ML20117M421
| ML20117M421 | |
| Person / Time | |
|---|---|
| Site: | South Texas  |
| Issue date: | 12/31/1995 |
| From: | Brooks E CENTRAL & SOUTH WEST CORP. |
| To: | |
| Shared Package | |
| ML20117M337 | List: |
| References | |
| NUDOCS 9609170437 | |
| Download: ML20117M421 (280) | |
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- Futems Cademar Leyalty
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[ L electric servise is ahmest 4.4 seen people is a widely everslied area severug y is 152,000 square uses.nis arm is the seesmHergest served by my elesbic se-: 'llerhet prin .. Omdads
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- ity spetsu.in to umlied States." ' Illh ; Lew i - Paid .
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. : De serpersben abe assirols SEEBRAM plc, a redesel elecindy esapers' the ' - 1995
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6 Other sdai6mies mood by the 'serpersbes are Transek, lac., m idrastate not-nirdquain 26%- -24% 0 430 ed gm pedne ad surholmg esapay; CSW Emers, lac, whis develops, .
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- suas ud operales senWly power preiects ni the ihnsd States; CSW Cruit, :
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Fest tunter.. z $30%1 $N% $0.425 k miiemi, Inc., whis partimpstes in power samraben, tramassise ad g,,
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{ 1996. Ilie' ads reRect sur systemi god af beht die energ sippler of theice may 6e obtairred by calling Centml and Luth IUst Corporationi sharholda scr-
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CSW Enterprises Profile CSil' Enterprises trunnsues tise non-utility l>usinesses of tise corjnwariors and its SEEBG4RD plc unit.
It prwided 23 percent of 1995 rewnnes and a return on cswrunors ecjuity of1011jnwent.
SEEBOARD pk E SEEBOARD suppie It operates appE== stwas in may cities and perfenns elecincal centractag ud mantenace.
h a joint vmbn with Amece,it wiu seu atural gas to catemers threshout the thited lingdom.
SEEBOARB aise has an emmenlup interest in independent power producten.
(muiens) 1995 opwatus nevanes $208 Netincane fw Commen Stock $ 10 Total Assets $2,821 (Inciales equity ennungs fw llevember ud futy *a-WJ resuNs for December)
,.w. gp Transok, lac.
.n+ c.u Transek, headquatwed in Tuba, is a intratate mated gm pipeEn and maketag absdisy. It ,
L- . also owns eight natural-gas-liquids processag phets and a 26-bilimHdefest umierpound I storage facibty. Transk markets gas en more the 30 other systems.
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(mEises) 1995 19H 1993 Operating Revenues $ 721 $647 $705 lietincome fwCommen Stock $ 25 $ 25 $ 19 Total Assets $ 766 $724 $684 CSW Energy, Inc., and CSW Intemational, Inc.
CSW Energy and CSW Internabend develop, een and operate cogeneration ad independent peen prepcts in the U.S. and othw ematns; CSW hternatmed aise inats in lweign utEty proportes. CSW Enerp has protects totaling 648 megawatts of guaraben.
"'8 (muiens) 1995 19M 1993 lietincese forCommen Stock $ 5 $1 $ (6)
Totd Assets $926 $ 300 $246 3
j gQg CSW Credit,Inc.
.7 "4 CSW Credit buys, without recour, the accouts receivable of the CSW eperating compamos aml 4
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<. w (su5 ens) 0,,ab,gme,,n,e, 1995
$ 71 1994
$ 59 1993
$ 57 i lietincese fw CmunenStock $ 8 $7 $ 7
! Tetd Assets $704 $716 $ 707 1 -
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% CSWCommumcations,Inc.
- .M, CSW t hemiquatered in Austin, Texas, develops and markets ow Catemer J. * ; Choice & Centrol" mergy-management program and related tecimales. The subudiary aise
!, ,I inests ' m city-to-city fiber optic telecommsucabens ins. In February 1996, CSW Causueca-
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[%3 ties wm the Erst emapany te lie an appicaba as a "umupt h campany" under the Teleceanuncabens Act of 1996.
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y ) Formed in 1995, EnerShop offers tecluscal analyss, financeg and intalaben of equp i save enerp and improve productmty. its primary markets are commercial office buildmes, gn-
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- ernmentd ad institubenal faciibes, grocery stores and latel chains, and light - - ,
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Chairman'sletter ;
The highlights on page 1 show that 1995 was an historic year for Central and South West Corporation.
We worked to expand our carent base of customers, to offer new services that add value to the energy they buy and to accelerate growth in areas that complement our core !
electric utility business.
In 1995 we realized 'w,oitzt results from our work doing the past several years l
to sharpen our corporate strategy and to prepare CSW to succeed in an era of increased com- i petition in the electric power industry.
SEEBOARDPurchase Most significantly, we acquired SEEBOARD plc, the regional electricity company that serves Southeast England. We believe SEEBOARD is the premier electricity supply and distribution utility in the United Kingdom. Among the 12 regional electric companies in England and Wales, g gQ it has achieved the lowest overal rates and the best retum for its shareholders since privati- y .
zation. it also holds the highest ratings for customer service, as measured by the U.K. Office of Electricity Regulation.
hi S We are extremely pleased with SEEBOARD's prospects and with its management fi team led by Jim Elis, SEEBOARD's chairman and chief executive. SEEBOARD more than doubles
[T O E our number of electric customers and improves the earnings outlook for our shareholders.
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Equaly important, SEEBOARD gives us a respected presence in Great Britain, with expansion h@sy.?
opportunities there and elsewhere in Europe as wel as expertise in operating in a highly com- ?g%wm&.R qm petitive electric power maket. i Mah implementingOurStrategy .
Besides expanding our core electric utility business, our corporate strategy consists of enhanc- M: ,
ing our core utility business, expanding our non-utility businesses and pursuing financial .
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initiatives. This strategy builds on our system's traditional competitive strengths: low-cost gen- 't - )
eration; a healthy, diversified service area; good relationships with customers and regulators; a ,
strong financial position; and experience in the marketplace of energy services. !
i 4
(! d Ourfourelectricoperating CSW Energy signed a centract CSWInternationalamounced y, g wi3 Philips Petrolema to build pins to build a cogeneration 5%}j compmesintheUnitedStates set records for kiewatt-hour a 300-megawatt, gas-fired plantin hiexicoin painerslup ig% sales and ped de:and; they cogeneration plant at Phillips' with the petrochemicals group refinery and petrochencais of Alfa Corporation,basedin g] centeuedapelyingbestbusi-ness pratices that add to the complex near Sweeny. Texas. Nesterrey. This wiH be one of g savings gained from our The plant is CSW Energy's the first electric power projects system's1993 restructuring. largest project to date. in llexico for a U.S.compay
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.q. ship as a aghbw and suppEw CSW Commuscahons connected Our new EnerShop" subsaliary-some 700 homesin Larede, which effers energy malysis Texas, to test ow Custeener ad retrofits for conunercial, Choice & Cutrol'" service. goverunental,instituhonal Using an advanced fiber optic andindusbialcustomers to help network,this urvice gives themlower their costs and We signed agreements to pro-customers preciseiniwmation improve productivity-received vide 163 megawatts of capacity about the cost of electric its first contract. / to three electric cooperatives poweratdifferenttimesof the that had been customers of day and the amount that other utilities.
their maior appiances are using. -
lt helps customus centrol We addressed several major their use of electricity and uncertanties, including a pro-reduce their bik. posed acquisition of El Pass The a tric Com,-a ,r-e'"8 ngarding the costsincend M FaceEM by our CentralPower and Light OfE g
Company subsidiary during h a1993-94 outage at the South Texas Project nucles power l plant;along-runningdispute with Westinghouse Doctric As reported by TORTUNfmagazine, a about the steam generators at On employees contributed to
$P, and a nview d the m 'apnssve $24 mMu 's University of Michigan study of customer sat-rates of sw WestTexas Utilities cost reduccons and savings as isfaction ranked CSW first among 19 of the Comp ysubsian part of on sp ds nt program I nation's largest electric utilities and one of the t""t 'P"*8"8 "d "'i"t'- i nace expenses.
top companies in the entire senite settor. l We acquired SEEBOARD plc,the regional electricity company that serves Southeast England. SEEBOARD, our first foreign subsidiary, more than doubles our number of customers.
We dedicated one of the cun-O_ARD We committed our corporation try's most comprehensive toimplementag a program to renewable-energy preiects- better understad and manage using12 wind tubines and the diversity among our cus-few advanced sola systems- tsmers, employees, suppliers new Fort Davisin West Texas. ard commauties.
1 CSW Electric Profile l Csls' filectric nuun.gnes tlue core clectric utility l'usincu of Central arul .%otati I1est Grporatiors. ,
it provi< led 77 percent of 1995 nrenuci and a return on common equity of 147 percent. l Central Power and Light Company m CPL prevides electncity to 614,000 customers in South Texas. Major cities served include Corpus M,y -
'"N" Cleisti, Victoria, limlingen, McAlen and Laredo. The wea's economy has many oil refinenes, petrochenmed plants and manufactrag industries. Cattle, citrus, vegetables and rice we inpor- NbO ,
tut agncultad products of the region. g g [,h , w, (milions) 1995 1994 1993 s a "
Operating Revenes $1,073 $1,218 $1,224 Netincome for Common Stock $ 192 $192 $ 158 Total Assets $4,881 $4,823 $4,782 i
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"- a Public Service Company c,f Oklahoma >
PS0 provides electncity to 473,000 customers in eastern and southwestern Oklahoma. Maior Doctric Utgity System cities served we Tulsa, McAlester, Lawton and Batlesvile. PSO's customers include may oil and " E,[,7,'"c'/$f7,""
natwal gas producers, pipelines, aircraft and aerospace industries, telecommumcations compa-nies, wood-products producers, as wel as fanning and rachmg.
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m a kutinnutem lilatnc (milions) 1995 1994 1993 , $[,Ijj"ly,]Y f ,,,,
Operating Revenues $ 691 $740 $ 708 Gentuny Net income fu Cannon Stock $ 81 $ 67 $ 46 Totd Assets $1,481 $1,465 $1,420 or system seves152,000 square miles. It's the second-
,u . largest electric system in Southwestent Dectric Power Company ,
M" N, the nation geographicah We SWEPC0, headquatered in Shrevepwt, Lousiana, serves 409,000 customers in northwestern j 9 ewn an er portions of Leumana, northeastern Texas and western Arkansas. Key cities are Fayettevile, Arkansas; Bossier 103 generating uuts, with a City, Lousiana; and Texarkana and Longview, Texas. Area industries include pulp and paper mils, (9' L b4 generating capaintty of automotive assembly, chenveds manufactwing and oi refining. ]{j 14,168 megawatts.
(milions) 1995 1994 1993 Operating Revenes $ 837 $ 825 $837 Netincome for Common Stock $ 114 $102 $ 79 Total Assets $ 2,117 $2,079 $1,968 U
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West Texas Utilities Company 7-c J
WTU provides electncity to 187,000 customers in Nath Centrd and West Texas. its major cities 9 p -
g are Abilene, its headquarters, and San Angelo. Of ad gas productum, fanning and ranchmg, cotton ginning and militwy bases we importat to the wea's economy.
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(milions) 1995 1994 1993 SID i Operating Revenues $ 320 $ 343 $345 ,M' d l)
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Net income fw Commu Stock $ 34 $ 37 $ 29 fsum, f,
Total Assets $ 816 $ 772 $ 754 g
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- 6j Central and South West Services, Inc. >
- hlqf , 2 O CSWS provides, at cost, professiend services for the corporation and its subsalianes, primarty
' # D "*h@ ,/ y the for electric operating companies. It has two divisions: Operation Services, based in Tulsa, provides data processmg, accounting, biling, employee benefits and administrative support;
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4a13, ' 31 Producten Services, based in Dalas, provides engmeenng, fuel procwement, environmenti and
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In kuplementing this strategy, te have focused on ways to make CSW not just bigger, but also better. This goal cleariy has been reRected in our utility acquisition efforts.
For more than two years, we used our best efforts to acquire El Paso Electric Company. Daing that time, its potential value declined considerably, partly because a major city it serves voted to form a municipal utility. Because conditions of the proposed merger were not
,, satisfied, including failure to receive aH required state and federal regulatory approvals, and because terms of the merger agreement were breached by El Paso Elechic, we terminated the merger agreementin June 1995.
In October, we joined with flouston industries in an attempt to acquire Norweb plc, another regional iJu; city company in the U.K. After a British water utility bid up Norweb's price, we withdrew, realizing that the acquisition would not be beneficial to our shareholders.
Shortly thereafter, we met with SEEBOARD's management and were extremely impressed by the company's innovative plans, its financial characteristics, its growth opportu-nities and its management group. It quickly became obvious to us that SEEBOARD was an excelent acquisition candidate for CSW.
The acquisition of SEEBOARD is a tribute to al the hard work of our employees Q , " " who have developed our strategic expansion plan and have patiently and systematicaly fol-lowed it dwing the past five years. With SEEBOARD, we are confident that we became not just
- bigger, but also better.
laternationalMilestones 1.ike the U.K., other countries now are encouraging private enterprises to invest in their electric power systems. This trend offers a rare window of oppoitsuity, especialy for successful American utilities experienced in al aspects of power production, transmission and distribution.
We intend to be very selective in our approach, screening the better prospects carefuly to eval-uate their risks and retens.
. ,'i.?
Carently, we are working with Alpek, the petrochemicals group of Mexico's Alfa Corporation, on a proposal to build a cogeneration plant on the east coast of Mexico at Altamira, Tamaulipas. We also are bidding on a major project in Thailand. These projects and others in the formative stages wil position us for expansion in many areas of the world.
5
FinancialPerfonnance Our financial perfonnance in 1995 improved over that in 1994. Operating income increased 10.4 percent, but several non-reewring items limited the increase in eamings. Our net income for common stock was $402 milion, compared to $394 milion in 1994. Our eamings per share were
$2.10, compared to $2.08 in 1994. For both net income and eaniings per share,1995 results cere al-time records. In Janary 1996, the board of tiirectors increased the dividend for the .
45th consecutive year-a record topped by only one other company listed on the New Verk Stock Exchange. Our 1996 annual indicated dividend rate is $1.74. -
StrengtheningOurU.S. Businesses We took significant steps towani assuring that the core of our company, our four U.S. electric l
utilties, wil remain strong and competitive. To yield fwther savings, we continued implement-g{c77 ln ing best business practices as part of the restructming of or utRity operations. In addition, or g fAf employees participating in our $ pend $ mart incentive program contributed to nearly $24 milion
@w.iki . . .
of additional savings in operation and maintenance expense. As a result of their innovative E P "_
efforts, they received one-fowth of the savings. The $ pend $ mart program reduced expenses h).(h[
that ultimately are charged to our customers and made our elechic utilities even more com- 9 m i~
petitive with other i.L; city suppliers. E.
We also introduced two new lines of business that can help meet customers' Z ;
needs, thereby adding more value to their electric service. 0w Customer Choice & Control pro- i ;. .
gram gives residential customers unprecedented control over their i.L;eity usage-the timing, M ;
the amount and the price. Ow new EnerShop subsidiary offers commercial, institutional, gov- k OSI:c
- - m '
emmental and industrial customers energy analysis, financing and instalation of equipment, so WhE '
that they can use energy more eflii..;i and f productively. These programs can increase our ,
j customer loyalty and help us retain our customers as competition increases. .
Our maior non-utaity subsidiaries also showed strength in 1995. CSW Energy and 1 CSW International, which develop and own independent-power and cogeneration projects and
- 21. ,.
foreign utilty properties, increased their contribution to earnings from $1 migion in 1994, the first year they contributed to net income, to $5 milion in 1995. CSW Energy began work on its largest project to date, a 300-megawatt cogeneration plant at the PhiHips Petroleum Company i facility near Sweeny, Texas. The work of CSW Intemational in identifying opportunities in the U.K. ultimately led to ow pwchase of SEEB0ARD.
1
Transok, our intrastate natural gas pipeline and maketing subsidiary, managed to keep gas throughput on its system at essentidy the same level as 1994 and maintained eamings at its 1994 level of $25 milion. Regulatory restrictions are keeping us from fdy developing Transok's potential Therefore, we are studying strategic alternatives to use Transok's assets better, including the possibility of seling the unit.
- LimitingUncertainties in 1995 we addressed several lingering uncertainties:
We ended our proposed merger with El Paso Bechic Company, although Etigation with 8 Paso Electric relating to the proposed merger is pending.
We settled a rate case related to an extended outage doing 1993-94 at the South Texas Project, a nuclear power generating station operated by Houston Lighting & Power Company and partialy owned by our Central Power and Light Company subsidiary. The settlement included a one-time base-rate refund of $50 milion to cpl's customers and an agreement not to seek recovery of $62 milion in fuel costs. Those costs have been charged to 1995 opera-tions. The settlement resolved d outage and prudence issues and resulted in no permanent rate decrease.
We favorably resolved a five-year legal dispute with Westinghouse Electric Corporation ove steam generators provided by Westinghouse to the South Texas Project. Steam generators are heat exchangers, which produce the steam to drive the plant's tubine generators.
We filed for an overal net rate increase of $54 milion for our Central Power and Light Company subsidiary, which has maintained base rates at the current level since 1991. The Public
.- .. .~
Utility Commission of Texas has announced that cpl's filing wiH become a test case for set-ting rates in a more competitive electric power market. We look forward to a process that's
- [.
fair to our customers and shareholders alike; a decision in the case is not expected before December 1996.
- N = We settled a rate case involving our West Texas Utilities Company subsidiary. The settlement resolved the deferred accounting treatment of WTU's Oklaunion power plant as wen as other regulatory issues. As a result, WTU lowered its base rates by $14 million annudy, issued a
$21 million refund and agreed not to seek any base-rate increase for three years. The set-tiement ended a maior uncertainty without impairing WTU's financial integrity.
1 1
l The Changing K'oddofBectdc Power The realignment of the electric utility industry picked up its pace during 1995, largely due to new state and federalinitiatives.1hese changes began with the Public Utility Regulatory Policies Act of 1978, which gave incentives to non-utility cogenerators. The momentum grew in 1992, when the Energy Policy Act exempted certain types of non-utility power generators from federal reg-ulations and allowed all electric power suppliers to compete for wholesale customers, such as ,
municipalities, mral electric cooperatives and govemment agencies.
At CSW, we welcome this competition. Indeed, we already are benefiting from some 300 megawatts of bulk-power sales to wholesale customers that had been sened by other i utilities. Furthennore, we are becoming an even lower-cost and more efficient business, enabling us to attract new wholesale customers.
As lawmakers and regulators consider new policies to promote competition in electricity markets, they should be guided by the essential principles of faimess and equity.
In particular, we believe these principles should be applied to remove the restric-tions imposed by the antiquated Public Utility Holding Company Act of 1935.
This act requires the few registered public utility holding companies like CSW to obtain permission from the Securities and Exchange Commission before taking actions out-side our basic utility service, including acquisitions and non-routine financings. The law places .
us at a distinct disadvantage compared to the hundreds of other exempt utilities and utility q
holding companies. This past year, we led a coalition of utilities seeking to repeal the Public Utility Holding Company Act. in October, a bill to repeal the act was introduced in the United States Senate with strong bipartisan support from the leadership of both parties.
During 1996 the Federal Energy Regulatory Commission will issue new regulations N to deal with competitive matters such as comparable transmission service and stranded invest- .
ment. The FERC's actions will help ensure that wholesale competition as envisioned by the Energy Policy Act becomes a reality. We believe that federal attention should focus on remov- S.
ing baniers to competition in the wholesale market.
Additional solutions to competitive issues in electricity will emerge at the state level. Many states, including those we sene, now are considering how consumers can be sened by competitive markets.
8
some special interests to seek " retail" competition. Retail competition would hann the best interests of the customers, shareholders and bondholders of many U.S. electric utilities. At risk would be biHions of doNars of power-plant investments that were made by U.S. utilities to meet their obligation to sene the public interest, necessity and convenience. This obligation has
, existed for neariy a century and is stiH in force today under current law. Until al these plant costs can be fully depreciated-or the costs, which were reasonably incurred, can be repaid, as was promised when the plants were built-it wiH be impossible to fashion a fuHy competitive retail electricity maritet that's fair to aH.
We shall strongly oppose attempts to impose retail competition on our industry without just compensation for the risks and investments the industry undertook to sene the public's demand for electricity. We do not oppose fair competition, but we do oppose confisca-tion under the guise of competition.
A WoddofSuccessfulRelationships As the electric power industry continues its evolution, so wiH CSW-with the same persistence and focus on shareholder value and customer service that characterized 1995.
One of the most exciting changes will be CSW's evolution as a global enterprise.
Last year, in anticipating this change, we committed our entire management to implementing a program to better understand and manage diversity. CSW's success wiH grow through forging valuable relationships with our customers, employees, shareholders, suppliers and others.
We are confident that our world wiH continue expanding and our performance will continue improving, just as they did in 1995.
Ef ER. Brooks
.- Chairman, President and Chief Executive Officer February 28,1996 9
Introducing SEEBOARD, Our Newest Electric Utility SEEBOARD plc is one of 12 regional electricity companies privatized when the United Kingdom restructured its electric industry in 1990. SEEBOARD's basic business is distributing and sup-plying electricity to about 2 million customers in Southeast England. It serves large parts of Surrey and West Sussex, al of East Sussex and most of Kent. its territory extends from the sub-urbs of 1.ondon south and east to the coast, including Brighton, Canterbury, Dover and the south ,
bank of the Thames, where it flows into the English Channel. This is a prosperous and attractive residential and semi-rural area, with some heavy industrv and new commercial developments near the Channel Tunnel link to France.
SEEBOARD consistently has been the most successful of the privatized regional electricity companies in many respects. It has a highly regarded management team, which since w ,.
privatization has led the company to five years of steady growth in earnings and dividends.
Through aggressive cost reduction, SEEBOARD has achieved the lowest overall electric rates in
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the U.K. Its success in a highly competitive electric power market offers lessons for our own # M, four U.S. utilities as they prepare for increased competition. Q, w$
SEEBOARD has established several important energy niches in addition to its dis- DM tribution and supply of electric power:
phd a A joint venture with Amoco to sell natural gas throughout the U.K. to take advantage of the ,
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introduction of competition into the domestic gas market. > ,
a Independent power production, including a 37.5 percent ownership of a new 660--megawatt, M gas-fired station on the Isle of Grain in Kent. ' '
= SEEBOARD shops and superstores that sel electric and gas appliances.
= Electrical contracting, including key contracts for the design, installation and maintenance of the Channel Tunnel's high- and low-voltage equipment. .,;
These initiatives offer promise for expanding our services in the U.K. and other European countries.
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How CSW has grown with SEB0ARD 1M** f* SU""0
- - - **FMRD Number of customers L7million 3.7 miEon Number of employees 7,900 12,000 Geographic service area 152,000 square miles 155,000 square miles Assets $11.1 biEon $13.9 biEon Revenues $3.5 biEon $5.3 biEon' Kilowatt-hour sales 60 biEon 78 biEon'
'ho ferru assarig hat CSWheW SEBMR0 for he M12 math of1995 10
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SEEBOARD serves the terminus of the Channellunnelconnect-ing England and France. Busi-l ne>s in the surrounding area is a slocate n arby and distrib-W~ g utors and manufacturers use j ..J;;,;j,
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air transportation to Continental Europe.
SEEBOARD prides itself on Hilary Dresser, a SEEBOARD Canterbury Cathedralis one supenor customer service. It employee and Bntish Olympic of the many historic sites in recently became the first U.K. canoeist represents Southeast England, a region ut&ty company to win the SEEBOARD's commrtment to rich in hentage and charm.
prestigious Daily Telegraph and the community. >
I Bntishielecommunications Customer Service Awards, which attracted more than 400 entnes.
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CSWs core electric utihty ,s y business is continuing to %
adopt best business practices in all operations to lower operatmg costs and increase our campetitive positinn.
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Among the advanced tech-days of record demands for electricity contributed to the M- nologies at the CSW
_]. , _5: renewables projectis the ep s 4:#' T 53 9 4.5 percent increase in our T: 5 An C""*i"5 5 -di5h Shr'i"8
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E20 EE-The CSW system's economic- Irena Muguerza, a telephone I development programs are service representative at CPt's helping attract new industry centralded telephone center, like this $100 million Whirlpool is using automated technology Corporation appliance plant to help serve customers more in Tulsa. As the plant pre- efficiently with 24 hour2.777778e-4 days <br />0.00667 hours <br />3.968254e-5 weeks <br />9.132e-6 months <br /> access.
pares to open, [d Hartung of Whirlpoolis working with Bob Crun, PS0 key account l executive. m MedlubinesM shries tal riss absm a ridp hlho -
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1he Core of CSW:Our U.S. Utilities 0w four danestic electric utdities, which serve parts of Texas, Oklahoma, l.ouisiana and Arkansas, have formed the core business of CSW since it was founded in 1925. In 1995 their operations provided 71 percent of the corporation's revenues.
The four utilities tumed in record-setting peifonnances in 1995. Their retail sales of itudi increased 2.5 percent over 1994. This growth was partly due to weather patterns, but also due to their fundamental strengths: low rates, economicdy diverse and growing ser-a vice areas, and a constant focus on customer service and marketing. 0ur system set a number of new d-time peaks for itudy demand during the summer of 1995; the new record, set on July 28, was12,314 megawatts.
3j Our utility business continued developing best business practices as part of an
- 1 overd restmetming which , began in 1993 The goalis to reduce costs and to improve efficiency y/mi to meet increased competition. As a result, many functions that had been performed by the four utilities individody 'aciuding certain power-plant functions, engineering, customer biling, accounting and administrative support-are now centralized in Central and South West Services.
The restructuring has allowed us to cut our staffing by more than 7 percent and to reduce operatingexpenses significantly.
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Fostedng Customer ioyally: New Products, New Senices As competition increases, the chalenge for electric utdities is to keep their carent customers and to attract new ones. We are meeting that chalenge by developing new products and ser-vices that give customers more control, more choice and more value than they would receive if they simply purchased electric power as a commodity.
For the past two years, we have been conducting extensive opinion research with our customers, including a detailed segmentation analysis to understand their personal inter-ests and concems related to electric power and energy use. These studies have identified 22 h categories of customers-far more than the traditional utility classification of customers into residential, commercial and industrial groups. Our sei; .dAicn study has led us to begin devel-oping several new customer-service programs. 7757q mp, s9 Customer Choice & Control" yRb k in I.aredo, Texas, we completed the first phases of a trial run of our Customer Choice & Control n .~v program, the country's largest and most advanced energy-management project.1he program h j [h h wil continue in 1996, providing new energy-management services, Internet access, seceity, tele- 1+ w jifam phey and vide opportunities. .jgjg in essence, the program works by sending residential customers real-time signals
$x $. C 4 M throughout the day about the cost of iady and the amount being used by their major appli- UWDMN
< n gown ances. The information is sent over a fiber-optic and coaxial cable netwat to their homes. *WF W qg Because it costs us more to produce i3&y at peak-use periods, the 3_.e%e.wy Customer Choice & Control customers have agreed to pay more dwing those times. But it costs f7ppggq us far less at other times; therefore, these customers pay less dwing those times and benefit 'N 'I 7 from the savings. By shifting their use of air conditioning, water heating and other maior appH-ances to lower-cost periods of the day, the Customer Choice & Control customers in I.aredo are , l saving, on average,7 to 10 percent on their monthly electric bins.
The Customer Choice & Control fiber-optic system also provides us with other 4.l l money-saving capabiRties, from automatic meter reading today to automatic biling in the future. It offers the opportunity to deliver new services to our customers, including telecom-munications, information and other related services.
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,4 '.x le meet shalesale Our system is expanding its ! i Our Customer Choice &
' seeds.- community leadership efforts. Control' advanced energy.
, PSO's Robert Coverly (center), management system is helping president of the Jay. 0klahoma, P. - more than 700 households Chamber of Commerce, often ( -l in laredo, Texas, reduce their meets about city matters with -
electricity consumption and Terry Sixkiller (left), vice save, on average,7 to 10 per-chairman of the Jay Industrial cent on their electric bills.
Trust Authority, and Jay Mayor Bill Roberts.
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i T campaign introduced in 1995. N lt's based on segmentation studies that help match cus-tomer programs with customer ;
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{ use and take advantage of lower electric rates during j our business. Visit us at 4 -
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! http1/www csw.com. video, telephony, home secunty l and Internet access-l
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is Patsylorres' message to kidsin South Texas who attend pon ed ene .
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More than 700 households in Laredo are participating in the Customer Choice &
Control program, with the number growing daily. The network has been expanded to reach more than 4,000 houses. Based on this experience, CSW Communications has submitted a proposal to establish a similar netwat in Austin, Texas.
The City of Georgetown, a neighboring community to Austin, has selected CSW Communications to instal an energy-management system for the city's 10,000 utility customers.
Construction in Georgetown is expected to begin in 1996 and to be completed in 1997.
CSW Communications owns or is constructing hundreds of miles of fiber-optic cable to conect key markets in CSW's four-state service area.
EnerShop" EnerShop loc., a new subsidiary fonned in 1995, offers commercial, institutional, governmental and industrial customers a range of services to help them use energy more efReiently and productively.
The services include formal assessments of an organization's energy use, recommendations for improving efficiencies, financing and instalation of new equipment, and development of proce-dures to reduce costs and increase productivity. The new equipment typicaly involves high-efficiency lighting; high-efficiency heating, air-conditioning and ventilation systems; improved
- fans, chilers and air-handling equipment; and variable-speed drives and high-efficiency motors.
j EnerShop signed its first contract in 1995 to provide energy-management services
~ to Matagorda Comty, Texas.
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Non-utility Energy Projects at flome and Abroad CSW Energy, Inc., and CSW Intemational, Inc., continued growing in 1995. Their business is to develop and own cogeneration and independent power projects in the U.S. and other countries.
CSW International also enables us to participate in transmission and distribution projects out-side the U.S. All projects are carefully screened to meet prospects for a good retum with a limited risk.
CSW Energy owns an interest in independent power projects with 648 megawatts of capacity, in 1994 CSW Energy made its first profit $2 million. In 1995 the combined contri-bution to earnings of CSW Energy and CSW Intemationalincreased to $5 million.
In 1995 CSW Energy started up its Grange cogeneration plant in Polk County, Florida. It provides thermal energy to an orange-juice processing plant and produces 103 .
megawatts of electric power, which is sold to two local utilities. ,
CSW Eneity also signed an agreement to build a 300-megawatt cogeneration L -( $-
plant at Phillips Petroleum Company's refinery and petrochemicals complex at Sweeny, Texas.
This project, scheduled for completion in 1998, will be the largest CSW Energy has constructed. c
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In addition, CSW Energy acquired the 85-megawatt Newgulf power plant near Wharton, Texas. it !
will be recommissioned and operated as an independent power project. Both the Sweeny and MaswameA f
Newgulf projects will connect with multiple transmission paths to reach several markets.
In the Pacific Northwest, CSW Energy positioned itself to expand by forming a partnership with an affiliate of Kansas City Power & l.ight Company and Kva Resources of
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- f6 Bellevue, Washington. The joint venture proposes to build and market 838 megawatts of nat ,
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ural-gas-fueled capacity near Creston, Washington. The Pacific Northwest faces the need for waAm nea generation partly because of restrictions on expanding hydropower. Environmental hear-ings have been completed, and a permit to proceed is expected in 1996. Project construction .
could begin as early as1998.
IntemationalProjects in the international power market, we have emphasized project development as well as foreign acquisitions. In 1995 CSW International announced an agreement with Alpek, the petrochemicals group of Mexico's Alfa Corporation, to build a 100-megawatt cogeneration plant at Altamira, Tamaulipas. The project is important for us strategically: our electric system shares 570 miles a
- of the border with Mexico, and two of our electric utilities have worked cooperatively with Mexico on power needs since 1916.1he Alpek project will strengthen our close relationship as I a reliable partner for Mexico and help its electric system meet new demands.
j in Europe, CSW Intemational's activities laid a foundation for work that later led
! to our acquisition of SEEBOARD.
- Other international opportunities look promising, but we may need regulatory l' pennission to invest more in these projects. At the end of 1995, we were participating in a joint-l- venture bid to build and operate two 650-megawatt, coal-fired power plants in southern l Thailand. CSW Energy and CSW International were actively working on 12 potential projects at j home and abroad.
Transok Transok, Inc., our intrastate natural gas pipeline and marketing subsidiary, increased its rev-enues in 1995 by 11 percent to $721 million, including sales to affiliates. Cas throughput on its pipeline system remained flat at 511 billion cubic feet, and Transok maintained its net income at $25 milion, unchanged from1994.
In early 1996, we began considering strategic altematives for Transok's assets, including a possible sale of the company. CSW is constrained by current regulatory restrictions in realizing Transok's full value. As a result, Transok may offer more value to another company that can fury integrate its operations.
Non-utifity Power Projects in Operation or Development k>t bernar her haiect fudar (mapatts) hte Arder stem,sest Bnish H Brush,C0 68 January 19M Public Service 15-acre greenhouse Co.of Colorado
$ Fort Lupton Fort Lupton,C0 272 June 1994 Public Service 20-acre greenhouse
- l. ,
Mulberry Polk County, FL 120 August 1994 Co.of Colorado l Florida Power DistiNed-water /
i.. Corp. ethanolplant Orange Pok County, FL 103 June 1995 Florida Power Orange-juice
! Corp., Tampa processor j Electric Co.
Newgulf Wharton,TX 85 Mid1996 To be detennined independent power j project Sweeny Sweeny,TX 300 Mid1998 To be detenened Refinery
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Condensed Consddated Statements of income *endensed Consddated Statements of Cash Flows Central and Smth itlst Corpration Central and Snah lilst Corporatism l
Fw me hars faded December 31, Fw the hars Ended December 31, 1995 19M IH3 1995 1994 1993 (miliens, except per-share amounts)
(uness)
Openas OperatingActmbes Electric - $3,091 $3,065 $3,055 listlaceae $421 $412 $327 Cas and Other 644 _ 558 _632 Depreashes ad Amertuaben 425 402 366 ,
_3,735 _31 623 3g Other A4ustments to Not . j imeme ad Chaen ., '
Expemes Fueland Pwchased Peser 1,184 1,126 1,181 in Assets and bablitres _(4_7) _50)( _1 -
799 764 694 IlateralGas and Gas Products 481 409 510 Operalier.s adllantenace 155 763 887 g ,g g 383 8
- Enero Project Actmbes (786) (714) (741)
Celschens(pwchases)ellion-
, ~
g g aniEsted Accounts Receivable 2 11 (314)
Other (11) (
_(28) _14)
Otherincome (inciales blirror (812)
(716)
(1,069)
$68, and $76in1995,19M' Changein Commen Stock 57 50 1 nd1993,respectnely) 99 111 93 laterest Charges W u W ad W M 597 38 6 51 (334) (293)
Cumulatne Effect of Changes,a (269)
WdW M) (340) (325)
Accoutse Prmapin - -
46 306 l) ~M listlaceae 421 412 - 3 liet Changein Cash and 3 Preferred Stock 18 Cash Equivalents 293 46 (48)
~19 19 {
lietincome for Commen Stock 5402 $ 394 5~ies Cash and Cash Equivalents- l lamuryl 108 _62 _110 . Average Commen Sharee 19L7 189.3 188.4 Cash and Cash Walents- ! December 31 $401 $108 $ $2 Eanmes per Shue $ 2.10 $ 2.08 $L63 - - Omdends Paid perShare $L72 $ 1.70 $1.62 P
*lhe condensed wnsolidatedfnancial statenwnts in this summary anonul npwt urre derhrdfrom the wnsolidatedfinarvial st.nenwnts that apjwar in Appendix A to the prary statenwntpr the 19% annual trurtmg of slurcitolders. Copics of tlse amsoluluedfnarvial statenwrns and the report ofArthur Andersen U.P thernm l
may le obtairwd by callmg Ceraral and South Iiht Corporiniord sharchoIJer ser-vices departnwnt at 1-800 .27-SP2 20
Condensed Casolidated Balance Sheets Report of Independent Public Accountants Central and South ifist Corporation As of December 31, To the Shareholders and lioard of Directors oiCentral and South West , 1995 1994 Corporation: (mEiens) We have audited, in accordance with generally accepted auditing standards, the consohdated balance sheets of Central and South West Assets Corporation (a Iklaware corporation) and subsidiary companies as of Electric $12,891 $11,055 Ikcember 31,199s and 1994, and the related consondated statements of i Gas and Other Dwerss6ed 887 813 income, retained earnings and cash flows ihr each of the three years Accenulated Depreceben (4,761) -(3,870) in the period ended Ikcember 31,1995, rppearing in Appendix A to the g,g ~g7 7 ggg proxy statement for the 1996 annual meeting of sharehoklers of the Corporation (not presented herein). Our report dated Februai y 28,1996, Current Assets 2,039 1,346 aho appeanng in that proxy statement, contained an explanatory para-graph calhng attention to certain changes in methods of accounting thwussed in Note 1 to those mnsolidated financial statements. l Goodwil 1,074 - ; g (73g (73 in our opinion, the infbrmation set forth in the accompanymg con-g gg densed consolidated balance sheets as ofIkcember 31.1995 and 1994, and in the related condensed statements of consolidated income and i CaptaEzaben and Liablites cash flows for each of the three yean in the period ended ikcember 31, l Ceaunen Stock $ 3,178 $ 3,052 1995 i5 fairly 5t'ted, in all material respects, in relation to the comoli- i Wed $M 326 3U dated financial statements from which it has been derived. Leetern Debt 3 914 2,940 Totd CaptaEraben 7,5 ~',3f9 6 dbr " '2N Curent LiabiEbes 3,627 2,188 Anhur Andenen RP Dall.u, 7?xas Delerred Credits _ 2,824 _2p Idruary 28,19% i slug 9 $11,066 Report of Management The condensed censolidated financial statements in this summary I annual report were derived from the consolidated financial statements that appear in Appendix A to the proxy statement for the 1996 annual meeting of shareholders. Management is responsible for preparing the comolidated financial statements, in accordance with generally accepted accounting principles appropriate in the circumstances, and for main-l taining the Corporation's systems ofinternal accounting controls. A description of these controh, along with management's opinion about their ostrall effectiveness, is contained within the Report of Management included in Appendix A to the proxy statement for the 1996 annual meet- ) ing ofsbareholders.The consolidated financial statements were authted by i Arthur Andersen LLit the Corporatiors independent pubhc accountants, whose report on the condensed comohdated financial statements appears
+
above.
"P..
l E.it thooks Cluurnuus,1%sident and Chief Exantiw Opiar b . J Glenn 11 lbsiber Senior ila 1%sident and ChufI4nancial Ot]iar Wend .. liargus Controller 21 l
Comparative Statistical and Fmancid Record Central and South Ii'st e Corpration 1995 19H 1993 1992 1991 LS. hibes Electnc Revenues (sulons) Readestal $1,138 $1,156 $1,160 $1,046 $1,081 Commercial 810 836 832 773 Tl8 Industrial 702 733 736 659 632 Sales fw resale 224 204 179 177 173 Other 9 136 148 135 139
$2,883 $3,065 $3,055 $2,790 $2,803 j Sales (kilowatt hearsin suunns) !
Resdestul 16,872 16,368 15,903 14,593 15,236 Commercial 13,755 13,463 12,966 12,370 12,512 Industrial 19,321 18,869 18,205 17,257 16,739 Sales for resale 8,468 7,133 5,852 6,262 5,942 Other 1,518 _1,501 1,434 1,363 _ 1,3 _46 593 934 57,334 54,360 51,845 51,775 Average llumber of Customers (timusands) Resdentul 1,425 1,403 1,373 1,353 1,335 Commercial 207 203 198 195 193 ladustrial 24 24 25 25 25 i Other 13 13 12 12 12 1,669 1,643 1,613 1,585 1,565 Numbw of Castemws-End of Period (thessands) 1,683 1,661 1,633 1,599 1,577 Residentul5 ales Avwages llilowatt-heurs per castemw 11,840 11,665 11,541 10,786 11,413 Revenue per customer $799 $824 $842 $773 $810 Revenue per kilowatt-hour 6.75c 7.06c 7.29c 7.17c 7.10c Total Electric Revenue pu llilevattJmur 4.81c 5.35c 5.62c 5.38c 5.41c
]
System Peak Demand (megawatts) 12,314 11,434 11,464 10,606 10,203 Feel Data j Average Stu per set kilowatt-hour 10,193 10,344 10,391 10,482 10,461 l l Cost per miHien Btu $1.58 $1.82 $2.11 $L92 $1.87 Cost per kilowatt-Imer generated (mius) 16.13 18.80 2L90 20.12 19.59 CSIVSysten
'letal Plant (adliens) j Cost $13,778 $11,868 $11,343 $10,826 $10,788 j Annual ad6 tens 1,933 616 594 457 578 .
Accumulated deprecutes 4,761 3,870 3,550 3,265 2,986 .; j Capdalizaties (edliens) l Commes stock $3,178 - $3,052 $2,930 $2,927 $2,834 *l Preferred stock 326 327 350 367 389 ! Leag-term debt 3,914 2,940 2,749 2,647 2,518 l
Board of Directors Ofkers I
' Glenn liiggs Coulrd amlSenth West Corporaben CSW Electric 14csident, l#qes & Ct E.lt Ilrooks 11arry 11 Mattison'
.%n ,4ntonis has )
c;ug,,,u,, gy;3,, ,,k, agggg,ng;,, og;,,, %h & Of %Mw WW Molly Shi lloren Thom V Mmckig 111 Cenird Power and @ Company l Attorney, Nonrurt, Oklahorrus [Lucuch, Iia Isident %bert lL Carey' , E.lL ISrooks Harry 11 Mattison, 1%ident arti Chief fixeaninv Olliar l Guirnun,1%iknt and CohfILwcuthe Offiar ,, ,y y , ,,;3, , Central and .%nah liFst Lorporatim , udlas, 7/xa, Ferd. C. Meyer,Jr. lu>bert L Zemanek i Senior iia 14esident and Generd Gnmsel lhesident and Chhf fixecutiw Offiar I)onald M. Carlton 1%ident Glenn 11 Nsilier Senikwestern Electric Power Company Radian International LLC Senior 1Ta Ibident and Chief Financial Olliar IUchard H.13remer l Austin, Texas Lawrence E. De Simone I%sidan and Chief flucutiw Olliar IIc' l&'Sid'"f. S'rategic Planni"f
~
l Thomas H. Cruikshank Wut hm UWin Company Retired Chairnuou arul OshfILwaahr Offiar Thomas M. Hagan Glt nn Viles Ifalliburton Corn;uny Iice 14csiknt, Gournunent IMaions l' resident and ChiefILwaahr Olliar Id6 *d' Venita McCellon-Allen Castral and Senlh West Services, Inc. T.J. Ellis lia 14csident, Corgerate Sen ias M.13ruce Evans Guimun and Chief fixcaahr IWsiknt, Operation Sarias
'%EL'IK11RD IJc Kenneth C ILaney,Jr.
ila 1%ident and.4ssistant General Counxl ILichard it Verret 3"# "' Michael 11 Snuth I**I*" U"'duchon Senias ; Retired ihrtner,13raccurU and Itaterson k.errville, Te.xas I.ra 1%ident, Alereers and Acquisitions , CSWlaterpnses i bbert W. Lawless
- I 'I'homas V. Shockley,111 I P ind Chief Excaniw Olliar I'* "#'T "" ' " "0"Y Ibiknt and Chief E.waaiw ofilar
. IJch Unhrrsity and Wendy G. Hargus his Tech Uniwrsity Ilealth Sciena Center G'ntndla Luddionk, T?xas T.J. Ellis stephen J. McDonnell Guirnun and Griefihranhr i Harry 11 Mattison Weasurer L.xmanr i.sce President Iransek, lac.
J. stuart solomon Centr.d and South IIest Corporation *"
' Assistant SecretaT g y 37,,, I resident and Chief Excaaiw Olliar CSW Leasig,Inc.
James L lbwell CSW EnerD, b.
)
Ranthin.g and Irnestmans Glenn 11 Nsilier Ti.rry D Dennis Ihrt AlcKawtt, Texas itesident 1%ident and Chief theaaiw Opiar Thomas V. Shockley, til gg, ,, CSW Internabenal, lac. liwaaix lia Ivesidan Terry D Denms Glenn 11 Nsilier Canval and Sinah ilFst Corporation p ;3. , 14esidan and Chief Excaahr Olliar udlas, 7bxas cgg e y J.C Templeton Lawrence E. De Simone Imrstments, Ilausson, Texas l%ident
, 3 g,_ gg.,, uqy g.co,n, p,,,;s.,g of g,,
l
- Lloyd 11 Ward Uniwrsity of 7hl3a on Alay I,1994 EastShop inc. l Division 14csidan-Caaral Lawrence E. De Simone
- Alr. Aknison and Alr. Carey uill take early Frito-Lsy, Inc., udlas, Texas ISid'"'
n1iranaa m April M 1996 Ceauuittees d he Board d Diretters
- 1. The Aiaht Gianinutac recomtsrnds in ilw !=urd of direchws clw nidegs ndent public accountan s to be appointed. unbject to shareholder .ippnwal. Tiw Audit Connnuttie reviews l with the mdependeni pubhc auuuntants and the Owporatam's mternal auditon the scope of external and intern d atuhes anJ the adeyacy of, and the complunce with. the l
! O rporarnun syuem of inc:s! m.mmng controk I
.1 The Execunve Compenution Omumttee revwws benefit progrann and management 4uccouan pnigrams and Jcternunes the cumpensanon of esecuuve oilkers.
i 1 The Ninnmanng Oxnnunce renews the cennpenutam of the h ard of dwectors and recomnwnds candidaan for nwmN nhip. 4 The Ibhcy Conutuitee retwws and nuin recomnwndarsms , die hurd of dwecton concerning mapr pohcy iwues; consen on a contmumg imis the comp % tion, sann ture and functums of the txurd of shrecton and its conumtren; and revwws exanng corporate pohcrs and recommends ilunges wlwn approptute. Tlw lbhcy Omumrtce tus autimnry i to act m place of the hurd of directors when the board is amt in scwon. m the extent pctnutted by law Membenhip of these comnutters is as folkw Gletm thggs (t) (3); Molly shi ihren (1) (2); E lt linx.h. Onumum if #w IWy Gemuner (4); I Unald M. Carinm (1) (3), Thonus 11 Crtubhank (2) (3); Joe il fuy. Onsmam if av Lwnew Gwynnatum C.wneunri-(2) (3) (4); IWwrt W l.awlt w duerman ,it alw.4utir Gmuentrev (1) (2) (4); Jaines 1 Ibwell. ranumann if stir Nimiu6ernte Gmuvuttrr (1) (3) (4); J. G Templeton (1) (2); thiyd il Ward (2) 0). 23
i i hformation for Sharthlders l 1 l l l Connes Sted Lislig Taxpayer IIlieder Central and South West Corporations common smck is traded under Federal law requires each durchokler to provide a taxpayer identification the tisker syndml CSR and is hsted on the New Wrk and the Chicago number for all shareholder accounts, fur indwidual sharehoklers, your ID stock exchangs. numler is your Social Secunty number. You can obtain stock quotations from the New %rk Stock Exclung You must proside your ID number whenever you open a new ascount , report in most daily newspapers under the hsting CenSoW. in our stock, even if you already own stock in existing accounts in your ; name. Ifyou do not provide the ID number, the Corporation is required Commen $ led Imdnuls j to withhold 31 percent federal income tax from your dividends. , Dwidends of 43 cents a share were paid in each quarter of1995. All dw-idends paid by the Corporanon represent taxable income to shareholders H.your smck is registered in a joint account, it is important to tell us the for federal income tax purposes, taxpayer m number of the prinury aner you designate. If you are a cusunlun for a minor or act as a trustee on an account, please pnwide In January 1996, the CorporatioiA board of directors increased the quar- the beneficial owner's tax identi6 cation number. This wdl ensure that f. tedy dividend rate to 43.5 cents a share, payable on February 29,1996, to your dividends are reported under the correct name, address and taxpayer l shareholders of record on February H,1996. The increase nurked the ID number. I 45th consecutive year of higher dwidends paid by the Corporation.The Corporation is one ofonly twu companies hsted on the New %rk Stock if you have not yet giwn us your taxpayer ID number, please contact our Exchange to have such an uninterrupted record of dividend mcreaws. shareholder senices department to request a W-9 form. Complete, sign and return the form as soon as possible, s Traditionally, the CorporatimA board of directors has declared dividends j to be payable on the last bminess day of February, May, August and Supfmate AnualDepart Matings November. Futme cash dividends will be dependent upon the pohcies We are required to mail an annual report to all of our sharehoklert %u i of the Corporations board of directors and the Corporatiors earnings, wdl recewe duplicate maihngs from us if there are two or more share- l financial condnion and other factors. holders at the ume address or if your slures are registered in ditTerent, but i similar, names I Last Buidend Checks er $ted Ceridicates ifyou do not receive your dwidend check or stock certificate, or ifeither Direct Beposit is kwt, destroyed or stolen, please call our shareholder services depart. We are pleased to otter direct deposit of dwidend payments to your ment immedutely. checking, savings or credit union account at any financial institution that accepts electronic direct deposits. Direct deposit eliminates the pos-Stock framler sibihty of your check being lost or stolen, and the funds are credited to q Central and South West Senices, Inc., is the tramfer agent and registrar your account on the dividend payment date. If you woukilike an enroH- i for Central and South West Corporatims common stmk and for the ment card, please call our sharehokler senices department. ! preferred stocks of the CorporatiorA subsidiary companies. Presy and Dividend Malings To transfer your sawk to another name, wnte the new name, address and Duphcare mailings of proxies and dwidend checks cannot be eliminated tax idenuhcation number on the back of the certi6cate and sign your unless the registration is the same fbr 211 of your accounts. I name exactly as it appean on the front. Then, have your signature l Medalhon-guaranteed by a commercial b,mk or a smckbroker whose if your account registratiom are identical, notify our sharehokler senices l firm is a member firm of the New York Stock Exchange. Signatures department that you want to combine your accounct if your account cannot be Medalhon-guaranteed by a notary public. registrations are diflerent and you want to ctm ' your accounts, all , certificates must be issued in the one registrare mu prefer. To have 1
%ur mick certificate shoukt be sent to our shareholder senices depart' l your certificates reissued, folkiw the instructions under Suwk Tramfer.
! ment by registered or certified maik d if you luse questons about transferring your shares, you can write or 1996 Annameeting call our sharehokler services department. The 1996 annual meeting of shareholders is scheduled for Apnl 18. It will be heki at the San Angeki convention Center, Suo Rio Concho Dr., San Angehi, Texat The meeting wdl begm at In:45 a.m., Central time. If you , will not be attendmg the meeting, please mte your shares by signing and returning your proxy card as soon as possible. l ... l l M 4 i
+ -
W ,, Penw9iare" Disidend Ismseskusst and Blesh Plurshnes Plan ; Addhensilsfurushes
- The Corporation . offers its shareholders a conwnient.way to purchase ' We win be plear,ed to send you ad&tional copies of this summary armual E additional shares of conunon stock tluough its IbwerShare" Dividend f : report. Also avaibble are Appendix A to the proxy' statement for the i Reinvestment and Stock Purchase Plan? 1996' annual meeting of shareholders, a preliminary quartedy limancial -
JThe plat offers shareholders, non-shareholders oflehal age who are res; . ; rep n, a Qar Snandal andta&&al Meunf de Garal smd &nah} q
~ idents of the states of Arkansas Inuisiana,' Oklahoma and Texas, and - ^ %t Stem and our latest Ermironmental Report of the Centad and Snah - ,
s emphyyees'and eligible retirees of the Corporation or its subsidiaries a e
~
O' M*' ' _ convenient and economical way to purchase the Corporation's common : ; The Corporation is subject to the informational requirenient.: of th'e . stock.. , Securities Exchahge Act of1934 and files rdports and other information 1 Once participants are enrolled in the phn, cash dividends, as well as any natements with' the. Securities' and Exchange CorranissionhThese; , cash investments and/or payroll or pemion de' ductions, may'be used to E repo"$ may be inspected at the SEC and at the New %rk and Chicago purchase shares ofcommon stock. . - it ck exchanges 1 Ihrticipants may make optional cash purchases from a mimmum of $25 ' .We will }4rwide copies of these . reports without chay to any Central ' E up to $100000 per calendar year (annual limit) for the purchase of! and South West shareholder. If you would like to receive a report, please common stock.. write or call ur shareholder services department.: , 4
; CSW shareholders of record may enrol.1 in IbwerShare" simply by -
persholderIsrvisis . . _ . . completing and returning ths enrollment form received from 'the - L Our shareholder services uaffis available Monday through Friday from '
' Corporation. .
' .9 a.m. to 4 pm., Central time, to answer questions you may have. Our
- address and telephone number are:-
Employees and eligible retirees of the. Corporation or its subsidiaries may purchase shares of common stock through automatic payroll or Central and South West Corporation pemion deductions. Shareholder Services Department
- PQ llox 660164,
' Fullinvestment offundsis possible under the plan (subject to minimum 1 and nuximum purchase requirements) because both full and fractional -
, shares will be credited to participants' plan accounts.
{' Participantsm ' ay deposit all of their certificates of conunon stock with '
'our shareholder services department for safekeeping and will receive-- Sasurity Ansipst Coulast l< '
- credit to their pbn accounts for 'uch s shares. Security analyns should contact: .
Sharon ILItavy, Director ofInvestor Relations Paru..cipants will receive quarterly statements of account with a record of . Central and South West Corporation.
' their activity as soon as practicable fbilowing each dividend payment gggy
- date and will receive written confirmations ofinvestments upon open-Ting phn accounts or. making optional cash purchases of plan shares. If you would like to be included on our investor relations mailing list to,
, Statements of account are a participant's continuing record of transac..' l receive news releases and.other corporate information, please contact tions and should be retained for tax purposes. our shareholder services department. .
}
Through the phn, participants may sell shares of common stock held or depc-ited in their phn accounts. .
' We aho otter autonutic electronic investment to participants in thel I PowerShare" Phn Optional cash payments can be electronically : C 1996 Central and South Wen Corporation. All rights reserved.
processed directly from your checking, savings or credit union account Customer Choice & Control
- is a trademark of Central and South West at any financial institution that accepts electronic direct debits. Corporation.
This aces owt cmstitute an of}br to sell or soliatarion of an o[Fr to imy smerities.
" Y"*" '" '""*'* ' ""'h #'" P"*"" .
^
" Such @n and solicitations are made by uuy ofpnvjutsis only. No sales gCSW " 'O # h* " " **A M '"U ""d " A W'" " P"*"*- '
l comunw stock under the plan will he made or commitments to purrluur accepted The image on page 16 is reproduced in permission from the December 11,
'_until o copy of the pnujwtus k delinwd There is no obikatim to participate in 19% edaim ofIDRTUh% C19% Time Enc. FORTUNE is a reputered
' '"* #"* # # "b" "'*0' '
the plan, and the alwe does not constitute CSIn ummurwndation to particijute in die plan The cover ofIkpud Race and Ceruler, C 1991 R.Rooncit Thomas,Jr., is repro-
' duced on page 1 by permi sion of the pubbsher, AMACOM. All rights reserved.
The photo ofThe Seven Sisters clitTs on page S, C1995 Comstock. - The photo of Canterbury Cathedral on page 11. C 1995 Comstock'. ' Credas: ! Dnkn: Summerford Design, Inc. PtwayurJry: Gerry Kang Philhp Radchfli, Les Wollam QA Photos. Qumrock Cer: From the television commercial "Detter Choices /llrought to You lly., " produced by linahers & Co directed by Cheyanne Atchley of Haley Films. > with photography direction by Philhp PfeitTer.
@ Printed on recycled paper.
1.
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r- y 1 l i TABLE OF CONTENTS l J PAGE l GLOSSARY OF TERMS.. . . . . . ii l PARTI l i i ITEM l. BUSINESS General.. . . . . . . . . .. . .. 1-1 4 , Domestic Utility Operations... . . . .. . . . . . . . 1-2 l l United Kingdom Utility Operations... . . .. .. 1-27 ; l Non-Utility Operations . . . . . . . .. 1-29 ! Other Information... . . . . . . . . . . . . . . .. . . 1-33 ITEM 2. PROPERTIES.. .. .. . . . . 1-35 ITEM 3. LEGAL PROCEEDINGS., . . . . . . . . . . . . . . . . . . . . . . 1-35 , ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .. . 1-35 PART II l ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED l STOCKHOLDER MATTERS : 2-1 ' 1 TEM 6. SELECTED FINANCIAL DATA . . . . .. 2-1 Central Power and Light Company.. . . . . . . . . 2-69 i Public Service Company of Oklahoma.... .. .. 2-95 ! Southwestern Electric Power Company - .. 2-115 West Texas Utilities Company 2-136 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL i l CONDITION AND RESULTS OF OPERATIONS... .. .. .. 2-2 i Central Power and Light Company.. . . . . 2-70 Public Service Company of Oklahoma . ~2-96 Southwestern Electric Power Company - . 2-116 West Texas Utilities Company.. .. . 2-137 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.. .. . . . . . 2-2 l Central Power and Light Company... . . . . . . . . . . . . . . . . , . 2-81 Public Service Company of Oklahoma. 2-103 Southwestern Electric Power Company.. . . . . . 2-124 West Texas Utilities Companyz . . .. . . . 2-146 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE... .. 2 157 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS.. . . . 3-1 j ITEM i1. EXECUTIVE COMPENSATION.. . . .. 3-8 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... .. . . . 3-14 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.. 3-17 PART IV t ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.. . . . .. . 4-1 i
GLOSSARY OF TERMS The following abbreviations or acronyms used in this Form 10-K are defined below- . Abbreviation or Acronym Definition 1996 Stock Offering.. Public offering of 15,525,000 shares of CSW Common ADPCE.. Arkansas Department of Pollution Control and Ecology AFUDC Allowance for funds used during construction ALJ.. Administrative Law Judge AMAX , AMAX Coal Company ANI.. American Nuclear Insurance APBO.. Accumulated Postretirement Benefit Obligation Arkansas Commission.. Arkansas Public Service Conunission Ash Creek.. Ash Cieck Mining Company, Tulsa, Oklahoma Austin.. City of Austin, Texas Bankruptcy Court.. United States Bankruptcy Court for the Western District of Texas, Austin Division, before which the El Paso bankruptcy reorganization proceeding, Case No. 92-10148-FM, was pending Bcf.. . Billion cubic feet BREMCO.. Bossier Rural Electric Membership Corporation Btu.. British thermal unit Burlington Northern.. Burlington Northern Railroad Company Cajun.. Cajun Electric Power Cooperative, Inc. CEO.. Chief Executive Ollicer CERCLA.. Comprehensive Environmental Response, Compensation and Liability Act of 1980 Cimmaron.. Cinunaron Chemical Company Cities.. Several cities in CPL's service territory Clean Air Act.. Clean Air Act Amendments of 1990 COO.. Chief Operating Officer Court ofAppeals.. Court of Appeals, Third District of Texas, Austin, Texas CPL., Central Power and Light Company, Corpus Christi, Texas CPL 1995 Agreement.. Settlement Agreement filed by CPL with the Texas Commission to settle certain CPL regulatory matters CSF.. Customer Supplied Fuel Program CSW., Central and South West Corporation, Dallas, Texas CSW Common.. CSW common stock, $3.50 par value per share CSW Communications.. CSW Communications,Inc., Austin, Texas CSW Credit.. CSW Credit, Inc., Dallas, Texas CSW Credit Agreement.. $850 million senior credit agreement entered into by CSW with a consortium of banks to partially fund the SEEBOARD acquisition CSW Energy.. CSW Energy, Inc., Dallas, Texas CSW International.. CSW International, Inc., Dallas, Texas ) CSW Investments.. CSW Investments, an unlimited company organized in the United Kinr1 m which is wholly owned, indirectly though subsidiaries, by CSW Internation CSW Investments Credit Facility.. 11.0 billion senior credit facility arranged by CSW Investments witn a consortium of banks to partially fund the SEEBOARD acquisition CSW Leasing.. CSW Leasing, Inc., Dallas, Texas . CSW System.. CSW and its subsidiaries (excluding SEEBOARD Group) I CSW Services.. Central and South West Services, Inc., Dallas, Texas and Tulsa, Oklahoma l CSW Suit.. Suit filed by CSW against El Paso in the Bankruptcy Court CSW (UK) . CSW (UK) plc., a public limited company organized in the United Kingdom which is wholly owned by CSW Investments CWIP.. Construction work in progress DeSoto.. Parish of DeSoto, State of Louisiana pollution control revenue bond issuing authority DGES.. Director General of Electricity Supply DOE... United States Department of Energy El Paso.. El Paso Electric Company El Paso Suit.. Suit filed by El Paso acainst CSW in state district court in El Paso, Texas Electric Operating Companies.. CPL, PSO, SWEPCO and WTU EMF.. Electric and magnetic fields Energy Policy Act.. National Energy Policy Act of 1992 EnerShop.. EnerShop*, Inc., Dallas, Texas EPA.. United States Environmental Protection Agency EPS.. Earnings per share ii
GLOSSARY OF TERMS (continued) The following abbreviations or acionyms used in this Form 10-K are dermed below-i ERCOT.. Electric Reliability Council of Texas . ERISA.. Employee Retirement income Secunty Act of 1974, as amended __ EWG.. Exempt Wholesale Oenerators FASB.. Financial Accounting Standards Board FCC.. Federal Communications Commission FERC.. Federal Energy Regulatory Commission l FMB.. . First Mortgage Bond FUSER.. Fuel Supply Electricity Rider - Guadalupe.. .Guadalupe-Blanco River Authority pollution control revenue bond issuing authority GSU.. Gulf States Utilities Company IILP. Ilouston Lighting & Power Company, the Project Manager of STP 1lolding Company Act.. Public Utility llolding Company Act of 1935, as amended iIVdc.. Ilighaottage direct <urrent IPP. Independent Power Producer ITC.. Investment tax credit KV.. Kilovolt KW.. Kilowatt KWil.. Kilowatt-hour Lone Star.. Lone Star Gas Company Louisiana Commission.. Louisiana Public Service Commission LTIP.. Long-Term Incentive Plan Matagorda.. Matagorda County Navigation District Number One (Texas) pollution 6 ntrol revenue bond issuing authority Mcf... 1,000 cubic feet MCPC.. Mid-Continent Power Company,Inc. MD&A.. ' Management's Discussion and Analysis of Financial Condition and Results of Operations MDEQ.. Mississippi Department ofEnvironmental Quality Merger.. The proposed merger whereby El Paso would have become a wholly owned subsidiary of CSW. Merger Agreement.. Agreement and Plan of Merger between El Paso and CSW, dated as of May 3,1993, as amended MGP.. . Manufactured gas plant or coal gasification plant Mirror CWIP.. Mirror construction work in progress Mississippi Power.. Mississippi Power Company MMbtu.. Million Btu MMcf/d.. Million cubic feet of gas per day Modified Plan.. Modified Third Amended Plan of Reorganization for the proposed merger with El Paso MTN.. Medium-term note MW.. Megawatt MWil.. Megawatt-hour Named Executive Ollicers.. The CEO and the four most highly compensated executive officers, as defined by regulation National Grid.. National Grid Group plc NEIL.. Nuclear Electric insurance Limited NOPR., Notice of Proposed Rule Making Notes.. Notes to Financial Statements NRC.. Nuclear Regulatory Commission Nueces.. Nueces County Navigation District pollution control revenue bond issuing authority OEFA.. Oklahoma Environmental Finance Authonty pollution control revenue bond issuing authority Oklahoma Commission.. Corporation Commission of the State of Oklahoma Oklaunion . Oklaunion Power Station Unit No.1 OMPA.. Oklahoma Municipal Power Authority OPEBs.. Other Postretirement Employee Benefits Operating Companies.. CPL, PSO, SWEPCO, WTU, and Transok OPUC.. Of! ice of Public Utility Counsel of Texas PCB.. Polychlorinated biphenyl i PCRB.. Pollution Control Revenue Bond PFD.. Proposal for Decision l PowerShare.. CSW's PowerSharesu Dividend Reinvestment and Stock Purchase Plan Project Manager.. IILP, the Project Manager for STP PRP.. Potentially responsible party PSO.. Public Service Company of Oklahoma, Tulsa, Oklahoma iii
1 i i GLOSSARY OF TERMS (continued) The following abbreviations or acronyms used in tlus Fonn 10-K are defined below: PURA.. Public Uulity Regulatory Act of the State of Texas RCRA.. . Federal Resource Conservation and Recovery Act of 1976 Red River.. Red River Authority of Texas pollution control revenue bond issuing authority . RESCTA.. Rural Electric Supplier Certified Territory Act Sabine.. Sabine River Authority of Texas pollution control revenue bond issuing authority San Antonio.. City of San Antonio, Texas SAIL. Stock appreciation right SEEBOARD.. SEEBOARD plc., Cruwley, West Sussex, United Kingdom SEEBOARD Group.. Consolidaied SEEBOARD, CSW (UK) and CSW Investments converted to U.S. Generally Accepted Accounting Principles SEC.. Securities and Exchange Commission SERP. Special Executive Retirement Plan SFAS.. Statement of Financial Accounting Standards SFAS No. 71.. Accounting for the EITects of Certain Types of Regulation SFAS No. 87.. Employers' Accounting for Pensions SFAS No.106.. Employers' Accounting for Postretirement llenefits Other than Pensions SFAS No.109.. Accounting for income Taxes SFAS No. I12.. Employers' Accounting for Postemployment Benefits SFAS No 121... Accounting for the Impairment of Long-Lived Assets SFAS No.123.. Accountmg for Stock-Based Compensation Siloam Springs.. City of Siloam Springs, Arkansas pollution control revenue bond issuing authority Southern Pacific.. Southern Pacific Transportation Company Stafr.. The Staff of the Texas Commission STP.. South Texas Project nuclear electric generating station STP Unit 1 Order.. October 1990 Texas Commission STP Unit 1 Final Order STP Unit 2 Order.. December 1990 Texas Commission STP Unit 2 Final Order Supreme Court.. Supreme Court of Texas SWEPCO.. Southwestern Electric Power Company, Shreveport, Louisiana Tender Offer.. CSW (UK)'s approximately $2.12 billion tender ofter in the United Kingdom for all the outstanding share capital of SEEBOARD Texas Conunission.. Public Utility Commission of Texas Tex-La.. Tex-La Electric Cooperative of Texas,Inc. TEX / CON.. TEX / CON Oil and Gas Company Titus County.. Titus County Fresh Water Supply Distnct No. I pollution control revenue bond issuing authority TNRCC.. Texas Natural Resource Conservation Commission Transok.. Transok, Inc. and subsidiaries, Tulsa, Oklahoma TSCA.. Toxic Substance Control Act of 1976 TU.. Texas Utilities Electric Company UK RPI.. United Kingdom Retail Price Index Union Pacific.. Union Pacific Railroad Company Westinghouse.. Westinghouse Electric Corporation WTU.. West Texas Utilities Company, Abilene, Texas WTU Stipulation and Agreement.. Stipulation and Agreement to settle certain WTU regulatory matters iv
PARTI ITEM I. BUSINESS. . 1 e I GENERAL , l T . . l
.,e . CSW, incorporated under the laws of Delaware in 1925, is a Dallas-based public utility holding l company registered under the Holding Company Act. CSW owns all of the outstanding shares of common stock l of the Operating Companies, CSW Senices, CSW Credit, CSW Energy, CSW International, CSW D ,
! Communications and EnerShop, in addition, CSW owns 80% of the outstanding shares of common stock of i ! CSW Leasing. I On January 10,1996, CSW's tender offer of approximately $2.12 billion in the United Kingdom for all l l of the outstanding share capital of SEEBOARD was declared wholly unconditional. Through February 29,1996, . C.SW (UK) had acquired shares representing, or had received valid acceptances in respect of, approximately i 92.3% of the outstanding share capital of SEEBOARD. CSW (UK) expects to acquire the remaining 7.7% of the I outstanding SEEBOARD share capital by the end of the second quarter of 1996. SEEBOARD is a regional electricity company in the United Kingdom headquartered in Crawley, West Sussex, with approximately two million customers and a distribution territory in southeast England that covers approximately 3,000 square miles, l extending from the outlying areas of London to the English Channel. In addition to the distribution and supply of electricity, SEEBOARD is involved in gas supply, electricity generation, electrio., contracting and retailing. See l UNITED KINGDOM UTILITY OPERATIONS below, ITEM 7-MD&A and ITEM 8-NOTE 13. l UNAUDITED PRO FORMA INFORMATION. l l
,The Electric Operating Companies are public utility companies engaged in generating, purchasing, l transmitting, distributing and selling electricity. Information concerning the incorporation of each of the Electric Operating Companies is presented in the following table.
State of Year of Registrant incorporation incorporation CPL Texas 1945
+ .- PSO Oklahoma 1913 n SH'EPCO Delaware 1912 HTU Texas 1927.
The Electric Operating Companies serve approximately 1.7 million customers in one of the largest service territories in the United States covering approximately 152,000 square miles in portions of Texas, Oklahoma, Louisiana and Arkansas. CPL and WTU operate in portions of south and central west Texas, respectively. PSO , operates in portions of castem and southwestern Oklahoma and SWEPCO operates in ponions of northeastern ) Texas, northwestem Louisiana and western Arkansas. The Electric Operating Companies' customer base l includes a mix of residential, commercial and diversified industrial customers. Transok is an intrastate natural l gas pipeline and gas marketing company that gathers, processes and stores natural gas for, and transports and ) markets natural gas to the Electric Operating Companies, principally PSO, as well as other customers. CSW is committed to expanding its electric utility business through strategic domestic and international acquisitions and through marketing initiatives within these territories. Acquisitions of utility assets must meet dermed criteria, including the potential to lower costs, increase long-term efficiency and competitiveness and provide an acceptable rate of retum and benefit to CSW. CSW believes that the SEEBOARD acquisition meets these criteria. 1-1
CSW continues to seek opportunities to expand its non-utility business in areas related to its core electric utility business. Through CSW Energy, which develops and operates independent power and cogeneration projects, CSW has completed four gas-fired cogeneration plants. CSW International was formed to invest , internationally either alone or with local or other partners. CSW International will also continue CSW's efforts in Mexico and will seek to expand into other countries in Latin America, Europe and Asia that meet CSW's investment criteria. CSW Communications provides communication services to the Electric Operating Companies and non-affiliates, including enhancement of senices through fiber optic and other telecommunications technologies. EnerShop was fonned in 1995 to provide commercial, industrial, institutional and governmental customers with energy management senices designed to control cost, enhance productivity and improve convenience, safety and comfort. CSW Senices performs, at cost, various accounting, engineering, tax, legal, fmancial, electronic data processing, centralized economic dispatching of electric power and other services for the CSW System. CSW Credit purchases accounts receivable of the Operating Companies and non-affiliated utilities and CSW Leasing invests in leveraged leases. The CSW System is subject to the jurisdiction of the SEC und: r the Holding Company Act with respect to the issuance, acquisition and sale of securities, the acquisition and sale of certain assets or any interest in any business and accounting practices and other matters. See Reculation below, and ITEM 7-MD&A for additional i information regarding the Holding Company Act. in 1995, the Operating Companics and SEEBOARD contributed the following percentages to aggregate operating revenues, operating income and net income for CSW Common. ; SEEBOARD Total CPL PSO SWEPCO IITU Group (l) Electric Transok Other Total Operating Revenues 29% 18% 22 % 8% 6% 83 % 16 % 1% 100 % , Operating Income 44 % 16 % 24 % 10% '2% 96 % 6% (2%) 100 % l Net income for CSW Common 48% 20% 28% 9% 2% 107 % 6% (13%) 100 % l l (1) Represents the SEEBOARD Group's 27.6% and 76.45% interest in SEEBOARD's earnings for November and December 1995, respectively. See ITEM 8-NOTE 1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES. i The relative contributions of the Operating Companies and SEEBOARD to the aggregate operating revenues, operating income and net income for CSW Common differ from year to year due to variations in weather, fuel costs reflected in charges to customers, timing and amount of rate changes and other factors, including changes in business conditions and the results of non-utility businesses. l DOMESTIC UTILITY OPERATIONS General infonnation concerning .he senice territories of the Electric Operating Companies at December 31,1995, ) is set forth in the following table. I 1 I l-2
^
I l Estimated Appmximate Retail Rural Electric Company and Largest Cities Served Population Square Miles Customers Municipalities Cooperatives CPL 2,065,000 44,000 614,000 1 4 Corpus Christi, Texas 271,000 , Laredo, Texas 150,000 McAllen, Texas 101,000 I PSD 1,031,000 30,000 473,000 2 2 Tulsa, Oklahoma 563,000 Lawton, Oklahoma 90,000 l Dartlesville, Oklahoma 44,000 l . Sif7?PCO 870,000 25,000 409,000 3 8 Shreveport / Bossier City, Lnuisiana 285,000 Longview, Texas 99,000 Texarkana, Texas and Arkansas 76,000 liTU 413,000 53,000 187,000 2 13 Abilene, Texas 112,000 San Angelo, Texas ~ 90,000 CSIV 4,379,000 152,000 1,683,000 8 27 In 1995, approximately 61% of the Electric Operating Companics' electric revenues were earned in Texas,24% in Oklahoma,9% in Louisiana and 6% in Arkansas. CPL i The economic base of CPL's senice territory includes manufacturing, mining, agricultural, j transportation and public utilities sectors. Major contributing activities to these sectors include oil and gas extraction, food processing, apparel, metal refining, chemical and petroleum refining, plastics and machinery equipment. In 1995, excluding the effects of the provisions for rate refunds, industrial customers accounted for approximately 22% of CPL's total operating revenues. Contracts with substantially all large industrial customers provide for both demand and energy charges. Demand charges continue under such contracts even during periods of reduced industrial activity, thus mitigating the effect of reduced activity on operating income. PSO , The economic base of PSO's senice territory includes mining, petroleum products, manufacturing and agriculture. The principal industries in the territory include natural gas and oil production, oil refming, steel processing, aircraft maintenance, paper manufacturing and timber products, glass, chemicals, cement and aircraft components. l SWEPCO The economic base of SWEPCO's senice territory includes mining, manufacturing, chemical products, petroleum products, agriculture and tourism. The principal industries in the territory include natural gas and oil production, petroleum refining, manufacturing of pulp and paper, chemicals, food processing and metal refining. ! I The territory also includes several military installations, colleges and universities. WTU The economic base of WTU's senice territory includes agricultural businesses, such as the production of cattle, sheep, goats, cotton, wool, mohair and feed crops. Significant gains have been made in economic diversification through value added processing of these products. The natural resources of the territory include 1-3
.--- ------.--.-_----- . ..- - - .-. - .- - . .- ~ oil, natural gas, sulfur, gypsum and ceramic clays. Important manufacturing and processing plants served by WTU produce cotton seed products, oil products, electronic equipment, precision and consumer metal products, meat products and gypsum products. The territory also includes several military installations and state correctional institutions. . l Competition and Industry Challences , Competitive forces at work in the electric utility industry are impacting the CSW System and electric utilities generally. Increased competition facing electric utilities is driven by complex economic, political and : technological factors. These factors have resulted in legislative and regulatory initiatives that are likely to result , in even greater competition at both the wholesale and retail level in the future. As competition in the industry increases, the Electric Operating Companies will have the opportunity to seek new customers and at the same time be at risk oflosing customers to other competitors. Additionally, the Electric Operating Companies will ; continue to compete with suppliers of alternative forms of energy, such as natural gas, fuel oil and coal, some of which may be cheaper than electricity. The Electric Operating Companies believe that their prices for electricity and the quality and reliability of their service currently place them in a position to compete effectively in the j marketplace. For additional information regarding competition and industry challenges, see ITEM 7-MD&A. ! l PURA Amendments to PURA, the legal foundation of electric regulation in Texas, became effective on September 1,1995. Among other things, the amendments deregulate the wholesale bulk power market in ERCOT, permit pricing flexibility for utilities facing competitive challenges, provide for a market-driven ! integrated resource planning process and mandate comparable open access transmission service. On December 21,1995, a preliminary order was issued by the Texas Commission that expanded the scope of the CPL rate review to address certain competitive issues facing the electric utility industry. The competitive issues to be addressed by CPL in a supplemental filing due April 1,1996, are: (i) the calculation of , rates on an unbundled or functional basis (i.e., generation, transmission and distribution); (ii) current value of ! CPL's generating assets as compared to estimates of market value of such assets under alternative future industry i I structures; (iii) the application of performance based ratemaking; (iv) potential revisions in the methodology of reconciling and recovering fuel costs; and (v) the Texas Commission's authority to introduce competition in the electric utility industry under existing law. For additional infonnation regarding PURA and the CPL rate review, J see ITEM 7-MD&A. l t ElectricServiceAreasin Texas in Texas, electric service areas are approved by the Texas Commission. A given tract in a utility's i overall senice area may be singly certificated to a utility, to one of several competing electric cooperatives or to one of the competing municipal electric systems, or it may be dually or triply certificated to these entities. These certificated areas have changed only slightly since the formation of the Texas Commission in 1976. CPL is generally singly certificated to serve inside most municipalities, and cooperatives are singly certificated to serve much of the rural areas. The suburban areas are mostly dually certificated. Since 1990, in dually certificated areas, CPL's rates have been higher than some competitors for some customers, especially small commercial and industrial customers. However, most business has been retained and some new business acquired, primarily because of senice reliability and other customer senice advantages. The availability oflow cost natural gas and other alternative fuels, including those used in cogeneration facilities, have resulted in some losses of sales. Although there have been some losses, electricity is still the fuel of choice for most air conditioning installations. Renewable energy such as solar and wind is not now a feasible economic choice for customers of CPL in most instances. CPL believes that its rates, the quality and reliability ofits senice and the relatively inelastic demand for electricity for certain end uses should allow it to continue to compete in current retail markets. 1-4 l
r i l 1 l l CSW is unable to predict the ultimate outcome or impact of competitive forces on the electric utility industry or the CSW System. As the wholesale and retail electricity markets become more competitive, however, . j l l the principal factor determining success is likely to be price and, to a lessor extent, reliability, availability of I capacity and customer service. See ITEM 7-MD&A for additional discussion of competitive issues facing the utility industry. Reculation The CSW System is subject to the jurisdiction of the SEC under the Holding Company Act. The Holding Company Act generally limits the operations of a registered holding company to a single integrated public utility system, plus such additional businesses as are functionally related to such system. The Electric Operating Companics have been classified as public utilities under the Federal Power Act and accordingly the FERC has jurisdiction in certain respects over their electric utility facilities and operations, wholesale rates, and in certain other matters. The Electric Operating Companies are subject to the jurisdiction of various state commissions as to rates, l accounting matters, standards of service and, in some cases, issuance of securities, certification of facilities and extensions and division of service territory. , i 1 Nuclear Regulation - CPL Ownership of an interest in a nuclear generating unit exposes CPL and, indirectly, CSW to regulatic, not common to a fossil generating unit. Under the Atomic Energy Act of 1954 and the Energy Reorganization Act of 1974, operation of nuclear plants is intensively regulated by the NRC, which has broad power to impose licensing and safety-related requirernents. Along with other federal and state agencies, the NRC also has extensive regulations pertaining to the environmental aspects of nuclear reactors. The NRC has the authority to impose fines and/or shut down a unit until compliance is achieved, depending upon its assessment of the severity of the situation. For a discussion of NRC regulation and other considerations arising from the ownership of nuclear assets, see NUCLEAR - CPL, below. l EnvironmentalRegulation For a discussion of regulation related to the various environmental agencies that impact the CSW Electric i Operating Companies, see Environmental Matters below. Rates The retail rates of the Electric Operating Companies are subject to regulation by the state utility commissions in the states in which they operate. As discussed above the wholesale rates of the Electric Operating Companies are subject to regulation by the FERC. In addition, SWEPCO has agreements, which have been approved by the FERC, with all ofits wholesale customers under which rates are based upon an agreed cost of service formula. These rates are adjusted periodically to reflect the actual cost of providing service. Tevas Rates - CPL, Sil'EPCC) and WTU The Texas Commission has originaljurisdiction over retail rates in the unincorporated areas of Texas. l The governing bodies ofincorporated municipalities have originaljurisdiction over rates within their incorporated limits. Municipalities may elect, and some have elected, to surrender this jurisdiction to the Texas Commission. l The Texas Commission has cppellate jurisdiction over rates set by incorporated municipalities. 1-5
Oklahoma Rates - PSU PSO is subject to thejurisdiction of the Oklahoma Conunission with respect to retail prices. Pursuant to authority granted under RESCTA, the Oklahoma Commission established service territorial boundary maps in all unincorporated areas for all regulated retail electric suppliers serving Oklahoma. In accordance with RESCTA, a retail electric supplier may not extend retail electric service into the certified territory of another supplier, except to serve its own facilities or to serve a new customer with an initial full load of 1,000 KW or more. RESCTA provides that when any territory certified to a retail electric supplier or suppliers is annexed and becomes part of , an incorporated city or town, the certification becomes null and void. However, once established in the annexed ; territory, a supplier may generally continue to serve within the annexed area. Arkansas and Louisiana Rates - SIVEPCO l SWEPCO is subject to thejurisdiction of the Arkansas Commission and Louisiana Commission with i respect to retail rates, as well as the Texas Conunission as described above. j Fuel Recoverv l l The recovery of fuel costs from retail customers by the Electric Operating Companies is subject to regulation by the state utility commissions in the states in which they operate. All of the Electric Operating ; Companies' contracts with their wholesale customers contain FERC approved fuel-adjustment provisions for recovery of fuel costs. Texas FuelRecovery- CPL, SWEPCO and HTU - Electric utilities in Texas, including CPL, SWEPCO and WTU, are not allowed to make automatic ! adjustments to recover changes in fuel costs from retail customers. A utility is allowed to recover its known or reasonably predictable fuel costs through a fixed fuel factor. The Texas Commission established procedures ' efTective in 1993 whereby each utility under its jurisdiction may petition to revise its fuel factor every six months according to a specified schedule. Fuel factors may also be revised in the case of emergencies or in a general rate proceeding. Fuel factors are in the nature of temporary rates and the utility's collection of revenues by such , factors is subject to adjustment at the time of a fuel reconciliation. Under these procedures, at its semi-annual , adjustment date, a utility will be required to petition the Texas Commission for a surcharge or to make a refund ; when it has materially under- or over-collected its fuel costs and projects that it will continue to materially under- l or over-collect. Material under- or over-collections including interest are defmed as four percent of the most , recent Texas Commission adopted annual estimated fuel cost for the utility. A utility does not have to revise its ) fuel factor when requesting a surcharge or refund. An interim emergency fuel factor order must be issued by the Texas Commission within 30 days after such petition is filed by the utility. Final reconciliation of fuel costs is made through a reconciliation proceeding, which may contain a maximum of three years and a minimum of one year of reconcilable data, and must be filed with the Texas Commission no later than six months after the end of the period to be reconciled. In addition, a utility must include a reconciliation of fuel costs in any general rate proceeding regardless of the time since its last fuel reconciliation proceeding. Any fuel costs that are detemiined unreasonably incurred in a reconciliation proceeding are not recoverable from retail customers. Oklahoma FuctRecovery-K : All KWH sales to PSO's retail customers, except for sales pursuant to FUSER and CSF, were made l under rates which include a fuel cost adjustment clause. Oklahoma law requires that an examination of PSO's ! retail fuel cost adjustment clause be performed annually by the Oklahoma Commission. The fuel cost adjustment is computed for each month on the basis of the average cost of fuel consumed in the month. The amount of any difference in such cost over or under a base rate is applied on a KWH basis and reflected in adjustments to customers' bills during the second month subsequent to the month in which the difference occurred. The FUSER program, for qualified commercial and industrial customers, and the CSF program, for qualified wholesale customers, were developed to allow program participants to purchase natural gas directly 1-6
I from suppliers, at negotiated prices, to be delivered to and burned in PSO's gas-fired power plants, resulting in reduced prices because of the low cost spot gas fuel provided. Under these programs, participants could deliver . sufficient quantities of natural gas to meet 70% of their generation requirements with the remaining 30% met with electricity generated by PSO's coal fired plants. The FUSER and CSF programs resulted in lower electric costs to all classes of PSO's customers. The FUSER program was canceled effective October 1,1993 because changing market and supply conditions eliminated the economic viability of the program, i Arkansas andLos 'na FuelRecovery-SWEPCO
. SWEPCO's retail .:urrently in effect in Louisiana are adjusted based on SWEPCO's cost of fuel in accordance with a fuel cost aajustment which is applied to each billing month based on the second previous month's average cost of fuel. Provision for any over- or under-recovery of fuel costs is allowed under an I automatic fuel clause. Under SWEPCO's fuel adjustment rider currently in effect in Arkansas, the fuel cost
! adjustment is applied for each billing month on a basis which permits SWEPCO to recover the level of fuel cost
- expenenced two months earlier.
l Recoverability of Fuel The inability of any Electric Operating Company to recover its fuel costs under the procedures described above could have a material adverse effect on such company's results of operations and financial condition. l
- See ITEM 7-MD&A and ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for further information with respect to regulatory, rate and fuel proceedings.
l Nuclear - CPL l CPL owns 25.2% of STP, a two-unit nuclear power plant which is located near Bay City, Texas. In l addition, HLP, the Project Manager, owns 30.8%; San Antonio owns 28.0%; and Austin owns 16.0% of STP. l STP Unit I was placed in service in August 1988 and STP Unit 2 was placed in service in June 1989. Nuclear Decommissioning l At the end of STP's senice life, deconunissioning is expected to be accomplished using the decontamination method, which is one of the techniques acceptable to the NRC. Using this method, the decontamination activities occur as soon as possible after the end of plant operations. Contaminated equipment is cleaned and removed to a permanent disposal location, and the site is generally retumed to its pre-plant state. l l CPL's decommissioning costs are accrued and funded to an extemal trust over the expected senice life of the l STP units. He existing NRC operating licenses will allow the operation of STP Unit I until 2027, and Unit 2 until l 2028. He accrual for decommissioning costs is an annual level cost based on the estimated future cost to decommission STP, including escalations for expected inflation to the expected time of decommissioning, and is net of expected camings from the trust fund. See ITEM 8-NOTE 1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES for further information related to nuclear decommissioning. CPL DeferredAccounting CPL was granted deferred accounting treatment for certain STP Unit I and 2 costs by Texas Commission orders. Rese orders allowed CPL to defer post-in-senice operating and maintenance costs, including taxes and depreciation, and canying costs until these costs were reflected in retail rates. Deferred accounting had an immediate positive effect on net income in the years allowed, but cash camings were not increased until rates went into effect j reflecting STP in senice. See ITEM 8-NOTE 1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS, for additional information related to deferred accounting at STP. l l l-7
- . . - . - - - _ . . _ _ - - . .. - ~ .. -.= - - . - . - . _ .-
. - . ~ _ . . - .
'l t Nuclear insurance
- See ITEM 8-NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for further infonnation related to nuclear insurance for STP. ,
Operatine Data ' l Facilities, Plants andProperties i At December 31,1995, the Electric Operating Companies owned the following electric generating plants, l or portions thereofin the case ofjointly owned plants, substantially all of which were steam electrie units. , Net Dependable [ Summer Rating Principal Fuel Capability Plant Name and Location Source (a) (MW) (h) CPL i La Palma, San Benito, Texas Gas 205' (c) ! Victoria, Victoria, Texas Gas 432 (c) ! Nueces lluy, Corpus Christi, Texas Gas 529 (c) !
- Lon C. Ilill, Corpus Christi, Texas Gas 550 l Laredo, Laredo, Texas Gas 177 J. L.13ates, Mission, Texas Gas 182 E.S. Joslin, Point Comfort, Texas Gas 249 llamey M. Davis, Corpus Christi, Texas Gas 695 ;
Coleto Creek, Goliad, Texas Coal 632 Oklaunion, Vernon, Texas (b) Coal 53 [ STP, Bay City, Texas (b) Nuclear 630 ; Eagle Pass, Eagle Pass, Texas Hydro 6 l 4,340 ; PSU l Tulsa, Tulsa, Oklahoma Gas 165 (c) i Oil 8 : Riverside, Jenks, Oklahoma Gas 916 { Oil 3 ! Northeastem, Oologah, Oklahoma Gas 637 j Coal 883 i Oil 4 { Southwestern, Washita, Oklahoma Gas 475 ! Oil 2 ! Comanche, Lawton, Oklahoma Gas 273 f Oil 4 - Weleetka, Weleetka, Oklahoma Gas 151 ! Oil 4 { Oklaunion, Vernon, Texas (b) Coal 106 l 3,631 ! SITPCO Arsenal Hill, Shreveport, Louisiana Gas 110 i Liebennan, Mooringsport, Louisiana Gas 276 Knox Lee, Cherokee Lake, Texas Gas 497 Wilkes, JelTerson, Texas Gas 875 , Lone Star, Daingerfield, Texas Gas 50 Welsh, Cason, Texas Coal 1,5R4 Flint Creek, Gentry, Arkansas (b) Coal 240 g llenry W. Pirkey, IIallsville, Texas (b) Lignite 559 ; Dolet llills, Mansfield, Louisiana (b) Lignite 262 ! 4,453 f t i I l-8 i
- - - . . - . - - - - _ . - . - . . ~ - -
1 i Net Dependable Summer Rating . Principal Fuel Capability Plant Name and Location Source (a) (MW)(h) HTU l Paint Creek, llaskell, Texas Gas 237 Rio Pecos, Girvin, Texas Gas 137 ! San Angelo, San Angelo, Texas Gas 125 ! Fort Phantom, Abilene, Texas 362 Gas (d) ~ Oak Creek, Bronte, Texas Gas 87 { Abilene, Abilene, Texas Gas 12 ! Lake Pauline, Quanah, Texas Gas 46 i Ft. Stockton, Ft. Stockton, Texas . Gas 5 l Vernon, Vernon, Texas Oil 9 ! Oklaunion, Vemon, Texas (b) Coal 370 !' Presidio, Presidio, Texas Oil 2 1,392 l Total, excluding plant in storage 13,816 i Plant in storage 392 i CSW Total 14,208 l (o) Some plants have the capability of burning oil in combination with gas. Use of oil in facilities primarily designed to burn gas l results in increased maintenance expense and a reduction of approximately 5% to 15% in capability, PSO and WTU have 25 ! MW and 11 MW, respectively, of facilities primarily designed to burn oil. (b) Data reflects only CSW System's portion of plants which are jointly owned with non-affiliates. For additional information !
- concemingjointly owned facilities see ITEM 8-NOTE 6. JOINTLY OWNED ELECTRIC UTILITY PLANT, l (c) Excludes units in storage, consisting of 34 MW at Nueces Bay,60 MW at Victoria, and 48 MW at La Palma for CPL and 250 i MW at Tulsa for PSO.
(d) Although both Fort Phantom units bum primarily gas, Unit 1 is designed to burn fuel oil for extended periods of time before maintenance is required and Unit 2 is designed to bum fuel oil on a continuous basis. ; t l All of the generating plants described above are located on land owned by the Electric Operating l
. Companies or, in the case ofjointly owned plants, jointly with other participants. He Electric Operating i Companies' electric transmission and distribution facilities are mostly located over or under highways, streets and i other public places or property owned by others, for which permits, grants, casements or licenses (which the !
Electric Operating Companies believe to be satisfactory, but without examination of underlying land titles) have ! been obtained. The principal plants and properties of the Electric Operating Companies are subject to the liens of ; l the first mortgage indentures under which the Electric Operating Companies' bonds are issued. Construction Expenditures f . The Electric Operating Companies maintain a continuing construction program, the nature and extent of I which is based upon current and estimated demands upon the system. See ITEM 7-MD&A for additional l information related to construction expenditures. i l l 1-9
- , ,r
i Peak Loads andSystem Capabilities ofthe Electric Operating Companies The following tables set forth for the last three years (i) the net system capability, including the net amounts of contracted purchases and contracted sales, at the time of peak demand, (ii) the maximum coincident ; system demand on a one-hour integrated basis, exclusive of sales to other electric utilities and (iii) the respective l amounts and percentages of peak demand generated by the Electric Operating Companies and net purchases and sales. CVil' 1995 1994 1993 j Net system capabihty (MW) 14,168(2) 13,549 (2) 13,163 (1)(2) Maximum coincident system demand (MW) 12,314 11,434 11,464 Percentage increase (decrease) in peak demand over prior period 7.7% (0.3)% 8.1 % ; Generation at time of peak (MW) 12,053 11,353 10,624 Percent of peak demand generated 97.9 % 99.3 % 92.7 % Net purchases (sales) at time of peak (MW) 261 81 840 Percent of net purchases (sales) at time of peak 2.1% 0.7% 7.3% Date of maximwn coincident system demand July 28 June 27 August I8 l (1) Does not include 630 MW of STP capability that was not available at the 1993 peak due to the outa;e described in ITEM 7-l MD&A. (2) Does not include 446 MW of system capability in storage in 1995 as described above in Facilities, Plants and Properties, 881 MW of system capability in storage in 1994 and 719 MW of system capabihty in storage in 1993. CPL 1995 1994 1993 Net system capability (MW) 4,200 (2) 3,969 (2) 3,850 (I)(2) Maximum coincident system demand (MW) 3,862 3,732 3,518 Percentage increase (decrease) in peak demand over prior period 3.5% 6.1% 5.1% Generation at time of peak (MW) 3,846 3,074 2,943 Percent of peak demand generated 99.6 % 82.4 % 83.7 % Net purchases (sales) at time of peak (MW) 16 658 575 Percent of net purchases (sales) at time of peak 0.4% 17.6 % 16.3 % Date of maximum coincident system demand July 26 August 18 August 25 l (1) Does not include 630 MW of STP capability that was not available at the 1993 peak due to the outage described in ITEM 7-MD&A. (2) Does not include 142 MW of system capability in storage in 1995 as described above in facilities, Plants and Properties and 310 MW of system capability in storage in 1994 and 1993. PSO 1995 1994 1993 Net system capabihty (MW) 3,759 (1) 3,664 (1) 3,649 (1) Maximum coincident system demand (MW) 3,292 3,167 3,147 Percentage increase (decrease) in peak demand over prior period 39% 0.6% 4.6% Generation at time of peak (MW) 3,025 2,645 2,609 Percent of peak demand generated 91.9 % 835% 82.9 % Net purchases (sales) at tune of peak (MW) 267 522 538 Percent of net purchases (sales) at time of peak 81% 16.5 % 17.1 % Date of maximum coincident system demand August 28 June 27 August 18 (1) Does not melude 250 MW of system capability m storage in 1995 as described above in Facilities, Plants and Properties, 247 MW of system capability in storage in 1994 and 409 MW of system capability in storage in 1993. 1-10
SirEPCO 1995 1994 1993 Net system capability (MW) 4,783 (1) 4,464 (2) 4,436 - Maximum coincident system demand (MW) 3,932 3,526 3,651 Percentage increase (decrease) in peak demand over prior period 11.5 % (3.4%) 12.8 % Generation at time of peak (MW) 4,022 3,987 3,559 Percent of peak demand generated 102.3 % 113.1 % 97.5 % Net purchases (sales) at time of peak (MW) (90) (461) 92 Percent of net purchases (sales) at time of peak (2.3%) (13.1%) 2,5% l Date of maximum coincident system demand July 28 June 27 August 18 (1) Does not include 54 MW of capability in 1995 that was not available at the peak due to fuel procurement issues.
- (2) Does not include 324 MW of capability in 1994 that was unavailable due to inefliciencies as a result of slag build-ups and fuel procurement issues.
l l IITU 1995 1994 1993 l Net system capability (MW) 1,426 1,459 1,384 i Maximum coincident syr. tem demanJ (MW) 1,435 1,262 1,201 Percentage increase (decrease)in peak demand over prior period 13.7 % 5.1% 7.4% Generation at time of peak (MW) 1,167 1,401 1,223 I Percent of peak demand generated 81.3 % 111.0 % 101.8 % Net purchases (sales) at time of reak (MW) 268 (139) (22) Percent of net purchases (sales) at time of peak 18.7 % (l1.0%) (1.8%) ! Date of maximum coincident system demand July 28 June 27 August 11 l i i i i l i 1 i l t l l l-11 l
Electric Operating Statistics CentralAndSouth West Corporation andSubsidiary Companies (excludes the SEEBOARD Group) . 1995 1994 1993 Kilowatt-hour sales (millions) Residential 16,872 16,368 15,903 Conunercial 13,755 13,463 12,466 Industrial 19,321 18,869 18,205 Other retail 1,518 1,501 1,4 34 Sales to retail customers 51,466 50,201 48,508 Sales for resale 8,468 7,133 5,852 Total 59,934 57,334 54,360 Number of electric customers at end of period (thousands) Residential 1,437 1,417 1,396 Commercial 209 205 201 Industrial 24 24 24 Other 13 15 12 Total 1,683 1,661 1,633 lb side .:f r.1 sales averages KWH per customer 11,840 11,665 11,541 Revenue per customer (a),(b) $799 $824 $842 Revenue per KWil (a),(b) 6.75# 7.06c 7.29d Revenue per KWil on total sales (a),(b) 4.81# 5.35g 5.62d Fuel cost data (a) Average Btu per net KWil 10,193 10,344 10,391 Cost per million litu $ 1.58 $1.82 $2.11 Cost per KW11 generated 1.61 g 1.88d 2.19# Cost as a percentage of revenue (b) 35.0 % 36.7 % 38.7 % (a) These statistics reCect the outage at STP in 1993 and early 1994, and the impact of CSF in 1995 and FUSER and CSF in 1993. For udditional information about FUSER and CSF, see l'uct Recorcry above and Fuel Sunniv below (b) 'lhese statistics reflect the refunds and fuel disallowance that occurred as a result of both the CPL 1995 Agreement and the WTU Stipulation and Agreement. For additional information, see ITEM 7-MD& A. 1-12
i Operating Statistics l CentralPower and Light Company 1995 1994 1993 Kilowatt-hour sales (millions) Residential 6,223 5,954 5,612 Commercial 4,656 4,523 4,278 Industrial 7,250 6,910 6,406 Other retail 465 457 435 Sales to retail customers 18,594 17,844 16,731 Sales for resale 1,680 1,286 913 Total 20,274 19,130 17,644 Number of electric customers at end of perimi Residential 526,909 516,355 504,893 Commercial 77,743 76,739 74,767 Industrial (a) 5,731 5,864 6,156 Other 3,561 3,577 3,538 Total 613,944 602,535 589,354 Residential sales averas;es KWII per customer 11,985 11,729 11,298 Revenue per customer (b),(c) 5896 5935 5955 Revenue per KWil (b),(c) 7.48v 7.97# 8.45f Revenue per KWTI on total sales (b),(c) 5.29# 6.37v 6.93t Fuel cost datu (b) Average Btu per net KWil 10,175 10,289 10,296 Cost per million Btu $1.37 51.75 32.17 Cost per KWH generated 1.39c 1.80t 2.23g Cost as a percentage of revenue (c) 26.8 % 27.0 % 28.6 % (a) The customer decrease in 1994 was due primarily to the combining of multiple customer accounts into single accounts and a decline in customers due to econorme and competitive conditions. (b) These statistics reflect the outage at STP in 1993 and early 1994. (c) These statistics reflect the refund and fuel disallowance that occurred as a result of the CPL 1995 Agreemen,t for additional mformation, see ITEM 7-MD& A. 1-13
Operating Statistics , Public Service Company of Oklahoma : 1995 1994 1993
)
Kilowatt-hour sales (millions) Residential 4,753 4,74 9 4,714 Commercial 4,427 4,434 4,352 Industrial 4,307 4,360 4',445 Other retail 80 89 87 Sales to retail customers 13,567 13,632 13,598 Sales for resale 1,617 1,509 563 Total 15,184 15,141 14,161 Number 01 electric customers at end of period Residential 412,765 409,675 406,847 Conunercial $4,102 53,454 53,166 ! Industrial 5,205 5,156 5,087 Other 1,353 1,287 1,008 Total 473,425 469,572 466,108 Residential sales averages KWil per customer 11,563 11,640 11,637 i Revenue per customer $682 $726 $731 l Revenue per KWH 5.89d 6.24 d 6.28d I 1 1 Revenue per KWH on total sales (a) 4.55d 4 89# 5.00t Fuel cost data (a) l Average Btu per net KWH 10,151 10,231 10,220 j Cost per million Btu $1.73 $1.96 $2.38 l Cost per KWH generated 1.75# 2.00# 2.43d l Cost as a percentage of revenue 42.3 % 39.5 % 43.7 % ) (a) 7hese statistics reDect the impact of CSF in 1995 and FUSER and CSF in 1993. See fuelRecorcry above and FucI Sunnly below. 1 1-14
Operating Statistics Southwestern Electric Power Company 1995 1994 1993 Kilowatt-hour sales (millions) Residential 4,406 4,157 4,114 Commercial 3,521 3,378 3,249 Industrial 6,531 6,357 6,122 Other retail 424 400 390 Sales to retail customers 14,882 14,292 13,875 Sales for resale 5,002 5,189 4,508 {
~
Total 19,884 19,481 18,383 Number of electric customers at end of period l Residential 351,131 346,227 340,379 Commercial 49,123 48,153 46,728 ! Industrial 5,864 5,747 5,809 Other 2,615 2,609 2,605 Total 408,733 402,736 395,521 l Residential sales averages KWH per customer 12,627 12,107 12,357 i Revenue per customer $798 $776 $822 I Revenue per KWH 6.32 g 6.41 g 6.65g 1 i Revenue per KWH on total sales 4.21 g 4.24g 4.60g Fuel cost data , Average Btu per net KWH 10,531 10,489 10,582 j Cost per million Btu $1.61 $1.75 $1.94 l Cost per KWH generated 1.70g 1.84t 2.05d l Cost us a percentage of revenue 38.3 % 40.6 % 42.5 % 4 l l l-15
Operating Statistics H'est Texas Utilities Company 1995 1994 1993 Kilowatt-hour sales (millions) Residential 1,490 1,508 1,464 Commercial 1,152 1,128 1,087 Industrial 1,233 1,241 1,231 Other retail 549 556 522 Sales to retail customers 4,424 4,433 4,304 Sales for resale 2,268 2,051 2,288 Total 6,692 6,484 6,592 Number of electric customers at end of period Residential 146,235 144,966 143,453 Commercial 27,243 26,618 26,001 Industrial 7,317 7,392 7,453 Other 5,685 5,533 5,361 Total 186,480 144,509 182,268 Residential sales averages j KWII per customer 10,224 10,449 10,241 i Revenue per customer (a) $784 $822 $811 Revenue per KWII (a) 7.67# 7.86c 7.92d 4 i 1 Revenue per KWH on total sales (a) 4.78t 5.29g 5.24c ) Fuel cost data j Average Btu per net KWH 10,370 10,424 10,491 j Cost per million Btu $ 1.83 $1.88 $1.91 ) Cost per KWil generated 1.90g 1.96c 2.00# Cost as a percentage of revenue (a) 38.7 % 38.3 % 39.1 % (a) These statistics reflect the refund and lower rates that occuned as a result of the WTU Stipulation and Agreement. See ITEM 7-MD&A. l l l-16
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Power Purchases and Sales Various municipalities, electric cooperatives and public power authorities are served by the Electric Operating Companies. The Electric Operating Companies exchange power on an emergency or economy basis with various neighboring systems and engage in economy interchanges with each other. In addition, they contract with certain suppliers for the purchase or sale of power on a unit capacity basis. SWEPCO - BREMCO As part of the agreement to acquire BREMCO, SWEPCO entered into a long-term purchased power contract with Cajun, BREMCO's previous full-requirements wholesale supplier. The contract covered the purchase of energy at a fixed price for 1993 and 1994, and the purchase of capacity and energy in subsequent years. See ITEM 7-MD&A for information regarding SWEPCO's pending proposal to acquire all of Cajun's non-nuclear assets. SWEPCO and WTU- Tev-La WTU sells 92 MW of power and energy to Tex-La. Tex-La has a peak requirement of approximately 120 MW. WTU will serve Tex-La until facilities are completed to connect Tex-La to SWEPCO, at which time SWEPCO will provide 85 MW and WTU will retain 35 MW of the Tex-La electric load. PSO - MCPC in 1989, PSO entered into certain long-term contracts with MCPC, a cogeneration development company located in northeastern Oklahoma. These contracts include: (i) an Interconnection and Interchange Agreement providing terms and conditions under which MCPC could connect its electric generating facilities to PSO's transmission system and providing for future transmission by PSO of specified amounts cf MCPC's power to an unaffiliated utility; (ii) a Stock / Asset Purchase Agreement which allows PSO under certain conditions to acquire the stock or assets of MCPC; and (iii) an Energy Conversion Agreement which required PSO to deliver natural gas to MCPC for conversion to electrical energy to be delivered by MCPC to PSO. Under the Energy Conversion Agreement, PSO had the right to dispatch up to 60 MWH per hour of quick-stan capability. See ITEM 8- l NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS, for information regarding litigation arising out of PSO's contracts with MCPC. SWEPCO - Other H7solesale SWEPCO furnishes energy at wholesale to three municipalities and also supplies electric energy at wholesale to eight electric cooperatives operating in its territory. , WTU- Other H7tolesale WTU provides wholesale electricity to four electric cooperatives and one municipality for all their respective electric energy requirements. WTU also provides wholesale power to nine other electric cooperatives, one other municipal customer and one investor owned electric utility company. WTU's contractual obligations with fifteen ofits wholesale customers reqaire a five-year notice of termination, and one wholesale customer has a l fourteen-year obligation. Other Operational Information System Interconnection The CSW System operates on an interstate basis to facilitate exchanges of power. PSO and WTU are interconnected tnrough the 200 MW North HVdc transmission interconnection. In 1992, SWEPCO and CPL entered into an agreement with HLP and TU to construct and operate an East Texas HVdc transmission interconnection to facilitate exchanges of power for the CSW System. This interconnection consists of a back-to-back HVdc converter station and 16 miles of 345 KV transmission line connecting transmission substations at SWEPCO's Welsh Power Plant and TU's Monticello Power Plant. In 1993, an application for a Certificate of 1-17 l 1
l Convenience and Necessity for the transmission interconnection was approved by the Texas Commission, and m ' mid-1995, the 600 MW East Texas HVdc project was completed. Transmission charges paid to TU are recorded as transmission expenses and are then recovered from customers through the fuel recovery mechanisms in Texas. CPL and WTU are members of ERCOT, which also includes TU, HLP, Texas Municipal Power Agency, Texas Municipal Power Pool, Lower Colorado River Authority, the municipal systems of San Antonio, Austin and Brownsville, the South Texas and Medina Electric Cooperatives, and several other interconnected systems and cooperatives. PSO and SWEPCO are members of the Southwest Power Pool, which is comprised of 43 members, including 17 investor-owned utilities,12 municipalities,10 cooperatives,3 state and I federal agency operating in the states of Arkansas, Kansas, Louisiana, Oklahoma and parts of Mississippi, Missouri, New Mexico and Texas. ERCOT members interchange power and energy with one another on a firm, economy and emergency basis, as do the members of the Southwest Power Pool. Seasonality Sales of electricity by the Electric Operating Companies tend to increase during warmer summer months and, to a lesser extent, cooler winter months, because of higher demand for power. Franchises The Electric Operating Companies hold franchises to provide electric service in various municipalities in their service areas. These franchises have varying provisions and expiration dates including, in some cases, termination and buy-out provisions. CSW considers the Electric Operating Companies' franchises to be adequate for the conduct of their business. Fuel Supolv General The CSW System's present net dependable summer rating power generation capabilities and the type of fuel used are set forth in Facilities, Plants and Properties above. Additional fuel supply data is set forth in the tables presented below. Aggregate Capability (MW) CSil' CPL PSO SilEPCO liTU Natural Gas 8,455 3,019 2,617 1,808 1,011 Coal 3,868 685 989 1,824 370 Lignite 821 - -- 821 -- 1 Nuclear 630 630 - - - Hydro and Oil 42 6 25 - 11 l 13,816 4,340 3,631 4,453 1,392 Plant in Storage 392 142 250 - - Total 14,208 4,482 3,881 4,453 1,392 Generation Mix (as a % of MWil) CSil' CPL PSU SilEPCO IlTU Natural Gas 47 55 62 20 65 Coal 36 21 38 50 35 Lignite 9 - - 30 -- Nuclear 8 24 -- -- -- Hydro and Oil - - -- -- - 100 10/J 100 100 100 1-18
l 1 l I l Natural Gas The Electric Operating Companies purchase their gas from a number of suppliers operating in and around - their senice territories. In 1995, approximately 43% of the Electric Operating Companies' total gas purchases were made under long-term contracts and approximately 57% came from short-term contracts and spot purchases. CPL CPL's eight gas-fired electric generating plants are supplied by a ponfolio oflong-term and shon-tenn y l natural gas purchase agreements through multiple natural gas pipeline systems. Approximately 59% of CPL's total gas requirements in 1995 were purchased under long-term arrangements representing both purchase obligations and discretianary purchases, while the balance of CPL's requirements were acquired under short-term arrangements in the spot market. PSO PSO engages in a program to maintain adequate gas supplies necessary for operation. Natural gas for generation is provided by purchases under a number oflong-term and spot, market contracts. Approximately 49% of PSO's natural gas requirements m 1995 were provided for under finn contracts. Transok acts as an j administrator with respect to purchases of natural gas supplies. Gas is transported by Transok to PSO facilities under agreements pursuant to which PSO pays Transok for actual costs incurred in providing the services as determined on an allocated cost of senice basis, including a rate of return on equity applicable between affiliates as specified by the Oklahoma Commission in PSO's most recent Oklahoma price review. See ITEM 7-MD&A and ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS, for further infonnation with respect to Transok and the agreements between PSO and Transok. l l SWEPCO l SWEPCO purchased approximately 100% ofits gas requirements in 1995 pursuant to spot purchase , contracts with no take-or-pay obligations. Subject to market conditions, SWEPCO plans to continue to enter into short-tenn contracts with various suppliers to provide gas for peaking purposes. HTU WTU has gas purchase contracts with several suppliers. The largest long-term contract, which is with Lone Star, provided approximately 11% of WTU's total gas requirements in 1995. Lone Star is obligated, except during curtailments, to have gas available for 125% of the estimated annual fuel requirements of each plant l served, provided the total of all plants does not exceed 110% of the estimated annual fuel requirement. The Lone l Star contract, which expires in 2000, allows WTU considerable Ocxibility to purchase gas from other sources. l Utilizing this flexibility in 1995, WTU purchased approximately 72% ofits gas requirements on the spot market from many different suppliers. The remaining 17% of WTU's 1995 gas requirements came from supplemental firm contracts with several suppliers. The contracts with suppliers vary in their terms, but generally provide for periodic or other price adjustments. l Coal and Lignite The Electric Operating Companies purchase coal from a number of suppliers. In 1995, approximately 74% of the Electric Operating Companies' total coal purchases were supplied under long-term contracts with the balance procured on the spot market. The coal for the CSW System plants comes primarily from Wyoming or Colorado mines which are located between 1,000 and 1,700 rail miles from the generating plants. i l Proposed Railroad Merger l On November 30,1995, Union Pacific, Southern Pacific and certain other affiliates of each filed an application with the Interstate Commerce Commission to merge their rail operations. Union Pacific and Southem i Pacific currently compete for portions of the coal transportation traffic to CPL's Coleto Creek Power Plant. In addition, Southern Pacific controls the destination ponion of movements of coal from the Powder River Basin of Wyoming, where Union Pacific competes with Burlington Northem for the origination portion of the movements. 1-19
l l l i I i i { Because of the potential climination of such competition and other factors, CPL may be adversely affected by this j merger, if approved, unless conditions mitigating the impact are included in the merger. i Oklaunion - CPL, PSO and HTU , The jointly owned Oklaunion plant purchases coal under a coal supply contract with Caballo Coal j Company. Approximately 99% of the total 1995 Oklaunion coal requirements for WTU,78% for CPL and 85% for PSO were supplied under the Caballo Coal Company contract with the balance procured on the spot market. As of December 31,1995, CPL's share of the coal inventory at Oklaunion was approximately 46,000 tons, representing approximately 83 days supply; PSO's share was approximately 78,000 tons, representing approximately 71 days supply; and WTU's share was approximately 205,000 tons, representing approximately y 67 days supply. Prior to the expiration of a coal transportation contract in October 1995, all coal used at Oklaunion was transported approximately 1,100 miles to the plant by Burlington Northern. Subsequently, coal has been transported in Burlington Northern supplied rail cars pursuant to a tariff filed with the Interstate Commerce Commission, whose authority in the matter was transferred to the Surface Transportation Board of the U.S. Department of Transportation effective January 1,1996. In a case currently pending before such board, WTU has challenged the rate filed by Burlington Northern and requested prescription of a reasonable rate by the Surface Transportation Board. l Coleto Crech - CPL CPL acquired approximately 34% of the 1995 coal requirements for its Coleto Creek plant pursuant to a long-term agreement with Colowyo Coal Company, which expires in 1999. CPL's remaining purchase obligation under the Colowyo agreement is for approximately 25% of Coleto Creck's requirements. The coal is mined in
)
northwestern Colorado and is transported approximately 1,400 miles by Denver & Rio Grande Western Railroad Company and Southern Pacific. Southem Pacific is currently the only rail carrier with access to the Coleto Creek plant. CPL owns sufficient railcars for operation of three unit trains. CPL has instituted a proceeding at the Interstate Commerce Conunission, whose authority in the matter was transferred to the Surface Transportation Board of the U.S. Depanment of Transportation, effective January 1,1996, requesting a reasonable rate for the 16 mile movement from Victoria, Texas, a station sen ed by Missouri Pacific Railroad Company, to Coleto Creek. CPL has entered into an agreement with Colowyo Coal Company for most of Coleto Creek's coal requirements for 1996. Under this contract, transportation charges are paid by Colowyo Coal Company. CPL has also contracted for a test bum of coal from the Powder River Basin of Wyoming during 1996. After 1996, CPL intends to utilize Powder River Basin coal for a portion of the Coleto Creek plant requirements and intends to negotiate rail transportation agreements for such coal. Powder River Basin coal is transported approximately 1,700 miles, using either Burlington Northem or Union Pacific as the originating carrier and Southem Pacific as the destination carrier. See Proposed Railroad Merger above. At December 31,1995, CPL had approximately 531,000 tons of coal in inventory at Coleto Creek, representing approximately 73 days supply. Northeastern Station - PSG PSO has a contract with Kerr-McGee Coal Corporation, which substantially covers the coal supply for PSO's Northeastern Station coal units through at least 2014. Coal delivery is by unit trains from mines located in the Gillette, Wyoming vicinity, a distance of about 1,100 rail miles from Northeastern Station. PSO owns , sufficient rail cars and spares for operation of six unit trains. Coal is transported to Northeastern Station ! pursuant to a long-term contract with Burlington Northem. At December 31,1995, PSO had approximately 438,000 tons of coal in inventory at Northeastern representing approximately 41 days supply. See ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS, for additionalinformation. H'ctsh and Flint Creek - SH'EPCO All of the long-term supply for SWEPCO's Welsh plant and its 50 percent-owned Flint Creek plant is provided under a contract with AMAX. Coal under the AMAX contract is mined near Gillette, Wyoming, a I 1-20 j
1 i distance of about 1,500 and 1,100 miles, respectively, from the Welsh and Flint Creek plants. Coal is delivered to the plants under rail transportation contracts with Burlington Northern and the Kansas City Southern Railroad . Company having expiration dates ranging between 1996 and 2007. SWEPCO owns or leases under long-term : leases sufficient cars and spares for operation of twelve unit trains. SWEPCO has supplemented its railcar flect I from time to time with short-term leases. At December 31,1995, SWEPCO had coal inventories of approximately 1,552,000 tons at Welsh, representing 68 days supply, and approximately 468,000 tons at Flint Creek, representing 68 days supply. See ITEM 8-NOTE 2. LITIGATION AND REGULATORY l PROCEEDINGS and ITEM 8-NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES, for information additional information. l Pirkey and Dolet Hills- SWEPCO
- SWEPCO has acquired lignite leases covering an aggregate of about 27,000 acres near the Henry W.
l Pirkey power plant. Sabine Mining Company is the contract miner of these reserves. At December 31,1995, ( approximately 238,000 tons oflignite were in inventory at the plant representing 22 days supply. Another 25,000 l acres arejointly leased in equal portions by SWEPCO and Central Louisiana Electric Company in the Dolet Hills l area of Louisiana near Dolet Hills Power Plant. The Dolet Hills Mining Venture is the contract miner for these reserves. At December 31,1995, SWEPCO had approximately 207,000 tons oflignite in inventory at the plant - l representing 40 days supply. In the opinion of the management of SWEPCO, the acreage under lease in these areas contains sufficient reserves to cover the anticipated lignite requirements for the estimated useful lives of the lignite-fired plants. ' Nuclear Fuel- CPL The supply of fuel for STP involves a complex process. This process includes the acquisition of uranium concentrate, the conversion of uranium concentrate to uranium hexafluoride, the enrichment of uranium hexafluoride in the isotope U235 and the fabrication of the enriched uranium into fuel rods and incorporation of fuel rods into fuel assemblies. The fuel assemblies are the final product loaded into the reactor core. The time ! associated with this process requires that fuel decisions be made years in advance of the actual need to refuel the : reactor. Fuel requirements for STP are being handled by the STP Management Committee, comprised of , representatives of all participants in STP. l Outages are necessary approximately every 18 months for refueling. Because STP's fuel costs are significantly lower than any of the other CPL units, CPL's average fuel costs are expected to be higher whenever an STP unit is down for refueling or maintenance. CPL and the other STP participants have entered into contracts with suppliers for uranium concentrate and conversion service sufficient for the operation of both STP units through November 1997. Additional flexible contracts are in place to provide 50% of the uranium concentrate and 100% of the conversion service needed for STP from the end of 1997 through 2000. Enrichment contracts were secured for a 30-year period from the initial operation of each unit. The STP participants have canceled the enrichment requirements for the period from October 2000 to September 2005 under a ten year no cost termination provision of the enrichment contract. The STP participants believe that other, lower cost options will be available in the future. Also, fuel fabrication j services have been contracted for operation through 2005 for Unit I and 2006 for Unit 2. Although CPL and the i i other STP owners cannot predict the availability of uranium and related services, CPL and the other STP owners l do not currently expect to have difficulty obtaining uranium and related services required for the remaining years I of STP operation. The Energy Policy Act has provisions for the recovery of a portion of the costs associated with the decommissioning and decontamination of the gaseous diffusion plants used in the enrichment process. These costs are being recovered on the basis of enrichment services purchased by utilities from the DOE prior to October of 1992. The total annual assessment for all domestic utilities is limited to $150 million per federal fiscal I l-21
l l year and assessable until October 2007. The STP assessment will be approximately $2.0 million each year with l CPL's share being 25.2% of the annual STP assessment.
- l The Nuclear Waste Policy Act of 1982, as amended, requires the DOE to develop a pennanent high level waste disposal facility for the storage of spent nuclear fuel by 1998. The DOE last estimated that the permanent facility will not be available until 2010. The DOE will be taking possession of all spent fuel generated at STP as a result of a contract CPL and other STP participants have entered into with the DOE. STP has on-site storage facilities with the capability to store all the spent nuclear fuel generated by the STP units over their lives.
Therefore, the DOE delay in providing the disposal facility will not impact the operation of the STP units. Under provisions of the Nuclear Waste Pokey Act of 1992, a one-mill per KWii assessment on electricity generated and sold from nuclear reactors funds the DOE waste disposal program. Risks of substantial liability could arise from the operation of STP and from the use, handling, disposal i and possible radioactive emissions associated with nuclear fuel. While CPL carries insurance, the availability, i amount and coverage thereofis limited and may become more limited in the future. The available insurance may not cover all types or amounts ofloss or expense which may be experienced in connection with the ownership of STP. See ITEM 8-NOTE 3. COMMITMENTS AND CONTINGENT LI ABILITIES for information relating to nuclear insurance. Gm crnmentalRegulation The price and availability of each of the foregoing fuel types are significantly affected by governmental regulation. Any inability in the future to obtain adequate fuel supplies, or adoption of additional regulatory measures restricting the use of such fuels for the generation of electricity might afTect the CSW System's ability j to economically meet the needs ofits customers, and could require the Electric Operating Companies to l supplement or replace, prior to normal retirement, existing generating capability with units using other fuels. This would be impossible to accomplish quickly, would require substantial additional expenditures for construction and could have a material adverse effect on CSW's and/or the Electric Operating Companies' financial condition and results of operations. 1 l l l i l l l 1-22 l
Fuel Cmts and Consumption Additional fuel cost data for the CSW System appears under Operating Statistics above. Average fuel - costs and consumption by fuel type for 1995 are presented in the following table. 1995 Average Cost per 1995 Consumption ! Fuel Type MMhtu (million) 1 Btus Mcfs Tons , CPL l Natural gas $ 1.62 118 114 I Coal $1.71 41 2 j Nuclear 30.51 50 Composite $ 1.37 PSO l Natural gas $2.01 91 88 Coal $1.31 62 4 Composite $1.73 l Sil'EPCO l Natural gas $ 1.68 38 38 l Coal $1.85 99 6 i Lignite $1.19 61 5 i Composite $1.61 1 IITU Natural gas $188 44 44 Coal $1.70 23 1 Composite $1.83 CSil' , Natural gas $1.79 ! Coal $1.66 Lignite $1.19 Nuclear 50.51 { Composite $1.58
)
The registrants are unable to reliably predict the future cost of fuel. See ITEM 7-MD&A for further information concerning fuel costs. Environmental Matters 1 1 The Operating Companies and CSW Energy are subject to regulation with respect to air and water ' quality and solid waste standards and other environmental matters by various federal, state and local authorities. These authorities have continuing jurisdiction in most cases to require modifications in the Electric Operating Companies' facilities and operations. Changes in environmental statutes or regulations could require substantial additional expenditures to modify the Electric Operating Companies' facilities and operations and could have a material adverse effect on CSW's and each of the Electric Operating Companies' results of operations and fmancial condition. Violations of environmental statutes or regulations can result in fmes and other costs. Air Quality \ Air quality standards and emission limitations are subject to thejurisdiction of state regulatory authorities j in each state in which the CSW System operates, with oversight by the EPA in accordance with regulations of these state authoritics, permits are required for all generatmg units on which construction is conunenced or which i are substantially modified after the effective date of the applicable regulations. l 1-23
l I in 1990, the United States Congress passed the Clean Air Act which places restrictions on the emission of sulfur dioxide from gas , coal- and lignite-fired generating plants. Beginning in the year 2000, the Electric Operating Companies will be required to hold allowances in order to emit sulfur dioxide. The EPA issues allowances to owners of existing generating units based on historical operating conditions. Based on the CSW System facilities plan, CSW believes that the Electric Operating Companies' allowances are adequate to meet their needs at least through 2008. Public and private markets are developing for trading of excess allowances. The Clean Air Act also directs the EPA to issue regulations governing nitrogen oxide emissions and require government studies to determine what controls, if any, should be imposed on utilities to control air toxics emissions. The impact that the nitrogen oxide emission regulations and the air toxics study will have on CSW and the Electric Operating Companies cannot be determined at this time. As a result of requirements imposed by the Clean Air Act, CSW expects to spend approximately $1.7 million over a three year period from 1995 to 1997 for annual testing of, software modifications to, and maintenance of continuous emission monitoring equipment. Of this, approximately $0.5 million was spent in 1995. The expected expenditures and the 1995 expenditures for each of the Electric Operating Companies are presented in the following table. CPL PSU SlWPCO IITU (thousands) Total expected expenditures (1995-1997) $540 $329 $488 $309 Expenditures in 1995 $146 $98 $131 $86 Water Quality Water quality is subject to the jurisdiction of each of the state regulatory authorities in which the CSW System operates as well as the EPA. These authorities havejurisdiction over all wastewater discharges into state waters and also for establishing water quality standards and issuing waste control permits covering discharges which might affect the quality of state waters. The EPA has jurisdiction over point source discharges through the National Pollutant Discharge Elimination System provisions of the Clean Water Act. RCRA and CERCLA The RCRA and the Arkansas, Louisiana, Oklahoma and Texas solid waste rules provide for comprehensive control of all solid wastes from generation to final disposal. The appropriate state regulatory authorities in the states in which the CSW System operates have received authorization from the EPA to administer the RCRA solid waste control program for their respective states. The operations of the CSW System, like those of other utility systems, generally involve the use and disposal of substances subject to environmental laws. CERCLA, the federal"Superfund" law, addresses the cleanup of sites contaminated by hazardous substances. Superfund requires that PRPs fund remedial actions regardless of fault or the legality of past disposal activities. PRPs include owners and operators of contaminated sites and transporters and/or generators of hazardous substances. Many states have similar laws. Theoretically, any one PRP can be held responsible for the entire cost of a cleanup. Typically, however, cleanup costs are allocated among PRPs. CSW's subsidiaries incur significant costs for the handling, transportation, storage and disposal of hazardous and non-hazardous waste materials. Unit costs for waste classified as hazardous exceed by a substantial margin unit costs for waste classified as non-hazardous. The Electric Operating Companies, like other electric utilities, produce combustion and other generation by-products, such as ash sludge, slag, low-level radioactive waste and spent nuclear fuel. The Electric Operating Companies own distribution poles treated with creosote or related substances. The EPA currently exempts coal combustion by-products from regulation as hazardous wastes. Distribution poles treated with creosote or similar 1-24
substances are not expected to exhibit characteristics that would cause them to be hazardous waste. In connection with their operations, the Electric Operating Companies also have used asbestos PCBs and materials classi6ed as . hazardous waste. If additional by-products or other materials generated or used by companies in the CSW System were reclassified as hazardous wastes, or other new laws or regulations concerning hazardous wastes or other materials were put in effect, CSW System disposal and remedial costs could increase materially. The EPA is expected to issue new regulations stating whether certain other materials will be classified as hazardous. TSCA Violation - CPL Under the TSCA, the storage, use and disposal, among other things, of PCBs are regulated. Violations of the TSCA may lead to fmes and penalties. CPL was inspected by the EPA in 1992 and found to have TSCA , record-keeping and other violations for PCBs. During 1995, CPL negotiated a settlement, signed a consent l agreement and paid a penalty of approximately $76,000. Sol Lynn SuperfundSite- CPL The Sol Lynn salvage yard was declared a Superfund site by the EPA after it was found to contain a number of contaminants including PCBs. Gulf States Utilities Company remediated the site for approximately $2 million and attempted to recover a portion of the remediation costs from alleged PRPs, including CPL. During 1995, CPL and Gulf States Utilities Company reached an agreement whereby CPL paid $50,000 as its share of the remediation costs. l Rose Chemical Site - SWEPCO, WTU and CPL SWEPCO, WTU and CPL were named PRPs in the cleanup of the Rose Chemical Site, in Missouri, along with 750 other companies. A cleanup fund was established through payments by PRPs who agreed to a "buyout settlement," and the site remediation was undertaken. The site buildings were removed and the grounds cleaned to standards acceptable to the EPA. The court settlement became fmal in July 1994, and during 1995, SWEPCO, WTU and CPL received refunds of $225,000, $235,000 and $60,000, respectively, from the l previously collected cleanup fund. PCB Storage Facilities - PSO PSO investigated and identified PCB contamination at one ofits PCB storage facilities in Sand Springs, Oklahoma. PSO made proper notification to the EPA of the contamination that was caused by spills prior to the adoption of PCB spill regulations. PSO negotiated a remediation plan with the EPA. Remediation of the PCB storage site began in November 1994 and was completed in 1995 at a cost of approximately $235,000. As part of the remediation plan, however, the EPA requested PSO to sample the land surrounding the PCB storage building site. The land includes an active PSO substation and a privately owned industrial area. Testing of the PSO property conducted during 1995 revealed minor contamination, and a resulting cleanup of the substation was completed at a cost of $73,000. PSO has not been able to test the adjoining industrial area, so it has been unable to determine the extent of any PCB contamination. Compass Industries Superfund Site - PSO , PSO has received notice from the EPA that it is a PRP under CERCLA and may be required to share in ; the reimbursement of cleanup costs for the Compass Industries Superfund site which has been remediated. PSO l I has been named defendant in a lawsuit filed in Federal District Coun in Tulsa, Oklahoma on August 29,1994, for reimbursement of the cleanup costs. PSO's degree of responsibility, if any, as a de minimis party appears to be insignificant and management expects that PSO will have an opponunity to pay its share of costs and remove itself l from the case. Accordingly, in 1995, PSO accrued a $100,000 liability for this expected settlement in 1996. l Coal Mine Reclamation - PSO in August 1994, PSO received approval from the Wyoming Department of Environmental Quality to begin reclamation of a coal mine in Sheridan, Wyoming, owned by Ash Creek, a wholly owned subsidiary of PSO. Ash Creek recorded a S3 million liability in 1993 for the estimated reclamation costs and subsequently accrued an 1-25
additional $500,000 in 1995. Actual reclamation work commenced in September 1995, with completion expected in late 1996. Surveillance monitoring will continue for ten years after fmal reclamation. Management believes that ultimate resolution of this matter will not have a material adverse efTect on CSW's or PSO's consolidated results of operations or financial condition. Suspected Biloxi, Afississippi AfGPSite-SIVEPCO in 1994, SWEPCO was notified by Mississippi Power that it may be a PRP at a MGP site in Biloxi, Mississippi, formerly owned and operated by a predecessor of SWEPCO. SWEPCO worked with Mississippi Power to investigate the extent of contamination at this site. The MDEQ approved a site investigation work plan and, in January 1995, SWEPCO and Mississippi Power initiated sampling pursuant to that work plan. Contamination at the site was identified as a result of the investigation of the property and adjacent properties. Soil and grounds water test results were sent to the MDEQ for review and comment. The test results confirmed the contamination on the property and indicated the possibility of contamination of an adjacent property. A risk assessment has been performed to assist SWEPCO and Mississippi Power in determining remediation alternatives. A final range of cleanup costs has not been detennined, but based on preliminary estimates, SWEPCO has accrued approximately $2 million for its portion of the cleanup of this site. i l i Suspected AIGP Sites in Texarkana, Arkansas and Shreveport, Louisiana - SIVEPCl) SWEPCO owns a suspected former MGP site in Texarkana, Arkansas. The EPA ordered an initial investigation of this site, as well as a site in Shreveport, Louisiana, which is no longer owned by SWEPCO. The contractor who perfonned the investigations of these two sites reconunended to the EPA that no further action be taken at this time. SWEPCO discovered that an underground storage tank was in place at the Texarkana site and that it was leaking. SWEPCO removed the tank in early 1995 and has made a request for closure from the ADPCE based on soil and ground water quality resuits. SWEPCO does not believe that any further action will be required for either of these sites. Suspected A1GPSitein Afarshall, Texas-SWEPCO SWEPCO owns a suspected former MGP site in Marshall, Texas. SWEPCO notified the TNRCC that evidence of contamination has been found at the site. Sampling was conducted at the end of 1993 and early 1994, to evaluate the extent, if any, to which contamination has impacted soil, groundwater and other conditions in the area. SWEPCO later conducted another round of groundwater sampling from the site's groundwater monitor wells. Sample results from each of the nine monitor wells indicate that there were no drinking waier standards exceeded for RCRA metals. In April 1995, additional off-site soil samples were collected and wert analyzed for metals concentrations to provide for statistical comparison of on-site soils metals concentrations with off-site or background levels. Metal concentrations were determined to be comparable to background levels, so SWEPCO proceeded with closure of the site with the TNRCC. Cleanup work at the site was completed for substantially less than the preliminary $2 million estimate that was accrued in 1993. EAIFs Research is ongoing whether exposure to EMFs may result in adverse health effects. Although a few of the studies to date have suggested certain associations between EMFs and some types of efTects, the research to date has not established a cause-and-effect relationship between EMFs and adverse health effects. CSW cannot predict the impact on CSW or the electric utility industry if further investigations or proceedings were to establish that the present electricity delivery system is contributing to increased risk or incidence of health problems. Other Environmental Afatters From time to time the registrants are made aware of various other environmental issues or are named as a party to various other legal claims, actions, complaints or other proceedings related to environmental matters. Management does not expect disposition of any such pending environmental proceedings to have a material adverse effect on CSW's or any of the Electric Operating Companies' results of operations or financial condition. 1-26
l l l See ITEM 7-MD&A, ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS ; ( and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES, for additional information relating to . j environmental matters. l 1 UNITED KINGDOM UTILl'IY OPERATIONS Background and Overview On November 6,1995, CSW, indirectly through CSW (UK), announced its intention to conunence the l Tender Offer in the United Kingdom to acquire all of the outstanding share capital of SEEBOARD, a regional ; electricity company in the United Kingdom, for an aggregate adjusted purchase price of approximately $2.12 ; billion. Through February 29,1996, CSW (UK) had acquired shares representing, or had received valid j acceptances in respect of, approximately 92.3% of the outstanding share capital of SEEBOARD. CSW (UK) expects to acquire the remaining 7.7% of the outstanding SEEBOARD share capital by the end of the second quarter of 1996. l l SEEBOARD is one of the 12 regional electricity companics which came into existence as a result of the restructuring and subsequent privatization of the United Kingdom electricity industry in 1990. SEEBOARD's primary regulated businesses are the distribution and supply of clectricity within its southeast England service area. SEEBOARD is also involved in other activities, including gas supply, electricity generation, electrical contracting and retailing. SEEBOARD serves an affluent suburban and rural area in the United Kingdom. I SEEBOARD is also one of the lowest cost suppliers of below 100 KV customers among the United Kingdom's regional electricity companies. Distribution and Supply Businesses ServiceArea SEEBOARD's service area covers approximately 3,000 square miles in southeast England, extending from the outlying areas of London to the English Channel. SEEBOARD's service area includes large towns such as Kingston-upon-Thames, Croydon, Crawley, Maidstone, Ashford and Brighton, as well as substantial rural areas. The area has a population of approximately 4.6 million people with significant portions of the area, such as south London, having a high population density. Over the past 25 years, the services sector of the area's economy has become increasingly important, while the industrial sector has been in decline. There has been considerable conunercial development in a number of towns in the area over the last ten years, in particular in the areas around Gatwick Airport and the English Channel ports. Distribution Business l Distribution is the core business of SEEBOARD and involves the distribution of electricity to consumers over SEEBOARD's distribution system. Electricity is transported from generating plants across the United Kingdom, typically at 400 KV or at 275 KV via the National Grid, to points within SEEBOARD's geographical area. It is then transformed to 132 KV and enters SEEBOARD's distribution system. Almost all of the i electricity that enters SEEBOARD's system is received at these National Grid supply points. However, a small ; amount of electricity is received from power stations within SEEBOARD's geographical area. At December 31, ; ( ~ 1995, SEEBOARD's distribution system contained approximately 7,655 miles of overhead lines and approximately 19,874 miles of underground cables. The bulk of SEEBOARD's tangible fixed assets are currently employed in the distribution business. Supply Business SEEBOARD's supply business consists of the bulk purchase of electricity and its sale to customers. The majority of electricity sold by SEEBOARD in its supply business is purchased through a pool created in 1990 for 1-27
i the bulk trading of electricity. Pool prices are variable and dif6 cult to predict. Accordingly, in an effort to
- control exposure to prices, SEEBOARD has a portfolio of contracts with major generators as a means of hedging price fluctuations'in the' pool. The physical delivery of electricity via SEEBO ARD's distribution network results in a cost to the supply business and income to the distribution business. l 1
SEEBOARD currently has the sole right to supply substantially all of the consumers in its authorized ' area, except where demand is above 100 KW. As a part of the restructuring of the electricity industry, competition is being introduced into the market for electricity supply on a phased basis. The threshold for competitive supply was reduced from 1 MW to 100 KW cffective April I,1994. SEEBOARD, as well as other licensed suppliers, are pennitted to supply electricity to customers whose peak demand exceeds 100 KW in the areas of other regional electricity companies. All holders of a second-tier license, including SEEBOARD, who supply electricity to non-franchise customers (i.e., demand of 100 KW or above) must pay charges to the host regional electricity company for the use ofits distribution network. It is currently intended that, effective April 1, 1998, the regional electricity companies' supply businesses (including SEEBOARD's) will no longer be protected by a franchise. SEEBOARD has always been a strong supporter of extending competition in electricity whenever feasible and practicable. To dati. SEEBOARD has established a profitable business in supplying customers outside ofits franchise area. While SEEBOARD is currently unable to predict the impact that the transition in 1998 to full competition will have on its electricity supply business, its primary objective is one of prof t and not market share. Regulation The distribution and supply businesses of SEEBOARD are principally regulated by the Electricity Act of 1989 and by the conditions contained in SEEBOARD's public electricity supply license. The public electricity supply license generally continues until at least 2025, although it may be revoked upon 25 years prior notice. The Secretary of State for Trade and Industry and the DGES are the principal regulators of SEEBOARD's business. Most of the income of the distribution business is regulated by a fonnula set by the DGES based upon, among other factors, the UK RPl. The formula generally sets a cap on the average price per unit distributed, with allowed annual increases based upon changes in the UK RPl plus a percentage factor set from time to time by the DGES (which was initially set at 0.75%). In August 1994, the DGES annonneed that SEEBOARD's allowed per unit price would be reduced by 14% effective April 1,1995 and that increases (or, if applicable, decreases) in the allowed per unit price in subsequent years would be based upon changes in the UK RPI minus 2%. In July 1995, the DGES proposed a further revis;on to SEEBOARD's price controls which would further reduce the allowed per unit price by 13%. effective April 1,1996, and restrict increases (or, if applicable, require decreases) in the allowed per unit price in each of the three subsequent years based upon changes in the UK 1U21 minus 3%. The DGES is not scheduled to review the allowed distribution charges for the regional electricity companies, including SEEBOARD, until 2000 although the DGES may reopen the review before such time under certain Circumstances. The prices charged by SEEBOARD in its franchise supply business are also detennined from a formula set from time to time by the DGES. The formula generally provides for the pass through to customers of certain costs incurred by SEEBOARD in supplying the electricity, which include electricity purchase costs, transmission charges, and distribution costs, together with an allowed margin as detemlined by the DGES. Under the current fonnula, SEEBOARD is pemiitted annual increases (or, if applicable, decreases) in its allowed margin by an amount equal to the UK RPI minus 2%. The DGES is not scheduled to review the allowed supply charges for the regional electricity companies, including SEEBOARD, until 1998, although the DGES may reopen the review before such time under certain circumstances. 1 1 1-28 ! l i
Other Businesses in addition to its distribution and supply businesses, SEEBOARD is also engaged in other activities, including gas supply, electricity generation, electrical contracting and retailing. SEEBOARD's gas supply , business was established in 1993 to compete in the competitive commercial and industrial markets. In 1995, a joint venture was entered into with Amoco to take advantage of the extension of competition into the United Kingdom natural gas domestic market, and will result in the supply by SEEBOARD of natural gas throughout the United Kingdom. SEEBOARD's electricity generation business is conducted through its 37.5% interest in Medway Power Ltd's 660 MW gas fired power plant located on the Isle of Grain. SEEBOARD also provides electrical contracting services as both a primary contractor and subcontractor to a variety ofindustrial, commercial and domestic customers. These operations are primarily in Southeast England but include a growing national element. Finally, SEEBOARD conducts an electrical retailing business through its chain of retail electrical appliance shops and superstores. Although the retail business remains concentrated in SEEBOARD's t authorized service area, a small number of superstores have been developed successfully outside of the region. Financial Information For the year ended December 31,1995, SEEBOARD had electricity sales of approximately 18 bilhon ' KWH and, excluding exceptional items, net earnings of approximately $118 million on revenues of l approximately $1.9 billion (E1.00=$1.58). SEEBOARD's results for the year ended December 31,1995 are not indicative of the results that will be experienced by SEEBOARD as a subsidiary of CSW due, in part, to the debt incurred in connection with the financing of the acquisition, the purchase accounting adjustments and the other accounting adjustments made to adjust SEEBOARD's results for U.S. Generally Accepted Accounting Principles. See ITEM 7-MD&A and ITEM 8-NOTE 13. UNAUDITED PRO FORMA INFORMATION for more information regarding SEEBOARD. Environmental Regulation l SEEBOARD's operations are subject to regulation with respect to water quality standards and other emironmental matters by various authorities within the United Kingdom. Under certain circumstances, these authorities may require modifications to SEEBOARD's facilities and operations or impose fines and other costs for violations of applicable statutes and regulations. From time to time SEEBOARD is made aware of various emkonmental issues or is named as a party to various other legal claims, actions, complaints or other proceedings related to environmental matters. Management does not expect disposition of any such pending environmental proceedings to have a material adverse effect on CSW's results of operations or financial condition. NON-UTILITY OPERATIONS i i Transok Transok, is an intrastate natural gas pipeline and gas marketing company that gathers, processes and stores natural gas for, and transports and markets natural gas to, the Electric Operating Companies and other - customers. Transok, which was mcorporated in Oklahoma in 1955, was acquired by CSW in 1961 to supply , natural gas to PSO's power stations. Transok's operations in recent years have included the marketing and
)
transportation of natural gas for third parties, as well as the supply of gas and senices to the other Electric ' Operating Companies and CSW Energy. Transok provides a variety of services to the Electric Operating Companies including acquiring and transporting natural gas to meet certain of their power generation needs. Transok's largest customer is PSO. The 1-29
contract between PSO and Transok provides (i) for the transportation of PSO's natural gas fuel supply through Transok's pipeline system and (ii) for Transok to act as PSO's supply administrator in acquiring natural gas and - negotiating and administering supply contracts. PSO pays Transok for such services at cost, including a return on ! equity applicable between affiliates as specified by the Oklahoma Commission in PSO's most recent Oklahoma price review. The contract expires on January 1,2003. Under the contract, PSO has the right to require delivery of up to 165,000 MMbtu per day of natural gas through Transok's pipeline system. PSO has the option, l exercisable on or before July 1,1997, to increase delivery of natural gas under the contract up to 255,000 MMbtu per day effective January 1,1998. Transok's current delivery rate to PSO is approximately 98 Bcf of natural gas annually, which is projected to increase in the future. Natural Gas Transportation and Gathering Transok provides natural gas suppliers and shippers with pipeline interconnects for access to the Electric Operating Companies and other end-users throughout the United States. At December 31,1995, Transok's pipeline system consisted of approximately 6,504 miles of gathering and transmission lines which include approximately 4,030 miles of gathering lines in Oklahoma,276 miles in Louisiana and 214 miles in Texas. At December 31,1995, Transok's pipeline system consisted of 205 compressors with 228,300 horsepower to provide both gathering and transmission line compression. Transok's pipeline facilities are located in the major natural gas producing basins in Oklahoma, including the Anadarko and Arkoma basins, and in the major Louisiana corridur of pipelines transporting natural gas to the northeast from the Gulf Coast and mid-continent areas. The Transok pipeline system has numerous connections with major interstate pipelines through which natural gas is transported to markets throughout the United States. In 1995, the Transok pipeline system had a throughput of 511 Bef of natural gas. Transok transported approximately 89 Bcf of natural gas for P'SO in 1995 and provided administrative services to PSO to manage its supply of natural gas. Transok has been active in the development ofjoint gas purchase arrangements with its other CSW affiliates as well. Transok's access to diverse natural gas markets combined with the natural gas fuel needs of the Electric Operating Companies allow for natural gas opportunities at high load factors, reducing the cost of natural gas fuel for the CSW System. Natural Gas Processing Transok also owns and operates eight natural gas processing plants, including the Cox City plant which began operations in January 1996, for the production of natural gas liquids. The plants have an aggregate capacity of 564 MMcf/d. Transok is the largest natural gas processor in Oklahoma and ranks eighteenth among natural gas liquids producers nationwide. In 1995, Transok's plants produced 344 million gallons of natural gas liquids while revenue from the sale of natural gas liquids amounted to $135 million for the year. Natural Gas Storage Transok owns and operates an underground natural gas storage reservoir in Oklahoma with an aggregate storage capacity of approximately 26 Bcf. Operational capabilities include injection into storage at a rate of 200 MMcf/d and a withdrawal rate in excess of 300 MMcf/d. The FERC has approved market-based storage rates for Transok which enables it to sell storage services to interstate customers at negotiated fees based on the value of those services in the competitive marketplace. Transok's gas storage field also allows Transok to offer peaking services, accommodate volume swings on its pipeline system and support the natural gas requirements of the Electric Operating Companies. Natural Gas Marketing in 1989, Transok began its natural gas marketing program and sold 26 Bef to a variety of customers including local distributica companies, end-users and other pipelines. In 1995, Transok's natural gas sales volumes were 326 Bcf with a : ales revenue of $529 million. Off-system sales of natural gas accounted for 164 Bcf of the natural gas sold in 1995. This increase was the result of pipeline acquisition and construction activities , combined with new customers. Transok aggregates natural gas supply into various supply pools, which provide j 1 1-30 < -u
Transok with rehable sources of natural gas at market sensitive prices, allowing Transok to meet its natural gas supply needs. Transok offers various gas supply services to provide customers with peaking and balancing . alternatives utilizing Transok's gas supplies and facilities. In addition, Transok's customers have the opportunity to select various pricing options including: (i) fixed or variable pricing; (ii) indexed to New York Mercantile Exchange pricing; or (iii) cash quotes. Transok uses natural gas futures, options and basis swaps to reduce its price risk exposure arising from the purchase and sale of natural gas. Natural gas futures and options allow Transok to protect agamst volatility in supply costs in fulfilling fixed price contracts, meeting storage requirements and purchasing natural gas for processing operations. Natural gas futures and options also are used to protect Transok against price exposure on sales of natural gas from storage or anticipated purchases. In addition, basis swaps protect Transok against volatility in price differentials between geographic areas in matching anticipated supply and demand prices. In 1992, FERC Order 636 went into effect to deregulate the natural gas industry and increase competition. Although Transok operations were not directly affected by Order 636, Transok has developed tariff services, flexible contracts and other natural gas related services in order to meet customers' needs and take advantage of new competitive opportunities. Servicesfor CSW Energy Transok provides natural gas fuel planning and management senices for CSW Energy. Transok assists CSW Energy in developing natural gas supply and transportation strategies for CSW Energy's non-utility electric generation projects. Regulation l As a subsidiary of CSW, Transok is subject to regulation under the Holding Company Act. The Holding Company Act, among other things, requires that regulated companies seek prior SEC approval before entering into certain transactions, including the acquisition or issuance of securities. Transok's pipelines are considered gathering systems or intrastate pipelines. Transok is therefore exernpt from regulation by the FERC under the Natural Gas Act. However, Transok's rates for transporting gas in j interstate commerce are subject to FERC regulation under the Natural Gas Policy Act of 1978. The FERC approves Transok's rates for transportation of gas in interstate commerce through Transok's pipelines in Oklahoma and Louisiana and the Texas Railroad Commission approves the rates for such transportation through pipelines in Texas. The FERC also has given Transok approval to charge market-based rates for storage of gas j using Transok's storage facility in Oklahoma. While Transok is not subject to direct regulation by any state public utility conunission, the costs that { result from transactions with the Electric Operating Companies are subject to review by the state commissions regulating affiliates and are required to meet standards for affiliate transactions to be recoverable by the Electric ' Operating Compames. j i Transok's compressor engines and other emission sources are subject to air permit requirements, l including monitoring. As a result of new requirements under the Cleen Air Act, seven of Transok's facilities will j be subject to additional permit requirements. The Clean Air Act may also impose additional enhanced monitoring requirements on these seven facilities. j Strategic Alternativesfor Transok in January 1996, CSW announced it was exploring strategic alternatives for its investment in Transok. I The alternatives for Transok, which include a possible sale, are a part of CSW's continuous strategic asset review. Although it is not presently possible to predict the terms upon which any sale of Transok would be effected, CSW ; l-31 s
does not expect that the sale of Transok to an unaf61iated third party would have a material adverse effect on the
- price or availability of natural gas for PSO or any of the other Electric Operating Companies.
CSW Energy l CSW Energy is authorized to develop various independent power and cogeneration facilities and to own and operate such non-utility projects, subject to regulatory approval. CSW Energy's participation in projects as ,
' of the end of 1995 is presented in the following table. l Capacity Commercial Operation Ownership Thennal :
(in Mw) Project Location Total Sold Date Interest llost llost titility l Brush, CO 68 68 January 1994 47 % Greenhouse Public Service Company Brush Il , ofColorado , Ft. Lupton, CO 272 272 June 1994 50 % Greenhouse Public Service Company . Ft. Lupton ofColorado Polk County, FL 120 110 Augiist 1994 50 % Distilled Florida Power Corporation
- Mulberry '
water / ethanol plant Folk County, FL 103 97 June 1995 50 % Orange juice Florida Power Corporation , Orange processor Tampa Electric Company , Phillips Sweeny Sweeny, TX 300 90' . Mid 1998 50 % Refinery Undetennined' Wharton, TX 85 Mid 1996 100 % IPP Undetennined Newgulf -
'Re Phillips Sweeny project has the unexercised option to sell 90 MW of capacity to Phillips Petroleum Company.
In addition to these projects, CSW Energy has another six projects totaling approximately 2,000 MW in various stages of development, mostly in affiliation with other developers. See ITEM 7-MD&A for additional discussion of the settlement of certain issues between CSW Energy and a former business partner that resulted in a new business partner for the Mulberry and Orange projects. , CSW International CSW International was formed in 1994 to engage in international activities, including developing, acquiring, financing and owning EWGs and foreign utility companies. CSW International's most signi6 cant activity to date is the acquisition, indirectly through CSW (UK), of the outstanding share capital of SEEBOARD j pursuant to the Tender Offer. See UNITED KINGDOM UTILITY OPERATIONS above, and ITEM 7-MD&A. CSW International also intends to continue its efforts in Mexico, with a stated goal of participating in providing Mexico's future electricity needs. Although the recent devaluation of the Mexican peso has slowed . previously projected power demand, CSW International continues to believe that the geographic location of the CSW System offers opportunities to provide bulk power to Mexico. CSW International continues to seek to l expand into other countries in Latin America, Europe and Asia that meet its investment criteria. i CSW Credit CSW Credit was fomied to purchase, without recourse, the accounts receivables from the Operating
~
Companies. This helps provide liquidity to the Operating Companies due to the seasonal nature of the electric utility industry. CSW Credit's business has been expanded to include the purchase, without recourse, of ; accounts receivables for certain non-affiliated parties as well. In addition, CSW Credit's capital structurc contains greater leverage than that of the Operating Companies, consequently lowering CSW's overall cost of i capital. CSW Credit, as a subsidiary of CSW, is subject to the Holding Company Act. As such, CSW Credit must comply with a restriction whereby no more than 50% of the average outstanding accounts receivable balances held may be from non-affdiated parties. l-32
CSW Communications 1 CSW Communications was fonned to provide communication senices to the Operating Companics and non-affiliates. One important goal of CSW Communications is to enhance senices to CSW System customers through fiber optics and other telecommunications technologies. In Laredo, Texas, a project has been undertaken to install fiber optic lines and coaxial cable to CPL residential customers. The project, a network of over 3,000 homes with approximately 700 customers currently participating, will demanstrate the energy efficiency and cost savings that result from giving customers greater choice and control over their electric senice. CSW Communications offers similar energy efficiency senices to other parties, including affiliates as well as non-affiliates. In the future, CSW Communications may, subject to any required regulatory approvals, seek to lease or othenvise use the remaining capacity for other services including possibly telephone senice, cable television and home security systems. CSW Communications presently owns and manages a 185 mile fiber-optic line connecting the south Texas cities of Corpus Christi, Harlingen and McAllen, and anticipates the construction of another fiber-optic line, connecting Shreveport, Louisiana and Longview, Texas, to begin in mid-1996. CSW Communications filed for " exempt telecommunications company" status with the FCC on February 8,1996, subsequent to legislation that introduced competition to telephone and other communications industries that operated within regulated environments. The filing with the FCC automatically qualifies CSW Conununications as an exempt telecommunications company, pending the FCC's review of the application (which is required to be completed within 60 days). CSW believes that CSW Communications' exempt telecommunications company status will enable it to compete more effectively with other telecommunications companies. EnerShop In September 1995, EnerShop was formed to provide energy senices to customers throughout the Southwest. EnerShop offers senices that help reduce customers' operating costs through increased energy efficiencies and improved equipment operations. EnerShop utilizes the skills oflocal trade allies in offering services that include energy and facility analysis, project management, engineering design and equipment procurement and construction, third party financing and equipment leasing, savings and perfomiance guarantees and performance monitoring. EnerShop recently secured its first major contract and has bids outstanding for several additional projects in 1996. OTHER INFORM ATION Emplovces The number of employees at December 31,1995, is presented in the following table. CSW Services 1,109 CPL 1,896 PSO 1,477 SWEPCO 1,747 WTU 1,063 Transok 546 CSW Energy 87 SEEllOARD 4,139 12,n64 l Approximately 550 employees at PSO and 750 employees at SWEPCO are covered under collective bargaining agreements with the International Brotherhood of Electrical Workers. Approximately 3,300 employees at SEEBOARD are covered by collective agreements with several different unions. These unions 1-33 J
include the Amalgamated Electrical and Engineering Union, GMB, Electrical Power Engineers Association, Unison and the Transport and General Workers Union. . Executive Officers of CSW The following information is included in Part I pursuant to Regulation S-K, item 401(b), Instmetion 3. Age at March Name 16.1996 Present Position E. R. Brooks 58 Chairman, President and CEO, Director llarry D. Mattison (1) 59 Executive Vice President of CSW, President and CEO of CSW Electrie, Director T. V. Shockley, HI 51 Executive Vice President of CSW, President and CEO of CSW Enterprises, Director Ferd. C. Meyer, Jr. 56 Senior Vice President and General Counsel Glenn D. Rositier 48 Senior Vice President and Chief Financial Omcer Fredeiic L. Frawley 53 Corporate Secretary and Senior Attorney Stephen J. McDonnell 45 Treasurer Wendy G. Hargus 38 Controller (1) Mr. Mattison will retire as a director and executive of!icer of CSW c1Tective April 18,1996 and April 30,1996, respectively. Each of the executive officers of CSW is elected to hold office until the first meeting of CSW's Board of Directors after the next annual meeting of stockholders. CSW's next annual meeting of stockholders is scheduled to be held April 18,1996. Each of the executive officers listed in the table above has been employed by CSW or l an affiliate of CSW in an executive or managerial capacity for more than the last five years. 1-34
i i l l ITEM 2. PROPERTIES. ! l
. 1 See ITEM 1. BUSINESS for a description of the CSW System and SEEBOARD properties.
l l l ! ITEM 3. LEGAL PROCEEDINGS. i ! The registrants are party to various legal claims, actions and complaints arising in the normal course of business that are not described herein. Management does not expect disposition of these matters to have a material adverse effect on any of the registrants' results of operations or financial condition. See ITEM l-BUSINESS, ITEh! 7-MD& A and ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for information relating to pending legal, environmental and regulatory proceedings. ITEM 4. SUBMISSION OF. MATTERS TO A VOTE OF SECURITY 1-lOLDERS. ; CSil' None. , CPL None. \ PSO None. Sil'EPCO None. IITU None. 1 i l l l l 1 1 l f 1-35
i l l [This Page Intentionally Left Blank) I 1 i l
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND ' RELATED STOCKHOLDER MATTERS. ; l CSW COMMON STOCK INFORM ATION 1995 1994 Market Price Dividends Market Price Dividends Ifigh Low Paid liigh Low Paid First Quarter $24 7/8 $22 3/8 43.0 t $30 7/8 $24 1/8 42.5 r Second Quarter 26 5/8 23 7/8 43.0 26 1/4 20 1/8 42.5 Third Quarter 26 3/8 24 t/8 43.0 23 1/4 20 7/8 42.5 4 I Fourth Quaner 28 1/2 24 3/4 43.0 23 3/4 20 1/8 42.5 CSW's common stock is traded under the ticker symbol CSR and listed on the New York Stock l Exchange, Inc. and Chicago Stock Exchange,Inc. Market prices for CSW Common were obtained from the ' composite listing of all CSW Common trades as reported on Bloomberg Financial Commodities News. Dividends of 43 cents a share were paid in each quarter of 1995. All dividends paid by CSW represent taxable income to stockholders for federal income tax purposes. In January 1996, CSW's board of directors increased the quarterly dividend to 43.5 cents per share, payable on February 29,1996, to stockholders of record on February 8,1996. Future cash dividends will be dependent upon the policies of CSW's board of directors and CSW's earnings, fmancial condition and other factors. Traditionally, the CSW board of directors has declared dividends to be payable on the last business day of February, May, August, and November. On February 27,1996, CSW sold 15,525,000 shares of CSW Common in the 1996 Stock ' Offering. CSW received net proceeds of approximately $398 million. These proceeds were used to repay a portion of the indebtedness incurred by CSW under the CSW Credit Agreement to fund the acquisition of SEEBOARD. l There were approximately 74,000 record holders of CSW's common stock as of February 29,1996. CPL, PSO, SWEPCO AND WTU COMMON STOCK INFORMATION All of the outstanding shares of common stock of CPL, PSO, SWEPCO and WTU are owned by CSW. j l l ITEM 6. SELECTED FINANCIAL DATA. l l Reference is made to the page numbers noted in the following table for the location ofITE516. SELECTED i FINANCIAL DATA, which is included in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Page Number CSii' CPL PSO Sil'EPCO ISTU l Selected Financial Data 2-5 2-69 2 95 2-115 2-136 l O@ 2-1 1
1 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF . OPERATIONS. ! l l Reference is made to the page numbers noted in the following table for the location ofITEM 7. MD& A which is included in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Page Number CSil' CI'L l'SO SilEI'C0 IITU MD&A 2-6 2-70 2-96 2-116 2-l37 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. E w Central and South West Corporation 2-4 Selected Financial Data 2-5 Management's Discussion and Analysis of Financial Condition and Results of Operations 2-6 Consolidated Statements ofIncome 2-27 Consolidated Statements of Retained Earnings 2-28 Consolidated Balance Sheets 2-29 Consolidated Statements of Cash Flows 2-31 Notes to Consolidated Financial Statements 2-32 Report ofIndependent Public Accountants 2-66 Report of Management 2-67 j17 v 1 p.[J- . .
- c. .
Central Power and Light Company 2-68 Selected Financial Data 2-69 Management's Discussion and Analysis of Financial Condition and Results of Operations 2-70 Statements ofIncome 2-81 Statements of Retained Earnings 2-82 Balance Sheets 2-83 Statements of Cash Flows 2-85 Statements of Capitalization 2-86 Notes to Financial Statements 2-87 Report ofIndependent Public Accountants 2-92 Report of Management 2-93 C& 2-2
l l l l 1 Public Service Company of Oklahoma 2-94 Selected Financial Data 2-95 Management's Discussion and Analysis of Financial Condition and Results of 0perations 2-96 Consolidated Statements ofincome 2-103 ) Consolidated Statements of Retained Earnings 2-104 l Consolidated Balance Sheets 2-105 Consolidated Statements of Cash Flows 2-107 Consolidated Statements of Capitalization 2-108 Notes to Consolidated Financial Statements 2-109 Report oflndependent Public Accountants 2-112 Report of Management 2-113
)
{I""" g l i Southwestern Electric Power Company 2-114 Selected Financial Data 2-115 l Management's Discussion and Analysis of Financial Condition and Results of Operations 2-116 Statements of income 2-124 Statements of Retained Earnings 2-125 Balance Sheets 2-126 Statements of Cash Flows 2-128 Statements of Capitalization 2-129 Notes to Financial Statements 2-130 Report ofIndependent Public Accountants 2-133 Report of Management 2-134 l l West Texas Utilities Company 2-135 l Selected Financial Data 2-136 Management's Discussion and Analysis of Financial Condition and Results of Operations 2-137 Statements of Income 2-14 6 Statements of Retained Eamings 2-147 Balance Sheets 2-148 Statements of Cash Flows 2-150 Statements of Capitalization 2-151 Notes to Financial Statements 2-152 Report ofIndependent Public Accountants 2-155 Report of Management 2-156 09 2-3
CENTRAL AND SOUTH WEST CORPORATION l l i CJm' 2-4
SELECTED FINANCI AL DATA The following selected financial data for each of the five years ended December 31 is provided to highlight significant trends in the financial condition and results of operations for CSW, All common stock data have been adjusted to reDect the two-for-one common stock split, effected by a 100% stock dividend paid on March 6,1992. Certain financial statement items for prior years base been reclassified to conform to the most recent period presented. 1995 (1) 1994 1993 (2) 1992 1991 (nuthons, except per share and ratio data) INCOME STATEM ENT DATA Revenues $3,735 $3.623 $3.687 $3,289 $3,047 Operating expenses and taxes 3,079 3,029 3,230 2,701 2,481 Operating income 656 594 457 588 566 Other income and deductions 99 I11 93 82 105 Interest charges 334 293 269 266 270 Net income 421 412 327 404 401 Net income for common stock 402 394 308 382 375 EPS of common stock $2.10 $2.08 $1.63 $2.03 $ 1.99 Dividends paid per share of common stock $ 1.72 $ 1.70 $1.62 $ 1.54 $ 1.46 Average common shares outstanding 191.7 189.3 188.4 188.3 188.3 IIALANCE SIIEET DATA Assets 13,869 11,066 10,604 9,829 9.396 Common stock equity 3,178 3.052 2,930 2,927 2.834 Preferred stock Not subject to mandatory redemption 292 292 292 292 292 Subject to mandatory redemption 34 35 58 75 97 Long-term debt 3,914 2,940 2,749 2.647 2,518 Current liabilities 3,425 2,188 2,143 1,562 1,304 Capitalization ratios Common stock equity 43 % 48% 49% 49 % 49% Preferred stock 4 5 6 6 7 Long-term debt 53 47 45 45 44 (1) Earnings in 1995 include the SEEBOARD Group's equity earnings for Nos ember and full consolidation for December. See NOTE 1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (2) Earnings in 1993 were significantly affected by restrue:uring charges, the $46 million cumulatis e effect of changes in accounting principles, the establishment of reserses for fuel and other properties and prior year tax adjustments. C@ 2-5
CENTRAL AND SOUTli WEST CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to CSW's Consolidated Financial Statements and related Notes to Financial Statements and Selected Financial Data. The information contained therein should be read in conjunction with, and is essential in understanding, the following discussion and analysis. i
)
OVERVIEW The electric utility industry is changing rapidly as it is becoming more competitive. Several years ago, in anticipation ofincreasing competition and fundamental changes in the industry, CSW's management developed the following four-part strategic plan designed to help position CSW to be competitive in this rapidly changing environment: 1
. Enhance CSW's core electric utility business 1
. Expand CSW's core electric utility business
. Expand CSW's non-utility business
- Pursue Gnancialinitiatives ,
Since the introduction of CSW's strategic plan in 1990, CSW has undertaken key initiatives in each of these areas that are important steps in the implementation of the overall strategy. These initiatives were marked by the restructuring of CSW's core business in 1993 and 1994, the recent SEEBOARD acquisition and, although it was not consummated, the proposed acquisition of El Paso. These events are discussed below and elsewhere in this report. CSW believes that, compared to other electric utilities, the CSW System is well positioned to capitalize on the opportunities and challenges of an increasingly deregulated and competitive market for the generation, transmission and distribution of electricity. The CSW System bene 0ts from economies of scale by virtue ofits size and is a reliable and relatively low-cost provider of electric power. More speci6cally, CSW seeks competitive advantages through its diverse and stable customer base, competitive prices for electricity, diversined fuel mix, extensive transmission interconnections, diversity of regulation and Gnancial Dexibility. See RECENT DEVELOPMENTS AND TRENDS, SEEBOARD ACQUISITION l On November 6,1995, CSW, indirectly through CSW (UK), announced its intention to commence the Tender Offer in the United Kingdom to acquire all of the outstanding share capital of SEEBOARD, a regional electricity company in the United Kingdom, for an aggregate adjusted purchase price of approximately $2.12 billion. SEEBOARD is one of the 12 regional electricity companies which came into existence as a result of the restructuring and subsequent privatization of the United Kingdom electric industry in 1990. Its principal businesses are the distribution and supply of electricity in southeast England. SEEBOARD is also involved in other activities, including gas supply, electricity generation, electrical contracting and retailing. SEEBOARD serves an afDuent suburban and rural area in the United Kingdom. SEEBOARD is also one of the lowest cost suppliers among the United Kingdom's regional electricity companies. Approximately 91% of SEEBOARD's customers are residential. For the year ended December 31,1995, SEEBOARD had electricity sales of approximately 18 billion KWH and, excluding exceptional items, net earnings of O@ ; 2-6
inimately $118 million on revenues of approximately $1.9 billion (f1.00=$1.58). SEEBOARD's results ! e year ended December 31.1995 are not ir.dicative of the results that will be experienced by SEE ubsidiary of CSW due, in part, to the debt incurred in connection with the Gnancing of ,
- the iase accounting adjustments and the accounting adjustments made to adjust SEEBOARD's results rally Accepted Accounting Principles. See LIQUIDITY AND CAPITAL RESOURCES and NO UDITED PRO FORMA INFORMATION. .
On January CSW (UK) had acquired shares representing, or had received va , ximately 92.3% of the outstanding share capital of SEEBOARD. CSW (UK) expects to acq ning 7.7% of the outstanding share capital of SEEBOARD by the end of the second quarter o
\11 NATION OF EL PASO MERGER in May 1993, CSW entered into a Merger Agreement pursuant to which El Paso would emer iptcy as a wholly owned subsidiary of CSW. El Paso is an electric utility company headquartered in El Texas, which Gled a voluntary petition for reorganization under Chapter 11 of the Bankruptcy y 8,1992. On June 9,1995, CSW noti 6ed El Paso that CSW would not extend the termination date the Merger Agreement as had been requested by El Paso and, accordingly, that it was termin r Agreement. CSW also informed El Paso on June 9,1995 that it was withdrawing the Modified Plan proposed Merger with El Paso by a contemporaneous Oling with the Bankruptcy Court. On June 9, following CSW's notification that it was terminating the Merger and withdrawing the Modi 6ed Pl
' led suit against CSW. On June 15,1995, CSW Oled suit against El Paso. See NOTE 2. LITIGATION LEGULATORY PROCEEDINGS for a discussion of the legal proceedings surrounding this ation.
. f-
'TRUCTURING During 1993, CS5V announced a restructuring under which the CSW System restructured the Ele
- ng Companies under a new business unit called CSW Electric and centralized many common service as into CSW Services in order to reduce costs and improve ef6ciency and productivity. The uring included restafGng positions throughout the CSW System and a reduction in the workforce an 7% system-wide. The restructuring costs were initially estimated to be $97 million and were d in 1993. The actual costs of the restructuring, approximately $86 million, were incurred primari 1994. CSW has realized a number of benents from the restructuring, including increased ef6ciencies ergies through the elimination of previously duplicated functions.
5 AND REGULATORY MATTERS CPL Rate Review On November 6,1995, CPL Gled with the Texas Commission a request to increase its retail base rates nillion and reduce its annual retail fuel factors by $17 million. The net effect of these proposals would
- rease of $54 million, or 4.6%, in total annual retail revenues based on a test year ended June 30,1995.
iot seeking interim rate relief, but will implement bonded rates in May 1996, the earliest date permitted
}
s CPL30,1995. Jane also is seeking to reconcile $229 million of fuel costs incurred during the period July 1,1994 CPL's previous request to reconcile fuel costs from March 1,1990 to June 30,1994 in 4o.13650 was consolidated with the current rate review. If the requested increase and other ; I cpm 2-7
1 djustments in rate structure are approved. CPL has committed not to increa 2001, subject to certain force majeure events. CPL is requesting this rate review in large pad as a result of the expiration o Mirror CWIP liability. The Mirror CWIP liability was amortized d 1991. In 1995,to income in dec year period from 1991 through 1995 pursuant to rate settlements reached by CPL Mirror CWIP provided $41 million in non-cash earnings at CPL. Also included i CPL to accelerate recovery of nuclear and regulatory assets I lias inarya way to proactiv could possibly be unrecoverable or stranded in a more competitive i t address electric utility indus order issued December 21,1995, the Texas Commission expanded the scope of the rate rev ew certain competitive issues facing the electric utility industry. dled or The competitive functional basis issues to be a supplemental filing due April 1,1996, are: (i) the calculation of rates on an unbun d to (i.e., generation, transmission and distribution); (ii) the iii) current value the application of of CPL's gene estimates of the market vclue of such assets under alternate future industry i fl structures;( performance based ratemaking;(iv) potential revisions l i inindustry tility the methodology under of r costs; and (v) the Texas Commission's authority to introduce competition in the e ectr c u existing law. On February 13,1996, intervening parties filed testimony dind athe baserevenue rate requirement base rate case. Among the parties that filed testimony were reduction of approximately $52 million on a total company basis. On February 20,1996, the Staff filed testimony recommending l an increase in to of approximately $30 million. Certain elements of the Staff's proposal are describe The Staff recommended a return on common stock equity ofbilled 11.35% for compared common equiiy requested by CPL. The Staff recommended a disallowance of $16 m CPL were not clearly administrative services by CSW Services to CPL on the basis that the specific i i benefits to identified. Additionally, the Staff recommended a $7 i million STP. reduction A comparison of the in CPL's cu accrual and a $3 million reduction in CPL's requested accru the CPL RATE REVIEW COMPARISON table. CPL RATE REVIEW COMPARISON (millions)
$103 CPL resenue deficiency (1)
(21) Return on common equity (16) CSW Services expenses (7) Depreciation expense (3) J Decommissioning expense (26) Miscellaneous items l
$3u j Staff recommended revenue increase (2) 1 (1) The total company rate increase requested by CPL was
( reduced from $103 million to $78 million ($71 million allocated to the Texas retail jurisdiction) in accordance with rate settlements entered into by CPL in 1990 and 1991. (2) The Staff recommended that CPL be granted a $23 million base rate increase and an annual increase of $7 million in customer service charges. OTuo 2-8
l l 1 The Staff and Cities recently Gled testimony on the fuel portion of the rate case recommending a reduction to CPL's eligible fuel costs of $16 million and $32 million, respectively. After completion of hearings in all phases of the rate case, which began in late February 1996 and are expected to conclude during the third qtiarter of 1996, the ALJs assigned to hear the case will issue a proposal for decision for consideration by the Texas Commission. Testimony Sled by parties to the rate case, including the Staff, is not binding on either the ALJs or the Texas Commission. A Onal decision on the rate request is not anticipated from the Texas Commission prior to December 1996. Management of CSW and CPL cannot predict the ultimate outcome of CPL's rate case, although management believes that the ultimate resolution will not have a material adverse effect on CPL's or CSW's consolidated results of operations or financial condition. However, if CPL ultimately is unsuccessful in l obtaining adequate rate relief, CPL and CSW could experience a material adverse effect on their results of operations and financial condition. CPL 1995 Agreement On April 5,1995, CPL reached an agreement in principle with other parties to pending regulatory proceedings involving base rate, fuel and prudence issues relating to an outage experienced at STP during 1993 and 1994. On May 16,1995, CPL Died the CPL 1995 Agreement with the Texas Commission. Pursuant to the CPL 1995 Agreement, base rate refunds, fuct refunds and the reduction of CPL's fuel factors were implemented on an interim basis during the summer of 1995. Under the CPL 1995 Agreement, CPL provided customers a one-time base rate refund of $50 million, in addition, CPL refunded approximately $30 million in i over-recovered fuel costs through April 1995. Furthermore. CPL did not charge customers for $62.25 million in replacement power costs and related interest primarily associated with the 1993-1994 STP outage. The CPL 1995 Agreement did not result in any ongoing change in base rate levels and provided that there would be no new rate review requests Gled prior to September 28,1995. CPL also reduced its fuel factors, effective in July 1995, by approximately $55 million on an annual basis due to projections oflower fuel costs. Hearings on the CPL 1995 Agreement were held on July 19,1995, and the Snal written Texas Commission order approving the CPL 1995 Agreement was received on October 4,1995. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. WTUStipulation and Agreement WTU has been the subject of several pending regulatory matters, including the following: (i) a retail rate proceeding and fuel reconciliation before the Texas Commission in Docket No.13369;(ii) Writ of Error to the Supreme Court - review of WTU's 1987 Texas rate case in Docket No. 7510; and (iii) the Texas Commission's proceeding on remand in Docket No.13949 regarding deferred accounting treatment for Oklaunion Power Station Unit No. I originally authorized in the Texas Commission's order in Docket No. 7239. I On September 22,1995, WTU, aleng with other major parties to the above described matters, Sled ~ with the Texas Commission ajoint stipulation and agreement to resolve all of these matters. The WTU Stipulation and Agreement is a uni 6ed package that included: (i) a retail base rate reduction of approximately $13,5 million annually starting with WTU's October 1995 revenue month billing cycle;(ii) a $21 million retail refund which was not attributed to any speciGe cause but was inclusive of all claims related to the three above described litigation and regulatory matters and included the effect of the rate reduction retroactive to October 1,1994;(iii) a reduction of reduced 6xed fuel factors by approximately 2%;(iv) various rate and accounting treatments including a reasonable return on equity for retail operations of 11.375%; and (v) a retail base rate freeze until October 1,1998, subject to certain force majeure provisions. C6iin 2-9
l On November 9,1995, the Texas Commission rendered a final order that implemented the joint . stipulation and agreement. The WTU Stipulation and Agieement is expected to impact WTU's results of operations for the next several years, reducing annual carnings by approximately $8 million beginning in 1996. . The WTU Stipulation and Agreement also eliminated several significant risks that have been the subject of f regulatory proceedings relating to deferred accounting plant costs and rates and will enable WTU's rates to remain , at competitive levels for the foreseeable future. See NOTE 2. LITIGATION AND REGULATORY f PROCEEDINGS. ; See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for information regarding other regulatory matters. N' TRANSOK ! i: In January 1996, CSW announced it was exploring strategic alternatives for Transok, CSW's wholly [ owned intrastate natural gas gathering, transmission, marketing and processing subsidiary. The alternatives for , j Transok, which include a possible sale, are a part of CSW's continuous strategic review ofits business. See , l NON-UTILITY INITIATIVES. ' SOUTII TEXAS PROJECT CPL owns 25.2% of STP, a two-unit nuclear power plant which is located near Bay City, Texas. In addition, HLP, the Project Manager of STP, owns 30.8%, San Antonio owns 28.0%, and Austin owns 16.0% of STP. STP Unit I was placed in service in August 1988 and STP Unit 2 was placed in service in June 1989. 1 From February 1993 until May 1994, STP experienced an unscheduled outage resulting from f mechanical problems. The outage resulted in significant rate and regulatory proceedings involving CPL, including a base rate case and fuel reconciliation proceedings as previously discussed. Unit I restarted on l February 25,1994 and reached 100% power on April 8,1994 and Unit 2 resumed operation on May 30,1994 ; and reached 100% power on June 16,1994. During the last six months of 1994, the STP units operated at capacity factors of 98.6% for Unit I and 99.2% for Unit 2. For a discussion of regulatory matters surrounding the STP outage, see RATES AND REGULATORY MATTERS above and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. j Both STP units were removed from service during 1995 for scheduled refueling outages. The fueling outages lasted 41 days for Unit I and 26 days for Unit 2. For the year 1995, Unit 1 and Unit 2 operated at net apacity factors of 84.9% and 90.6%, respectively.
^
For additional information regarding STP and the accounting for the decommissioning of STP, see NOTE 1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. LIQUIDITY AND CAPITAL RESOURCES l Overview The historical capital requirements of the CSW System have been primarily for the construction of electric utility plant. Based on projections of growth in peak demand, CSW does not anticipate that large capital expenditures for the construction of new generating capacity will be required through the end of this Cfm' l 2-10 l 1
I I i l decade. Accordingly, future capital expenditures for the Electric Operating Companies, as well as SEEBOARD, are anticipated to be primarily for existing distribution systems. Primary sources of capital are i long-term debt and prefbred stock issued by the Electric Operating Companies, long-term and shon-term debt , and common stock issued by CSW and internally generated funds. CSW Energy and CSW International l typically use various forms of non-recourse project financing to provide a portion of the capital required for I their respective projects, in addition, CSW, in order to strengthen its capital structure and support growth from l time to time, may issue additional shares of CSW Common. t Internally generated funds should meet most of the capital requirements of the Electric Operating ; i Companies. However, CSW's strategic initiatives, including expanding CSW's core electric utility and non . j utility businesses through acquisitions or otherwise, may require additional capital from external sources. As i of February 29,1996, CSW Investments had borrowed approximately $1.0 billion to fund a portion of the ) l SEEBOARD acquisition purchase price pursuant to a credit facility for which neither CSW nor CSW l International is subject to recourse. On February 27,1996. CSW sold 15,525,000 shares of CSW Common ! pursuant to the 1996 Stock Offering and received approximately $398 million in net proceeds, which it used to i repay a portion of the indebtedness incurred by CSW to finance the acquisition of SEEBOARD. l i l l Productive investment of net funds from operations in excess of capital expenditures and dividend i l payments are necessary to enhance the long-term value of CSW for its investors, CSW is continually evaluating the best use of these funds. Subject to cenain exceptions, CSW is required to obtain authorization i from various regulators in order to invest in any additional business activities. See RECENT j DEVELOPMENTS AND TRENDS - Holding Compa:iy Act below. SEEBOARD Acquisition Financing The aggregate adjusted purchase price to be paid for SEEBOARD in the Tender Offer is approximately
$2.12 billion. As of February 29,1996, CSW had contributed approximately $829 million of the purchase price to complete the acquisition of SEEBOARD shares in connection with the Tender Offer. CSW obtained such funds through borrowings under the $850 million CSW Credit Agreement. Borrowings under the CSW Credit Agreement are unsecured and mature on November 6,2000, subject to prepayment by CSW at any time. On
, February 28,1996, CSW used the $398 million net proceeds from the 1996 Stock Offering to repay a portion of these borrowings. CSW anticipates that the remaining amounts owed under the CSW Credit Agreement will be repaid through a combination ofinternally generated funds, additional sales of CSW Common (including sales through CSW's Thrift Plan and PowerShare) or strategic sales of assets, including possibly Transok. See TRANSOK, and 1996 Stock Offering. ThriftPlus Plan and PowerShare below. CSW (UK) has obtained or will obtain the remaining funds necessary to consummate the Tender Offer, approximately $1.29 billion, from capital contributions or loans to be made to CSW (UK) by its sole j shareholder, CSW Investments, which has arranged the CSW Investment Credit Facility for that purpose. l Neither CSW nor CSW International, the indirect parent of CSW Investments and CSW (UK), has guaranteed j or is otherwise subject to recourse for amounts borrowed under the CSW Investments Credit Facility. As of l February 29,1996, CSW Investments had borrowed approximately $1.0 billion under the CSW Investments Credit Facility. CSW Investments anticipates that amounts borrowed under the CSW Investments Credit Facility will be repaid through dividends and other amounts received, indirectly through CSW (UK), from SEEBOARD. CapitalExpenditures l Total capital expenditures for CSW, including the Electric Operating Companies. SEEBOARD, i Transok and other diversified operations (but excluding capital that may be required for acquisitions), are 3 estimated to be approximately $636 million, $671 million and $563 million for the years 1996 through 1998. l The foregoing consists of forward looking information and, accordingly, actual results may differ materially
! from such projected information due to changes in the underlying assumptions. Such assumptions are based on I
Crm 2-11 l
numerous factors, including factors such as the rate ofload growth. escalation of construction costs, chaages in lead times in manufacturing, inflation, the availability and pricing of alternatives to construction, nuclear, environmental and other regulation, delays from regulatory hearings, adequacy of rate relief and the availability of necessary external capital. In addition, actual results may differ materially from the projected information due to changes in the nature and scope of CSW's diversified operations and the capital . requirements that may be required to fund such operations. CSW periodically revaluates its capital spending policies and generally seeks to fund only those construction projects and investments that management believes will offer satisfactory returns in the current environment. Consistent with this strategy, the CSW System is likely to continue to make additional investments in energy-related and non-utility businesses and will continue to search for electric utility companies or other electric utility properties to acquire. CSW expects to fund the majority ofits construction expenditures through internally generated funds. Ilowever, for any significant investment or acquisition, additional funds from the capital markets, including from the issuance and sale of additional CSW Common and short-term and long-term borrowings, may be required. Construction Expenditures The Electric Operating Companies maintain a continuing construction program, the nature and extent of which is based upon current and estimated future demands upon the system. Planned construction expenditures for the Electric Operating Companies for the next three years are primarily to improve and expand distribution facilities and will be funded primarily through internally generated funds. These improvements will be required to meet the anticipated needs of new customers and the growth in the requirements of existing customers. Construction expenditures for the Electric Operating Companies were approximately $398 million in 1995, $492 million in 1994 and $445 million in 1993. The estimated total construction expenditures for the Electric Operating Companies for the years 1996 through 1998 are presented in the following table. CONSTRUCTION EXPENDITUllES 1996 1997 1998 Total (milhons) Generation 540 $M 542 5150 Transmission 38 46 55 139 Distribution 168 172 174 514 Fuct IS 11 15 44 Other 68 59 57 184 5322 5356 5343 $ 1.u31 Information in the foregoing table is a forward looking statement and, accordingly, actual results may differ materially from such projected information due to changes in the underlying assumptions based on numerous factors, including those factors enumerated above under CapitalE.spenditures. Changes in those and other factors could cause cach of the Electric Operating Companies to defer or accelerate construction or to sell or buy more power, which would affect its cash position, revenues and income to an extent that cannot now be reliably predicted. Although CSW does not believe that the Electric Operating Companies will require substantial additions of generating capacity through the end of the decade, the CSW System's internal resource plan presently anticipates that any additional capacity needs will come from a variety of sources including projected coal- and lignite-fired generating plants for which the CSW System has invested approximately $135 million in prior years for plant sites, engineering studies and lignite reserves. Should future plans exclude these plants for environmental, economical or other reasons, CSW would evaluate the probability of recovery of these investments and may record appropriate reserves. 1 l C@ ! 2-12 I
Long-Tenn Financing As of December 31,1995, the capitalization ratios of CSW were 43% common stock equity,4% preferred stock and 53% long-term debt. CSW continues to be committed to maintaining Onancial ficxibility through maintaining a strong capital structure and favorable securities ratings in order to access capital markets opportunistically or when required. The 1995 capitalization ratios were significantly impacted when compared to 1994 due to the amount ofindebtedness utilized to finance the SEEBOARD acquisition, a ponion of which was repaid on February 28,1996, with the $398 million net proceeds from the 1996 Stock Offering. CSW continually monitors the capital markets for opportunities to lower its cost of capital through reEnancing. Since 1991, CSW has reOnanced nearly $2.0 billion of outstanding securities and has lowered its embedded cost of debt from approximately 9.0% to 7.2% at the end of 1995. CSW's signincant long-term financing activity for 1995 and 1996 through February 29,1996 is summarized in the following table. ISSUED / UTILIZED REACQUIRED Financing Amount Financial Amount Instrument (millions) Rate Maturity Instrument (millions) Rate Maturity CFL FMB(1) $200 0 65/8% 2005 FMB $139.2 93/8% 2019 PCRB 100.6 6.1% 2028 PCRB 68.9 101/8% 2014 PCRB (2) 31.8 93/4% 2015 PCRB 40.9 floating 2015 PCRB (3) 8.4 71/8% 2004 PCRB (3) 34.2 6.0% 2007 2000 - PSO MTN (4) 30.0 various 2001 ffTU FMB (5) 40.0 71/2% 2000 FMB (6) 80 0 63/8% 2005 FMB 53 3 91/4% 2019 CSIV Credit Facility (7) 431.0 floating 2000 CSW Investments Credit Facility (8) 1,024.7 floating 2001 (1) The balance of proceeds not used to redeem higher cost FMBs were used to repay a portion of CPL's short-term borrowings, to provide working capital and for other general corporate purposes. (2) Collateralized PCRB (secured by a FMB). ; (3) The additional funds required to redeem these issues were provided through internal funds and shon-term borrowings. (4) Proceeds were used to repay a portion of PSO's short-term borrowings and to reimburse PSO's treasury for the scheduled maturity . of $25 million FMBs on March 1,1996. The MTNs are a series of PSO's Senior Notes. The rates on the MTNs range from 5.89% l to 6.03% j (5) Proceeds were used to repay a portion of WTU's short-term borrow mgs and to reimburse WTU's treasury for the reacquisition of FMDs. (6) The balance of proceeds not used to redeem higher cost FMBs were used to repay a portion of WTU's short-term borrowings. (7) Represents the amount outstanding of the CSW Credit Agreement on February 29.1996. Proceeds were used to purchase capital i shares of SEEBOARD. Approximately $731 million was outstanding under the CSW Credit Agreement and is included in Long- l Term Debt on the balance sheet at December 31.1995. See SEEBOARD Acquisition Financing above. On February 28,1996, l CSW repaid $398 million under borrowings under the CSW Credit Agreement from the net proceeds of the 1996 Stock Offenng. l See 1996 StocA Offering. below. (2) Represents the amount outstanding of the CSW Insestments Credit facility on February 29,1996. Proceeds were used to purchase additional capital shares under SEEBOARD in 1996. See SEEBOARD Acquisition financing above. l 1996 Stock Offenny On February 27,1996, CSW sold 15,525,000 shares of CSW Common in the 1996 Stock Offering and l received net proceeds of approximately 5398 million. These proceeds were used to repay a ponion of the i indebtedness incurred by CSW under the CSW Credit Agreement to fund the acquisition of SEEBOARD. l O@ 2-13
l Shelf Registralian Statements CSW and the Electric Operating Companies may issue additional securities subject to market conditions and other factors. CPL and PSO have filed shelf registration statements with the SEC for the . l issuance of securities from time to time based upon market conditions. CPL has shelf registration statements I on file for up to $60 million of FMBs and up to $75 million of preferred stock. PSO has a shelf registration statement on file for the sale of up to $75 million of Senior Notes, $45 million of which was remaining as of February 29,1996. Short-Term Financing The Electric Operating Companies utilize short-term debt to meet fluctuations in working capital requirements due to the seasonal nature of electric sales and other interim capital needs. The CSW System has established a money pool to coordinate short-term borrowings by the Electric Operating Companies, Transok and CSW Services, which is funded through CSW's issuance of commercial paper. At December 31,1995, the CSW System had two credit facilities in place aggregating $1.2 billion to back up the CSW commercial paper ; program. ' During 1995, the maximum amount of consolidated short-term debt outstanding for the CSW System was $1.65 billion in March 1995, which represe".ted 22% of the total capitaliz.ation at December 31,1995. The I average amount of short-term debt during 1995 was $1.47 billion, of which $667 million was attributable to CSW Credit. The weighted average cost of short-term debt was 6.64% in 1995. PowerShare CSW's PowerShare plan is available to all CSW shareholders, employees, eligible retirees, utility , customers and other residents of the four states where the Electric Operating Companies operate. Under this i dividend reinvestment and stock purchase plan, participants are able to make optional cash payments and reinvest all or any portion of their dividends in additional CSW Common. In February 1996, CSW filed a registration statement with the SEC relating (i) to the issue and sale of an additional five million shares of CSW Common through the PowerShare plan and (ii) proposed amendments to the plan that would, among other things, make the plan available to the residents of all fifty states and the District of Columbia. During 1995 and 1994, CSW raised approximately $57 million and $50 million, respectively, in new equity through PowerShare. CSW expects to use the proceeds from sales of CSW Common made pursuant to PowerShare to reduce shon-term and long-term debt and for other general corporate purposes. ThriftPlus Plan CSW's ThriftPlus plan permits eligible employees to contribute up to 12% of their annual compensation to the plan, subject to certain exceptions. Funds contributed to the plan are invested by the plan trustee, at the employce's direction, in any of five investment options, including an option consisting of CSW l Common. Historically, funds allocated to the CSW Common option under the plan have been used by the j trustee to purchase shares of CSW Common in the open market, in order to provide the plan with the flexibility to acquire shares of CSW Common directly from CSW rather than on the open market, CSW filed a registration statement with the SEC during 1995 with respect to the issue and sale of up to an additional five million shares of CSW Common. In the event the ThriftPlus plan trustee elects, on behalf of the plan, to purchase CSW Common directly from CSW, CSW expects to use the proceeds from such sales to reduce short-term and long-term debt and for other general corporate purposes. Internally Generated Funds internally generated funds consist of cash flows from operating activities less common and preferred stock dividends. The Electric Operating Companies utilize short-term debt to meet fluctuations in working O@ 2-14
l l l capita! requirements due to the seasonal nature of energy sales. Information concerning internally generated l funds is presented in the following table. I 1995 1994 1993 (5 in millions) Internally generated funds $451 5424 $369 l Capital expenditures provided by internally generated funds (1) 37% 63 % 58 % (1) Capital expenditures include construction and acquisition expenditures, equity investments in ) CSW Energy projects and amounts invested by CSW to finance the SEEBOARD acquisition. I CSIl' Energy l At December 31,1995, CSW had loaned $66 million to CSW Energy on an interim basis for the ; purpose of developing and constructing independent power and cogeneration facilities. Repayment of these amounts to CSW is expected to be made through funds obtained from third party non-recourse project ! financing. During 1995, CSW Energy secured such financing for its Ft. Lupton and Mulberry projects and reimbursed CSW for the interim loans. In addition to the amounts already expended for the development of projects, CSW Energy has, subject to certain limitations in the case of EWG and foreign utility investments, authority from the SEC to expend up to $250 million on future projects. The following table summarizes CSW's investments and commitments in CSW Energy projects at December 31,1995. I Letters of Credit l Eauity and Guarantees 1.o anJ_ 1 (millions) Brush $ 15.3 5-- 5-- Orange Cogeneration 53.2 2.3 -- I Ft. Lupton 44.0 58.9 36.5 l Mulberry 23 6 32.3 -- Phillips Sweeny -- 3.0 4.2 Newgulf 10.5 -- ' - Various developmental projects 8.1 7.1 9.5 CSW Energy through CSW Development-1, Inc., a wholly owned subsidiary of CSW Energy, entered into a fixed price contract of $14 million to construct the Mulberry thermal host. At November 2,1995, the thermal host was substantially completed for an aggregate cost of approximately $43 million and CSW Energy reached an agreement and settlement with its business partner regarding the $29 million cost overruns for the host facility. These negotiations also resulted in a change in the business partner for the Mulberry and Orange Cogeneration projects. Under the terms of the settlement, the newly admitted partner paid to CSW Energy 50%, or $53.2 million, of the outstanding obligations of Orange Cogeneration and assumed 50%, or $2.3 million, of the letters of credit and guarantees of the project. Concurrently, CSW Energy contributed as partners capital the remaining debt of $53.2 million to Orange Cogeneration. On the same date, CSW Energy obtained its term financing for the Mulberry project. CSil' Credit CSW Credit purchases, without recourse, the accounts receivable of the Operating Companies and certain non-affiliated electric companies. CSW Credit's capital structure contains greater leverage than that of the Operating Companies, consequently lowering CSW's cost of capital. CSW Credit issues commercial paper, secured by the assignment ofits receivables, to meet its financing needs. CSW Credit maintains a secured revolving credit agreement which aggregated $900 million at December 31,1995 to back up its commercial paper program. The sale of these accounts receivables provides the Operating Companies with cash immediately, thereby reducing working capital needs and revenue requirements. CFm 2-15 I l
ItECENT DEVELOPMENTS AND TitENDS Cmnpetition and industry Challenges
- Competitive forces at work in the electric utility industry are impacting the CSW System and electric utilities generally. Increased competition facing electric utilities is driven by complex economic, political and technological factors. These factors have resulted in legislative and regulatory initiatives that are likely to result in even greater competition at both the wholesale and retail level in the future. As competition in the industry increases, the Electric Operating Companies will have the opportunity to seek new customers and at the same time be at risk oflosing customers to other competitors. Additionally, the Electric Operating Companies will continue to compete with suppliers of alternative forms of energy, such as natural gas, fuel oil and coal, some of which may be cheaper than electricity. The Electric Operating Companies believe that their prices for electricity and the quality and reliability of their service currently place them in a position to compete effectively in the marketplace.
The Energy Policy Act, which was enacted in 1992, signiGcantly alters the way in which electric utilities compete. The Energy Policy Act creates exemptions from regulation under the Holding Company Act and permits utilitics, including registered utility holding companies and non-utility companies, to form EWGs. EWGs are a new category of non-utility wholesale power producers that are free from most federal and state regulation, including the principal restrictions of the Holding Company Act. These provisions enable broader participation in wholesale power markets by reducing regulatory hurdles to such participation. The Energy Policy Act also allows the FERC, on a case-by-case basis and with certain restrictions, to order wholesale transmission access and to order electric utilities to enlarge their transmission systems. A FERC order requiring a transmitting utility to provide wholesale transmission service must include provisions generally that permit the utility to recover from the FERC applicant all of the costs incurred in connection with the transmission services and any enlargement of the transmission system and associated services. Wholesale energy markets, including the market for wholesale electric power, have been extremely competitive since the enactment of the Energy Policy Act. The Electric Operating Companics must compete in the wholesale energy markets with other public utilities, cogenerators, qualifying facilities, EWGs and others for sales of electric power. While CSW believes that the Energy Policy Act will continue to make the wholesale markets more competitive, CSW is unable to predict the extent to which the Energy Policy Act will impact CSW System operations. On March 29,1995, consistent with the direction of the Energy Policy Act, the FERC announced in a NOPR a requirement that each public utility that owns and controls transmission facilities in interstate commerce must unbundle its services and file open access transmission tariffs under which such utility will offer comparable open access transmission services to its transmission customers. In addition, the FERC revised its proposed mechanisms by which utilities will be permitted to recover stranded investment costs expected to be brought about by the proposed changes. On August 7,1995, CSW Gled comments on the proposed approach in the NOPR with the FERC. Although CSW supports the concept of comparable open access for the nation's transmission service, CSW believes that certain changes must be made in the FERC's proposed approach ofimplementing the open transmission system. First, with respect to the issue of stranded investments, the FERC proposed that customers who left the utility company pay for a portion, but not all, of the costs incurred by the owner of existing facilities that are not utilized as a result of the loss of such customers. CSW raised concerns about the FERC's proposed methodology for addressing stranded investment because it did not, in CSW's view, provide for the fair recovery of the full amount previously invested. Second, CSW proposed that the FERC adopt a " power flow pricing" approach whereby all electrie systems that incur costs because of a transmission transaction are compensated, as opposed to the traditional" postage stamp" method whereby only the companics that are directly involved in the actual purchase and sale of the electricity are compensated or charged. O@ 2-16
On February 9,1996, the Electric Operating Companies filed at the FERC complete sets of open access transmission tariffs for both the companies that are members of the Southwest Power Pool as well as the companies that are members of ERCOT. These tariffs substantially reflect the pro forma tariffs attached to the , FERC's March 29,1995 NOPR. Open access and market pricing should increase marketing opportunities for the Electric Operating Companies, but may also expose them to the risk of loss ofload or reduced revenues due to competition with alternate suppliers. Increasing competition in the utility industry brings an increased need to stabilize or reduce rates. The retail regulatory environment is beginning to shift from traditional rate base regulation to incentive regulation. Incentive rate and performance-based plans encourage efficiencies and increased productivity while permitting utilities to share in the results. Retail wheeling, a major industry issue which may require utilities to " wheel" or move power from third parties to their own retail customers, is evolving gradually. Many states throughout the country cvrently have legislation introduced to investigate the issue. For example, in Oklahoma (portions of which are served by PSO), a legislative task force is examining state laws affecting retail electric companies. Issues being addressed include retail wheeling, territorial boundaries, taxes and condemnations. CSW believes that retail competition would harm the best interests of CSW's and the Electric Operating Companies' customers and security holders unless CSW receives fair recovery of the full amounts previously invested to finance power plants. These investments, which were reasonably incurred, were made by the CSW System to meet their obligation to serve the public interest, necessity and convenience. This obligation has existed for nearly a century and remains in force under current law. CSW intends to strongly oppose attempts to impose retail competition without just compensation for the risks and investments CSW undertook to serve the public's demand for electricity. CSW is unable to predict the ultimate outcome or impact of competitive forces on the electric utility industry or the CSW System. As the wholesale and retail electricity markets become more competitive, however, the principal factor determining success is likely to be price, and to a lesser extent, reliability, availability of capacity, and customer service. PURA 1 Amendments to PURA, the legal foundation of electric regulation in Texas, became effective on l September 1,1995. Among other things, the amendments deregulate the wholesale bulk power market in j ERCOT, permit pricing flexibility for utilities facing competitive challenges, provide for a market-driven i integrated resource planning process and mandate comparable open access transmission service. PURA also requires that the Texas Commission adopt a rule on comparable open transmission access by March 1,1996. In conjunction with this rulemaking proceeding (Project No.14045), Texas Commission Chairman Pat Wood issued a proposal on September 6,1995, for the purpose of maximizing competition in the ERCOT wholesale bulk power market. The proposal calls for the functional unbundling ofintegrated utilities where distribution entities could purchase their power requirements from any generator or set of generators in ] ERCOT. Those generators which are currently regulated would be deregulated after provisions are in place to recover stranded costs. The proposal has been assigned to a separate proceeding (Project No.15000). CSW expects this project to provide the vehicle for the Texas Commission and other interested parties to develop positions on industry restructuring before the Texas Legislature convenes in Jar.uary 1997. A schedule has been developed for Project No.15000 that includes a series of workshops and technical conferences during the first half of 1996. The schedule contemplates that the Texas Commission will develop legislative recommendations on restructuring and stranded costs during the second half of 1996. i On February 7,1996, the Texas Commission adopted a rule governing transmission access and pricing l (Project No.14045). The pricing method tentatively adopted by the Texas Commission is a hybrid combination of an ERCOT-wide postage stamp rate covering 70% of total ERCOT transmission costs and a C@ 2-17
_ _ _~__ _ ______ _ ____ _ _.__.___ _ _ ___ _ ! i l l l l l distance-sensitive component referred to as a vector-absolute megawatt mile which recovers the remaining [ 30% of ERCOT transmission costs. Although the open access tariffs filed with the FERC on February 9,1996 i do not reflect Project No.14045 pricing, CSW anticipates filing tariffs with the FERC that do conform to the Texas Commission's rule in the second quaner of 1996. Regulatory Accounting , Consistent with industry practice and the provisions of SFAS No. 71, which allows for the recognition I and recovery of regulatory assets, the Electric Operating Companies have recognized significant regulatory l assets and liabilities. Management believes that the Electric Operating Companies will continue to meet the l criteria for following SFAS No. 71. Ilowever,in the event the Electric Operating Companies no longer meet ; the criteria for following SFAS No. 71, a write-off of regulatory assets and liabilities would be required. For ! additional information regarding SFAS No. 71 reference is made to NOTE 1. SUMM ARY OF ' SIGNIFICANT ACCOUNTING POLICIES. Holding Company Act i The Holding Company Act generally has been construed to limit the operations of a registered holding company to a single integrated public utility system, plus such additional businesses as are functionally related l to such system. Among other things, the Holding Company Act requires CSW and its subsidiaries to seek ! prior SEC approval before effecting mergers and acquisitions or pursuing other types of non-utility initiatives. Pervasive regulation under the Holding Company Act may impede or delay CSW's efforts to achieve its j strategic and operating objectives, including its pursuit of non-utility initiatives. During 1995, a bill was introduced in the United States Senate which, if adopted, would repeal the lloiding Company Act and replace it ; with a new, less restrictive, holding company law administered by the FERC. CSW cannot predict if or when j Holding Company Act repeal legislation will be enacted or what form such legislation will take if adopted. However, CSW intends to continue its efforts to repeal or modify the Holding Company Act in order to ; provide the flexibility to compete within the changing environment. Consolidated Taxes Prior to 1992, the Texas Commission allowed income taxes to be recovered in rates based on the federal income tax incurred by a utility as if it were a stand-alone company. This " stand-alone" approach treated the regulated activities of a utility as a separate entity and considered only those revenues and expenses that are included in the utility's cost of service to calculate the federal income tax liability for ratemaking purposes. However, in 1992 the Texas Commission changed its method of calculating the federal income tax component of rates to the " actual tax approach." T his approach reduces rates by the tax benefits of deductions which are not considered for or included in setting rates for the utility. On April 13,1995, the Supreme Coun issued a decision which holds that the Texas Commission is not required to use the tax benefits associated with the losses of unregulated affiliates to reduce tax expense in cost of service. The Supreme Court also ruled that the Texas Commission cannot include the income tax deductions taken by the utility for disallowed expenses when determining the utility's federal income tax liability. This decision will allow CSW, and indirectly its shareholders, to retain the tax benefits associated with disallowed expenditures. ENVIRONMENTAL M ATTERS The operations of the CSW System, like those of other utility systems, generally involve the use and disposal of substances subject to environmental laws. CERCLA, the n deral"Superfund" law, addresses the cleanup of sites contaminated by hazardous substances. Superfund requires that PRPs fund remedial actions regardless of fault or the legality of past disposal activities. PRPs include owners and operators of contaminated sites and transporters and/or generators of hazardous substances. Many states base similar laws. CFm 2-18
. . . ~. - . . -- . _ - . . ..--- -
Legally any one PRP can be held responsible for the entire cost of a cleanup. Usually, however, cleanup costs are allocated among PRPs. l The Electric Operating Companies are subject to various pending claims alleging that they are PRPs under federal or state remedial laws for investigating and cleaning up contaminated property. CSW anticipates j that resolution of these claims, individually or in the aggregate, will not have a material adverse effect on l CSW's or any Electric Operating Company's results of operations or financial condition. Although the reasons for this expectation differ from site to site, factors that are the basis for the expectation for specific sites include the volume and/or type of waste allegedly contributed by the Electric Operating Company, the ; estimated amount of costs allocated to the Electric Operating Company and the participation of other parties. l See ITEM 1-BUSINESS, NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LI ABILITIES for additional discussion regarding environmental matters. NON-UTILITY INITIATIVES As indicated above, one component of CSW's four-part strategy to meet the increasing competition i and fundamental changes in the electric utility industry is to expand CSW's non-utility and energy-related business. While CSW believes that such initiatives are necessary to maintain its competitiveness and to l supplement its growth in the future, the Holding Company Act may impede or delay its ability to successfully pursue such initiatives. See RECENT DEVELOPMENTS ANI) TRENDS above. l Transok Transok is an intrastate natural gas gathering, transmission, marketing and processing company that j provides natural gas services to CSW System companies, predominately PSO, and to non. affiliated gas j customers throughout the United States. Transok's natural gas facilities are located in Oklahoma, Louisiana and Texas. It operates gas processing plants and markets natural gas liquids produced from those plants to l various markets. During 1995, a new processing plant was completed that increased Transok's processing capacity by approximately 27%. In addition, during the second quarter of 1996, two new natural gas compression units are scheduled to be completed. These units will increase Transok's west to east transport capacity by approximately 22%. In January 1996, CSW announced it was exploring strategic alternatives for its investment in Transok. The alternatives, which include a possible sale, are a part of CSW's ongoing strategic review ofits business. CSWEnergy CSW Energy is authorized to develop various independent power and cogeneration facilities and to own and operate such non-utility projects, subject to regulatory approval. The table below summarizes CSW Energy's participation in projects as of the end of 1995. a l 2-19
, . . _ _ _ _ . ._ _ __m __ -- m _ _ _ _ - , _ _ _ _ . - . .__ _ _ - _ _ _ . , 1 I l l Capacity Commercial (in MW) Operation Ownership Thermal hoject Ifocation Total Sold Date Interest ilost ilost Utility ..
' linch 11 Brush, CO 68 68 January 1994 47% Greenhouse Public Service Company ofColorado Ft. Lupton Ft. Lupton, CO 272 272 June 1994 50% Greenhouse Public Service Company of Colorado ,
Mulberry Polk County, FL 120 110 August 1994 50 % Distilled Florida Power Corporation water / ethanol i plant ' i Orange Polk County, FL 103 97 June 1995 50 % Orangejuice Florida Power Corporation processor Tampa Electric Company Phillips Sweeny Sweeny, TX 300 90* Mid 1998 50 % Refinery Undetermined
- Newgulf Wharton. TX 85 -- Mid 1996 100 % IPP Undetermined '
'The Phillips Sweeny project has the unexercised option to sell 90 MW of capacity to Phillips Petroleum Company. ;
In addition to these projects. CSW Energy has another six projects totaling approximately 2,000 MW in various stages of development, mostly in affiliation with other developers. CSM' International
' CSW International was formed in 1994 to engage in international activities, including developing,
- acquiring, Gnancing and owning EWGs and foreign utility companies. CSW International's most significant '
activity to date is the acquisition, indirectly through CSW (UK), of the outstanding share capital of SEEBOARD pursuant to the Tender Offer. See SEEBOARD ACQUISITION above. CSW International also ; intendr. to continue its efforts in Mexico, with a stated goal of participating in providing Mexico's future l c!cctricity needs. Although the recent devaluation of the Mexican peso has slowed previously projected power , demand, CSW International continues to believe that the geographic location of the CSW System offers I opportunities to provide bulk power to Mexico. CSW International continues to seek to expand into other countries in Latin America, Europe and Asia that meet its investment criteria.. ! CSH' Communications CSW Communications was formed in 1994 to provide communication services to the Electric Operating Companies and non-affiliates. One important geal of CSW Communications is to enhance services to CSW System customers through Ober optics and other telecommunications technologies, in Laredo, Texas, a project has been undertaken to install fiber optic lines and coaxial cable to CPL customers. The project, a network of over 3,000 homes with approximately 700 customers currently panicipating, will demonstrate the energy ef6ciency and cost savings that result from giving customers greater choice and control over their electric service. CSW Communications offers similar utility management services to other parties, including af0liates as well as non-afGliates. In the future, CSW Communications may, subject to any required regulatory approvals, seek to lease or otherwise use the reserve capacity for other services including telephone service, i cable television and home security systems. CSW Communications presently owns and manages a 185 mile Ober-optic line connecting the south Texas cities of Corpus Christi, liarlingen and McAllen, and anticipates the construction of another Ober-optic line, connecting Shreveport, Louisiana and Longview, Texas, to begin in mid-1996. l CSW Communications Gled for " exempt telecommunications company" status with the FCC on ! February 8,1996, subsequent to legislation that introduced competition to telephone and other communications industries that operated within regulated environments. The Oling with the FCC automatically qualifies CSW ! ! Communications as an exempt telecommunications company, pending the FCC's review of the application (which is required to be completed within 60 days). CSW believes that CSW Communications' exempt ! telecommunications company status will enable it to compete more effectively with other telecommunications companies. El 2-20
EnerSlwp In September 1995 EnerShop was formed to provide energy services to customers throughout the Southwest. EnerShop offers services that help reduce customers' operating costs through increased energy cfficiencies and improved equipment operations. EnerShop utilizes the skills oflocal trade allies in offering services that include energy and facility analysis, project management, engineering design and equipment procurement and construction, third party financing and equipment leasing, savings and performance guarantees and performance monitoring. EnerShop recently secured its first major contract and has bids outstanding for several additional projects in 1996. NEW ACCOUNTING STANDARDS SFAS No.121 In March 1995, the FASB issued SFAS No.121 to be effective for financial statements for fiscal years beginning after December 15,1995. The statement establishes a two-fold test for identification and quantification of an impaired asset. The first test in determining an impairment is to compare the sum of expected future cash Dows (undiscounted and without interest charges) related to an asset to the carrying amount of the asset. If the sum of expected cash Dows is not sufficient to recover the carrying value of the asset, then an impairment is recognized. Once an impairment is identified, the second part of the test is applied to quantify the amount of the impairment. The statement lists several alternative methods of establishing fair market value and quantifying the impairment. Cash Dows used to measure possible impairment of an asset are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. For the Electric Operating Companies, the lowest independently identifiable cash now level used for this analysis is jurisdictional rates charged to customers. ,, CSW will adopt SF,AS No.121 in the first quarter of 1996. Under the current regulatory environment, CSW does not expect the adoption of SFAS No.121 to have a significant impact on CSW's consolidated results of operations or financial condition. However, future developments in the electric industry and utility regulation couldjeopardize the full recovery of the carrying cost of certain investments. Consequently, CSW is monitoring the changing conditions facing the electric utility industry. SFAS No.123 SFAS No.123 was issued in October 1995 with an effective date for transactions entered into after December 15,1995. This statement requires the use of an option pricing model to calculate the value of stock-based compensation transactions where such value cannot otherwise be determined, but then allows for two alternative methods of reporting the transactions. One method recognizes this value as a cost of compensation and as an expense for the current period. The alternative method permits footnote disclosure of the compensation cost, without charging the amount against current earnings. As provided by the provisions of SFAS No.123, CSW will continue to apply the recognition ar.J measurement provisions of Accounting Principles Board Opinion No. 25," Accounting for Stock issued to , Employees" and adopt the disclosure requirements of SFAS No.123 in 1996. Accordingly, the adoption of SFAS No.123 will not impact CSW's consolidated results of operations or financial condition. l l l I l l 2-21 i
. . _ . _ . _ _ _ .m._____ m._ . _ . _ _ _ _ _ _ . _ . . - _ _ _ . _ _ . _ _ _
RESULTS OF OPEIMTIONS Overview o'. Results CSW's earnings increased to $402 million or $2.10 per share in 1995 as compared to $394 million or
$2.08 per sl.are in 1994 and $308 million or $1.63 per share in 1993. The return on average common stock equity was 13.1% in 1995 compared to 13.4% in 1994 and 10.6% in 1993. Electric operations contributed approxima ely 105% of total earnings in 1995 and approximately 100% of total earnings in 1994 and 1993. In 1995, corparate expenses, including $42 million of expenses related to the termination of the El Paso Merger, were offset in part by earnings at Transok, CSW Energy. SEEBOARD and CSW Credit, totaling $51 million in the aggregate.
i Earnings increased in 1995 compared to 1994 due primarily to higher electric revenues from customer growth and increased usage and lower operation and maintenance expenses. In addition, earnings from SEEBOARD contributed to the increase. Partially offsetting these factors were higher depreciation and ; 4 interest and lower earnings from Mirror CWlP. Significant one time items impacting 1995 carnings are set forth in the SIGNIFICANT ITEMS table. Earnings increased in 1994 compared to 1993 due primarily to higher KWH sales and natural gas margins and decreased costs associated with the end of the outage at STP. In addition, CSW Energy, which , i had three projects become operational during 1994, contributed $2 million to earnings in 1994. These items were partially offset by increased interest and depreciation and amortization expense. In addition, earnings in 1993 were significantly affected by several items set forth in the SIGNIFICANT ITEMS table. 5 SIGNIFICANT ITEMS (millions, after-tax) 1995 i CPL 1995 Agreement $(16) Merger termination (27) Tax adjustments 30 1993 Restructuring charges 5(63) l Recognition of unbilled revenues 19 Early adoption of SFAS No.112 (9) Adoption of SFAS No.109 6 i Establishment of reserves for fuel and ; other propenies (II) l Tax adjustments (18) Operatine Revenues Revenues increased $112 million or 3% in 1995, after a decrease of $64 million or 2% in 1994. The ! variances in the different revenue categories are shown in the REVENUE VARI ANCE table. Crm 2-22
I REVENUE VARI ANCE increase hkcrease)from prwrprar 1995 1994
~ -
(milhons) U.S. Electric CPL 1995 Agreement $(112) $--
%TO Stipulation and Agreement (22) --
Base rates (8) 7 Fuel costs (106) (49) K W ilsales 62 61 Other electric and diversified 16 2 Natural gas 74 (85) SEEBOARD 208 -
$112 $(64)
Electric Revenues Electric revenues decreased $182 million or 6% in 1995 compared to 1994. The acquisition of
'SEEBOARD contributed $208 million in revenues for the month of December 1995 and total U.S. Electric l KWil sales increased approximately 5%, with increases in sales among all customer classes. During 1995, the average number of customers increased approximately 2%. In addition to customer growth, there was increased usage during 1995 as compared to 1994. Ilowever, offsetting the increases in revenue due to SEEBOARD and increased KWH sales were customer refunds made by CPL and WTU resulting from the resolution of rate proceedings during 1995 and lower fuel costs.
Electric revenues increased $10 million in 1994 as compared to 1993 due primarily to increased KWH sales offset in part by decreased fuel revenues. Base rates increased in 1994 from 1993 due to a rate increase implemented by PSO in February 1994, offset in part by a 3.2% interim rate reduction implemented by WTU during the fourth quarter of 1994. The percentage changes in U.S. Electric KWH sales from the previous year for 1995 and 1994 are presented in the U.S. ELECTRIC KWH SALES VARIANCE table. KWH sales to retail customers increased in 1995 as a result ofincreased customer usage and customer growth. KWH sales to retail customers in 1994 increased as a result of more favorable weather and increased residential customers. SWEPCO acquired BREMCO in July 1993, and accordingly, there were twelve months of KWH sales to these customers i in 1994 compared to only six months in 1993. Weather was more favorable in 1994 than in 1993. ) i l U.S. ELECTRIC KWil SALES VARIANCE Increase fromprioryear l l995 I994 Residential 3.1% 2.9% Commercial 2.2 3.8 Industrial 2.4 3.6 Sales for resale 18.7 21.9 Total sales 4.5 5.5 The continued increases in industrial sales over the last two years reflect the increased marketing
- effons by the Electric Operating Companies and the continued improvement in the economy throughout their
- service areas. Sales for resale increased in 1995 because STP was operational for the full year as compared to most of 1994, thereby eliminating the need for plants in the CSW System to produce power to replace the i
i power normally produced at STP. In addition, during 1995, WTU began supplying a major new wholesale l customer. The Electric Operating Companies have maintained relatively low competitive rates in an N 2-23
increasingly competitise marketplace. Efforts have increased at each of the Electric Operating Companies to attract new customers uhile efGeiently serving all customers. l
. l l
Natural Gas Revenues l Revenues from natural gas increased 14% to $592 million in 1995 from $518 million in 1994 due primarily to an increase in natural gas sales volumes which was partially offset by a reduction in sales prices. l Also contributing to the increase in 1995 natural gas revenues were increased natural gas liquids sales volumes and prices. The 14% decrease in revenues in 1994 from $603 million in 1993 was due to a decrease in natural gas prices which was partially offset by an increase in volumes. Other Diversified Revenues Other diversiGed revenues increased 30% to $52 million in 1995 as compared to $40 million in 1994 , due primarily to two CSW Energy projects that went into operation during the second and third quarter of 1994 and increased factoring revenues at CSW Credit. Other diversi6ed revenues increased 38% in 1994 from $29 i million in 1993 due to the reclassincation of CSW Energy's operating revenues as discussed below under Other income and Deductions. Revenuesfrom SEEBOARD CSW's operating revenues includes $208 million of revenues from SEEBOARD for the month of December 1995. During the month of December 1995, pursuant to its effective control of SEEBOARD through its 76.45% ownership interest, CSW began full consolidation accounting for SEEBOARD in its consolidated Gnancial statements. Q)erating Exnenses Fuel and Purchased Power Expense During 1995, the Electric Operating Companies generated approximately 98% of their electric energy requirements. During 1994 and 1993, they generated 95% and 92%, respectively. Total fuel and purchased power expenses increased $58 million or 5% from 1994, due primarily to SEEBOARD's December 1995 power purchases. Without including such purchases, total fuel and purchased power decreased $116 million during 1995 due mainly to a decrease in natural gas prices and an increased usage oflower cost nuclear fuel. The average unit cost of fuel was $1.58 per MMbtu during 1995, compared to $1.82 in 1994 and $2.11 in 1993. Purchased power decreased $8 million during 1995 due primarily to increased generation from STP which replaced power that had been purchased during the Erst six months of 1994 when STP was out of service. During 1995 STP was operational for the entire year allowing the use oflower cost nuclear fuel. The decrease in fuel and purchased power expense in 1994 compared to 1993 was attributable to a decrease in fossil fuel costs and increased usage of lower cost nuclear fuel. Gas Purchasedfor Resale / Gas Extraction andMarketing Gas purchased for resale increased 20% in 1995 from 1994, while it decreased 27% in 1994 from 1993. The increase in 1995 was caused by higher sales volumes, which more than offset the relatively low average cost of gas which prevailed during 1995 compared to 1994. Lower gas prices caused the decrease in ! 1994, including a signiGcant reduction in prices attributable to sales made on natural gas drawn from storage. l Gas extraction and marketing expenses increased 11% in 1995 from 1994 and 14% in 1994 from 1993. The 1995 and 1994 increases were both due to increases in natural gas liquids purchased for resale. j Other Operating andMaintenance Expenses and Taxes l Other operating and maintenance expenses in 1995 increased $18 million or 2% from 1994 due ! primarily to the establishment of a $42 million reserve for expenses incurred in association with the terminated j El Paso Merger and the inclusion of SEEBOARD's December 1995 operating and maintenance expenses, l offset in part by the beneEts that were realized from a cost-reduction initiative whereby CSW System C@ 2-24
I 1 I l employ ees received a portion of the operating and maintenance expense savings. In 1994, the 2% decrease in other operating and maintenance expenses from 1993 was due primarily to the absence of $29 million in maintenance expenses that were incurred during the 1993 STP outages, expenses associated with the 1993 , adoption of SFAS No.106 and reserves taken in 1993 on fuel and other properties, offset in part by the reclassification of CSW Energy's operating costs as discussed below under Other Incorne and Deductions. Income taxes were lower in 1995 than 1994 due to prior year adjustments, the reserse established in connection with the termination of the El Paso Merger as well as both the tax adjustments and the tax effects of the CPL 1995 Agreement and the WTU Stipulation and Agreement. In 1994, income taxes were higher than 1993 due to higher pre-tax income. Taxes other than income decreased in 1995 due to prior year l adjustments but remained approximately the same in 1994 as in 1993. Restructuring Charges Restructuring charges reGect the original accrual of $97 million in 1993, which was subsequently reduced by $9 million in 1994 and $2 million in 1995. In addition, during 1995,$34 million in regulatory I assets were capitalized in accordance with the CPL 1995 Agreement and the WTU Stipulation and Agreement for costs associated with the restructuring that had previously been charged to expense. Depreciation and A rnortization Depreciatien and amortization expense increased in 1995 and 1994 when compared to the prior ycar due primarily to increases in depreciable plant. 01her Items Other income and Deductions Other income and deductions decreased $12 million or 11% in 1995 compared to 1994, as a result of decreased Mirror CWIP liability amonization offset in part by approximately $11 million in previously deferred factoring income recognized as income by CPL beginning in 1995 pursuant to the CPL 1995 Agreement, increased interest income of $4 million and a $3 million gain on PSO's sale of non-utility Gber optic telecommunication property. Other income and deductions increased $18 million or 19% in 1994 compared to 1993 as a result of the l reclassiGeation of CSW Energy's operating activities offset partially by decreased Mirror CWIP liability ) amortization and the absence of adjustments recorded in 1993 associated with Transok's 1991 acquisition of l TEX / CON. Prior to 1994, CSW Energy was in the developmental stage ofits business and, as a result, its l operating activities were classified in CSW's Other income and Deductions. However, in conjunction with the ! completion of three projects in 1994, CSW Energy's revenues and expenses were classiGed as operating l activities in CSW's Operating Revenues and Other Operating Expenses. The net amount of these components I had negative earnings impacts classiGed in Other income and Deductions in 1993. Interest Charges Interest expense on long-term debt increased 30% in 1995 from 1994 due to higher levels of debt outstanding, whereas interest expense on long-term debt in 1994 was comparable to 1993. CSW's embedded cost oflong-term debt decreased to 7.2% in 1995 from 7.7% in 1994. Shon-term interest expense increased in j 1994 due primarily to higher short-term interest rates combined with higher general corporate borrowings. l Cumulative Effect of Changes in Accounting Principles in 1993, CSW implemented SFAS No. I12, SFAS No.109, and changed the method of accounting for unbilled revenues. These changes had a cumulative effect ofincreasing net income approximately $46 million. OTv l 2-25 l
l l I inflation l Annual inflation rates, as measured by the national Consumer Price Index, have averaged approximately 2.8% during the three years ended December 31,1995. Management believes that inflation, at this level, does not materially affect CSW's consolidated results of operations or financial position. However, l under existing regulatory practice, only the historical cost of plant is recoverable from customers. As a result, l cash flows designed to provide recovery of historical plant costs may not be adequate to replace plant in future l years. Tm 2-26
r l OTs ' i Consolidated Statements of income l Central andSouth West Corporation ; I for the Years Ended December 31, 1995 1994 1993 ($ in millions, except share amounts) Operating Revenues $ 3,735 $ 3,623 $ 3,687 Operating Expenses and Taxes Fuel and purchased power 1,184 1,126 1,181 Gas purchased for resale 372 311 424 Gas extraction and marketing 109 98 86 Other operating 629 596 593 Restructuring charges (36) (9) 97 Maintenance 161 176 197 Depreciation and amortization 384 356 330 Taxes, other than income 171 186 191 Inconte taxes 105 189 131 3.079 3,029 3.230 Operating income 656 594 457 Other income and Deductions Mirror CWIP liability amortization 41 68 76 Other 58 43 17 99 til 93 income Before Interest Charges 755 705 550 Interest Charges Interest on long-term debt 284 218 219 Interest on short-term debt and other 50 75 50 334 293 269 Income Before Cumulative Effect of j Changes in Accounting Principles 421 412 281 l Cumulative Effect of Changes in Accounting Principles -- -- 46 Net income 421 412 327 Preferred stock dividends 19 18 19 Net income for Common Stock 5 402 5 394 5 308 i 1 Average Common Shares Outstanding 191.7 189.3 188.4 Earnings per Share of Common Stock before Cumulative Effect of Changes in Accounting Principles $2.10 $2.08 $ 1.39 Cumulative Effect of Changes in Accounting Principles -- -- 0.24 Earnings per Share of Common Stock S2.10 S2.08 $ 1.63 l Dividends Paid per Share of Common Stock $ 1.72 $ 1.70 S1.62 The accompanying notes to consolidated financial statements are an integral part of these statements. cpm l 2-27
l l I l I l i l l I [This Page Intentionally Left Blank] i l 1 1 i
I ! C/m' Consolidated Statements of Retained Earnings Central and South II'est Corporation I For the Years Ended December 31, 1995 1994 1993 (millions) i Retained Earnings at Beginning of Year $ 1,824 $ 1,753 $ 1,751 I Net income for common stock 402 394 308 Deduct: Common stock dividends 329 322 306 Deduct: Preferred stock and other adjustments 4 1 -- Retained Eamings at End of Year 5 1.893 S 1,824 S I,753 f I 1 The accompanying notes to consolidated financial statements are an integral part of these statements. Cfg 2-28
I l l l I Cfm' l Consolidated Italance Sheets CentralandSouth West Corporation l As of December 31. I 1995 1994 (millions) ASSETS Electric Production S 5,888 $ 5,802 Transmission 1,484 1,377 Distribution 3,799 2,539 General 1,209 764 Construction work in progress 346 412 Nuclear fuel 165 161 Total Electric 12,891 11,055 Gas 869 798 Other diversified 18 15 13,778 11,868 Less - Accumulated depreciation 4,761 3,870 9,017 7,998 Current Assets Cash and temporary cash investments 401 108 National Grid assets held for sale 100 -- Accounts receivable 1,093 837 Materials and supplies, at average cost 188 162 Electric utility fuel inventory, substantially at average cost 129 118 Gas inventory / products for resale 13 23 Under-recovered fuel costs -- 54 Prepayments and other i15 44 2,039 1,346 Deferred Charges and Other Assets Deferred plant costs 514 516 Mirror CWIP asset 312 322 Other non-utility investments 296 394 Income tax related regulatory assets, nel 253 216 Goodwill 1,074 -- Other 364 274 2,813 1,722 S 13,869 S 11,066 The accompanying notes to consolidated financial statements are an integral part of these statements. OTu_ - -
Cim Consolidated Italance Sheets Central and South II'est Corporation As of December 31, 1995 1994 CAPITALIZATION AND LIABILITIES (millions) Capitalization Common stock: $3.50 par value Authorized shares: 350.0 million shares Issued and outstanding: 192.9 million shares in 1995 and 190.6 million shares in 1994 5 675 5 667 Paid-in capital 610 561 Retained earnings 1,893 1,824 Total Common Stock Equity 3,178 3,052 Preferred stock
)'
Not subject to mandatory redemption 292 292 Subject to mandatory redemption 34 35 Long-term debt 3,914 2,040_ Total Capitalization 7,418 6,3 i 9_ l Minority Interest 202 -- Current Liabilities Long-term debt and preferred stock due within twelve months 30 7 Short-term debt 692 910 1 Short-term debt - CSW Credit, Inc. 646 654 Accounts payable 595 286 Accrued taxes 228 111 Accrued interest 77 61 l Provision for SEEBOARD acceptances 1,001 -- Other 156 159 ) 3,425 2,188 Deferred Credits Income taxes 2,306 2,048 Investment tax credits 306 320 l Mirror CWIP liability -- 4I Other 212 150 2.824 2,559 5 13,869 S 11,066 The accompanying notes to consolidated financial statements are an integral part of these statements. O@ 2-30
Clin j Consolidated Statements of Cash Flows ) CentralandSouth II'est Corporation For the Years Ended December 31, 1995 1994 1993 (millions) OPERATING ACTIVITIES Net income S 421 S 412 S 327 Non-cash items included in Net income Depreciation and amortization 425 402 366 Deferred income taxes and investment tax credits (11) 87 94 Mirror CWIP liability amortization (41) (68) (76) Restructuring charges (2) (9) 97 Cuinulative effect of changes in accounting principles -- -- (46) Charges for terminated Merger 42 -- -- Regulatory assets established for previously incurred restructuring charges (34) -- -- Changes in Assets and Liabilities Accounts receivable (36) 29 (52) Unrecovered fuel costs 76 16 (63) Accounts payable (32) (27) 34 Accrued taxes 25 21 37 Accrued restructuring charges (2) (57) -- Other (32) (42) (24) 799 764 694 INVESTING ACTIVITIES Capital expenditures (474) (578) (508) Acquisitions excluding SEEBOARD (6) (21) (106) Net cash paid on SEEBOARD acquisition (415) -- Non-affiliated accounts receivable collections /(purchases), net 2 11 (314) CSW Energy projects (includes $2, S73 and $19 of equity investments for 1995,1994 and 1993, respectively) 109 (115) (127) Other (28) (13) (14) (812) (716) (1.069) FINANCING ACTIVITIES Common stock sold 57 50 1 Proceeds from issuance of long-term debt 1,187 199 904 Retirement of long-term debt (8) (4) (50) Reacquisition oflong term debt (355) (27) (987) Special deposits for reacquisition oflong term debt -- -- 199 Redemption of preferred stock (1) (33) (17) I Change in short-term debt (226) 153 602 l Payment of dividends (348) (340) (325) 306 (2) 327 Net Change in Cash and Cash Equivalents 293 46 (48) Cash and Cash Equivalents at Beginning of Year 108 62 110 Cash and Cash Equivalents at End of Year S 401 S 108 5 62 SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized S 301 S 280 S 260 Income taxes paid S 77 $ 93 5 53 The accompanying notes to consolidated financial statements are an integral part of these statements. O@ , , ,
i CENTRAL AND SOUTH WEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . 1
- 1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES l Nature of Operations CSW is a registered holding company under the Holding Company Act subject to regulation by the SEC. CSW's four Electric Operating Companies are also regulated by the SEC under the Holding Company Act. The principal business of CSW's four Electric Operating Companies, CPL, PSO, SWEPCO and j WTU, is the generation, transmission, and distribution of electric power and energy. These four compames ! are subject to regulation by the FERC under the Federal Power Act and follow the Uniform System of Accounts prescribed by the FERC. They are subject to further regulation with regard to rates and other matters by state regulatory commissions as follows: CPL and WTU are subject to the Texas Commission; , PSO is subject to the Oklahoma Commission; and SWEPCO is subject to the Arkansas Commission, Louisiana Commission, Oklahoma Commission and the Texas Commission. ! The principal business of CSW's United Kingdom electric operating subsidiary, SEEBOARD, is the distribution of electric power and energy in southeast England. SEEBOARD is subject to regulation of rates by the United Kingdom Office of Electricity Regulation. In addition to the electric utility operations, CSW has subsidiaries involved in a variety of business activities. Transok is an Oklahoma natural gas company, CSW Energy and CSW International pursue cogeneration and other energy-related ventures, CSW Credit purchases the accounts receivable of affiliates and non-affiliates, CSW Communications pursues telecornmunications projects, CSW Leasing invests in leveraged leases and EnerShop offers energy-management services. The more significant accounting policies of the CSW System are summarized below: Principles of Consolidation The consolidated financial statements include the accounts of CSW and its subsidiary companies. The consolidated financial statements for PSO include the accounts ofits wholly owned ; subsidiary, Ash Creek. All significant intercompany items and transactions system have been eliminated. Use ofEstimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of i assets and liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reponed amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FiredAssets Electric fixed assets are stated at the original cost of construction, which includes the cost of contracted services, direct labor, materials, overhead items and allowances for borrowed and equity funds used during construction. SEEBOARD's fixed assets are stated at fair market value based on the preliminary allocation of the purchase price CSW paid for SEEBOARD. Transok's gas plant acquisitions are stated at fair market value based on the purchase price while other gas plant is stated at original cost of construction, which includes the cost of contracted services, direct labor, materials, overhead items and CFm 2-32 i
capitalized interest. See SEEBOARD Acquisition below for additional information, including the allocation of purchase price to the SEEBOARD Group's fixed asset accounts. . Depreciation Provisions for depreciation of plant are computed using the straight-line method, generally at individual rates applied to the various classes of depreciable property. The annual average consolidated composite rates are presented in the following tahic. CSW CPL PSO SWEPCO HTU 1995 34% 2.9% 34% 3.2% 3.2% 32% 3.0% 3.5% 3.2% 3 2"i, 1994 1993 3.2% 30% 3.5% 3.2% 3.2% CPL Nuclear Decommissioning of the STP Plant At the end of STP's service life, decommissioning is expected to be accomplished using the decontamination method, which is one of the techniques acceptable to the NRC. Using this method, the decontamination activities occur as soon as possible after the end of plant operations. Contaminated equipment is cleaned and removed to a permanent disposal location, and the site is generally returned to its pre-plant state. CPL's decommissioning costs are accrued and funded to an external trust over the expected service life of the STP units. The existing NRC operating licenses will allow the operation of STP Unit 1 until 2027 and Unit 2 until 2028. The accrual for decommissioning costs is an annual level cost based on the estimated future cost to decommission STP, including escalations for expected in6ation to the expected time of decommissioning, and is net of expected earnings on the trust fund. CPL's portion of the costs of decommissioning STP were estimated to be $85 million in 1986 dollars based on a site speci6c study completed in 1986. CPL is recovering these decommissioning costs through rates based on the service life of STP at a rate of $4.2 million per year. The $4.2 million annual cost of decommissioning is reflected on the income statement in other operating expense. Decommissioning costs are paid to an irrevocable external trust and as such are not re6ected on CPL's balance sheet. At December 31,1995, the trust balance was $28.0 million. In August 1995, CPL received a new decommissioning study updating the cost estimates to decommission STP that indicated that CPL's share of such costs would increase from $85 million, as stated in 1986 dollars, to $258 million, as stated in 1995 dollars. The increase in costs occurred primarily as a result of extended on-site storage of high level waste, much higher estimates oflow-level waste disposal costs and increased labor costs since the prior study. These costs are expected to be incurred during the years 2027 through 2062. While this is the best estimate available at this time, these costs may change between now and when the funds are actually expended because of changes in the assumptions used to derive the estimates, including the prices of the goods and services required to accomplish the decommissioning. Additional studies will be completed periodically to update this information. Based on this projected cost to decommission STP, CPL estimates that its annual funding level should increase to $10.5 million. CPL has requested this amount as part ofits cost of service in its current rate Bling. Other parties to the proceeding have Gled annual projections ranging from $1.4 million to $8.2 million. CPL expects to fund at the level ultimately ordered by the Texas Commission although CPL cannot predict that level. Historically, the Texas Commission has allowed full recovery of nuclear decommissioning costs. For further information on CPL's current rate Bling, see NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. C@ 2-33
I i l Electric Revenues and Fuel l Prior to 1993, electric revenues were recorded at the time billings were made to customers on a cycle-billing basis. Electric service provided subsequent to billing dates through the end of each calendar - month became part of operating revenues of the next month. To conform to general industry standards, the Electric Operating Companies changed their method of accounting to accrue for estimated unbilled revenues. The effect of this change on 1993 net income was pre-tax increase of $75 million, and an after-tax increase of $49 million, included in cumulative effect of changes in accounting principles. See the effects of this change under Accounting Changes below. CPL, SWEPCO and WTU recover fuel costs in Texas as a fixed component of base rates ' whereby over-recoveries of fuel are payable to customers and under-recoveries may be billed to customers after Texas Commission approval. The cost of fuel is charged to expense as consumed. PSO recovers fuel costs in Oklahoma and SWEPCO recovers fuel costs in Arkansas and Louisiana through automatic fuel recovery mechanisms. The application of these mechanisms varies byjurisdiction. See NOTE 2. LITIGATION AND REGULATOlW PROCEEDINGS, for further information about fuel recovery. CPL, PSO and WTU recover fuel costs applicable to wholesale customers, which are regulated by the FERC, through an automatic fuel adjustment clause. SWEPCO recovers fuel costs applicable to wholesale customers through formula rates. CPL amortizes direct nuclear fuel costs to fuel expense on the basis of a ratio of the estimated energy used in the core to the energy expected to be derived from such fuel assembly over its life in the core. In addition to fuel amortization, CPL also records nuclear fuel expense as a result of other items, including spent fuel disposal fees assessed on the basis of net KWHs sold from STP and DOE special assessment fees for decontaminatior and decommissioning of the enrichment facilities on the basis of prior usage of enrichment services. Accounts Receivable CSW Credit, as a wholly owned subsidiary of CSW, purchases, without recourse, the billed and unbilled accounts receivable of the Electric Operating Companies, Transok and certain non-affiliated companies. Regulatory Assets and Liabilities For their regulated activities, each of the Electric Operating Companies follows SFAS No. 71, which defines the criteria for establishing regulatory assets and regulatory liabilities. Regulatory assets represent probable future revenue to the company associated with certain costs which will be recovered from customers through the ratemaking process. Regulatory liabilities represent probable future refunds to customers. The significant regulatory assets and liabilities that have been recorded by the CSW System are presented in the following table. O@ 2-34
CSn' CPL F50 SHTPCO UTE t milhons) (thousands) As of December 31,1995 , Regulatory Assets Dcferred plant costs $514 $488.047 $- $-- $26,092 Mirror CWIP asset 312 311,804 -- -- -- Income tax related regulatory assets, net 253 346.993 - -- - Deferred restructuring and rate case costs 46 28,025 - - 17,577 Deferred storm costs 4 -- 3,623 -- -- Demand side management costs 14 7,465 6,419 -- .. OPl.ils 7 -- 4.008 2,794 -- Other 10 5,384 4.798 -- 431 Regulatory 1.iabilities income tax related regulatory habihties, net 41,820 37,363 14.464 As of December 31,1994 Regulatory Assets Deferred plant costs $516 $488,987 $ -- $-- $26,914 Mirror CWIP asset 322 321,825 - - -- Income tax related regulatory assets, net 216 288,444 -- -- -- Deferred storm costs 5 -- 4,798 -- - Demand side management costs 5,635 11 5,411 -- Ol'lills 6 -- 4,504 1,949 -- Other 5,989 11 4,945 -- -- Regulatory 1 iabihties Mirror CWIP liability 41 41,000 -- -- --
)
Income tax related regulatory liabihties, net -- 18,611 44,836 ) 9,217 Deferred Plant Costs at CPL and IiTU in accordance with orders of the Texas Commission, CPL and WTU deferreo carrying costs, as w ell as operating, depreciation and tax costs incurred for STP and Oklaunion, respectively. These deferrals were for the period beginning on the date when the plants began commercial operation until the date the plants were included in rate base. CPL is amortizing and recovering these chferred costs through rates over the life of the plant. WTU is amortizing and recovering such costs over sev' n years. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS, for further discussion of the deferred accounting proceedings, CPL Mirror Cll'IP in accordance with Texas Commission orders, CPL previonsly recorded a Mirror CWIP asset, which is being amortized over the life of STP. For further information regarding Mirror CWIP, reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. SEEBOARD Acquisition The acquisition of SEEBOARD was accounted for as a purchase combination. A preliminary allocation of the purchase price has been performed and is reDected in the consolidated Gnancial statements. This includes an allocation of approximately $1.0 billion to goodwill at December 31,1995, which will increase to approximately $1.4 billion when CSW reaches its eventual 100% ownership interest in SEEBOARD. While the allocation of the purchase price may be revised at a later date, the goadwill is expected to be amortized on a straight-line basis over 40 years. SEEBOARD's results of operations are included in the consolidated CSW results in the following manner. Equity earnings representing the 27.6% CSW ownership interest in SEEBOARD during Novemoer 1995 were recorded in Other income and Deductions. During December 1995, pursuant to its effective control of SEEBOARD through its 76.45% ownership interest, CSW began full consolidation accounting for SEEBOARD in its consolidated Gnancial G@ 2-35 i
stat:ments. At that time, CSW recorded a current liability of approximately $1.0 billion representing the i obligation to purchase the controlled shares for which CSW had received acceptances but had not actually purchased. National Grid Assets Heldfor Sale Pursuant to a December 11,1995 distribution by SEEBOARD, CSW (UK), as a shareholder of l SEEBOARD, received 32,492,966 shares of National Grid common stock At December 31,1995, the i carrying value of the National Grid assets held for sale, when converted to U.S. dollars, was approximately l
$100 million. On February 2,1996, all of the shares of National Grid that CSW (UK) held were sold. On i February 29,1996, the proceeds from the sale of the National Grid sha.es were used to repay a portion of the CSW Investments Credit Facility.
1 Price Risk Managtnrent Activities l Transok periodically uses natural gas futures, options and basis swap contracts to manage the I impact of price fluctuations on its inventory of natural gas, fuel and shrinkage requirements for its processing plants and certain fixed price purchase and sales contracts. Such contracts are designated at inception as a hedge when there is a direct relationship to the price risk associated with Transok's operations. Gains and losses on hedge contracts are deferred until the effect of the corresponding hedged transaction is recognized. For those contracts that are not designated as hedges, changes in the fair value of those contracts are recognized as gains or losses in income currently and are recorded in the balance sheet at fair value at the reporting date. Transok determines the fair value ofits contracts based upon settlement prices for exchange traded contracts, market-related indexes or by obtaining quotes from brokers. Transok's trading gains and losses, either from its hedging or its speculative trading, did not have a material impact upon CSW's consolidated results of operations. Transok's open trade positions at December 31,1995, were not material to CSW's financial position. Accounting Changes Effective January 1,1993, the CSW System adopted SFAS No.104 SFAS No. I12 and SFAS No.109. In addition, the Electric Operating Companies also changed their methoJ nraccounting for unbilled revenues. See Electric Revenues and Fuel above for further information regaroing the change in method of accounting for unbilled revenue. See NOTE 4. INCOME TAXES for further information regarding the adoption of SFAS No.109 and see NOTE 5. BENEFIT PLANS for further information regarding the adoption of SFAS No.106. In 1993, the change in accounting for unbilled revenues and the adoption of both SFAS No.109 and SFAS No. I12 were presented as a cumulative effect of changes in accounting principles for CSW and the Electric Operating Companies as presented in the following table. CSIV CPL PSO SIVEPCO IITU (milhons. except EPS) (thousands) Unbilled Res enues Pre-tax effect $75 $45.363 $13.758 58.286 58.347 Tax effect (26) (15.877) (5.321) (2.900) (2.921) Net mcome effect 549 $29.486 58.437 55.386 55.426 EPS effect (CSW only ; 50 26 2-36
l CSil' CPL PS0 SilEPCO H Tl! (millions. I except EPS) (thousands) SFAS No.109 Pre tax effect $-- $.. $-- 5.- $.- Tax e!Tect 6 -- (268) -- -- l Net income effect 5 -- 5(268) 5-- 5-- _ 56 EPS cffect (CSW only) $0.03 SFAS No.112 Pre-tax effect $(13) 5(3.371) $(3.173) $(3.047) 5(2.534) Tax effect 4 1.180 1.227 1.066 887 Net income effect 5(9) 5(2.191) 5(l.946) 5(l.981) 5(l.647) EPS cffect (CSW only) 5(0 05) Total Cumulative Effect of Changes in Accounting Princi1 Pre-tas clTect $62 $41992 510.585 $5.239 $5.813 Tax effect (16) (14.o97) (4.362) (1.834) (2.034) Net income etTect 546 52 .295 56.223 53.405 53.779 EPS cffect (CSW only) $0.24 Staternents of Cash Flows Cash equivalents are considered to be highly liquid debt instruments purchased with a maturity of three months or less. Accordingly, temporary cash investments are considered cash equivalents. Reclassification Certain financial statement items for prior years have been reclassified to conform to the 1995 presentation.
- 2. LITIGATION AND REGULATORY PROCEEDINGS Terrnination of El Paso Merger in May 1993, CSW entered into a Merger Agreement pursuant to which El Paso would emerge from bankruptcy as a wholly owned subsidiary of CSW. El Paso is an electric utility company headquartered in El Paso, Texas, which filed a voluntary petition for reorganization under Chapter il of the Bankruptcy Code on January 8,1992.
On June 9,1995, CSW notified El Paso that CSW would not extend the termination date under the Merger Agreement as had been requested by El Paso and, accordingly, that it was terminating the Merger Agreement. CSW also informed El Paso on June 9,1995, that it was withdrawing the Modified Plan for the proposed Merger with El Paso by a contemporaneous filing with the United States Bankruptcy Court for the Western District of Texas, Austin Division, before which the El Paso bankruptcy reorganization proceeding was pending. On June 9,1995, following CSW's notification that it was terminating the Merger and withdrawing the Modified Plan, El Paso filed the El Paso Suit against CSW in state district court in El Paso, Texas, claiming breach of contract, breach of duty of good faith and fair dealing, breach of fiduciary duty, business disparagement, tortious interference with contract and fraud in the inducement. The El Paso Suit seeks a $25 million termination fee from CSW, certain costs related to the Modified Plan, additional Crin 2-37 i
unspecified damages, punitive damages, interest as permitted by law, reasonable attorneys' fees and court costs. On June 15,1995, CSW filed the CSW Suit against El Paso in the United States Bankruptcy Court for the Western District of Texas, Austin Division, seeking a $25 million termination fee from El Paso due to El Paso's breach of the Merger Agreement, at least $3.6 million in rate case expenses incurred by CSW on behalf of El Paso related to state regulatory merger proceedings an'd a declaratoryjudgment that CSW properly terminated the Merger Agreement. CSW also removed the El Paso Suit from state district court to the United States Bankruptcy Court for the Western District of Texas, El Paso Division. The El Paso Suit was then transferred to the United States Bankruptcy Court in Austin, Texas. On August 4,1995, El Paso filed motions with the Austin bankruptcy court to remand the El Paso Suit back to the state district court in El Paso and abstain from hearing the CSW Suit. The bankruptcy court denied El Paso's motions, and in connection therewith thejudge presiding over El Paso's bankruptcy proceeding recused himself from hearing the El Paso Suit and the CSW Suit. Both lawsuits have since been assigned to anotherjudge of the United States Bankruptcy Court for the Western District ofTexas, Austin Division. On October 19,1995, El Paso filed motions (i) to withdraw the reference of both lawsuits from the United States Bankruptcy Court for the Western District of Texas to the United States District Court for the Western District of Texas and (ii) to change venue in both lawsuits to the El Paso Division. El Paso's motion to withdraw the reference was denied on November 15,1995, by the United States District Court for the Western District of Texas, Austin Division, and El Paso's motion for reconsideration of this ruling was denied on December l 1,1995. On January 26,1996, El Paso filed a petition for writ of mandamus in the United States Court of Appeals for the Fifth Circuit seeking an order directing the withdrawal of the reference of both lawsuits from the Bankruptcy Court. On February 26, 1996, El Paso's motion to transfer venue was denied by the United States Bankruptcy Court for the Western District of Texas, Austin Division, and the court consolidated the El Paso Suit and the CSW Suit into one adversary proceeding. CSW is the named plaintiffin the consolidated adversary proceeding. On February 27,1996, the Fifth Circuit Court of Appeal's denied El Paso's petition for writ of mandamus. No trial date has been set for the lawsuits. Although CSW believes that it has substantial defenses to El Paso's claims and intends to defend El Paso's claims and pursue CSW's claims vigorously CSW cannot presently predict the outcome of the lawsuit. However, if the lawsuit is decided adversely to CSW, it could have a material adverse effect on CSW's consolidated results of operations and financial condition. CPL Rate Review On November 6,1995, CPL filed with the Texas Commission a request to increase its retail base rates by S71 million and reduce its annual retail fuel factors by $17 million. The net effect of these proposals would be an increase of 554 million, or 4.6%, in total annual retail revenues based on a test year ended June 30,1995. CPL is not seeking interim rate relief, but will implement bonded rates in May 1996, the earliest date permitted by law. CPL also is seeking to reconcile $229 million of fuel costs incurred during the period July 1,1994 through June 30,1995. CPL's previous request to reconcile fuel costs from l March 1,1990 to June 30,1994 in Docket No.13650 was consolidated with the current rate review. If the requested increase and other adjustments in rate structure are approved, CPL has committed not to increase ! its base rates prior to January 1,2001, subject to certain force majeure events. l CPL is requesting this rate review in large part as a result of the expiration of the amortization of l its Mirror CWIP liability. The Mirror CWIP liability was amortized to income in declining amounts over a five-year period from 1991 through 1995 pursuant to rate settlements reached by CPL in 1990 and 1991. In 1995, Mirror CWIP provided $41 million in non-cash earnings at CPL. Also included in the request are proposals by CPL to accelerate recovery of nuclear and regulatory assets as a way to proactively address certain assets that could possibly be unrecoverable or stranded in a more competitive electric utility industry. In a preliminary order issued December 21,1995, the Texas Commission expanded the scope of (
$U 2-38 l
l
the rate review to address certain competitis e issues facing the electric utility industry. The competitive issues to be addressed by CPL in a supplemental filing due April 1,1996, are: (i) the calculation of rates on an unbundled or functional basis (i.e., generation, transmission and distribution);(ii) the current value of CPL's generating assets as compared to estimates of the market value of such assets under alternate future industry structures; (iii) the application of performance based ratemaking; (iv) potential revisions in the methodology of reconciling and recovering fuel costs; and (v) the Texas Commission's authority to introduce competition in the electric utility industry under existing law. On February 13,1996, intervening panies filed testimony in the revenue requirements phase of CPL's base rate case. Among the parties that filed testimony were the OPUC which recommended a base rate decrease of approximately $75 million on a total company basis and the Cities which recommended a base rate reduction of approximately $52 million on a total company basis. On February 20,1996, the Staff filed testimony recommending an increase in total company base rates of approximately $30 million. Certain elements of the Staff's proposal are described below. The Staff recommended a return on common stock equity of 11.35% compared to the 12.25% return on common equity requested by CPL. The Staff recommended a disallowance of $16 million in costs billed for administrative services by CSW Services to CPL on the basis that the specific benefits to CPL were not clearly identified. Additionally, the Staff recommended a $7 million reduction in CPL's current annual depreciation accrual and a $3 million reduction in CPL's requested accrual for decoimnissioning STP. A comparison of the Staff's recommendation for a base rate increase, compared to CPL's claimed revenue deficiency is provided in the CPL RATE REVIEW COMPARISON table. CPL RATE ItEVIEW COMPARISON (unaudited) (millions) CPL res enue deficiency (1) $103 Return on common equity (21) CSW Services expenses (16) Depreciation expense (7) Decommissioning expense (3) Miscellaneous items (26) Staff recommended res enue increase (2) 530 (1) The total company rate increase requested by CPL was reduced from 5103 million to $78 million ($71 million allocated to the Texas retailjurisdiction)in accordance with rate settlements entered into by CPL in 1990 and 1991. (2) The Staff recommended that CPL be granted a $23 million base rate increase and an annual increase of $7 million in customer service charges. The Staff and Cities recently filed testimony on the fuel portion of the rate case recommending a reduction to CPL's eligible fuel costs of $16 million and $32 million, respectively. After completion of hearings in all phases of the rate case, which began in late February 1996 and are expected to conclude during the third quarter of 1996, the ALJs assigned to hear the case will issue a proposai for decision for consideration by the Texas Commission. Testimony filed by parties to the rate case, including the Staff, is not binding on either the ALJs or the Texas Commission. A final decision on the rate request is not anticipated from the Texas Commission prior to December 1996. O@ 2-39
l Management of CSW and CPL cannot predict the ultimate outcome of CPL's rate case, although l management belieses that the ultimate resolution will not have a material adverse effect on CPL's or CSW's consolidated results of operations or financial condition. However, if CPL ultimately is . unsuccessful in obtaining adequate rate relief, CPL and CSW could experience a material adverse effect on their results of operations and Gnancial condition. CPL 1995 Agreement On April 5,1995, CPL reached an agreement in principle with other parties to pending regulatory proceedings involving base rate, fuel and prudence issues relating to an outage experienced at STP during 1993 and 1994. On May 16,1995, CPL filed the CPL 1995 Agreement with the Texas Commission. Pursuant to the CPL 1995 Agreement, base rate refunds, fuel refunds and the reduction of l CPL's fuel factors were implemented during the summer of 1995. Under the CPL 1995 Agreement, CPL provided customers a one-time base rate refund of $50 million. In addition, CPL refunded approximately l
$30 million in over-recovered fuel costs through April 1995. Furthermore, CPL did not charge customers l for $62.25 million in replacement power costs and related interest primarily associated with the 1993-1994 STP outage. The CPL 1995 Agreement did not result in any ongoing change in base rate levels and provided that there would be no new rate review requests Gled prior to September 28,1995. CPL also reduced its fuel factors, effective in July 1995, by approximately $55 million on an annual basis due to projections oflower fuel costs. Ilearings on the CPL 1995 Agreement were held on July 19,1995, and the Gnal written Texas Commission order approving the CPL 1995 Agreement was received on October 4, 1995. Details of the items in the CPL 1995 Agreement and the total 1995 carnings impact for CPL, including certain accounting provisions, are set forth in the following table.
I Pre-tax After-tax (milhons) 13ase rate refund $(50.0) $(32.5) Fuel disallowance (62.3) (40.5) Wholesale fuel refund (3.2) (2.1) Current flowback of excess deferred federal income taxes 34.3 34.3 i Capitalization of previously expensed I restructuring and rate case costs 27.6 17.9 Recognition of factoring income 16.1 10.5 i Amortization. interest and other (6.6) (4.4) l CPL Deferred Accomiting CPL was granted deferred accounting treatment for certain STP Unit I and 2 costs by Texas Commission orders issued in October 1990 and December 1990, respectively. In 1994, the Supreme Court sustained deferred accounting as an appropriate mechanism for the Texas Commission to use in preserving the Gnancial integrity of CPL, but remanded CPL's case to the Court of Appeals to consider certain substantial evidence points of error not previously decided by the Court of Appeals given its prior determinations. On August 16,1995, the Court of Appeals rendered its opinion in the remand proceeding and affirmed the Texas Commission's order in all respects. l CPL believes that the language of the Supreme Court's opinion suggests that the appropriateness l of allowing deferred accounting may be reviewed under a Gnancial integrity standard in the first case in l which the deferred STP costs are recovered through rates. If the courts decide that subsequent review under the Gnancial integrity standard is required, that review would be conducted in a remand of the STP Unit I and 2 orders. Pending the ultimate resolution of CPL's deferred accounting issues, CPL is unable to predict how its deferred accounting orders will ultimately be resolved by the Texas Commission. I CFm 2-40 I
if CPL's deferred accounting matters are not favorably resolved. CSW and CPL could experience a material adverse effect on their respectis c results of operations and Gnancial condition. While CPL's management is unable to predict the ultimate outcome of these matters, management believes
- CPL will receive approval ofits deferred accounting orders or will be successful in renegotiation ofits rate orders, so that there will be no material adverse effect on CSW's or CPL's results of operation or financial condition.
CPL Westinghouse Litigation CPL and other owners of STP were plaintiffs in a lawsuit Gled in October 1990 in the District Court in Matagorda County, Texas against Westinghouse, seeking damages and other relief. The suit alleged that Westinghouse supplied STP with defective steam generator tubes that are susceptible to stress corrosion cracking. On December 8,1995, CPL and the other owners of STP settled the lawsuit. While the court order prohibits disclosure of the terms of the settlement, CPL believes the litigation was settled on terms that provided satisfactory consideration to CPL a d STP and will not have a material adverse effect on the results of operations or Gnancial condition of CSW or CPL. CPL CivilPenalties in October 1995, the NRC noti 0ed HLP of a Notice of Violation and proposed penalties totaling $160,000 related to es ents that occurred at STP in May 1992. The Notice of Violation and penalties reflect the NRC's belief that certain STP employees were terminated as a result of raising safety concerns with the NRC. The Notice of Violation was the result of a Department of Labor decision and order in April 1995 and is awaiting Onal action by the Secretary of Labor. IILP is not required to reply to the NRC's Notice of Violation or pay the penalties pending the Secretary of Labor's Gnal decision. The NRC indicated that the proposed civil penalties reDect minimum penalties allewed because of improvements made to the STP Employee Concerns Program since 1992. CPL's share of any penalty that is ultimately paid would be approximately 25%, reDecting its ow nership interest in STP. CPL Industrial Road and IndustrialMetals Site Three suits naming CPL and others as defendants relating to a third-party owned and operated site in Corpus Christi, Texas formerly used for commercial reclamation of used electrical transformers, lead acid batteries and other scrap metals, are currently pending in federal and state court in Corpus Christi, Texas. Plaintiffs' complaints seek dama'_es for alleged property damage and health impairment as a result of operations on the site and cleanup actisitles. Management cannot predict the outcome of these suits. However, management belies es that CPL has defenses to the plaintiffs' complaints and intends to defend the suits vigorously. Management also telieves that the ultimate resolution of these matters will not have a material adverse effect on CSW's or CPL's results of operations or financial condition. PSO Gas Transportation and FuelManagement Fees An order issued by the Oklahoma Commission in 1991 required that the level of gas transportation and fuel management fees, paid to Transok by PSO, permitted for recovery through the fuel adjustment clause be reviewed in PSO's 1993 rate proceeding. This portion of the 1993 rate review was subsequently bifurcated. In March 1995, an order was issued by the Oklahoma Commission approving an agreement which allows PSO to recover approximately $28.4 million of transportation and fuel management fees in base rates using 1991 determinants and approximately 51 million through the fuel adjustment clause. The agreement also requires the phase-in of competitive bidding of natural gas transportation requirements in excess of 165 MMcf/d. PSO Gas Purchase Contracts PSO has been named defendant in complaints Gled in federal and state couns of Oklahoma and Texas in 1984 through 1995 by gas suppliers alleging claims arising out of certain gas purchase contracts. The plaintiffs seek relief through the Oling dates as well as attorneys' fees. In January 1996, complaints VDE 2-41
i I l representing approximately $10 million in claims were swtiled. Remaining complaints currently total l approximuely $1 miilion in claimed actual damages. The settlements did not have a material effect on l CSW's and PSO's consolidated results of operations or financial condition. The remaining suits are in the , l preliminary stages. Management cannot predict the outcome of these proceedings. However, management l believes that PSO has defenses to the remaining complaints and intends to defend the suits vigorously. I Management also believes that the ultimate resolution of the remaining complaints will not have a material adverse effect on CSW's or PSO's consolidated results of operations or financial condition. PSO PCB Cases ! PSO has been named a defendant in complaints Gled in federal and state courts of Oklahoma in 1984,1985,1986,1993 and 1996. The complaints allege, among other things, that some of the plaintiffs and the property of other plaintiffs were contaminated with PCBs and other toxic by-products following certain incidents, including transformer malfunctions, in April 1982, December 1983 and May 1984. To date, all complaints, except for claims representing approximately $13 million in alleged damages and claims filed in February 1996 for additional unspecified actual and punitive damages, have been dismissed. l certain of which resulted from settlements among the parties. Management believes that PSO has defenses to the remaining complaints and intends to defend the suits vigorously. Moreover, management believes that the remaining claims are covered under insurance. Management also believes that the ultimate resolution of the remaining complaints will not have a material adverse effect on CSW's or PSO's consolidated results of operations or Gnancial condition. PSO Burlington Northcrn Transportation Contract in June 1992, PSO Gled suit in the United States District Court for the Northern District of Oklahoma against Burlington Northern seeking declaratory relief under a long-term contract for the transportation of coal. In July 1992, Burlington Northern asserted counterclaims for unspeci6ed damages against PSO alleging that PSO breached the contract. In December 1993, PSO amended its suit against Burlington Northern seeking damages and declaratory relief under federal and state antitrust laws. In December 1995, PSO and Burlington Northern reached a compromise settlement of all outstanding claims and counterclaims, and the action was dismissed with prejudice. The settlement did not have a material adverse effect on CSW's or PSO's consolidated results of operations or financial condition. PSO Burlington Northern Arbitration In May 1994,in an arbitration related to the Burlington Northern coal transportation contract l described above, an arbitration panel made an award in favor of PSO concerning basic transportation rates i under the coal transportation contract and concerning the contract mechanism for adjustment for future l transportation rates. This arbitration award was then the subject oflitigation in the United States District l Courts for the Northern Districts of Oklahoma and Texas and the United States Court of Appeals for the j Tenth Circuit. In December 1995, this litigation was settled as part of the compromise settlement of the related I?wsuit described above. Under the settlement, a $16.4 million judgment by the U.S. District Court for the Northern District of Oklahoma con 6rming the arbitration award became Onal and was then released and satisfied of record. ? PSO Ash Creek CoalMine Reclamation in August 1994, PSO received approval from the Wyoming Department of Environmental Quality to begin reclamation of a coal mine in Sheridan, Wyoming, owned by Ash Creek, a wholly owned subsidiary of PSO. Ash Creek recorded a $3 million liability in 1993 for the estimated reclamation costs and subsequently accrued an additional 5500,000 in 1995. Actual reclamation work commenced in September 1995, with completion expected in late 1996. Surveillance monitoring will continue for ten years after final reclamation. Management believes that ultimate resolution of this matter will not have a material adverse effect on CSW's or PSO's consolidated results of operations or financial condition. O@ ! 2 42 l
PSO MCPC in 1989, PSO entered into certain long-term contracts with MCPC, a cogeneration development company located in northeastern Oklahoma. These contracts include:(i) an Interconnection and Interchange Agreement providing terms and conditions under which MCPC could connect its electric generating facilities to PSO's transmission system and providing for future transmission by PSO of specified amounts of MCPC's power to an unafGliated utility;(ii) a Stock / Asset Purchase Agreement which allows PSO under certain conditions to acquire the stock or assets of MCPC: and (iii) an Energy Conversion Agreement which required PSO to deliver natural gas to MCPC for conversion to electrical energy to be delivered by MCPC to PSO. Under the Energy Conversion Agreement, PSO had the right to dispatch up to 60 MWii per hour of quick-start capability. In 1993, MCPC Gled an application with the Oklahoma Commission requesting relief through the modi 0 cation of the existing Energy Conversion Agreement. An emergency order was issued under MCPC's application which increased the payment made by PSO to MCPC ror energy purchases and decreased the amount of Orm energy MCPC was required to deliver to PSO. The emergency order was subject to a permanent ruling. In July 1993, PSO commenced a lawsuit in the District Court of Tulsa County, Oklahoma, seeking a declaratoryjudgment that PSO was entitled to terminate the Energy Conversion Agreement as of August 1,1993, because of a default committed by MCPC. On March 31,1995, PSO, MCPC and the Oklahoma Commission Staff signed ajoint settlement resolving all issues pursuant to the various proceedings before the Oklahoma Commission and the District Court of Tulsa County, Oklahoma. The settlement, among other things, eliminated a requirement that MCPC deliver an annual minimum of 394,200 MWH of Assured Delivery Energy and related provisions associated with underdelivery charges. Most other provisions of the agreement between PSO and MCPC were kept intact. The Oklahoma Commission issued an order in May 1995 approving the settlement. The settlement is on terms satisfactory to PSO and will not have a material adverse effect on CSW's or PSO's consolidated results of operations or financial condition. SWEPCO Fuel Factor Proceedings On October 6,1995, SWEPCO filed a petition, designated as Docket No.14819, with the Texas Commission to revise its 6xed fuel factors for the recovery of fuel and purchased power costs. SWEPCO was experiencing an over-recovery of fuel costs based on application ofits then current factors which became effective in July 1994. The original Cling with the Texas Commission proposed decreasing SWEPCO's Oxed fuel factors and refunding to customers $7.1 million of cumulative over-recoveries for the period January 1994 to June 1995. SWEPCO subsequently revised its petition to the Texas Commission, updating the cumulative fuel over-recovery to $10.4 million through September 1995. On December 20,1995, the Texas Commission issued an order approving SWEPCO's revised fixed fuel factors and authorizing the refund of $10.8 million, including interest, to customers primarily as billing credits on January 1996 monthly bills. SWEPCO Burlington Northern Transportation Contract On January 20,1995, a state district court in Bowie County, Texas, entered judgment in favor of SWEPCO against Burlington Northern in a lawsuit regarding rates charged under two rail transportation contracts for delivery of coal to SWEPCO's Welsh and Flint Creek power plants. The court awarded SWEPCO approximately $72 million covering damages for the period from April 27,1989 through September 26,1994, post-judgment interest and attorneys' fees and granted certain declaratory relief requested by SWEPCO. Burlington Northern appealed the state district coun'sjudgment to the Texarkana, Texas Court of Appeals. The appeal is now pending.
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OTs 2-43
T l l HTUStipulation and Agreement WTU has been the subject of several pending regulatory matters. including the following:(i) a retail rate proceeding and fuel reconciliation before the Texas Commission in Docket No.13369;(ii) Writ
)
{ l of Error to the Supreme Coun - review of WTU's 1987 Texas rate case in Docket No. 7510; and (iii) the l l Texas Commission's proceeding on remand in Docket No.13949 regarding deferred accounting treatment for Oklaunion Power Station Unit No.1 originally authorized in the Texas Commission's Docket No. 7289. l On September 22,1995, WTU, along with other major parties to the above described matters, Oled with the Texas Commission ajoint stipulation and agreement to resolve all of these matters. The l WTU Stipulation and Agreement is a unified package that included: (i) a retail base rate reduction of approximately $13.5 million annually starting with WTU's October 1995 revenue month billing cycle;(ii) : a $21 million retail refund which was not attributed to any speciOc cause but was inclusive of all claims ! related to the three above described litigation and regulatory matters and included the effect of the rate j reduction to October 1,1994;(iii) a reduction of fixed fuel factors by approximately 2%;(iv) various rate l and accounting treatments including a reasonable return on equity for retail operations of i 1.375%; and (v) l a retail base rate freeze until October 1,1998, subject to certain force majeure provisions. l On November 9,1995, the Texas Commission rendered a Unal order that implemented thejoint i stipulation and agreement, ending the rate proceeding and fuel reconciliation in Docket No.13369 and the remand, designated Docket No.13949, to the Texas Commission by the Supreme Court for the deferred
)
1 accounting treatment of Oklaunion Power Station Unit No. I originally authorized by the Texas j Commission in Docket No. 7289. The final order also set into motion the actions required to seek a i remand of the appeal of Docket No. 7510 to the Texas Commission to implement a final order consistent with the WTU Stipulation and Agreement. On December 8,1995, all parties to the appeals Oled a joint motion with the Supreme Court and, l on December 22,1995, the Supreme Court approved the joint motion to withdraw and dismissed the case. l The case will now go back to the Court of Appeals so that it can be remanded back to the Texas l Commission. The date of this remand and final action by the Texas Commission is not known. , 1 l The WTU Stipulation and Agreement is expected to impact WTU's results of operations for the next several years, reducing annual earnings by approximately $8 million beginning in 1996. Details of the items with signi0 cant earnings impact for 1995 and 1996, including certain accounting treatments, are set forth in the following table. 1995 1996 (unaudited) Pre-tax After-tax Pre-tax After-tax (milhons) Refund to retail customers 5(21.0) S(13.7) 5-- $-- Effect of retail rate reduction (2 4) (1.6) (7.6) (4.9) Current flowback of property related excess deferred federal income taxes 6.9 6.9 -- -- Five year flow back of non-property related excess deferred federal income taxes 0.1 01 0.5 0.5 Capitahzation and amortization of previously expensed restructuring costs 12.7 8.2 (1.9) (1.2) Accelerated amortization of deferred Oklaunion plant costs (accelerated from the remaining 31 years to 7 y cars) -- -- (2.9) (l.9) Other amortization (0.2) to.1) (0.8) (0.5) Other one-time items 1.0 0.7 -- -- l 09 2-44
_ _ ._ _ _ . ~ _ _ _ _ _ _ . . - _ _ . _ _ _ - . _ . _ _ _ _ . . _ _ __ __ _ _ _ The WTU Stipulation and Agreement also eliminated several significant risks that have been the I subject of regulatory proceedings relating to deferred accounting and rates and will enable WTU's rates to remain at competitive levels for the foreseeable future. CSWEnergy Cimmaron Litigation On January 12,1994, Cimmaron brought suit against CSW and its wholly owned subsidiary, CSW Energy, in the 125th District Coun ofliouston, Harris County, Texas. Cimmaron alleged that CSW and CSW Energy breached commitments to participate with Cimmaron in the failed BioTech Cogeneration project located in Colorado. CSW Energy Eled a counterclaim against Cimmaron and third-party claims against the principals of Cimmaron on December 22,1994. On January 10,1995, Cimmaron added claims of negligence and gross negligence against the members of CSW Energy's board of directors at the time of the f ailed project. Effective July 27,1995, the parties agreed upon a settlement whereby they would dismiss their respective claims. The terms of the settlement were on terms satisfactory to CSW and CSW Energy and had no material adverse impact on CSW's consolidated results of operations or Unancial condition. Other ; CSW is party to various other legal claims, actions and complaints arising in the normal course i of business. Management does not expect disposition of these matters to have a material adverse effect on CSW's consolidated results of operations or 6nancial condition.
- 3. COMMITMENTS AND CONTINGENT LIABILITIES Construction and Capital Expenditures
, it is estimated that CSW, including the Electric Operating Companies, SEEBOARD, Transok l
and other diversified operations, will spend approximately $636 million in capital expenditures during j 1996. Substantial commitments have been made in connection with these programs. During 1996, each of the Electric Operating Companies expects to spend, including AFUDC, approximately the following amounts in construction expenditures: CPL - $137 million PSO- $68 million SWEPCO - $98 million WTU- $42 million Fuel Commitments To supply a portion of the fuel requirements of the CSW System, the subsidiary companies have entered into various commitments for the procurement of fuel. SWEPCO Henry W. Pirhey Power Plant in connection with the South Hallsville lignite mining contract for its Henry W. Pirkey Power Plant, SWEPCO has agreed, under certain conditions, to assume the obligations of the mining contractor. As of December 31,1995, the maximum amount SWEPCO would have to assume was $71.9 million. The l maximum amount may vary as the mining contractor's need for funds nuctuates. The contractor's actual j obligation outstanding at December 31,1995 was $58.7 million. I SWEPCO South Hallsville Lignite Mine As part of the process to receive a renewal of a Texas Railroad Commission permit for lignite mining at the South Hallsville lignite mine, SWEPCO has agreed to provide bond guarantees on mine reclamation in the amount of $70 million. Since SWEPCO uses self-bonding, the guarantee provides for G@ l 2-45
- - 4 - s.i. ,c
I i SWiiPCO to commit to use its resources to complete the reclamation in the event the work is not completed by the third party miner. The current cost to reclaim the mine is estimated to be approximately $25 million. l llTU Pipeline Leases WTU has entered into various commitments for the procurement of fuel. WTU has a sale / leaseback agreement with Transok, an afliliated company, for full capacity use of a natural gas pipeline l to WTU's Ft. Phantom generating plant. The lease agreement also provides for full capacity use of Transok's natural gas pipelines serving WTU's San Angelo, Oak Creek and Rio Pecos generating plants. The initial terms of the agreement entered into in 1992 are for twelve years nith renewable options thereafter. Other Commilnintis.and Conting'encies CPL Nuclear Insurance in connection with the licensing and operation of STP, the owners have purchased the maximum limits of nuclear liability insurance, as required by law, and have executed indemnification agreements with the NRC in accordance with the financial protection requirements of the Price-Anderson Act. The Price-Anderson Act, a comprehensive statutory arrangement providing limitations on nuclear liability and governmental indemnities, is in effect until August 1,2002. The limit ofliability under the Price-Anderson Act for licensees of nuclear power plants is $8.92 billion per incident, effective as of January 1995. The owners of STP are insured for their share of this liability through a combination of private insurance amounting to $200 million and a mandatory industry-wide program for self-insurance totaling $8.72 billion. The maximum amount that each licensee may be assessed under the industry-wide program of self-insurance following a nuclear incident at an insured facility is $75.5 million per reactor, which may be adjusted for inflation, plus a five percent charge for legal expenses, but not more than $10 million per reactor for each nuclear incident in any one year. CPL and each of the other STP owners are subject to such assessments, which CPL and other owners have agreed will be allocated on the basis of their respective ownership interests in STP. For purposes of these assessments, STP has two licensed reactors. I The owners of STP currently maintain on-site decontamination liability and property damage l insurance in the amount of $2.75 billion provided by ANI and NEIL. Policies ofinsurance issued by ANI l and NEIL stipulate that policy proceeds must be used first to pay decontamination and cleanup costs before I being used to cover direct losses to property. Under project agreements, CPL and the other owners of STP l will share the total cost of decontamination liability and property insurance for STP, including premiums l and assessments, on a pro rata basis, according to each owner's respective ownership interest in STP. CPL purchases, for its own account, a NEIL I Business Interruption and/or Extra Expense policy. This insurance will reimburse CPL for extra e spenses incurred for replacement generation or purchased power as the result of a covered acciden' that , huts down production at one or both of the STP Units for more than 21 consecutive weeks. In the txer,t of an outage of STP Units 1 and 2 and the outage is the result of the same accident, insurance will reimburse CPL up to 80% of the single unit recovery. The maximum amount recoverable for a single unit outage is $86.02 million for Unit 1 and $85.96 million for Unit 2. CPL is subject to an additional assessment up to $1.6 million for the current policy year in the event that insured losses at a nuclear facility covered under the NEll I policy exceeds the accumulated funds as ailable under the policy. On August 28.1994, CPL filed a claim under the NEIL I policy relating to the 1993 - 1994
- outage at STP Units I and 2. NEIL has denied the claim. CPL management is currently evaluating its j options regarding this claim, but cannot predict the ultimate outcome of this matter.
G% 2-46
Sil'EPCU Rental and Leaw Commitments SWEPCO has entered into various financing arrangements primarily with respect to coal ! transportation and related equipment, w hich are treated as operating leases for rate-making purposes. At
- December 31,1995, leased assets of $46 million, net of accumulated amortization of $33.7 million, were included in Electric fixed assets on the balance sheet and at December 31,1994, leased assets were $46 million, net of accumulated amortization of $30.1 million. Total charges to SWEPCO's operating expenses for expenses associated with these financing arrangements were $6.3 million, $6.8 million and $7.1 million for the years 1995,1994 and 1993, respectively.
Sil'EPCO Biloxi, Mixxinippi MGPSite ,
\
in 1994, SWEPCO was notified by Mississippi Power that it may be a PRP at a MGP site in Biloxi, Mississippi, formerly owned and operated by a predecessor of SWEPCO. SWEPCO worked with f i Mississippi Power to investigate the extent of contamination at this site. The MDEQ approved a site investigation work plan and, in January 1995, SWEPCO and Mississippi Power initiated sampling pursuant to that work plan. Contamination at the site was identified as a result of the investigation of property and adjacent properties. Soil and grounds water test results were sent to the MDEQ for review and comment. The test results confirmed the contamination on the property and indicated the possibility ofcontamination of an adjacent property. A risk assessment has been performed to assist SWEPCO and Mississippi Power in determining remediation ahernatives. A final range of cleanup costs has not been determined, but based on preliminary estimates, SWEPCO has accrued approximately $2 million for its portion of the cleanup of this site. CSil' Energy Investments and Commitments CSW Energy provided construction services to the Mulberry cogeneration facility through a wholly owned subsidiary, CSW Development-1, Inc. The project achieved commercial operation in August 1994 and added 120 MW of on-line capacity of which CSW Energy owns 50%. CSW Energy's maximum potential liability under the fixed price contract is $29 million which will decrease to zero in August 1996. i As of December 31,1995, CSW had provided additional guarantees to the project totaling approximately l $3.3 million. CSW Energy has entered into a purchase agreement on the Ft. Lupton project to provide $80.6 million of equity upon the occurrence of certain events. As of December 31,1995, $44 million has been paid and CSW has provided a guarantee for $40 million. Additionally, CSW Energy has provided four letters of credit to the project totaling $18.9 million. In March 1995, CSW Energy closed permanent project financing on the Ft. Lupton facility in the amount of $208 million which allowed the project to repay its $102 million construction borrowing to CSW. The following table summarizes the investments and commitments in CSW Energy's projects at December 31,1995. I etters of Creda 1;quny and Guarantees Loans (nulhons) l Brush 515.3 5.- 5.. Orange Cogeneranon 53.2 2.3 .. ft. Lupton 44.0 58 9 36 5 Mulberry 23 6 I 32.3 .. Philhps Sweeny 30 42 Neugulf g1 .. .. Various des elopmental projects 10 5 7.1 9.5 SEEBOARD Medway Conunitment In April 1992, SEEBOARD entered into an agreement to provide 37.5% of the equity to Medway Power Ltd., a company formed to construct, own and operate a 660 MW gas-fired power plant on the Isle VDE 2-47
of Grain, Kent, in the United Kingdom. Through December 31,1995, SEEBOARD has invested Il 1.6 million or approximately $18.0 million in the project and remains committed for an additional maximum l amount ofIl1.3 million or approximately $17.5 million (fl.00=$1.55). In addition, SEEBOARD has , entered into a commitment to purchase 50% of the Medway power plant's output for 15 years commencing in 1996. 4, INCOME TAXES CSW Gles a consolidated federal income tax return and participates in a tax sharing agreement with its subsidiaries. Income tax includes federal income taxes, applicable state income taxes and SEEBOARD's United Kingdom Corporation income taxes. The CSW System adopted the provisions of SFAS No.109 effective January 1,1993. The net effect on CSW's carnings for the year ended December 31,1993, was a one-time adjustment to increase net income by $6 million or $0.03 per share. This adjustment was recorded as a cumulative effect of change in accounting principle. The beneGt was attributable to the reduction in deferred taxes associated with CSW's non-utility operations previously recorded at rates higher than current rates. For the Electric Operating Companies, there were no material effects of SFAS No.109 on - CSW's earnings. As a result of this change, CSW recognized additional accumulated deferred income taxes from its utility operations and corresponding regulatory assets and liabilities to ratepayers in amounts equal to future revenues or the reduction in future revenues required when the book versus tax differences reverse and are recovered or settled in rates. As a result of a favorable earnings history, the CSW System did not record any valuation allowance against deferred tax assets at December 31,1995,1994 and 1993. Total income taxes (income taxes included ic Operating Expenses and Taxes as well as Other i income and Deductions) differ from the amounts compt ted by applying the federal statutory income tax rates to income before taxes for a number of reasons. The ax implications of the CPL 1995 Agreement , and the WTU Stipulation and Agreement, whereby the Cowback of unprotected excess deferred income j
. taxes was accelerated, contributed to the difference as did adj istments that were made to eliminate tax obligations that no longer exist. These differences are presennd in the INCOME TAXRA TE l RECONCILIATIONtable below.
l Information concerning income taxes, including total income tax expense, a reconciliation i between the federal statutory tax rate and the effective tax rate and signiGeant components of deferred income taxes follow. INC0h!E TAX EXPENSE CSW CPL PSO SWEPCO HTU (milhons) (thousands) 1995 Included on Operanng Expenses and Taxes Current $107 $51.626 $37,687 $41.852 $4,892 Deferred 12 (30,025) 2.704 6.287 1.971 Deferred ITC (l) (14) (5.789) (2.789) (4.786) (1.321) ; 105 15.812 37.602 43.353 5,542 Included in Other income and Deductions l 129 1,564 t Current 2 (197) (721) i ! (4) -- Deferred -- -- -- (2) 129 (197) (721) 1.564 ) ! $103 S l 5.941 $37.405 542.632 $7,106 Crm 2-48
1
)
CSIV CPL PSO Sil'EPCO IITl! (milhons) (thousands) 1994 l Included in Operating Espenses and Tates l Current 594 $54,486 $32.083 524.333 $10.898 Deferred 109 26.659 7,844 22.248 8.377 Deferred ITC (l) (14) (5.789) (2.789) (4.278) (1,321) 189 75,356 37.138 42,303 17.954 Included in Other Income and Deductions Current (13) (3.157) (4,129) (3.710) (2,998) Deferred (5) -- (65) -- -- (18) (3,157) (4.194) (3,710) (2.998) 5171 572,199 532.944 538.593 S14.956 1993 Included in Operatmg Expenses and Taxes Current $35 $(19.690) $ 15,339 $37.235 $11.379 Deferred til 90,682 9,419 (2.481) 3.593 Deferred l'I C (l) (15) (5.806) (2.791) (5.193) (1.321) 131 65.186 21.967 29.56I I 3.65 I included in Other income and Deductions Current (3) 736 (1,785) (1.847) (510) Deferred (3) (162: 71 -- -- (6) 574 (l.714) (l.847) (510) Tax Effects ofCumulative Effect ofChanges in Accounting I'rincip/cs 14 14.697 4.362 1.834 2.034 5139 580.457 $24.615 $29.548 515,175 (1) ITC deferred in prior years are included in income os er the lives of the related properties. INC0hfE TAX RA TE i RECONCILIA TION CSIV CPL PSO SIVEPCO HTU (5 in milhons) (5 in thousands) 1995 Tax at statutory rates $182 35?6 $77.836 35 % $41,732 35 % $55.886 35 % $ 14.573 35 % Differences ! Amortization of lTC (14) (3) (5.789) (3) (2,789) (2) (4,786) (3) (1.321) (3) Mirror CWIP (11) (2) (10.843) (5) -- -- -- l CPL 1995 Agreement (34) (7) (34.289) (15) -- -- -- l WTU Stipulation and ; Agreement (7) (l) -- -- -- (6,859) (16) I Prior period adjustments (22) (4) (13.462) (6) (2.949) (2) (2.783) (2) 953 2 Other 9 2 2.488 1 1.411 -- (5.685) (3) (240) (1) 5103 2 05. 515.941 7% 537.405 31 % $42.632 27S b 57.106 179 1 1994 Tax at statutory rates $204 35 % 597.174 35% $ 35.442 35"b 550.483 35 % $18.313 35?b l Diflerences l l Amortization oflTC (14) (2) (5.789) (2) (2,789) (3) (4.277) (3) (1.321) (3) Mirror CWIP (20) (4) (20.293) (7) -- -- -- Prior period adjustments (2) -- (1.955) (1) (1.272) (1) (2,588) (2) -- Other 3 -- 3.062 1 1.563 2 (5.025) (3) (2.036) (3) I 5171 29 % 572.199 26 % $32.944 33 % $ 38,593 27?'o 514.956 29"6 2-49
r CSIV Cl*L /*SO SWEI'C0 liTU ($ m milhons) ($ in thousands) 1993 Tax at statutory rates $163 35 % $88.509 35% $24,967 35 % $38,998 35 % $15,915 35 % Differences Amortimtion of !TC (15) (3) (5,806) (2) (2,790) (4) (5.193) (5) (1,321) (3) Mirror CWIP (23) (5) (22.989) (9) -- -- -- l Prior period adjustments 19 4 19.101 7 (355) (1) (576) (1) -- l Cumulative elTect of change in method of accounting l for income taxes (8) (2) -- -- -- -- i Other 3 1 1.642 1 2.793 5 (3.681) (2) 581 1 l $139 30% $80,457 32 % $24.615 35 % $29.548 27% $ 15,175 33 % DEFL'RRED INCOME TAXES CSW CI'L PSD SWEPCO IITU (milhons) (thousands) 1995 Deferred Income Tax Liabilities Depreciable utility plant $ 1.679 $769.888 $277.317 $388,394 $ 130,490 Deferred plant costs 180 170,816 -- -- 9,132 Mirror CWIP asset 109 109,132 -- -- -- Income tax related regulatory assets 220 163,014 14.481 32,462 10,557 Other 474 69.671 24,923 23,441 25.606 2.662 1.282.521 316.721 444,297 175,785 Deferred income Tax Assets income tax rela:ed regulatory liability (133) (41,567) (30.657) (44,914) (15,619) , Unamortized ITC (98) (53.460) (17.878) (15,868) (10.696) Alternative minimum tax carryforward (96) (21,456) - -- -- Other (71) (36.386) (14.222) (10.906) (9.668) I (398) (152,869) (62,757) (71,688) (35,983) Net Accumulated Deferred income Taxes $2.264 $ 1.129.652 $253.964 $372,609 $ 139.802 1 Net Accumulated Deferred income Taxes i' Noncurrent $2,306 $1,151,823 $264,353 $377,245 $145,130 Current (42) (22.171) (10.389) (4,636) (5,328)
$2.264 $ l .129.652 $253.964 $372.609 $ 139.802 l
f O@ 2-50 i
CSW CPL PSO Sii'EPCO DC TU (milhons) (thousands) 1994 Deferred Income Tax Liabilities Depreciable utility plant $ 1,683 $755,437 $292.127 $389,016 $144,501 , Deferred plant costs 181 171,145 -- -- 9,420 Mirror CWil' asset i13 l 12,639 -- -- -- Income tax related regulatory assets 229 169,104 15,061 33,847 10,908 Other 262 49.800 25.309 41,150 10.120 2.468 1,258.125 332.497 464,013 174,949 Deferred Income' lax Assets income tax related regulatory liability (155) (68.149) (22.260) (50,162) (14,134) Unamortized lTC (115) (55,486) (18.957) (29.482) (11.159) Alternative minimum tax carry forward (96) (26.138) -- -- -- Other (56) (7.223) (16.811) (25.520) (6.578) (422) (156,996) (58.028) (105,164) (31.87 ; ) Net Accumulated Deferred income Taxes $2.046 $ 1.101,129 $274.469 5358.849 $ 143.078 Net Accumulated Deferred Income Taxes Noncurrent $2,048 $ 1,087,317 $281,139 $365,441 $146,146 Current (2) 13.812 (6,670) (6.592) (3.068)
$2.046 $ 1,101.129 $274 469 $358.849 5143.078
- 5. BENEFIT PLANS Defined Benefil Pension Plan The CSW System maintains a tax quali0ed, non-contributory de6ned benc6t pension plan covering substantially all employees. Benefits are based on employees' years of credited service, age at retirement, and Gnal average annual earnings with an offset for the participant's primary Social Security benefit. The CSW System's funding policy is based on actuarially determined contributions, taking into account amounts which are deductible for income tax purposes and minimum contributions required by ERISA. Pension plan assets consist primarily of common stocks and short-term and intermediate-term 6xed income investments. Information about the pension plan, including:(1) pension plan net periodic costs and contributions;(2) pension plan participation;(3) a reconciliation of the funded status of the pension plan to the amounts recognized on the balance sheets; and (4) assumptions used in accounting for the pension plan follow, NET PERIODIC PENSION Pb1N COSTS AND CONTRIBUTIONS CSW CPL PSO SWEPCO HTU (milhons) (thousands) 1995 Net Periodic Pension Costs Service cost $20 $4.699 $3,614 $4.220 $2.609 Interest cost on projected benefit obligation 64 14.86n i1.428 13.345 8,251 Actual return on plan assets (l17) (27,137) (20.869) (24.370) (1 5,0(38)
Net amortization and deferral 44 10.136 7.795 9.102 5.628
$I1 $2.558 $ 1,968 $2.297 $ 1.420 l'ension Plan Contributions $29 $6.754 $ 5,195 $6.066 $3,751 OTw 2-51
Ch il' CPL PSO SiiEPCO l> Til l (milhons) (thousands) 1994 Net Periodic Pension Costs ) l Service cost $22 $5,796 $5.181 $4.843 $3.08' l I l Interest co t on projected l benefit obligation 62 15,989 14.292 13,361 H.501 l Actual return on plan assets (4) (1,131) (1,01 !) (945) (601) l Net amortization and deferral (70) (17.972) (16.064) (15.018) (9.556) 510 52.682 52.398 52.241 51,426 Pension Plan Contributions $28 $7.099 56,345 $5,932 51,744 j 1993 Net Periodic Pension Costs l Service cost $20 $5,228 $4,642 $4,239 $2.732 Interest cost on projected benefit obligation 56 14.878 13.209 12.063 7,776 Actual return on plan assets (68) (18.079) (16.051) (14.658) (9,448) Net amortization and <leferral -- 68 60 55 35 58 52.095 51.860 51.699 11.095 ) l l Pension Plan Contributions $32 $11,005 $6,694 $6,113 $3,940 l l l l l APPRONin!A TE NUAfBER OF PARTICIPANTS IN PLAN DURING 1995 CSil' CPL PSD SilEPCO FITU Actis c employ ees 7,700 1,900 1,400 1,700 1.100 Retirees 4,200 1,400 1,200 900 600 Terminated employees 1.300 400 400 200 200 RECONCILIA TION OF FUNDED STA TUS OF PLAN TO A310UNTS \ RECOGNIZED ON Tile CSil' CONSOLIDA TED BALANCE SilEETS December 3I. 1995 1994 (millions) Plan assels, at fair value $897 $794 Actuarial present value of Accumulated benefit obhgation for service rendered to date 745 685 Additional benefit for future salary levels 140 112 Projected benelit obligation 885 797 Plan assets in excess /(below) the projected benefit obhgation 12 (3) Unrecognized net gain 64 60 Unrecognized prior service cost (8) (8) Unrecognized net obhgation 14 15 Prepaid pension cost 582 564 The vested portion of the accumulated benefit obligations at December 31,1995 and 1994 was $678 l million and $626 million, respectively. The unrecognized net obligation is being amortized over the average remaining service life of employees or 16 years. Prepaid pension cost is included in Deferred Charges and Other Assets on the consolidated balance sheet. No reconciliation of the funding status of the O@ 2-52
______.__.__.__._.__c.______.._ plan for CPL, PSO. SWEPCO or WTU is presented because the plan is administered for the CSW System as a whole and such information is unavailable for the Electric Operating Companies individually. 1 in addition to the amounts shown in the above table, the CSW System has a non-quali0ed excess benefit plan. This plan is available to all pension plan participants who are entitled to receive a pension benefit from CSW which is in excess of the limitations imposed on benefits by the Internal Revenue Code ; through the qualified plan. CSW's net periodic cost for this non-qualified plan for the years ended December 31.1995,1994 and 1993 was $2.4 million, $1.8 million and $0.5 million, respectively, t ASSUhlPTIONS USED IN Long Term Compensation Iteturn on Plan l ACCOUNTING FOR Tile PENSION PLAN I)iscount Itate Increase Assets ) t 1995 8.00 % 5.46% 9.50 % i 1994 K.25% 5.46 % 9.50% - ; 1993 7.75 % 5.46 % 9.50 % Postretirement Benefits Other Than Pensions The CSW System, including each of the Electric Operating Companies, adopted SFAS No.106 effective January 1,1993. The effect on the CSW System's operating expense in 1993 was an increase of
$16 million, with the individual Electric Operating Companies' effects being approximately $5.9 million,
$3.0 million and $1.9 million for CPL, SWEPCO and WTU, respectively. The transition obligation is being amortized over twenty years, with seventeen years remaining. Prior to 1993, these benefits were ,
accounted for on a pay-as-you-go basis. Pursuant to an order by the Oklahoma Commission, PSO , established a regulatory asset of approximately $5 million in 1993 for the difference between the pay-as-you-go basis and the costs determined under SFAS No.106. PSO is recovering the amortization of this regulatory asset over a ten year period. Information about the non-pension postretirement benefit plan, including: (1) net periodic postretirement benefit costs; (2) a reconciliation of the funded status of the postretirement benefit plan to the amounts recognized on the balance sheets; and (3) assumptions used in accounting for the postretirement benefit plan follow, l NETPERIODIC POSTRETIREhlENT BENEFIT COSTS CSW CPL PSO SM'EPCO HTU
- tmillions) (thousands) !
1995 , Service cost $8 $2,123 $1.986 $1,803 $1.113 : Interest cost on APIlO 18 5,929 5.175 4,299 2,561 Actual return on plan assets (8) (1.948) (2,597) (2,466) (870) i Amortization of transition obligation 9 2,900 2,528 1,967 1.225 Net amortization and deferral 2 238 631 679 96 } 529 59.242 57.723 56,282 54.125 i 1994 Service cost 59 $2.435 $2,350 $1,965 $ 1.233 , Interest cost on AP130 19 6,061 5,317 4.266 2.559 Actuai return on plan assets (I) (285) (495) (464) (113) Amortization of transition obligation 9 2,900 2,528 1,967 1.225 , Net amonization and deferral (4) (913) (917) (765) (4181
$32 51u.198 58.783 56,969 $4.486 l
l l O@ 2-53 l_ . _ . -- _ _ _ _ _ . _ _ _ . _ _ _ - _ _ _. . _ - _ _ , _ , _ _ , _ _ _
NET PERIODIC POSTRETIRDIENT llENEFIT COSTS CSW s CPL PSO SWEPCO IS TU (nuthons) (thousands) 1993 Sers ice cost 58 $2.257 52,175 51,813 $1,157 Interest cost on APBO 17 5,505 4.811 3.782 2316 Actual return on plan assets (1) (249) (264) (230) (104) Amortization of transition obligation 9 2,900 2.528 1,967 1,225 Net amortization and deferral (2) (703) (564) (474) (296) 531 59.710 58,686 56.858 54,298 RECONCILIA TION OF FUNDED STA TUS OF PLAN TO A310UNTS RECOGNIZL'D ON lilE BALANCE SilEETS CSW CPL PSO SWEPCO IITU (milhons) (thousandM 1995 APBO Retirees $175 558,337 $49,130 $38,762 $23,880 Other fully eligible participants 13 3,026 2,974 3.622 1.837 Other actise participents 57 14.676 12.697 13.205 7.829 Total 245 76,039 64.801 $ 5,589 33.546 Plan assets at fair value (100) (27,997) (27,904) (24.424) (12,708) APBO in excess of plan assets 145 48,042 36,897 31,165 20,838 Unrecognized transition obligation (153) (49.308) (42.984) (33,436) (20.822) Unrecognized gain or (loss) 8 2.325 5.511 2.310 378 (Accrued)/ Prepaid Cost 5-- $ 1.059 5(576) 539 5394 1994 APBO Retirees $149 $49,852 $42,233 $32.938 $19,703 Other fully eligible participants 31 9,278 8,077 7,945 4,764 Other active participants 55 15.017 14.372 12.726 7,519 Total 235 74,147 64.682 53,609 31,986 l Plan assets at fair salue (76) (21,457) (21.649) (18,775) (9.636) APBO in excess of plan assets 159 52,690 43,033 34,834 22.350 Unrecognized transition obhgation (162) (52,208) (45.512) (35,403) (22.047) Unrecognized gain or (loss) 4 577 1,903 608 91 (Accrued)/ Prepaid Cost 51 51,059 5(576) 539 5394 ASSUSfPTIONS USED TilROUGHOUT Tile CSW S)'STE31IN THE ACCOUNTING Return on Tax Rate for FOR SFAS NO.106 Discount Rate Itm Assets Taxable Trusts 1995 8 00 % 9.50 % 39.6 % i994 8.25 % 9.50 % 39 6 % 1993 7.75 % 9 00 % 39.6 % licalth care cost trend rates Pre-65
Participants:
1995 Rate of 10.50% grading down .75% per year to an ultimate rate of 6.0% in 2001. 1994 Rate of I l.75% grading down .75% per y car to an ultimate rate of 6.5% in 2001. Post-65
Participants:
1995 Rate of 10 00% grading down .75% per ycar to an ultimate rate of 5 5% in 2001, 1994 Rate of I1.25% grading down .75% per year to an ultimate rate of 6 0% in 2001. C*nm 2-54
i l Increasing the assumed health care cost trend rates by one percentage point in each year would increase the APBO and the aggregate of the service and interest costs components on net postretirement benefits by the amounts presented in the following table. CSW CPL PSO SWEPCO HTU - (milhons) AI'llO $260 $8.0 $7.0 $6.0 $3.6 Service and interest costs 4.0 1.0 1.0 0.9 0.5 t Health and Welfare Plans The CSW System has medical, dental, group life insurance, dependent life insurance, and accidental death and dismemberment plans for substantially all active CSW System employees. The contributions for the CSW System, recorded on a pay-as-you-go basis, for the years ended December 31, l 1995,1994 and 1993 are listed in the following table. CSW CPL PSO SWEPCO HTU j (milhons) 1995 $27.0 $2.4 $4.6 $4.7 $1.1 1994 17.0 4.6 3.6 4.1 2.7 1993 23.0 6.1 5.0 5.4 3.5 , Effective January 1993, the CSW System's method of providing health benefits was modined to include such benents as a health maintenance organization, preferred provider options, managed prescription drug and mail-order program and a mental health and substance abuse program in addition to . I the self-insured indemnity plans. SEEBOARD's Employee Benefits The majority of SEEBOARD's employeesjoined, and received pension benents from a pension plan that is administered for the United Kingdom's electricity industry. The assets of this plan are held in a separate trustee administered fund that is actuarially valued every three years. SEEBOARD and its participating employees both contribute to the plan for the employee's benent. Subsequent to July 1,1995, new employees were no longer able to participate in that plan. Instead, two new pension plans were made available to new employees, both of which are also separate trustee-administered plans. At December 31, 1995, SEEBOARD's pension plan projected benent obligation, re6ecting CSW's 76.45% ownership interest in SEEBOARD, is approximately $676 million while the fair value of the pension plan's assets is approximately $719 million. The excess of the fair value represents a $43 million prepaid pension cost and is included in Deferred Charges and Other Assets on the consolidated balance sheets at December 31,1995. j Employer provided health care benents are not common in the United Kingdom due to the country's
. national health care system. Accordingly, SEEBOARD does not provide health care benents to the majority ofits employees.
- 6. JOINTLY OWNED ELECTRIC UTILITY PLANT The Electric Operating Companies are parties to variousjoint ownership agreements with other ,
non-af6tiated entities. Such agreements provide for thejoint ownership and operation of generating stations and related facilities, whereby each participant bears its share of the project costs. At December Cfin 2-55
31,1995, the Electric Operating Companies had undivided interests in Ove such generating stations and related facilities as shown in the following table, CPL SHEPCO SWEPCO SHEPCO CSH'*
- S7P Flint Creek - - brkey Dolet flills Oklaumon Nuclear Plant Coal Plant Lignite Plant Lignite Plant Coal Plant
($ in millions) Plant in service $2,325 $79 $432 $226 $396 Accumulated depreciation $443 $42 $148 $69 $103 Plant capacity-MW 2.501 480 650 650 676 Participation 25.2 % 50.0 % 85.9 % 40.2 % 78.1% Share of capacity-MW 630 240 559 262 528 CPL, PSO and WTU havejoint ownersh;p agreements with each other and other non-afGliated entities. Such agreements proside for thejoint ownership and operation of Oklaunion Power Station. Each participant provided Gnancing for its share of the project, which was placed in service in December 1986. CPL's 7.8%, PSO's 15.6% and WTU's 54.7% ownen. hip , participation represents CSW's 78.1% participation in the plant. The statements ofincome reDect CPL's, PSO's and WTU's respective portions of the operating costs of Oklaunion l'ower Station. The totalinvestments, including AFUDC,in Oklaunion Power Station for CPL, PSO and WTU were $36 million, $80 million and $280 million, respectively, at December 31,1995. Accumulated depreciation is $9 million, $27 million and $67 million for CPL, PSO and WTU, respectively.
- 7. FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the following fair values of each class of Snancial instruments for which it is practicable to estimate fair value. The fair value does not affect CSW's or any of the Electric Operating Companies' liabilities unless the issues are redeemed prior to their maturity dates.
Cash, temporary cash investments, special deposits, accounts receivable and short-term debt The fair value equah the carrying amount as stated on the balance sheets because of the short maturity'of those instruments. National Grid assets heldfor sale The fair value and the carrying value of the 32,492,966 shares of common stock of the National Grid held for sale are both approximately $100 million. The fair value is based on the closing market price for National Grid common stock on the London Stock Exchange on December 31,1995 (f1.995 per share) and an exchange rate of f1.00=$1.55 (the prevailing exchange rate on December 31,1995). Long-term debt The fair value of CSW's long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to CSW for debt of the same remaining maturities. Preferred stock subject to mandatory redemption The fair value of the Electric Operating Companies' preferred stock subject to mandatory redemption is estimated based on quoted market prices for the same or similar issues or on the current rates offered to CSW for preferred stock with the same or similar remaining redemption provision. Long-term debt andpreferred stock due within 12 months The fair value of current maturities oflong-term debt and preferred stock due within 12 months are estimated based on quoted market prices for the same or similar issues or on the current rates offered for long term debt or preferred stock with the same or similar remaining redemption provisions. VM 2-56 l 1
CARR YING I ALUE AND ESTIMA TED f* AIR l'ALUE CSH' CI'L l'SO S H'El'C0 H 7'U (imlhons) (thousands) Long-term debt 1995 carrying amount $3.914 $ 1,517.347 $379.250 $598.951 $273,245 fair value 4,090 1,583,959 396,386 627,034 286,648 1994 carrying amount 2,940 1,466.393 402.752 595,833 210,047 fair value 2,795 1,395.590 364.585 555,659 199,986 PrcjerrcJ stock . subject to mandatory redemptwn 1995 carrying amount 34 -- -- 33,628 -- fair value 35 -- -- 34,648 -- 1994 carrying amount 35 -- -- 34,828 -- fair value 32 -- -- 31,968 -- Long-term debt and preferred stock due within 12 months 1995 carrying amount 30 231 25.000 5.099 -- fair value 30 231 25,000 5,136 -- 1994 carrying amount 7 723 -- 5.270 650 tair value 7 725 -- 5.171 666
- 8. LONG-TERM DEllT CSW's long-term debt outstanding as of the end of the last two years is presented in the following table.
Maturities Interest Rates December 31, From To From To 1995 1994 (millions) First mortgage bonds 1996 1999 5.25 % 7.50 % $418 $443 2000 2004 5.25 % 7.75 % 876 836 2005 2009 6 20 % 7.75 % 527 247 2010 2014 7.50 % 7.50 % 112 l12 2015 2019 9.I5% 9.75 % -- 226 2020 2024 7.25% 7.50 % 295 295 2025 2029 6.875 % 6.875 % 80 80 Pollution control bonds 2000 2004 6 90% 7.125 % 12 21 2005 2009 5.90 % 6 00 % 49 83 2010 2014 7 875 % 10.125 % 162 231 2015 2019 4.135 % 7 875 % 154 114 2025 2029 0 00 % 6.10 % 221 120 Notes and Lease Obligations 1996 2023 6 287 % 9.75 % 477 328 CSW Credit Agreement 2000 floating 731 -- Unamortized discount (13) (21) t!namortized cost of reacquired debt (187) (175)
$3.914 $2,940 The mortgage indentures, as amended and supplemented, securing first mortgage bonds issued by the Electric Operating Companies, constitute a direct first mortgage lien on substantially all electric C@
2-57
1 l i utility plant. 'lhe Operating Companies may offer additional first mortgage bonds, MTNs and other I securities subject to market conditions and other factors. ) 1 l CPL CPL's $40.9 million Series 1995, GBRA, PCRBs were issued with a variable rate computed daily. The average interest rate for 1995 was 4.1%. I Sil'EPCO SWEPCO's $50.0 million bank loan was issued with a variable rate. The weighted average interest rate for 1995 was 6.3%. CSW's year end weighted average cost oflong-term debt was 7.2% for 1995,7.7% for 1994 and 7.8% for 1993. For additional information about each of the Electric Operating Companies' long term debt, see cach of their Statements of Capitalization. l Annual Requirentents Certain series of outstanding first mortgage bonds have amiaai sinking fund requirements, which are generally 1% of the amount of each such series issued. These requirements may be, and generally have l been. satisfied by the application of net expenditures for bondab!e property in an amount equal to 166- l 2/3% of the annual requirements. Certain series of pollution control bonds also have sinking fund l requirements. At December 31,1995, the annual sink:ng fund requirements and annual maturitics for first l rnortgage bonds, pollution control bonds and SWEPCO's rail car capital lease obligations for the next five l l years are presented in the following table. Sinking l'und Requirements CSir CPL PSO SifEPCO IITU (millions) (thousands) 1996 $1 $640 $550 $145 $-- 1997 1 640 550 145 -- l 1998 1 360 550 145 -- I 1999 1 360 300 595 -- l 2000 1 360 300 595 -- l Annual Maturities CSIV CPL PSO SilIPCO IITU (milhons) (thousands) 1996 $31 $640 $25.550 $3.900 $ .. 1997 204 200,640 550 2,600 -- 1998 31 28,360 550 2.400 -- 1999 194 125.360 25.300 44.000 -- ', 2000 188 100.360 300 48.000 40.000 Dividends The Electric Operating Companies' mortgage indentures, as amended and supplemented, contain certain restrictions on the use of their retained earnings for cash dividends on their common stock. These restrictions do not limit the ability of CSW to pay dividends to its shareholders. At December 31,1995, approximately $1.5 billion of the subsidiary companies' retained earnings were available for payment of cash dividends to CSW. At December 31,1995, the amount of retained earnings available for payment of cash dividends to CSW by the Electric Operating Companies was as follows: CPL - $744 million PSO - $150 million Sil'EPCO - $302 million llTU- $126 million C/m' 2-58
i l Reacquired Long-term Debt During 1995,1994 and 1993, the Electric Operating Companies reacquired $355 million, $27 million and $987 million oflong-term debt, respectively, including reacquisition premiums, prior to maturity. The premiums and related reacquisition costs and discounts are included in long-term debt on the consolidated balance sheets and are being amortized over 5 to 35 years, consistent with its expected ratemaking treatment. Reference is made to MD& A for further information related to long-term debt, including new issues and reacquisitions.
- 9. PitEFEltltED STOCK The outstanding preferred stock of the Electric Operating Companies as of the end of the last two years is presented in the following table.
Current Dividend Rate December 31 Redemption Price l' rom - To 1995 1994 l' rom - To (millions) Not subject to mandatory redemption 592,900 shares 4.00 5.00 % $59 559 $102.75 - $109.00 760,000 shares 7.12W 8.72% 76 76 100.00 - 101.00 1,600,000 shares auction 160 160 100.00 issuance expenses and unamortized redemption costs (3) (3) 5292 5292 Subject to mandatory redemption 352,000 shares 6.95 % $35 $36 104.64 To be redeemed uithin one year (1) (1)
$34 535 Total authorized shares 6.405.000 All of the outstanding preferred stock is redeemable at the option of the Electric Operating Companics upon 30 days notice at the current redemptio., price per share.
During 1994 and 1993, the Electric Operating Companies redeemed $33 million and $17 million, respectively, of preferred stock, including redemption premiums, while in 1995, the only preferred stock redemption was SWEPCO's $1.2 million annual sinking fund requirement. CPL l The dividends on CPL's $160 million auction and money market preferred stocks are adjusted j every 49 days, based on current market rates. The dividend rates averaged 4.5%,3.5% and 2.7% during 1995, 1994 and 1993, respectively. CPL retired its remaining 10.05% preferred stock during August 1994. SU'EPCO The minimum annual sinking fund requirement for SWEPCO's preferred stock subject to mandatory redemption is $1.2 million for the years 1996 through 2000. This sinking fund retires 12,000 shares annually. HTU In July 1993, WTU redeemed 100.000 shares ofits 7.25% Series. S100 par value, Preferred Stock, for $10 million,in accordance with mandatory and optional sinking fund provisions. The capital required for Grin 2-59
i l this transaction was provided by short-term borrowings from the CSW System money pool and internal sources. In July 1994, WTU redeemed the remaining 47,000 shares ofits 7.25% Series, $100 par value, j Preferred Stock. . For additional information about each of the Electric Operating Companies' preferred stock, see each of their Statements of Capitalization.
- 10. SHORT-TERM FINANCING The CSW System has established a money pool to coordinate short-term borrowings by the Electric Operating Companies, Transok and CSW Services, which is funded through CSW's issuance of commercial paper. At December 31,1995, the CSW System had two credit facilities in place aggregating
$1.2 billion to back up its commercial paper program, which had $692 million outstanding at a weighted average rate of 5.85%.
CSW Credit, which does not participate in the money pool, issues commercial paper on a stand-done basis that is secured by the assignment ofits receivables. CSW Credit maintains a secured revolving credit agreement which aggregated $900 million to back up its commercial paper program which, at December 31,1995, had $646 million outstanding at a weighted average rate of 5.83%.
- 11. COMMON STOCK CSW has reserved 100,000 shares of CSW Common for issuance to outside directors pursuant to the directors restricted stock plan. In addition, CSW maintains a long-term incentive plan pursuant to which CSW is authorized to issue shares of restricted common stock, stock options and/or stock appreciation rights to certain eligible employees. Under the long-term incentive plan, approximately 3.8 million shares of CSW Common were available for grant as of December 31,1995 and approximt tely 1.6 million shares were reserved for issuance upon exercise of options which were outstanding at December 31,1995. In January 1996, the compensation committee of the board of directors of CSW authorized a restricted stock grant for the executive officers of CSW. This special award was made to reward sustained, long-term corporate performance, encourage executive retention and focus an t ie long-term perspective.
This grant vests in 25 percent increments in 1997,1998,1999 and 2000. The PowerShare plan is available to all CSW shareholders, employees eligible retirees, utility customers and other residents of the four states where the Electric Operating Companies operate. Plan l participants are able to make optional cash payments and reinvest all or any portion of their dividends in additional CSW Common. In February 1996, CSW Dicd a registration statement with the SEC relating (i) to the issue and sale of an additional five million shares of CSW Common through the PowerShare plan and (ii) proposed amendments to the plan that would, among other things, make the plan available to the residents of all Ofty states and the District of Columbia. During 1995 and 1994, CSW raised approximately $57 million and $50 million, respectively, in new equity through the PowerShare plan. CSW expects to use the proceeds from sales of CSW Common made pursuant to the PowerShare plan to l reduce short-term and long-term debt and for other general corporate purposes. Information concerning i new CSW Common equity, primarily through PowerShare, issued during 1995 and 1994 is presented in the l following table. I i l O@ ! 2-60 ) i
1995 1994 Number of new shares issued (milhons) 2.3 2.2 Range of stock price for new shares $22 5/8 - 528 3/8 $2n 3/8 - $29 5/8 New common stock equity (millions) $57 $50 On February 27,1996. CSW sold 15,525,000 shares ofits CSW Common in the 1996 Stock Offering and received net proceeds of approximately $398 million. These proceeds were used to repay a portion of the indebtedness incurred by CSW under the CSW Credit Agreement to fund the acquisition of SEEBOARD.
- 12. BUSINESS SEGMENTS CSW's business segments include United States Electric Operations (CPL, PSO, SWEPCO, WTU), United Kingdom Electric Operations (SEEBOARD Group) and Gas Operations (Transok). Seven additional non-utility companies are included with CSW in Corporate items and Other (CSW Energy, CSW International, CSW Communications, CSW Credit, CSW Leasing, CSW Services and EnerShop). The United Kingdom Electric Operations includes the activities of SEEBOARD, as well as the purchase accounting adjustments and fmancing activities included in the SEEBOARD Group. See NOTE 1.
SUMMARY
OF SIGNIFICA1'T ACCOUNTING POLICIES for a discussion of the accounting for the SEEBOARD acquisition. CSW's business segment information is presented in the following tables. 1995 1994 1993 (milhons) Operating Revenues Electric Operations United States $2,883 $3,065 $3,055 United Kingdom (1) 208 -- -- Gas Operations 592 518 603 Corporate items and Other 52 40 29 53.735 53.623 $3.687 Operating income Electric Operations United States $719 $728 $559 United Kingdom (1) 21 -- -- Gas Operations 52 49 25 Corporate items and Other (31) 6 4 Operating income before taxes 761 783 588 Income taxes 105 189 131 5656 5594 $457 Depreciation and Amortcation Electric Operations United States $335 $316 $296 United Kingdom (1) 7 .. .- Gas Operatior's 31 32 29 Corporate items and Other iI 8 5 5384 5356 533u OTe 2-61
1995 1994 1993 (nulhons) IdennfiaMe Assets
- 1:lectric Operations United States 59.201 $9,066 $8,927 United Kingdom (1) 2.821 -- --
1 Gas Operations 766 724 a84 I Corporate items and Other 1.081 1.276 993
$ 13.869 511.066 $10.604 1
Capaal expenditurcs and acquisitions 1 lectric Operations tinited States $398 $493 $481 United Kingdom (1)(2) 731 - -- Gas Operations 66 65 88 Corporate items and Other (3) 19 114 64 51.214 5672 5633 (1) Represents equit) method of accounting for Nosember 1995 (27.6%) and full consolidation accounting for I)ccember 1995 (76.45"6). (2) Represents cash that had been used as ofI)ecember 31,1995, to purchase SEEllOARI) capital shares in the open market. (3) includes CSW Energy equity investments. l
- 13. UNAUDITED PRO FORMA INFORM ATION On November 6,1995, CSW, indirectly through CSW (JK), announced its intention to commence the Tender Offer in the United Kingdom to acquire ah of the outstanding share capital of SEEBOARD, a regional electric company based in the United Kingdom, for an aggregate adjusted purchase price of approximately $2.12 billion. j SEEBOARD's principal business is the distribution and supply of electricity in southeast England. SEEBOARD has its headquarters in Crawley, West Sussex. It has a distribution territory that covers approximately 3,000 square miles which extends from the outlying areas of London to the English Channel. SEEBOARD serves approximately 2 million customers. Approximately 80% of SEEBOARD's sales are to residential and commercial customers, while the remaining 20% are primarily to industrial customers. For the year ended December 31,1995, SEEBOARD had electricity sales of approximately 18 billion KWHs and, excluding exceptional items, net earnings of $118 million on revenues of approximately
$1.9 billion. SEEBOARD's results for the calendar year ended December 31,1995 are not indicative of the 1 results that will be experienced by SEEBOARD as a subsidiary of CSW due, in part, to the debt incurred in l
connection with the financing of the acquisition, the purchase accounting adjustments and the accounting l adjustments made to adjust SEEBOARD's results for U.S. Generally Accepted Accounting Principles. i SEEBOARD is also involved in certain activities other than electricity distribution and supply, including electrical contracting and retailing, gas supply and electricity generation. The earnings of SEEBOARD l presented above have been converted into U. S. dollar amounts for illustrative purposes only at an exchange i rate of fl.00=$1.58, which was the prevailing rate of exchange at the close of business on November 3, 1995, the business day prior to the announcement of the Tender Offer. See MD&A for a discussion of the financing of the SEEBOARD acquisition. l The unaudited pro forma information is presented in response to applicable accounting rules l relating to acquisition transactions. The pro forma information gives effect to the acquisition of SEEBOARD accounted for under the purchase method of accounting for the twelve months ended December 31,1995 and the twelve months ended December 31,1994 as if the transaction had been consummated at the beginning of the periods presented. Cfin 2-62
The unaudited pro forma information is based upon preliminary fair value allocations related to the purchase of SEEllOARD. The allocations are subject to revision after more detailed analyses, , appraisals and evaluations are completed. The unaudited pro forma information has been prepared in accordance with United States generally accepted accounting principles. The pro forma information in the following table is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the SEEBOARD acquisition had taken place at the beginning of the period speciGed, nor is it necessarily indicative of future operating results. The following pro forma information has been prepared reDecting the February 1996 issuance of CSW Common, and has been converted at an exchange rate of f1.00=$1.58 and f1.00=$1.54 for the twelve months ended December 31, 1995 and 1994, respectively. 1995 1994 (milhons, except EPS) Operating Revenues $5.404 $ 5.465 Operating income 75i. 745 Net income for Common Stock 445 431 EPS of Common Stock $2.15 $2.I3 I t l l l 2-63 l
I l l
- 14. QU AllTEllLY INFOllM ATION (UN AUDITED) l The following unaudited quarterly information includes, in the opinion of management, all
- I adjustments necessary for a fair presentation of such amounts. Information for quarterly periods is affected by seasonal variations in sales, rate changes, timing of fuel expense recovery and other factors.
l 1995 QUARTER ENDED CSH' CI'L l'SO SHEPCO HTU (imlhons, except EPS) (thousands) March 31,1995 Operating Revenues $659 $127,282 5148,416 $ 169,240 $74,921 Operating income 90 30,556 12,848 26.587 9,896 Net income 44 16,362 7,449 15.525 4,233 EPS (CSW only) $0.20 l June 30,1995 Operating Revenues $920 $324,525 $ 161,644 $212,960 $83,049 Operating income 170 96,518 28,370 48,878 13,186 i Net Income 108 75,644 20,512 38,070 7,926 EPS (CSW only) l
$0.54 '
September 30,1995 f Operating Resenues $1,087 $358,790 $232,156 $266.268 $87,178 l Operating income 267 104,082 58,524 59,880 30.432 Net income 203 82.238 50,6P2 48,473 24,021 EPS (CSW only) $ 1.04 l Deecmber 31,1995 Operating Revenues $ 1,069 $262.872 $148.607 $188,237 $74,687 Operating income l 129 51,028 12,027 27,431 5,972 i Net income 66 32,203 3.185 15,046 (1,650) EPS (CSW only) $0.32 l 1 Total 1995 I Operating Revenues $3,735 $ 1,073.469 $690.823 $836.705 $319,835 Operating income 656 282,184 I I I,769 162,776 59,486 i Net Income 421 206,447 81,828 117,114 34,530 ' EPS (CSW only) $2.10 2-64
QUAltTEllLY INFOllM ATION - (UNAUDITED) 1994 OllARTI.It ENDl:D CS f f' C/'L PSO Sif E/'CO H7U t millions, except 1.I'M (thousands) March 31,1994 Op r . ting Res enues 5850 5263.229 $ 157,509 5190,066 $83.319 0 ruung income 93 36,943 12,427 24,820 8,487 Net income 48 24.986 4,307 14,537 3,546 l:l'S (CSW only) 50 23 June 30,1994 Operating Revenues $908 $333.169 5174,631 5211,989 583,016 Operating income 157 75,070 23,808 36,699 12,958 Net income 107 62,470 15,927 25.851 8,192 EPS (CSW only ) 50 55 September 30,1994 Operating Ruenues $ 1,070 5364.044 $246,378 5245,331 $109,348 Operatmg income 239 96.062 47,196 53,304 27,987 Net income 189 82.877 40.003 41,854 23,271 I!PS (CSW only ) 50.97 December 31,1994 Operating Revenues 5795 $257.537 $ 161.978 $177,910 567,308 Operating income 105 48,176 14.827 31,099 5,331 Net income 68 35,106 8,029 23,470 2,357 EPS (CSW only) $0.33 Total 1994 Operating Revenues $3,623 $1,217,979 $740,496 $825,296 $342,991 Operating income 594 256.251 98.258 145,922 54,763 Net incomc 412 205.439 68,266 105,712 37,366 EPS (CSW only) $2.08 5 2-65
I l REPORT OF INDEPENDENT PUllLIC ACCOUNTANTS i f To the Stockholders and Board ofDirectors ofCentral andSouth West Corporation: - i We have audited the accompanying consolidated balance sheets of Central and South West !
- l. Corporation (a Delaware corporation) and subsidiary companies as of December 31,1995 and 1994, and the '
related consolidated statements ofincome, retained earnings and cash Dows, for each of the three years ended l December 31,1995. These financial statements are the responsibility of the Corporation's management. Our ! responsibility is to express an opinion on these Onancial statements based on our audits. ! We conducted our audits in accordance with generally accepted auditing standards. Those standards { j require that we plan and perform the audit to obtain reasonable assurance about whether the financial l statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting l the amounts and disclosures in the financial statements. An audit also includes assessing the accounting l principles used and significant estimates made by management, as well as evaluating the overall financial l statement presentation. We believe that our audits provide a reasonable basis for our opinion. ; t j in our opinion the financial statements referred to above present fairly, in all material respects, the Onancial position of Central and South West Corporation and subsidiary companies as of December 31,'1995 l and 1994, and the related consolidated statements ofincome, retained earnings and cash Dows for each of the , three years ended December 31,1995, in conformity with generally accepted accounting principles, j l in 1993, as discussed in NOTE 1, Central and South West Corporation and subsidiary companies ! changed their methods of accounting for unbilled revenues, postretirement benefits other than pensions, l l income taxes and postemployment benefits. l I Our audits were made for the purpose of forming an opinion on the Gnancial statements taken as a ; whole. The supplemental Schedule 11 is presented for purposes of complying with the Securities and Exchange l Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the
- auditing procedures applied in the audits of the basic Onancial statements and, in our opinion, fairly states in all material respects the Onancial data required to be set forth therein in relation to the basic Onancial statements taken as a whole.
i Arthur Andersen LLP i Dallas, Texas February 28,1996 l
- i 1 l l
cpm 2-66
ItEPOltT OF M ANAGEMENT , Management is responsible for the preparation, integrity and objectivity of the consolidated Gnancial statements of Central and South West Corporation and subsidiary companies as well as other information contained in this Annual Report. The consolidated Gnancial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reDect amounts based on the best estimates and judgments of management, giving due consideration to materiality. Financial information contained elsewhere in this Annual Report is consistent with that in the consolidated Unancial statements. The consolidated financial statements have been audited by the independent accounting firm, Arthur Andersen LLP, which was given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the board of directors and committees of the board. CSW and its subsidiaries believe that representations made to the independent auditors during their audit were valid and appropriate. Arthur Andersen LLP's audit report is presented elsewhere in this report. CSW, together with its subsidiary companies, maintains a system of internal controls to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the consolidated financial statements are prepared in accordance with generally accepted accounting principles and that the assets of CSW and its subsidiaries are properly safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that the companies j will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees. Internal auditors continuously monitor the effectiveness of the internal control system following standards established by the Institute ofInternal Auditors. Actions are taken by management to respond to deGeiencies as they are identified. The board, operating through its audit committee, which is comprised entirely of directors who are not officers or employees of CSW or its subsidiaries, provides oversight to the financial reporting process. Due to the inherent limitations in the effectiveness of internal controls, no internal control system can provide absolute assurance that errors uill not occur. Ilowever, management strives to maintain a balance, recognizing that the cost of such a system should not exceed the beneGts derived. CSW and its subsidiaries believe that, in all material respects, its system ofinternal controls over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectisely as of December 31.1995. E. R. Brooks Glenn D. Rosilier Wendy G. Hargus Chairman, President and Senior Vice President and Controller Chief Executive Of6cer Chief Financial Of0cer OTm 2-67
4 4 i 1 l 1 l . l i l 4 CENTRAL POWER AND LIGHT
- COMPANY 1
4 4 4 l l i l 4 4 i j 1 l i i l l l d I I l 4 I (EEYr h 2-68
l SELECTED FINANCIAL DATA l The following selected financial data for each of the five years ended December 31 is provided to - highlight significant trends in the financial condition and results of operations for CPL, Certain financial j statement items for prior years have been reclassified to conform to the most recent period presented. l 1995 1994 1993 (1) 1992 1991 ($ thousands, except ratio data) INCOME STATEMENT DATA Revenues $ 1,073,469 $1,217,979 $ 1,223,528 $1,113,423 $ 1,098.730 Operating expenses and taxes 791,285 961,728 1,033,449 846,758 849,157 Operating income 282,184 256,251 190,079 266,665 249,573 Other income and deductions - 56,322 70,487 78,439 83,825 100,261 Interest charges 132,059 121,299 123,388 131,979 132.628 Net income 206,447 205,439 172,425 218,511 217,206 Net income for common stock 191,978 191,635 158,422 202,44 l 197.362 BALANCE SIIEET DATA ! Assets 4,881,136 4,822.699 4,781,745 4.583,660 4,458.063 Common stock equity 1,437,332 1,431,354 1,424,195 1,437,876 1,428.547 Preferred stock Not subject to mandatory redemption 250,351 250,351 250,351 250,351 250,351 Subject to mandatory redemption - -- 22,021 28,393 35,331 Long-term debt 1,517,347 1,466.393 1,362,799 1,347,887 1,350,854 l Current liabilitics (2) 357,772 376.006 370,534 380,058 210,923 Capitalintion ratios Common stock equity 44.9 % 45.5 % 46.6 % 46.9% 46.6% Preferred stock 7.8 7.9 8.9 9.1 9.3 Long term debt 47.3 46.6 44.5 44.0 44.1 Ratio of earnings to Dxed charges (SEC Method) before cumulative effect of changes in accounting i principles 2.63 3.24 2.69 3.23 3.18 l (1) Earnings in 1993 were signincantly affected by restructuring charges, the $27 million cumulative effect of changes in accounting i principles and prior year tax adjustments PL changed its method of accounting for unbilled revenues in 1993. Pro forma amounts, assuming that the change in accounting for unbilled revenues had been adopted retroactively, are not materially different fmm amounts j reported for pnor years and therefore have not been restated. (2) !ncludes net unbilled factored accounts receivable in 19G and 1995.
)
5IYES 6: 2-69
i CENTRAL POWER AND LIGilT COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS \ Reference is made to CPL's Financial Statements and related Notes to Financial Statements and _ . Selected Financial Data. The information contained therein should be read in conjunction with, and is essential in understanding, the following discussion and analysis. , OVERVIEW s Net income for common stock was stable in 1995 when compared to 1994 at $192 million, although CPL reported lower electric operating revenues, Mirror CWIP liability amortization and higher interest charges offset by lower operating expenses and taxes. Also impacting 1995 were the effects of the CPL 1995 Agreement. j Net incbme for common stock for 1994 increased 21% to $192 million from $158 million in 1993. l The increase was due primarily to an increase in base revenue, a decrease in restructuring costs and a decrease in maintenance expense. Such increases were partially offset by the cumulative effect of changes in accounting principles recorded in 1993. RESTRUCTURING During 1993, CSW announced a restructuring under which the CSW System restructured the Electric Operating Companies (including CPL) under a new business unit called CSW Electric and centralized many common service functions into CSW Services in order to reduce costs and improve efficiency and productivity. The restructuring included restaffing positions throughout the CSW System and a reduction in the workforce : by more than 7% system-wide. CPL's restructuring costs, approximately $29 million, were expensed during 1993 and incurred primarily during 1994. CPL has realized a number of benefits from the restructuring, j including increased efficiencies and synergies through the elimination of previously duplicated functions. 1 f RATES AND REGULATORY MATTERS CPL Rate Revien" On November 6,1995, CPL filed with the Texas Commission a request to increase its retail base rates by $71 million and redece its annual retail fuel factors by $17 million. The net effect of these proposals would be an increase of $54 million, or 4.6%, in total annual retail revenues based on a test year ended June 30,1995. l CPL is not seeking interim rate relief, but will implement bonded rates in May 1996, the earliest date permitted by law. CPL also is seeking to reconcile $229 million of fuel costs incurred during the period July 1,1994 through June 30,1995. CPL's previous request to reconcile fuel costs from March 1,1990 to June 30,1994 in Docket No.13650 was consolidated with the current rate review. If the requested increase and other adjustments in rate structure are approved, CPL has committed not to increase its base rates prior to January 1, 2001, subject to certain force majeure events. CPL is requesting this rate review in large part as a result of the expiration of the amortization of its Mirror CWIP liability. The Mirror CWIP liability was amortized to income in declining amounts over a five-year period from 1991 through 1995 pursuant to rate settlements reached by CPL in 1990 and 1991. In 1995, , Mirror CWIP provided $41 million in non-cash earnings at CPL. Also included in the request are proposals by 15?f 2-70 0
l CPL to accelerate recovery of nuclear and regulatory assets as a way to proactively address certain assets that ' could possibly be unrecoverable or stranded in a more competitive electric utility industry. In a preliminary order issued December 21,1995, the Texas Commission expanded the scope of the rate review to address certain competitive issues facing the electric utility industry. The competitive issues to be addressed by CPL in , a supplemental 61ing due April 1,1996, are: (i) the calculation of rates on an unbundled or functional basis (i.e., generation, transmission and distribution);(ii) the current value of CPL's generating assets as compared to estimates of the market value of such assets under alternate future industry structures;(iii) the application of performance based ratemal;ing;(iv) potential revisions in the methodology of reconciling and recovering fuel costs; and (v) the Texas Commission's authority to introduce competition in the electric utility industry under existing law. On February 13,1996, intervening parties Cled testimony in the revenue requirements phase of CPL's base rate case. Among the parties that Gled testimony were the OPUC which recommended a base rate decrease of approximately $75 million on a total company basis and the Cities which recommended a base rate reduction of approximately $52 million on a total company basis. On February 20,1996, the Staff Sled testimony recommending an increase in total company base rates of approximately $30 million. Certain elements of the Staff's proposal are described below. The Staff recommended a return on common stock equity of 11.35% compared to the 12.25% return on common equity requested by CPL. The Staff recommended a disallowance of $16 million in costs billed for administrative services by CSW Services to CPL on the basis that the specific bene 6ts to CPL were not clearly identi6ed. Additionally, the Staff recommended a $7 million reduction in CPL's current annual depreciation accrual and a $3 million reduction in CPL's requested accrual for decommissioning STP. A comparison of the Staff's recommendation for a base rate increase, compared to CPL's claimed revenue denciency is provided in the CPL RATE REVIEW COMPARISON table. CPL RATE REVIEW COMPARISON (millions) CPL revenue deficiency (1) $103 RetLrn on common equity (21) CSW Services expenses (16) Depreciation expense (7) Decommissioning expense (3) Miscellaneous items (26) Staff recommended revenue increase (2) $30 (1) The total company rate increase requested by CPL was reduced from $103 million to $78 million ($71 million allocated to the Texas retailjurisdiction) in accordance with rate settlements entered into by CPL in 1990 and 1991. (2) The Staff recommended that CPL be granted a $23 million base rate increase and an annual increase of $7 million in customer service charges. The Staff and Cities recently filed testimony on the fuel portion of the rate case recommending a reduction to CPL's eligible fuel costs of $16 million and $32 million, respectively. After completion of hearings in all phases of the rate case, which began in late February 1996 and are expected to conclude during the third quarter of 1996, the ALJs assigned to hear the case will issue a proposal ; for decision for consideration by the Texas Commission. Testimony Gled by parties to the rate case, includmg l 1
-a
&L 5 71
l the Staff, is not binding on either the ALJs or the Texas Comraission. A Gnal decision on the rate request is not anticipated from the Texas Commission prior to December 1996. Management of CPL cannot predict the ultimate outcome of CPL's rate case, although management believes that the ultimate resolution will not have a material adverse effect on CPL's results of operations or , Gnancial condition. However, if CPL ultimately is unsuccessful in obtaining adequate rate .~elief, CPL could experience a material adverse effect on itsie~sults of operations and fiiiancial condition. CPL 1995 Agreement On April 5,1995, CPL reached an agreement in principle with other parties to pending regulatory proceedings involving base rate, fuel and prudence issues relating to an outage experienced at STP during 1993 and 1994. On May 16,1995, CPL Hled the CPL 1995 Agreement with the Texas Commission. Pursuant to the CPL 1995 Agreement, base rate refunds, fuel refunds and the reduction of CPL's fuel factors were implemented on an interim basis during the summer of 1995. Under the CPL 1995 Agreement, CPL provided customers a one-time base rate refund of $50 million. In addition, CPL refunded approximately $30 million in over-recovered fuel costs through April 1995. Furthermore, CPL did not charge customers for $62.25 million in replacement power costs and related interest primarily associated with the 1993-1994 STP outage. The CPL 1995 Agreement did not result in any ongoing change in base rate levels and provided that there would be no new rate review requests filed prior to September 28,1995. CPL also reduced its fuel factors, effective in July j 1995, by approximately $55 million on an annual basis due to projections oflower fuel costs licarings on the CPL 1995 Agreement were held on July 19,1995, and the final written Texas Commission order approving the CPL 1995 Agreement was received on October 4,1995. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. ! See NOTE 2. LITIG ATION AND REGULATORY PROCEEDINGS for a discussion of additional regulatory proceedings. l l SOUTH TEXAS PROJECT , CPL owns 25.2% of STP, a two-unit nuclear power plant which is located near Bay City, Texas, in j addition, HLP, the Project Manager of STP, owns 30.8%, San Antonio owns 28.0%, and Austin owns 16.0% of l STP. STP Unit I was placed in service in August 1988 and STP Unit 2 was placed in service in June 1989. From February 1993 until May 1994, STP experienced an unscheduled outage resulting from i mechanical problems. The outage resulted in signiDeant rate and regulatory proceedings involving CPL, including a base rate case and fuel reconciliation proceedings as previously discussed. Unit I rcstarted on February 25,1994 and reached 100% power on April 8,1994 and Unit 2 resumed operation on May 30,1994 and reached 100% power on June 16,1994. During the last six months of 1994, the STP units operated at capacity factors of 98.6% for Unit I and 99.2% for Unit 2. For a discussion of regulatory matters surrounding the STP outage, see RATES AND REGULATORY MATTERS above and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. Both STP units were removed from service during 1995 for scheduled refueling outages. The fueling outages lasted 41 days for Unit I and 26 days for Unit 2. For the year 1995, Unit I and Unit 2 operated at net capacity factors of 84.9% and 90.6%, respectively. For additional information regarding STP and the accounting for the decommissioning of STP, see NOTE 1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES and NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. i [ 2-72 l
LIQUIDITY AND CAPITAL ltESOUllCES Overview CPL's need for capital results primarily from its construction of facilities to provide reliable electric , service to its customers. Accordingly, internally generated fun _ds should meet most of the capital requirements. Ilowever, ifinternally generated funds are not sufficient, CPL's financial condition should j allow it access to the capital markets. l Construction Expenditures CPL maintains a continuing construction program, the nature and extent of which is based upon current and estimated future demands upon the system. Planned construction expenditures for CPL for the next three years are primarily to improve and expand distribution facilities and will be funded primarily through internally generated funds. These improvements will be required to meet the anticipated needs of new customers and the growth in the requirements of existing customers. Construction expenditures, including AFUDC, for CPL were approximately $155 million in 1995, $179 million in 1994 and $180 million in 1993. CPL's estimated total construction expenditures, including AFUDC, for the years 1996 through 1998 are presented in the following table. CONSTRUCTION EXPENDITURES 1996 1997 1998 Total (milhons) Generation $17 $ 42 $16 $75 Transmission 14 18 19 51 Distribution 69 72 74 215 Fuel 18 il 15 44 Other 19 14 13 46 5137 5157 5137 $431 The foregoing consists of forward looking information and, accordingly, actual results may differ materially from such projected information due to changes in the underlying assumptions. Such assumptions are based on numerous factors, including factors such as the rate of load growth, escalation of construction costs, changes in lead times in manufacturing, in0ation, the availability and pricing of alternatives to construction, nuclear, environmental and other regulation, delays from regulatory hearings, adequacy of rate relief and the availability of necessary external capital. Changes in those and other factors could cause CPL to defer or accelerate construction or to sell or buy more power, which would affect its cash position, revenues and income to an extent that cannot now be reliably predicted. Although CPL does not believe that it will require substantial additions of generating capacity through the end of the decade, the CSW System's internal resource plan presently anticipates that any additional capacity needs will come from a variety of sources including projected coal- and lignite-fired generating plants for which CPL has invested approximately $24 million in prior years for plant sites, engineering studies and lignite reserves. Should future plans exclude these plants for environmental, economical or other reasons, CPL would evaluate the probability of recovery of these investments and may record appropriate reserves. Long-Term Financing As of December 31,1995, the capitalization ratios of CPL were 45% common stock equity,8% preferred stock and 47% long-term debt. CPL's embedded cost oflong-term debt was 7.2% at December 31, 1995. CPL continually monitors the capital markets for opportunities to lower its cost of capital through re6nancing. CPL is committed to maintaining Snancial Dexibility through a strong capital structure and
/]GI 2-73
favorable securities ratings in order to access the capital markets opportunistically or w hen required. CPL's } ( long term Onancing activity for 1995 is summarized in the following table. j ISSt ED REACQl: IRED l 1 mancing Amount Financial Amount instrument (millions) Rate Matur ty Instrument (millions) Rate Maturity j FMil(l) $200.0 65'8% 2005 FMB $139.2 9 3/8. 2019 - - PCRil 100.6 6.1% 2028 PCRB 68.9 101/H% *2014 PCRil(2) 31.8 93/4% 2015 PCRil 40.9 floating 2015 PCRB (3) 8.4 71/8% 2004 PCRB (3) 34.2 6.0% 2007 (1) The balance of proceeds not used to redeem higher cost FMils were used to repay a portion of CPI 's short-term borrowings, to provide working capital and for other general corporate purposes. (2) Collaterali/.ed PCRB (secured by a FMil). (3) The additional funds required to redeem these issues were provided through internal funds and short-term borrowings. ShelfRegistration Statements CPL has $60 million remaining for the issuance of FMBs, and $75 million remaining for the issuance of preferred stock, under shelf registration statements filed with the SEC in 1993 and 1994, respectively. CPL may offer additional FMBs and preferred stock subject to market conditions and other factors. The proceeds of
]
j any such offerings will be used principally to redeem higher cost FMBs and prcferred stock in order to lower ' l CPL's cost of capital. l l 1 l Short-Term Financing l CPL, together with other members of CSW System, has established a CSW System money pool to l coordinate short-term borrowings. These loans are unsecured demand obligations at rates approximating the CSW System's commercial paper borrowing costs. At December 31,1995 CPL's short-term borrowing limit from the money pool was approximately $268 million. During 1995, the annual weighted average interest rate l on CPL's borrowings was 6.1% and the average amount of CPL's short-term borrowings outstanding was $148 i million. The maximum amount of CPL short-term borrowings outstanding during 1995 was $236 million, which was the amount outstanding at March 2,1995. 1 Internally Generated Funds l Internally generated funds consist of cash Dows from operating activities less common and preferred stock dividends. CPL uses short-term debt to meet Ductuations in working capital requirements due to the l seasonal nature of energy sales. CPL anticipates that capital requirements for the period 1996 to 1998 will be met, in large part, from internal sources. CPL also anticipates that some external finaacing will be required during the period, but the nature, timing and extent have not yet been determined. Information concerning internally generated funds is presented in the following table. l 1995 1994 1993 ($ in milhons) l Internally Generated Funds $100 $114 $92 i ( Construction Expenditures Provided by interr. ally Generated Funds 66 % 65 % 52 % Sales ofAccounts Receivable l CPL sells its billed and unbilled accounts receivable, without recourse, to CSW Credit. The sales provided CPL with cash immediately, thereby reducing working capital needs and revenue requirements. The average and year end amounts of accounts receivable sold were $109 million and $85 million, respectively, in 1995, as compared to $123 million and $113 million, respectively, in 1994.
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I RECENT DEVELOPMENTS AND TRENDS 1 Competition andIndustry Challenges l Competitive forces at work in the electric utility industry are impacting CPL and electric utilities generally. Increased competition facing electric utilities is driven by complex economic, political and technological factors. These factors have resulted in legislative and regulatory initiatives that are likely to result in even greater competition at both the wholesale and retail level in the future. As competition in the industry increases, CPL will have the opportunity to seek new customers and at the same time be at risk of losing customers to other competitors. Additionally, CPL will continue to compete with suppliers of alternative forms of energy, such as natural gas, fuel oil and coal, some of which may be cheaper than electricity. CPL believes that its prices for electricity and the quality and reliability ofits service currently places it in a position to compete effectively in the marketplace. The Energy Policy Act, which was enacted in 1992, significantly alters the way in which electric utilities compete. The Energy Policy Act creates exemptions from regulation under the liolding Company Act and permits utilities, including registered utility holding companies and non-utility companies, to form EWGs. EWGs are a new category of non-utility wholesale power producers that are free from most federal and state regulation, including the principal restrictions of the Holding Company Act. These provisions enable broader participation in wholesale power markets by reducing regulatory hurdles to such participation. The Energy Policy Act also allows the FERC, on a case-by-case basis and with certain restrictions, to order wholesale transmission access and to order electric utilities to enlarge their transmission systems. A FERC order requiring a transmitting utility to provide wholesale transmission service must include provisions generally that permit the utility to recover from the FERC applicant all of the costs incurred in connection with the transmission services and any enlargement of the transmission system and associated services. Wholesale energy markets, including the market for wholesale electric power, base been extremely competitive since the enactment of the Energy Policy Act. CPL must compete in the wholesale energy markets with other public utilities, cogenerators, qualified facilities, EWGs and others for sales of electric power. While CPL believes that the Energy Policy Act will continue to make the wholesale markets more competitive, CPL is unable to predict the extent to which the Energy Policy Act will impact its operations. On March 29,1995, consistent with the direction of the Energy Policy Act, the FERC announced in a NOPR that each public utility that owns and controls transmission facilities in interstate commerce must unbundle its services and file open access transmission tariffs under which each utility will offer comparable open access transmission services to its transmission customers. In addition, the FERC revised its proposed mechanisms by which utilities will be permitted to recover stranded investment costs expected to be brought about by the proposed changes. On August 7,1995, CSW Cled comments on the proposed approach in the NOPR with the FERC. Although CSW supports the concept of comparable open access for the nation's transmission service, CSW believes that certain changes must be made in the FERC's proposed approach of implementing the open transmission system. First, with respect to the issue of stranded investments, the FERC proposed that customers who left the utility company pay for a portion, but not all, of the costs incurred by the owner of existing facilities that are not utilized as a result of the loss of such customers. CSW raised concerns about the FERC's proposed methodology for addressing stranded investment because it did not, in CSW's view, provide for the fair recovery of the full amount previously invested. Second, CSW proposed that the j FERC adopt a " power Dow pricing" approach whereby all electric systems that incur costs because of a transmission transaction are compensated, as opposed to the traditional " postage stamp" method whereby only the companies that are directly involved in the actual purchase and sale of the electricity are compensated or charged. On February 9,1996, CPL Died at the FERC complete sets of open access transmission tariffs. These tariffs substantially reDect the pro forma tariffs attached to the FERC's March 29,1995 NOPR. Open access w=-"A.%2. E, 2-75
( l Rcgulatmy Accounting
\
Consistent with industry practice and the provisions of SFAS No. 71, which allows for the recognition l and recovery of regulatory assets. CPL has recognized signiGcant regulatory assets and liabilities. l Management believes that CPL will continue to meet the criteria for following SFAS No. 71. Ilowever, in the i event CPL no longer meets the criteria for following SFAS No. 71, a write-off of regulatory assets and liabilities would be required. For additional information regarding SFAS No. 71 reference is made to NOTE 1
- 1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES. l Consolidated Taxes Prior to 1992, the Texas Commission allowed income taxes to be recovered in rates based on the federal income tax incurred by a utility as ifit were a stand-alone company. This " stand-alone" approach treated the regulated activities of a utility as a separate entity and considered only those revenues and expenses p j that are included in the utility's cost of service to calculate the federal income tax liability for ratemaking ; l purposes. Ilowever, in 1992 the Texas Commission changed its method of calculating the federal income tax ;
- component of rates to the " actual tax approach." This approach reduces rates by the tax benefits of deductions i which are not considered for or included in setting rates for the utility.
j On April 13,1995, the Supreme Court issued a decision which holds that the Texas Commission is not ! l required to use the tax benents associated with the losses of unregulated affiliates to reduce tax expense in cost l of service. The Supreme Court also ruled that the Texas Commission cannot include the income tax l deductions taken by the utility for disallowed expenses when determining the utility's federal income tax l liability. ENVIRONMENTAL MATTERS ! The operations of CPL, like those of other utility systems, generally involve the use and disposal of l substances subject to environmental laws. CERCLA, the federal "Superfund" law, addresses the cleanup of l sites contaminated by hazardous substances. Superfund requires that PRPs fund remedial actions regardless of
]'
fault or the legality of past disposal activities. PRPs include owners and operators of contaminated sites and transporters and/or generators of hazardous substances. Many states have similar laws. Legally, any one PRP can be held responsible for the entire cost of a cleanup. Usually, however, cleanup costs are allocated among PRPs. CPL is subject to various pending claims alleging that it is a PRP under federal or state remedial laws for investigating and cleaning up contaminated property. CPL anticipates that resolution of these claims, individually or in the aggregate, will not have a material adverse effect on CPL's results of operations or financial condition. Although the reasons for this expectation differ from site to site, factors that are the basis for the expectation for specinc sites include the volume and/or type of waste allegedly contributed by CPL, the estimated amount of costs allocated to CPL and the participation of other parties. See ITEM 1-BUSINESS, j NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND l CONTINGENT LI ABILITIES for additional discussion regarding environmental matters. NEW ACCOUNTING STANDARDS SFAS No.121 in March 1995, the FASB issued SFAS No.121 to be effective for Gnancial statements for Oscal years I beginning after December 15,1995. The statement establishes a two-fold test for identiGcation and i quantiGcation of an impaired asset. The first test in determining an impairment is to compare the sum of expected future cash flows (undiscounted and without interest charges) related to an asset to the carrying l .251L h-77
and market pricing should increase marketing oppor2unitics for CPL, but may also expose it to the risk ofloss ofload or reduced revenues due to competition with alternate suppliers. Increasing competition in the utility industry brings an increased need to stabilize or reduce rates. The ] retail regulatory environment is beginning to shift from traditional rate base regulation to incentive regulation. - incentive rate and performance-based plans encourage efficiencies and increased productivity while permitting utilities to share in the results. Retail wheeling, a major industry issue which may require utilities to " wheel" or move power from third parties to their own retail customers, is evolving gradually. Many states throughout the country currently have legislation introduced to investigate the issue. CPL believes that retail competition would harm the best interests of CPL's customers and security i holders unless CPL receives fair recovery of the full amounts previously invested to finance power plants. These investments, which were reasonably incurred, were made by CPL to meet its obligation to serve the ! public interest, necessity and convenience. This obligation has existed for nearly a century and remains in force under current law. CPL intends to strongly oppose attempts to impose retail competition without just compensation for the risks and investments CPL undertook to serve the public's demand for electricity. 1 CPL is unable to predict the ultimate outcome or impact of competitive forces on the electric utility industry or on CPL. As the wholesale and retail electricity markets become more competitive, however, the principal factor determining success is likely to be price, and to a lesser extent, reliability, availability of capacity, and customer service. PURA Amendments to PURA, the legal foundation of electric regulation in Texas, became effective on September 1,1995. Among other things, the amendments deregulate the wholesale bulk power market in ERCOT, permit pricing flexibility for utilities facing competitive challenges, provide for a market-driven integrated resource planning process and mandate comparable open access transmission service. PURA also requires that the Texas Commission adopt a rule on comparable open transmission access by March 1,1996. In conjunction with this rulemaking proceeding (Project No.14045), Texas Commission Chairman Pat Wood issued a propos'al on September 6,1995, for the purpose of maximizing competition in the ERCOT wholesale bulk power market. The proposal calls for the functional unbundling ofintegrated utilities where distribution entities could purchase their power requirements from any generator or set of generators in ERCOT. Those generators which are currently regulated would be deregulated after provisions are in place to recover stranded costs. The proposal has been assigned to a separate proceeding (Project No.15000). CPL expects this project to provide the vehicle for the Texas Commission and other interested parties to develop positions on industry restructuring before the Texas Legislature convenes in January 1997. A schedule has been developed for this project that includes a series of workshops and technical conferences during the first half of 1996. The schedule co'ntemplates that the Texas Commission will develop legislative recommendations on restructuring and stranded costs during the second half of 1996. On February 7,1996, the Texas Commission adopted a rule governing transmission access and pricing (Project No.14045). The pricing method tentatively adopted by the Texas Commission is a hybrid combination of an ERCOT-wide postage stamp rate covering 70% of total ERCOT transmission costs and a distance-sensitive component referred to as a vector-absolute megawatt mile which recovers the remaining 30% of ERCOT transmission costs. Although the open access tariffs filed with the FERC on February 9,1996 do not reflect Project No.14045 pricing, CPL anticipates filing tariffs with the FERC that do conform to the Texas Commission's rule in the second quarter of 1996. 6]/E.b.- 2 76
mount of the asset. If the sum _ of expected cash Hows is not sufficient to recover the carrying value of the j sset, then an impairment is recognized. Once an impairment is identified, the second part of the test is applied
) quantify the amount of the impairment. The statement lists several ahernative methods of establishing fair aarket value and quantifying the impairment. Cash Dows used to measure possible impairment of an asset are
- rouped at the lowest level for which there are identiGable cash Dows that are largely independent of the cash .
. lows of other groups of assets. For CPL, the lowest independently identi0able cash now level used for this inalysis isjurisdictional rates chargedio cist'omers. ,
t CPL will adopt SFAS No.121 in the Drst quarter of 1996. Under the current regulatory environment, PL does not expect the adoption of SFAS No.121 to have a signincant impact on CPL's results of operations l ir financial condition. Ilowever, future developments in the electric industry and utility regulation could i sopardize the full recovery of the carrying cost of certain investments. Consequently, CPL is monitoring the I hanging conditions facing the electric utility industry. SFASNo.123 SFAS No.123 was issued in October 1995 with an effective date for transactions entered into after ! iecember 15,1995. This statement requires the use of an option pricing model to calculate the value of stock- i 3 sed compensation transactions where such value cannot otherwise be determined, but then allows for two - l tternative methods of reporting the transactions. One method recognizes this value as a cost ofcompe { ad as an expense for the current period. The alternative method permits footnote disclosure of the ! ampensation cost, without charging the amount against current earnings. I ' As provided by the provisions of SFAS No.123, CPL will continue to apply the recognition and icasurement provisions of Accounting Principles Board Opinion No. 25," Accounting for Stock Issued m mployees" and adopt the disclosure requirements of SFAS No.123 in 1996. Accordingly, the e.Joption of FAS No.123 will not impact CPL's results of operations or Gnancial condition. aESULTS OF OPERATIONS i Electric Operating Revenues Total revenues were'$1.1 billion in 1995, a decrease of 12% when compared to 1994 revenues of $1.2 l! liion. The decline was due primarily to a one time $50 million base rate refund and a $62.3 million sallowance of under-recovered fuel costs resulting from the CPL 1995 Agreement. Also contributing to the crease in revenue was a $66.6 million decrease in fuel revenue resulting primarily from lower average unit el costs and purchased power as discussed below and a wholesale fuel revenue refund.' Partially offsetting e decrease in fuel revenue was a $34.4 million increase in non-fuel revenue resulting from a 6% increase in WH sales. The increase in sales was attributable to increased usage per customer, residential and commercial stomer growth and a new contract with an existing wholesale customer. Total revenues decreased $5.5 million in 1994 when compared to 1993 revenues. The 1994 decrease flects lower fuel-related revenues of $41.5 million partially offset by higher base revenues of S35.9 million. el-related revenues declined as a result oflower per unit fuel and purchased power costs. An 8% increase in WH sales resulting from an increased number of residential and commercial customers served as well as
;rmer spring and summer weather also contributed to the increase in base revenues.
Fuel Fuel expense decreased $40.5 million, or 12%, during 1995 as compared to 1994. The decrease in fuel i sense was due primarily to a 22% decrease in the average unit cost of fuel from $1.75 per Mmbtu in 1994 to 3 37 per Mmbtu in 1995. The decrease in the average unit cost of fuel resulted from the expiration of higher j ced gas contracts that were replaced with lower cost spot market natural gas, the renegotiation of a coal l _ _- 2-78
contract and increased usage oflower unit cost nuclear fuel. The decrease in the unit cost of fuel was partially ' offset by a 13% increase in generation. Fuel expense decreased $21.8 million in 1994 when compared to 1993 due primarily to a decrease in the average unit cost of fuel from $2.17 per Mmbtu in 1993 to $1.75 per Mmbtu in 1994 partially offset by a 16% increase in generation. The lower average unicost of fuel reDects increased ~ usage oflower unit cost i nuclear fuel since STp Units 1 and 2 restarted and reached 100 percent output level in April and June of 1994, respectively, and lower unit costs of gas and coal in 1994. STP Units 1 and 2 had not operated at full capacity since February 1993 as discussed previously under SOUTil TEXAS PROJECT. {
- Purchased Power i Purchased power decreased $22.7 million and $21.7 million during 1995 and 1994, respectively, when l compared to the prior year. The decrease in 1995 was due primarily to increased generation at STP, which replaced power that had been purchased during the Grst half of 1994 when STP was out of service, and an unscheduled outage at a fossil-fueled generating plant during the third quarter of 1994. The decrease of $21.7 million in 1994 as compared to 1993 was due primarily to the outage at STP which began in February 1993.
Other Operating Other operating expenses decreased $15.8 million, or 7%, during 1995 when compared to 1994. The l decrease was due primarily to a reduction in employee related costs. Other operating expenses in 1994 were relatively consistent with 1993 levels. Restructuring Charges ' Restructuring charges decreased $20.8 million during 1995 when compared to 1994. The decrease was i due primarily to the recognition of a $20.7 million regulatory asset established in accordance with the CPL 1995 Agreement for previously recorded restructuring charges. Restructuring charges in 1993 reDect the original accrual of $29.4 million. Maintenance I
~
Maintenance expense decreased $5.3 million in 1995 when compared to 1994 as a result of l postponement of previously scheduled plant maintenance and savings resulting from cost containment efforts. l Maintenance expense decreased $12.8 million during 1994 as compared to 1993 due primarily to lower STP j outage-related maintenance activities. Depreciation and Antortization Depreciation and amortization increased $8.9 million, or 6%, during 1995 as compared to 1994 as a result of an increase in depreciable property and the amortization of regulatory assets associated with the CPL-1995 Agreement. Depreciation and amortization increased in 1994 as compared to 1993 as a result of an increase in depreciable property and a decline in amortization credits related to power plant inventory. Taxes, Other than income Taxes, other than income decreased $14.5 million during 1995 as compared to 1994 due primarily to , lower ad valorem tax expense resulting from a true-up of prior year estimates. The $5.9 million decrease m J 1994 when compared to 1993 was primarily a result of a franchise tax refund. i income Dixes , income taxes decreased $59.5 million in 1995 as compared to 1994 due primarily to the reduction of
$34.3 million of deferred income taxes in accordance with the CPL 1995 Agreement, prior year tax '
adjustments and lower pre-tax income, locome taxes increased $10.2 million in 1994 as compared to 1993 due to higher pre-tax income.
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Other income and Deductions Mirror CWlP liability amortization decreased $27.0 million and $8.0 million in 1995 and 1994, respectively, when compared to the prior year. In accordance with the original liability amortization schedule agreed upon in the settlement ofits rate cases in 1990 and 1991, CPL amortized its Mirror CWIP liability in declining amounts over the years 1991 through 1995. The absence of Mirror CWIP liability amortization in - 1996 will have a negative impact on CPL's net income, although its cash Dow will not be impacted. Other . income was higher in 1995 when compared to 1994 due primarily to the recognition of factoring income-pursuant to the CPL 1995 Agreement. Interest Charges interest'on long term debt increased $4.8 million during 1995 as compared to 1994 as a result of increased long-term debt outstanding. Interest on short-term debt and other increased $7.6 million during 1995 when compared to 1994 as a result of higher lewis of short-term debt outstanding at higher interest rates and the recognition ofinterest expense associated with over-recovered fuel. Cumulative Effect of C.'sanges in Accounting Principles in 1993, CPL changed its method of accounting for unbilled revenues and implemented SFAS No. I12. These accounting changes had a cumulative effect ofincreasing net income by $27.3 million in 1993. Inflation Annual inflation rates, as measured by the Consumer Price Index, have averaged approximately 2.8% during the three years ended December 31,1995. CPL believes that inHation, at this level, does not materially affect its results of operation or financial condition. However, under existing regulatory practice, only the historical cost of plant is recoverable from customers. As a result, cash flows designed to provide recovery of historical plant costs may not be adequate to replace plant in future years. l l l l l t l i 1 l 1 f :.:mr, tr s: ...s. 2-80 l
t = y.u~ Statements of Income CentralPower and Light Company For the Years Ended December 31, 1995 1994 1993 . (thousands) __ ._ Electric Operating Revenues Residential 5 465,478 5 474,480 S 474,426 Commercial 355,238 368,405 369,426 Industrial 256,223 271,738 281.247 Sales for resale 52,081 50,777 45,369 Other (55,551) 52,579 53,060 1,073,469 1,217,979 1,223,528 Operating Expenses and Taxes Fuel 287,979 328,460 350,268 Purchased power 19,632 42,342 64,025 Other operating 209,021 224,852 225,034 Restructuring charges (20,793) 98 29,365 Maintenance 63,201 68,537 81,352 Depreciation and amortization 150,508 141,622 131,825 Taxes, other than income 65,925 80,461 86,394 Income taxes 15,812 75,356 65,186 79),285 961,728 1,033,449 Operating income 282,184 256,251 190,079 Other income and Deductions Allowance for equity funds used during construction 442 1,215 1,074 Mirror CWlP liability amortization 41,000 68,000 75,702 Other 14,880 1,272 1,663 56,322 70,487 78,439 i Income Before Interest Charges 338,506 326,738 268,518 Interest Charges Interest on long-term debt i16,205 i l1,408 112,939 1 1 Interest on short-term debt and other 19,926 12,365 11,993 Allowance for borrowed funds used during construction (4,072) (2,474) (1,544) 132,059 121,299 123,388 income Before Cumulative Effect of Changes in Accounting Principles 206,447 205,439 145,130 Cumulative Effect of Changes in Accounting Principles -- -- 27,295 i Net income 206,447 205,439 172,425 Preferred stock dividends 14,469 13,804 14,003 Net income for Common Stock S 191,978 $ 191,635 S 158,422 The accompanying notes to financial statements are an integral pan of these statements. (CGIS.S l. 2-81 l l l
Statements of Retained Earnings Central l'ower and Light Company For the Years Ended December 31, 1995 1994 1993 (thousands) Retained Earnings at Beginning of Year S 857A66 5 850,307 $ 863,988 Net income for common stock 191,978 191,635 158,422 Deduct: Common stock dividends 186,000 183,000 172,000 Preferred stock redemption costs -- 1,476 103 Retained Earnings at End of Year S 863.444 $ 857,466 5 850,307 i l l I l l l l 1 The accompanying notes to Snancial statements are an integral part of these statements. [5ES .Y l 2-82
1 702W51 Ilince Sheets Centrall'ower and Light Company As of December 31, 1995 1994 . (thousands) ASSETS Electric Utility Plant Production S 3,110,744 S 3,070,005 Transmission 486,090 451,050 Distribution 879,618 828,350 General 248,629 216,888 Construction work in progress 127,307 142,724 Nuclear fuel 165,087 161,152 5,017,475 4,870,169 Less Accumulated depreciation 1,547,530 1.400,343 3,469.945 3,469,826 Current Assets Cash 2,883 642 Special deposits 797 668 Accounts receivable 45,186 29,865 Materials and supplies, at average cost 71,112 66.209 Fuel inventory, at average cost 26,472 22,916 Accumulated deferred income taxes 22,171 -- Under-recovered fuel costs -- 54,126 Prepayments 1,739 2,316 170,360 176,742 DeferTed Charges and Other Assets Deferred STP costs 488,047 488,987 Mirror CWIP asset 311,804 321,825 income tax related regulatory assets, net 346,993 288,444 Other 93,987 76.875 1,240,831 1,176,131 5 4,881,136 S 4.822,699 i l i The accompanying notes to financial statements are an integral part of these statements. E 2 L:- 2 83
II:lznce Sheets Central Power and Light Company As of December 31, 1995 1994 CAPITALIZATION AND LIABILITIES (thousands) Capitalization ~ Common stock: $25 par value Authorized shares: 12,000,000 l Issued and outstanding shares: 6,755,535 $ 168,888 S 168,888 l Paid in capital 405,000 405,000 Retained earnings 863,444 857,466 Total Common Stock Equity 1,437,332 1,431,354 Preferred stock 250,351 250,351 Long-tenn debt 1,517,347 1,466,393 Total Capitalization 3,205,030 3,148,098 Current Liabilities Long-tenn debt due within twelve months 231 723 Advances from affiliates ' 176,334 161,320 , Accounts payable 49,507 84,608. Accrued taxes 61,614 59,386 Accumulated deferred income taxes -- 13,812 , Accrued interest 32,742 24,681 {' Over-recovered fuel costs 12,586 -- Other 24,758 31,476 357,772 376,006 Deferred Credits Accumulated deferred income taxes 1,151,823 1,087,317 investment tax credits 152,744 158,533 Mirror CWIP liability an'd other 13,767 52,745 1,318,334 1,298,595 !
$ 4,881,136 $ 4,822,699 l
1 l I l i l The accompanying notes to financial statements are an integral part of these statements.
':En
.- 7 X.. :.-.
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l:j, L St tements of Cash Flows Central Power and Light Company For the Years Ended December 31, 1995 1994 1993
~ ~
(thousands) OPERATING ACTIVITIES Net income $ 206,447 5 205,439 5 172,425 Non-cash items included in Net Income Depreciation and amortization 173,711 170,971 140,223 Deferred income taxes and investment tax credits (35,815) 20,870 84,714 Mirror CWIP liability amortization (41,000) (68,000) (75,702) Restructuring charges (240) 98 29,365 Regulatory asset established for previously incurred restructuring charges (20,652) -- -- Allowance for equity funds used during construction (442) (1,215) (1,074) Cumulative effect of changes in accounting principles -- -- (27,295) Changes in Assets and Liabilities Accounts receivable (15,321) (6,015) (3,554) Fuel inventory (3,556) (5,982) 12,325 i Accounts payable (35,101) (5,765) (22,386) ; Accrued taxes 2,228 25,617 (9,311) Over- and under-recovered fuel costs 66,712 (1,167) (57,386) Accrued restructuring charges (1,085) (20,245) -- Other deferred c. edits 2,022 1,444 6,295 Other 1,910 (4,575) 29.928 299,818 311,475 278,567 INVESTING ACTIVITIES : Construction expenditures (150,372) (174,993) (177,120) Allowance for borrowed funds used during construction (4,072) (2,474) (1,544) (154,444) (177,467) (178,664) FINANCING ACTIVITIES Proceeds from issuance oflong-term debt 337,828 99,190 441,131 Retirement oflong-term debt -- (459) (431) Reacquisition oflong-term debt (295,938) (618) (573,776) Retirement of preferred stock -- (27,021) (6,578) Special deposits for reacquisition oflong-term debt -- -- 145,482 Change in advances from affiliates 15,014 (9,845) 79,399 Payment ordividends (200,037) (197,048) (186,361) (143,133) (135,801) (101,134) Net Change in Cash and Cash Equivalents 2,241 (1,793) . (1,231) Cash and Cash Equivalents at Beginning of Year 642 2,435 3,666 Cash and Cash Equivalents at End of Year S 2,883 S 642 S 2,435 SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $ 115,845 $ i14,980 5 116.664 income taxes paid S 37,151 $ 28,166 5 3,631 The accompanying notes to financial statements are an integral part of these statements.
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L 2-85
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Statements of Cepitetization Centrall't>wer and Light Crumpany As of December 31, 1995 1994 (thousands) ! COMMON STOCK EQUITY 1,437,332 1,431,354 S $ PREFERRED STOCK ! Cumulative $100 Par Value, Authorized 3,035,000 shares Number Current l ofShares Redemption Series Outstanding Price Not Subject to Mandatory Redemption
- 4.00 % 100,000 $105.75 10,000 10,000 4.20% 75,000 $103.75 7,500 7,500 7.12 % 260,000 5101.00 26,000 26,000 8.72 % $00,000 $100.00 50,000 50,000 Auction Money Market 750,000 5100.00 75,000 75,000 Auction Series A 425,000 $100.00 42,500 42,500
[ Auction Series B 425,000 5100.00 42,500 42,500 issuance Expense (3,149) (3,149) 250,351 250,35i LONG-TERM DEllT First Mortgage Bonds Series J,6 5/8% due January 1,1998 28,000 28,000 Series L,7%, duc February 1,2001 36,000 36.000 Series T,71/2%, due December 15,2014' (Matagorda) 111,700 111,700 Series U,9 3/4%, due July 1,2015' (Matagorda) -- 31,765 Series Z,9 3/8%, due December 1,2019 -- 139,405 Series AA,7 I/2%, due March 1,2020* (Matagorda) 50,000 50,000 ! Series BB,6%, due October I,1997 200,000 200,000 Series CC,71/4%, due Oc:ober 1,2004 100,000 100,000 Series DD,71/8%, due December 1,1999 25,000 25,000 Series EE,71/2%, due December I,2002 115,000 115,000 Series FF,6 7/8%, due February 1,2003 50,000 50,000 Series GG,71/8%, due February 1,2008 75,000 75,000 Series llH,6%, due April 1,2000 100,000 100,000 Series 11,71/2%, due April 1,2023 100,000 100,000 Series JJ,71/2%, due May 1,1999 100,000 100.000 Series KK. 6 5/8%, duc July 1,2005 200,000 -- Installment Sales Agreements - PCRBs Series 1974 A,71/8%, duc June 1,2004 (Nueces) -- 8,700 Series 1977,6%, duc November 1,2007 (Guadalupe) -- 34,235 Series 1981. 7 7/8%, due September 15,2014 (Red Riser) 6.330 6,330 Series 1984.101/8%, due October 15,2014 (Matagorda) -- 68,870 Series 1986,7 7/8%. due December I,2016 (Matagorda) 60,000 60,000 Series 1993,6%, due July 1,2028 (Matagorda) 120,265 120.265 Series 1995,6.10%, duc July 1,2028 (Matagorda) 100,635 - Series 1995, s ariable rate, due November 1,2015 (Guadalupe) 40,890 - Notes Payable,61/2%, due December 8,1995 231 448 L'namortized Discount (6,115) (11.655) Unamortized Costs of Reacquired Debt (95,358) (81,947) Amount to be Redeemed Within One Year (231) (723) 1,517.347 1.466.393 l
. TOTAL CAPITAllZATION $ 3,205.030 5 3,148.098 l
- Obligations incurred in connection with the sale by public authonties of tax-exempt PCRBs.
, The accompanying notes to financial statements are an integral part of these statements. l . .,,'.l... 2-86
CENTilAL POWElt AND LIGilT COMPANY l NOTES TO FINANCI AL STATEMENTS ,
- 1. SUMMAltY OF SIGNIFICANT ACCOUNTING POLICIES See CSW's NOTE 1 on pages 2-32 to 2-37.
t l
- 2. LITIGATION AND ltEGULATOltY PItOCEEDINGS CPL Rate Review On November 6,1995, CPL Gled with the Texas Commission a request to increase its retail base rates by $71 million and reduce its annual retail fuel factors by $17 million. The net effect of these proposals would be an increase of $54 million, or 4.6%, in total annual retail revenues based on a test year ended June 30,1995. CPL is not seeking interim rate relief, but will implement bonded rates in May 1996, i
the earliest date permitted by law. CPL also is seeking to reconcile $229 million of fuel costs incurred l during the period July 1,1994 through June 30,1995. CPL's previous request to reconcile fuel costs from l ' March 1,1990 to June 30,1994 in Docket No.13650 was consolidated with the current rate review. If the requested increase and other adjustments in rate structure are approved, CPL has committed not to increase its base rates prior to January 1,2001, subject to certain force majeure events. l CPL is requesting this rate review in large part as a result of the expiration of the amortization of its Mirror CWIP liability. The Mirror CWIP liability was amortized to income in declining amounts over a five-year period from 1991 through 1995 pursuant to rate settlements reached by CPL in 1990 and 1991, in 1995, Mirror CWIP provided $41 million in non-cash earnings at CPL. Also included in the request are proposals by CPL to accelerate recovery of nuclear and regulatory assets as a way to proactively address l , I certain assets that could possibly be unrecoverable or stranded in a more competitive electric utility industry. In a preliminary order issued December 21,1995, the Texas Commission expanded the scope of the rate review to address certain competitive issues facing the electric utility industry. The competitive issues to be addressed by CPL in a supplemental Cling due April 1,1996, are: (i) the calculation of rates on an unbundled or functional basis (i.e., generation, transmission and distribution);(ii) the current value of CPL's generating assets as compared to estimates of the market value of such assets under alternate future industry structures;(iii) the application of performance based ratemaking; (iv) potential revisions in the methodology of reconciling and recovering fuel costs; and (v) the Texas Commission's authority to introduce competition in the electric utility industry under existing law. On February 13,1996, intervening parties filed testimony in the revenue requirements phase of CPL's base rate case. Among the parties that Gled testimony were the OPUC which recommended a base rate decrease of approximately $75 million on a total company basis and the Cities which recommended a base rate reduction of approximately $52 million on a total company basis. On February 20,1996, the Staff filed testimony recommending an increase in total company base l rates of approximately $30 million. Certain elements of the Staff's proposal are described below. The Staff recommended a return on common stock equity of 11.35% compared to the 12.25% return on common equity requested by CPL. The Staff recommended a disallowance of $16 million in costs billed for administrative services by CSW Services to CPL on the basis that the speciGe bene 0ts to CPL were not clearly identified. Additionally, the Staff recommended a $7 million reduction in CPL's current annual depreciation accrual and a $3 million reduction in CPL's requested accrual for
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decommissioning STP. A comparison of the Staff's recomrnendation for a base rate increase, compared to l CPL's claimed revenue deficiency is provided in the CPL RATE REVIEW COMPARISON table. CPL RATE REVIEW COMPARISON (unnudited) (millions) . CPL revenue deficiency (1) $103 Return on common equity (2I) CSW Services expenses (16) l Depreciation expense (7) Decommissioning expense (3) Miscellaneous items (26) Staff recommended revenue increase (2) 13u (1) The total company rate increase requested by CPL was reduced from $103 million to $78 million ($71 million l allocated to the Texas retail jurisdiction) in accordance
.I with rate settlements entered into by CPL in 1990 and i 1991. l (2) The Staff recommended that CPL be granted a $23 l million base rate increase and an annual increase of $7 million in customer service charges.
The Staff and Cities recently filed testimony on the fuel portion of the rate case recommending a reduction to CPL's eligible fuel costs of $16 million and $32 million, respectively. 1 l After completion of hearings in all phases of the rate case, which began in late February 1996 and l are expected to conclude during the third quarter of 1996, the ALJs assigned to hear the case will issue a I proposal for decision for consideration by the Texas Commission. Testimony filed by parties to the rate I case, including the Staff, is not binding on either the ALJs or the Texas Commission. A final decision on j the rate request is not anticipated from the Texas Commission prior to December 1996. CPL's management cannot predict the ultimate outcome of CPL's rate case, although management believes that the ultimate resolution will not have a material adverse effect on CPL's results of operations or financial condition. liowever, if CPL ultimately is unsuccessful in obtaining adequate rate relief, CPL could experience a material adverse effect on its results of operations and financial condition. CPL 1995 Agreement On April 5,1995, CPL reached an agreement in principle with other parties to pending regulatory proceedings involving base rate, fuel and prudence issues relating to an outage experienced at STP during 1993 and 1994. On May 16,1995, CPL filed the CPL 1995 Agreement with the Texas Commission. Pursuant to the CPL 1995 Agreement, base rate refunds, fuel refunds and the reduction of CPL's fuel factors were implemented during the summer of 1995. Under the CPL 1995 Agreement, CPL provided customers a one-time base rate refund of $50 million. In addition, CPL refunded approximately $30 million in over-recovered fuel costs through April 1995. Furthermore, CPL did not charge customers for $62.25 million in replacement power costs and related interest primarily associated with the 1993-1994 STP outage. The CPL 1995 Agreement did not result in any ongoing change in base rate levels and provided that there would be no new rate review requests filed prior to September 28,1995. CPL also reduced its fuel factors, effective in July 1995, by approximately $55 million on an annual basis due to projections oflower fuel costs. Hearings on the CPL 1995 Agreement were held on July 19,1995, and the final written Texas Commission order approving the CPL 1995 Agreement was received on October 4, 1995. Details of the items in the CPL 1995 Agreement and the total 1995 earnings impact for CPL, including certain accounting provisions, are set forth in the following table. 2-88
. - _~ _. - . ._- . - - -
Pre-tax After. tax (milhons) liase rate refund 5(50 0) 5(32.5) l'uel disallowance (62.3) (40 5) , Wholesale fuel refund (3.2) (2.1) Current flowback of excess deferred federal income taxes 34.3 34.3 Capitalization of previously expensed restructuring und rate case costs 27.6 17.9 Recognition of factoring income 16.1 10.5 Amortization. interest and other (6.6) (4.4) CPL Deferred Accounting CPL was granted deferred accounting treatment for certain STP Unit I and 2 costs by Texas Commission orders issued in October 1990 and December 1990, respectively. In 1994, the Supreme Cour'. sustained deferred accounting as an appropriate mechanism for the Texas Commission to use in preserving the financial integrity of CPL, but remanded CPL's case to the Court of Appeals to consider certain substantial evidence points of error not previously decided by the Court of Appeals given its prior determinations. On August 16,1995, the Court of Appeals rendered its opinion in the remand proceeding and afGrmed the Texas Commission's order in all respects. CPL believes that the language of the Supreme Court's opinion suggests that the appropriateness of allowing deferred accounting may be reviewed under a Gnancial integrity standard in the first case in which the deferred STP costs are recovered through rates. If the courts decide that subsequent review , under the Gnancial integrity standard is required, that review would be conducted in a remand of the STP Unit I and 2 orders. Pending the ultimate resolution of CPL's deferred accounting issues, CPL is unable to predict how its deferred accounting orders will ultimately be resolved by the Texas Commission. If CPL's deferred accounting matters are not favorably resolved, CPL could experience a material adverse effect on its results of operations and financial condition. While CPL's management is unable to predict the ultimate outcome of these matters, management believes CPL will receive approval of its deferred accounting orders or will be successful in renegotiation ofits rate orders, so that there will be no material adverse effect on CPL's results of operation or financial condition. CPL Westinghouse Litigation CPL and other owners of STP were plaintiffs in a lawsuit Gled in October 1990 in the District Court in Matagorda County, Texas against Westinghouse, seeking damages and other relief. The suit alleged that Westinghouse supplied STP with defective steam generator tubes that are susceptible to stress corrosion cracking. On December 8,1995, CPL and the other owners of STP settled the lawsuit. While the court order prohibits disclosure of the terms of the settlement, CPL believes the litigation was settled on terrns that provided satisfactory consideration to CPL and STP and will not have a material adverse effect on the results of operations or financial condition of CPL. CPL CivilPenalties in October 1995, the NRC noti 6ed HLP of a Notice of Violation and proposed penalties totaling
$160,000 related to events that occurred at STP in May 1992. The Notice of Violation and penalties reDect the NRC's belief that certain STP employees were terminated as a result of raising safety concerns with the NRC. The Notice of Violation was the result of a Depanment of Labor decision and order in April 1995 and is awaiting Gnal action by the Secretary of Labor. HLP is not required to reply to the NRC's Notice of Violation or pay the penalties pending the Secretary of Labor's fmal decision. The NRC indicated that the proposed civil penalties re0cet minimum penalties allowed because ofimprovements made to the STP
%.. ib 2-89
Employee Concerns Program since 1992. CPL's share of any penahy that is ultimately paid would be approximately 25%, reDecting its ownership interest in STP. CPL Industrial Road and Industrial Metals Site Three suits naming CPL and others as defendants relating to a third-party owned and operated , site in Corpus Christi, Texas formerly used for commercial reclamation of used electrical transformers, lead acid batteries and other scrap metals, are currently pending in federal and state court in Corpus Christi, Texas. Plaintiffs' complaints seek damages for alleged property damage and health impairment as a result - ofoperations on the site and cleanup activities. Management cannot predict the outcome of these suits. + However, management believes that CPL has defenses to the plaintiffs' complaints and intends to defend i the suits vigorously. Management also believes that the ultimate resolution of these matters will not have a material adverse effect on CPL's results of operations or financial condition. ' Other CPL is party to various other legal claims, actions and complaints arising in the normal course of business. Management does not expect disposition of these matters to have a material adverse effect on ; CPL's results of operations or financial condition.
- 3. COMMITMENTS AND CONTINGENT LIAHILITIES '
Construction and Capital Expendiluns it is estimated that CPL will spend approximately $137 million, including AFUDC, in i construction expenditures during 1996. Substantial commitments have been made in connection with this capital expenditure program. t Fuel Commitmntis i To supply a portion of the fuel requirements, CPL has entered into various commitments for j procurement of fuel. I Other Commitments and Contineencies CPL Nuclear Insurance in connection with the licensing and operation of STP, the owners have purchased the maximum limits of nuclear liability insurance, as required by law, and have executeo indemnification agreements with the NRC in accordance with the financial protection requirements of the Price-Anderson Act. The Price-Anderson Act, a comprehensive statutory arrangement providing limitations on nuclear liability and governmental indemnities, is in effect until August 1,2002. The limit ofliability under the Price-Anderson Act for licensees of nuclear power plants is $8.92 billion per incident, effective as of January 1995. The owners of STP are insured for their share of this liability through a combination of private insurance amounting to $200 million and a mandatory industry-wide program for self-insurance totaling S8.72 billion. The maximum amount that each licensee may be assessed under the industry-wide program of self-insurance following a nuclear incident at an insured facility is $75.5 million per reactor, which may be adjusted for inflation, plus a five p'ercent charge for legal expenses, but not more than $10 million per reactor for each nuclear incident in any one year. CPL and each of the other STP owners are subject to such assessments, which CPL and other owners have agreed will be allocated on the basis of their respective ownership interests in STP. For purposes of these assessments, STP has two licensed reactors. D!? .= b. 2-90
The owners of STP currently maintain on-site decontamination liability and property damage insurance in the amount of $2.75 billion provided by ANI and NEIL, Policies ofinsurance issued by ANI and NEIL stipulate that policy proceeds must be used first to pay decontamination and cleanup costs before being used to cover direct losses to property. Under project agreements, CPL and the other owners of STP will share the total cost of decontamination liability and property insurance for STP, including premiums and ~ assessments, on a pro rata basis, according to each owner's respective ownership interest in STP. CPL purchases, for its own account, a NEIL 1 Business Interruption and/or Extra Expense policy. This insurance will reimburse CPL for extra expenses incurred for replacement generation or purchased power as the result of a covered accident that shuts down production at one or both of the STP Units for more than 21 consecutive weeks. In the event of an outage of STP Units I and 2 and the outage is the result of the same accident, insurance will reimburse CPL up to 80% of the single unit recovery. The l maximum amount recoverable for a single unit outage is $86.02 million for Unit I and $85.96 million for Unit 2. CPL is subject to an additional assessment up to $1.6 million for the current policy year in the event that insured losses at a nuclear facility covered under the NEIL 1 policy exceeds the accumulated , funds available under the policy. On August 28,1994, CPL filed a claim under the NEIL I policy relating to the 1993-1994 outage at STP Units I and 2. NEIL has denied the claim. CPL management is currently evaluating its options regarding this claim, but cannot predict the ultimate outcome of this matter.
- 4. INCOME TAXES See CSW's NOTE 4. ,
- 5. BENEFIT PLANS See CSW's NOTE 5.
- 6. JOINTLY OWNED ELECTRIC UTILITY PLANT -
See CSW's NOTE 6.
- 7. FINANCIAL INSTRUMENTS See CSW's NOTE 7.
- 8. LONG-TERM DEBT See CSW's NOTE 8.
- 9. PREFERRED STOCK I
See CSW's NOTE 9.
- 10. SHORT-TERM FINANCING See CSW's NOTE 10.
- 11. QUARTERLY INFORMATION See CSW's NOTE 14 on pages 2-64 and 2-65.
CSW's NOTE 4 through NOTE. 'O are found on pages 2-48 through 2-60.
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REPOllT OF INDEPENDENT PUllLIC ACCOUNTANTS To the Stockholden and livard ofDirectors of Central Power and Light Company: ; We have audited the accompanying balance sheets and statements of capitalization of Central Power - and Light Company (a Texas corporation and a wholly owned subsidiary of Central and South West Corporation) as of December 31,1995 and 1994, and the related statements ofincome, retained earnings and l cash Dows for each of the three years in the period ended December 31,1995. These Gnancial statements are l the responsibility of CPL's management. Our responsibility is to express an opinion on these financial ' statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Gnancial statements. An audit also includes assessing the accounting principles used and signiGcant estimates made by management, as well as evaluating the overall Unancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the Gnancial position of Central Power and Light Company as of December 31,1995 and 1994, and the results of its operations and its cash Dows for each of the three years in the period ended December 31,1995, in conformity with generally accepted accounting principles. In 1993, as discussed in NOTE 1, CPL changed its methods of accounting for unbilled revenues, postretirement benefits other than pensions, income taxes and postemployment benents. Our audits were made for the purpose of forming an opinion on the financial statements taken as a whole. The supplemental Schedule 11 and Exhibit 12 are presented for purposes of complying with the, Securities and Exchange Commission's rules and are not pan of the basic Onancial statements. This schedule and exhibit have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to bv set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Dallas, Texas February 28,1996 l
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REPORT OF MANAGEMENT Management is responsible for the preparation, integrity and objectivity of the Gnancial statements of ; Central Power and Light Company as well as other information contained in this Annual Report. The Gnancial , i statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reDect amounts based on the best estimates andjudgments of management, giving due consideration to materiality. Financial information contained elsewhere in this Annual Report is consistent with that in the Gnancial statements. The financial statements have been audited by the independent accounting Erm, Arthur Andersen LLP, which was given unrestricted access to all Onancial records and related data, including minutes of all meetings of shareholders, the board of directors and committees of the board. CPL believes that representations made to the independent auditors during its audit were valid and appropriate. Arthur Andersen LLP's audit report is presented elsewhere in this report. CPL maintains a system ofinternal controls to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the Gnancial statements are prepared in accordance with generally accepted accounting principles and that the assets of CPL are properly safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that CPL will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees. Internal auditors continuously monitor the effectiveness of the internal control system following standards established by the Institute ofInternal Auditors. Actions are taken by management to respond to deficiencies as they are identified. The board, operating through its audit committee, which is comprised entirely of directors who are not of0cers or employees of CPL provides oversight to the financial reporting process. Due to the inherent limitations in the effectiveness ofinternal controls, no internal control system can provide absolute assurance that errors will not occur. However, management strives to maintain a balance, recognizing that the cost of such a system should not exceed the benents derived. CPL believes that, in all material respects, its system ofinternal controls over Gnancial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31,1995. Robert R. Carey R. Russell Davis President and CEO - CPL Controller - CPL 1 M* %.= 2-93
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i l 4 ELECTED FINANCI AL DATA The following selected financial data for each of the Sve years ended Decem i Gnancial ' td highlight significant trends in the financial id condition an 1991 1992 1994 1993 (1) 1995 (thousands, except ratio data)
$622,092 $650,942
$740,496 $707,536 INCOME STATEMENT DATA $690,823 543,996 564,146 642,238 635,380 Revenues 579,054 78,096 86,796 98,258 72,156 Operating expenses and taxes !11,769 (1,078) 1,627 (591)
Operating income 3,544 2,027 32,489 33,287 31,943 Other income and deductions 33,485 32,019 53,229 46,719 45,562 Interest charges 81,828 68,266 52,413 45,903 44,746 Net income 81,012 67,450 Net income for common stock 1,351.201 1,308,075 1,465,114 1,420,379 419,400 BALANCE SilEET DATA 1,489,816 429,146 461,499 435,049 Assets 487,5)1 19,826 19,826 19,826 Common stock equity 19,826 19,826 408,731 368,219 402,752 401,255 Preferred stock 379,250 120,140 136,295 223,461 206,004 Long-term debt 236,212 Cuitent liabilities (2) 50.0 % 51.9 % 52.2 % 50.8 % 2.5 Capitalization ratios 55.0 % 2.3 Common stock equity 2.2 2.3 45.6 2.2 46.9 47.7 Preferred stock 42.8 45.6 Long-term debt Ratio of carnings to fixed charges (SEC Method) before cumulative 2.95 3.33 effect of changes in accounting 4.03 2.78 4.32 principles li effect of changes in accounting suming that the change in (1) Earnings in 1993 were significantly affected by restructuring accounting for unbilled revenues had been adopted retroactively, are not materially and therefore have not been restated. (2) Includes net unbilled factored accounts receivable in 1994 and 1995. l l
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l 2-95
,. i l PUBLIC SERVICE COMPANY OF OKLAllOMA l MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- Reference is made to PSO's Consolidated Financial Statements and related Notes to Consolidated Financial Statement and Selected Financial Data. The information contained therein should be read in conjunction with, and is essential to understanding, the following discussion and analysis.
OVERVIEW Net income for common stock for 1995 was $81 million, representing a 20% increase from 1994 net income for common stock of $67 million. The increase was due primarily to decreased operating and maintenance expenses and the sale of a non-utility Ober optic telecommunication propeny during 1995. Net income for common stock for 1994 was $67 million, a 47% increase from 1993. The increase was due primarily to increased energy sales to retail customers and sales for resale to other electric utilities due to l increased market place demand and the 1993 restructuring charges of S25 million. 1 i RESTRUCTURING ' l During 1993, CSW announced a restructuring under which the CSW System restructured the Electric Operating Companies (including PSO) under a new business unit called CSW Electric and centralized many
)
common service functions into CSW Services in order to reduce costs and improve efficiency and productivity. I The restructuring included restaf0ng positions throughout the CSW System and a reduction in the workforce by more than 7% system-wide. PSO's restructuring costs were initially estimated to be $25 million and were expensed in 1993. The actual costs of the restructuring, approximately $24 million, were incurred primarily during 1994. PSO has realized a number of bene 0ts from the restructuring, including increased ef0ciencies and synergies through the elimination of previously duplicated functions. LIQUIDITY AND CAPITAL RESOURCES Overview l PSO's need for capital results primarily from the construction of facilities to provide reliable electric l service to its customers. Accordingly, internally generated funds should meet most of the capital requirements. However, ifinternally generated funds are not sufficient, PSO's Gnancial condition should allow it access to the capital markets. Construction Expenditures PSO maintains a continuing construction program, the nature and extent of which is based upon current and estimated future demands upon the system. Planned construction expenditures for PSO for the next three years are primarily to improve and expand distribution facilities and will be funded primarily through internally generated funds. These improvements will be required to meet the anticipated needs of new j customers and the growth in the requirements of existing customers. Construction expenditures, including AFUDC, for PSO were approximately $102 million in 1995, $131 million in 1994 and $95 million in 1993. l l 2-96
1 PSO's estimated total construction expenditures, including AFUDC, for the years 1996 through 1998 are presented in the following table. , CONSTitUCTION EXPENDITURES 1996 1997 1998 Total (milhons) Generation $11 $15 $12 $38 Transmission 3 3 3 9 Distribution 40 39 39 118 Other 14 15 15 44
$68 $72 $69 $209 The foregoing consists of forward looking information and, accordingly, actual results may differ materially from such projected information due to changes in the underlying assumptions. Such assumptions are based on numerous factors, including factors such as the rate ofload growth, escalation of construction costs, changes in lead times in manufacturing, inflation, the availability and pricing of alternatives to construction, environmental and other regulation, delays from regulatory hearings, adequacy of rate relief and the availability of necessary external capital. Changes in those and other factors could cause PSO to defer or accelerate construction or to sell or buy more power, which would affect its cash position, revenues and income to an extent that cannot now be reliably predicted.
Although PSO does not believe that it will require substantial additions of generating capacity through the end of the decade, the CSW System's internal resource plan presently anticipates that any additional capacity needs will come from a variety of sources including projected coal- and lignite-fired generating plants for which PSO has invested approximately $38 million in prior years for plant sites, engineering studies and lignite reserves. Should future plans exclude these plants for environmental, economical or other reasons, < PSO would evaluate the probability of recovery of these investments and may record appropriate reserves. 1 Long-Term Financing As of December 31,1995, the capitalization ratios of PSO were 55% common stock equity,2% ; preferred stock and 43% long-term debt. PSO's embedded cost oflong-term debt was 7.5% at December 31, 1995. PSO continually monitors the capital markets for opportunities to lower its cost of capital through l refinancing. PSO continues to be committed to maintaining financial Dexibility by maintaining a strong capital i structure and favorable securities ratings which should allow funds to be obtained from the capital markets when required. , l l In February 1996, PSO filed a shelf registration statement with the SEC for the sale of up to $75 l million of Senior Notes, in March 1996, PSO issued $30 million of MTNs, Series A under the shelf registration statement described ir. the preceding sentence. The proceeds were used to repay a portion of PSO's short-term borrowing and to reimburse PSO's treasury for the scheduled maturity of $25 million aggregate principal amount of FMBs on March 1,1996. PSO may offer the remaining $45 million of Senior Notes available under its shelf registration statement from time to time subject to market conditions and other factors. The proceeds of any such offering may be used to redeem FMBs, repay short-term debt or provide working capital. l Short-Term Financing PSO, together with other members of CSW System, has established a CSW System money pool to coordinate short-term borrowings. These loans are unsecured demand obligations at rates approximating the , CSW System's commercial paper borrowing costs. At December 31,1995 PSO's short-term borrowing limit from the money pool was approximately 593 million. During 1995, the annual weighted average interest rate on PSO's borrowings was 6.1% and the average amount of PSO's short-term borrowings outstanding was $54 P3J 2-97
1 million. The maximum amount of PSO's short-term borrowings outstanding during 1995 was $90 million, which was the amount outstanding at January 25,1995. Internally Generated Funds .; Internally generated funds consist of cash flows from operating activities less common and preferred stock dividends. PSO utilizes short-term debt to meet fluctuations in working capital requirements due to the
- seasonal nature of energy sales. PSO anticipates that capital requirements for the period 1996 to 1998 will be l met, in large part, from internal sources. PSO also anticipates that some external financing will be required )
( during the period, but the nature, timing and extent have not yet been determined. Information concerning internally generated funds is presented in the following table. l 1995 1994 1993 ($ in nnilions) I Internally Generated Funds $88 $110 $93 I Construction Expenditures l'rovided ! by Internally Generated Funds 87 % 85 % 99 % i Sales ofAccounts Receivable PSO sells its billed and unbilled accounts receivable, without recourse, to CSW Credit. The sales
. provide PSO with cash immediately, thereby reducing working capital needs and revenue requirements. The j average and year end amounts of accounts receivable sold were $80 million and $71 million, respectively, in l
1995, as compared to $91 million and $72 million, respectively, in 1994. l RECENT DEVELOPMENTS AND TRENDS 1 1 Competition andIndustry Challenges . Comp'etitive forces at work in the electric utility industry are impacting PSO and electric utilities generally. Increased competition facing electric utilities is driven by complex economic, political and technological factors. These factors have resulted in legislative and regulatory initiatives that are likely to ; result in even greater competition at both the wholesale and retail level in the future. As competition in the ' industry increases, PSO will have the opponunity to seek new customers and at the same time be at risk of , losing customers to other competitors. Additionally, PSO will continue to compete with suppliers of ! alternative forms of energy, such as natural gas, fuel oil and coal, some of which may be cheaper than electricity. PSO believes that its prices for electricity and the quality and reliability ofits service currently place it in a position to compete effectively in the marketplace. The Energy Policy Act, which was enacted in 1992, significantly alters the way in which eleuric utilities compete. The Energy Policy Act creates exemptions from regulation under the Holding Compny Act and permits utilities, including registered utility holding companies and non-utility companies, to form EWGs. EWGs are a new category of non-utility wholesale power producers that are free from most federal and state regulation, including the principal restrictions of the Holding Company Act. These provisions enable broader participation in wholesale power markets by reducing regulatory hurdles to such participation. The Energy Policy Act also allows the FERC, on a case-by-case basis and with certain restrictions, to order wholesale l transmission access and to order electric utilities to enlarge their transmission systems. A FERC order l requiring a transmitting utility to provide wholesale transmission service must include provisions generally that l permit the utility te' recover from the FERC applicant all of the costs incurred in connection with the i transmission services and any enlargement of the transmission system and associated services. Wholesale energy markets, including the market for wholesale electric power, have been extremely competitive since the enactment of the Energy Policy Act. PSO must compete in the wholesale energy markets with other public 2-98 l
utilities, cogenerators, qualified facilities, EWGs and others for sales of electric power. While PSO believes l that the Energy Policy Act will continue to make the wholesale markets more competitive, PSO is unable to ; predict the extent to which the Energy Policy Act will impact PSO operations.
~
On March 29,1995, consistent with the direction of the Energy Policy Act, the FERC announced in a NOPR a requirement that each public utility that owns and controls transmission facilities in interstate commerce must unbundle its sersices and Gle open access transmission tariffs under which such utility will offer comparable open access transmission services to its transmission customers. In addition, the FERC revised its proposed mechanisms by which utilities will be permitted to recover stranded investment costs expected to be brought about by the proposed changes. On August 7,1995, CSW Gled comments on the proposed approach in the NOPR with the FERC. Although CSW supports the concept of comparable open access for the nation's transmission service, CSW believes that certain changes must be made in the FERC's proposed approach of implementing the open transmission system. First, with respect to the issue of stranded investments, the FERC proposed that customers who left the utility company pay for a portion, but not all, of the costs incurred by the owner of existing facilities that are not utilized as a result of the loss of such customers. CSW raised concerns about the FERC's proposed methodology for addressing stranded investment because it did not, in CSW's view, provide for the fair recovery of the full amount previously invested. Second, CSW proposed that the FERC adopt a " power Gow pricing" approach whereby all electric systems that incur costs because of a transmission transaction are compensated, as opposed to the traditional" postage stamp" method whereby only the companies that are directly involved in the actual purchase and sale of the electricity are compensated or charged. On February 9,1996, PSO Gled at the FERC complete sets of open access transmission tariffs for the Southwest Power Pool. These tariffs substantially reGect the pro forma tariffs attached to the FERC's March 29,1995 NOPR. Open access and market pricing should increase marketing opportunities for PSO, but may also expose it to the risk ofloss ofload or reduced revenues due to competition with alternate suppliers. Increasing competition in the utility industry brings an increased need to stabilize or reduce rates. The retail regulatory environment is beginning to shift from traditional rate base regulation to incentive regulation. Incentive rate and performance-based plans encourage efGeiencies and increased productivity while permitting utilities to share in the results. Retail wheeling, a major industry issue which may require utilities to " wheel" or move power from third parties to their own retail customers, is evolving gradually. Many states throughout the country currently have legislation introduced to investigate the issue. In Oklahoma, a legislative task force is examining state laws affecting retail electric companies. Issues being addressed include retail wheeling, territorial boundaries, taxes and condemnations. PSO believes that retail competition would harm the best interests of PSO's customers and security holders unless PSO receives fair recovery of the full amounts previously invested to Gnance power plants. These investments, which were reasonably incurred, were made by PSO to meet its obligation to serve the public interest, necessity and convenience. This obligation has existed for nearly a century and remains in force under current law. PSO intends to strongly oppose attempts to impose retail competition without just compensation for the risks and investments PSO undertook to serve the public's demand for electricity. PSO is unable to predict the ultimate outcome or impact of competitive forces on the electric utility industry or on PSO. As the wholesale and retail electricity markets become more competitive, however, the principal factor determining success is likely to be price, and to a lesser extent, reliability, availability of capacity, and customer service. Regulatory Accounting Consistent with industry practice and the provisions of SFAS No. 71, w hich allows for the recognition and recovery of regulatory assets, PSO has recognized signiGeant regulatory assets and liabilities. b2-99
i
- ement believes that PSO will continue to meet the criteria for following SFAS No. 71. However, in the "SO no longer meets the criteria for following SFAS No. 71, a write-off of regulatory assets and
.ies would be required. For additional information regarding SFAS No. 71 reference is made to NOTE .
\1 MARY OF SIGNIFICANT ACCOUNTING POLICIES. _.
1RONMENTAL MATTERS l The operations of PSO, like those of other utility systems, generally involve the use and disposal of nces subject to environmental laws. CERCLA, the federal"Superfund" law, addresses the cleanup of antaminated by hazardous substances. Superfund requires that PRPs fund remedial actions regardless of r the legality of past disposal activities. PRPs include owners and operators of contaminated sites and arters and/or generators of hazardous substances. Many states have similar laws. Legally, any one PRP held responsible for the entire cost of a cleanup. Usually, however, cleanup costs are allocated among
- PSO is subject to various pending claims alleging that it is a PRP under federal or state remedial laws estigating and cleaning up contaminated property. PSO anticipates that resolution of these claims, lually or in the aggregate, will not have a material adverse effect on PSO's results of operations or ial condition. Although the reasons for this expectation differ from site to site, factors that are the basis expectation for specific sites include the volume and/or type of waste allegedly contributed by PSO, the ited amount of costs allocated to PSO and the participation of other parties. See ITEM l-HUSINESS OTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional discussion regarding - nmental matters.
_ ' ACCOUNTING STANDARDS SFAS No.121 In March 1995, the FASB issued SFAS No.121 to be effective for financial statements for fiscal years
- ing after December 15,1995. The statement establishes a two-fold test for identification and fication of an impaired asset. The first test in determining an impairment is to compare the sum of ed future cash flows (undiscounted and without interest charges) related to an asset to the carrying
't of the asset. If the sum of expected cash flows is not sufficient to recover the carrying value of the hen an impairment is recognized. Once an impairment is identified, the second part of the test is applied 7tify the amount of the impairment. The statement lists several alternative methods'of establishing fair
- value and quantifying the impairment. Cash flows used to measure possible impairment of an asset are d at the lowest level for which there are identifiable cash flows that are largely independent of the cash if other groups of assets. Fcr PSO, the lowest independently identifiable cash flow level used for this is is jurisdictional rates charged to customers.
PSO will adopt SFAS No.12'. in the first quarter of 1996. Under the current regulatory environment,
. aes not expect the adoption of SFAS No.121 to have a significant impact on PSO's consolidated results rations or financial condition. However, future developments in the electric industry and utility
- ion could jeopardize the full recovery of the carrying cost of certain investments. Consequently, PSO is i > ring the changing conditions facing the electric utility industry.
l l SFAS No.123 l SFAS No,123 was issued in October 1995 with an effective date for transactions entered into after ; iber 15,1995. This statement requires the use of an option pricing model to calculate the value of stock- l l compensation transactions where such value cannot otherwise be determined, but then allows for two ; 2-100
alternative methods of reporting the transactions. One method recognizes this value as a cost of compensation and as an expense for the current period. The alternative method permits footnote disclosure of the compensation cost, without charging the amount against current earnings.
- As provided by the provisions of SFAS No.123, PSO will continue to apply the recognition and measurement provisions of Accounting Principles Board Opinion No. 25," Accounting for Stock issued to Employees" and adopt the disclosure requirements of SFAS No.123 in 1996. Accordingly, the adoption of SFAS No.123 will not impact PSO's consolidated results of operations or Gnancial condition.
RESULTS OF OPERATIONS Electric Operating Revenues Electric operating revenues decreased 7% to $690.8 million during 1995 from $740.5 million during 1994. The decrease in 1995 was due primarily to decreased fuel recovery and a decrease in weather-related retail customer demand partially offset by customer growth. Electric operating revenues for 1994 increased 5% to $740.5 million from $707.5 million during 1993. The increase in 1994 reficcted an increase of approximately 8% in KWH sales resulting from increased sales for resale to other electric utilities due to increased marketplace demand, partially offset by lower unit fuel costs as described below. Additionally,1994 was affected by increased fuel revenue as discussed below. Fuel Fuel expense was $273.5 million during 1995, which represented a 14% decrease compared to $316.5 million during 1994. The decrease was primarily attributable to a reduction in the over-recovery of fuel costs, as well as a reduction in average fuel costs from $1.96 per Mmbtu in 1994 to $1.73 per Mmbtu in 1995. The decrease in average unit fuel costs was attributable to the settlement of certain coal transportation litigation and a reduction in the spot market price of natural gas. The decrease was partially offset by a 3% increase in KWH generation. Fuel expense for 1994 increased approximately 6% to $316.5 million in 1994 from $298.9 million in 1993. Fuel expense for 1994 increased primarily as a result of the termination of the FUSER Program effective October 1993. See ITEM 1-BUSINESS for additional information relating to the FUSER program. In 1994, fuel expense was also affected by a 17% increase in KWH generation and an over-recovery of fuel costs from customers, which was previously recorded as deferred fuel, offset in part by a reduction in average unit fuel costs. The average unit fuel cost for 1994 was $1.96 per Mmbtu, a decrease of approximately 18% from 1993 levels. The decrease in per unit fuel cost reDects the reversal of prior years accruals for potential liabilities related to coal transportation, as well as lower costs for natural gas and coal. Purchased Power Purchased power expenses decreased approximately 32% to $23.6 million for 1995 from $34.9 million in 1994. Purchased power expenses for 1994 increased approximately $2.2 million or 7% when compared to 1993. Both 1995 and 1994 were impacted by the 1994 increases in purchases of economy energy. Other Operating Expenses Other operating expenses decreased 3% to $116.7 million during 1995 from $120.2 million during 1994. The decrease was due primarily to a net decrease in customer related expenses, decreased distribution meter expenses and the realization of savings from cost containment efforts. The decreases were offset in part by increases in employee related costs and additional transmission expenses associated with the completion and placement in service of a new HVdc tie in 1995, b 2-101 '
Other operating expenses in 1994 were $120.2 million, a decrease of 5% when compared to other operating expenses of $127.1 million in 1993. The decrease was due to the 1993 write-off of approximately $5 million of certain lignite properties and accrued mine reclamation expenses of approximately $3 million. Ressmco; ring Charges ' f R6tish.g charges reDect the orig aal accrual of S25 million in 1993 which was subsequently reduced by b.2 iillion and 50.5 million it 1994 and 1995, respectively, resulting in total restructuring costs of $24.3 million. Maintenance j Maintenance expenses in 1995 decreased 21% to $35.4 million from $44.9 million in 1994 as a result j of the 1994 write-off of certain deferred expenses associated with the Tulsa Power Station. Also contributing to the decrease was the realization of savings from cost containment efforts. Depreciation and Arnortization l Depreciation and amortization expense increased $4.6 million and $4.0 million in 1995 and 1994, t I respectively, when compared to the prior years due primarily to increases in depreciable property. Income Taxes income tax expense in 1995 was affected by higher pre-tax income, offset by prior year tax ; adjustments. Income tax expense increased approximately $15.2 million or 69% in 1994 as compared to 1993 primarily as a result ofincreased pre-tax income. Other income amlDeductions i Other income and deductions increased $1.3 million for 1995 when compared to 1994 primarily as a , l result of a $2.7 million gain on the sale of non-utility fiber optic telecommunication property, offset in part by . an adjustment to reallocate parent company tax benefits. i Interest Charges interest on short-term debt and other for 1995 increased 65% to $6.4 million from $3.8 million in l 1994. The increase was due primarily to higher levels of short-term debt outstanding at higher interest rates. Interest on long-term debt for 1994 decreased approximately $1.8 million or 6% as a result of the reOnancing l in 1993 of higher cost debt. This decrease was offset in part by increases in short-term borrowings. Cumulative Effect of Changes in Accounting Principles PSO implemented a number of accounting changes in 1993. These included the adoption of SFAS No. I12 and SFAS No.109. PSO also changed its method of accounting for unbilled revenues. These accounting changes had a cumulative effect ofincreasing net income approximately $6 million. inflation Annual inGation rates, as measured by the national Consumer Price Index, have averaged approximately 2.8% during the three years ended December 31,1995. PSO believes that inflation, at this level, does not materially affect its consolidated results of operations or financial condition. However, under existing l~ regulatory practice, only the historical cost of plant is recoverable from customers. As a result, cash flows designed to provide recovery of historical plant costs may not be adequate to replace plant in future years. l i 2-102
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. ~ . - - . - - .- , .. .- - . _ . - . - ~ . _ - _ - - . - ~ . . - - - - . ~ . ,
i b9 Consolidated Statements ofIncome Public Service Company ofOklahoma
- l For the Years Ended December 31, 1995 1994 1993 (thousands)
Electric Operating Revenues , Residential $280,127 $296,159 $296,027 [ Commercial 210,875 227,488 222,598 , Industrial 147,811 165,200 149,762 l Sales for resale 34,273 35,458 18,248 - ; Other 17,737 16,191 20,901 3 690.823 740,496 707,536 I Operating Expenses and Taxes , Fuel 273,533 316,470 298,905 Purchased power 23,584 34,906 ' 32,711 ; Other operating _116,663- 120,221 127,072 l Restructuring charges (488) (197) 24,995 Maintenance 35,356 44,847 45,777 : Depreciation and amortization 67,657 63,096 59,133 : Taxes, other than income 25,147 25,757 24,820 , Income taxes 37,602 37,138 21,967 l 579,054 - 642,238- 635,380 Operating income 111,769 98.258 72,156 , Other Income and Deductions . Allowance for equity funds used during construction 1,270 1,094 1,096 ! Other 2,274 933 531 i 3,544 2,027 1,627 l Income Before Interest Charges 115,313 100,285 73,783 Interest Charges Interest on long term debt . 29,594 29,594 31,410 l Interest on short-term debt and other 6,355 3,844 2,729 l Allowance for borrowe'd funds used during construction (2,464) (1,419) (852) l 33,485 32,019 33,287 income Before Cumulative Effect of Changes in Accounting Principles 81,828 68,266 40,496 Cumulative Effect of Changes in Accouting Principles -- -- 6.223 Net Income 81,828 68,266 46,719 Preferred stock dividends 816 816 816 Net income for Common Stock 5 81,012 S 67,450 $ 45,903 i i The accompanying notes to consolidated financial statements are an integral part of these statements.
.2-103 __ __ _
h olidited Statements ofItetained Earnings c SenIce Company of Oklahoma For the Years Ended December 31, 1995 1994 1993 (thousands) ned Earnings at Beginning of Year $ 124,269 $ 97,819 $ 91,916 t income for common stock 81,012 67,450 45,903 duct: Common stock dividends 55,000 41,000 40,000 ted Earnings at End of Year $ 150,281 $ 124,269 $ 97,819 I l l 1 l l l The accompanying notes to consolidated financial statements are an integral part of these statements. 2-104
b0 Consolidated llalance Sheets Public SenIce Company of Oklahoma As of December 31, 1995 1994 (thousands) ASSETS Electric Utility Plant Production $ 939,106 $ 902,602 Transmission 363,692 346,433 Distribution 712,483 668,346 General 182,705 150,898 Construction work in progress 56,576 96,133 2,254,562 2,164,412 Less - Accumulated depreciation 924,186 859,894 1,330,376 1,304,518 Current Assets Cash 744 5,453 Accounts receivable 17,957 21,531 Materials and supplies, at average cost 41,179 39,888 Fuel inventory, at LIFO cost 15,765 17,820 Accurnulated deferred income taxes 10,389 6,670 Prepayments 2,450 7,889 88.484 99,251 Deferred Charges and Other Assets 61,956 61,345
$ 1,480,816 5 1,465,114 The accompanying notes to consolidated linancial statements are an integral part of these statements.
P,3)
.tn<
P59 Consolidated llalance Sheets l'ublic Service Company of Oklahoma , As of December 31, 1995 1994 CAPITALIZATION AND LIAI31LITIES (thousands) Capitalization Common stock: $15 par value Authorized shares: 11,000,000 shares issued 10,482,000 shares and outstanding 9,013,000 shares $ 157,230 $ 157,230 Paid-in capital 180,000 180,000 Retained earnings 150,281 124,269 Total Common Stock Equity 487,511 461,499 Preferred stock 19,826 19,826 Long-term debt 379,250 402,752 Total Capitalization 886,587 884,077 Current Liabilities Long-term debt due within 12 months 25,000 -- Advances from affiliates 70,510 55,160 Payables to affiliates 40,463 44,367 Accounts payable 23,094 59,899 Payables to customers 32,517 22,655 Accrued taxes 27,014 17,356 Accrued interest 9,025 8,867 Other 8,589 15,157 236,212 223,461 Deferred Credits Accumulated deferred income taxes 264,353 281,139 Investment tax credits 46,222 49,011 lacon e tax related regulatory liabilities, net 41,820 18,611 Other 5,622 8,815 358,017 357,576 S 1,480.816 S 1,465,114 The accompanying notes to consolidated financial statements are an integral part of these statements. P3] 2-106
i bh -
~ Consolidated Statements of Cash Flows
- PublicService company ofoklahoma .
i For the Years Ended December 31, ! l995 I994 1993 I (thousands)
- OPERATING ACTIVITIES Net income $ 81,828 $ 68,266 $ 46,719 Non-cash items included in Net income Depreciation and amortization 73,218 67,452 65,242 Restructuring charges (400) 24,995 (197)
Deferred income taxes and investment tax credits (85) 4,990 6,700 Allowance for equity funds used during construction (1,270) (1,094) (1,006) Cumulative efrect of changes in accounting principles -- -- (6,223) - Changes in Assets and Liabilities
. Accounts receivable 3,574 15,081 (17,299)
Material and supplies (1,291) 1,777 2,872 Accounts payable (22,970) 26,894 (2,963) Accrued taxes 9,658 2,165 4,240 Accrued restructuring charges (646) (15,626) Other deferred credits (3,193) (17,153) 9,583 Other 5,465 1,322 (754) 143,888 J ,801 134,092
. INVESTING ACTIVITIES Construction expenditures (98,415) (128,625) (92,648)
Allowance for borrowed funds used during construction (2,464) (1,419) (852) Other (7,251) (335) (6,125) (108,130) (130,379) (99,625) FINANCING ACTIVITIES Proceeds from issuance oflong-term debt -- - 181,194 Retirement oflong-term debt -- -- (10,000) Reacquisition oflong-term debt -- -- (189,685) Change in advances from affiliates 15,350 23,416 26,454 Payment ordividends (55,817) (41,814) (40,816) (40,467) (18,398) (32,853) Net Change in Cash and Cash Equivalents (4,709) 3,024 1,614 Cash and Cash Equivalents at Beginning of Year 5,453 2,429 815 Cash and Cash Equivalents at End of Year S' 744 S 5,453 5 2,429 SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $ 31,285 S 31,459 $ 34,844 income taxes paid , S 27.651 5 28,910 S 9,232 The accompanying notes to consolidated financial statements are an integral part of these statements.
1 P59 Consolidated Statements of Capitalization Public Service Contpany of Oklahoma As of December 31, 1995 1994 (thousands) COMMON STOCK EQUITY $ 487.511 $ 461,499 PREFERRED STOCK (Curaulative $100 Par Value, Authorized 700,000 shares, redeemable at the option of PSO upon 30 days notice) Number Current of Shares Redemption Series Outstanding Price 4.00 % 97,900 $ 105.75 9,790 9,790 4.20 % 100,000 $ 103.19 10,000 10,000 I Premium 36 36 l 19,826 19,826 ' LONG-TERM DEBT First Mortgage Bonds Series J,51/4%, due March 1,1996 25,000 25,000 Series K,71/4%, due January 1,1999 25,000 25,000 ; Series L,7 3/8%, due March 1,2002 30,000 30,000 Series S,71/4%, due July 1,2003 65,000 65,000 Series T,7 3/8%, due December 1,2004 50,000 50,000 Series U,61/4%, due April 1,2003 35,000 35,000 Series V,7 3/8%, due April 1,2023 100,000 100,000 Series W,61/2%, due June 1,2005 50,000 50,000 Installment sales agreement - PCRBs Series A,5.9%, due December 1,2007 (OEFA) 34,700 34,700 Series 15'84,7 7/8%, due September 15,2014 (Red River) 12,660 12,660 Unamortized discount (4,415) (4,756) Unamortized costs of reacquired debt (18,695) (19,852) Amount to be redeemed within one year (25,000) -- 379,250 402,752 TOTAL CAPITALIZATION $ 886,587 $ 884,077 i The accompanying notes to consolidated financial statements are an integral part of these statements. l l 2-108
i l PUBLIC SERVICE COMPANY OF OKLAllOM A NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- l.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES See CSW's NOTE 1 on pages 2-32 to 2-37.
- 2. LITIGATION AND REGULATORY PROCEEDINGS PSO Gas Transportation and FuelManagement Fees An order issued by the Oklahoma Commission in 1991 required that the level of ga '
transportation and fuel management fees, paid to Transok by PSO, permitted for recov , adjustment clause be reviewed in PSO's 1993 rate proceeding. This portion of the 1993 r , subsequently bifurcated. In March 1995, an order was issued by the Oklahoma C agreement which allows PSO to recover approximately $28.4 million of transportation and fuel management fees in base rates using 1991 determinants and approximately $1 million throi adjustment clause. The agreement also requires the phase-in of competitive biddin transportation requirements in excess of 165 MMcf/d. PSO Gas Purchase Contracts PSO has been named defendant in complaints filed in federal and state courts of Oklah Texas in 1984 through 1995 by gas suppliers alleging claims arising out of certain gas p The plaintiffs seek relief through the filing dates as well as attorneys' fees. In Janua representing approximately $10 million in claims were settled. Remaining complaints curre approximately $1 million in claimed actual damages. The settlements did not have a material e PSO's consolidated results of operations or financial condition. The remaining sui stages. Management cannot predict the outcome of these proceedings. However, management that PSO has defenses to the remaining complaints and intends to defend the suits vig Management also believes that the ultimate resolution of the remaining complaints will n adverse effect on PSO's consolidated results of operations or financial condition. PSO PCB Cases PSO has been named a defendant in complaints filed in federal and state courts of Oklaho 1984,1985,1986,1993 and 1996. The complaints allege. among other things, that some and the property of other plaintiffs were contaminated with PCBs and other toxic by- ! certain incidents, including transformer malfunctions, in April 1982. December 1983 and M date, all complaints, except for claims representing approximately $13 million in alleged claims filed in February 1996 for additional unspecified actual and punitive damages, have , certain of w hich resulted from settlements among the parties. Management believes that PS; to the remaining complaints and intends to defend the suits vigorously. Moreover, managem that the remaining claims are covered under insurance. Management also believes that the ultim resolution of the remaining complaints will not have a material adverse effect on PSO's consolidat results of operations or financial condition. PSO Burlington Northern Transportation Contract in June 1992, PSO filed suit in the United States District Court for the Northern District of I Oklahoma against Burlington Northern seeking declaratory relief under a long-term contract forI transportation of coal. In July 1992, Burlington Nonhern asserted counterclaims for unsp against PSO alleging that PSO breached the contract. In December 1993, PSO amen 1 - J
Burlington Northern seeking damages and declaratory relief under federal and state antitrust laws. In December 1995, PSO and Burling!on Northern reached a compromise settlement of all outstanding claims and counterclaims, and the action was dismissed with prejudice. The settlement did not have a material , adverse effect on PSO's consolidated results of operations or financial condition. PSO Burlington Northerit Arbitration in May 1994, in an arbitration related to the Burlington Northern coal transportation contract described above, an arbitration panel made an award in favor of PSO concerning basic transportation rates under the coal transportation contract and concerning the contract mechanism for adjustment for future transportation rates. This arbitration award was then the subject oflitigation in the United States District Courts for the Northern Districts of Oklahoma and Texas and the United States Court of Appeals for the Tenth Circuit, in December 1995, thir litigation was settled as part of the compromise settlement of the related lawsuit described above. Under the settlement, a $16.4 million judgment by the U.S. District Court for the Northern District of Oklahoma confirming the arbitration award became final and was then released and satisfied of record. PSO Ash Creek CoalMine Reclamation in August 1994, PSO received approval from the Wyoming Department of Environmental Quality to begin reclamation of a coal mine in Sheridan, Wyoming, owned by Ash Creek, a wholly owned subsidiary of PSO. Ash Creek recorded a $3 million liability in 1993 for the estimated reclamation costs and subsequently accrued an additional $$ 00,000 in 1995. Actual reclamation work commenced in September 1995, with completion expected in late 1996. Surveillance monitoring will continue for ten years after final reclamation. Management believes that ultimate resolution of this matter will not have a material adverse effect on PSO's consolida ed results of operations u financial condition. PSO MCPC in 1989, PSO entered into certain long-term contracts with MCPC, a cogeneration development company located in northeastern Oklahoma. These contracts include: (i) an Interconnection and Interchange Agreement providing terms and conditions under which MCPC could connect its electric , generating facilities to PSO's transmission sys tem and providing for future transmission by PSO of ) specified amounts of MCPC's power to an unaffiliated utility;(ii) a Stock / Asset Purchase Agreement which allows PSO under certain conditions to i equire the stock or assets of MCPC; and (iii) an Energy Conversion Agreement which required PSO to deliver natural gas to MCPC for conversion to electrical energy to be delivered by MCPC to PSO. Unde-the Energy Conversion Agreement, PSO had the right to dispatch up to 60 MWH per hour of quick-start capability. 1 in 1993, MCPC filed an application with the Oklahoma Commission requesting relief through the modification of the existing Energy Conversicn Agreement. An emergency order was issued under MCPC's application which increased the payment made by PSO to MCPC for energy purchases and decreased the amount of firm energy MCPC was r(quired to deliver to PSO. The emergency order was subject to a permanent ruling. In July 1993, PSO commenced a lawsuit in the District Court of Tulsa County, Oklahoma, seeking a declaratoryjudgment that PSO was entitled to terminate the Energy Conversion Agreement as of August 1,1993, because of a default committed by MCPC. On March 31,1995, PSO, MCPC and the Oklahoma Commission Staff signed a joint settlement resolving all issues pursuant to the various proceedings before the Oklahoma Commission and the District Court of Tulsa County, Oklahoma. The settlement, among other things, climinated a requirement that MCPC deliver an annual minimum of 394,200 MWH of Assured Delisery Energy and related provisions associated with underdelivery charges. Most other provisions of the agreement between PSO ar d MCPC were kept intact. The Oklahoma Commission issued an order in May 1995 approving the settlement. The settlement is on terms satisfactory 2-110
to PSO and will not have a material adverse effect on PSO's consolidated results of operations or financial condition. Other PSO is party to various other legal claims, actions and complaints arising in the normal course of l business. Management does not expect disposition of these matters to have a material adverse effect on PSO's consolidated results of operations or financial condition. ,
- 3. COMMITMENTS AND CONTINGENT LIABILITIES l
1 It is estimated that PSO will spend approximately $68 million, including AFUDC, in capital expenditures during 1996. Substantial commitments have been made in connection with the 1996 construction program. i To supply the fuel requirements ofits generating plants, PSO has entered into various commitments for the procurement of fuel. J l
- 4. INCOME TAXES See CSW's NOTE 4.
- 5. BENEFIT PLANS See CSW's NOTE 5.
- 6. JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6.
- 7. FINANCI AL INSTRUMENTS See CSW's NOTE 7.
- 8. LONG-TERM DEBT See CSW's NOTE 8. )
- 9. PREFERRED STOCK See CSW's NOTE 9.
- 10. SilORT-TERM FINANCING See CSW's NOTE 10.
- 11. QUARTERLY INFORMATION See CSW's NOTE 14 on pages 2-64 and 2-65.
CSW's NOTE 4 through NOTE 10 are found on pages 2-48 through 2-60. 18) 2-111
1 i i IIT OF INDEPENDENT PUBLIC ACCOUNTANTS
-t elockholders and Board of Directors ofPublic Service Company ofOklahoma: '
We have audited the accompanying consolidated balance sheets and consolidated statements of attion of Public Service Company of Oklahoma (an Oklahoma corporation and a wholly owned 3ry of Central and South West Corporation) and subsidiary company, as of December 31,1995 and id the related consolidated statements ofincome, retained earnings and cash Dows, for each of the I ars in the period ended December 31,1995. These financial statements are the responsibility of PSO's ment. Our responsibility is to express an opinion on these Gnancial statements based on our audits. { t We conducted our audits in accordance with generally accepted auditing standards.: Those standards i that we plan and perform the audit to obtain reasonable assurance about whether the financial l its are free of material misstatement. An audit includes examining, on a test basis, evidence supporting , unts and disclosures in the Gnancial statements. An audit also includes assessing the accounting s used and signincant estimates made by management, as well as evaluating the overall Onancial it presentation. We believe that our audits provide a reasonable basis for our opinion. ' in our opinion, the financial statements referred to above present fairly, in all material respects, the 1 position of Public Service Company of Oklahoma and subsidiary company as of December 31,1995 f 4, and the results of their operations and their cash Dows for each of the three years in the period ended
.er 31,1995, in conformity with generally accepted accounting principles.
In 1993, as discussed in NOTE 1, PSO changed its methods of accounting for unbilled revenues, ement benefits other than pensions, income taxes and postemployment benefits. ; i Our audits were made for the purpose of forming an opinion on the financial statements taken as a - ' Ehe supplemental Schedule 11 and Exhibit 12 are presented for purposes of complying with the
- es and Exchange Commission's rules and are not part of the basic Hnancial statements. This schedule 9 Sit have been subjected to the auditing procedures applied in the audits of the basic financial ,
i 4 ts and, in our opinion, fairly state in all material respects the financial data required to be set forth 1 i 1 relation to the basic financial statements taken as a whole. l i i i
- j. ndersen LLP 1
- exas 4
28,1996 4 j I l PMJ 2-112
REPORT OF M ANAGEMENT - Management is responsible for the preparation, integrity and objectivity of the consolidated Gnancial statements of Public Service Company of Oklahoma and its subsidiary company as well as other information contained in this Annual Repon. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reflect amounts based on the best estimates and judgments of management, giving due consideration to materiality. Financial information contained elsewhere in this Annual Report is consistent with that in the consolidated Snancial ; statements. l The consolidated Gnancial statements have been audited by the independent accounting Drm, Arthur Andersen LLP, which was given unrestricted access to all financial records and related data, including minutes of all meetings of shareholders, the board of directors and committees of the board. PSO and its subsidiary believe that representations made to the independent auditors during their audit were valid and appropriate. Arthur Andersen LLP's audit report is presented elsewhere in this report. ; PSO, together with its subsidiary company, maintains a system ofinternal controls to provide , reasonable assurance that transactions are executed in accordance with management's authorization, that the consolidated financial statements are prepared in accordance with generally accepted accounting principles and that the assets of the companies are properly safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that PSO will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees. Internal auditors continuously monitor the effectiveness of the internal control system following standards established by the Institute ofinternal Auditors. Actions are taken by management to respond to deficiencies as they are identi0ed. The board, operating through its audit committee, which is comprised 1 entirely of directors who are not of0cers or employees of PSO or its subsidiary, provides oversight to the financial reponing process. I Due to the inherent limitations in the effectiveness ofinternal controls, no internal control system can provide absolute assurance that errors will not occur. However, management strives to maintain a balance, recognizing that the cost of such a system should not exceed the benefits derived. PSO and its subsidiary believe that, in all material respects, its system ofinternal controls over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31,1995. l I Robert L. Zemanek R. Russell Davis President and CEO - PSO Controller - PSO IS) 2-113
SOUTHWESTERN ELECTRIC POWER COMPANY MANAGEMENToS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Reference is made to SWEPCO's Financial Statements and related Notes to Financial Statements and Selected Financial Data.' The information contained therein should be read in cosijunction with, and is essential in understanding, the following discussion and analysis. OVERVIEW Net income for common stock increased 11% during 1995 to approximately $113.9 million from approximately $102.4 million in 1994 due primarily to an increase in non-fuel revenue. The increase in non-fuel revenue was attributable to a 4% increase in KWil sales from weather-related demand and customer
- growth, i
Net income for common stock increased 30% during 1994 to approximately $102.4 million from approximately $78.5 million in 1993, due primarily to the effects of restructuring costs recorded during 1993. 1 RESTRUCTURING l During 1993, CSW announced a restructuring under which the CSW System restructured the Electric I Operating Companies (including SWEPCO) under a new business unit called CSW Electric and centralized ) many common service functions into CSW Services in order to reduce costs and improve efficiency and productivity. The restructuring included restaffing positions throughout the CSW System and a reduction in ; the workforce by more than 7% system-wide. SWEPCO's restructuring costs were initially estimated to be l $25 million and were expensed in 1993. The actual costs of the restructuring, approximately $20 million, were incurred primarily during 1994. SWEPCO is realizing a number of benefits from the restructuring, including increased efficiencies and synergies through the elimination of previously duplicated functions. This leads to enhanced communication and efficiency, which SWEPCO believes should translate into a reduction in the rate of growth in operating and maintenance costs. I LIQUIDITY AND CAPITAL RESOURCES I i Overview SWEPCO's need for capital results primarily from its construction of facilities to provide reliable electric service to its customers. Accordingly, internally generated funds should meet most of the capital requirements. However, if internally generated funds are not sufficient, SWEPCO's financial condition should allow it access to the capital markets. Construction Expenditures' SWEPCO maintains a continuing construction program, the nature and extent of which is based upon current and estimated future demands upon the system. Planned construction expenditures for SWEPCO for the next three years are primarily to improve and expand distribution facilities and will be funded primarily through internally generated funds. These improvements will be required to meet the anticipated needs of new customers and the growth in the requirements of existing customers. Construction expenditures, including AFUDC, for SWEPCO were approximately $115 million in 1995, $153 million in 1994 and $176 million in 1993. Included in the 1993 construction expenditures is approximately $35 million in capital expenditures that uuwgg 2-116
were incurred for the acquisition of BREMCO, a rural electric cooperative with service territory adjacent to SWEPCO's service territory in Louisiana. SWEPCO's estimated total construction expenditures, including AFUDC, for the years 1996 through 1998 are presented in the following table. CONSTRUCTION EXPENDITURES 1996 1997 1998 Total (milhons) Generation 59 $10 $12 $31 Transmission 18 21 31 70 Distribution 46 45 44 135 Other 25 21 18 64 598 5!'7 1105 $300 The foregoing consists of forward looking information and, accordingly, actual results may differ materially from such projected information due to changes in the underlying assumptions. Such assumptions are based on numerous factors, including factors such as the rate ofload growth, escalation of construction costs, changes in lead times in manufacturing, in0ation, the evailability and pricing of alternatives to construction, environmental and other regulation, delays from regulatory hearings, adequacy of rate relief and the availability of necessary external capital. Changes in those and other factors could cause SWEPCO to defer or accelerate construction or to sell or buy more power, which would affect its cash position, revenues and income to an extent that cannot now be reliably predicted. Although SWEPCO does not believe that it will require substantial additions of generating capacity through the end of the decade, the CSW System's internal resource plan presently anticipates that any additional capacity needs will come from a variety of sources including projected coal- and lignite-Gred generating plants for which SWEPCO has invested approximately $34 million in prior years for plant sites, engineering studies and lignite reserves. Should future plans exclude these plants for environmental, economical or other reasons, SWEPCO would evaluate the probability of recovery of these investments and may record appropriate reserves. Long-Ternt Financing As of December 31,1995, the capitalization ratios of SWEPCO were 51% common stock equity,4% preferred stock and 45% long-term debt. SWEPCO's embedded cost oflong-term debt was 7.5% at December 31,1995. SWEPCO continually monitors the capital markets for opportunities to lower its cost of capital through reGnancing. SWEPCO is committed to maintaining financial flexibility through a strong capital structure and favorable securities ratings in order to access the capital markets opportunistically or when required. Short-Term Financing SWEPCO, together with other members of CSW System, has established a CSW System money pool to coordinate short-term borrowings. These loans are unsecured demand obligations at rates approximating the CSW System's commercial paper borrowing costs. At December 31,1995 SWEPCO's short-term borrowing limit from the money pool was approximately $133 million. During 1995, the annual weighted average interest rate on SWEPCO's borrowings was 6.0% and the average amount of SWEPCO short-term borrowings outstanding was $79 million. The maximum amount of SWEPCO short-term borrowings outstanding during 1995 was $115 million, which was the amount outstanding at February 7,1995. Internally Generated Funds Internally generated funds censist of cash Cowc from opeist:ng amvi%s less common and preferred stock dividends. SWEPCO utilizes short-term debt to meet tiucmanons in working capital requirements due to the seasonal nature of energy sales. SWEPCO anticipates that capital requirements for the period 1996 to 1998 2-117
will be met, in large part, from internal sources. SWEPCO also anticipates that some external financing will be required during the period, however the nature, timing and extent have not yet been determined. Information concerning internally generated funds is presented in the following table. 1995 1994 1993 ($ in millions) Internally Generated Funds $100 $105 $149 Construction Expenditures Provided by Internally Generated Funds 96% 71 % 85 % Sales ofAccounts Receivable SWEPCO sells its billed and unbilled accounts receivable, without recourse, to CSW Credit. The sales provide SWEPCO with cash immediately, thereby reducing working capital needs and revenue requirements. The average and year end amounts of accounts receivable sold were $84 million and $72 million, respectively, in 1995, as compared to $69 million and $62 million, respectively, in 1994. RECENT DEVELOPMENTS AND TRENDS Cornpctition and Industry Challenges Competitive forces at work in the electric utility industry are impacting SWEPCO and electric utilities generally. Increased competition facing electric utilities is driven by complex economic, political and technological factors. These factors have resulted in legislative and regulatory initiatives that are likely to result in even greater competition at both the wholesale and retail level in the future. As competition in the industry increases, SWEPCO will have the opportunity to seek new customers and at the same time be at risk oflosing customers to other competitors. Additionally, SWEPCO will continue to compete with suppliers of alternative forms of energy, such as natural gas, fuel oil and coal, some of which may be cheaper than electricity. SWEPCO believes that its prices for electricity and the quality and reliability ofits service currently place it in a position to compete effectively in the marketplace. The Energy Policy Act, which was enacted in 1992, significantly alters the way in which electric utilities compete. The Energy Policy Act creates exemptions from regulation under the Holding Company Act and permits utilities, including registered utility holding companies and non-utility companies, to form EWGs. EWGs are a new category of non-utility wholesale power producers that are free from most federal and state regulation, including the principal restrictions of the Holding Company Act. These provisions enable broader participation in wriolesale power markets by reducing regulatory hurdles to such participation. The Energy Policy Act also allows the FERC, on a case-by-case basis and with certain restrictions, to order wholesale transmission access and to order electric utilities to enlarge their transmission systems. A FERC order requiring a transmitting utility to provide wholesale transmission service must include provisions generally that permit the utility to recover from the FERC applicant all of the costs incurred in connection with the transmission services and any enlargement of the transmission system and associated services. Wholesale energy markets, including the market for wholesale electric power, have been extremely competitive since the enactment of the Energy Policy Act. SWEPCO must compete in the wholesale energy markets with other public utilities, cogenerators, qualified facilities, exempt wholesale generators and others for sales of electric power. While SWEPCO believes that the Energy Policy Act will continue to make the wholesale markets more competitive, SWEPCO is unable to predict the extent to which the Energy Policy Act will impact SWEPCO operations. On March 29,1995, consistent with the direction of the Eneigy Policy Act, the FERC announced in a NOPR that each public utility that owns and controls transmission facilities in interstate commerce must 2-118 l
unbundle its services and Gle open access transmission tariffs under which each utility will offer comparable open access transmission services to its transmission customers. In addition, the FERC revised its proposed mechanisms by which utilities will be permitted to recover stranded investment costs expected to be brought about by the proposed changes. On August 7,1995, CSW Gled comments on the proposed approach in the
- NOPR with the FERC. Although CSW supports the concept of comparable open access for the nation's transmission service, CSW believes that certain changes must be made in the FERC's proposed approach of implementing the open transmission system. First, with respect to the issue of stranded investments, the FERC proposed that customers who left the owner company pay for a portion, but not all, of the costs incurred by the utility of existing facilities that are not utilized as a result of the loss of such customers. CSW raised concerns about the FERC's proposed methodology for addressing stranded investment because it did not, in CSW's view, provide for the fair recovery of the full amount previously invested. Second, CSW proposed that the FERC adopt a " power Dow pricing" approach whereby all electric systems that incur costs because of a transmission transaction are compensated, as opposed to the traditional" postage stamp" method whereby only the companies that are directly involved in the actual purchase and sale of the electricity are compensated or charged.
On February 9,1996, SWEPCO Gled at the FERC complete sets of open access transmission tariffs. These tariffs substantially renect the pro forma tariffs attached to the FERC's March 29,1995 NOPR. Open access and market pricing should increase marketing oppodunities for SWEPCO, but may also expose it to the risk ofloss ofload or reduced revenues due to competition with alternate suppliers. Increasing competition in the utility industry brings an increased need to stabilize or reduce rates. The retail regulatory environment is beginning to shift from traditional rate base regulation to incentive regulation. Incentive rate and performance-based plans encourage ef0ciencies and increased productivity while permitting utilities to share in the results. Retail wheeling, a major industry issue which may require utilities to " wheel" or move power from third parties to their own retail customers, is evolving gradually. Many states throughout the country currently have legislation introduced to investigate the issue. SWEPCO believes that retail competition would harm the best interests of SWEPCO's customers and security holders unless SWEPCO receives fair recovery of the full amounts previously invested to finance power plants. These investments, which were reasonably incurred, were made by SWEPCO to meet its obligation to serve the pub'ic interest, necessity and convenience. This obligation has existed for nearly a century and remains in force under current law. SWEPCO intends to strongly oppose attempts to impose retail competition withoutjust compensation for the risks and investments SWEPCO undenook to serve the public's demand for electricity. SWEPCO is unable to predict the ultimate outcome or impact of competitive forces on the electric utility industry or on SWEPCO. As the wholesale and retail electricity markets become more competitive, however, the principal factor determining success is likely to be price, and to a lesser extent, reliability, availability of capacity, and customer service. Cajun Asset Purchase Proposal On March 8,1996, SWEPCO, together with GSU and the members committee of Cajun (which represents 10 of the 12 Louisiana distribution cooperatives that are served by Cajun), submitted to Cajun's court appointed trustee in bankruptcy a joint proposal pursuant to which SWEPCO would acquire all of Cajun's non nuclear assets, including a three-unit coal-Gred plant and a two-unit natural gas-Ered plant, and would serve the member co-ops through new w holesale power-supply agreements. In addition, thejoint proposal would, if accepted, resolve litigation between GSU and Cajun related to the River Bend nuclear generating station, which currently is owned 30% by Cajun and 70% by GSU. Thejoint proposal was submitted in response to a formal bid procedure established by the trustee. It is currently anticipated that the trustee will select a lead proposal in early April, and Ole a plan of reorganization with the bankruptcy court on or about 2-119
April 22,1996. The timing cnd completion of any transaction would depend, among other things, upon bankruptcy court approval of a reorganization plan and receipt by SWEPCO and CSW of all requisite regulatory approvals. Cajun Oled a petition for reorganization under Chapter il of the United States llankruptcy Code on December 21,1994 and is currently operating under the supervision of the United States - Ilankruptcy Court for the Middle District of Louisiana. PURA Amendments to PURA, the legal foundation of electric regulation in Texas, became effective on September 1,1995. Among other things, the amendments permit pricing Dexibility for utilities facing competitive challenges, provide for a market-driven integrated resource planning process and mandate comparable open access transmission service. In addition, one effect of the amendments is the deregulation of the wholesale bulk power market in ERCOT. However, SWEPCO, as a member of the Southwest Power Pool rather than ERCOT, will not be directly impacted by this. Regsdatory Accounting Consistent with industry practice and the provisions of SFAS No. 71, which allows for the recognition and recovery of regulatory assets, SWEPCO has recognized regulatory assets and liabilities. Management believes that SWEPCO will continue to meet the criteria for following SFAS No. 71. However, in the event that i SWEPCO no longer meets the criteria for following SFAS No. 71, a write-off of regulatory assets and liabilities would be required. For additional information regarding SFAS No. 71 reference is made to NOTE 1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES. I Consolidated Taxes
- Prior to 1992, the Texas Commission allowed income taxes to be recovered in rates based on the federal income tax incurred by a utility as ifit were a stand-alone company. This " stand-alone" approach ;
treated the regulated activities of a utility as a separate entity and considered only those revenues and expenses that are included in the utility's cost of service to calculate the federal income tax liability for ratemaking : purposes. However, in 1992 the Texas Commission changed its method of calculating the federal income tax component of rates to the " actual tax approach." This approach reduces rates by the tax benefits of deductions which are not considered for or included in setting rates for the utility. On April 13,1995, the Supreme Court issued a decision which holds that the Texas Commission is not required to use the tax benefits associated with the losses of unregulated af0liates to reduce tax expense in cost of service. The Supreme Coun also ruled that the Texas Commission cannot include the income tax deductions taken by the utility for disallowed expenses when determining the utility's federal income tax liability. l ENVIRONMENTAL MATTERS i l The operations of SWEPCO, like those of other utility systems, generally involve the use and disposal l of substances subject to environmental laws. CERCLA, the federal "Superfund" law, addresses the cleanup of sites contaminated by hazardous substances. Superfund requires that PRPs fund remedial actions regardless of fault or the legality of past disposal activities. PRPs include owners and operators of contaminated sites and transporters and/or generators of hazardous substances. Many states have similar laws. Legally, any one PRP can be held responsible for the entire cost of a cleanup. Usually, however, cleanup costs are allocated among PRPs. SWEPCO is subject to various pending claims alleging that it is a PRP under federal or state remedial laws for investigating and cleaning up contaminated property. SWEPCO anticipates that resolution of these claims, individually or in the aggregate, will not have a material adverse effect on SWEPCO's results of 2-120
operations or financial condition.. Although the reasons for this expectation differ from site to site, factors that are the basis for the expectation for specific sites include the volume and/or type of waste allegedly contributed l by SWEPCO the estimated amount of costs allocated to SWEPCO and the participation of other parties. See
- ITEM 1-BUSINESS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for additional
' discussion regarding environmental matters. NEW ACCOUNTING STANDARDS SFAS No.121 In March 1995, the FASB issued SFAS No.121 to be effective for Gnancial statements for fiscal years beginning after December 15,1995. The statement establishes a two-fold test for identification and quantification of an impaired asset. The Erst test in determining an impairment is to compare the sum of expected future cash flows (undiscounted and without interest charges) related to an asset to the carrying amount of the asset. if the sum of expected cash flows is not sufficient to recover the carrying value of the i asset, then an impairment is recognized. Once an impairment is identified, the second part of the test is applied to quantify the amount of the impairment. The statement lists several alternative methods of establishing fair market value and quantifying the impairment. Cash ilows used to measure possible impairment of an asset are grouped at the lowest level for which there are identinable cash flows that are it.rgely independent of the cash flows of other groups of assets. For SWEPCO, the lowest independently identifiable cash flow level used for this analysis is jurisdictional rates charged to customers. SWEPCO will adopt SFAS No.121 in the first quarter of 1996. Under the current regulatory environment, SWEPCO does not expect the adoption of SFAS No.121 to have a significant impact on SWEPCO's results of operations or financial condition. However, future developments in the electric industry and utility regulation could jeopardize the full recovery of the carrying cost of certain investments. Consequently, SWEPCO is monitoring the changing conditions facing the electric utility industry. SFAS No.123 SFAS No.123 was issued in October 1995 with an effective date for transactions entered into after December 15,1995. This statement requires the use of an option pricing model to calculate the value of stock-based compensation transactions where such value cannot otherwise be determined, but then allows for two alternative methods of reporting the transactions. One method recognizes this value as a cost of compensation and as an expense for the current period. The citernative method permits footnote disclosure of the compensation cost, without charging the amount against current earnings. As provided by the provisions of SFAS No.123, SWEPCO will continue to apply the recognition and measurement provisions of Accounting Principles Board Opinion No. 25," Accounting for Stock issued to 6mployees" and adopt the disclosure requirements of SFAS No.123 in 1996. Accordingly, the adoption of SFAS No.123 will not impact SWEPCO's results of operations or financial condition. RESULTS OF OPERATIONS Electric Operating Revenues Total electric operating revenues increased $11.4 million, or 1%, to $836.7 million during 1995 due primarily to a $28.3 million increase in non-fuel revenues. The increase in non-fuel revenues was attributable to . a 4% increase in retail KWH sales resulting from weather related demand and customer growth. The increase in non-fuel revenues was offset in part by a $14.8 million decrease in fuel revenue due to lower average fuel costs as discussed below. NHg 2-121
{ Total electric operating revenues decreased $11.9 million, or 1%, during 1994 due prim i creased fuel revenues partially offset by a 3% increase in retail KWil sales due to custome
.cre:se in lower margin sales for resale.
Fuel . l Fuel expense was $318.5 million in 1995, a decrease of 5% when compared to 1994l! 33(,.4 million. The decrease in fuel expense was due primarily to an 8% decrease in the aver ael from $1.75 per Mmbtu in 1994 to $1.61 per Mmbtu in 1995, which was offset in part by a 3 ene;ation. The decrease in the per unit cost of fuel resuhed from a decrease in the spot Fuel expense decreased approximately $27.2 million or 7% in 994 when compared to 1993 d imarily to a decrease in the average unit cost of fuel from $1.94 per Mmbtu in 1993 to $1.75
'94.price arket Theof gas.
decrease in unit fuel costs was primarily due to coal contract negotiations an PurchasedPower Purchased power expense decreased approximately $1.2 million, or 6%, during 1995 when 44 due primarily to a 36% decrease in purchases, partially offset by a firm contract for add erves and on peak capacity. Purchased power increased from $13.1 million in 1993 to $20.2 million in e primarily to a purchased power contract negotiated as a part of the 1993 purchase of BREMCO. Other Operating Other operating expenses increased approximately $2.5 million, or 2%, during 1995 when\
)4. He increase was due primarily to an increase in transmission expenses associat d l i plac: ment in service of a new IIVdc tie in 1995 and an increase in employee related costse with th Restructuring Charges l 1
Restructuring charges reflect the original accrual of $25.2 million in December 1993 which was l
- S19.6 million at December 31,1995."srquently reduced by $5.0 million in 1994 and l Maintenance l
Maintenance expense decreased approximately $7.4 million, or 15%, during 1994 when co i I
- 3. The decrease was due primarily to decreased maintenance of distribution facilities and ge
- Depreciation andAmorti
- ation Depreciation and amortization increased $3.4 million and $5.5 million during 1995 and 1994,
'ectively, when compared to the prior years. The increases during both periods were due prim eases in depreciable plant.
Taxes, Other than income Taxes, other than income, increased approximately $1.6 million, or 4%, during 1995 when c i due primarily to increases in ad valorem taxes. Income Taxes Income tax expense decreased approximately $1.0 million in 1995 due primarily to prior year stments partially offset by higher pre-tax income. Income tax expense increased approximately $12 on, or 43%, in 1994 due primarily to an increase in pre-tax income. 2-122
.i
' Aliowancefor Equity and Burrowed Funds Used During Construction :
AFUDC increased approximately $3.2 million and $3.5 million during 1995 and 1994, respe; when compared to the prior year due primarily to increased CWIP balances accruing AFUDC.
~
contributing to the increase in 1995 was a prior period true-up. n. Interest on Long-Terns Debt Interest expense on long-term debt was comparable in 1995 and 1994, while it increas > ' $2.4 million, or 6%,in 1994.when compared to 1993 due primarily to an increase in average bala outstanding. Interest on Short-Term Debt and Other Interest expense on shon-term debt and other increased approximately $3.1 million, or 4 , 1995 when compared to 1994 due primarily to higher levels of short-term debt outstanding a . interest rates. Interest expense on short term debt and other increased approximately d $2.7 < compared to 1993 due primarily to an interest accrual pursuant to the terms of a settlement a i by the Texas Commission in connection with SWEPCO's fuel reconciliation and increas associated with short-term debt. : Cumulative Effect of Changes in Accounting Principles i Accounting changes in 1993 included the adoption of SFAS i 112. iSWEPCO also cha
. accounting for unbilled revenues. These accounting changes had a cumulative effect ofincrea 5 by $3.4 million.
I i infiation Annual inflation rates, as measured by the national Consumer Price Index, have aver 2.8% for the three-year period ending December 31,1995. SWEPCO believes that inHation at this level does not materially affect SWEPCO's results of operations or financial condition. Under exil however, only the historical cost of plant is recoverable from customers. As a result, cash , provide recovery of historical plant costs may not be adequate to replace plant in future years. 5 f l 1 l N 2-123
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i Statements of income South western Electric Power Company ! For the Years Ended December 31, 1995 1994 (thousands) 1993
-l Electric Operating Revenues l Residential $278,319 i
$266,620 $273,707 {
Commercial 177,135 ' 173,718 175,059 Industrial . 246,182 243,518 250,912 + Sales for resale 94,638 - 102,723 93,337 Other { 40,431 38,717 44,177 836,705 825,296 837,192 Operating Expenses and Taxes t Fuel 318,506' 336,389 363,627 Purchased power 19,077 20,244 13,145 Other operating ; 121,826 119,277 118,665 Restructuring charges { (578) (4,978) 25,203 ' Maintenance ' 43,320 42,782 50,164 Depreciation and amortization i 83,272 79,845 74,385 j Taxes, other than income 45,153 43.512 44,385 Income taxes : 43,353 42,303 ' 29,561 [ 673,929 679,374 719,135 I Operating income 162,776 145,922 118.057 ! Other Income and Deductions , Allowance for equity funds used during construction 4,290 3,579 1.560 Other 178 4,656 3,658 ! 4,468 8.235 5,218 income Before Interest Charges 167,244 154,157 123,275. i Interest Charges i Interest on long-term debt 44,468 43,395 40,958 Interest on short-term debt and other 10,706 7,568 4,866 - Allowance for borrowed funds used during construction (5,044) (2,518) (1,020) 50,130 48,445 44,804 k income Before Cumulative Effect of Changes in Accounting Principles 117,114 105,712 78,471 ! Cumulative Effect of Changes in Accounting Principles -- -- 3,405 Net income i17,114 105,712 81,876 Preferred stock dividends 3,244 3,361 3,362 Net income for Common Stock [ S113,870 $ 102,351 S 78,514 i I The accompanying notes to financial statements are an integral part of these statements, 2-124
striements of Hetained E:rnings uruthwestern Electric l'erwer Crimpany For the Years Ended December 31, l l 1995 1994 1993 l (thousands) Retained Earnings at Beginning of Year 5 297,462 $ 265,071 $ 266,557 Net income for comrnon stock 113,870 102,351 78,514 Gain on reacquisition of preferred stock 2 40 -- Deduct: Common stock dividends 109.000 70,000 80,000 Retained Earnings at End of Year S 302.334 $ 297,462 $ 265,071 l i I l l l l l The accompanying notes to financial statements are an integral part of these statements. 2-125
Italance Sheets Southwestern Electric l'ower Company As of December 31,
- 1995 1994 (thousands)
ASSETS Electric Utility Plant Production $ 1,410.546 $ 1,401,418 Transmission 435,362 385,113 Distribution 789,884 733,707 General 231,276 213,563 Construction work in progress 128,963 149,508 2,996,031 2,883,309 Less - Accumulated depreciation 1,116,375 1,026,751 1,879,656 I,856,558 Current Assets Cash and temporary cash investments 1,702 1,296 Accounts receivable 54,628 54,344 Materials and supplies, at average cost 30,097 28,109 Fuel inventory, at average cost 73,276 61,701 Accumulated deferred income taxes 4,636 6,592 Prepayments and other 14,109 13,071 178,448 165,113 Deferred Charges and Other Assets 58.615 57,536
$ 2,116,719 $ 2,079,207 The accompanying notes to financial statements are an integral part of these statements.
2-126
llalonce Sheets Southwestern Electric nower Cromptiny
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As of December 31,
- 1995 1994 t
CAPITALIZATION AND LIABILITIES Capitalization (thousands) Common stock: $18 par value Authorized: 7,600,000 shares issued and outstanding: 7,536,640 shares
$ 135,660 $ 135,660 Paid-in capital ,.
245,000 245,000 Retained earnings 302,334 297,462 TotalCommon Stock Equity 682,994 678,122 Preferred stock Not subject to mandatory redemption 16,032 16,032 Subject to mandatory redernption 33,628 34,828 Long-term debt 598,951 595,833 Total Capitalization 1,331,605 1,324.815 Current Liabilities l Long-term debt and preferred stock due within twelve months 5,099 5,270 Advances from af6liates 101,228 81,868 Accounts payable 34,717 38,020 { Payables to affiliates 52,474 40,739 Over-recovered fuel cost 8,923 12,200 Customer deposits 11,027 13,075 Accrued taxes 30,339 12,495 Accrued interest 17,894 17,175 Other 25,454 30.615 287.155 251,457 Deferred Credits Accumulated deferred income taxes 377,245 365,441 Investment tax credits 76,237 81,023 income tax related regulatory liabilities, net 37,363 44,836 Other 7,114 11,635 497,959 502,935
$ 2,116,719 $ 2,079,207 The accompanying notes to financial statements are an integral part of these statements.
l l 7-127 l t
Statements of Cash Flom Southwestern Electric Power Company , For the Years Ended December 31, 1995 1994 1993 (thousands) OPERATING ACTIVITIES Net income $ 117,114 $ 105,712 5 81,876 Non-cash items included in Net income Depreciation and amortization 93.624 89,646 93,120 Restructuring charges (582) (4,978) 25,203 Deferred income taxes and investment tax credits 1,501 17,970 (4,775) Cumulative effect of changes in accounting principles -- -- (3,405) Allowance for equity funds used during construction (4,290) (3,579) (1,560) Changes in Assets and Liabilities Accounts receivable (284) (29,981) (3,632) Fuel inventory (11,575) (12,214) 21,101 Accounts payable (3,303) (4) 37,087 Payables to affiliates 11,735 44,172 (45,478) Accrued taxes 17,844 (14,845) 11,561 Accrued restructuring charges (1,110) (I I,694) -- Unrecovered fuel / Fuel refund due customers (3,277) 9,842 1,946 Other deferred credits (4,521) (1,662) 7,044 Other 638 (10.264) 12.010 213,514 178,121 232,098 INVESTING ACTIVITIES Construction expenditures (105,193) (146,865) (138,510) Acquisition expenditures -- -- (35,333) Allowance for borrowed funds used during construction (5,044) (2,518) (1,020) Sale of electric utility plant and other (4,393) (4,980) (4,113) (114,630) (154,363) (178,976) FINANCING ACTIVITIES Proceeds from sale oflong-term debt -- -- 221,511 Reacquisition of long-term debt -- (5,475) (198,962) Redemp; ion of preferred stock (1,200) (1,160) -- Retirement oflong-term debt (3,600) (3,213) (39,835) Change in advances from affiliates 19,360 54,004 (286) Special deposits for reacquisition oflong-term debt -- -- 53,500 Payment of dividends (l13.038) (73,341) (83,386) (98,478) (29,185) (47,458) Net Change in Cash and Cash Equivalents 406 (5,427) 5,664 Cash and Cash Equivalents at Beginning of Year 1,296 6,723 1,059 Cash and Cash Equivalents at End of Year S 1,702 S 1,296 S 6.723 SUPPLEMENTARY INFORM ATION Interest paid less amounts capitalized S 46,243 $ 45,260 $ 42,271 income taxes paid 5 28,079 5 36,632 $ 21,112 The accompanying notes to financial statements are an integral part of these statements. l 2-128
I l l Statements of Ccpitalization l l Southwestern Electric Power Company ' As of December 31,
- l 1995 -
1994 I (thousands) l COMMON STOCK EQUITY $ 682,994 $ 678,122 ~l PREFERRED STOCK Cumulative $100 Par Value, Authorized 1,860,000 shares Number Current of Shares Redemption Series Outstanding Price l Not Subject to Mandatory Redemption 5.00 % 75,000 $109.00 7,500 7,500 4.65 % 25,000 $l02.75 2,500 2,500 4.28% 60,000 $103.90 6,000 6,000 Premium 32 32 l 16,032 16.032 Subject to Mandatory Redemption 6.95 % 352,000 $ 104.64 35,200 36,400 l Issuance Expense (372) (372) Amount to be redeemed within one year (1,200) (1,200) 33,628 34,828 l l LONG-TERM DEBT First Mortgage Bonds Series V,7 3/4%, due June 1,2004 40,000 40,000 Series W,61/8%, due September 1,1999 40,000 40,000 Series X,7%, due September 1,2007 90,000 90,000 Series Y,6 5/8%, due February 1,2003 55,000 55,000 Series Z,71/4%, due July 1,2023 45,000 45,000 Series AA,51/4%, due April 1,2000 45,000 45,000 Series BB,6 7/8%, due October 1,2025 80,000 80,000 1976 Series A,6.20%, due November 1,2006' (Siloam Springs) 6,520 6,665 1976 Series B,6.20%, due November 1,2006* (Siloam Springs) 1,000 1,000 installment Sales Agreements - PCRBs 1978 Series A,6%, due January 1,2008 (Titus County) 14,420 14,420 Series 1986,8.2%, due July 1,2014 (Sabine) 81,700 81,700 1991 Series A,8.2%, due August 1,2011 (Titus County) 17,125 17,125 1991 Series B,6.9%, due November 1,2004 (Titus County) 12,290 12,290 Series 1992,7.6%, due January 1,2019 (DeSoto) 53,500 53,500 Bank Loan, Variable Rate, due June 15,2000 50,000 50,000 Railcar lease obligations 13,996 17,922 Unamortized discount and premium 373 (3,745) Unamortized costs of reacquired debt (43,074) (45,974) Amount to be redeemed within one year (3,599) (4,070) 598,951 595,833 i TOTAL CAPITALIZATION 5 1,331,605 5 1,324,815 l l
' Obligations incurred in connection with the sale by public authorities of tax-exempt PCRBs.
The accompanying notes to financial statements are an integral part of these statements. 2-129
SOUTilWESTEltN ELECTItIC POWEll COMPANY NOTES TO FINANCIAL STATEMENTS l
. I i
- 1. SUMMAltY OF SIGNIFICANT ACCOUNTING POLICIES l
, See CSW's NOTE 1 on pages 2-32 to 2-37. l l 2. LITIGATION AND ItEGULATOltY PItOCEEDINGS SWEPCO FuelFactor Proceedings On October 6,1995, SWEPCO filed a petition, designated as Docket No.14819, with the Texas Commission to revise its fixed fuel factors for the recovery of fuel and purchased power costs. SWEPCO was experiencing an over-recovery of fuel costs based on application ofits then current factors which became effective in July 1994. The original filing with the Texas Commission proposed decreasing SWEPCO's fixed fuel factors and refunding to customers $7.1 million of cumulative over-recoveries for the period January 1994 to June 1995. SWEPCO subsequently revised its petition to the Texas Commission, updating the cumulative fuel over-recovery to $10.4 million through September 1995. On December 20,1995, the Texas Commission issued an order approving SWEPCO's revised fixed fuel factors and authorizing the refund of $10.8 million, including interest, to customers primarily as billing credits on January 1996 monthly bills. SWEPCO Burlington Northern Transportation Contract On January 20,1995, a state district court in Bowie County, Texas, entered judgment in favor of SWEPCO against Burlington Northern in a lawsuit regarding rates charged under two rail transportation contracts for delivery of coal to SWEPCO's Welsh and Flint Creek power plants. The coun awarded SWEPCO approximately $72 million covering damages for the period from April 27,1989 through September 26,1994, post-judgment interest and attorneys' fees and granted certain declaratory relief requested by SWEPCO. Burlington Northern appealed the state district court'sjudgment to the Texarkana, Texas Court of Appeals. The appeal is now pending. Other SWEPCO is party to various other legal claims, actions and complaints arising in the normal course of business. Management does not expect disposition of these matters to have a material adverse effect on SWEPCO's results of operations or financial condition.
- 3. COMMITMENTS AND CONTINGENT LIABILITIES Construction and Canital Exnenditures u .s estimated that SWEPCO will spend approximately $98 million, including AFUDC, in construction expenditures during 1996. Substantial commitments have been made in connection with this capital expenditure program.
Etici Commitments To supply a portion of the fuel requirements, SWEPCO has entered into various commitments for procurement of fuel. 2-130
I Sil'EPCO Henry li'. Pirlsey Power Plant in connection with the South llallsville lignite mining contract for its llenry W. Pirkey Power Plant, SWEPCO has agreed, under certain conditions, to assume the obligations of the mining contractor. As of December 31,1995, the maximum amount SWEPCO would have to assume was $71.9 million. The , maximum amount may vary as the mining contractor's need for funds Ductuates. The contractor's actual l obligation outstanding at December 31,1995 was $58.7 million. l l Sil'EPCO Soutle Hallsville Lignite Mine l As part of the process to receive a renewal of a Texas Railroad Commission permit for lignite i mmmg at the South Hallsville lignite mine, SWEPCO has agreed to provide bond guarantees on mine reclamation in the amount of S70 million. Since SWEPCO uses self bonding, the guarantee provides for SWEPCO to commit to use its resources to complete the reclamation in the event the work is not completed by the third party miner. The current cost to reclaim the mine is estimated to be approximately $25 million. Other Comntitments :tud Contineencies Sil'EPCO Rental and Lease Conunisments SWEPCO has entered into various Gnancing arrangements primarily with respect to coal transportation and related equipment, which are treated as operating leases for rate-making purposes. At December 31,1995, leased assets of $46 million, net of accumulated amortization of $33.7 million, were included in electric 0xed assets on the balance sheet and at December 31,1994, leased assets were $46 million, net of accumulated amortization of $30.1 million. Total charges to SWEPCO's operating expenses for expenses associated with these Gnancing arrangements were $6.3 million, $6.8 million and $7.1 million for the years 1995,1994 and 1993, respectively. Sil'EPCO Biloxi, Mississippi MGP Site in 1994, SWEPCO was notified by Mississippi Power that it may be a PRP at a MGP site in Biloxi, Mississippi, formerly owned and operated by a predecessor of SWEPCO. SWEPCO worked with Mississippi Power to investigate the extent of contamination at this site. The MDEQ approved a site l investigation work plan and, in January 1995, SWEPCO and Mississippi Power initiated sampling pursuant to that work plan. Contamination at the site was identified as a result of the investigation of property and adjacent properties. Soil and grounds water test results were sent to the MDEQ for review and comment. The test results conGrmed the contamination on the property and indicated the possibility of contamination of an adjacent property. A risk assessment has been performed to assist SWEPCO and Mississippi Power in determining remediation alternatives. A final range of cleanup costs has not been determined, but based on preliminary estimates, SWEPCO has accrued approximately $2 million for its portion of the cleanup of this site.
- 4. INCOME TAXES See CSW's NOTE 4.
- 5. BENEFIT PLANS See CSW's NOTE 5.
- 6. JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6.
- 7. FINANCIAL INSTRUMENTS l See CSW's NOTE 7.
2-131 .
H. LONG-TERM DEllT See CSW"s NOTE 8.
- 9. l' REFERRED STOCK See CSW's NOTE 9.
- 10. SiiORT-TERM FINANCING See CSW's NOTE 10.
- 11. QUARTERLY INFORM ATION See CSW's NOTE 14 on pages 2-64 and 2-65.
t' CSW's NOTE 4 through NOTE 10 are found on pages 2-48 through 2-60. t 4 2-132
REPORT OF INDEl'ENDENT PUllLIC ACCOUNTANTS I To the Stockholders and Board ofDirectors ofSouthwestern Electric Power Company: l We have audited the accompanying balance sheets and statements of capitalization of Southwestern i Electric Power Company (a Delaware corporation and a wholly owned subsidiary of Central and South West Corporation) as of December 31,1995 and 1994, and the related statements ofincome, retained earnings and t cash flows for each of the three years in the period ended December 31,1995. These financial statements are , the responsibility of SWEPCO's management. Our responsibility is to express an opinion on these financial statements based on our audits. j 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 Gnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the . amounts and disclosures in the Snancial statements. An audit also includes assessing the accounting principles used and signincant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the Gnancial position of Southwestern Electric Power Company as of December 31,1995 and 1994, and the results ofits operations and its cash Dows for each of the three years in the period ended December 31,1995, in conformity with generally accepted accounting principles. In 1993, as discussed in NOTE 1, SWEPCO changed its method of accounting for unbilled revenues, postretirement benents other than pensions, income taxes and postemployment benents. Our audits were made for the purpose of forming an opinion on the Snancial statements taken as a whole. The supplemental Schedule 11 and Exhibit 12 are presented for purposes of complying with the S:curities and Exchange Commission's rules and are not part of the basic financial statements. This schedule and exhibit have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the Gnancial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLP Dallas, Texas February 28,1996 2-133 _. _ . , _ _ _ _ . ---- - - - - - ^ - - - ^
itEPOllT OF M ANAG EM ENT Management is responsible for the preparation, integrity and objectivity of the financial statements of . l Southwestern Electric Power Company as well as other information contained in this Annual Report. The l Onancial statements have been prepared in conformity with generally accepted accounting principles applied on ! a consistent basis and, in some cases, reDect amounts based on the best estimates and judgments of I management, giving due consideration to materiality. Financial information contained elsewhere in this Annual Report is consistent with that in the Gnancial statements. The Gnancial statements have been audited by the independent accounting Orm, Arthur Andersen LLP, which was given unrestricted access to all Enancial records and related data, including minutes of all meetings of shareholders, the board of directors and committees of the board. SWEPCO believes that representations made to the independent auditors during its audit were valid and appropriate. Arthur Andersen LLP's audit l report is presented elsewhere in this report.
)
l SWEPCO maintains a system ofinternal controls to provide reasonable assurance that transactions are i executed in accordance with management's authorization, that the Gnancial statements are prepared in I accordance with generally accepted accounting principles and that the assets of the companies are properly l safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that SWEPCO will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees. Internal auditors continuously monitor the effectiveness of the internal control system following l standards established by the Institute ofInternal Auditors. Actions are taken by management to respond to I de6ciencies as they are identi6ed. The board, operating through its audit committee, which is comprised entirely of directors who are not ofGeers or employees of SWEPCO provides oversight to the Gnancial reporting ; process. l Due to the inherent limitations in the effectiveness ofinternal controls, no internal control system can provide absolute assurance that errors will not occur. However, management strives to maintain a balance, recognizing that the cost of such a system should not exceed the benefits derived. SWEPCO believes that, in all material respects, its system of internal controls over Gnancial reporting l and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of l December 3 i, '995. Richard H. Bremer R. Russell Davis President and CEO - SWEPCO Controller - SWEPCO 2-134
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i l l l WEST TEXAS UTILITIES COMPANY 4 l l t I l l l l l l > s l l. 1 2 135
1 l 1 SELECTED FINANCIAL DATA highlight signincant trends ine years theended Gnancial condition and r December 31 is provided to statement items for prior years have been reclassiGed to confesults ofoper orm to the most recent period presented. 1995 1994 INCOME STATEMENT DATA 1993 (I) 1992 Revenues (thousands, except ratio data) 1991 Operating expenses and taxes $319,835
$342,991 Operating income 260,349 $345,445 288,228 $315,370 59,486 298,869 $318,966 Other income and deductions 54,763 258,068 Interest charges (85) 46,576 261,04i 4,360 57,302 Net income 24,871 2,016 57,925 21,757 1,165 34,530 22,075 1,671 Net income for common stock 34,266 37,366 23,460 30,296 23.228 36,914 35,007 29,329 36,368 BALANCE SilEET DATA Assets 33,556 34,500 Common stock equity 815,614 771,977 Preferred stock 265,220 754,443 271,954 744.829 266,092 734,053 Not subject to mandatory sedemption 266,874 259,373 Subject to mandatory redemption 6,291 6,291 Long-term debt -- 6,291
-- 6,291 273,245 6,291 Current liabilities (2) 210,047 9,537 Capitalization Ratios 76,93l 176,882 14,482 91,629 211,610 Common stock equity 116,100 217,855 57,544 Preferred stock 48.7% 47,213 Long-term debt 55.7 %
1.2 $9.2% 1.3 54.0 % 50.1 1,4 52.1 % L(atio of carnings to fixed es charg 43.0 3.2 39.4 4.2 (SEC Method) before cumulative 42.8 43.7 effect of changes in accounting principles 2.63 3.37 2.79 ! 3.22 I) 3.30 Earnings in 1993 were significantly affected by restructuri ') principles. Pro forma amounts, assuming that the changes nin not materially different from amounts reported for prior y acng charges and accounting includes net unbilled factored ears and accounts therefore have not been restated. receivable , are counting for u m 1994 and 1995. i { 2-136
L l l WEST TEXAS UTILITIES COMPANY MANAGEMENT'S DISCUSSJON AND ANALYSIS OF flNANCIAL CONDITION AND RESULTS OF OPERATIONS ! Reference is made to WTU's Financial Statements and selated Notes to Financial Statements and j Selected Financial Data. The information contained therein should te read in conjunction with, and is essential to understanding, the following discussion and analysis. OVERVIEW Net income for common stock was $34 mdlion in 1995, which repmsented a 7% decrease when compared to 1994. The decrease was due primarily to increased depreciation, a prior year non-operating tax adjustment, and an increase in iriterest charges on long-term debt. These effects were partiaPy offset by decreases in other operating, maintenance, and federal income tax expenses. Net income for common stock was $37 million in 1994, a 26% increa: e when compared to 1993. This increase was due primarily to an increase in retail base revenues and other income and a decrease in restructuring charges. RESTRUCTURING During 1993, CFW announced a restructuring under which the CSW System restructured the Electric Operating Companies (including WTU) under a new business unit called CSW Eh ctric and centralized many common service functions into CSW Services in order to reduce costs and improve efficiency and productivity. l The restructuring included restaffmg positions throughout the CSW System and a n duction in the workforce by more than 7% system wide. WTU's restructuring costs were initially estimated tc be $15 million and were expensed in 1993. The actuai costs of the restructuring, approximately $13 million, i1cluding AFUDC, were incurred primarily during 1994. WTU has realized a number of benefits from $he restructuring, including increased efficiencies and synergies through the elimination of previously duplicated functions. l RATES AND REGULATORY MATTERS HTUStipulation andAgreament l WTU has been the subject of several pending regulatory matters, including the following: (i) a retail rate proceeding and fuel reconciliation before the Texas Commission in Docket No.13369; (ii) Writ of Error to ! the Supreme Court - review of WTU's 1987 Texas rate case in Docket No. 7510; and (iii) the Texas Commission's proceeding on remand in Docket No.13949 regarding deferred accounting trea'. ment for Oklaunion Power Station Unit No.1 originally authorized in the Texas Commission's order in Docket No. 7289. 1 On September 22,1995, WTU, alor:g with other major parties to the above described matters, Gled with the Texas Commission ajoint stipulation and agreement to resolve all of these matters. The WTU Stipulation and Agreement is a unified package that included: (i) a retail base rate reduction of approximately
$13.5 million annually starting with WTU's October 1995 revenue month billing cycle;(ii) a $21 million retail refund which was not attributed to any specific cause but was inclusive of all claims related to the th ce above
- described litigation and regulatory matters and included the effect of the rate reduction iaroactive to October 1,1994;(iii) a reduction of reduced Oxed fuel factors by approximately 2%; (iv) varica ate and acco mting UTU 2-137 l
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treatments including a reasonable return on equity for retail operations of 11.375%: and (v) a retail base rate freeze until October 1,1998, subject to certain force majeure provisions. On November 9,1995, the Texas Commission rendered a final order that implemented thejoint
- stipulation and agreement. The WTU Stipulation and Agreement is expected to impact WTU's results of :
operations for the next several years, reducing annual earnings by approximately $8 million beginning in 1996. The WTU Stipulation and Agreement also climinated several significant risks that have been the subject of l regulatory proceedings relating to deferred accounting plar.t costs and rates and will enable WTU's rates to remain i at competitive levels for the foreseeable future. See NOTE 2. LITIGATION AND REGULATORY ! PROCEEDINGS. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for information regarding other regulatory matters. LIQUIDITY AND CAPITAL RESOURCES overview WTU's need for capital results primarily from the construction of facilities to provide reliable electric service to its customers. Accordingly, internally generated funds should meet most of the capital requirements. However, if internally generated funds are not sufricient, WTU's financial condition and credit rating should allow it access to the capital markets. l Construction Expenditures l WTU maintains a continuing construction program, the nature and extent of which is based upon current and estimated future demands upon the system. Planned construction expenditures for WTU for the i next three years are primarily to improve and expand distribution facilities and will be funded primarily through internally generated funds. These improvements will be required to meet the anticipated needs of new j customers and the growth in the requirements of existing customers. Construction expenditures, including AFUDC, for WTU were approximately $45 million in 1995, $42 million in 1994 and $37 million in 1993. WTU's estimated total construction expenditures, including AFUDC, for the years 1996 through 1998 are presented in the following table. CONSTRUCTION EXPENDITURES i 1996 1997 1998 Total (millions) , Generation $4 54 $4 $12 i Transtnission 6 6 6 18 l Distribution 20 20 20 60 Other 12 12 13 37 542 542 543 5127 The foregoing consists of forward looking information and, accordingly, actual results may differ ! materially from such projected information due to changes in the underlying assumptions. Such assumptions are based on numerous factors, including factors such as the rate ofload growth, escalation of construction ecsts, changes in lead times in manufacturing, inflation, the availability and pricing of alternatives to construction, environmental and other regulation, delays from regulatory hearings, adequacy of rate relief and the availability of necessary external capital. Changes in those and other factors could cause WTU to defer or accelerate construction or to sell or buy more power, which would affect its cash position, revenues and income to an extent that cannot now be reliably predicted. UPU 2-138
a l Although WTU does not believe that it will require substantial additions of generating capacity l through the end of the decade, the CSW System's internal resource plan presently anticipates that any l additional capacity needs will come from a variety of sources including projected coal- and lignite-Gred l
- generating plants for which WTU has invested approximately $15 million in prior years for plant sites, engineering studies and lignite reserves. Should future plans exclude these plants for environmental, l l economical or other reasons, WTU would evaluate the probability of recovery of these investments and may ;
l record appropriate reserves. l Long-Term Financing , As of December 31,1995, the capitalization ratios of WTU were 49% common stock equity,1% l preferred stock and 50% long-term debt. WTU's embedded cost oflong-term debt was 7.8% at December 31, j 1995, WTU is committed to maintaining financial flexibility through a strong capital structure and favorable , securities ratings in order to access the capital markets opponunistically or when required. WTU's long-term l Unancing activity for 1995 is summarized in the following table. l ISSUED REACQUIRED Financing Amount Financial Amount j instrument (millions) Rate Maturity Instrument (millions) Rate Maturity l FMB (1) $40.0 7 I/2% 2000 l FMB (2) 80.0 63/8% 2005 FMB $53.3 91/4% 2019 J l (1) Proceeds were used to repay a portion of WTU's short term borrowings and to reimburse WTU's treasury for the reacquisition of FMBs. . (2) The balance of proceeds not used to redeem higher cost FMus were used to repay a portion of WTU's short-term borrowings. j 1 Short-Term Financing i WTU, together with other members of the CSW System, has established a CSW System money pool to j coordinate short-term borrowings. These loans are unsecured demand obligations at rates approximating the ! CSW System's commercial paper borrowing costs. At December 31,1995 WTU's shon-term borrowing limit from the money pool was approximately $58 million. During 1995, the annual weighted average interest rate on WTU borrowings was 6.1% and the average amount of WTU short-term borrowings outstanding was $20 million. The maximum amount of WTU short-term borrowings outstanding during 1995 was $50 million, which was the amount' outstanding at February 3,1995. Internally Generated Funds Internally generated funds consist of cash flows from operating activities less common and preferred j stock dividends. WTU uses short-term debt to meet Ductuations in working capital requirements due to the ; o seasonal nature of energy sales. During 1993 and 1994, WTU experienced several non-recurring transactions that resulted in negative internally generated funds in 1994, including the refinancing of Series G and Series H FMBs with Series S FMBs which occurred between December 1993 and February 1994. This refinancing caused an abnormally high accounts payable balance to affiliates at December 31,1993 which was subsequently reduced by the issuance of Series S FMBs in February 1994, resulting in the appearance of a large out flow of cash from operating funds. WTU anticipates that capital requirements for the period 1996 to 1998 may be met, in large part, from internal sources. WTU also expects that some external financings will be required during the period, but the nature, timing and extent have not yet been determined. Information concerning internally generated funds is presented in the following table. 1995 1994 1993 ($ in millions) Internally Generated Funds $12 ($4) $59 j Construction Expenditures Provided j by Internally Generated Funds 27% -- 163 % i l UN 2-139
Sulch ofAccounts Receivable WTU sells its billed and unhilled accounts receivable, without recourse, to CSW Credit. The sales provide WTU with cash immediately, thereby reducing working capital needs and revenue requirem average and year end amounts of accounts receivable sold were $33 million and $28 million, respectiv
- 1995, as compared to $35 million and $18 million, respectively, in 1994.
RECENT DEVELOPMENTS AND TRENDS Competition andIndustry Challenges Competitive forces at work in the electric utility industry are impacting WTU and electric utilities generally. Increased competition facing electric utilities is driven by complex economic, political and technological factors. These factors have resulted in legislative and regulatory initiatives that are lik result in even gretter competition at both the wholesale and retail level in the future. As competition in the industry increases, WTU will have the opportunity to seek new customers and at the same time be at risk o losing customers to other competitors. Additionally, WTU will continue to compete with suppliers of alternative forms of energy, such as natural gas, fuel oil and coal, some of which may be cheaper than electricity. WTU believes that its prices for electricity and the quality and reliability ofits service curr place it in a position to compete effectively in the marketplace. The Energy Policy Act, which was enacted in 1992, significantly alters the way in which electric utilities compete. The Energy Policy Act creates exemptions from regulation under the Holding Com and permits utilities, including registered utility holding companies and non-utility companies, to form EWGs. EWGs are a new category of non-utility wholesale power producers that are free from most federal and state regulation, including the principal restrictions of the Holding Company Act. These provisions enable broader panicipation in wholesale power markets by reducing regulatory hurdles to such participation. The E Policy Act also allows the FERC, on a case-by-case basis and with certain restrictions, to order wholesale transmission access and to order electric utilities to enlarge their transmission systems. A FERC order requiring a transmitting utility to provide wholesale transmission service must include provisions gen permit the utility to recover from the FERC applicant all of the costs incurred in connection with the transmission services and any enlargement of the transmission system and associated services. Wholesale energy markets, including the market for wholesale electric power, have been extremely competitive since the enactment of the Energy Policy Act. WTU must compete in the wholesale energy markets with other public utilities, cogenerators, qualified facilities, EWGs and others for sales of electric power. While WTU believes that the Energy Policy Act will continue to make the wholesale markets more competitive, WTU is unable to predict the extent to which the Energy Policy Act will impact WTU operations. On March 29,1995, consistent with the direction of the Energy Policy Act, the FERC announced in a NOPR that each public utility that owns and controls transmission facilities in interstate commerce must unbundle its services and Ole open access transmission tariffs under which each utility will offer compa open access transmissio'n services to its transmission customers. In addition, the FERC revised its proposed mechanisms by which utilities will be permitted to recover stranded investment costs expected to be br about by the proposed changes. On August 7,1995, CSW Oled comments on the proposed approach in the NOPR with the FERC. Although CSW supports the concept of comparabic open access for the nation's transmission service, CSW believes that certain changes must be made in the FERC's proposed approach o implementing the open transmission system. First, with respect to the issue of stranded investments, the FERC l proposed that customers who left the utility company pay for a portion, but not all, of the costs incurred by tj owner of existing facilities that are not utilized as a result of the loss of such customers. CSW raised concerns about the FERC's proposed methodology for addressing stranded investment because it did not, in CSW's I view, provide for the fair recovery of the full amount previously invested. Second, CSW proposed that the 2-140
I FERC adopt a " power How pricing" approach whereby all electric systems that incur costs because of a l transmission transaction are compensated, as opposed to the traditional" postage stamp" method whereby only the companies that are directly involved in the actual purchase and sale of the electricity are compensated or charged. On February 9,1996, WTU Gled at the FERC complete sets of open access transmission tariffs. These tariffs substantially reGect the pro forma tariffs attached to the FERC's March 29,1995 NOPR. Open access and market pricing should increase marketing opponunities for WTU, but may also expose them to the risk of loss ofload or reduced revenues due to competition with alternate suppliers. Increasing competition in the utility industry brings an increased need to stabilize or reduce rates. The retail regulatory environment is beginning to shift from traditional rate base regulation to incentive regulation. Incentive rate and performance-based plans encourage efGeiencies and increased productivity while permitting utilities to share in the results. Retail wheeling, a major industry issue which may require utilities to " wheel" or move power from third parties to their own retail customers, is evolving gradually. Many states throughout the country currently have legislation introduced to investigate the issue. WTU believes that retail competition would harm the best interests of WTU's customers and security holders unless WTU receives fair recovery of the full amounts previously invested to Gnance power plants. These investments, which were reasonably incurred, were made by WTU to meet its obligation to serve the public interest, necessity and convenience. This obligation has existed for nearly a century and remains in force under current law. WTU intends to strongly oppose attempts to impose retail competition withoutjust compensation for the risks and investments WTU undertook to serve the public's demand for electricity. l 1 WTU is unable to predict the ultimate outcome or impact of competitive forces on the electric utility industry or on WTU. As the wholesale and retail electricity markets become more competitive, however, the principal factor determining success is likely to be price, and to a lesser extent, reliability, availability of capacity, and customer service. PURA Amendments to PURA, the legal foundation of electric regulation in Texas, became effective on September 1,1995. Among other things, the amendments deregulate the wholesale bulk power market in ERCOT, permit pricing flexibility for utilities facing competitive challenges, provide for a market-driven integrated resource planning process an.! mandate comparable open access transmission service. l l PURA also requires that the Texas Commission adopt a rule on comparable open transmission access by March 1,1996. In conjunction with this rulemaking proceeding (Project No.14045), Texas Commission Chairman Pat Wood issued a proposal on September 6,1995, for the purpose of maximizing competition in the ERCOT wholesale bulk power market. The proposal calls for the functional unbundling ofintegrated utilities where distribution entities could purchase their power requirements from any generator or set of generators in j ERCOT. Those generators which are currently regulated would be deregulated after provisions are in place to J recover stranded costs. The proposal has been assigned to a separate proceeding (Project No.15000). CSW l expects this project to provide the vehicle for the Texas Commission and other interested parties to develop i l positions on industry restructuring before the Texas Legislature convenes in January 1997. The schedule for i Project No.15000 contemplates that the Texas Commission will develop legislative recommendations on i restructuring and stranded costs during the second half of 1996 and a schedule has been developed for this l project that includes a series of workshops and technical conferences during the Grst half of 1996. j i On February 7,1996, the Texas Commission adopted a rule governing transmission access and pricing i (Project No.14045). The pricing method tentatively adopted by the Texas Commission is a hybrid I combination of an ERCOT-wide postage stamp rate covering 70% of total ERCOT transmission costs and a UN2-141 i ! I l
)
distance sensitive component referred to as a vector absolute megawatt mile which recovers the remaining 30% of ERCOT transmission costs. Although the open access tariffs filed with the FERC on February 9,1996 do not reflect Project No.14045 pricing, WTU anticipates Oling tariffs with the FERC that do conform to the l Texas Commission's rule in the second quarter of 1996. - l 1 RegulatoryAccounting I Consistent with industry practice and the provisions of SFAS No. 71, which allows for the recognition and recovery of regulatory assets, WTU has recognized significant regulatory assets and liabilities. Management believes that WTU will continue to meet the criteria for following SFAS No. 71. However, in the event WTU no longer meets the criteria for following SFAS No. 71, a write-off of regulatory assets and - liabilities would be required. For additional information regarding SFAS No. 71 reference is made to NOTE
- 1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES. , Consolidated Taxes Prior to 1992, the Texas Commission allowed income taxes to be recovered in rates based on the , federal income tax incurred by a utility as ifit were a stand-alone company. This " stand-alone" approach i treated the regulated activities of a utility as a separate entity and considered only those revenues and expenses l that are included in the utility's cost of service to calculate the federal income tax liability for ratemaking purposes. However, in 1992 the Texas Commission changed its method of calculating the federal income tax l component of rates to the " actual tax approach." This approach reduces rates by the tax benefits of deductions ! which are not considered for or included in setting rates for the utility. I On April 13,1995, the Supreme Court issued a decision which holds that the Texas Commission is not required to use the tax benefits associated with the losses of unregulated affiliates to reduce tax expense in cost I of service. The Supreme Court also ruled that the Texas Commission cannot include the income tax : deductions taken by the utility for disallowed expenses when determining the utility's federal income tax j -liability. 1 ENVIRONMENTAI., MATTERS I l The operations of WTU, like those of other utility systems, generally involve the use and disposal of substances subject to environmental laws. CERCLA, the federal _"Superfund" law, addresses the cleanup of ! sites contaminated by hazardous substances. Superfund requires that PRPs fund remedial actions regardless of fault or the legality of past disposal act ivities. PRPs include owners and operators of contaminated sites and transporters and/or generators of hazardous .ubstances. Many states have similar laws. Legally, any one PRP can be held responsible for the entire cost of a cleanup. Usually, however, cleanup costs are allocated among , PRPs. l WTU is subject to various pending claims alleging that it is a PRP under federal or state remedial laws for investigating and cleaning up contaminated property. WTU anticipates that resolution of these claims, individually or in the aggregate, will not have a material adverse effect on its results of operations or financial condition. Although the reasons for this expectation differ from site to site, factors that are the basis for the expectation for specific sites include the volume and/or type of waste allegedly contributed by WTU, the estimated amount of costs allocated to WTU and the participation of other parties. 2-142
NEW ACCOUNTING STANDARDS 1 l l SFAS No.121 In March 1995, the FASB issued SFAS No.121 to be effective for financial statements for fiscal years . beginning after December 15,1995. The statement establishes a two-fold test for identification and I quantification of an impaired asset. The first test in determining an impairment is to compare the sum of ! expected future cash flows (undiscounted and without interest charges) related to an asset to the carrying amount of the asset. If the sum of expected cash flows is not sufficient to recover the carrying value of the i asset, then an impairment is recognized. Once an impairment is identified, the second part of the test is applied j to quantify the amount of the impairment. The statement lists several alternative methods of establishing fair 1 market value and quantifying the impairment. Cash flows used to measure possible impairment of an asset are I grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash I flows of other groups of assets. For WTU, the lowest independently identifiable cash flow level used for this analysis isjurisdictional rates charged to customers. WTU will adopt SFAS No.121 in the first quarter of 1996. Under the current regulatory environment, WTU does not expect the adoption of SFAS No.121 to have a significant impact on WTU's results of operations or financial condition. However, future developments in the electric industry and utility regulation . could jeopardize the full recovery of the carrying cost of certain investments. Consequently, WTU is I monitoring the changing conditions facing the electric utility industry. SFAS No.123 SFAS No.123 was issued in October 1995 with an effective date for tracactions entered into after December 15,1995. This statement requires the use of an option pricing model to ca'culate the value of stock-based compensation transactions where such value cannot otherwise be determined, but then allows for two alternative methods of reporting the transactions. One method recognizes this value as a cost of compensation j and as an expense for the current period. The alternative method permits footnote disclosure of the compensation cost, without charging the amount against current earnings. As provided by the provisions of SFAS No.123, WTU will continue to apply the recognition and measurement provisions of Accounting Principles Board Opinion No. 25," Accounting for Stock issued to Employees" and adopt the disclosure requirements of SFAS No.123 in 1996. Accordingly, the adoption of SFAS No.123 will not impact WTU's results of operations or financial condition. RESULTS OF OPERATIONS Electric Operating Revenues Electric operating revenues decreased approximately $23.2 million and $2.5 million in 1995 and 1994, respectively, when compared to the prior year. The decrease in 1995 was attributable primarily to a one-time
$21 million base rate refund made pursuant to the WTU Stipulation and Agreement. Also contributing to such decrease were reductions in retail base rates made in accordance with the WTU Stipulation and Agreement and decreases in transmission equalization revenues and other miscellaneous non-KWH related revenues. These decreases were partially offset by increases in sales to a major new wholesale customer.
The 1994 decrease in electric operating revenues was due primarily to a reduction in lower margin off-( system sales of $8 million resulting from decreased market place demand, and was partially offset by higher l on-system revenues of 56.5 million attributable to a 3% increase in retail KWH sales. Also contributing to the 1994 decrease was an interim rate reduction of approximately $5.7 million on an annual basis effective October 1,1994. WlN2-143 l
Fuel Fuel expenses were $123.7 million in 1995, which represented a decrease of 6% when compared to . 1994 fuel expenses of $131.3 million. The decrease was primarily attributable to a 3% decrease in average unit l fuel costs from $1.88 per Mmbtu in 1994 to $1.83 per Mmbtu in 1995 due largely to lower spot gas market - prices brought about by weak demand and excess gas storage. Also contributing to the decreased fuel expense , was increased plant efficiencies in 1995 which resulted in less fuel required per MWil generated. j l In 1994, fuel expenses decreased approximately $3.8 million or 3% when compared to 1993. The 1994 ' decrease in fuel expenses was primarily attributable to a 2% decrease in average unit fuel costs from $1.91 per ; Mmbtu in 1993 to $1.88 per Mmbtu in 1994 and a 2% decrease in generation. Purchased Power Expenses Purchased power expenses increased approximately $5.9 million during 1995 when compared with 1994, but decreased approximately $2.3 million in 1994 when compared to 1993. The 1995 increase was primarily attributable to additional energy purchases made to serve the increased load resulting from the addition of a wholesale customer and increased economy purchases. The decrease in 1994 resulted from a decrease in economy purchases. Other Operating Other operating expenses decreased approximately $2.6 million during 1995 when compared to 1994, but increased in 1994 when compared to 1993 by $4.9 million. The decrease in 1995 was primarily due to the realization of savings resulting from cost containment efforts and decreased environmental expenditures. Partially offsetting these decreases were increases in transmission e' xpenses associated with the completion and placement in service of a new HVdc tie in 1995, incrersed employee related costs and increased telecommunications expenses. The 1994 increase in operating expenses reflects a reimbursement in 1993 for the settlement of a dispute relating to a coal supply contract which lewered expenses in 1993. Higher outside services for fuel related issues and other employee related expenses also contributed to the increase. Restructuring Restructuring charges reflect the original accrual of $15.2 million in 1993, which was subsequently adjusted by $2 million in 1994 and $0.4 million in 1995, and the recording of a $13.2 million regulatory asset during 1995 in accordance with the WTU Stipulation and Agreement for previously recorded costs associated with the restructuring. Maintenance Maintenance expense in 1995 decreased from 1994 by approximately $1 million or 7% due primarily to decreased production maintenance resulting from non-recurring plant overhauls in 1994 and savings resulting from cost containment effons. Maintenance expense in 1994 increased over 1993 by approximately
$1.7 million or 13% due primarily to increased production maintenance of boiler and electric plant.
Depreciation and Arnortization l Depreciation and amortization expenses increased approximately $1.7 million and $1.2 million during ' 1995 and 1994, respectively, when compared to prior years due primarily to increases in depreciable property. Incorne Taxes Income taxes decreased approximately $12.4 million or 69% in 1995 when compared with 1994 due primarily to a reduction of $6.9 million of deferred income taxes in accordance with the WTU Stipulation and Agreement and lower pre-tax income. The increase of approximately $4.3 million or 32% in 1994 when compared with 1993 was due to higher pre-tax income. UN 2-144 l l
i Other income and Deductions Other income decreased approximately $4.7 million in 1995 due primarily to an adjustment to reallocate parent company tax benc0ts. Other income increased approximately $2.3 million in 1994 when compared to 1993 as a result of tax benclits received under WTU's tax sharing agreement with CSW. Interest on Long-Term Debt > Interest on long-term debt increased approximately $2.9 million in 1995 when compared to the prior , year as a result of higher levels oflong-term debt outstanding. Interest on long-term debt decreased. ; approximately $0.7 million in 1994 when compared to the prior year due to WTU's refinancing of higher cost debt with lower cost debt and decreased average balances outstanding. Cumulative Effect of Changes in Accounting Principles in 1993, WTU changed its method of accounting for unbilled revenue and implemented SFAS No. , 112. These accounting changes had a cumulative effect ofincreasing net income by $3.8 million. j i inflation l Annual innation rates, as measured by the national Consumer Price Index, have averaged approximately 2.8% for the three-year period ending December 31,1995. WTU believes that innation, at this j level, does not materially affect its results of operations or Gnancial condition. However, under existing j - regulatory practice, only the historical cost of plant is recoverable from customers. As a result, cash Dows j designed to provide recovery of historical plant costs may not be adequate to replace plant in future years. j i l ! I l l 1 2 4 i 2-145 l'
i 1 GYU Statements of income West Texas Utilities Company For the Years Ended December 31, . 1995 1994 1993 Electric Operating Revenues (thousands) Residential $ 114,269 $ 118,525 $ 115,932 Commercial 66,363 66,483 65,085 Industrial 51,443 52,626 53,709 Sales for resale 73,905 67,076 72,252 Other 13,855 38,281 38,467 319,835 342,991 345,445 Operating Expenses and Taxes Fuel 123,723 131,258 135,048 Purchased power 10,998 5,144 7,411 Other operating 63,727 66,290 61,357 Restructuring charges (13,582) (2,037) 15,250 Maintenance 13,931 14,978 13,251 Depreciation and amortization 33,290 31,569 30,405 Taxes, other than income 22,720 23,072 22,496 Income taxes 5,542 17,954 13,651 260,349 288,228 298,869 Operating income 59,486 54.763 46,576 Other income and Deductions Allowance for equity funds used during construction 378 150 109 Other (463) 4,210 1,907 (85) 4,360 2.016 Income Before Interest Charges $9,401 59,123 48,592 Interest Charges Interest on long-tenn debt 21,413 18,547 19,225 Interest on short-term debt and other 4,111 3,534 2,988 Allowance for borrowed funds used during construction (653) (324) (138) 24,871 21,757 22,075 Income Before Cumulative Effect of Changes in Accounting Principles 34,530 37,366 26,517 l Cumulative Effect of Changes in Accounting Principles -- -- 3.779 i Net Income 34,530 37,366 30,296 ' Prefened stock dividends 264 452 967 Net Income for Common Stock S 34,266 S 36,914 S 29,329 l l l l I l The accompanying notes to financial statements are an integral part of these statements. UTU2-146
WTU l 4tatements ofIlet .ined Earnings it'est Texas litilitics Company ! l or the Years Ended December 31. 1995 1994 1993 1 l (thousands) l Retained Earnings at Beginning of Year $ 132,504 $ 126,642 $ 127,424 l Net income for common stock 34,266 36,914 29,329 t Deduct: Common stock dividends 41,000 31,000 30,000 Preferred stock redemption costs -- 52 11I i Retained Earnings at End of Year S 125,770 $ 132,504 5 126,642 i i 1 i l l
'The accompanying notes to financial statements are an integral part of these statements.
2-147
_ _ _ - . _ _ _ _ . . _ . . _ - ._ _ _ - _ . _ _ _ _ . _ _ _ . _ . _ __ ___ .__ m . _ . _ _ _ - _ _ . . _ _ . _ - _ . . _ WTU - Balance Sheets West Texas Utilities Company As of December 31, *
~--
1995 1994 (thousands) j ASSETS i Electric Utility Plant Production S 427,547 $ 427,736 , Transmission 199,055 194,402 l Distribution 326,337 308,905 ! General 84,326 73,938 Construction work in progress 32,686 23,257 - 1,069,951 1,028,238 Less- Accumulated depreciation 389,379 364,383 680,572 663,855 i Current Assets ' Cash 717 2,501 Accounts r;ceivable 28,923 23,165 Materials and supplies, at average cost 16,660 16,519 Fuel inventory, at average cost 8,281 9,229 Coalinventory, at LIFO cost 5,545 6,442 l Accumulated deferred income taxes 5,328 3,068 l Prepayments and other 1,042 1,091 j 66,496 62,015 Deferred Charges and Other Assets r Deferred Oklaunion costs 26,092 26,914 l Restructuring costs 12,741 -- i Other 29,713 19,193 68,546 46,107 ,
$ 815,614 $ 771,977 i
t l 1 i-The accompanying notes to financial statements are an integral part of these statements. WfU 2-148
+~ -
a n-~ , -- - --- e . - . , ,, - a - ,e - n ,
l l 1 ! MTU i llalance Sheets r li'est Tetas Utilities Company i As of December 31, 1995 1994 CAPITALIZATION AND LIABILITIES (thousands) Capitalization l Common stock: $25 par value Authorized: 7,800,000 shares issued and outstanding: 5,488,560 shares $ 137,214 $ 137,214 Paid in capital 2,236 2,236 Retained earnings 125,770 132,504 Total Common Stock Equity 265,220 271,954 Preferred stock Not subject to mandatory redemption 6,291 6,291 Long-term debt 273,245 210,047 Total Capitalization 544,756 488,292 Current Liabilities Long-term debt due within twelve months -- 650 Advances from affiliates 19,820 46,315 Payables to aiTiliates 8,244 4,547 Accounts payable 20,611 23,942 Accrued taxes 13,182 7,452 l Accrued interest 6,081 4,394 , Over-recovered fuel costs 4,060 1,586 ! Refund due customers 1,812 -- l Other 3,121 2,743 1 76,931 91,629 I l Deferred Credits l Accumulated deferred income taxes 145,130 146,146 I Investment tax credits 30,561 31,882 I Income tax related regulatory liabilities, net 14,464 9,217 Other 3,772 4,811 l 193,927 192,056 l j 5 815,614 5 771.977 l l l l The accompanying notes to financial statements are an integral part of these statements. l 91TU l 2-149
UTU ' Statements of Cash Flows West Texas !!tilities Company For the Years Ended December 31, . 1995 1994 1993 (thousands) OPERATING ACTIVITIES Net Income S 34,530 $ 37,366 5 30,296 Non-cash items included in Net income Depreciation and amortization 34,382 33,362 31,925 Restructuring charges (367) (2,037) 15,250 Deferred income taxes and investment tax credits 650 7,056 3,159 Regulatory asset established for previously incurred restructuring charges (13,213) -- -- Cumulative effect of changes in accounting principles -- -- (3,779) Allowance for equity funds used during construction (378) (150) (109) Changes in Assets and Liabilities Accounts receivable (5,758) 1,332 (3,159) Fuel inventory 1,845 (1,010) (6) Accounts payable (4,922) 7,558 (5,775) Payables to associates 3,697 (36,564) 22,627 Accrued taxes 5,730 1,168) 7 4,085 Accrued restructuring charges (204) (8,918) -- Over- and under-recovered fuel costs 2,474 1,512 (1,767) Refunds due customers 1,812 Other deferred credits (1,039) 1,053 3,767 Other (5,899) (5,388) (6,496) 53,340 28,004 90.018 INVESTING ACTIVITIES Construction expenditures (44,076) (41,504) (36,318) Allowance for borrowed funds used during construction (653) (324) (138) Disposition of plant (1,864) (1,315) 3,302 (46,593) (43,143) (33,154) FINANCING ACTIVITIES Proceeds from issuance oflong-term debt 118,376 39,354 (77) Reacquisition oflong-term debt (59,082) (20,73l) (24,250) Redemption of preferred stock -- (4,700) (10,000) Payment of dividends (41,330) (31,520) (30,816) Change in advances from affiliates (26,495) 34,531 7,241 (8.531) 16,934 (57,902) Net Change in Cash and Cash Equivalents (1,784) 1,795 (1,038) Cash and Cash Equivalents at Beginning of Year 2,501 706 1,744 Cash and Cash Equivalents at End of Year S 717 5 2,501 S 706 SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized 5 20,496 S 18,128 S 18,430 income taxes paid S 8,399 S 12,720 $ 325 The accompanying notes to financial statements are an integral part of these statements. 2-150
WTU l statements of Capitaliz0 tion li'est Texas Utilities Company As of December 31, 1995 1994 (thousands) COMMON STOCK EQUITY $ 265,220 $ 271,954 PREFERRED STOCK ! Cumulative $100 Par Value, Authorized 810,000 shares l Number Current of Shares Redemption Series Outstanding Price Not Subject to Mandatory Redemption 4.40% 60,000 $ 107.00 6,000 6,000 Premium 291 291 6,291 6,291 , LONG-TERM DEBT First Mortgage Bonds Series 0,91/4%, due December 1,2019 -- 55,203 Series P,7 3/4%, due June 1,2007 25,000 25,000 Series Q,6 7/8%, due October 1,2002 35,000 35,000 Series R,7%, due October 1,2004 40,000 40,000 Series S,6 !/8%, due February 1,2004 40,000 40,000 Series T,71/2%, due April 1,2000 40,000 -- Series U,6 3/8%, due October 1,2005 80,000 -- Installment Sales Agreements - PCRBs Series 1984,7 7/8%, due September 15,2014 (Red River) 44,310 44,310 Unamortized discount and premium (1,607) (1,323) Unamortized costs of reacquired debt (29,458) (27,493) Amount to be redeemed within one year -- (650) 273,245 210,047 TOTAL CAPITALIZATION $ 544,756 $ 488,292 l l l I i The accompanying notes to financial statements are an integral part of these statements. l UlN 2-151 i
WEST TEXAS UTILITIES COMPANY NOTES TO FINANCIAL STATEMENTS
- 1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES See CSW's NOTE 1 on pages 2-32 to 2-37.
- 2. LITIGATION AND REGULATORY PROCEEDINGS I WTUStipulation and Agreement WTU has been the subject of several pending regulttory matters, including the following: (i) retail rate proceeding and fuel reconciliation before the Texas Commission in Docket No.13369;(i of Error to the Supreme Court - reviev of WTU's 1987 Texas rate case in Docket No. 7510; and (i Texas Commission's proceeding on remand in Docket No.13949 regarding deferred accounting tre for Oklaunion Power Station Unit No. I originally authorized in the Texas Commission's Docket No.
7289. On September 22,1995, WTU, along with other major parties to the above described matters, filed with the Texas Commission ajoint stipulation and agreement to resolve all of these matters. The WTU Stipulation and Agreement is a unified package that included:(i) a retail base rate reduction of approximately $13.5 million annually starting with WTU's October 1995 revenue month billing cycle; a $21 million retail refund which was not attributed to any specific cause but was inclusive of all claims related to the three above described litigation and regulatory matters and included the effect of the rate reduction to October 1,1994: (iii) a reduction of fixed fuel factors by approximately 2%;(iv) various rate and accounting treatments including a reasonable return on equity for retail operations of 11.375%; ;a a retail base rate freeze until October 1,1998, subject to certain force majeure provisions. ' On November 9,1995, the Texas Commission rendered a final order that implemented thejoint stipulation and agreement, ending the rate proceeding and fuel reconciliation in Docket No.13369 and the remand, designated Docket No.13949, to the Texas Commission by the Supreme Court for the deferred accounting treatment of Oklaunion Power Station Unit No.1 originally authorized by the Texas Commission in Docket No. 7289. The final order also set into motion the actions required to seek a remand of the appeal of Docket No. 7510 to the Texas Commission to implement a final order consistent with the WTU Stipulation and Agreement. On December 8,1995, all parties to the appeals filed a joint motion with the Supreme Court and, on December 22,1995, the Supreme Court approved the joint motion to withdraw and dismissed the case. The case will now go back to the Court of Appeals so that it can be remanded back to the Texas Commission. The date of this remand and final action by the Texas Commission is not known. The WTU Stipulation and Agreement is expected to impact WTU's results of operations for the ; next several years, reducing annual earnings by approximately $8 million beginning in 1996. Details of the items with significant earnings impact for 1995 and 1996, including certain accounting treatments, are set forth in the following table, i i 1 UTU 2-152
.- -, .. . . . .--. - . - . _ . - - -._ - - . . . = _ ~ . - . - - - . . - - _ _
l 1995 1996 (unaudited) Pre-tax After-tax Pre-tax After-tax (millions) Refund to retail customers $(21.0) $(13.7) 5-- $-
- Effect of retail rate reduction (2.4) (1.6) (7.6) (4.9)
Current flowback of property related excess deferred federalincome taxes 6.9 6.9 - -. Five year flowback of non property related excess deferred federal income taxes 0.1 0.1 0.5 0.5 Capitalization and amortization of previously expensed restructuring costs 12.7 N.2 (1.9) (1.2) Accelerated amortization of deferred Oklaunion plant
- costs (accelerated from the remaining 31 years to 7 years) . - -
(2.9) (1.9) ' Other amortization (0.2) (0.1) (0.8) (0.5) Other one-time items 1.0 0.7 - The WTU Stipulation and Agreement also eliminated several signiGcant risks that have been the subject of regulatory proceedings relating to deferred accounting and rates and will enable WTU's rates to remain at competitive levels for the foreseeable future. Other WTU is party to various other legal claims, actions and complaints arising in the normal course of business. Management does not expect disposition of these matters to have a material adverse effect on WTU's results of operations or financial condition.
- 3. COMMITMENTS AND CONTINGENT LIABILITIES
! Construction and Capital Expenditurfs It is estimated that WTU will spend approximately $42 million, including AFUDC, in , construction expenditures during 1996. Substantial commitments have been made in connection with this ! capital expenditure program. l 1 Fuel Commitments l l WTU has entered into various commitments for the procurement of fuel. WTU Pipeline Leases WTU has a sale / leaseback agreement with Transok, an affiliated company, for full capacity use of a natural gas pipeline to WTU's Ft. Phantom generating plant. The lease agreement also provides for full capacity use of Transok's natural gas pipelines serving WTU's San Angelo Oak Creek and Rio Pecos generating plants. The initial terms of the agreement entered into in 1992 are for twelve years with renewable options thereafter.
- 4. INCOME TAXES i See CSW's NOTE 4. i i
l i . 5. BENEFIT PLANS l See CSW's NOTE 5. UTU 2-153 l l
I
- 6. JOINTLY OWNED ELECTRIC UTILITY PLANT
. See CSW's NOTE 6.
- 7. FINANCIAL INSTRUMENTS See CSW's NOTE 7.
l j
- 8. LONG-TERM DEllT l See CSW's NOTE 8.
- 9. PREFERRED STOCK 1 l
See CSW's NOTE 9.
- 10. SilORT-TERM FINANCING See CSW's NOTE 10.
I
- 11. QUARTERLY INFORM ATION See CSW's NOTE 14 on pages 2-64 and 2-65.
l CSW's NOTE 4 through NOTE 10 are found on pages 2-48 through 2-60. l I I l I l 9PU 2-154
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board ofDirectors of West Texas Utilities Company: We have audited the accompanying balance sheets and statements of capitalization of West Texas Utilities Company (a Texas corporation and a wholly owned subsidiary of Central and South West Corporation) as of December 31,1995 and 1994, and the related statements ofincome, retained earnings and cash flows for each of the three years in the period ended December 31,1995. These financial statements are the responsibility of WTU's management. Our responsibility is to express an opinion'on these financial statements based on our audits. i l We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. ' An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial , statement presentation. We believe that our audits provide a reasonable basis for our opinion. l l l In our opinion, the financial statements referred to above present fairly, in all material respects, the ' financial position of West Texas Utilities Company as of December 31,1995 and 1994, and the results ofits ; operations and its cash Hows for each of the three years in the period ended December 31,1995, in conformity with generally accepted accounting principles. ) in 1993, as discussed in NOTE 1, WTU changed its methods of accounting for unbilled revenues, l postretirement benefits other than pensions, income taxes and postemployment benefits.
)
l Our audits were made for the purpose of forming an opinion on the financial statements taken as a ! whole. The supplemental Schedule 11 and Exhibit 12 are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. This schedule and exhibit have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.' Arthur Andersen LLP Dallas, Texas February 28,1996 I 4 I W10 2-155 l t -
ItEPOllT OF MANAGEM ENT Management is responsible for the preparation, integrity and objectivity of the financial statements of West Texas Utilities Company as well as other information contained in this Annual Report. The Gnancial - statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reDect amounts based on the best estimates and judgments of management, giving due consideration to materiality. Financial information contained elsewhere in this Annual Report is consistent with that in the Onancial statements. The financial statements have been audited by the independent accounting Grm, Arthur Andersen ., LLP, which was given unrestricted access to all Enancial records and related data, including minutes of all meetings of shareholders, the board of directors and committees of the board. WTU believes that representations made to the independent auditors during their audit were valid and appropriate. Arthur Andersen LLP's audit report is presented elsewhere in this report. WTU maintains a system of internal controls to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the Gnancial statements are prepared in accordance with generally accepted accounting principles and that the assets of the companies are properly i safeguarded against unauthorized acquisition, use or disposition. The system includes a documented l organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that WTU will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees. Internal auditors continuously monitor the effectiveness of the internal control system following standards established by the Institute ofinternal Auditors. Actions are taken by management to respond to denciencies as they are identiHed. The board, operating through its audit committee, which is comprised entirely of directors who are not of6cers or employees of WTU provides oversight to the Gnancial reporting process, e>ue to the inherent limitations in the effectiveness of internal controls, no internal control system can j provide absolute assurance that errors will not occur. However, management strives to maintain a balance, l recognizing that the cost of such a system should not exceed the benefits derived. l I WTU believes that, in all material respects, its system ofinternal controls over Gnancial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31,1995. Glenn Files R. Russell Davis President and CEO - WTU Controller - WTU 1 2-156
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. . CSIV None. CPL None. PSO None. Sil'EPCO None. IITU None. l l l 2-157
1 i
- j 1
[This Page Intentionally Left Blank] L 1 i l l
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS. CSW has filed with the SEC its Notice of Annual Meeting of Stockholders and Proxy Statement relating to its 1996 Annual Meeting of Stockholders. The information required by ITEM 10, other than with respect to certain information regarding the executive officers of CSW which is included in ITEM l-BUSINESS, is hereby incorporated by reference herein from pages 3-5 and 8 of such Proxy Statement. (a) Directors of each of the Electric Operating Companies, together with certain information with respect to each of them, are listed below. Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorshins Director CPL JOHN F. BRIMBERRY AGE - 63 1995 President of Professional Insurance Agents, Inc., Victoria, Texas. E. R. BROOKS AGE - 58 1991 Chairman, President and CEO of CSW since 1991. President of CSW from 1990 to 1991. Director of CSW and each ofits subsidiaries. Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor University Medical Center, Dallas, Texas and Hardin-Simmons University, Abilene, Texas. ROBERT R. CAREY
- AGE - 58 1989 President and CEO of CPL since 1990. Director of NationsBank, Corpus Christi, Texas.
- Mr. Carey will retire from all positions held at CPL effective April 30,1996.
RUBEN M. GARCIA AGE - 64 1981 President or principal of several firms engaged primarily in construction and land development in the Laredo, Texas area. DAVID L. HOOPER AGE - 40 1994 Vice President, Marketing and Business Development of CPL since 1994. Director of Marketing and Business Development ofCSW Services from 1993 to 1994. Director of Marketing and Business Development of CPL from 1991 to 1993. Area manager of CPL from 1990 to 1991. HARRY D. MATTISON
- AGE - 59 1994 Executive Vice President of CSW since 1990 and CEO of CSW Services since 1993.
COO of CSW from 1990 to 1993. Director of CSW and each of CSW's wholly owned subsidiaries. President and CEO of SWEPCO from 1989 to 1990.
- Mr. Mattison will retire from CPL's board of directors effective April 11,1996.
3-1 _]
l Name, Age, Principal 1 Occupation, Business Experience Year 1 and Other Directorshins First Became - Director ROBERT A. McALLEN AGE - 61 l Robert A. McAllen, Insurance Agency, Weslaco, Texas. 1983 PETE MORALES, JR. AGE - 55 1990 President and General Manager of Morales Feed Lots, Inc., Devine, Texas. Director of The Bank of Texas, Devine, Texas. S. LOYD NEAL, JR. AGE - 58 l 1990 President of Hilb, Rogal and Hamilton Company of Corpus Christi, an insurance agency, i Corpus Christi, Texas. Director of Bay Area Medical Center, Corpus Christi, Texas. H. LEE RICHARDS AGE - 62 i 1987 Chairman of the Board of Hygeia Dairy Company, Harlingen, Texas. I i MELANIE 3. RICHARDSON AGE - 39 ; 1993 Vice President, Administration of CPL since 1993. Treasurer of CPL from 1992 to 1994. Vice President, Corporate Services of CPL from 1992 to 1993. Director ofinternal Audits 1991. of CPL from 1991 to 1992. Manager of Personnel Services ofCPL from 1986 to i J. GONZALO SANDOVAL AGE - 47 1992 Vice President, Operations and Engineering of CPL since 1993. Vice Pres'ident, Regional Operations of CPL from 1992 to 1993. Vice President, Corporate Services of CPL 1991. from 1991 to 1992. General Manager of the Southern Region of CPL from 1988 to GERALD E. VAUGHN AGE - 53 1993 I Vice President, Nuclear of CSW Services since 1994. Vice President, Nuclear Affairs of CPL from 1993 to 1994. Vice President for Shearon Harris Nuclear Plant from 1992-1993 and Vice President, Nuclear Services from 1990 to 1992 of Carolina Power and Light Company, Raleigh, North Carolina. Each of the directors and executive officers of CPL is elected to hold office until the Board of Directors after the 1996 Annual Meeting of Stockholders. CPL's 1996 Annual Me is presently scheduled to be held on April 11,1996. occupations listed above for a period of more than five years, unless otherwise in PSO E. R. BROOKS AGE - 58 1991 Chairman, President and CEO of CSW since 1991. President ofCSW from 1990 to 1991. Director of CSW and each ofits subsidiaries. Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor University Medical Center, Dallas, Texas and Hardin-Simmons University, Abilene, Texas. 3-2
1 . l Name, Age, Principal Year Occupation, Business Experience First Became l and Other Directorshios Director *
~
HARRY A. CLARKE AGE - 67 1972 - General Partner and President ofIIAC Investments, Afton, Oklahoma. PAUL K. LACKEY, JR. AGE - 52 1992 Secretary of Health and Human Services, Executive Director of the OfGee of Juvenile Affairs, State of Oklahoma, beginning in 1995. Consultant, Flint Industries, Inc., a ! construction, electronics manufacturing, and environmental services company, Tulsa, Oklahoma. Advisory Director of Bank IV-Tulsa, Tulsa, Oklahoma. 1 PAULA MARSHALL-CllAPMAN AGE - 42 1991 General Partner /CEO of Bama Pie Ltd., a baked goods produce company, Tulsa, Oklahoma. HARRY D. MATTISON
- AGE - 59 1994 Executive Vice President of CSW since 1990 and CEO of CSW Services since 1993.
COO of CSW from 1990 to 1993. Director of CSW and each of CSW's wholly owned subsidiaries. President and CEO of SWEPCO from 1989 to 1990.
- Mr. Mattison will retire from PSO's board of directors effective April 16,1996.
WILLIAM R. McKAMEY AGE - 49 1993 Vice President, Marketing and Business Development of PSO since 1993. Director of Marketing and Business Development of CSW from 1992 to 1993. Director of Marketing of SWEPCO from 1990 to 1992. MARY M. POLFER AGE - 51 1991 Vice President, Administration of PSO since 1993. Vice President, Finance of PSO from 1990 to 1993. DR. ROBERT B. TAYLOR, JR. AGE - 67 1975 Retired dentist, Okmulgee, Oklahoma. ROBERT L. ZEMANEK AGE - 46 1990 President and CEO of PSO since 1992. Executive Vice President of PSO from 1990 to 1992. WALDO J. ZERGER, JR. AGE - 49 1991 Vice President, Operations and Engineering of PSO since 1994. Vice President of l Division Operations of PSO from 1990 to 1994. Each of the directors and executive of6cers of PSO is elected to hold office until the first meeting of
- PSO's Board of Directors after the 1996 Annual Meeting of Stockholders. PSO's 1996 Annual Meeting of l Stockholders is presently scheduled to be held on April 16,1996. All outside directors have engaged in their j principal occupations listed above for a period of more than five years, unless otherwise indicated.
i 3-3
I Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorshins Director SWEPCO , i - RICHARD H. BREMER AGE - 47 1989 President and CEO of SWEPCO since 1990. Director of Commercial National Bank, Shreveport, Louisiana. Director of Deposit Guaranty Corporation, Jackson, . Mississippi. E, R. BROOKS AGE - 58 1991 Chairman, President and CEO of CSW since 1991. President of CSW from 1990 to 1991. Director of CSW and each ofits subsidiaries. Director of Hubbell, Inc., Orange, ., Connecticut. Trustee of Baylor University Medical Center, Dallas, Texas and Hardin-Simmons University, Abilene, Texas. JAMES E. DAVISON AGE - 58 1993 Sole Proprietor of Paul M. Davison Petroleum Products. President and Chief Executive Officer of Davison Transport, Inc. and Davison Terminal Services, Inc. Advisory Board member of Heritage Financial Group. All of the above entities are located in Ruston, Louisiana. AL P. EASON, JR.
- AGE - 70 1975 l President, Eason and Company, a general insurance company, Fayetteville, Arkansas.
- Mr. Eason will retire from SWEPCO's board of directors effective April 10,1996. l I
W. J. GOOGE, JR. AGE - 53 1990 Vice President, Administration of SWEPCO since 1993. Vice President, Corporate Services of SWEPCO from 1990 to 1993. ! DR. FREDERICK E.. JOYCE AGE - 61 1990 i Physician. President of Chappell-Joyce Pathology Association, P.A., Texarkana, Texas. President of Doctors Diagnostic Laboratory, Inc., Texarkana, Texas. Director of , State First National Bank and State First Financial Corporation, Texarkana, Arkansas. I Director of First Commercial Corporation, Little Rock, Arkansas. I MICHAEL H. MADISON AGE - 47 1992 i Vice President, Operations and Engineering of SWEPCO since 1993. Vice President, Engineering and Production of SWEPCO from 1992 to 1993. Vice President, Corporate Services of WTU from 1990 to 1992. HARRY D. MATTISON
- AGE - 59 1994 Executive Vice President of CSW since 1990 and CEO of CSW Services since 1993.
COO of CSW from 1990 to 1993. Director of CSW and each of CSW's wholly owned subsidiaries. President and CEO of SWEPCO from 1989 to 1990.
- Mr. Mattison will retire from SWEPCO's board of directors effective April 10,1996.
MARVIN R. McGREGOR AGE - 49 1990 Vice President, Marketing and Business Development of SWEPCO since 1990. 3-4
I i l l l Name, Age, Principal Year l Occupation, Business Experience First Became l l and Other Directorshios Director ! i l ! WILLI AM C. PEATROSS AGE - 52 1990 ] President of Caddo Abstract and Title Co., Inc., Director of Commercial National l Bank. Both entities are located in Shreveport, Louisiana. MAXINE P. SARPY AGE - 56 1996 ! Vice President of the Caddo-Bossier Port Commission, Treasurer of the Association l for Community Training and State President of the Auxiliary to the Louisiana Medical i Association, Board Member of the National Conference of Christians and Jews. All of l the above entities are located in Shreveport, Louisiana. Vice President of the Southern University Foundation Board, Baton Rouge, Louisiana. Each of the directors and executive ofGcers of SWEPCO is elected to hold office until the first meeting of SWEPCO's Board of Directors after the 1996 Annual Meeting of Stockholders. SWEPCO's 1996 Annual l Meeting of Stockholders is presently scheduled to be held on April 10,1996. All outside directors have , engaged in their principal occupations listed above for a period of more than five years, unless otherwise l indicated. H7U RICHARD F. BACON AGE - 69 1980 Retired President and CEO of Merchants, Inc. Companies, a freight common carrier, ! Abilene, Texas. C. HARWELL BARBER AGE - 69 1990 Chairman of Rita Barber, Inc., a burial clothing company, Abilene, Texas. ) l E. R. BROOKS AGE - 58 1980 l Chairman, President and CEO of CSW since 1991. President of CSW from 1990 to i 1991. Director of CSW and each ofits subsidiaries. Director of Hubbell,Inc., Orange, Connecticut. Trustee of Baylor University Medical Center, Dallas, Texas and Hardin-Simmons University, Abilene, Texas. l PAUL J. BROWER AGE - 47 1991 Vice President, Marketing and Business Development of WTU since 1991. Division Manager of PSO from 1990 to 1991. T. D. CHURCHWELL AGE - 51 1994 Executive Vice President, Operations and Engineering of WTU beginning in 1995. Executive Vice President of WTU from 1994 to 1995. Vice President, Corporate l ' ) Services of CSW Services from 1991 to 1993. Central Region Manager of CPL from i 1989 to 1991. l l 1 3-5
i l i 1 Name, Age, Principal Year Occupation, Business Experience First Became , and Other Directorshins Director GLENN FILES
- AGE - 48 1991 President and CEO of WTU since 1992. Executive Vice President of WTU from 1991 to 1992. Vice President, Marketing and Business Development of CPL from 1990 to 1991.
Director of First National Bank of Abilene, Texas.
- Effective February 26,1996, Mr. Filesjoined CSW's executive management team while retaining his responsibilities at WTU. Mr. Files will also assume an executive advisory role relating to CPL, effective April 30,1996, pursuant to Mr. Robert R.
Carey's retirement. HARRY D. MATflSON
- AGE - 59 1994 .
Executive Vice President of CSW since 1990 and CEO of CSW Services since 1993. COO of CSW from 1990 to 1993. Director of CSW and each of CSW's wholly owned subsidiaries. President and CEO of SWEPCO from 1989 to 1990.
- Mr. Mattison will retire from WTU's board of directors effective March 26,1996.
TOMMY MORRIS AGE-61 1976 ; independent insurance agent, Abilene, Texas. ; DIAN G. OWEN AGE - 56 1994 Chairman of Owen Healthcare, Inc., hospital services, Abilene, Texas. Director of First l National Bank of Abilene, Abilene, Texas. Director of First Financial Bankshares,Inc., ! Abilene, Texas. ! i JAMES M. PARKER AGE - 65 1987 ! I President and CEO of J. M. Parker and Associates, Inc., an investment company, Abilene, Texas. Director of First Financial Bankshares, Inc. and First National Bank of Abilene, Abilene, Texas. DENNIS M. SHARKEY AGE-51 1994 Vice President, Administration of WTU since 1994. Vice President, Finance and ! Director of SWEPCO from 1990 to 1994. l I F. L. STEPHENS AGE - 58 1980 Chairman and CEO of Town & Country Food Stores,Inc., San Angelo, Texas. Director of Norwest Texas, Lubbock, Texas. ' Each of the directors and executive of6cers of WTU is elected to hold of0ce until the first meeting of WTU's Board of Directors after the 1996 Annual Meeting of Stockholders. WTU's 1996 Annual Meeting of Stockholders is presently scheduled to be held on March 26,1996. All outside directors have engaged in their principal occupations listed above for a period of more than five years, unless otherwise indicated. 3-6
(b) The following is a list of officers who are not directors of the registrants, together with certain iaformation with respect to each of them: Year First - i Name, Age, Principal -- Elected to Occuoation. Business Exnerience Present Position l CPL, PSO, SWEPCO and WTU l . SHIRLEY S. BRIONES , AGE - 44 1994 l Treasurer of CPL, PSO, SWEPCO, WTU and CSW Services since 1994. Manager, Budgets and Accounting Systems of CPL from 1992 to 1994. Supervisor of Accounting of CPL from 1990 to 1992. - R. RUSSELL DAVIS AGE - 39 1994 Controller of CPL, WTU, SWEPCO and CSW Services since 1994. Controller of PSO : since 1993. Assistant Controller of CSW from 1992 to 1993. Assistant Controller of I l CSW Services from 1991 to 1992. Business Improvement Project Manager of WTU in ,
- l. 1991. Manager of Financial Reporting of WTU from 1988 to 1991. L CPL DAVID P. SARTIN AGE - 39 1994 ;
Director of Planning and Analysis and Secretary of CPL since 1994. Controller of CPL from 1991 to 1994. Controller of WTU from 1989 to 1991. 1 PSO l BETSY J. POWERS AGE - 60 1989 Secretary of PSO since 1989.- SWEPCO MARILYN S. KIRKLAND AGE - 48 1995 Secretary of SWEPCO since 1995. Senior executive secretary to the president since 1992. Previously a human resource representative at SWEPCO. WTU MARTHA MURRAY . ; AGE- 50 1992 Secretary of WTU since 1992. Previously a senior secretary at WTU. b l i l i 3-7
b ITEM 11. EXECUTIVE COMPENSATION. Cash and Olher Forms of Comnensation Information required by ITEM 1 I with respect to CSW is hereby incorporated by reference herein i' from pages 15-19 of CSW's Proxy Statement. i The following table sets forth the aggregate cash and other compensation for services rendered for the l fiscal years of 1995,1994 and 1993 paid or awarded by each registrant to the CEO and each of the four most i highly compensated Executive Officers, other than the CEO, whose salary and bonus exceeds $100,000, and up to i swo additional individuals, if aie, not holding an executive officer position as of year-end but who held such a l pcsition at ar.iy time during the year, and whose compensation for the year would have placed them among the i four most highly ccimpensated executive officers. For CPL, PSO and SWEPCO only three Executive Officers meet these requirements.
- Summary Compensation Table I rww Term Comnenution Annual Cmnnenutinn A wardi Pavouts
- CSW oilier CSW Secunties Annual Restncied Underlying All ohr Compen- stock opuons/ LTIP Compen.
Name and Enlary !! onus sanon $ARs Payouts Award (s) sation
, Pnncmnt Poonnn Year (1) fiWI) (SW2) f5)flW3) (#1 ft) fili 4)
~
CFL
- Robert R.Carey, 19Q 306,415 44,679 9,414 - - - 23,117 f President and CEO 1994;,- 293.344 -
516 - 15,901 - 23,763 } 1993 \ 272,893 32,943 9,548 33,608 - - 27,587 i N j' J. Gonzalo Sandoval, 1995 M7,760 19,303 4,366 - - - 6,199 Vice President, Operations 1994 12h932 - 989 - 4,010 - 5,847 and Engineering 1993 120,M7 7,878 4,963 7.986 - - 4,221 Melanic J. Richardson, Vice 1995 130.890 \ , 21,670 1,658 - - - 3,927 i President, Administration 1994 122,230 - 454 4,010
-- - 3,667 l 1993 109.228 8399 1,598 - - - 3,277 3 David L Hooper, Vice 1995 128,060 15,587 2,402 - - - 3,789 President Marketing and 1994 87,704 - 51,928 - 4,010 - 3,365 Business Development (2)(5) 1993 - - - - - - -
i eso Robert L, Zemanck, 1995 276,270 91,436 9,192 - -- - 23,117 President and CEO 1994 262,962 - 2,981 - 14,792 - 17,472 1993 238,269 24.051 3,927 24,503 - - 26,835 Waldo J. Zerger, Jr., Vice 1995 146,169 20.586 5,162 -- - -- 6,578 President. Operanons and 1994 138,108 - 2,634 - 4,010 -- 12,847 Engineering 1993 128,866 4.988 2,571 5,052 - - 5,347 Mary M. Polfer Vice 1995 142,492 19,503 5,075 - - - 4,275 President, Administration 1994 135,820 - 3,417 - 4,010 -- 8,439 1993 127,403 4,635 3,071 4,179 - - 3,518 William R. McKamey, Vice 1995 128.024 19,503 3.282 - - - 5,761 President, Marketing and 1994 119,900 - 2,401 - 4,010 -- 6,074 Dusiness Development (2)(5) 1993 52,953 -- 33,903 - - - 4,487 3-8
LulsanIsmvanawa Annual Comnenu nm Aw ar A hwuts CSW Other CsW Secuntics Annual Restncted Underlying All Other
- Compen, stock options / LTIP Compen-Name and salary Bonus sation Awardo) sARs Payouts satmn Prmespal PmMan Year (1) ri)f i) (11(?) (1) (1)(1) (#1 (1) (11MJ SWEPCO Richard H. Brerner, 1995 298,372 89,358 14,691 - - - 21,706 President and CEO 1994 277,359 50,000 13,978 -- 15,901 - 22,235 1993 263,833 36,017 13,206 36,724 -- - 24,088 Marvin R. McGregor, 1995 145,825 23,837 3,801 - - - 7,402 Vice President, Marketing 1994 133,773 - 4,292 - 4,010 - 6,695 and Business Development 1993 126,620 8,196 5,769 8,319 - - 5,197 Michael 11. Madison, Vice 1995 142.448 22,753 4,376 - - -- 7,250 President, Operating and 1994 131,621 - 3,625 -- 4,010 - 6,600 Engineering (2) 1993 126,215 7.140 30,742 7,260 - -
5.188 W, J. Googe, Jr.. 1995 133,664 21,670 2,718 -- - - 6,854 Vice President, 1994 122,769 -- 2,543 - 4,010 - 6.213 Administration 1993 117,644 7,001 4,965 9,620 - - 6,632 HTU Glenn Files, President 1995 266,223 85,048 19,144 - - - 23,117 and CEO (2) 1994 246,699 50,000 10,032 - 13,758 - 6.750 1993 223,333 24,675 39,223 25,138 -- - 26,126 T. D. Churchwell, 1995 180,400 40,388 9,206 - - - 4,500 Executive Vice President, 1994 163,329 - 180,191 - 6.133 - 4,500 Operrtion and Engineering 1993 - - - - - - - 0)(5) Dennis M. Sharkey, 1995 171,001 18,419 7.959 - - - 4,500 Vice President, 1994 157,046 - 72.927 -- 4,010 - 4,500 Administration (2)(5) 1993 - - -- - -- -- - Paul J, Brower, Vice 1995 147,119 19,503 11,546 -- - -- 4.413 President, Marketing and 1994 132,058 - 5.519 - 4,010 - 3,962 Business Development 1993 123,133 7.231 673 7,351 -- -- 3.366 Donald A. Welch, Vice 1995 91,034 17.336 20.011 -- -- - 4,071 President Division Operations 1994 136,962 - 5,003 -- 4,010 - 6,163 and Engineering (2)($) 1993 129,650 7.178 1,628 7,290 -- - 5,339 (1) Amounts in this column are paid or awarded in a calendar year for performance in a preceding year. 1 (2) The following are the perquisites and other personal benefits required to be identified in respect of each ' Named Executive Officer. CPL in 1994, Mr. Hooper was reimbursed $49,485 for relocation expenses. PSO In 1993, Mr. McKamey was reimbursed $24,641 for relocation expenses. SWEPCO in 1993, Mr. Madison was reimbursed $14,848 for relocation expenses, 3-9 l l I
H7U In 1995, Mr. Welch received $13,133 in compensation related to the sale of restricted stock. , in 1994, Mr. Churchwell and Mr. Sharkey were reimbursed $21,052 and $43,816, respectively, for relocation expenses. Mr. Churchwell was reimbursed $73,490 for loss on the sale of his home, due to structural problems. In 1993, Mr. Files was reimbursed $8,482 for spouse travel expenses. (3) CPL, PSO, Sil'EPCO and iITU Grants of restricted stock are administered by the Executive Compensation Committee of CSW's BoatJ of Directors, which has the authority to determine the individuals to whom and the terms upon which restricted stock grants, including the number of underlying shares, shall be made. The awards reflected in this column all have four-year vesting periods with 20% of the stock vesting on the first, second and third anniversary dates of the award and 40% vesting on the fourth such anniversary date. Upon vesting, shares of CSW Common are re-issued without restrictions. The individuals receive dividends and may vote shares of restricted stock, even before they are vested. The amount reported in the table represents the market value of the shares at the date of grant. As of the end of 1995, the aggregate restricted stock holdings of each of the Named Executive Officers are presented in the following table. Restricted Stock lleld Market Value at Name at December 31.1995 December 31,1995 CPL Robert R. Carey 1,417 $39,499 J. Gonzalo Sandoval 158 4,404 Melanie J. Richardson -- - David L Hooper -- -- PSO Robert L Zemanek 680 18,955 Waldo J. Zerger, Jr. 289 8.056 Mary M. Polfer 302 8,418 William R. McKamey - -- SWEPCO Richard 11. Bremer 1,550 43,206 Marvin R. McGregor 325 9,059 Michael H. Madison 300 8,363 W. Jerry Googe, Jr. 296 8,251 FITU Glenn Files 733 20,432 T. D. Churchwell 301 8.390 Dennis M. Shaakey 340 9.478 Paul J. Brow er 237 6.606 Donald A. Welch -- .. (4) CPL, PSO, SIl'EPCO and i1TU Amounts shown in this column consist of(i) the annual employer matching payments to CSW's Thrift Plus Plan,(ii) premiums paid per participant for personal liability insurance and (iii) average amounts of premiums paid per participant under CSW's memorial gift program. Under this program, for certain executive officers, directors and retired directors from the CSW System, CSW will make a donation in the participant's name for up to three charitable organizations of an aggregate of $500,000, payable by CSW ; upon such person's death. CSW maintains corporate-owned life insurance policies to fund the program. ! The annual premiums paid by CSW are based on pooled risks and averaged $16,367 per participant for l 1995 and $17,013 per participant for 1994 and 1993. During 1995, Messrs. Bremer, Carey, Files and l I 3-10 : I
Zemanek participated. During 1994, Messrs. Carey and Bremer participated. Messrs. Files and Zemanck , also participated in the plan in 1994, but coverage was provided by CSW. During 1993, Messrs. Bremer, Carey, Files, and Zemanek participated, . (5) CSW System Affiliations. CPL Mr. liooper was employed by CSW Services during 1993 and a portion of 1994, PSO Mr. McKamey was employed by CSW during a portion of 1993. HTU Mr. Churchwell was employed by CSW Services during 1993. Mr. Sharkey was employed by SWEPCO during'1993, and Mr. Welch resigned in August of 1995, Option /SAR Grants No stock options or stock appreciation rights were granted in 1995. The stock option plans are administered by the Executive Compensation Committee of the CSW Board of Directors, which has the authority to determine the individuals to whom and the terms upon which option and SAR grants shall be made. Option /SAR Exercises and Year-End Value Table ; Information regarding option /SAR exercises during 1995 and unexercised options /SARs at December 31, 1995 for the Named Executive Officers is presented in the following table. Number of CSW Securities Underlying Unexercised Value of Value Options /SARs at Year-End In-the-Money /SARs at Shares Acquired Realized (#) Exercisable / Year-End ($) Exercisable / . Nane on Exercise (#) ($) Unexercisable Unexercisable (1) CPL Robert R. Carey - - 19,231/10.601 11,912/32,460 J. Gonzalo Sandoval - -- 4,252/2,674 --/8,188 Melanic J. Richardson - - 2,643/2,674 1,804/8,188 David L. Hooper - -- 2,848/2,674 1,445/8,188 PSO Robert L Zemanek - - 15,568/9,862 --/30,197 Waldo J, Zerger, Jr. -- -- 4,471,2,674 --/8,188 Mary M. Polfer - -- 4,252/2.674 --/8,188 William R. McKamey -- -- 3,322/2,674 615/8,188
- SWEPCO Richard H. Bremer - -- 17,731/10.601 --/32,460 Marvin R. McGregor - -- 4,471/2,674 --/8,188 Michael H. Madison - - 4,471/2,674 --/8,188 W. Jerry Googe, Jr. --
-. 4,252/2,674 --/8,188 H7U Glenn Files -- - 14,481/9,172 --/28.085 T. D. Churchwell - -- 5,179/4,089 772/12,521 Dennis M. Sharkey - - 10,652/2,674 73,688/8,I88 Paul J. Brower -- -- 4,470/2,675 --/8,191 Donald A. Welch - - 16,458/2,675 76,380/8,191 3-11
i l l , (1) Calculated based upon the difference between the closing price of CSW Common on the New York Stock ! Exchange on December 31,1995 ($27.875 per share) and the exercise price per share of the outstanding . , options (ranging from $16.125 to $29.625 per share). l Lone-term Incentive Plan Awards in 1995 Information concerning awards made to the Named Executive Officers during 1995 under the LTIP is set f forth in the following table. l Performance or Estimated Future Payouts under ; Number of CSW Other Period Non-Stock Price Based Plans Shares Units or Until Maturation Threshold Target Maximum , Name Other Richts f #) or Pavout (1) f$) ($) f$) ! CPL Robert R. Carey - 2 years - 146,437 219,656
- 1. Gonzalo Sandoval --
2 years - 31,580 47.370 , Melanic J. Richardson -- 2 years -- 31,580 47.370 David L. Ilooper -- 2 years -- 31,580 47,370 PSO Robert L. Zemanck - 2 years - 136.223 204,335 : Waldo J. Zerger, Jr. - 2 years - 31,580 47,370 ! Mary M. Polfer -- 2 years - 31,580 47,370 ! William R. McKamey - 2 years - 31,580 47,370 , SWEPCO Richard 11. Bremer - 2 years -- 146,437 219,656 ; Marvin R. McGregor - 2 years - 31,580 47,370 ! Michael H. Madison - 2 years - 31,580 47,370 W. Jerry Googe, Jr. - 2 years - 31,580 47,370 j t WTU Glenn Files - 2 years -- 126,723 190,085 T. D. Churchwell -- 2 years l 63.258 94.887 , Dennis M Sharkey - 2 years - 31,580 47,370 ! Paul J. Brower -- 2 years - 31,580 47,370 l Donald A. Welch -- - - - -- f Payouts of the awards are contingent upon CSW achieving a specified level of total stockholder return, ! relative to a peer group of utility companies, for the three-year period, or cycle, and exceeding a certain defined : minimum threshold. Total stockholder return is calculated by dividing (i) the sum of(a) the cumulative amount of dividends per share for the three-year period, assuming full dividend reinvestment, and (b) the change in share price over the three-year period, by (ii) the share price at the beginning of the three-year period. If CSW's total stockholder return for a cycle falls in one of the top three quartiles of similarly-calculated total stockholder returns achieved at companies in the peer group of utility companies, CSW will make a payout to participants for the three-year cycle then ending. First, second and third quartile performance will result in payouts of 150 percent, i 100 percent and 50 percent of target, respectively, Performance in the fourth quanile yields no payout under the LTIP, if the Named Executive Officer's employment is terminated during the performance period for any reason
)
other than death, total and permanent disability or retirement, then the award is canceled. In March 1995, the committee reviewed total stockholder return results and because they were below the threshold for a payout, no awards were granted. The Executive Compensation Committee is scheduled to evaluate the 1993 to 1995 cycle performance under the LTIP in March 1996. The LTIP contains a provision accelerating awards upon a change in control of CSW, Except as provided in the next sentence, if a change in control of CSW occurs (i) all options and SARs become fully exercisable and 3 12 l
(ii) all restrictions, terms and conditions applicable to all restricted stock are deemed lapsed and satisfied and all I performance units are deemed to have been fully earned, as of the date of the change in control. Awards which have been outstanding for less than six months prior to the date the change in control occurs are not subject to
- acceleration upon the occurrence of a change in control. The LTIP also contains provisions designed to prevent I circumvention of the above acceleration provisions through coerced termination of an employee prior to a change in control.
Retirement Plan Pension Plan Table Annual Benefits After Specified Years of Credited Senice Average compensation 15 20 25 30 or more
$100,000 , , $ 25,050 $ 33,333 $ 41,667 $ 50,000 150,000 , 37,575 50.000 62,500 75,000 200,000 .. 50,l00 66,667 83,333 100,000 250,000 . .. 62.625 83,333 104,167 125,000 300,000 75.150 100,000 125,000 150,000 350,000 . , 87,675 116,667 145.833 175,000 450,000 . 112,725 150,000 187,500 225,000 550,000 . 137,775 183.333 229,167 275,000 650,000 ,, 162,825 216,667 270.833 325,000 750,000 187,875 250,000 312,500 375,000 Executive officers are eligible to participate in the tax-qualified CSW Pension Plan like other employees of the registrants. Certain executive officers, including the Named Executive Officers, are also eligible to participate in the SERP, a non-qualified ERISA excess benefit plan. Such pension benefits depend upon years of credited service, age at retirement and amount of covered compensation earned by a participant. The annual normal retirement benefits payable under the pension and the SERP are based on 1.67 percent of" Average Compensation" times the number of years of credited service (reduced by (i) no more than 50 percent of a participant's age'62 or later Social Security benefit and (ii) certain other offset benefits).
" Average Compensation" is the covered compensation for the plans and equals the average annual compensation, reported as salary in the Summary Compensation Table, during the 36 consecutive months of highest pay during the 120 months prior to retirement. The combined benefit levels in the table above, which
' include both the pension and SERP benefits, are based on retirement at age 65, the years of credited service shown, continued existence of the plans without substantial change and payment in the form of a single life annuity. Respective years of credited service and ages, as of December 31,1995, for the Named Executive Officers are presented in the following table. Named Executive Officer Years of Credited Service Age CPL Roben R. Carey 28 58 J. Gonzalo Sandoval 22 46 Melanie J. Richardson 14 39 David L. Ilooper 16 39 PSO Roben L Zemanek 23 46 Waldo J. Zerger, Jr. 25 49 ) Mary M. Polfer 5 51 William R. McKamey 25 49 3-13
1 l Named Executive Omccr Years of Credited Service Age SHEPCO . Richard H. Bremer 18 47 _ Marvin R. McGregor 26 49 Michael 11. Madison 24 47 W. Jerry Googe, Jr. 30 53 HTU Glenn Files 24 48 T. D. Churchwell 17
)
51 l Dennis M. Sharkey 17 51 Paul J. Brower 19 46 Donald A. Welch 30 56 l Meetint's and Compensation Those directors who are not also of6cers of CPL, PSO, SWEPCO and WTU receive annual directors' l fees and a fee of $300 plus expenses for each board or committee meeting attended, as described below. They are j also eligible to participate in a deferred compensation plan. Under this plan such directors may elect to defer ! payment of annual directors' and meeting fees until they retire from the board or as they otherwise direct. The number of board meetings and annual directors' fees are presented in the following table. CPL PSO SHEPCO HTU Number of regular board meetings 4 l 4 4 5 ; Annual directors' fees $6,000 $6,000 $6,600 $6,000 Compensation Committec Interlocks and Insider Participation No person serving during 1995 as a member of the Executive Compensation Committee of the Board of Directors ofCSW served as an of6cer or employee of any registrant during or prior to 1995. No person serving during 1995 as an executive of6cer of the Electric Operating Companies serves or has served on the compensation committee or as a director of another company whose executive officers serve or has served as a member of the Executive Compensation Committee of CSW or as a director of one of the Electric Operating Companies. ITEM 12. SECURITY OWNFsRSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. CSW The information required by ITEM 12 is incorporated by reference herein from page 5-6 of CSW's Proxy Statement. CPL, PSO, SWEPCO and WTU All of the outstanding shares of common stock of each of the Electric Operating Companies, presented in the following table, is owned beneficially and of record by CSW,1616 Woodall Rodgers Freeway, Dallas, Texas 75202-1234. Company Shares Par Value CPL 6,755,535 $25 par value PSO 9,013,000 $15 par value SHIPCO 7,536,640 $18 par value HTU 5,488,560 $25 par value 3-14
Security Ownership of Manacement f' The following tables show securities beneficially owned as of December 31,1995, by each director, the . l- CEO and the four other rnost highly compensated executive officers, and as a group, all directors and Executive i Officers of each of the Electric Operating Companies. . Share amounts shown in this table include options - exercisable within 60 days after year-end, restricted stock, shares of CSW Common credited to CSW Thrift Plus accounts and all other shares of CSW Common beneficially owned by the listed persons. L Each of the Electric Operating Companies has one or more series of preferred stock outstanding. As of 4 December 31,1995, none of the individuals listed in the following tables owned any shares of preferred stock of-any Electric Operating Company, a 1
- CPL 's Beneficial Ownership as of December 31,1995
- CSW Common
! lJnderlying 3' CSW Restricted immediately ' ' Name Common (1) Stock (2)(3) Exercisable Options (3) John F. Brimberry - - - - i E. R. Brooks 86,887 2,572 41,455 Robert R. Carey 27,224 1,417 19,231
- Ruben M. Garcia - -- --
4 David L. Ilooper 4,102 - -- i llarry D. Mattison 49,580 1,654 26,429
- Robert A.McAllen - - -
Pete Morales, Jr. - -- -- I 1,572 S. Loyd Neal, Jr. -- - l II. Lee Richards 1,700 -- - t Melanie J. Richardson 3,583 - . 2,641 J. Gonzalo Sandoval 14,942 158 4,252 Gerald E. Vaughn 3,924 - 1,336 All of the above and o:her officers as a group 200,045 5,801 -102,125 (1) Beneficial ownership percentages are all less than one percent and therefore are omitted. (2) These individuals currently have voting power, but not investment power, with respect to these shares. (3) . These shares are included in the CSW Common column. PSO's Beneficial Ownership as ofDecember 31,1995 CSW Common lJnderlying CSW Restricted immediately Name Common (1) Stock (2)(3) Exerdsab!c Options (3) E. R. Brooks 86,887 - 2,572 41,455 Harry A. Clarke - - - Paul K. Lackey, Jr. - ~ ~ Paula Marshall-Chapman - - -
}{arry D. Mattison 49,580 1,654 26,429 William R. McKamey 10,739 -- .3.322 Mary M. Polfer 6,063 302 4,252 Dr. Robert B. Tayior, Jr. -- -- -
Robert L Zemanck 19,122 680 15,568 Waldo J. Zerger, Jr. 13,101 289 4,471 All of the above and other ofTicers as a group 194,589 5,497 99.24I (1) Beneficial ownership percentages are all less than one percent and therefore are omitted. (2) These individuals currently have voting power, but not investment power, with respect to these shares. (3) These shares are included in the CSW Common column. 3-15
SWEPCO's Beneficial Ownenhip as of December 31,1995 CSW Common
- Underlying CSW Restricted immediately Name Common (1) Stock (2)(3) Exercisable Options (3)
Richard 11. Bremer 38,984 1,550 17,731 E. R. Brooks 86.887 2,572 41,455 James E. Davison -- - - Al P. Eason, Jr. 2,000 - -- W. J. Googe, Jr. 7,716 296 4,252 Dr. Frederick E. soyce 2,000 - -- Michael 11. Madison 6.975 300 4,471 liarry D. Mattison 49,780 1,654 26,429 Marvin R. McGregor 7,006 325 4,471 William C. Peatross 380 - -- Maxine P. Sarpy - - - All of the above and other of0cers as a group 204,060 6.697 100,629 (1) Benencial ownership percentages are all less thar. one percent and therefore are omitted. (2) Dese individuals currently have voting power, but not investment power, with respect to these shares. (3) These shares are included in the CSW Comnion column. WTU Beneficial Ownenhip as of December 31, I995 CSW Common Undeilying CSW Restricted immediateiy Name Common (1) Stock (2)(3) Exegle Options (3) Richard F. Bacon 345 - -- C. Harwell Barber 12.292 -- - E. R. Brooks 86,887 2,572 41,455 Paul J Brower 6,443 237 4.470 T. D. Churchwell 6,734 301 5,179 Glenn Files 22,218 733 14,481 Harry D. Mattison 49.580 1,654 26.429 Tommy Morris 2.000 - -- Dian G. Owen 50 -- -- James M. Parker 1,700 -- - Dennis M. Sharkey 19,583 340 10,652 F. L Stephens 1,707 -- - Donald A. Welch 10.280 - 4,470 All of the above and other of0cers as a group 224.615 5,837 108,956 (1) Beneficial ownership percentages are all less than one percent and therefore are omitted. 1 (2) These individuals currently have voting pow er, bet not ins estment power, with respect to these shares. l (3) These shares are included in the CSW Common column. l 3-16
ITEM 13. CERTAIN RELATIONS 111PS AND RELATED TRANSACTIONS. cSw The information required by ITEM 13 is incorporated herein by reference from page 7 of CSW's Proxy Statement. CPL, PSO, Sil'EPCO and WTU None. l 1 3-17
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PART IV l r l ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDU.LES AND ' REPORTS ON FORM 8-K. l l (0) The following documents are filed as a part of this report on this Form 10-K. (1) FinancialStatements. Reports ofIndependent Public Accountants on the financial statements for CSWand subsidiary companies, CPL, PSO, SWEPCO and WTU are listed under ITEM 8 herein. The financial statements filed as a part of this report for CSWand subsidiary companies, CPL, PSO, SWEPCO and WTU are listed under ITEM 8 herein. (2) FinancialStatementSchedules. Report ofIndependent Public Accountants as to Schedules for CSW, CPL, PSO, SWEPCO and WTU are included in the Report ofIndependent Public Accountants for each registrant. Financial Statement Schedules for CSW, CPL, PSO, SWEPCO and WTU are listed in (d) Index to the Financial Statement Schedules below. (3) Exhibits. Exhibits for CSW, CPL, PSO, SWEPCO and WTU are listed in (c) Index to Exhibits below. (b) Reports on Form 8-K. CSW ltem 5. Other Events, reponing CPL's intent to file a rate review request, dated September 27,1995 (filed in the fourth quarter). Item 5. Other Events ana item 7. Financial Statements and Exhibits, reporting CSW's and its partner's bid to acquire Norweb, dated September 28,1995 (filed in the fourth quarter). Item 5. Other Events, reporting the termination of CSW's and its partner's bid to acquire Norweb, dated October 12,1995. l'em 2. Acquisition or Disposition of Assets and Item 7. Financial Statements and Exhibits, reporting CSW's acquisition of SEEBOARD and financial information related to the acquisition, dated January 10,1996. Item 5. Other Events, updating recent developments in connection with CSW's common stock offering, dated January 30,1996. Item 5. Other Events, reporting information related to CPL's rate review, dated February 13,1996. Item 5. Other Events and item 7. Financial Statements, Pro Forma Financial Information and Exhibits, i reporting information related to CSW's common stock offering, dated February 22,1996. i 4-1
CPL ltem 5. Other Events, reporting CPL's intent to file a rate review request, dated September 27,1995 '(filed in the founh quarter). . Item 5. Other Events, providing unaudited financial information for the quarter and year ended September 30,1995, in connection with a debt offering by CPL, dated October 19,1995. . Item 5. Other Events, reporting information related to CPL's rate review, dated February 13,1996. PSO ltem 5. Other Events, providing unaudited financial information for the year ended December 31,1995 in connection with a debt offering by PSO, dated February 23,1996. Item 5. Other Events, and item 7, Financial statements, pro forma financial information and exhibits, reponing information related to a PSO debt offering, dated March 4,1996. SWEPCO No reports were filed on Form 8-K during the quarter ended December 31,1995. MTU ltem 5. Other Events, providing unaudited financial information for the quarter ended and year ended September 30,1995, in connection with a debt offering by WTU, dated October 19,1995. 4-2
CSH' SIGNATURES i i Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this repon to be signed on its behalf by the undersigned, thereunto duly authorized, on March 27,1996. The signature of the undersigned registrant shall be deemed to relate only to matters having reference to such registrant and any subsidiaries thereof. 1 CENTRAL AND SOUTH WEST CORPORATION l By: Wendy G. Hargus Controller i ! Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been l signed below by the following persons on behalf of the registrant and in the capacities indicated on March 27, 1996. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant and any subsidiaries thereof. Signature Titls E. R. Brooks President and CEO and Director (Principal Executive Officer) Glenn D. Rositier Chief Financial Officer (Principal Financial Officer) l Wendy G. Hargus Controller (Principal Accounting Officer)
*Glenn Biggs Director i
- Molly Shi Boren Director
- Donald M. Carlton Director l
- Thomas H. Cruikshank Director
'T. J. Ellis Director i
- Joe H. Foy Director l
- Robert Lawless Director
' Harry D. Mattison Executive Vice President and Director
- James L. Powell Director
*T. V. Shockley,111 Executive Vice President and Director *J. C. Templeton Director *Lloyd D. Ward Director *Wendy G. Hargus, by signing her name hereto, does sign this document on behalf of the persons indicated above ,ursuant to a power of attorney duly executed by each such person.
- By: Wendy G. Hargus l Attorney-in-Fact l
t 4-3
. ~ ._ . - - . . _ . - - ..- -- .
CPL SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 27,1996. The signature of the undersigned registrant shall be deemed to relate only to matters having reference to such registrant. CENTRAL POWER AND LIGHT COMPANY By: R. Russell Davis Controller Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalfof the registrant and in the capacities indicated on March 27, 1996. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant. Signature IJtig Robert R. Carey President and CEO and Director (Principal Executive Officer) l R. Russell Davis Controller (Principal Accounting and Financial Officer) ' ' John F. Brimberry Director
- E. R. Brooks Director ,
- Ruben M. Garcia Director I
- David L. Hooper Director I
- Harry D. Mattison Director
- Robert A. McAllen Director
- Pete Morales, Jr. Director i
- S. Loyd Neal, Jr. Director l
'H. Lee Richards Director
- Melanie J. Richardson Director
- J. Gonzalo Sandoval Director
- Gerald E. Vaughn Director
- R. Russell Davis, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a power of attorney duly executed by each such person.
- By: R. Russell Davis Attorney-in-Fact 4-4
1 PSO i SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, ! the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 27,1996. The signature of the undersigned registrant shall be deemed to relate only to matters having reference to such registrant. PUBLIC SERVICE COMPANY OF OKLAllOMA By: R.RussellDavis Controller Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalfof the registrant and in the capacities indicated on March 27, 1996. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant. Signature Titic Robert L. Zemanek President and CEO and Director (Principal Executive Officer) i R. Russell Davis Controller (Principal Accounting and Financial Officer)
) *E. R. Brooks Director
- Harry A. Clark Director
- Paul K. Lackey, Jr. Director
*Paula Marshall-Chapman Director
- Harry D. Mattison Director
- William R. McKamey Director ,
- Mary M. Polfer Director ;
*Dr. Robert B. Taylor, Jr. Director
*Waldo J. Zerger, Jr. Director
*R. Russell Davis, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a power of attorney duly executed by each such person.
*By: R. Russell Davis Attorney-in-Fact .
i f l l 45 l
SWEPCO SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 27,1996. The signature of the undersigned registrant shall be deemed to relate only to matters having reference to such registrant. SOUTHWESTERN ELECTRIC POWER COMPANY By: R. Russell Davis Controller Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 27, 1996. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant. Sienature lille 1 Richard H. Bremer President and CEO and Director (Principal Executive Officer) R. Russell Davis Controller (Principal Accounting and Financial Officer)
*E. R. Brooks Director
- James E. Davison Director
- Al P. Eason, Jr. Director
- W. J. Googe, Jr. Director
*Dr. Frederick E. Joyce Director
- Michael H. Madison Director
- Harry D. Mattison Director
*Marvin R. McGregor Director
- William C. Peatross Director
*Maxine P. Sarpy Director *R. Russell Davis, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a power of attorney duly executed by each such person.
- By: R. Russell Davis Attorney-in-Fact f
l 4-6
l H7U SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, i on March 27,1996. The signature of the undersigned registrant shall be deemed to relate only to matters having reference to such registrant. I WEST TEXAS UTILITIES COMPANY ) By: R. Russell Davis Controller l l Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 27, 1996. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant. Signature .Titic j Glenn Files President and CEO and Director (Principal Executive Officer) R. Russell Davis Controller (Principal Accounting and Financial Officer)
- Richard F. Bacon Director
'C. Harwell Barber Director *E. R. Brooks Director
- Paul J. Brower Director
*T. D. Churchwell Director
- Harry D. Mattison Director j
- Tommy Morris Director
*Dian G. Owen Director
- James M. Parker Director
- Dennis M. Sharkey Director
'F. L. Stephens Director I
*R. Russell Davis, by signing his name hereto, does sign this document on behalf of the persons indicated above l pursuant to a power of attorney duly executed by each such person. !
*By: R. Russell Davis Attomey-in-Fact 4-7
i 5 j (c) Index to Exhibits. The following exhibits indicated by an asterisk (*) preceding the exhibit number are filed herewith. The balance of the exhibits have heretofore been Oled with the SEC, respectively, as the exhibits and in the Ole { numbers indicated and are incorporated herein by reference. The exhibits marked with a plus (+) are management contracts or compensatory plans or arrangements required to be Oled herewith and required to be
- identified as such by ITEM 14. of Form 10-K. Reference is made to a duplicate list of exhibits being Oled as a
- part of this Form 10-K, which list, prepared in accordance with item 102 of Regulation S-T of the SEC, immediately precedes the exhibits being filed with this Form 10-K.
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession. CSW i 1 Agreement and Plan of Merger Among El Paso Electric Company, Central and South West Corporation and CSW Sub,Inc. Dated as of May 3,1993 as Amended May 18,1993 l (incorporated herein by reference to Exhibit 2.1 to CSW's Form 8-K dated December 29,1993, . ! File No.1-1443). l 2 Second Amendment Dated as of August 26,1993 to Agreement and Plan of Merger Among El Paso Electric Company, Central and South West Corporation and CSW Sub, Inc. Dated as of May 3,1993 as amended on May 18,1993 (incorporated herein by reference to Exhibit 2.2 to CSW's Form 8-K dated December 29,1993, File No.1-1443). 3 Third Amendment Dated as of December 1,1993 to Agreement and Plan of Merger Among El Paso Electric Company, Central and South West Corporation and CSW Sub,Inc. Dated as of May 3,1993 as amended on May 18,1993 and August 26,1993 (incorporated herein by i reference to Exhibit 2.3 to CSW's Form 8-K dated December 29,1993, File No.1-1443). 4 Modified Third Amended Plan of Reorganization of El Paso Electric Company Providing for the Acquisition of El Paso Electric Company by Central and South West Corporation as corrected December 6,1993, and confirmed by the Bankruptcy Court (incorporated herein by reference to Exhibit 2.4 to CSW's Form 8-K dated December 29,1993, File No.1-1443). 5 Order and Judgment Confirming El Paso Electric Company's Third Amended Plan of Reorganization, as Modified, Under Chapter 11 of the United States Bankruptcy Code and Granting Related Relief (incorporated herein by reference to Exhibit 2.5 to CSW's Form 8-K dated December 29,1993, File No.1-1443). (3) Articles ofIncorporation and By-Laws. CSW 1 Second Restated Certificate ofincorporation of CSW, as amended (incorporated herein by reference to Exhibit 3 (a) to CSW's 1990 Form 10-K, File No.1-1443). 2 Bylaws of CSW, as amended (incorporated herein by reference to Exhibit 3 (b) to CSW's 1990 Form 10-K, File No.1-1443). CPL 1 Restated Articles ofIncorporation, as amended, of CPL (incorporated herein by reference to Exhibit 4(a) to CPL's Registration Statement No. 33-4897, Exhibits 5 and 7 to Form U-1, File No. 70-7171, Exhibits 5,8.1,8.2 and 19 to Form U-1, File No. 70-7472 and CPL's Form 10-Q for the quarterly period ended September 30,1992, ITEM 6, Exhibit 1). 2 Bylaws of CPL, as amended (incorporated herein by reference to Exhibit 3(b) 2 to CPL's 1994 Form 10-K, File No. 0-346). 4-8
r j l i PSO 1 Restated Certi0cate ofincorporation of PSO (incorporated herein by reference to Exhibit 3 to PSO's 1987 Form 10-K, File No. 0-343). - 2 Bylaws of PSO, as amended (incorporated herein by reference to Exhibit 3(c) 2 to PSO's 1994 Form 10-K, File No. 0-343). SWEPCO 1 Restated Certi0cate ofIncorporation, as amended, of SWEPCO (incorporated herein by reference to Exhibit 3 to SWEPCO's 1980 Form 10-K, File No.1-3146, Exhibit 2 to Form U-l File No. 70-6819, Exhibit 3 to Form U-1, File No. 70-6924 and Exhibit 4 to Form U-l File No. . , j 70-7360). 2 Bylaws of SWEPCO, as amended (incorporated herein by reference to Exhibit 3(d) 2 to SWEPCO's 1994 Form 10-K, File No.1-3146). l 1 Restated Articles ofincorporation, as amended, of WTU (incorporated herein by reference to l Exhibit 3(c) I to WTU's 1994 Form 10-K, File No. 0-340). l 2 Bylaws of WTU, as amended (incorporated herein by reference to Exhibit 3(e) 2 to WTU's , 1994 Form 10-K, File No. 0-340). (4) Instruments defining the rights of security holder, including indentures. l CPL Indenture of Mongage or Deed of Trust dated November 1,1943, executed by CPL to The First ! National Bank of Chicago and Robert L Grinnell, as Trustee, as amended through October 1, 1977 (incorporated herein by reference to Exhibit 5.01 in File No. 2-60712), and the Supplemental Indentures of CPL dated September 1,1978 (incorporated herein by reference to Exhibit 2.02 in File No. 2-62271) and December 15,1984, July 1,1985, May 1,1986 and November 1,1987 (incorporated herein by reference to Exhibit 17 to Form U-1, File No. 70-7003, Exhibit 4 (b) in File No. 2-98944, Exhibit 4 to Form U-1, File No. 70-7236 and Exhibit 4 to Form U-1, File No. 70-7249) and June 1,1988, December 1,1989, March 1,1990, October i 1,1992, December 1,1992, February 1,1993, April 1,1993, May 1,1994 and July 1,1995 l l (incorporated herein by reference to Exhibit 2 to Form U-1, File No. 70-7520, Exhibit 3 to ) Form U-1, File No. 70-7721, Exhibit 10 to Form U-1, File No. 70-7725 and Exhibit 10 (a),10 (b),10 (c),10 (d),10(e) and 10(f), respectively, to Form U-1, File No. 70-8053). PSO 1 Indenture dated July 1,1945, as amended, of PSO (incorporated herein by reference to Exhibit 5.03 in Registration No. 2-60712), the Supplemental Indenture of PSO dated June 1,1979 (incorporated ; herein by reference to Exhibit 2.02 in Registration No. 2-64432), the Supplemental Indenture of l l l PSO dated December 1,1979 (incorporated herein by reference to Exhibit 2.02 in Registration No. 2-65871), the Supplemental indenture of PSO dated March 1,1983 (incorporated herein by reference to Exhibit 2 to Form U-1, File No. 70-6822), the Supplemental Indenture of PSC dated May 1,1986 (incorporated herein by reference to Exhibit 3 to Form U-1, File No. 70-7234), the , l Supplemental Indenture of PSO dated July 1,1992 (incorporated herein by reference to Exhibit 4 (b) ! to Form S-3, File No. 33-48650), the Supplemental Indenture of PSO dated December 1,1992 l (incorporated herein by reference to Exhibit 4 (c) to Form S-3, File No. 33-49143), the j Supplemental Indenture of PSO dated April 1,1993 (incorporated herein by reference to Exhibit 4 (b) to Fonn S-3, File No. 33-49575), Supplemental indenture of PSO dated June 1,1993 (incorporated herein by reference to Exhibit 4 (b) to PSO's 1993 Form 10-K, File No. 0-343) and Supplemental Indenture dated as of February 1,1996 (incorporated herein by reference to Exhibit 4.03 to PSO's Form 8-K dated March 4,1996, File No. 0-343). l ! 4-9 l
2 Indenture dated as of February 1,1996 of PSO (incorporated herein by reference to Exhibit 4.01 to PSO's Form 8-K dated March 4,1996, File No. 0-343) and First Supplemental indenture dated as of . February 1,1996 of PSO (incorporated herein by reference to Exhibit 4.02 to PSO's Form 8-K dated March 4,1996, File No. 0-343). ) SWEPCO ; indenture dated February 1,1940, as amended through November 1,1976, of SWEPCO ; (incorporated herein by reference to Exhibit 5.04 in Registration No. 2-60712), the Supplemental ! Indenture dated August 1,1978 incorporated herein by reference to Exhibit 2.02 in Registration No. 2-61943), the Supplemental Indenture dated January 1,1980 (incorporated herein by reference to ' Exhibit 2.02 in Registration No. 2-66033), the Supplemental Indenture dated April 1,1981 (incorporated herein by reference to Exhibit 2.02 in Registration No. 2-71126), the Supplemental Indenture dated May 1,1982 (incorporated herein by reference to Exhibit 2.02 in Registration No. 2-77165), the Supplemental Indenture dated August 1,1985 (incorporated herein by reference to Exhibit 4 to Form U-1, File No. 70-7121), the Supplemental indenture dated May 1,1986 (incorporated herein by reference to Exhibit 3 to Form U-l File No. 70-7233), the Supplemental Indenture dated November 1,1989 (incorporated herein by reference to Exhibit 3 to Form U-1, File No. 70-7676), the Supplemental Indenture dated June 1,1992 (incorporated herein by reference to Exhibit 10 to Form U-1, File No. 70-7934), the Supplemental Indenture dated September 1,1992 l (incorporated herein by reference to Exhibit 10 (b) to Form U-1, File No. 72-8041), the Supplemental Indenture dated July 1,1993 (incorporated herein by reference to Exhibit 10 (c) to Form U-1, File No. 70-8041) and the Supplemental Indenture dated October 1,1993 (incorporated herein by reference to Exhibit 10 (a) to Form U-1, File No. 70-8239). WTU Indenture dated August I,1943, as amended through July 1,1973 (incorporated herein by reference to Exhibit 5.05 in File No. 2-60712), Supplemental Indenture dated May 1,1979 (incorporated herein by reference to Exhibit No. 2.02 in File No. 2-63931), Supplemental Indenture dated November 15,1981 (incorporated herein by reference to Exhibit No. 4.02 in File No. 2-74408), Supplemental Indenture dated November 1,1983 (incorporated herein by reference to Exhibit 12 to Form U-1, File No. 70-6820), Supplemental Indenture dated April 15,1985 (incorporated herein by reference to Amended Exhibit 13 to Form U-1, File No. 70-6925), Supplemental Indenture dated August 1,1985 (incorporated herein by reference to Exhibit 4 (b)in File No. 2-98843), Supplemental Indenture dated May 1,1986 (incorporated herein by reference to Exhibit 4 to Form U-1, File No. 70-7237), Supplemental Indenture dated December 1,1989 (incorporated herein by reference to Exhibit 3 to Form U-1, in File No. 70-7719), Supplemental Indenture dated June 1, 1992 (incorporated herein by reference to Exhibit 10 to Form U-1, File Nc. 70-7936), Supplemental Indenture dated October 1,1992 (incorporated herein by reference to Exhibit 10 to Form U-1, File No. 70-8057), Supplemental Indenture dated February 1,1994 (incorporated herein by reference to Exhibit 10-Form U-1, File No. 70-8265), Supplemental Indenture dated March 1,1995 (incorporated herein by reference to Exhibit 10(b) to Form U-1, File No. 70-8057) and Supplemental Indenture dated October 1,1995 (incorporated herein by reference to Exhibit 10(c) to Form U-1, File No. 70-8057). l 1 (10) Material contracts. I CSW l
+1 Restricted Stock Plan for Central and South West Corporation (incorporated herein by reference to Exhibit 10(a) to CSW's 1990 Form 10-K, File No.1-1443).
+2 Central and South West System Special Executive Retirement Plan (incorporated herein by reference to Exhibit 10(b) to CSW's 1990 Form 10-K, File No.1-1443). l
+3 Executive Incentive Compensation Plan for Central and South West System (incorporated herein by reference to Exhibit 10(c) to the Corporation's 1990 Form 10-K, File No.1-1443). i l
4-10
4 Central and South West Corporation Stock Option Plan (incorporated herein by reference to Exhibit 10(d) to the Corporation's 1990 Form 10-K, File No.1-1443). 5 Central and South West Corporation Deferred Compensation Plan for Directors (incorporated * ' herein by reference to Exhibit 10(e) to the Corporation's 1990 Form 10-K, File No.1-1443).
+6 Central and South West Corporation 1992 Long-Term Incentive Plan (incorporated herein by reference to Appendix A to the Central and South West Corporation Notice of 1992 Annual Meeting of Shareholders and Proxy Statement).
*7 Amended and Restated Credit Agreement dated as of January 18,1996 among Central and South West Corporation and the banks listed therein.
*8 Facility Agreement dated as of November 6.1995 among CSW Investments, CSW (UK) plc and the banks listed therein.
(12) Statements re computation of ratios. CPL, PSO, SWEPCO and ilTU
*1 CPL's Statement re computation of Ratio of Earnings to Fixed Charges for the five years ended December 31,1995.
*2 PSO's Statement re computation of Ratio of Earnings to Fixed Charges for the five years ended December 31,1995.
*3 SWEPCO's Statement re computation of Ratio of Earnings to Fixed Charges for the five years ended December 31,1995.
*4 WTU's Statement re computation of Ratio of Earnings to Fixed Charges for the five years ended December 31,1995. ;
- (21) Subsidiaries of the registrant (CSR). j i
l 1 (23) Consent of experts and counsel. l CSW, CPL, PSO and WTU
*1 CSW's Consent ofIndependent Public Accountants.
*2 CPL's Consent ofIndependent Public Accountants.
*3 PSO's Consent of!ndependent Public Accountants.
*4 WTU's Consent efindependent Public Accountants.
(24) Power of attorney. CSW
*1 Power of Attorney.
*2 Power of Attorney.
*3 Power of Attorney.
*4 Power of Attorney.
4-11
CPL
*5 Power of Attorney. .
*6 Power of Attorney. . __
- 7 . Power of Attorney.
PSO
*8 Power of Attorney.
*9 Power of Attorney.
- 10 Power of Attorney. ,
SWEPCO
- 11 Power of Attorney. ;
- 12 Power of Attorney.
- 13 Power of Attomey.
WTU
- 14 Power of Attorney.
- 15 Power of Attorney.
- 16 Power of Attorney, i
(27) Financial Data Schedules. , CSW, CPL, PSO, SWEPCO and HTU
*1 CSW's Financial Data Schedule
*2 CPL's Financial Data Schedule
*3 PSO's Financial Data Schedule
*4 SWEPCO's Financial Data Schedule
*5 WTU's Financial Data Schedule 4 12
(d) Index to Financial Statement Schedules. Schedule II- Valuation and Qualifying Accounts. __ . CSW, CPL, PSO, SWEPCO and WTU 1 CSW's Schedule II - Valuation and Qualifying Accounts 2 CPL's Schedule II - Valuation and Qualifying Accounts 3 PSO's Schedule 11 - Valuation and Qualifying Accounts ' 4 SWEPCO's Schedule 11 - Valuation and Qualifying Accounts 5 WTU's Schedule II- Valuation and Qualifying Accounts Other Schedules, i ! All other exhibits and schedules are omitted because of the absence of the conditions under which they j are required or because the required information is included in the financial statements or related notes to i financial statements. i i i 1 4-13
Schedule 11-1 Central And South West Corporation And Subsidiary Companies Valuation And Qualifying Accounts Column A Column B Column C Column D Column E Additions Balance at Charged to Charged Balance Beginning Costs and to Other at End Description of Year Expenses Accounts (b) Deductions (c) of Year (millions) 1995 Accrued Restructuring Charges $4 $(2)(a) --
$(2) --
1994 Accrued Restructuring Charges $97 $(9)(a) $(27) $57 $4 1993 Accrued Restructuring Charges $-- $97 $-- $-- $97 (a) Reflects true-up to revised estimate of restructuring charges. (b) Effects of early retirement related to SFAS No. 87 and SFAS No.112 follow: (millions) SFAS No. 87 $(31) SFAS No.112 4 Total II22) (c) Payments of accrued restructuring charges. 4-14
Schedule 11-2 Central Power and Light Company Valuation And Qualifying Accounts Column A Column B Column C Column D Column E Additions Balance at Charged to Charged Balance Beginning Costs and to Other at End Description ofYear Expenses Accounts (b) Deductions (c) of Year (thousands) 1995 Accrued Restructuring Charges $ 1,325 ($141)(a) $-- $ 1,184 $- 1994 Accrued Restructuring Charges $29,365 $98 (a) $(7,893) $20,245 $ 1,325 1993 Accrued Restructuring Charges $-- $29,365 $-- $-- $29.365 (a) ReDects true-up to revised estimate of restructuring charges. (b) Effects of early retirement related to SFAS No. 87 and SFAS No. I12 follow: (thousands) SFAS No. 87 $(9,099) SFAS No.112 1.206 Total $(7.893) (c) Payments of accrued restructuring charges. I I i l l 4-15 l 1
Schedule 11-3 Public Service Company of Oklahoma Valuation And Qualifying Accounts Column A Column B Column C Column D Column E Additions Balance at Charged to Charged Balance Beginning Costs and to Other at End Description of Year Expenses Accounts (b) Deductions (c) of Year (thousands) 1995 Accrued Restructuring Charges $1,046 ($488)(a) $-- 558 S-- 1994 Accrued Restructuring Charges $24,995 $(197)(a) $(8,126) $ 15,626 $1,046 1993 Accrued Restructuring Charges $-- $24,995 S-- $-- $24,995 l I (a) Reflects true-up to revised estimate of restructuring charges. (b) Effects of early retirement related to SFAS No. 87 and SFAS No.112 follow: (thousands) SFAS No. 87 $(9,880) SFAS No. I12 . 1.754 i Total $(8.126) l (c) Payments of accrued restructuring charges. 4-16
1 l i Schedule 11-4 . Southwestern Electric Power Company - Valuation And Qualifying Accounts - - - - Column A Column B Column C Column D - Column E Additions Balance at Charged to - Charged Balance Beginning Costs and to Other at End Description ofYear Expenses Accounts (b) Deductions (c) ofYear (thousands) ~1995 . j Accrued Restructuring
.)
Charges $1,110 ($578)(a) $-- $532 $-- j 1994 ", Accrued Restructuring ij Charges $25,203 $(4,978)(a) $(7,421) $11,694 $1,110 l l 1993 Accrued Restructuring l Charges $-- $25,203 $-- $-- $25,203 i ~(a) Reflects true-up to revised estimate of restructuring charges. . (b) Effects of early retirement related to SFAS No. 87 and SFAS No. I12 follow: (thousands) l SFAS No. 87 $(8,016) SFAS No.112 595 Total . $(7.421) - (c) Payments of accrued restructuring charges. 4 17
1 8 Schedule 11-5 l 4
- - - - -West Texas Utilities Company
. Valuation And Qualifying Accounts Column A Column B Column C Column D Column E j Additions l
Balance at Charged to Charged Balance l Beginning Costs and to Other at End !
' Description of Year - Expenses Accounts (b) Deductions (c)- ofYear t (thousands) i 1995 Accrued Restructuring Charges 5571 ($369)(a) $-- $202 $-- !
i 1994' ! Accrued Restructuring - ! Charges $15,250 $ (2,037)(a) $(3,724) $8,918 $571 l 1993 , Accrued Restructuring , Charges 5-- $15,250 $-- $-- $15,250 . i (a) Reflects true-up to revised estimate of restructuring charges. : (b) Effects of early retirement related to SFAS No. 87 and SFAS No,112 follow: , (thousands) - i SFAS No. 87 . $(3,992) SFAS No. I12 268 Total - $(3.724) - (c) Payments of accrued restructuring charges, 4-18 I
i l l Exhibit 12.1 Central Power and Light Company Ratio of Earnings to Fixed Charges For Years Ended December 31 1995 1994 1993 1992 1991 (thousands, except ratios) Operating income $282,184 $256,251 $190,079 $266.665 $249,573 Adjustments: Income taxes 51,755 51,329 (l8,954) 34,726 42,869 Provision for deferred income taxes (30,025) 26,659 90,520 48,610 36,821 l Deferred investment tax credits (5,789) (5,789) (5,806) (5,837) (5,831) Other income and deductions 14,880 1,272 1,663 890 2,522 Allowance for borrowed and equity funds used during construction 4,514 3,689 2,618 1,171 2,124 Mirror CWIP amortization 41,000 68,000 75,702 82,527 96,671 Earnings $358,519 $401,411 $335,822 $428,752 $424,749 Fixed charges: Interest on iong-term debt $ 116,205 $111,408 $112,939 $125,476 $124,987 Interest on short-term debt and other 19,926 12,365 11,993 7,266 8,697 Fixed charges $136,131 $123,773 $124,932 $132,742 $133,684 Ratio of earnings to fixed charges 2.63 3.24 2.69 3.23 3.18 l l
Exhibit 12.2 l Public Service Company of Oklahoma Consolidated Ratio of Earnings to Fixed Charges For Years Ended December 31 1995 1994 1993 1992 1991 (thousands, except ratios) Operating income $111,769 $98,258 $72,156 $78,096 $86,796 Adjustments: Income taxes 37,490 27,954 13,554 (835) 18,321 Provision for deferred income taxes 2,704 7,779 9,537 21,157 10,133 Deferred investment tax credits (2,789) (2,789) (2,838) (2,711) (2,925) Other income and deductions 2,274 933 531 (940) (1,667) Allowance for borrowed and equity funds used during construction 3,734 2,513 1,948 740 1,931 Interest portion of financing leases -- -- 17 37 34 Earnings $ 155,182 $134,648 $94,905 $95,544 $112,623 Fixed charges: Interest on long-tenn debt $29,594 $29,594 $31,410 $30,688 $30,545 Interest on short-term debt and other 6,355 3,844 2,729 1,646 3,286 Interest portion of financing leases -- -- 17 37 34 Fixed charges $35,949 $33,438 $34,156 $32,371 $33,865 Ratio of earnings to fixed charges 4.32 4.03 2.78 2.95 3.33 1 i l l l
i
)
' Exhibit 12.4 West Texas Utilities Company , i Ratio of Earnings to Fixed Charges , For Years Ended December 31 _ . _ . . 1995 __1994 1993 1992 1991
~~
(thousands, except ratios) Operating income $59,486, , , $54,763 $46,576 $57,302 $57,925 Adjustments: Income taxes 6,456 7,900 . 10,869 12,387 13,283 Provision for deferred income taxes 1,971 8,377 3,593 6,426' 5,216 Deferred investment tax credits (1,321) , (1,321) , (1,321) (1,515) (1,349) Other income and deductions (463) 7, 4,210 - 1,907 1,114 1,603 Allowance for borrowed and equity funds used during construction 1,030 474 247 156 146 Earnings $67,159 $74,403 $61,871 575,870 $76,824 Fixed charges: Interest on long-term debt $21,413 $18,547 $19,225 $21,368 $21.339 , Interest on short-term debt and other 4,110 3,534 2,988 2,197 1,967 .j Fixed charges $25,523 $22,081 $22,213 $23,565 - $23.306 Ratio of earnings'to fixed charges , 1 2.63 3.37 , 2.79 3.22 3.30
, e
l Exhibit 12.3 - 1 Southwestern Electric Power Company ,
-_ Ratio of Earnings to Fixed Charges For Years Ended December 31 1995 1994 1993 1992 1991 (thousands, except ratios)
Operating income $162,776 $145,922 '$118,057 $145,727 $143,317 Adjustments: Income taxes 41,131 20,622 37,108 31,478 39,785 Provision for deferred income taxes 6,287 22,248 (648) 10,258 5,566 Deferred investment tax credits (4,786) (4,278) (5,193) (6,864) (4,938) Other income and deductions 178 4,656 3,658 537 3,883 Allowance for borrowed and equity funds used during construction 9,334 6,097 2,580 182 978 Interest portion of fmancing leases 1,896 2,562 2,534 2,783 2,946 Eunings $216,816 $197,829 $158,096 $184,101 $191,537 Fixed charges: . Interest on long-tenn debt , ,
$44,468 $43,395 $ 40,958 $ 47,490 $ 48,382 Interest on short-term debt and other 10,706 7,568 4,866 4,073 3,172 Interest portion of financing leases 1,896 2,562 2,534 2,783 2,946 Fixed charges $57,070 $53,525 $ 48,358 $ 54,346 $ 54,500 Ratio of earnings to fixed charges 3.80 3.70 3.27 3.39 3.51 1
b t f
4 shibit 21 I
- ntral And South West Corporation ibsidiaries Of The Registrant
- 4 Of December 31,1995 ompany Name usiness Conducted Under Same Name State or Jurisdiction of incorporation entral Power and Light Company Texas 59 North Carancahua Street orpus Christi, Texas 78401 2802 ablic Service Company of Oklahoma Oklahoma
! 12 East 6th Street
< alsa, Oklahoma 74119 1212 3uthwestern Electric Power Company Delaware 28 Travis Street
,reveport, Louisiana 7l 156-0001
. 'est Texas Utilities Company Texas di Cypress Street bilene, Texas 79601-5820 I!EBOARD, plc United Kingdom egistered Office arest Gate, Brighton Road rawley, West Sussex Rilli 9Bil ransok,Inc. Oklahoma 10 West 7th Street utsa, Oklahoma 74119 1044 entral cnd South West Services, Inc. Texas -
' West Second Street
, utsa, Oklahoma 74103-3102 and 516 Woodall Rodgers Freeway
'allas, Texas 75202-1234 SW Communications, Inc. Delaware 705 South Capital of Texas Highway Suite 400
.ustin, Texas 78746 SW Credit, Inc. Delaware 516 Woodall Rodgers Freeway tallas. Texas 75202-1234 SW Energy, Inc. Texas 616 Woodall Rodgers Freeway
>allas, Texas 75202-1234
'SW International, Inc. Delaware 616 Woodall Rodgers Freeway iallas, Texas 75202 1234 SW Leasing, Inc. Delaware 616 Woodall Rodgers Freeway
>allas, Texas 75202-1234 nerShop Inc. Delaware 616 Woodall Rodgers Freeway
>allas, Texas 75202-1234
Exhibit 23.1 Consent ofIndependent Public Accountants
- To the Stockholders and Board of Directors of Central and South West Corporation:
As independent public accountants, we hereby consent to the incorporation of our reports dated February 28,1996, included in, and incorporated by reference in this Form 10-K, into Central and South West Corporation's previously filed registration statements on Form S-8 (File Nw. 2-70746,33-12992,33-49301, 33-63027 and 33-64233) and on Form S-3 (File No. 33-50193 and 333-0091l). Arthur Andersen LLP Dallas, Texas March 27,1996 l
)
I i Exhibit 23.2 l i . Consent ofIndependent Public Accountants l To the Stockholders and Board of Directors of Central Power and Light Company: As independent public accountants, we hereby consent to the incorporation of our reports dated February 28,1996, included in, and incorporated by reference in this Form 10-K, into Central Power and Light Company's previously filed registration statement on Form S-3 (File Nos. 33-49577 and 33-52759). 1 Arthur Andersen LLP ! l Dallas, Texas March 27,1996 l l t
Exhibit 23.3 Consent ofIndependent Public Accountants , To the Stockholders and Board of Directors of Public Service Company of Oklahoma: As independent public accountants, we hereby consent to the incorporation of our reports dated February 28,1996, included in, and incorporated by reference in this Form 10-K, into Public Service Company of Oklahoma's previously filed registration statement on Form S-3 (File No. 333-00973). Arthur Andersen LLP Dallas, Texas March 27,1996 I
Exhibit 23.4 Consent ofindependent Public Accountants i To the Stockholders and Board of Directors of West Texas Utilities Company: l As independent public accountants, we hereby consent to the incorporation of our reports dated February 28,1996, included in, and incorporated by reference in this Form 10-K, into West Texas Utilities Company's previously filed registration statement on Form S-3 (File No. 33 60801). Arthur Andersen LLP Dallas, Texas Mareh 27,1996
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