpurchased 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 ofa 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 ofthe 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 ofaverage depreciable utilityplant 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 ofthe 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 ofthe cost ofutilityplant and is credited to income as a reduction ofdebt 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 ofCalifornia enacted more stringent safety standards for earth lilled dams which would have required the rcplacemcnt ofthe 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 ofupgrading the dams and complying with increased water quality standards pre-cluded rcfillingthc reservoir. Therefore, the project was formally abandoned, resulting in a utilityplant write-offof
$ 10.7 million as ofJune 30, 1987.
Note C Long-Term Debt Long-term debt outstanding at June 30, 1989, consisted ofrevenue 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 millionand
$ 13 million, respectively.
Note DShared Operating Expenses The Water System shares certain administrative functions with the Dcpartmcnt's Power System. Generally, the costs ofthese functions are allocated on the basis ofbenefits provided to the Systems.
Operating expenses shared with the Power System werc 8251 million, $256 millionand $235 millionfor fiscal years 1989, 1988 and 1987, respectively, ofwhich $85 million, $89 million and $82 millionwere allocated to the Water System.
Note E Employee Benefits The Department has a funded contributory retirement, disability and death benefit insurance plan covering substan-tiallyall ofits employees. Plan benefits are generally based on years ofservice, age at retirement and the employees'ighest 12 consecutive months ofsalary 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 ofStatement ofFinancial Accounting Standards No. 87, "Employers'ccount for Pensions!'he adoption ofthis 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):
Service cost Interest cost Actual return on plan assets Nct amortization and deferral Nct retircmcnt plan cost Disability and death benefit plan costs and administrative expenses Total benclit plan costs 19S9 19SS
('i 10 3 11 41 38 (61)
" (10) 39 (11) 29 28 5
4 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 ofthe plan's total costs for fiscal year 1987 amounting to ()33 million.
The followingschedule reconciles the funded status ofthe plan with amounts reported in the financial statements (amounts in millions):
Actuarial present value ofbenefit obligations:
Vested benefits Non-vested benefits Accumulated benefit obligation Projected future compensation level Projected bcncfit obligation Plan assets at fair value Projected benefit obligation in excess ofplan assets Unrecognized nct gain and effects ofchanges in assumptions Unrecognized nct obligation at July 1, 1987 being recognized over 15 years Accrued pension liability Junc 30.
19S9
$481 1
482 95 577 432 145 (26)
(94)
S 25 June 30, 1988
$ 411 2
413 72 485 367 118 8
(101) 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 ofincrease in future compensation levels was 6.0 lo in both years. The long-term rate ofreturn on plan assets was 8.0 lo in both 1989 and 1988. Plan assets consist primarilyofcorporate 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 ofproviding such benefits to retired employees amounted to $2 million, 83 million and S2 millionfor fiscal years 1989, 1988 and 1987, respectively.
Note F Commitnicnts and Contingcncics Payments to the reserve fund of the CityUnder the provisions ofthe City Charter, the Water System trans-fers funds at its discretion to the reserve fund ofthc City. Such payments are not in lieu oftaxes and are rccordcd as distributions ofretained income. The Department expects to make payments of815 millionin fiscal year 1990 from the Water System to thc rcscrve fund ofthe City.
LitigationA number ofclaims and suits arc pending against thc Department for alleged damages to persons and property and for other alleged liabilities arising out ofits operations. In the opinion ofmanagement, any ultimate liabilitywhich may arise from these actions willnot materially affect the Water System's financial position as of June 30, 1989.
40
CITY OF I,OS ANGEI,ES DEPART'EIENT OF WATER AND POWER REPORT OF INDEPENDENT ACCOUNTANTS August 28, 1989 To the Board ofWater and Power Commissioners Department ofWater and Power City ofLos Angeles In our opinion, the accompanying balance sheet and the related statements ofincome, retained income reinvested in the business and cash flows present fairly, in all material respects, the financial position ofthe Water System ofthe Department ofWater and Power ofthe City ofLos Angeles at Junc 30, 1989 and 1988, and the results ofits opera-tions and its cash flows for each ofthe three years in the period ended June 30, 1989, in conformity with generally accepted accounting principles. These financial statements are the responsibility ofthe 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 ofmaterial 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.
41
CITY OF I.OS ANGEI.ES DEPARTh1ENT OF WATER AND POWER P 0 W E R S Y S T E ili S TATE M E N T 0 F I N C 0 M E IInThousands)
Operating Revenues Residential Commercial and industrial Other Year ended Junc 30 1989 484,591 1,162,027 69,703 1988 430,696 1,085,557 53,775 1987 4y 388,730 963,151 51,560 Total operating revenues Operating Expenses Fuel for generation Purchased power Other operating expenses Maintenance Depreciation Total operating expenses 253,576 534,462 364,394 148,742 136,954 228,499 470,957 339,219 153,062 124,004 219,944 355,975 307,960 147,673 115,629 1,438,128 1,315,741 1,147,181 1,716,321 1,570,028 1,403,441 Operating Income Other Income and Expenses, Net Income before debt expenses Debt Expenses Interest on debt Allowance for borrowed funds used during construction Total debt expenses 278,193 18,257 296,450 110,289 (7,268) 103,021 254,287 18,037 272,324 102,437 (5,674) 96,763 256,260 19,754 276,014 96,926 (7,759) 89,167 Net Income 8
198,429 8
175,561 8
186,847 STATEMENT OF RETAINED INCOi)IE REINVESTED IN THE BUSINESS IInThousands)
Balance at beginning ofyear Net income for the year Year ended Junc 30 1989 S1,785,701 193,429 1988 81,680,322 175,561 1987 81,561,388 186,847 Less Payments to the reserve fund ofthe City Balance at cnd ofyear 1,979,130 78,502 1,855,883 70,182 1,748,235 67,913 51,900,628 81,785,701 81,680,822 Thc accompanyins notes are an inteSral part ofthese linancial statements.
42
CITY OF LOS ANGEI.ES DEPARTSIENT OF WATER AND POWER POWER SYSTEBI BALANCE SHEET (In Thousan Js)
Assets UtilityPlant, at original cost Production Transmission Distribution General Less Accumulated depreciation June 30 1989 81,756,070 641,473 2,005,735 320,030 4,723,308 1,458,485 1938 81,749,777 561,178 1,845,703 284,625 4,441,283 1,356,344 Construction work in progress Nuclear fuel, at amortized cost Nct utilityplant 3,264,823 241,729 17,385 3,084,939 215,435 24,550 3,523,937 3,324,924 Current Assets Cash and investments Customer nnd other accounts receivable, less $2,400 and $2,500 allowance for losses Receivable from Intermountain Power Agency Accrued unbilled revenue (Materials and supplies, at average cost Fuel inventory Prcpaymcnts and other current assets Total current assets 143,183 169,084 49,573 94,576 85,061 60,721 27,663 629,861 179,170 143,310 88,782 74,663 56,123 37,776 579,824 Total utilityplant and assets 34,153,798 33,904,748 Capitalization and Liabilities Capitalization Equity Retained income rcinvested in thc business Contributions in aid ofconstruction
$ 1,900,628 123,041 81,785,701 104,825 Long-term debt Total capitalization 2,023,669 1,602,469 1,890,526 1,554,170 3,626,138 3,444,696 Current Liabilities Long-term debt duc within one year Revenue certificates Accrued interest Accounts payable and accrued expenses Over-recovered energy costs Extension and other deposits Deferred creditIntermountain Power Agency Total current liabilities 51,930 90,000 36,526 238,036 47,687 13,908 49,573 527,660 53,545 90,000 30,648 212,380 57,552 15,927 460,052 Commitincnts and Contingencies Total capitalization and liabilities 34,153,798 33,904,748 Thc accompanying notes are an integral part ofthese financial statements.
GlTY Of LOS ANGELES DEPARTMENT Of WATER AND POWER P 0 W E R S Y S T E ill S TATE ihI E NT 0 F C A S H F LOW S (in Thousands)
Year ended Junc 30 1989 1988 1987 Cash Flows From Operating Activities:
Net income Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation Amortization ofnuclear fuel Allowance for borrowed fund used during construction Changes in current assets and liabilities:
Customer and other accounts receivable Receivable from Intermountain Power Agency Accrued unbilled revenue Materials and supplies Fuel inventory Dcfcrred energy costs Prepayments and other current assets Accrued interest Accounts payable and accrued expenses Over-recovered energy costs Extension and other deposits Deferred creditIntcrmountain Power Agency Net cash provided by operating activities 136,954 7,527 (7,268) 124,004 7,516 (5,674) 115,629 5,936 (7,759)
(25,774)
(49,573)
(5,794)
(10,398)
(4,598) 10,113 5,878 25,656 (9,865)
(2,019) 49,573 313,841 (3,023)
(4,247)
(11,654) 9,774 8,928 (7,509) 4,191 (30,593)
(15,644)
(3,750) 247,880 (244)
(806)
(1,189)
(4,078) 17,856 (18,659)
(47)
(72,546) 3,935 2,228 227,103 8 193,429 8 175,561 8 186,847 Cash Flows From Financing Activities:
Sale ofrevenue bonds Sale ofadvance refunding bonds Contributions in aid ofconstruction Reduction oflong-term debt Amount deposited in escrow account and offset against advance refunding bonds Payments to the reserve fund ofthe City Net cash provided by (used in) financing activities 99,527 18,216 (52,843)
(78,502)
(13,602) 198,108 13,473 (67,223)
(70,182) 74,176 47,312 6,644 (60,835)
(47,312)
(67,913)
(122,104)
Cash Flows From Investing Activities:
Expenditures for plant and cquipmcnt (336,226)
(317,316)
(303,360)
Cash and Investments:
Nct increase (decrease)
Beginning ofyear End ofyear (35,987) 4,740 (198,361) 179,170 174,430 372,791 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 ofthcsc iinancial statements.
CITY OF LOS ANCELES DEPARTMENT OF Wh'rER AND POWER POWER SYSTEM NOTES TO FINANCIAL STATEMENTS Note ASummary of Significant Accounting Policics The Department The Department ofWater and Power ofthe City ofLos Angeles exists under and by virtue of the City Charter enacted in 1925 as a separate proprietary agency ofthc City. The Power System is responsible for the generation, transmission and distribution ofelectric power for sale in the City.
Financial statement presentation-The financial statements ofthc Power System arc presented in conformity witE> generally accepted accouiiting principles, and substantially in conformity with tlie uniform system ofaccounts prescribed by the Federal Energy Regulatory Commission and the California Public Utilities Commission except for the method ofaccounting for contributions in aid ofconstruction described below. The Department is not subject to regulations ofsuch coinmissions.
Utilityplant The cost ofadditions to utilityplant and replacements ofretired units ofproperty 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 ofrepairs and minor replacements are charged to appropriate maintenance accounts. The original cost ofproperty 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 ofIncome on the basis ofactual thermal energy produced relative to total thermal energy expected to be produced over the lifeofthe fuel. Under the provisions ofthc Nuclear i~Vastc Policy Act of 1982, the federal government assumed responsibility for thc future disposal ofspent nuclear fuel.
Nuclear decommissioning Decommissioning ofthe 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 ofthe estimated decommissioning costs is 835 million in 1986 dollars. Decominissioning costs are charged as part ofdepreciation expense over the life ofthe nuclear power plant.
A Nuclear Decommissioning Fund has been established and the Power System is setting aside funds for its sharc ofthe 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 ofthe 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 millionand 812 million, respectively, ofrestricted 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 ofthc City Charter, amounts received from customers and others for constructing utilityplant arc combined with retained income reinvested in the business to represent equity for purposes ofcomputing the Power System's borrowing limits. Accordingly, contributions in aid ofconstruction are shown in the accompanying balance sheet as an equity account and are not offset against utilityplant.
Revenues Revenues consist ofbillings to customers for consumption ofelectric energy and include amounts resulting from an energy cost adjustment formula designed to permit the fullrecovery ofenergy costs. The Depart-rncnt projects these costs to establish the energy cost recovery component ofcustomer 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 ofenergy 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 ofa 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 ofthe 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 ofaverage depreciable utilityplant in service was 3.2% for each ofthe 1989, 1988 and 1987 fiscal years.
Debt expenses Debt premium, discount and issue expenses are deferred and amortized to expense over the lives ofthe related issues.
Allowance for funds used during construction (AFUDC)AFUDC represents the costofborrowed funds used for the construction ofnew facilitics. AFUDC is capitalized as part ofthe cost ofutilityplant and is credited to income as a reduction ofdebt 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 ofJuly 1, 1988, an amendment to an Intcrmountain Power Agency (IPA) bond resolution provided for the use ofsurplus construction funds from the Intermountain Power Project. As a member participant ofthis project, the Department's share ofsuch surplus funds totaled $ 110 inillionat July 1, 1988, to be received over a three to four year period. AtJunc 30, 1989, the Department had a receivable from IPA of850 millionwhich represented a deferred credit for use as a future reduction ofpurchased power expense.
Note C Revenue Certificates AtJune 30, 1989 and 1988, the average interest rate ofrevenue certificates payablc was 6.4% and 4.9% with vari-ous maturities ofup to 130 and 242 days, respectively. Thc Department has an unsecured standby line ofcredit of v)90 millionwhich may be used ifthe certificates cannot be refinanced as they mature.
Note DJointly-Owned UtilityPlant 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 ofconstruction and operating costs. The followingschedule shows the Power System's investment in each jointly-owned utilityplant as included in the balance sheet at June 30, 1989 (dollar amounts in millions):
Fiant in Service Palo Verde Nuclear Generating Station (Note H)
Navajo Stcam Generating Station Mohave Coal Gcncrating Station Pacific Intertie DC Transmission System Other transmission systems Ownership Interest 5.7%
21.2%
20.0%
40.0%
Various 3490 180 75 161 72 3978 Aceumutated Depreciation 3 31 71 23 14 15
$ 154 Work In Progress 810 5
9 1
$25 46
The Power System willincur certain minimum operating costs on thc jointly-owned facilitics, regardless ofthe amount ofenergy gencratcd or thc ability to take delivery ofits sharc ofenergy generated. The proportionate share ofthese expenses is included in the appropriate categories ofoperating expenses.
Note E Long-Term Debt Long-term debt outstanding at June 30, 1989, consisted ofrcvcnue 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. Untilthe bonds to be refunded are called, interest on the advance ret'unding bonds is payablc from interest earned on securities ofthe United States government purchased out ofthe proceeds ofthe sales and held in escrow accounts with Citibank, N.A.,
New York. AtJune 30, 1989, $48 millionofthese 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 willbe 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 ofthese functions are allocated on the basis ofbcnelits provided to the Systems.
Operating expenses shared with the AVater System werc 8251 million, 8256 million and 8235 millionfor fiscal years 1989, 1988 and 1987, rcspectivcly, ofwhich $ 166 million, $ 167 million and 8153 millionwere allocated to the Power System.
Note G Employee Benefits The Department has a funded contributory retirement, disability and death benefit insurance plan covering substan-tiallyall ofits employees. Plan benelits are generally based on years ofservice, age at retirement and the employees'ighest 12 consecutive months ofsalary 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 ofStatement ofFinancial Accounting Standards No. 87, "Employers'ccounting for Pensions!'he adoption ofthis statement did not materially affect the Depart-ment's results ofoperations. 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 Intcrcst cost Actual return on plan assets Nct amortization and dcfcrral Nct rctircmcnt plan cost Disability and death benefit plan cost and adrninistrativc expenses Total benefit plan costs 3 33 3 35 130 120 (194)
'(31) 122 (37) 91 87 13 12
$ 104 3 99 The Power System was allocated 76% ofthc 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 followingschedule reconciles the funded status ofthe plan with amounts reported in the financial statements (amounts in millions):
June 30, Junc 30, 19S9
)938 Actuarial present value ofbenefit obligations:
Vcstc'd benefits Non-vested benefits Accumulated benefit obligation Projected future compensation lcvcl Projected benefit obligation Plan assets at fair value Projected bcncfit obligation in excess ofplan assets Unrecognized net gain an>ens Rn Aqueduct System 0>>ens Gorge Power Plan hlcCullough Switching Station UTAII NaYsJO Generating Station Hoorer Dam Power Plant stead Switching Station Et Dorado SubStation ARIZONA Phoenix Area Palo Verde Generating Station aqueduct O>>e Gorgo ISttstc Water t Sylmar Ttransm don Projectl
'\\
(/
Line Comcrter
/g I'
Stolon
$/
~)J.,i)
I Castalc il/
Po>>ef Plait t
Loa Angeks I
. Ioharc Arear Generating A Valley GeneratingStation I
Station A Scattergood Generattng Station A Haynes Generaung Section A Harbor 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 ofmiles away, is brought to L.A. by aqueduct to serve the needs ofthc 3.4 million population.
INFORMATION OF INTEREST IVater Power Thc amount ofwater consumed er,eryseconrf in tl c City nfl sAng<<le.
o Id lillamcdium-sized swimming pool.
The first water meter in Los Angeles was installed at a winery near the corner of Macy Street and Mission Road in 1889.
Los Angeles'argest body ofwater in terms of surface area is thc Los Angeles Reservoir in Mission Hills, covering 176.1 acres.
Los Angeles'argest body ofwater in terms of volume is Lower Stone Cmiyon Reservoir above Bel Air, Ital(ling 3.4 billion gallons.
Peak daily water demmid in the City of Los Angeles last year occurred on August 22, 1988, when 833 milliongallons werc delivered.
Annual rainfall in Los Angeles over the Inst decade has ranged from a high ofmore than 30 inches in 1982-83 to a law af less than 10 inches in 1980-81.
Daily per capita ivater consmnption here over the last decade has ranged from a high of around 190 gallons in 1984-85 to a low of less tlmn 170 gallons in 1978-79.
The lirst water works system in America was built in Boston, Mass. in 1652.
The first municipal water system in I~s Angeles was established in 1854.
America's first electrical power for street light-ing was gcncratcd by the California Electric Light Company ofSan Francisco in 1879.
The lirst clcetricity sold to private customers was generated by the Edison Electric Illumin-ating Campany in 1882.
It would take thc physical labor ofcvcry adult male in California working steadily from 9 to 5 to produce as much energy as thc DIP delivers in an hour.
Peak electrical demand in Los Angeles last year occurred an September 6, 1988, when 4,991 megawatts werc delivered.
The DIP owns, jointlyor with partners, nearly 300,000 power poles.
Cables used to carry DIP electricity, ifjoined cnd to cnd, would reach from coast to coast morc than five times.
The typical residential clcctric billin Los Angeles last year was around $35.43 per month.
The DIP maintains nearly 3,500 portable and mobile radio transmitters, nearly 1,500 individ-ual pagcrs mid 123 telephane switchboards, in order to communicate effectively and provide eAicient customer services.
Prolonged drought conditions in 1930 cut water flow through the Los Angeles Aqueduct tojust over 50 percent of normal, thc lowest level ever recorded.
The highest single day usage ofwater in Los Angeles 923 milliongallons 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 lOmll.90