ML20154P948
| ML20154P948 | |
| Person / Time | |
|---|---|
| Site: | South Texas  |
| Issue date: | 12/31/1997 |
| From: | Brooks E CENTRAL & SOUTH WEST CORP. |
| To: | |
| Shared Package | |
| ML20154P838 | List: |
| References | |
| NUDOCS 9810230107 | |
| Download: ML20154P948 (100) | |
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CSW PROFILE
> CSW Credit,Inc., which buys t's accounts receivable of our Central and South West Corporallon is an investor-owned electric electric utility subsidiarias and other e uulity holding company based in Dallas, Teras. C3W own$ and
- CSW Leasing,Inc., which owns loveraged leases of capital operates leur electric utlHiles in the United States: Cardral Power equipment;and and Light Company, Public Service Company of Oklahoma,
- Central and South West tarvices, Inc, which provides man-Southwestern Electric Power Company and West Tus: Utilities agement and professional services, at cost, primarily for the corpo-Company. These companies serve 1.7 million customers in an area ration and its leur U.S. electric companies.
covering 152,g00 square miles of Texas, Oklahoma, Louisiana and Through separate equity investments la various oint ventures, Arkansas. CSW also owns a regional electricity company in the CSW owns indirectinterests in:
United Kingdon, SEE80AllD plc, which serves 2 m!!Ilon customers
> CSW)lCG ChoiceCom, L.P., a joint venture with ICG Telecom In Southeast England.
Broup,Inc., to provide local and long-distance 1sfephone and data CSW engages in international energy, telecommunications and transmissien services in Texas, Oklahoma, Loulslana and Arkansas;
. energy services businesses through these nonot!!ity subsidiaries:
> Humanco, which provides staffing services for nuclear-powered l
> CSW Energy,Inc., which develops, acquires, constructs, owns electric generating plants; 95 and operates nenudlity power projects in the Unlied States;
> Diversified Energy Contractors Company, wh!ch repairs,
. > CSW interestional,Inc., which engages in international activi-
' ties, bcluding developing, acquirlag, financing and owning exempt upgrades, b. stalls and maintains steam, power and process systems is the U.S.:
L wholesale generators and foreign Ptility companies;
- Empresa de Eletricidade Vale Paranapanema S.A., an electric
- C3 Communications, Inc. (formerly CSW Communications, distribution company serving 1.1 mitilon customers in southern and inc4 which provides automated metering services to utilities,central Brazil; energy-service providers and other customers and offers telecom-
> Enertek, a joint venture company that owns Mexico's first
- musicaHons services through CSW/ICG ChoiceCom";
major tegeneration project located la Altamira, Tamaulipas;
> EnerShop inc.; which provides energy-management analysis,
> Beacon Ges, a joint ventors with Amoco to market natural gas equipment and information to increase product!vity and lower energy throughout the U.K.; and
{
costs for commercial and governmental entities;
- Medway Power, which owns a 675-megawatt independent
> CSW Energy Services, Inc., which markets electricity in power station on the Isle of Grain in the U.K.
iiT competitive retailmarkets;
.g l
_ ~.
HIGHUGHTS CElCML AND SoVTH WI51 COAPOMrs 1997 _._ 1996 Financial Data wws; Operating Revenues
$ 5.268 $ 5,155 U.S. Electric Fuel and Purchased Power 1,266 1,228 United Kingdom Cost of Sales 1.291 1,331 Other Operating Expenses 1,630 1.399 Taxes 346 402 Operating income 735 795 Other income (Expense) 32 (61)
Interest and Preferred Stock Dividends (438)
(437) income from Discontinued Operations 12 Gain on Sale of Discontinued Operations 120 Extraordinary item (176)
Net income for Common Stock
$ 153 $ 429 Commen Stock Data and Dividends Return on Average Earnings and Basic and Diluted Earnings per Share
$0 72
$2.07 Coinnen Equity Dwidends per Share Dividends per Share
$174
$1,74 Book Value per Share
$16 76 $17 98 Average Common Shares Outstanding tm,n w 212.1 207.5 o
m sm Return on Average Common Equity 4.2%
12.1 %
Dividend Yield 64%
68%
m 52 m Dividend Payout Ratio 242 %
84 %
Year-End Market Price
$27 t/16 $255/8 u n, si.so 3.y*
crosuv ww mv Dividends
,3,
.._.._. _ Hjgh_
l.ow _ __. Paid _
suai 1997 J
First Quarter
$253/4
$21 tid $0.435 4s Second Quarter 22 !!8 181/4 0.435 g 9, Third 0uarter 22 7/16 193/4 0 435 r,.
Fourth O_uarter 275/16 20 a18 0.435 5" ""
$1.74
' ^'
.1 9
94 9s 96 97 9.)
94 93 96 97 1996 e omaena, First 0uarter
$281/2
$26u $0435 e Remned unune Second Quarter 2e ns 2612 0.435 a s unani one-Tune hems Third Quarter 281/2 2514 0.435 a
Fourth Quarter 28 251/2 0 435
$1.74 The catensed consondated finattet statements in mis sunewy anrwal report nere ikuved from try cxsawted Imance! statements !!ut great in Csm 1%? hiacal Report to snarenc&rs Cap es of f'
the exsaimred !wancat statements and me report of A:mut A&sen U P thereon truy M cttand by i
caihng Centrai and south nest Comoratnon s Investor suces Departirect at 1-Av53$197 CONTENTS l
CSW Maestones 2 Letter from me Chairman 3 CSWOperahors 6 CEO Irrteiview The Planned Merger 18 i
FinancialInformaten 24 Comparahve Stahshcal and Fmarcal Hecord 26 Beard of Directors and Officers 27 Shareholderinformahon 28 3
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LETTER FROM THE CHAIRMAN he direction of the electric power industry became dramatically clearer in
~1997, and so did the direction of Central and South West Corporation.
In I)ecember we announced plans for CSW to merge with American Electric Power Company,Inc., one of the largest electric utility companies in the country. We expect to complete the merger in 1999 and to become part of a new, expanded AEP. Before the merger can be completed,a number of regulatory and other conditions must be satisfied. We expect that the com-bined company will become the nation's premier power company and a major player in the increasingly competitive worldwide power market.
As the restructuring of the electric utility industry evolves, we believe the most successful companies will be those large enough to operate in interna-tional markets with low-cost power generation and a culture ofinnovation and excellent customer service. In AEP we found a partner that shares these views as well as conunon goals and strategies. AEP has established a successful brand and marketing program in the United States and in other countries.
We are excited about the prospects for the combined company and about the CSW 1997 Revenues potential benefits for our shareholders, customers and employees.
us. umnan The new company will be based in Columbus, Ohio, and will be led by sruoAno 3s+,
p os., n 1)r. E. Linn I) raper Jr., currently chairman, president and chief executive otlicer ofAER i have known Linn for many years as both a colleague and friend.
I believe he is one of the most talented and respected leaders in the electric G
executive management. Thomas V. Shockley.111, who in 1997 became CSW's power industry. CSW's operations and employees will be in good hands.
I will serve on the board of the new company but will step down from president and chief operating otlicer, will remain a key senior otlicer of the new company's Southwest region.
You will find more information about the merger in an interview with I)r.1) raper and me in this annual report, beginning on page 18 1997 Financial Chalkngs. A number of events caused our stock price to p
decline in early 1997. Most damaging was the unprecedented decidon of the Public Utility Conunission of Texas in the rate case of our Central Power and Light Company subsidiary. The conunission ruled that $xno million of CPL's investment in the South Texas Project nuclear electric generating station was
" excess cost over market"and reduced the allowed rate of return on that amount. In addition, the conunission ordered CPI to lower its rates by $19 million in 1997 and by an additional Sl3 million in 199X and again in 1999 This ruhng led to a significant drop in the stock prices of CSW and the other major investor-owned electric utilities in Texas. We have filed an appeal in court, challenging portions of the conunission's decision in the CPL case.
3
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During 1997 several other nujor tinancial challenges were resolved.
> In Oklahonu, the settlement of a rate inquiry resulted in our Public Service Company of Oklahonu subsidury nuking a one-time retimd of $29 million and lowering its retail base rates by about 536 nullion a year, even though its rates already were among the lowest in the region.
> In the United Kingdom, Parliament approved the new I.abour govern-ment's initiative to impose a " windfall profits" tax on privatized electric utilities; the cost for our SEEBOARD unit was significant - $176 milhon.
- In litigation with El Paso Electric Company related to the termination of our proposed merger transaction, we reached a negotiated settlement of all issues by paying 535 million to El Paso Electric and its various creditors.
Although none of these events retlected on the etliciency of our operations, the etrectiveness of our employees or the ability of CSW to compete in the electric power marketplace, they significantly hurt CSW's 1997 tinancial pertbr-mance. Earnings per share fbr 1997 were 50.72, compared to 52.07 tbr 1996.
l in January 1998 our board of directors determined that CSW's dividend wouki remain at the annual indicated rate of $1.74. We beheve the combina-tion of CSW with AEP will otter improved prospects tbr future earnings and dividend growth.
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CSW'S SIX STRATEGIES prepare us fbr success in the competitive era ahead. As the 1997 milestones
- 1. Shape the future of the on page 2 show, we are making substantial progress toward those goals. I am electr,ic utility,mdustry.
particularly proud of the way our employees have met the challenge of con-
- 2. Create a client-driven tinuing to cut costs, of buaaing on our repuotion ihr customer satisfaction culture.
and of taking advantage of growth opportunities through investments in
- 3. Build a world-class brand promising new nurkets.such as Latin America. We believe all the elements of and marketing company.
our strategy will be advanced through the merger with AEP.
- 4. Build on our low-cost and Because the AEP merger must be approved by state and tideral regula-tors, we are determined to nunage CSW so that it renuins stmng and reliability posit. ions and competitive as a stand-alone company. We are optimistic that our activities in pursue growth markets.
the Um.ted S.tates and other countries will help us achieve a number of,
- 5. Aggressively pursue mergers, notable milestones during i,J,m.
acquisitions and alliances We contmue to gain new customers tbr our teleconununic.uions, energy for groWih.
services and other new businesses, and we hope to win their electric power
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- 6. Manage our portfolio of business when full retail competition is mpproved assets and businesses to increase shareholder value.
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We also are continuing ellbrts to acquire the non-nuclear assets of Cajun Electric l'ower Cooperative,Inc., which is operating in bankruptcy. Cajun sells power to 11 electric distnbution cooperatives and one former coopera-
,l tive that serve more than 330,000 customers and a population of I million in 1.ouisiana.
Elcaric l'ouvr IWicics. Much of 1997 was spent working on a critical part of our strategy - trying to shape the future of the electric power industry as debberations occur in Washington and in the capitals of our four states.
In 1997 the Texas Legislature considered legislation that wouki have thnctionally restructured the state's electric utilities and would have opened the industry to competition for retail customers. Although the legislation E. R. Brooks failed in the final days of the legislative session, we expect the 1999 Texas Chairman and Chief Executive Officer Central and South West Corporation Legislature to address this matter again.
In Oklahoma during 1997, a law was enacted requiring retail competinon in electricity to begin byJuly 1,2002. The state's lawmakers also mandated that several studies be completed before implementing any restructuring of the state's electric utilities. In Louisiana and Arkansas, the state public service conunissions have begun dockets to examine issues surrounding electric utihty restructuring.
We believe that all of our companies will be winners in a competitive marketplace because of their low prices ard strtag customer relationships. In the (bur states w here our U.S. electric cor ipanies operate, we are supporting policies that would open our industry to nwre competition. We support poh-cies that are fair to our shareholders and to all our classes of customers. The new laws must maintain the high degree of electric rehability that consumers expect today and provide for the recovery of al. previously approved costs.
We wdl oppose any proposals that would violate bese principles.
If the new rules for unlines are written fairly, wt believe we w di be well positioned as one of the industry's strongest compentors. Our low-cost gen-erating plants, our strong customer relationships, our invesunents in the U.K.,
Mexico and South America, and our growing energy services businew in the U S. will make us a fbrmidable competitor on our own. Merging with AEP
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will make us part of a new company that we believe ud! be even stronger.
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j Chairman and Chief Executive Othcer i ebruary 16.199S 5
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Position: CSW owns and l
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ptwer production and customer satisfaction.
U.S. ELECTRIC UTILITIES: LOW PRICES, SUPERIOR SERVICE We believe an electric utility will be successful in the competitive marke i
I place largely through two factors: low-cost power production and excellent l
customer relationships. In 1997 our U.S. utilities showed once again that they t
l are succeeding at both.
f leurring Costs. Our employees continued efforts to control operating and j
maintenance costs of our U.S. electric operations. Excluding extraordinary l
items,intlation alone would have added approximately $100 million to those costs in 1997 if our employees had not found greater etTiciencies and savings.
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As with O&M costs, employees also cut costs for fuel, fuel transportation and other expenses. As a result, our production cost of electricity today ranks among the lowest in the region. Of the 20 most etTicient electric power gen-erating plants in the U.S., eight are owned and operated by CSW.
Custorner Satishction. Our U.S. electric companies have continued to excel at customer satisfaction. During the past four years, the University of Michigan llusiness School, working with the American Society for Quality, U.s. Doctric has interviewed more than 50,000 consumers a year to produce the American llevenues by Class Customer Satisfaction Index. CSW has been at or near the top in the electric
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utility category nationally and consistently has placed first in our region.
Our U.S. electric companies have launched two initiatives to continue sum strengthening relationships with customers.
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- A new Perforinance Commitment Program emphasizes five customer commitments that our utilities strive to meet at least 95 percent of the time.
$7,w They include,among others, the connnitment to turn on a customer's electric si. son service within one working day after a request is made (if a meter i, installed),
arriving at a home or residence within an agreed-upon two-hour period and som sson achieving 100 percent accuracy in customer billing.
- In early 1998, we fbrmed a new Customer Relations group dedicated to satisfying customers and maintaining long-term relationships with them.
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97 e Other lim'iromncntal 14ofc(flon. Our electric companies have been recognized Ihr their strong environmental programs and renewable energy projects. In 1997 u,
o.,i e neuacnn.d we expanded these efibrts with our new ClearChoice pricing pmgram, which allows customers to help pay thr the use of renewable energy sources.
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Streamlining maintenance proc 1dures endInproving cznpsterizedparts invente-rios forpowerplants help our U.S. electric utilities control l
operating sad maintenance expenses. These efforts by
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h:ve made ourgenerating f:cIlitiessomeof themost
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When the Tulsa World lastallednew printing presses in downtown Tulsa, l
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The Harmon Science Center in Tulsais one of fourpublic Institutions to which CSW has l
contributed solar energy sys-l tems to show how renewable I
energy can be used. CSWis
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also providing solar systems for 19 public schools in Texas, Loulslana and Arkansas.
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Company Headquarters Customers l
CentralPower and Ltgot Company Corpus Chnsti, Texas 627.M l
Pubhc Service Company of Oklahoma Tulsa, Oklahoma 481.400 Southwestem Electnc Power Company Shreveport, Louisiana 415 %
l West Texas Utihties Company AMene. Texas 186.700
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- 345.000%It Transmission Lines era Our West Texas Utilities Company subsidiary in October launched ClearChoice in San Angelo, Texas. Customers there can opt to pay an addi-tional $5, $10 or $20 a month on their electric bills to fund 250,500 or U.S. Doctric 1,000 kilowatt-hours, respectively, of electricity generated at a hydroelectric 1997 Energy Sources renewable energy source, r-Natural Gas 36%
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On behalf of three of our electric companies, we issued requests for pro-puma,,s 7s posals to add up to 160 kilowatts of new photovoltaic power sources, to be E udear 7%
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installed on the rooftops at 19 schools. As a result of these etTorts, we believe 0.I 1
students and others in the conununity will learn more about photovoltaic technology,and our customers will benefit from the use of solar energy.
The National Association of Home lluilders Energy Subcommittee gave
. ' ' us its first innovative Energy EtTiciency Financing award in 1997 to honor our new SmartMove program. SmartMove otters our utility customers com-petitive financing rates for energy-etTiciency improvements to new or existing homes without adding to customers'down payments. Ily lowering honsehold energy bills, SmartMove increases consumers' buying power.
SmartMove also helps protect the environment by reducing energy use as it helps us forge stronger relationships with our customers. Central Power and Light Company first introduced the program, and our other U.S. electric utilities plan to otter it in 1998.
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Position: CSW owns SEEBOARD plc, a regional electricity company in Southeast England, and has equity investments in
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Latin America, including an investment in Empresa de Eletricidade Vale Parana.
INTERNATIONAL UTluTIES: PROVIDING GROWTH AND EXPERIENCE panema S.A. (Vale), a large Urtitcd Kingdom. SEEllOAlu) fits well with CSW's U.S. electric utilities electric distribut. ion utility in terms ofits operation and culture. Placing the same emphasis on excellent m Bran.i. Through these customer service, reliability and innovation,it is contributing the steady affiliates, CSW has more growth and earnings that we anticipated w. hen we acquired it m 1993.
electric utility Customers in Our one disappointment has been the magnitude of the" windfall protics" other countries than in the tax that was imposed on privatized utilities by the U.K. government. For United States.
SEEllOARD, the full tax assessment was $176 million, which we recognized 4
in 1997.
In both 1996 and 1997, SEEBOAlu) was the top-rated utihty in England for customer ser ice (by the Daily 7Haraph and Ilritish Telecom) and D
q was given the highest rating for customer service by the U.K. government's O )[Q Otiice of Electricity Regulation.
j A SEEBOAlu) consortium has been selected as the preferred bidder to ggongo
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ground, the largest metro rail system in the world. The contract for operating,
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For several years SEEBOARD has been preparing for retail competition pQj @
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SEEBOARD September 1998. liritish authorities delayed the opening of competition U
K DOARD beyond April 1998 after they found that most utihties were unable to n.eet Location Southeas!E9 gland, includmp much the deadline because ofinformation-technology issues. SEEllOARI) was One o/ Surrey and WesISussex. allo /
of only four companies found to be ready to compete in April.
EastSurreyandmostof Kent From SEEBOARD's expciience - transitioning from government to Heacquarters Crawley WestSussex, UnitedKmgdom private ownership and now to open competition - CSW is learning much to Serwces Electncdy distnbution prepare its U.S. electric utilities for the coming competition in this country.
flectocpcwer supply haturalgas marketmp by Beacon South cimerica. In 1997 we invested an additional $150 million in South Gas, ajomt venture with Amoco America. We made a further investment in Vale of approximately $69 million Retailapphance stores of convertible securities in early 1998.
Contractmg andconsultmg services Customers 2 mdllon electac customers, Vale -in which we now own a 37 percent interest - expanded its activi-150.000 Beacon Gas customers ties across Brazil as the country connnued privatizing its power industry.
In association with inepar,a Brazilian electric and telecommunications company, Vale acquired a controlling interest in Centrais Eletricas 10
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Location Brazihan states o/SJo Paulo, A second consortium,in which Vale owns 36 peret was awarded a
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$J0 Paulo, Sao Paulo, Brazil megawatt hydroelectric power plant in the state of Tocantins in central tirarit Serwces Electncity $stnbution Vale also won a concession to bmld the 1(osal hydroelectric power plant Electric generahnn on the Itabapoana Itiver, which forms the border between the lirarilian states ElecFicpowersupply ofIlio de Janeiro and Espirito Santo. Construction of the 55-megawatt plant investmentin six omer Brazihan electnc systems is under way, with commercial operation planned for the end of 1999.
Customers t I milhon electnc customers As one of Latin America's largest economies, firaril continues to show much promise far future development, with electricity demand growing at current rates of 7 to 10 percent. At the same time, Vale's excellent manage-Vale and Atmiates ment team has achieved continued system improvements. In November the senice Area company was honored by Eletricidade Moderna magazine with seven of 12
,A first-place titles in the lirarilian industry's 1997 Flectricity Awards.
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CSW Energy put into commercial operation its Sweeny Cogeneration Facility - the first large power facility built in the United States as a merchant plant. Both steam e'rd electricity from the plant are delivered to the Phillips 68 refinery and petrochemicals. ' '
comples in the background, with the plant's remaining electric output sold to wholesale buyers.
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Position: CSW has independent power plants in the United States, the United Kingdom and Mexico;it is aggressively seeking additional opportunities INDE NDENT POV R PLANTS: DEVELOPING NONUTILITY GENERATION to deyelop, acquire, construct, own and U.S rojuts. CSW Energy owns an interest in six cogeneration or inde-operate plants, pent t power plants and operates four of them. The six power plants - two ach in Colorado, Florida and Texas - have a total capacity of 978 megawatts.
Our newest and largest project began commercial operation in early 1998, ahead of schedule and under budget. The Sweeny Cogeneration Facility is providing 90 megawatts of electricity to Phillips Petroleum Company's refining and petrochemicals complex at Old Ocean, Texas. The remainder of the plant's 330-megawatt capacity is otTered to electric utilities and power marketers on a merchant basis. The Sweeny project is the country's first large power plant built to operate as a merchant plant.
Our Newgulf Project, which began commercial operation in 1997,is Texas' first exempt wholesale generator intended to take advantage of power market fluctuations. Like Sweeny,it is designed to operate successfully both today and in the future in the competitive market for electric power.
International Profuts. CSW International's Altamira Project, located near Tampico on the eastern coast of Mexico, went into operation in the first quarter of1998. We have comrnitments for all of the plant's steam as well as all ofits 109 megawatts of electric capacity.
The Altamira Project is a significant milestone in the Mexican power industry. It is the first major cogeneration project to be built under Mexico's new legal framework,in which power projects are regulated by the Comisi6n Reguladora de Energia, Mexico's energy regulatory commission.
The Altamira Project also is the first project to have long-term contractual agreements with the Comisi6n Federal de Electricidad for the interconnec-tion, backup and transmission of energy and with Petr61eos Mexicanos for natural gas to fuel the plant. The project is owned by Enertek, a joint venture between CSW International and Alpek, S.A. de C.V., a subsidiary of the ALFA Group. CSW International and Alpek own equal shares in the project.
Through SEEDOARD, we own a 37.5 percent interest in the Medway Power Station on the Isle of Grain in Kent. The 675-megawatt, combined-cycle gas turbine unit is owned and operated through ajoint venture among SEEBOARD, Southern Electric Power Generation Limited and AES Medway Electric Ltd.
13
4...............................
Position: Through its EnerShop subsidiary, CSW is helping commercial, industrial and governmental customers use energy more efficiently; a new subsidiary, CSW Energy Services, is marketing power in states ENERGY SERVICES: HELPING CUSTOMERS USE ENERGY EmCIENTLY that now permit retail x
EncrShop". EnerShop identities better ways for customers to mana and competition; and another use energy, designs the imprevements and shares in the savings. Its main cus-naw subs.d.iary, CSW Total tomers are large commercial businesses, hght mdustrial manufacturers and i
EV, plans to promote and government institutions.
market electric vehicles in n;97 EnerShop won contracts to improve the energy etliciency at 15 and battery chargers.
major racilities. Among these were several large omce buildings in l>allas.
EnerShop also announced an alliance with lioneywell,Inc., tojointly market energy-conservation services ti>r municipal and county buildings m Ti- < A new state law allows local and county governments to use perfi>r-mance contracting for energy-conservation improvements.
EnerShop's newest product is a state-of-the-art energy monitoring and optimization service, called EnerACT", that was developed jointly with Perot Systems. EnerACT conununicates with all brands and models of energy-management systems and utility meters, collects load profiles of many facilities for single-source purchasing of energy and optimizes energy controls of multiple buildings using simulation modeling.
CS!!' Encrey Scnices. CSW entered the competitive retail electricity mar-ket in 1997 with the formation of CSW Energy Services,Inc. fleadquartered State ActMties on Doctrk Restructuring and Competition in lloston. Energy Services is marketing electricity supply in selected states where retail competition is now permitted.
Imtial edbrts have focused on California and New Eneland. Cahfbrnia
+,
5 opened its retil markets March 31,1998, allowing electric suppliers to buy eDC power threctly from generators or through a power exchange and then sell 4
the power to users.
Typic.d of these contracts is Energy Services' pact with The Ilome y,
I)epot,Inc., North America's largest home-improvement retailer. Energy 8 tigl$lallVG - 3 5 t9915lallVS End RegulEl0Q - M a neoniatory - 3 a Adapted Retail compeiiiton - 16 Services will provide an estiniated 28 niillion kilowatt-hours of electricity thr A// 50 states and the District o/ Columbla are 14 Home 1)epot' retail centers in the San 1)iego area.
address /ng refortas to retall eleefric service.
Energy Services also has signed a retail supply contract with La Quinta Sixteen states so far have adoptedplans to In h
kh an nwdW llion kdowatt-hours to 12 major La implement electricity restructuring.
Quinta properties in California.
14
JT CSW Energy Services, a new CSW subsidiary, was launchedin t997 to supply electricity to major retail
. Customers in selected states. One ofits first agreements was with The Home Depot to supply 14 of the company's stores in Southern California.
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In the EnerACT command centerin Dallas, employees monitor energy consumption and controlenergy use to save clients money. Using advanced technologies developed by CSW'e EnerShop and Perot Energy Ser ices' new contracts and customers are expected to improve
' Systems, EnerACTprovides building CSW's knowledge ofcompetitive markets while otTering customers low costs managers throughout the couulty and excellent service.
with criticalinformation about
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CSil'7btal Elf With concerns about air emissions growing, the potential for electric-powered vehicles appears more promi.og than ever. For many years, CSW's U.S. electric companies have studied and tested electric vehicles and investigated how they could be used by customers. Now, through a new nonutility business, CSW Total EV, we propose to enter this market.
u CSW Tbtal EV initially expects to pursue two areas of the business: selling, installing and maintaining battery chargers for electric cars, trucks and buses; and selling and distributing a new line of recreational vehicles, including elec-tric bicycles and scooters. Operations are expected to be conducted in Texas, Oklahoma, Louisiana, Arkansas, New Mexico, Colorado, Kansas and Missouri.
CSW so far has donated more than 50 elettric bicycles to police depart-g1 ments in our service-area cities that have air-quality problems. Approval to sell the electric bikes is pending at the Securities and Exchange Connaission.
In 1997 CSW was the first electric utility to take delivery of the Chevrolet S-10 Electric pickup, the automotive industry's first factory-built CSW was tire first electric utility electric truck. CSW is using to of the S-10 Electric trucks in daily utility to take delivery of the Chevrolet operations to promote electric vehicle technology with customers.
510 Electrie rickup.
CSWTotal EV is working with the Metropolitanlblsa Transit Authority to obD n dectric buses for the city. It also is helping thelblsa International i
Airport Authority electrify the tugs, baggage tractors, loaders and other equipment at three gates.
16
C3 Communications' i._ q CholceCom partnership is offering alternative telephone and data services In major Texas cities, using the latest gggggggggy, gygg g, Q', i UMt Lucent SESS switches.
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with criticalinformation about CSil"lbtal lill With concerns about air emissions growing, the potential for electric-powered vehicles appears more promising than ever f:or inany years, CSW's U.S. electric companies have studied and tested electric vehicles and investigated how they could be used by customers. Now, through a new nonuality business, CSW Tiital EV, we propose to enter this market.
CSW Total EV initially expects to pursue two areas of the business: selling, instalhng and maintaimng battery chargers tiir electric cars, trucks and buses; and selhng and distributing a new hue of recreational vehicles,includmg elec-tric bicycles and scooters. Operations are expected to be conducted in Texas, Oklahoma, Louisiana, Arkansas, New Mexico, Colorado, Kansas and Missouri.
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In 1997 CSW was the first electric unhty to take delivery of the Chevrolet S-10 Electric pickup, the automouve industrv's tirst factorv-built CSW was the first electric utility electric truck. CSW is using 10 of the S-10 Electric trucks m dady unhty to take delivery of the Chevrolet operations to promote electric vehicle technology with customers.
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CSW Ti>tal EV is working with the Metropohtan Tulsa Transit Authority 1
to obtain electric buses fi>r the city It also is helping the Tulsa International Airport Authority electrify the tugs, baggage tractors, loaders and other equipment at three gates.
15
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Pos tion: CSW is working to i
become an industry leader in communications-based utility automation and in telecommunications with COMMUNICATIONS: TELEPHONES AND AUTOMATED METER READING Its C3 Communications subsidiary and Choicecom THg>lume Senic. In 1997 CSW entered the telephone business through a Jomt venture.
joint venture between our C3 Communications subsidiary and ICG Telecom, a subsidiary ofICG Communications, Inc. The joint venture, CSW/ICG ChoiceCom, connected its first customers with local telephone service in Austin, Corpus Christi and San Antonio, Texas.
In early 1998, ChoiceCom began marketing local telephone service in Dallas and Houston. It plans to otter local telephone,long-distance and data transmission services to businesses in selected cities in Texas, Oklahoma, Louisiana and Arkansas.
ChoiceCom owns and operates high-capacity fiber-optic lines that link several cities in Texas and Louisiana and is completing lines that will connect Dallas, Flouston, Austin and San Antonio. It has installed state-of-the-art Lucent Technologies SESS' telephone switches in Austin, Corpus Christi and San Antonio and plans to install SESS switches in Dallas and Houston during 1998.
Utility Automation. C3 Communications' Unlity Automation Division provides metering automation services to utilities and energy-service providers. Focusing on meter data rather than individual system components and communications technologies, C3 can provide the best automation solu-tion fbr its clients by choosing from a variety of technologies.
C3 Conununications was selected by City Public Service, San Antonio's natural gas and electric utility, to provide project management, systems inte-gration and marketing services for an initial 5,000 meters.15y installing advanced wireless and phone-based meter-reading equipment, the utility will be able to read customers' electric, gas and water meters at any time.
Work on similar metering projects continued in Austin and Georgetown, Texas. The City ofAustin automated 400 water and 800 electric meters and is considering expanding the project in 1998. Installation of Georgetown's citywide automated metering technology will be completed in mid-1998.
in addition, C3 Communications was approved as a meter data manage-ment agent (MDMA) for California's open electricity market. C3 is one of only a few nonutility companies in the U.S. to be approved by all three of the state's utility distribution companies to serve the meter data market. MDMAs read meters; validate, edit and estimate meter reading data; pubbsh data to the MDMA server; and archive meter data.
11 L
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"THIS IS THE BOLDEST MOVE IN THE HISTORY OF CSW, AND WE BELIEVE THE NEW COMBINED COMPANY WILL BE THE EPITOME q
AND ENVY OF THE INDUSTRY."mems f
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- BEHIND:THE DECISION TOLCREATE
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? AMERICA'S) PREMIER ELECTRIC COMPANY' l.
A conversation with E. R. Brooks, chairman and chief executive officer of Central and South West L Corp 0 ration, and Dr. E. Linn Oraper, Jr., chairman, president and chief executive officer of '
lAmerican Electric Power Company, Inc.
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E You both said when announcing this merger that AEP and CSW were ideal merger partners. Why?
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[ Brooks: We had been loo'kirig for an opportunity to merge with.a ' successful company that shared our stra'te
. culture. We wanted a partner that'was dedicated to serving our shareholders in the competitive era ahead' by. :
becoming an innovative, diversified leader in global energy markets and related services - our strategy. And.
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. One that emphasized low <ost generation and excellent customer service - our culture. In my 36 years of experience, I've never seen a company that was a more perfect fit with CSW than AEP.
Draper: As we've leamed more about each other in the past few months, we've found that our culture is even more
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compatible than we initially had realized. Except for the climate, our service areas are very similar. We both ii
. primarily serve large rural areas and small to mid-size dies. When you think about it, Fort Wayne and
~ Roanoke in AEP's territory are a lot like Tulsa and Shreveport in CSW's. We shouldn't have any trouble y
adapting to each other's territories because, in all of them, the same types of personal relationships with
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customers are especially important.
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"THIS IS THE BOLDEST MOVE IN THE HISTORY OF CSW, AND WE BELIEVE THE NEW COMBINED COMPANY WILL BE THE EPITOME AND ENVY OF THE INDUSTRY."o ses i
BEHIND THE DECISION TO CREATE AMERICA'S PREMIER ELECTRIC COMPANY A conversation with E. R. Brooks, chairman and chief executive of6cer of Central and South West Corporation, and Dr. E. Linn Draper, Jr., chairman, president and chief executive of6cer of American Electric Power Company, Inc.
You both said when announcing this merger that AEP and CSW were ideal merger partners. Why?
Brooks: We hac oeen looking for an opportunity to merge with a successful company that shared our strategy and our culture. We wanted a partner that was dedicated to serving our shareholders in the competitive era ahead by becoming an innovative, diversified leader in global energy markets and related services - our strategy. And one that emphasized low <ost generation and excellent customer service - our culture. In my 36 years of experience, I've never seen a company that was a more perfect fit with CSW than AEP.
Draper: As we've learned more about each other in the past few months, we've found that our culture is even more compatible than we initially had realized. Except for the climate, our service areas are very similar. We both primarily serve large rural areas and small to mid-size cities. When you think about it, Fort Wayne and Roanoke in AEP's territory are a lot like Tulsa and Shreveport in CSW's. We shouldn't have any trouble adapting to each other's territories because, ir all of them, the same types of personal relationships with customers are especially important.
1 is
Brooks: AEP also brings us some important capabilities that we need. We have been working to develop a significant electric power trading and marketing business. AEP already has that. Together, we will have a name brand identity that will be a great springboard for marketing electricity and other products and services throughout the United States.
Draper: We have many more similarities than differences, but even many of the differences are strengths. AEP's industrial customers are largely in primary metals, like steel and aluminum; CSW's industrial customers are largely in petrochemicals and refining. AEP is primarily a coalturning utility, with a little nuclear power; CSW has a large natural gas capability. This means that we will have greater diversity in types of customers and in fuel use, which will be an important competitive advantage.
How will this merger benefit shareholders?
Draper: We expect shareholders of both companies to benefit from the outset. Our studies show that the merger will add to cash flow from day one, and our financial models show that the merger will dilute the earnings per share of AEP and CSW shareholders only slightly in the early years. The greatest benefit to the shareholders will be the potential of the new combined company. We will have a diversified portfolio of low <ost power plants, a presence in 11 states and three power pools,38,000 megawatts of generating capacity and a base 4
of customers approaching 5 million nationally. We'll be positioned to be a major player in the international retail energy market as well.
. s "A COMPANY THAT IS GOOD AT ENERGY
.f DELIVERY WITH STRONG CUSTOMER SERVICE AND THAT HAS A PORTFOLIO OF j
LOW-COST GENERATING PLANTS WILL BE A VERY STRONG COMPETITOR."4 ussme
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Brooks: Both of these companies have been successful on a stand-alone basis. Together, they wil1 be even more competitive. And they will have the financial wherewithal to implement our strategy in bolder ways, aro world, than either of us could have done separately. All that should turn into shareholder value.
9 How well will the international activities fit together?
Brooks: CSW and AEP also mesh well in our international activities. AEP is primarily active in Asia, where we have long-term ambitions; CSW is primarily active in Latin America, where AEP has longer-range ambitio overlap only in the United Kingdom, where CSW owns a regional electricity company and AEP owns 50 L
of another regional electricity company. We believe that the merger will create a real global powerhouse.
Draper: We also complement each other in the capabilities we offer to other countries. AEP's internatio has focused on building efficient coal-fired facilities. CSW has experience in building and operating gas-fired generation and Western-U.S.-type-coal plants. So together we will have the capability to build the ty plant that makes the most sense in any region where we are working.
What kind of obstacles will this merger face?
Draper: We expect to complete the merger in the first half of 1999. Along the way, we expect two issu examined. The first is a concern about whether the merger could create a market-dominant company. We str beli9ve that the proposed merger would not have this effect. AEP and CSW do not operate in the same states or power pools. Neither company is now dominant in any state it serves; the combined company will nant in any state it serves. We'll have more footprints, but none of them will be bigger in_ any geogra
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"IT'S IMPRESSIVE THAT OVER THE PAST THREE YEARS BOTH COMPANIES HAVE BEEN RATED AMONG THE TOP FOUR UTIUTIES IN THE COUNTRY FOR f.-
CUSTOMER SATISFACTION."4 u-o
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"DURING THE MERGER PROCESS, WE'LL BE MOVING FORWARD AGGRESSIVELY TO ASSURE THAT, WHEN THE MERGER IS CONSUMMATED, WE CAN HIT THE GROUND RUNNING."-o#we
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The second issue revolves around the Public Utility Holding Company Act of 1935, which requires a holding com-pany to operate, or to be capable of operating, as an integrated public utility system. Historically, this has been interpreted to mean that a holding company system must operate in contiguous states. We are not contiguous, but there is only one energy provider separating us. We will purchase the right to use the transmission system of that company to exchange power between the eastern and western operations of our combined company. We believe that the combined company will be able to operate as an integrated system in this way.
Brooks: This will be the biggest merger in the history of U.S. electric utilities. We expect a lot of regulatory review and a lot of third-party Intervention. We will seek the approval of all four states that CSW serves - and based on our initial communications with them, I believe the response will be positive. We believe that we do not need formai approval from.the seven states that AEP serves, but some of them are expressing a strong interest, if the country truly is serious about creating a competitive electric power industry, we believe this merger between these two similar companies should be a model for future transactions. We are confident it will succeed.
How will the operating companies be known?
Brooks: One of the strengths of our U.S. electric companies is their strong relationships and name recognition with their customers. That's a competitive advantage. So we expect that CSW's four operating companies will continue using their estabiished names and identities, at least for the near future.
Draper: All nonregulated competitive activities will probably operate under the name of AEP, with our brand as America's Energy Partner". Today there's an ongoing debate as to what extent regulated electric companies can use the same names and identities for other services being marketed to their customers. We probably
~
won't change the names of the CSW electric companies until that matter has been decided.
21
"WE WILL BE A GLOBAL POWER COMPANY.
WITH A HEALTHY DIVERSITY OF FUELS, f
TYPES OF INDUSTRIAL CUSTOMERS AND CLIMATE PATTERNS, AND DYNAMICi I
INTERNATIONAL OPERATIONS.".t.was,
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.be affected. The jobs that overlap are largely corporate and administfative functions. We have identified ab ut
.1,100 duplicate positions that we are planning to eliminate. But we have plenty of t 1 during th'e regulatorp; approval process to take advantage of retirements and other attrition and to find employment' opportunities in :
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our other growing businesses. We believe the rea} number of job losses'will be much fewer th5n 1,100.1,
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- . t their employees well. For the great majority of employees who work for the new c'ombined company, I'm sdre there will be a great sense of pride, because the'y will be working at
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industry, and of excitement, because they will see a myriad _of.
- opportunities that this new company will offer.
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"WE WILL BE A GLOBAL POWER COMPANY WITH A HEALTHY DIVERSITY OF FUELS, TYPES OF INDUSTRIAL CUSTOMERS AND CLIMATE PATTERNS, AND DYNAMIC INTERNATIONAL OPERATIONS."-o -s How will employees be affected?
Draper: The vast majority of emp!oyees who are directly involved with serving customers or producing electricity will not be affected. The jobs that overlap are largely corporate and administrative functions. We have identified about 1,100 duplicate positions that we are planning to eliminate. But we have plenty of time during the regulatory approval process to take advantage of retirements and other attrition and to find employment opportunities in our other growing businesses. We believe the real number of job lossos will be much fewer than 1,100.
Brooks: The employees who lose theirjobs will be treated fairly. Both companies.have a strong tradition of treating.
their employees well. For the great majority of emp'. -
Y ork for the new combined company, I'm sure 1
there will be a great sense of pride, because they will ne working at one of the largest and most successful companies in this changing industry, and of excitement, because they will see a myriad of me opportunities that this new company will offer, y
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS CWM AND SOUTH nist COPP0AAHON C[NTM AND SOUTH W1ST CORPORATKA rn tr ym em mmw n 1997 1996 _ 1995_
r* ee e te mene n 1997 _ _1996 _ _1995 enas eactomwel nws!
Revenues Operating Activities U S. Electric
$ 3.321 $ 3.248 $ 2,883 Net income for Common Stock
$153
$429
$402 United Kingriom 1,870 1,848 208 Depreciation and Amortization 529 521 425 Other Diversified 77 59 52 Other Adjustments to Net locome and 5.268 5,155 3.143
_ Changes in Assets and Liabilities ___44._
_ 75) _ _ _ 28)_
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Expenses
_ 726 _ _875 799 U.S. Electric Fuel and Purchased Power 1,266 1.228 1,045 Investing Activities United Kingdom Cost of Sales 1,291 1,331 158 Construction Expenditures (507)
(521)
(474)
Operations anti Maintenance 1,133 935 712 Acquisition Expenditures (1,394)
(421)
Depreciation and Amortization 497 464 353 CSW Energy /CSW International Projects (382)
(124) 109
~~ Taxes 346 402 254 Cash Proceeds from Sale of Subsidiary 690
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A360 7 522 Other (15) 63 (26) 4.533 Operating income 735 795 621 (904)
(1,286)__ _ 812)
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Other income (Expense) 32 (61) 99 Financing Activities interest and Other Charges (438)
(437)
(343)^
Trust Preferred Securities Sold 323 Common Stock Sold 20 477 57
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income from Continuing Operations
_329____20__~57~~
Change in Debt and Preferred Stock 44 219 597 Jagent o[ Dividends (383)
(376)
(348) income from Discontinued Operations 12 25 4
Gain on Sale of Discontinued Operations 120 320 306 Income Before Extraordiaary item 329 429 402 Effect of Exchange Rate Changes on Cash (5)
(56)
Extfaofdinay item - RK. Windfall Profits Tax _(176) __
Net income for Common Stock
$ 153 $ 429 $ 402 Net Change in Cash and Cash Eauivalents (179)
(147) 293 a
a2 MaMs Wanuay 1 2M M
M8 Average Common Shares 212.1 207.5 191.7 Cash and Cash Equivalents - December 31 5 75
$254
$401 Basic and Diluted Earnings per Share
$ 0.72 $ 2.07 $ 2.10 Dividends Paid per Share
$ 1.74 $ 1.74 $ 1.72 I conensed consoudated finJrtd siderwnts in t s summary annual repod nere derived from the consobdated financial stJtements that argear in CSWs t997 Financial Repat to sturehol&rs Copies of N conschdated h wicd statements and te report of Arthur An&rsen LLP thereon may be %ned by cathng Centrat and South hest Corparations Inwstor Sereices Decanmert at I-8W527 5797 Cer'am matte's ascussed m tis sumnery annual report are tornar+looking statenenn onten&d to Qualty br the sde hwbors tram tialinty estabushed by the Pnvate Secuntes litiganon Reform Act $
19% These brwyd-loolog suremend can g'r'erally be t&ntthed as such tecause the context of the e
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statement wrtlinchide words sLch as CSW Tehews. ' 'rtcpates'or 'esects. 'or words of similar c: port Salart steenn tat escobe CSWnture plans. otject:ves andgcos also ve forwxd-l kKkngstdements SUChstJwmentsaodessfutureewntsandconditionstunce@ngC,ptalegend!!uret EUntngs, hhgation. rate VC other regulatory (TW"ert hQuidh and Captal tesources, Ed accounting matters Actual resula in eac!! case cobid htfer matercally from tose currently anhctpated in such statements by reason ofIKlors soCh as eWtnc utih& Industry restr!xturing. rncluding ongoing state and h' era'leftslaf!W did leQUldtury activItes, future KonorniC COndtons. kvelopmend in ltfe &V7eShc and Cler!UttorMItilutets e and CSwandis subsidiaries oterate state edkrkr2regutatuiy approvals of proceedings and other condittons prece&nt to te proposed merger w# AEP which inay of may not be S&shed and other circumsunces a!Mng anhcituted business vtivtes. revenues and costs 24 t
CONDENSED CONSOLIDATED BALANCE SHEETS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS crNTML AND SOUTHWEST CoRPorun0N f* M*'53* Sa"*lE _._
1997 1996_
To the Shareholders and Board of Directors of Central and South West Corporabon:
We have audited, in accordance with generally accepted auditing standards, the consolidated Electric
$ 13,5% $ 13,337 balance sheets of Central and South West Corporation (a Delaware corporation) and subsidiary Other Diversified 250 84 companies as of December 31,1997 and 1996, and the related consolidated statements of
~ Accumulated Depreciation (5,218) (4,940) income, stockholders' equity and cash flows for each of the three years in the period ended F xed Aeti~~
8,628 8,481 December 31,1997, appearing in the Central and South West Corporation 1997 Financial Report for the 1998 annual meeting of shareholders of the Corporation (nal presented herein).
Current Assets 1,390 1,509 Our report dated February 16,1998, also appearing in the Central and South West Corporahon l
Deferred Charges and Other Assets 1997 Financial Report, contained an explanatory sentence calling attention to the fact that we j
Goodwill 1,428 1,525 did not audit the financial statements of CSW UK Finance Company (1997 - which includes Other 2,005 1,817 CSW Investments) and CSW Investments (19%) which statements reflect total assets and rev-
$13.451 $13.332 enues of 22 percent and 35 percent in 1997 and 23 percent and 36 percent in 19%, respective-ly, of the consolidated totals. Those statements were audited by other auditors whose reports Capitalization and Liabilities have been fumished to us and our opinion, insofar as it relates to the amounts included for Common Stock
$ 3,556 $ 3,802 those entities, is based solely on the reports of the other auditors.
Preferred Stock 202 325 Trust Preferred Securities 335 In our opinion, based on our audits and the reports of other auditors, the information set forth Long-Term Debt 3.898 4,024 in the accompanying condensed consolidated balance sheets as of December 31,1997 and Total Capitalization 7,991 8,151 1996, and in the related condensed statements of conschdated income and cash flows for each of the three years in the period ended December 31,1997, are fairly stated, in all material Current Liabilities 2,499 2,425 respects, in relation to the consolidated financial statements from which it has been derived.
Deferred Credits 2,961 2,756
$13,451 $13,332 MM 2O Arthur Andersen LLP Dallas, Texas February 16,1998 REPORT OF MANAGEMENT The condensed consolidated financial statements in this summary annual report were derived from the consolidated fin $ncial statements that appear in the Central and South West Corporation 1997 Financial Report for the 1998 annual meeting of shareholders.
Management is responsible for preparing the consolidated financial statements, in accor-Cance with generally accepted accounting pnnciples appropriate in the circumstances, and for maintaining the Corporation's systems of internal accounting controls.
A description of these controls, along with management's opinion about their overall effective-ness, is contained within the Report of Management included in the Central and South West Corporation 1997 Financial Report for the 1998 annual meeting of shareholders. The consoli-dated financial statements were audited by the Corporation's independent public accountants, whose report on the condensed consolidated financial statements appears above.
[
E. R. Brooks Chairman and Chief Executive Officer M
J Glenn D. Rosilier Executive Vice President and Chief Financial Othcer L, d. Cn Lawrence B. Connors Controller as
...____ _ ____ J
AEP+CSW: A PERFECT FIT The proposed merger of Central and South West Corporation with American Electric Power Company will bring together two utilities ideally suited for the competitive environment ahead. Our size, our market presence, ourgeographic acat'Jn and our intemational operations present us with opportunities that few other companies will have.
The combined system will operate in il states. We'll supply power to 4.7 million U.S. customers, making us the single largest electricity supplier in the nation. Our mix of coal, gas and nuclear facilities willgive us a diversity oflow<ost generation. Our global subsidiaries will oper9te in some of the fastest-growing markets in the world and will provide significant opportunities forgrowth and expansion.
Our V ml commitment to exceIIence, customer service, customer choice, technology, and employee gron:
i development provides the synergies necessary for a company preparing to meet the competi-tion head-on.
FAST FACTS CSW AEP*
Combined **
Headquarters Dallas, Texas Columbus. Ohio Columbus. Onlo Kdosatt Hour Sa:es US (mahans) 63157 145.423 208.580 Kdesatt-Hour Sales U K (mdhons) 19.203 14 756 33,959 Employees U S 7.254 17.844 25.098 Employees U K 4 161 3 977 8.138 Service Area u S (square miles) 152.000 45.400 197.400 Service Area Uh (square mdes) 3 000 3SJ00 6,900 Customers U S taversge number) 1 112.000 2.959.000 4 671.000 Customers U K (average namter) 2.014 000 2.071.000 4 085 000 Generanng Stations U S 38 38 76 Generanny Stahans U K 1
10 11 Generating Cacach U S tmegasatts) 13 739 23,759 37 498 Generahng Capac4 U K (megasiris1 67!
329 1 004 Revenues (thousands)
$5 268.000
$6.161.000
$11.352.000 Net Income tor Common Stock ttnousands)
$153 000
$511.000
$664 000 Operating Cash Flos (thousands)
$726 000
$1198 000
$1924 000 Assels (thousands)
$13 451.000
$16 615.000
$30 066.000
- AEP acculred a 50 percent mierest in Yorksture Electricity Group plc. a U K. electoc distnbubon company on Apnl 1 1997, which is accounted for on an equity basis AEP's kilowatt-hour sales U K. are for the nme months ended December 31.1997.
- Rever+ues vary from combined tolafs due to recianhcahons 23
CONDENSED CONSOLIDATED STATEMENTS OF INCOME CONDENSED CONS 0UtATED STATEMENTS OF CASH FLOWS CENTRAL AND SOUTH Wf $r CORPCM40N CENiM AND SOUTH WEST c0RPOMDON 1997 1996 1995_
ta m m t e memm a _
_ 1997 1996
_1995 ra mm emme n,
Imilhops)
(:mlWs. May CW start amounB)
Revenues Operating Act;vities U S. Electric
$ 3.321 $ 3.248 $ 2,883 Net income for Common Stock
$153
$429
$402 United Kingdom 1,870 1.848 208 Depreciation and Amortization 529 521 425 Other Diversified 77 59 52 Other Adjustments to Net income and 5.268 5,155 3,143 Changes in Assets and Liabilities 44 (75)
(28)
_ 99_
7 726 875 Expenses U.S. Electric Fuel and Purchased Power 1,266 1.228 1,045 Investing Activities United Kingdom Cost of Sales 1,291 1,331 158 Construction Expenditures (507)
(521)
(474)
Operations and Maintenance 1,133 935 712 Acquisition Expenditures (1,394)
(421)
Depreciation and Amortization 497 464 353 CSW Energy /CSW International Projects (382)
(124) 109 Taxes 346 402 254 Cash Proceeds from Sate of Subsidiary 690
- 15) _ _63
. (26)
(
4,533 4.360 2,522 Other
_904)_..(1 286) _
(812)
(
Operating income 735 795 621 Other income (Expense) 32 (61) gg Financing Activities
(
Common Stock Sold 20 477 57 343)-
Trust Preferred Secunties Sold 323 Interest and Other Charges. _ __ _ 438).. _(43_7)_
(
Income from Continuing Operations 329 297 377 Change in Debt and Preferred Stock 44 219 597 Payment of Dividends f383)
N (348)
Income from Discontinued Operations 12 25 4
320 306 Gain on Sale of Discontinued Operations 120
--- ~
Income Before Extraordinary item 329 429 402 Effect of Exchange Rate Changes on Cash (5)
(56)
Extragrdinary item - U.K Windfall Profits Tax _ 176). _ _ _ _ _ -
(
Net income for Common Stock
$ 153 $ 429 $ 402 Net Change in Cash and Cash Equivalents (179)
(147) 293 Cash and Cash Equivalents-January 1 254 401 108 Average Common Shares 212.1 207.5 191.7 Cash and Cash Equivalents - December 31
$ 75
$254
$401 Basic and Diluted Eanings per Share
$ 0 72 $ 2.07 $ 2.10 Dividends Paid per Share
$ 1.74 $ 1.74 $ 112 the condens schYed fi:uncelsblements in Wts summary aantal report nere denved tren me ccoschdated haanca! sotements Nt appear m CSWs 1997Fituncal Report to staternlders. Coces of me conschdated knancel SUtements and the report of A:thur An&rsen LLP mereon may De attained by cathng Centraland South i4rst Corporatrota Investor Services Decartment at 1M52b5797 Cermin nu%rs $scussed in mis sumnwy annual report are fornardJock ng smtements intended to Quahly tw te sale hybus from labihty estabhshed by the Pnvate Securtles Liligation Relem Act of 1995 These brwarddookitig sk!ements can generafiy be dentihed as such Decause the Coni &xt ut te e
statement *Ill mCluk nor$ rKh as CSW Tekeves.' *antcpad w
- expects:w awds of somdar enpel. Similarly smiements Itut escribe CSM tuture plans. objectnes and goals afsc are torward-l kuhng SMemens Such stemenu akkess Mure evenn and cor%1thons concemmg cgdal egen6tures.
eamings htrgation, late and Oner regulatory nuMis, lklutdtty and C4tul roscurces. and gxcunhng ITutters Actual results in exh Case Could detter rnaler@!!y kom tttose currently ficpated in suct statemen!S by INsan at l@Clors sikh as electric Uhh'y industry reSIMtuting including ongomp c! ate and k&rallegeslatiye and regwalC9 Et: Vines. Mare economic c0Pdubons &yeQpinents m De domeshc
&%f Ardemationalnwkets m etcrch CSW and to shdanes operate, state and k&ral ter,tutey 4provats or procee6ngs and ott'er corttil:cos prewdent M We prcposed meqer with AEP which may or may not be sattshed, and othef Ctrcumsuncts af%chng antCpated busmeSs act:Vthes revenuesandCOS!s 34 k
CONDENSED CONSOLIDATED BALANCE SHEETS REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS CENrRAL AND SOUTH West c0RPoHATION M *" *"dM*"* 33_ _. _ _._.1997._.. 1996 To the Shareholders and Board of Directors of Cieai are South West Corporation.
Aneb We hae audlted. in accordance with gene'aily accepted auditing standards, the consolidated
- ~.
Electric
$13,596 $13,337 balaxe sheets of Centrat and South West Corporation (a Delaware corporation) and subsidiary Other Diversified 250 84 companies as of December 31,1997 and 1996, and the related consolidated statements of Accumulated Depreciation (5,218) (4,940) income, stockholders' equity and cash flows for each of the three years in the period ended Fixed Assets 8,628 8,481 December 31,1997, appearing in the Central and South West Corporation 1997 Financial Report for the 1998 annual meeting of shareholders oMhe Corporation (not presented herein).
Current Assets 1,390 1,509 Our report dated February 16,1998, also appearing in the Central and South West Corporation Deferred Charges and Other Assets 1997 Financial Report, contairied an explanatory sentence calling attention to the fact that we Goodwill 1.428 1,525 did not audit the hnancial statements of CSW UK Finance Company (1997 - which includes Other 2,005 1,817 CSW Investments) and CSW Investments (1996) whin statements reflect total assets and rev-
$13.451 $13.332 enues of 22 percent and 35 percent in 1997 and 23 pert.P and 36 percent in 1996, respective-ly, of the consolidated totals. Those statements were audited by other auditors whose reports Capitalization and Liabilities have been fumished to us and our opinion, insofar as it relates to the amounts included for Common Stock
$ 3.556 $ 3,802 those entities, is based sole!y on the reports of the Other auditors.
Preferred Stock 202 325 Trust Preferred Securities 335-In our opinion, based on our audits and the reports of other auditors, the information set forth Leng-Term Debt 3,898 4.024 in the accompanying condensed consolidated balance sheets as of December 31,1997 and Total Capitalization 7,991 8,151 1996, and in the related condensed statements of consolidated incomo and cash flows for each of the three years in the period ended December 31,1997, are fairly stated, in all material l
Current liabilities 2,499 2,425 respects, in relation to the consolidated financial statements from which it has been derived.
Deferred Credits 2,961 2,756
$13.451 $13,332 d
MM 4 N Arthur Andersen LLP Dallas, Texas February 16,1998 4
REPORT OF MANAGEMENT The condensed consolidated financial statements in this sumr,ary annual report were derived from the consolidated financial statements that appea. in the Central and South West Corporation 1997 Financial Report for the 1998 annual meeting of shareho'aers i
Management is responsible for preparing the consolidated financial statements, in accor-dance with generally accepted accounting principles appropriate in the circumstances, and for maintaining the Corporation's systems of intemal accounting controls.
A description of these controls, along with managements opinion about their overall effective-ness, is contained within the Report of Management included in the Central and South West Corporation 1997 Financial Report for the 1998 annual meeting of shareholders. The consoli-dated financial statements were audited by the Corporation's independent public accountants.
whose report on the condensed consolidated financial statements appears above.
[
E. R. Brooks Chairman and Chief Executive Officer M
l Glenn D. Rosilier
}
Executive Vice President and Chief Financial Otticer L, d. C-
\\
Lawrence B. Connors j
Controner as
=
l
COMPARATIVE STATISTICAL AND FINANCIAL RECORD CENTML ANC soum foST CORP 0Mn0N 199I... _.1996
_ 1995 _. 1994 1993 US Utdities Electric Revenues imes>
Residential
$1.253
$1,243
$1,138
$1,156
$1,160 Commercial 892 872 810 836 832 industrial 813 781 702 733 736 Sales for Resale 243 255 224 204 179
.__.20
_. __97 9_ _ _. 136_,_ _.. 148 1
Other _ _ _ _ _
$3.321
$3.248
_$2,883_ _$3.065
$3.055 Sales tw.att ws e mons)
Residential 17,99 17.883 16,872 16,368 15.903 Commercial 14.546 14.256 13.755 13.463 12,966 Industrial 21,087 20.266 19,321 18.869 18.205 Sales for Resale 7,824 8.428 8.468 7.133 5,852 7
34
. Other ___
8 _ _ __
Average Number of Customers <rtwwe5>
Residential 1,462 1,443 1,425 1,403 1,378 Commercial 214 209 207 203 198 Industrial 23 24 24 24 25 13 14 13 13 12 Other 1,712 1.690 1.669 1,643 1.613 Number of Customers -
End of Period muace 1,724 1,704 1,683 1,661 1,633 Residential Sales Averages Kilowatt-Hours per Customer 12,310 12,392 11.840 11.665 11.541 Revenue per Customer
$857
$861
$799
$824
$842 Revenue per Kilowatt-Hour 6 96t 6.95c 6.75c 7.06c 7.29c Total Electric Revenue per Kilowatt-Hour 5.26c 5.20e 4.81c 5.35c 5.62c System Peak Demand (%= 51 13.105 12.613 12.314 11,434 11,464 Fuel Data Average Btu per Net Kilowatt-Hour 10.405 10.440 10,299 10.344 10.391 Cost per Million Btu
$1.83
$1.81
$1.58
$1.82
$2.11 Cost per Kilcwatt-Hour Generated tmsts, 19 02 18 86 16.30 18 80 21.90 CSWSystem Total Plant Cost mesi
$13.846
$13.421
$13.778
$11.868
$11.343 Annual Additions 675 583 1,933 616 594 Accumulated Depreciation 5.218 4,940 4.761 3.870 3,550 s>
Capitalization mesi Common Stock
$3.556
$3.802
$3,178
$3.052
$2.930 Preferred Stock 202 325 326 327 350 Trust Preferred Securities 335 Long-Term Debt 3.848 4.024 3.914 2.940 2.749 Tv cwensedlcosondas kvarca! statements en th:s sunrnary enual moort were aved trorn tre conscocated knarrei statements u airear in CSM 1997 haancal Repwt to sharenatars Ccpes of the cot'sondated brunc:al statements and the report of Arthur Auersen UP thereon mar lt ol'l3rned by calht'g Central and South Wes! Corporahans Investor Services Departnnnt at 1-8D 5??-5?97 26 N
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' POWEftSHARE" DIVIDEND RUNVESTMENT - AND STOCK PURCHASE PLAN 2 w f .ADDITIONALINFORMATION O The Central and South West Corporation (Corporation) PowerShare Dividerid. We will be pleased to send you additional copies of this Summary : Reinvestment and Stock Purchase Plan (Plan) provides a convenient and inex-Annaal Report. Also available are the 1997 Financial Roport, the. pensive way to reinvest dividends and purchase shares of the Corporation's : Joint Proxy Staternent/ Prospectus for the 1998 Annual Meeting of - common stock, $350 par value per share (Common Stock). = S fenolders, a preliminary quarterly financial report, a Five-Year NONSHAREHOLDERS OF LEGAL AGE WHO ARE RESIDENTS OF THE 50 Financial and Statistical Review 0f N Central and South West ' STATES OF THE UNITED STATES OR THE DtSTRICT OF COLUMBIA MAY S) stem and our latest Environmental Report of the Central and ENROLL IN THE PLAN BY MAKING AN INITIAL CASH INVESTMENT OF $250. ' South West System. Employees and eligible retirees of the Corporation and its subsidiaries may the Corporation is subject to the infonuational requirements of the ! ' elect to purchase Common Stock 'through automatic payroll or pension deduc-Sedities Exchange Act of 1934 and files reports and'other informae . tions, with a minimum of $10 per pay period tion statements with the Securities and Exchange Commission. These recorts may be inspected at the SECT offices and on its intemet site i . ABOUT POWERSHARE ~ as well as at the New York and Chicago l stock exchanges' s' Easy Enmilmet ~ Wbill[providd copies'of these reports without charge to any. > $25 Minimurn' Additional Investments. Once an initialinvestment of $250 has. Central and South West shareholder. If you would like to receive a 1 ~ been made, the minimum additional investment or optional cash purchases - repert, please contact our Investor Services Department . of up to $100.000 per calendar year for CSW Common Stock can be made. INVESTOR SERVICESy > Dividend Reinvestment and Payment Options. Participants may elect to have Our lovestor Services staff is availsle Monday through Friday from cash dividends on all or any portion of their shares of Common Stock auto : 91m. to 4 p.m/ Central time to answer your questions. Our; Ematically reinvested in CSW Common Stock. Cash dividend payments not address and telephone number are < ' reinvested will be paid to participants by check or electronic oirect deposil' Centraland South West Corporation i s Safekeeping Service for CSW Common Stock Certificates. PowerShare Investor Services Department i participants may deposit certificates for CSW Common Stock with CSW's - P. O. Box 660164 investor Services Department for safekeeping, and the shares will be credited Dallas, Texas 75266-0164 - to those participants' PowerShare accounts. '1-800-527-5797 ' E-mail: Invest @csw.com J INVESTOR RELATIONS-FOR MORE INFORMATION.1ND A PROSPECTUS Securityanalysts shculd contact: more infonnadon you hav, the better your ability to make sound invest-Becky Hall. ment decisions. The CSW prospectus provides more details about PowerShare Director ofInvestor Relations and about Central and South West Corporation. We encourage you to read this Centraland South West Corporation information before deciding whether to enroll in the Plan or to send any money. 214-777-1277 ' if you have any questions, please call CSW's Investor Services Department if you would like to be added to our mailing list to receive our toll-free at 1-800-527-5797 weekdays between 9 a.m. and 4 p.m. Central time. news releases and other information, please contact our Investor Services Department 1 - @ 19M C!NfM AND SOUTM MST CCHPCAAf10lt Att RGHTS RESERWD C$W 10tAL EV* 6 A fMEMAIIK . Of QNTM Aldo 30VfH MST COMP';FiAh0ll EsslitSHOP".$MMMUW*.CLEAAHOICl* AIO i0MMMAAE* AAt $(BVICE MAAk$ 0F CIltT% AN050UfM M37 CORPORAfl0N CHOR:EC0hi* l8 4. l .. SETMCE MARR QF C$WMCN0it.ECOM. l P ENERACT* 6 A TWICE MAAR OF ENER)0P E, A SUBSDAAY J OFCENTRAL AIO$0VfMWESTCORPORA7'Olt ' " MERICAM ELECTRIC POWUW G A Mf! ret 1 fRAMMAiW Of AND AEP AMLEA$ E!dRG) PARS (R* $ 4 ' WMCI MW 0F. AAKEAli ELECfitt POMA COMPAN\\ M, ' THE HOMf 0f POT
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Csntral and South West Corporation / 1616 Woodall llodgers I reeway P.O. Ilox 660164 1)allas, Texas 75266 0164 http://www.csw.com i 1 l l s Pnnted in U S A CSWAR97 250
Central and South West Corporation 1997 FINANCIAL REPORT i .-d a 9
~- TABLE OF CONTENTS 1 Management's Discussion and Analysis of Financial Condition and Results of Operatio 30 Consolidated Statements ofIncome 31 Consolidated Statements of Stockholde s' Equity 32 Consolidated Balance Sheets 34 Consolidated Statements of Cash Flows 35 Notes to Consolidated Financial Statements 66 Report ofIndependent Public Accountants 69 Report of Management 70 Glossary of Terms l FORWARD LOOKING INFORMATION This report made by CSW and its subsidiaries contains forward looking state 21E of the Exchange Act. Although CSW and each ofits subsidiaries believe that, in d by statements, their expectations are based on reasonable assumptions, any such state factors that could cause actual outcomes and results to be materially different from t factors that could cause actual results to differ materia i ility currently has made or in the future may make investme Merger or other merger and acquisition activity; federal and state regulatory f which may have a substanti.;J adverse impact on the value of CSW System asse h relief; adverse changes in electric load and customer grov,th; climatic changes or ~ patterns; changing fuel prices, generating pl.nt and distribution facility perfor CSW's associated with nuclear generating facilities; uncertain supply businesses in the United Kingdom; and the tim di addition, would include, but are not limited to: the ability to compete effectively in new li fd l telecommunications, power marketing and brokering, and other energy related servic W and state regulatory legislation and policies that may adversely affect those in System's business in areas in which it operates. I I
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 Consolidated Financial Statements and Selected Financial Data. The infonnation contained therein should be read in conjunction with, and is essential in understanding, the following discussion and analysis. OVERVIEW l The electric utility industry is changing rapidly as it is becoming more competitive. In anticipation of increasing competition and fundamental changes in the industry, CSW's management is implementing a strategic plan designed to help position CSW to be competitive in this rapidly changing environment and is developing an emerging global energy business. CSW has undertaken key initiatives in the implementation of this overall strategy and is determining new directions for the corporation's future. One of these new directions is the proposed merger between AEP and CSW that was announced in December 1997. CSW would become a subsidiary of AEP in the proposed merger. The proposed merger would join two companies which are low cost providers of electricity and would achieve greater economies of scale than either company could achieve on its own. In 1997, CSW Intemational doubled its investment in a Brazilian electric distribution utility and made other investments in Latin America. CSW continues to pursue the acquisition of the non-nuclear generating assets of Cajun, a Louisiana member electric cooperative. C3 Communications' joint venture limited partnership, ChoiceCom, has entered the local telephone markets in the Texas cities of Austin, Corpus Christi and San Antonio and plans to enter the markets of Dallas and Houston offering a variety of telecommunications services. 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 foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). The CSW System benefits from economies of scale by virtue ofits size and is a reliable and relatively low-cost provider of electric power. Specifically, CSW seeks competitive advantages through its diverse and stable customer base, competitive prices for electricity, diversified fuel mix, extensive transmission interconnections, diversity of regulation and financial flexibility. See RECENT DEVELOPMENTS AND TRENDS for additionalinformation. LIQUIDITY AND CAPITAL RESOURCES Overview of Operating, Investing and Financing Activities Net cash provided by operating activities decreased $149 million during 1997 compared to 1996. The decrease was primarily attributable to the December 1997 payment of $88 million on the first installment of the windfall profits tax imposed on SEEBOARD in the United Kingdom in addition, increased factored accounts receivable purchases at CSW Credit, federal and state income tax payments for the gain on CSW's 1996 sale of Transok which totaled approximately $122 million (after being offset in part by the utilization of Alternative Minimum Tax credits that CSW had previously generated), and a $35 million payment related to the settlement of litigation between CSW and El Paso all contributed to the decrease. Offsetting part of the decrease, the U.S. Electric Operating Companies realized greater fuel recovery during 1997 compared to 1996. I
1 Net cash used in investing activities was $904 million in 1997 compared to S t.3 billion in 1996. There were no acquisition expenditures during 1997 while $1.4 billion in SEEBOARD acquisition expenditur) made during 1996. However, during 1996, CSW received $690 million in cash on the sale of Transo million on the sale of the National Grid shares. During 1997, while CSW's total construction expenditures decreased $14 million compared to 1996, a combined total of approximately $294 million was invested by Energy and CSW International in 1997 on several projects compared to $124 million in 1996. In a 1997, CSW Energy made its fmal payment on the Ft. Lupton cogeneration project which was more tha the reduction of CSW Energy's equity investment in the Orange cogeneration project when permanent extema fmancing was obtained on the project. Net cash flows from financing activities decreased substantially during 1997 compared to 1996. During 1996, CSW incurred substantial debt to finance the acquisition of SEEBOARD. In addition, CSW sold approximately 15.5 million shares of common stock and received net proceeds of approximately S398 million primary public offering in 1996, the proceeds of which were subsequently used to repay a portion of the debt incurred in connection with the SEEBOARD acquisition. CSW Energy also issued $200 million in Senior Notes during 1996. During 1997, CSW made changes in its common stock plans and stopped issuing original shares through these plans. Consequently, $20 million in new common stock was issued pursuant to these plans in 1997 compared to $79 million in 1996. CPL's $200 million Series BB,6% FMBs also matured in 1997. However, offsetting a portion of the decrease, the business trusts of CPL, PSO and SWEPCO received cash proceeds of approximately $323 million from the issuance of Trust Preferred Securities during 1997. These proceeds were used primarily to redeem preferred stock and repay short-term debt of the companies. f The non-cash impacts of exchange rate differences on the translation of foreign currency denominated assets and liabilities were recorded on a separate line on the cash flow statement in accordance with accounting ( guidelines. Internally Generated Funds Internally generated funds, which consist of cash flows from operating activities less common and preferred stock dividends, should meet most of the capital requirements of the CSW System. However, CSW's strategic initiatives, including expanding CSW's core electric utility and non-utility businesses through acquisitions or otherwise, may require additional capital from external sources. For a description of certain I restrictions on CSW's ability to raise capital from external sources, see PROPOSED AEP MERGER. I Productive investment of net funds from operations in excess of capital expenditures and dividend payments is necessary to enhance the long-term value of CSW for its investors. CSW is continually evaluating the best use of these funds. CSW's internally generated funds totaled $343 million, S499 million and $451 million for 1997, 1996 and 1995, respectively. l CapitalExpenditures The CSW System's need for capital results primarily from its construction of facilities to provide reliable j ~ electric service to its customers, and the historical capital requirements of the CSW System have been primarily for the construction of electric utility plant. However, current projected capital expenditures are expected to be primarily for existing distribution systems and for various non-utility investments. The U.S. Electric Operating Companies maintain a continuing construction program, the nature and extent of which is based upon current and estimated future demands upon the system. Planned construction expenditures for the U.S. Electric Operating Companies for the next three years are primarily to improve and expand distribution facilities and will be funded primarily through internally generated funds. These improvements will be required to meet the anticipated needs of new customers and the growth in the requirements of existing customers. CSW regularly evaluates its capital spending policies and generally seeks to fund only those projects and investments that management believes will offer satisfactory returns in the current environment. Consistent with 2
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. Primary sources of capital for these expenditures are long-term debt, trust preferred securities and preferred strck issued by the U.S. Electric Operating Companies, long-term and short-term debt issued by CSW, as well as internally generated fund ~s. Historically, the issuance of common stock by CSW has also been a source of capital. CSW Energy and CSW Intemational typically use various forms of non-recourse project financing to provide a portion of the capital required for their respective projects as well as utilizing long-term debt for other investments. Although CSW and each of the U.S. Electric Operating Companies expect to fund the majority of their respective capital expenditures for their existing utility systems through intemally generated funds, for any significant investment or acquisition, additional funds from the capital markets may be required. For a description of certain restrictions on CSW's ability to raise capital from external sources, including through the issuance of common stock, see PROPOSED AEP MERGER. The historical and estimated capital expenditures for the CSW System are shown in the table below. The amounts include constmetion expenditures for the U.S. Electric Operating Companies and, for SEEBOARD and CSW's other diversified operations, constmetion expenditures and net equity investments. It does not include the $2.1 billion used to acquire SEEBOARD during 1995 and 1996. The majority of the capital expenditures for the U.S. Electric Operating Companies for 1995 through 1997 were spent on distribution facilities. It is anticipated that the majority of the estimated capital expenditures for 1998 through 2000 will be for distribution facilities as well. For a description of certain restrictions on CSW's ab'lity to make capital expenditures, including through the issuance of common stock, see PROPOSED AEP MERGER (The table and statements below contain forward looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). Estimated 1995 1996 1997 1998 1999 2000 (millionsincluding AFUDC) Capital &penditures $495 3644 $760 $569 $586 $595 Estimated capital expenditures for 1998 - 2000 do not include expenditures for acquisition-type investments Although CSW does not believe that the U.S. Electric Operating Companies will require substantial additions of generating capacity over the next several years, the U.S. Electric system's intemal resource plan presently anticipates that any additional capacity needs will come from a variety of sources including power purchases. Refer to IntegratedResource Plan for additional information regarding the U.S. Electric System's capacity needs. Inflation Annual inflation rates, as measured by the U.S. Consumer Price Index, have averaged approximately 2.4% during the three years ended December 31,1997. CSW believes that inflation, at this level, does not materially affect CSW's results of operations or financial position. However, under existing regulatory practice, l only the historical cost of plant is recoverable from customers. As a result, cash flows designed to provide l recovery of historical plant costs may not be adequate to replace plant in future years. FinancialStructure, ShelfRegistrations and Credit Ratings As of December 31,1997, the capitalization ratios of CSW were 45% conunon stock equity, 2% preferred stock,4% Trust Preferred Securities and 49% long-term debt. CSW is committed to maintaining financial flexibility through a strong capital structure and favorable securities ratings in order to access capital 3
markets opportunistically or when required. CSW continually monitors the capital markets for opportunities to lower its cost of capital through refinancing activities. CSW's estimated embedded cost oflong-tenn debt for 1997 was 7.2%. l CSW can issue common stock, either through the purchase and reissuance of shares from the open market or original issue shares, to fund its LTIP, stock option plan, PowerShare plan and ThriftPlus plan. Following the issuance of the CPL 1997 Original Rate Order and the decline in the market price of CSW Common, which CSW believes was attributable in part to the CPL 1997 Original Rate Order, the determination was made that it was appropriate for CSW to begin funding these plans through open market purchases, effective April 1,1997. Prior to that time, CSW had issued $20 million in new common stock in 1997. CPL has shelf registration statements on file for the issuance of up to $60 million of FMBs and up to $75 million of preferred stock, and PSO has a shelf registration statement on file for the issuance of up to $35 million of Senior Notes. For a description of certain restrictions on CSW's ability to raise capital from external sources, see PROPOSED AEP MERGER. The current securities ratings for CSW and each of the U. S. Electric Operating Companies is presented in the following table, including the securities rating on the Trust Preferred Securities issued by CPL Capital I, PSO Capital I and SWEPCO Capital I. Moody's Du'T& Phelps Standard & Poor's CFL First mortgage bonds A3 A A Senior unsecured Baal A-A- Preferred stock baal BBB+ A-Trust preferred (CPL Capital!) baal BBB+ A-Junior subordinated deferrable interest debentures Baa2 PSO First mortgage bonds Al AA-AA-Senior unsecured A2 A+ A Preferred stock a3 A+ A Trust preferred (PSO CapitalI) a2 A+ A Junior subordinated deferrable interest debentures A3 SWEPCO First mortgage bonds Aa3 AA AA-Senior unsecured Al AA-A Preferred stock al AA-A Trust preferred (SWEPCO CapitalI) aa3 AA-A Junior subordinated deferrable l interest debentures A2 WU ( First mortgage bonds A2 A+ A { Senior unsecured A3 A-Prefened stock a3 A A-CSW Conunercial paper P-2 D-2 A-2 l These securities ratings may be revised or withdrawn at any time, and each rating should be evaluated independently of any other rating. Long-Term Financing On April 24,1997, PSO's business trust, PSO Capital I, sold to underwriters in a negotiated offering $75 million,8.00% Series A, Tmst Originated Preferred Securities due April 30,2037. The proceeds from the sale of these securities were used by PSO to repay short-term debt, to reimburse PSO's treasury for the cost of 4 l l
reacquiring approximately $14.5 million of 4.00% Series and 4.24% Series preferred stock, to provide working capital and for other general corporate purposes. Settlement of the transaction occurred on May 2,1997. PSO Capital I is treated as a subsidiary of PSO whose only assets are the approximately $77.3 million principal subordinated debentures issued by PSO. In addition to PSO's obligation under the subordinated debentures, PSO has also agreed to a security obligation which represents a full and unconditional guarantee of PSO Capital l's trust obligations. On April 30,1997, SWEPCO's business tmst, SWEPCO Capital I, sold to underwriters in a negotiated offering $110 million,7.875% Series A, Trust Preferred Securities due April 30,2037. The proceeds from the sale of these securities were used by SWEPCO to repay short-term debt, to reimburse SWEPCO's treasury for the cost of reacquiring approximately $15.5 million of 4.28% Series,4.65% Series,5.00% Series and 6.95% Series preferred stock, to provide working capital and for other general corporate purposes. Settlement of the transaction occurred on May 8,1997. SWEPCO Capital I is treated as a subsidiary of SWEPCO whose only assets are the approximately $113 4 million principal subordinated debentures issued by SWEPCO. In addition to SWEPCO's obligation under the subordinated debentures, SWEPCO has also agreed to a security obligation which represents a full and unconditional guarantee of SWEPCO Capital l's trust obligations. On May 8,1997, CPL's business trust, CPL Capital I, sold to underwriters in a negotiated offering $150 million,8.00% Series A, Cumulative Quarterly income Preferred Securities due April 30,2037. The proceeds from the sale of these securities were used by CPL to repay short-term debt, to reimburse CPL's treasury for the cost of reacquiring approximately $87.5 million of 4.00% Series,4.20% Series,7.12% Series and 8.72% Series preferred stock, to provide working capital and for other general corporate purposes. Settlement of the transaction occurred on May 14,1997. CPL Capital I is treated as a subsidiary of CPL whose only assets are the i l approximately $154.6 million principal subordinated debentures issued by CPL. In addition to CPL's obligation under the subordinated d bsntures, CPL has also agreed to a security obligation which represents a full and i unconditional guarantee of CPL Capital l's trust obligations. In March 1997, an affiliate of Orange Cogeneration Limited Partnership, an entity that is 50% indirectly owned by CSW Energy and accounted for by the equity method of accounting, issued $110 million, 8.175% Senior Secured Bonds, due 2022. The bonds are unconditionally guaranteed by Orange Cogeneration Limited Partnership. Concurrently, $53.2 million was distributed to CSW Energy representing its equity investment in the Orange Cogeneration project. 1 Short-Term Financing and Accounts Receivable Factoring The CSW System uses short-term debt, primarily commercial paper, to meet fluctuations in working l capital requirements and other interim capital needs. CSW has established a system money pool to coordinate l short-tenn borrowings for certain ofits subsidiaries, primarily the U.S. Electric Operating Companies. In l addition, CSW also incurs borrowings for other subsidiaries that are not included in the money pool. As of December 31,1997, CSW had a revohring credit facility totaling $1.4 billion to back up its commercial paper program. At December 31,1997 CSW had $721 million outstanding in short-term borrowings. The maximum amount of short-term borrowings outstanding during the year, which had a weighted average interest yield for the j year of 5.8%,,was $725 million during December 1997. I CSW Credit purchases, without recourse, the accounts receivable of the U.S. Electric Operating l Companies and certain non-affiliated electric companies. The sale of accounts receivable provides the U.S. l Electric Operating Companies with cash immediately, thereby reducing working capital needs and revenue requirements. In addition, CSW Credit's capital structure contains greater leverage than that of the U.S. Electric Operating Companies, so CSW's cost of capital is lowered. CSW Credit issues commercial paper to meet its financing needs. At December 31,1997, CSW Credit had a $900 million revolving credit agreement, secured by the assignment ofits receivables, to back up its commercial paper program, which had $637 million outstanding. 5 l l
The maximum amount of such commercial paper outstanding during the year, w interest yield of 5.6%, was $890 million during September 1997. CSW has recently made several fmance-related filings with the SEC under the d hi which, if approved, would increase CSW's financial flexibility. In the first filing, C repurchase up to ten percent ofits outstanding common stock as of June benefit plans (pursuant to the terms and conditions of such plans) from tim and to utilize its short-term borrowing program, including funds borrowed through its k fJune to finance its repurchase in the open market of up to twenty percent ofits outstanding comm No decision regarding this application has been made by the SEC. Such authority CSW's flexibility to adjust its capital structure. The second filing requests author 30,1997. for CSW, the U.S. Electric Operating Companies and CSW Services to finance ongoin term debt and finance the potential repurchase of outstanding securities. CSW has req common stock, while the U.S. Electric Operating Companies and CSW Services hav common stock, preferred stock and debt. Such authority would give CSW the flexibilit favorable market conditions for routine financings. 'Ihe SEC issued an order on Decem requested authority. The third filing requests an increase in the authorized short-term CSW and certain ofits subsidiaries. The SEC has not issued an order with respect to this app description of certain restrictions on CSW's ability to repurchase common stock and sources, see PROPOSED AEP MERGER. CSW Energy and CSWInternational In October 1996, CSW Energy issued $200 million,6.875% Senior Notes due 2001. The proceed the notes were for the acquisition, development and construction of electric generation assets in th and to make affiliate loans to CSW Intemational. CSb Energy has authority from the SEC to expend up to $250 million for general developmen related to qualifying facilities and independent power facilities. CSW Energy may seek specific additional amounts on certain projects subject to limitations contained in the AEP merger agreement.
- 3. COMMITMENTS AND CONTINGENT LIABILITIES, for a discussion of CSW's investments and l
commitments in CSW Energy projects at December 31,1997. In January 1997, CSW received authority from the SEC under the Holding Company Act to spend a amount up to 100% of consolidated retained earnings on EWG or FUCO investments. This represents an increase in authority previously granted under the Holding Company Act. However, the amount of any suc expenditures is subject to the terms of the AEP merger agreement. As of December 31,1997, C an amount equal to 49% of consolidated retained earnings, as defined by rule 53 of the Holding Comp EWG and FUCO investments. For a description of certain restrictions on the ability of CSW and its subsidiaries to make capital expenditures in respect of qualifying facilities and independent power facilities and to m F and FUCO investments, see PROPOSED AEP MERGER. 1 I RECENT DEVELOPMENTS AND TRENDS CSWStrategic Responses CSW has, from time to time considered, and expects to consider in the future, various strategies designed to enhance CSW's competitive position and to increase its ability to anticipate and adapt to changes in the electric i utility industry. These strategies may include business combinations with other companies, internal restructurings involving the complete or partial separation of CSW's generation, transmission and distribution businesses, acquisitions or dispositions of assets or lines of business, and additions to or reductions of franchised service territories. CSW may from time to time engage in discussions, either intemally or with third parties, 6
. - -.. ~ - - regarding one or more of these potential strategies. Those discussions may be subject to confidentiality agreements and CSW's policy is generally not to comment on such activities. No assurances can be given that any potential transaction of the type described above may actually occur, or, if one does occur, the ultimate effect thereof on CSW's results or operations, financial condition or competitive position (The foregoing statement constitutes a fonvard looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). AEP Merger in December 1997, AEP and CSW announced that their boards of directors approved a definitive merger agreement. If the merger is completed, the combined company will be a diversified electric utility serving more than 4.6 million customers in 11 states and approximately 4 million customers outside the United States. On January 19,1998, CSW announced a corporate realignment to more effectively position itself for competition and to better align itself with AEP related to the proposed merger of the two companies. The transaction must receive regulatory approval from federal and state authorities and must satisfy a number of other conditions, some of which, such as CSW and AEP shareholder approval, may not be waived by the parties. There can be no assurance that the AEP Merger will be consummated, and ifit is, the timing of such consummation or the effect of any regulatory conditions that may be imposed on such consummation. See PROPOSED AEP MERGER. Competition andIndustry Challenges Competitive forces at work in the electric utility industry are impacting the CSW System and electric utilities generally. Increased competition facing electric utilities is driven by complex economic, political and technological factors. These factors have resulted in legislative and regulatory initiatives that are likely to result in even greater competition at both the wholesale and retail levels in the future. As competition in the industry increases, the U.S. Electric Operating Companies will have the opportunity to seek new customers and at the same time be at risk oflosing customers to other competitors. Additionally, the U.S. Electric Operating Companies will continue to compete with suppliers of altemative forms of energy, such as natural gas, fuel oil and coal, some of which may be cheaper than electricity. In the United Kingdom, the franchised electricity supply business is scheduled to open to full competition on a phased-in basis on September 1,1998. As a result, SEEBOARD will be able to seek customers while risking the loss of existing customers to other competitors. As a whole, the CSW U.S. Electric System telieves that, overall, its prices for electricity and the quality and reliability ofits service currently place it in a position to compete effectively in the energy marketplace (The foregoing statement constitutes a fonvard looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). See RATES AND REGULATORY MATTERS for a discussion of several current issues impacting the CSW System. Electric industry restructuring and the development of competition in the generation and sale of electric power requires resolution of several important issues, including, but not limited to: (i) who will bear the costs of ymdent utility investments or past commitments incurred under traditional cost-of-service regulation that will be uneconomic in a competitive environment, sometimes referred to as stranded costs; (ii) whether all customers have access to the benefits of competition; (iii) how, and by whom, the rules of competition will be established; (iv) what the imoact of deregulation will be on conservation, environmental protection and other regulator-imposed programs; and (v) how transmission system reliability will be ensured. The degree of risk to CSW associated with various federal and state restructuring proposals aimed at resolving any or all of these issues will vary depending on many factors, including the proposals' competitive position and treatment of stranded utility investment resulting from such requirements. Although CSW believes it is in a position to compete effectively in a deregulated, more competitive marketplace, if stranded costs are not recovered from customers, then CSW may be required by existing accounting standards to recognize potentially significant losses from unrecovered stranded costs, especially with respect to STP (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected 7
information due to changes in the underlying assumptions. See FORWARD LOOKING INFO See Regulatory Accounting fc: additional information. At the federal level, several bills were introduced in Congress during the 1997 legislative ses provided for restructuring and/or deregulating the electric utility industry. However, n into law. In 1998, the United States Senate has progressed further in its consideration of com restmeturing legislation than the United States House of Representatives. However, in the differences must be resolved between those who favor legislation to repeal the Holding C who support repeal only in the context of comprehensive legislation. Prospects for repeal o Company Act in 1998 are unclear. While a majority of the states, including the four states in which the U.S. Electric Operating operate, have considered deregulation that requires some f when and ifit will be subject to one or more of these legislative initiatives, nor can it ptedict the such legislation on its results of operations or financial condition. For additional informat initiatives, see Industry Restructuring Initiatives in Texas, Louisiana, Oklahoma and Arkansas. Wholesale Electric Competition in the United States The Energy Policy Act, which was enacted in 1992, significantly altered the way in which compete. The Energy Policy Act created exemptions from regulation under the Holding permits utilities, including registered utility holding companies and non-utility compan are a relatively new category of non-utility wholesale power producers that are free from mos regulation, including restrictions under the Holding Company Act. These provisions en in wholesale power markets by reducing regulatory hurdles to such participation. The Energy allows the FERC, on a case-by-case basis and with certain restrictions, to order wholesale transm and to order electric utilities to enlarge their transmission systems. A FERC order requiring to provide wholesale transmission service must include provisions generally that pe the FERC applicant all of the costs incurred in connection with the transmission service the transmission system and associated services. Wholesale energy markets, including the electric power, have been increasingly competitive since enactment of the Energy Polic Operating Companies must compete in the wholesale energy markets with other public uti qualifying facilities, EWGs and others for sales of electric power. While CSW believ Act will continue to make the wholesale markets more competitive, CSW is unable to predic Policy Act will adversely impact the U.S. Electric Operating Companies. FERC Orders 888 and 889 The FERC issued Order No. 888 in 1996, which is the final comparable open access rule. The provisions of FERC Order No. 888 provide for comparable transmission ff their transmission customers by requiring utilities to take transmission service under their o hi wholesale sales and purchases and by requiring utilities to rely on the same transmission inf transmission customers rely on to make wholesale purchases and sales. In addition, the Texas Commission adopted a rule goveming transmission access in 1996. The pricing method adopted by the Texas Commission is a hybrid combina postage stamp rate covering 70% of total ERCOT transmission costs and a d recovers the remaining 30% of ERCOT's transmission costs. CPL and WTU began reco revenues and expenses in accordance with the Texas Conunission's rule on January 1,1997. FERC Order No. 888 requires holding companies to offer single system transmission ra FERC transmission rates of the U. S. Electric Operating Companies are under the exclusive juris 8
l while the transmission rates of most of the transmitting utilities in ERCOT are under the exclusive jurisdiction of the Texas Commission. Because the two commissions have different approaches to defining and implementing comparable open access transmission service, Order No. 888 granted the U. S. Electric Operating Companies an exemption permitting them an opportunity to propose a solution that provides comparability to all wholesale j users. On November 1,1996, the U. S. Electric Operating Companies filed a system-wide tariff to comply with Order No. 888 and, on December 31,1996, the FERC accepted for filing the system-wide tariff which became effective on January 1,1997, subject to refund and to the issuance of further orders. On December 10,1997 the FERC issued an order regarding the U. S. Electric Operating Companies' proposed system-wide tariff filed on November 1,1996. The FERC's order accepted the proposed tariff subject to several modifications, including revisions to provide for system-wide transmission service under a single system rate. The U. S. Electric Operating Companies filed the required compliance tariff on February 9,1998 and are waiting for FERC's acceptance of the revised tariff. In 1996, the FERC issued Order No. 889 requiring transmitting utilities to establish and operate an OASIS for the dissemination ofinformation regarding available transfer capability for their respective transmission systems. The OASIS is an on-line information system that provides the same information about the utility's transmission system to all transmission customers. The U.S. Electric Operating Companies utilize, and participate in the OASIS systems for ERCOT and SPP. Order No. 889 also created standards of conduct requiring utilities to conduct any wholesale power sales business separately from their transmission operations. The standards of conduct are designed to ensure that utilities and their affiliates, as sellers of power, do not have preferential access to information about wholesale transmission prices and availability. Retail Electric Competition in the United States Increased competition in the utility industry has resulted in increased pressure 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 legislative initiative which would require utilities to " wheel" or move power from third parties to their own retail customers, is evolving gradually. Most states either have introduced legislation or are investigating the issue, and several states have already passed legislation which mandates retail choice by a certain date. CSW believes that retail competition would not be in the best interests of CSW's 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 U.S. Electric Operating Companies to meet their obligation to serve the public interest, necessity and convenience. This obligation has existed for nearly a century and remains in force under current law CSW intends to strongly oppose attempts to impose retail competition withoutjust compensation for the risks and investments CSW undertook to serve the public's demand for electricity. For additional information related to retail wheeling in the United States, see Holding Company Act and Legislative Update and Industry Restructuring Initiatives in Texas, Louisiana, Oklahoma and Arkansas. Industry Restructuring Initiatives in Texas, Louisiana, Oklahoma and Arkansas Several initiatives regarding restructuring the electric utility industry have recently been undertaken in the four states in which the U.S. Electric Operating Companies operate. Legislation was enacted in Oklahoma while legislative activity in Texas, Louisiana and Arkansas stopped short of any such definitive action. In April 1997, the Oklahoma Legislature enacted legislation dealing with industry restructuring in Oklahoma, which provides for retail competition by July 1,2002. The legislation directs the Oklahoma Commission to study all relevant issues relating to restructuring and develop a framework for a restructured industry. The legislation divides the study of restructuring issues by the Oklahoma Commission into four parts: (i) independent system operator issues; (ii) technical issues; (iii) financial issues; and (iv) consumer issues. At the 9
~ _'-~ - - --- i h legislative end of each of these studies, the Oklahoma Commission must provide reports along w t i f l ti tility recommendations. The legislation directs the Oklahoma Tax Commission to study the m blishment of a uniform restructuring on state tax revenues and the existing tax structure, consider the esta The legis at on prohibits the li consumptian tax, and report to the Oklahoma Legislature by December 31,1998. il i l creates a Joint establishment of retail competition until a uniform tax policy is established. The leg s at on a Electric Utility Task Force, a 14-member panel compo f include the oversight and direction of the studies by the results of operations and fmancial. In March 1997, the Arkansas Legislature passed a resolution directing interim 7 dh study competition in the electric power industry in Arkansas. The study began in O h i iti t d a series committees will continue to hold hearings throughout 1998. Also, the Arkansas Commiss L i l t re by of generic restructuring dockets. The Arkansas Commission will provide a report t October 1998. In Louisiana, a special legislative committee created by the Louis impact of retail competition on the state of Louisiana. The committee is sc d di to next regular session of the Louisiana Legislature. The Louisiana Commission has als d S it im study restructuring and retail competition. In Texas, the Texas Lieutenant Governo f hearings and is committee to study retail competition and restructuring. The committee is holding a series o di i scheduled to issue a report by September 1998. Managem ~ Industry Restructuring in Texas Amendments to PURA, the legal foundation of electric regulation in Texas, became e September 1,1995. Among other things, the amendments deregulate the wh ERCOT, permit pricing flexibility for utilities facing competitive challenges, provide integrated resource planning process and mandate comparable open access tran PURA also required that the Texas Commission adopt a rule on comparable March 1,1996. In conjunction with this rulemaking pro i d tilities where wholesale bulk power market. The proposal calls for the fun Those generators which are currently regulated would be deregulated after provis n i f stranded costs. The proposal was assigned a separate proceeding (Project No.15000 b itt d final Scope of workshops and technical conferences conducted during 1996, the Texas Commission su m Competition report to the Texas Legislature in January 199 i l ificationof otection and existing authority including to certificate electric service resellere, the authority to adop the authority a universal service standards, the authority to determine and allocate stranded costs to all c d to promote unbundling, the authority to allow alternative fo i il fr alternative methods for fuel cost recovery. In addition, the final report offers the Texas Leg ii l tarily restructuring options. Option 1 maintains the regulatory status quo; Option 2 would offer retail access; Option 3 would provide for full wholesale competition; and Option 4 wo retail competition. The report's final recommendation is l i l t re established by the Texas Legislature, but with no retail access before the year 2000 considered but did not pass any of these proposals in the 1997 legislative session. ) 10
On February 7,1996, the Texas Commission adopted a rule governing transmission access and pricing (Project No.14045). The pricing method adopted by the Texas Commission is a hybrid combination of an ERCOT-wide postage stamp rate covering 70% of total ERCOT transmission costs and a distance-sensitive component referred to as a vector-absolute megawatt mile which recovers the remaining 30% of ERCOT transmission costs. The open access tariffs filed with the FERC on February 9,1996 did not reflect Project No. 14045 pricing. However, on November 1,1996, CSW filed tariffs with the FERC in accordance with FERC Order 888 that conform to the Texas Commission's rule. See FERC Orders 888 and 889 for additional information regarding the transmission pricing rules prescribed by FERC. By statute the Texas Commission was required to submit a report to the 1997 Texas Legislature en " methods or procedures for quantifying the magnitude of stranded investment, procedures for allocating costs, and the acceptable methods of recovering stranded costs." The Texas Commission initiated Project No.15001 to collect information to prepare the required report. In response to the Texas Commission's order in Project 15001, CPL, SWEPCO, and WTU each filed information on estimates of potential stranded costs. While the filings for CPL included estimates r f significant potential stranded costs, no significant potential stranded cos+s were identified in the filings for SWEPCO or WTU. In January 1998, the Texas Commission requested updated information on CPL's stranded costs for a report that the Texas Commission is prepadng for the Senate interim committee on restructuring. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for a discussion of the potential impact of potential stranded costs relating to CPL The Texas Commission's Project 15002, " Scope of Competition Report," is a report that the Texas Commission is required to present to the Texas Legislature in each odd-numbered year detailing the scope of competition in the electric markets and the impact of competition and industry restructuring on customers. In addition, the report is required to include the Texas Commission's recommendations to the Texas Legislature for further legislation. In June 1996, CPL, SWEPCO and WTU each filed infonnation for the Texas Commission's report. Texas Independent System Operator Plan In June 1996, CSW, including CPL and WTU, and more than 20 other parties, including other investor-owned utilities, municipal power companies, electric cooperatives, independent power producers and power marketers, filed plans to create an ISO to manage the ERCOT power grid. The filing marks a major step towards implementing the Texas Commission's overall strategy to create the competitive wholesale electric market that was mandated by the Texas Legislature in 1995. The Texas Commission approved the ISO in August 1996. Such approval made Texas the first state in the nation to adopt a plan for a regional ISO and a regional competitive wholesale bulk power market. Integrated Resource Plan In January 1997, CPL, WTU, and SWEPCO filed with the Texas Commission a joint integrated resource plan outlining the companies' future electric needs over a 10-year forecast horizon and the manner in which the companies propose to meet those needs. In July 1997 the Texas Commission issued an Interim Order on the Preliminarf Plan which adopted a settlement agreement that had been reached with all the parties in the cast The Interim Order approved the load forecast and individual resource needs for each of the companies, as well as the request for proposal documents to be used to procure future resource needs. The Interim Order also approved the targeted purchase goal amounts for renewable and energy efficiency programs, which will result in renewable and energy efficiency programs being included in the companies' resource mix. The targeted purchase goals were developed in response to customer input obtained through the deliberative polling process conducted at each operating company in the sununer of 1996. A separate phase of the Integrated Resource Plan was created to address the value ofinterruptible resources at CPL. That phase is expected to be completed in March 1998. The Interim Order also required that a green pricing tariff be filed which would allow customers who are interested in acquiring a greater portion of their personal consumption from environmentally beneficial generation to exercise 11
Texas in October 1996. A system-wide that choice. A green pricing tarifhvas approved for use in San Angelo, filing is expected in mid 1998. HoHing Company Act and Legislative Update The Holding Company Act generally has been construed to limit the operatio i functionally related to company to a single integrated public utility system, plus such additional bus nesses as i b idiaries to seek prior such system. Among other things, the Holdini; Company Such i bj ti i pervasive regulation may impede or delay CSW's efforts to achieve its strate ) Consequently, CSW continues to support efforts to repeal or modify this legislation. I In 1995, the SEC issued a report to the United States Congress advocating re h Company Act, either on a conditional and transitional basis or immediate h SEC's recommendation for repeal is that the Holding there were several bills introduced in both the United States Senate and Hous would have repealed the Holding Company Act on a conditional and transitiona d States House of oversight functions to the FERC and the states. Anothe hi h id d f qualifying among other things, requires investor owned utilities to purc In January 1997, a bill was introduced in the United States Senate provid f h Holding Company Act one utility industry restructuring and for retail choice by December 2003, repeal o t e h wer at their year aner the bill is enacted, as well as repeal of the requirement that electric utiliti f i rformed avoided cost from qualifying facilities under PURPA. U ill was ii li s at the reintroduced in the l'nited States House of Representatives providing for choice of elec i d States Senate bill, the retail level by the year 2000. Under this bill, which is substantially similar to the Un te b li i t d after each application of the Holding Company Act to a particular holding company system il state served by the electric utility companies in that system made a determination that reta that state. No legislation was enacted in 1997. In February 1997, the SEC adopted Rule 58 allowing a holding company re Company Act or any ofits subsidiaries, to acquire, without prior SEC approv curities related company subject to certain limits. Under the new mie, investment in energy- % of the consolidated without prior SEC approval is limited to the greater of(i) 550 million and (ii) 15 F 10-K as filed capitalization of the registered holding company as reported on its most recen f the securities of an with the SEC. Rule 58 does not exempt the acquisition by a registered holding company o i al as does the electric utility company or a gas utility company, which remains subject to the SEC's pr issuance of securities for the purpose of making such exempt investments. In 1998, the United States Senate has progressed further in its consideratio i h United States Senate, restructuring legislation than the United States House of R f l of the Holding who support repeal only in the context of comprehensive legislation. Prospects or repea Company Act in 1998 are unclear. Consistent with industry practice and the provisions of SFAS No. 71, w Regulatory Accounting f, i d significant regulatory and recovery of regulatory assets, the U.S. Electric Operating Companies have recogn ze 12
assets and liabilities. Management believes that the U.S. Electric Operating Companies currently meet the criteria for following SFAS No. 71. However, in the event the U.S. Electric Operating Companies or some portion of their business no longer meets the criteria for following SFAS No. 71 due to deregulation or for other reasons, a write-off of regulatory assets and liabilities would be required, absent a means of recovering such assets or settling such liabilities in a continuing regulated segment of the business. For additional information regarding regulatory accounting, reference is made to NEW ACCOUNTING STANDARDS and NOTE 1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES. PSO Union Negotiations As previously reported, PSO and its Local Union 1002 of the IBEW have been engaged in contract. renewal negotiations. The underlying agreement expired in September 1996 and, to date, the parties have been unable to reach an agreement. In December 1996, PSO implemented portions ofits final proposal after declaring an impasse. The principal issue cf disagreement involves PSO's need for flexibility in a deregulated environment. In April 1997, Oklahoma's govemor signed into law an electric industry restructuring bill. The new law mandates the implementation of retail competition to begin on July 1, 2002. PSO believes that the new law also broke the impasse in the contract negotiations and has resumed negotiations with the union. At this time, PSO cannot predict the outcome of this matter. However, PSO believes that, even in the event of a strike, its operations would continue without a significant disruption and that a strike would not have a material adverse effect on CSW's results of operations or financial condition (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). Impact of Competition and Industry Restructuring Initiatives CSW is unable to predict the ultimate outcome or impact of competitive forces on the electric utility industry in the United States, and in the United Kingdom or on the CSW System. As the electricity markets become more competitive, however, the principal factor determining success is likely to be price, and to a lesser extent reliability, availability of capacity, and customer service. CSW cannot predict the form or effect of any federal or state electric utility restructuring initiatives at this time. Federal and/or state electric utility restructuring may cause impairment of significant recorded assets, mateiial reductions of profit margins, and/or increased costs of capital. No assurance can be made that such events would not have a material adverse effect on CSW's results of operations, financial condition or competitive position (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOCKING INFORMATION). RATES AND REGULATORY MATTERS CPL Rate Review - Docket No. N965 In November 1995, CPL filed with the Texas Commission a request to increase its retail base rates by $71 million, and in May 1996, CPL placed a $70 million base rate increase into effect under bond, subject to refund based on the receipt of the CPL 1997 Original Rate Order of the Texas Commission. On March 31,1997, the Texas Commission issued a rate order in CPL's rate review, Docket No.14965. Thereafter, CPL filed a l motion for rehearing which requested the reconsideration of numerous provisions of the order. Motions for rehearing were also filed by other parties to the rate proceeding. In response to the motions for rehearing, in June 1997, the Texas Commission made several modifications to the CPL 1997 Original Rate Order and also agreed to rehear on remand several other issues. CPL restored its rates in July 1997, with two exceptions, to levels existing prior to the May 1996 implementation of bonded rates. On August 21,1997, aftei *econsidering the issues on remand, the Texas Commission voted to issue a revised final order and on September 10,1997, CPL received a 13
The second motion for revised final order. CPL filed its second motion for rehearing on September 30,1997. rehearing again requested reconsideration of m!merous issues in the rate case. On October 16,1997, the Commission issued the CPL 1997 Final Order. The CPL 1997 Final Order lowers the f CPL by approximately $19 million, or 2.5%, from CPL's rate level existing prior to May 1996. The Texas i Commission also included a " Glide Path" rate methodology in the CPL 1997 Final Order pursuant to which I CPL's annual rates will be reduced by an additional $13 million in mid-1998 and another $13 million in mid 1999. There are numerous contributing factors to the difference between the $71 million retail base rate increase originally requested by CPL and the $19 million retail base rate reduction included in the CPL 1 The CPL 1997 Final Order decreased CPL's requested return on equity of 12.25% on its retail rate base to a 10.9% return on equity for all non-ECOM invested capital, which results in a $30 million decrease in CPL's request. The CPL 1997 Final Order provides for the disallowance of approximately $18 million of aff transactions. In addition, the CPL 1997 Final Order denied CPL's request to use straight line amortization fo CPL's deferred accounting costs. Instead, the CPL 1997 Final Order requires CPL to continue to use the mortgage amortization method to amortize its deferred accounting costs, resulting in a reduction of $1 from CPL's rate request. The CPL 1997 Final Order also decreased depreciation by $17.4 million from CPL' rate request. Another major provision of the CPL 1997 Final Order was the Texas Commission's categorization of $800 million of CPL's investment in STP as ECOM. The term ECOM has been used to costs that potentially would become " stranded" if retail competition were mandated and prices were set in market, rather than the price being determined by current regulatory standards of reasonable and necessary providing service. The CPL 1997 Final Order reduced CPL's equity return on the ECOM portion of CP investment in STP to 7.96%, compared to the 10.9% return on common equity approved for all other invested capital, resulting in a $15.9 million decrease in CPL's rate request At the same time, the CPL 1997 Fi accelerated the recovery of the $800 million designated as ECOM to jears from the remaining 32-year life of STP. The following table contains details of the estimate of the financial impact of the CPL 1997 Fiul Order. 1997 1998 1999 (millions) Decrease in revenue $(24.2) $(28.7) $(41.9) Items included in decrease in revenue with an offsetting etTect on expense: 20.0 20.0 20.0 Recovery of STP (ECOM) Change in depreciation (11.3) (11.3) (11.3) 4.3 4.3 4.3 Decommissioning 6.8 2.1 2.1 Other 19.8 15 1 15.1 Change in current year income before tax (44.0) (43.8) (57.0) 14.8 14.8 19.3 Federalincome taxes Current year impact on net income (29.2) (29 0) (37.7) 1996 etTect (18.9) Estimated impact on net income $(48.1) $(29.0) $(37.7) CPL appealed the CPL 1997 Final Order to the State District Court of Travis County to challenge resolution of several issues in the rate case. The primary issues include: (i) the classification of $800 invested capital in STP as ECOM which was also assigned a lower return on equity than non-ECOM prop (ii) the Texas Commission's use of the " Glide Path" rate reduction methodology to be applied to r 1998 and mid-1999, and (iii) the $18 million of disallowed affiliate transactions from CSW Services. A 14
the appeal, CPL seeks a tcmporary injunction to prohibit the Texas Commission from implementing the " Glide Path" rate reduction methodology, currently scheduled to begin in May 1998. A hearing has been set for the temporary injunction on April 3,1998. Management is unable to predict how the final resolution of these issues will ultimately affect CSW's results of operations and fmancial condition. CPL currently accounts for the economic effects of regulation in accordance with SFAS No. 71. Pursuant to the provisions of SFAS No. 71, CPL had recorded approximately $1.3 billion of regulatory-related assets at December 31,1997. The application of SFAS No. 71 is conditioned upon CPL's rates being set based on the cost of providing service. In the event management concludes that as a result of changes in regulation, legislation, the competitive environment, or other factors, including the CPL 1997 Final Order, CPL no longer meets the criteria for following SFAS No. 71, a write-off of regulatory assets would be required. In addition, CSW could experience, depending on the timing and amount of any write-off, a material adverse effect on its results of operations and financial condition. The foregoing discussion of CPL Rate Review - Docket No. N965 constitutes fonvard looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information. See FORWARD LOOKING INFORMATION. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additionalinformation on the CPL 1997 Final Order. PSO 1997 Rate Settlement Agreement In July 1996, the Oklahoma Conuniaion staff filed an application seeking a review of PSO's camings. In accordance with the established schedule, PSO subsequently filed financial data, cost of service and rate design testimony supporting both its current rates and an increase in annual depreciation expense of $26 million. In July 1997, the Oklahoma Commission staff and other intervenors to the proceeding filed their revenue requirements testimony. In its filing, the Oklahoma Commission staff recommended a rate reduction of $76.8 million for PSO. On October 15,1997, PSO reached a stipulated agreement with parties to settle the rate inquiry that w~as pending before the Oklahoma Commission. On October 23,1997, the Oklahoma Commission issued a fmal order approving the agreement. The following table represents the financial impact of the PSO 1997 Rate Settlement Agreement on PSO's 1997 results of operations and also an estimate ofits ongoing annual impact on net income in successive years. Onp g Annual 1997 Impact .:npact (millions) Decrease in revenue Refund to customers 5(29.0) Change in rates (2.5) (35.9) (31.5) (35.9) Changes in expenses (offsetting impact included in revenues) Depreciation (6.3) (10.9) Rate case deferred costs 2.2 s Income tax (10 2) (8.8) (14.3) (19.7) (17.2) (16.2) Write-off of deferred assets, net of tax (10.2) 5(27.4) $(16.2) The PSO 1997 Rate Settlement Agreement resulted in a material adverse effect on PSO's results of operations for 1997 that will have a continuing material adverse effect on its results of operations because of the rate decrease. However, it also reduced significant risks for PSO related to this regulatory proceeding and will enable PSO's rates to remain competitive for the foreseeable future. 15
The foregoing discussion of PSO 1997 Rate Settlement Agreement constitutes fo hformation within the meaning of Section 21E of the Exchange Act. Actual results TE 2. LITIGATION such projected infomtation. See FORWARD LOOKING IN Agreement. SWEPCO Louisiana Rate Reviewin December 1997, the Louisiana Commiss In 1993, the Louisiana Commission issued an order initiating a review of the r in the state. Since that time, each of the other investor-o i 1985. and large industrial customers in January 1988. Prior to that, SWEPCO's last rate increase The Louisiana Commission has requested bids from consultants to perform a re l lt ltants and charges and to review SWEPCO's quality of service. The Louisiana Commission p during the second quarter of 1998 and a timeline for the review will be determine Management cannot predict the outcome of this review. SEEBOARD Recent Regulatory ActionsFollowing the phased-in opening SEEBOARD will competition in September 1998, customers will be able to choose their electricity suppl The DGES has compete for customers in its own area as well as throughou b ed by i The DGES has also the regional electricity companies d rough a charge to all cus h d i f mpetition, their domestic and small business customers over the first two years following the intro uct on o l d ices in taking into account its view of future electricity purchase c l year ending March 31,2000. Reference is made to NOTE 2. LITIGATION AND REGULATORY P Other information regarding fuel proceedings at CPL, SWEPCO and WTU. PROPOSED AEP MERGER On December 22,1997, CSW and AEP announced that their boards of directors defmitive merger agreement for a tax-free, stock-for-stock transaction creating f d k). capitalization of approximately $28.1 billion ($16.5 billio h AEP Merger will conditions, some of which may not be waived by the parties. There can be no assurance be consummated. This combination is expected to create one of the nation's preeminent diver United States. more than 4.6 million customers in 11 states and appr ilities in average. Over the last two years, both CSW and AEP have ranked among the t customer satisfaction in the ACSI. 16
Under the merger agreement, each common share of CSW will be converted into 0.6 shares of AEP common stock. Based upon AEP's closing price immediately prior to the merger announcement, this represented a premium of 20% over the CSW closing price. AEP will issue approximately $6.6 billion in stock to CSW stockholders to complete the transaction. CSW stockholders will own approximately 40% of the combined company. Both companies anticipate continuing their current dividend policies until the close of the transaction. Under the merger agreement, there will be no changes required with respect to the public debt issues, the outstanding preferred stock or the Tmst Preferred Securities of CSW or its subsidiaries. ' Die companies anticipate net savings related to the merger of approximately $2 billion over a 10-year period from the elimination of duplication in corporate and administrative programs, greater efficiencies in operations and business processes, increased purchasing efficiencies, and the combination of the two workforces. At the same time, the companies will continue their commitment to high quality, reliable service. Job reductions related to the merger are expected to be approximately 1,050 out of a total domestic workforce of approximately 25,000. The combined company will use a combination of growth, reduced hiring and attrition to mmtmize the need for employee separations. Organizational and staffing recommendations will be made by transition teams of i employees from both companies. The electric systems of AEP and CSW will operate on an int grated and coordinated basis as required by the Holding Company Act. Any fuel savings resulting from the coordinated operation of the combined company will be passed on to customers. The merger agreement contains covenants and agreements that restrict the manner in which the parties may operate their respective businesses until the time of closing of the merger. In particular, without the prior J written consent of AEP, CSW may not engage in a number of activities that could affect its sources and uses of funds. Pending closing of the merger, CSW's and its subsidiaries' strategic investment activity, capital expenditures and non-fuel operating and maintenance expenditures are restricted to specific agreed upon projects or agreed upon amounts. In addition, prior to consummation of the merger CSW and its subsidiaries are restricted from (i) issuing shares of common stock other than pursuant to employee benefit plans, (ii) issuing shares of preferred stock or similar securities other than to refinance existing obligations or to fund permitted investment or capital expenditures and (iii) incurring indebtedness other than pursuant to existing credit facilities, in the ordinary course of business or to fund permitted projects or capital expenditures. These restrictions are not l expected to limit the ability of CSW and its subsidiaries to make investments and expenditures in amounts previously budgeted. The merger is conditioned, among other things, upon the approval of CSW stockholders and several state and federal regulatory agencies. AEP shareholders must authorize additional common stock and approve a new common stock issuance to be used in the exchange for CSW common stock. The companies anticipate that regulatory approvals can be obtained in 12 to 18 months from the date of announcement. See NOTE 16. PROPOSED AEP MERGER. OTHER MERGER AND ACQUISITION ACTIVITIES Settlement ofLitigation Related to Termination ofElPaso Merger l In July 1997, CSW and El Paso reached a settlement agreement that resolved all of the pending litigation resulting from the termination of the proposed merger. Under the terms of the settlement agreement, CSW and El Paso agreed to dismiss all pending claims in the litigation and give a mutual release from any potential claims related to the El Paso Merger Agreement or the pending litigation, and CSW paid $35 million to El Paso, various ofits creditor groups under its plan of reorganization, and its attorneys. CSW recorded a charge of $25 million 2 in the first quarter of 1997 following the court's interim order and recorded an additional charge of $10 million in t 17 l
~ -~_ ~----_ The bankruptcy court vacated t the second quarter of 1997 to fully recognize the $35 million settlement amoun.TE 2. LITIGATION the interim order and approved the settlement agreement. See NO PROCEEDINGS. SWEPCO Cajun Asset Purchase ProposalOn March 18,1998, SWEP O Plan in the 7 of the 12 Louisiana member distribution cooperativ fh h three-unit Big Cajun II nuclear assets of Cajun, comprised of the two-unit Big Cajun i natural gas-fired plant, t e dj t nt pursuant to coal-fired plant, and related non-nuclear assets, for $940.5 million in cash, subject to a us terms of the asset purchase agreement proposed as part of the SWEPC Claiborne Electric Cooperative, Inc. the terms of a settlement between the RUS, the Cajun Members Committee, and SWEPCO. The SWEPCO Plan filed March 18,1998 replaces plans filed previously by l f i i f the Two competing plans of reorgan zat on or 1998, October 26,1996, September 30,1996 and April 19,1996. l ff hase prices, rate non-nuclear assets of Cajun have been filed with the bankruptcy court, each with di eren paths and other provisions. Confirmation hearings in Cajun's d the f l i addition to their board receipt by SWEPCO and CSW of all requisite state and federal regulatory approva s n te th i d approvals. If the SWEPCO Plan is confirmed, the $940.5 m ll d bt. There can be generated funds with approximately 70% of the external borrowings funded with no assura ace that the SWEPCO Plan will be confirmed by the bankruptcy court or, be approved by federal and state regulators. For additional information re I LITIES. purchase proposal see NOTE 3. COMMITMENTS AND CONTINGENT LIABI OTIIER INITIATIVES As described in OVERVIEW, a vital part of CSW's future strategy invo d fun'smental changes in of the traditional United States electric utility mdustry due to increasing competition anU this industry. In addition, lower anticipated growth rates in CSW's core i h i itiatives. These combined with the aforementioned industry factors have resulted in CSW pursu ng ot er n f CSW to develop initiatives have taken a variety of forms; however, they are all consistent with the o d h AEP merger agreement. a global energy business. CSW has restrictions on the amounts it may spend un er t While CSW believes that such initiatives are necessary to maintain its co f ll rsue such growth in the future, the Holding Company Act may imped S i 21E of i d to changes in the the Exchange Act. Actual results may differ materially from such projected informat on u CENT underlying assumptions. See FORWARD LOOKING INFORMATION). See RE DEVELOPMENTS AND TRENDS. d CSW Energy and CSWInternationalCSW Energy presently owns inter f in Colorado, Florida and Texas. In addition to these projects, CSW Energy development. In August 1997, an affiliate of CSW i l ments. expected to be repaid from project distributions or proc il his transaction. operation date of February 1,1998. CSW Energy did not recognize a gain or los 18
CSW Intemational was organized to pursue investment opportunities in EWO< and FUCOs. CSW Intemat'onal curretGy holds investments in the United Kingdom, Mexico and Latin America. CSW Intemational acquir@ atinority interest in Vale, a Brazilian electric utility company, for an initial investment of appmximately $40 million in December 1996. In 1997, CSW International made additional equity investments of approximately 5150 million in Latin America. The $190 million used to make the equity investments was funded through loans to CSW International by CSW Energy. CSW Energy obtained the funds from its $200 million Senior Note issance in October 1996. CSW International continues to seek to expand into other countries in Latin America, Europe, and Asia that meet its investment criteria and the investment criteria contained in the AEP merger agreement. C3 Ccmmunications C3 Communications has two active business units; its Utility Automation Division and a telecommun' cat %s partnership, ChoiceCom. C3 Comnumications' Utility Automation Division performs consulting, implementation and integration of utility meter automation products and services for traditional utility companies and, as competition markets open, in states like Califmnia, for energy service providers. C3 Communications offers clients innovatise meter-based competitive data :ervices including automated meter reading; hourly, daily and monthly delivery of consumption data; advanced load profiling data; aggregation reports for customers with multiple accounts and operational services like outage and tamper detection and real-time-pricing and time-of use data. ChoiceCom offers telecommunications services including local telephone service, long distance and long-haul data transmission services. ChoiceCom began offering local telephone service in August,1997, in Austin, Corpus Christi and San Antonio, Texas with an emphasis on the business customer. ChoiceCom also installed state-of-the-art Lucent SESS@ switches in those three citics. In January 1998, ChoiceCom began offering telephone service in Dallas and Houston with plans to install Lucent 5ESS@ switches in both cities by the end of the year. With the addition of Dallas and Houston, ChoiceCom's expected 5-year capital budget has increased to $210 million from $104 million. The partnership has grown to about 150 employees during its first year of operation. In November 1997, the parties amended the ChoiceCom Limited Partnership Agreement to provide that CSW hold 100% of the economic interest in ChoiceCom and 60% of the voting interest. ICG Communications, Inc. holds the remaining 40% voting interest in ChoiceCom, and has an option to acquire a 50% economic interest in ChoiceCom. In the event that its option terminates without being exercised, ICG Communications, Inc. will be bound by a non-compete agreement in CSW's service territory. EnerShop EnerShop currently provides energy services te customers in Texas which 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, equipment procurement and construction; and performance monitoring. Other Ventures CSW Energy Services will spearhead CSW's competitive efforts in the retail electricity markets of states outside of CSW's historical service territories. CSW Energy Services will seek to secure electricity supply business in the markets which soon will have retail competition, and will enable CSW to extend its business reach and name recognition beyond CSW's traditional customer base in March 1998, CSW Energy Services signed its i first major supply contract in California. The CSW Services Business Ventures group pursues energy projects related to the business activities of the U.S. Electric Operating Companies. Projects for these groups include l staffing services for electric utility nuclear power plants, energy management systems, electric substation i 19 ]
~ ~ ~ automation software and electric vehicles. In June 1997, the FERC approved the request Marketing to sell power and energy at market-based rates in the wholesale market. CS suspended this initiative in light of the AEP Merger since AEP is already pursuing th SOUTil TEXAS PROJECT CPL owns 25.2% of STP, a two-unit nuclear power plant which is located near B d in service in owns 30.8%, San Antonio owns 28.0%, and Austin owns 16.0% of STP. STP Unit I was plac August 1988, and STP Unit 2 was placed in service in June 1989. STP Unit I and Unit 2 were removed from service during 1997 for scheduled refueli lasted 24 days and 18 days, respectively. For the year 1997, Unit 1 and Unit 2 o t 90.1% and 91.0%, respectively. In September 1997, STPNOC was formed to replace HL&P as the STP Projec four STP co-owners are represented on the STPNOC board 'of directors. The CPL rep i d elected as the initial chairman of the board of directors. On October 1,1997, a STP were transferred from HL&P to STPNOC. On November Manager, and STPNOC became the operator of the plant. CSW believes the form interest. The establishment of STPNLC provides the following advantages: (i) allows the man force to focus exclusively on the safe, reliable and efficient operation of the STP uni possibility of disputes between the four owners over the operation of the facility; concerning the potential liability of HL&P who was acting as the project manager; and ( i h management of the facility to tailor a total compensation package for the STP work for li d work force and its needs. In addition, the formation and operation of STPNOC is expected to in costs allocable to CPL related to its investment in STP (The foregoing statement h statement within the meaning of Section 21E of the Exchange Act. Actual results may d projected information due to changes in the underlying assumptions. See FORWA INFORMATION). For additional information regarding STP and the accounting for the decommissioning NOTE L
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES AND REGULATORY PROCEEDINGS. ENVIRONMENTAL MATTERS The operations of the CSW System, like those of other utility systems, gener disposal of substances subject to environmental laws i d regardless of fault or the legality of past disposal activities. PRPs include owner sites and transporters and/or generators of hazardous substances. Many states hav ll td one PRP can be held responsible for the entire cost of a cleanup. Usually, however, clean among PRPs. The U.S. Electric Operating Companies are subject to various pending claims SW believes that under federal or state remediallaws for investigating and cleaning up contaminated prop CSW's resolution of these claims, individually or in the aggregate, will not have a material adv 20
results of operations or financial condition. Although the reasons for this expectation differ from site to site, factors that are the basis for the expectation for specific sites include the volume and/or type of waste allegedly contributed by the U.S. Electric Operating Company, the estimated amount of costs allocated to the U.S. Electric Operating Company and the participation of other parties (The foregoing statemen's constitute forward looking statements within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from l such projected information due to changes in the underlying assumptions. See FORWARD LOOKING l INFORMATION). See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for additional discussion regarding environmental matters. l The EPA recently promulgated revised, more stringent ambient air quality standards for ozone and particulates. While these standards do not mandate emission levels for facilities such as electricity generating power plants, they may result in more areas being designated as non-attainment for these two pollutants. States will be required to develop strategies to achieve compliance in these areas, strategies that may include lower l emission levels for electricity generating power plants, possibly including facilities within the CSW System. The l impact, if any, on CSW or the U.S. Electric Operating Companies cannot yet be determined, but the impact could l be significant. l At the Kyoto Conference on Olobal Warming held in December 1997, U.S. representatives agreed to a treaty which could require new limitations on " greenhouse gases" from power plants. CSW and the U.S. Electric l Operating companies could be affected if this treaty is approved by the United States Congress in its present form. The impact, if any, on CSW or the U.S. Electric Operating Companies cannot yet be determined, but the impact l could be significant. RISK MANAGEMENT In October 1997, CSW's board of directors adopted a risk management resolution authorizing CSW to engage in currency, interest rate and energy spot and forward transactions and related derivative transactions on behalf of CSW with foreign and domestic parties as deemed appropriate by executive officers of CSW. The risk management program is necessary to meet the growing demands of CSW's customers for competitive prices and price stability, to enable CSW to compete in a deregulated power industry, to manage the risks associated with domestic and foreign investments and to take advantage of strategic investment opportunities. I The U.S. Electric Operating Companies experience commodity price exposures related to the purchase of fuel supplies for the generation of electricity and for the purchase of power and energy from other generation sources. Contracts that provide for the future delivery of these commodities can be considered forward contracts which contain pricing and/or volume terms designed to stabilize the cost of the commodity. Consequently, the U.S. Electric Operating Companies manage their price exposure for the benefit of customers by balancing their commodity purchases through a combination oflong-term and short-term (spot-market) agreements. In addition, SEEBOARD has entered into contracts for differences to reduce exposure to fluctuations in the price of l electricity purchased from the United Kingdom's electricity power pool. This pool was established at l privatization of the United Kingdom's electric industry for the bulk trading of electricity between generators and suppliers. At December 31,1997, the gross value of such contracts for differences amounted to not more than 80% of any year's expected power purchases. CSW has, at times, been exposed to currency and interest rate risks which reflect the floating achange i rate that exists between the U.S. dollar and the British pound since its purchase of SEEBOARD in 199: CSW has utilized certain risk management tools to manage adverse changes in exchange rates and to facilitate fmancing transactions resulting from CSW's acquisition of SEEBOARD. At the end of 1997, CSW had positions in two cross currency swap contracts. The following table presents information relating to these contracts. The market 21 1
value represents the foreign exchange / interest rate terms inherent in the cross currcncy sw pricing. CSW expects to hold these contracts to maturity. At current exchange rates, this l long-term debt on the balance sheet at a carrying value of approximately $425 million. R Expected Expected Cash Cash Inflows Outflows Contract Maturity Date (Maturity Value) (Market Value) Cross currency swap August 1,2001 $200 million $216.5 million Cross currency swap August I,2006 $200 million $226.8 million OTHER MATTERS Year 2000 In 1996, a system-wide program to prepare CSW's computer systems and applications for the yea was initiated. CSW expects to incur internal staff costs as we'.1 as consulting and other expenses related to infrastmeture and facilities enhancements necessary to prepare the systems for the year 2000. Testing and conversion is expected to cost between $20 million and $21 million over the next two years including both domestic and foreign operations. A significant portion of these costs is likely to be covered through the redeployment of existing resources. The major applications which pose the greatest risk for CSW if implementation is not successful are the transmission and distribution automation system; the time in use and recorder metering system for commercial and industrial customers; and the power billing system. The potential problems related to these systems are electric service interruptions to customers, interrupted revenue data gathering and poor customer relations resulting from delayed billing, respectively. Costs related to the year 2000 program will be expensed as incurred. Adoption ofRights Plan In September 1997, CSW's board of directors adopted a Rights Plan, subject to SEC approval under the Holding Company Act. SEC approval was received in December 1997, and on December 22,1997, CSW executed the Rights Plan which had been modified to permit the AEP Merger. The Rights Plan was initially adopted and ultimately executed as part of the fiduciary responsibility of CSW's board of directors and was not 1 adopted because of any takeover offer or threat. 'Ihe intent of the Ryhts Plan is to assure fair and equal treatment for all of CSW's stockholders in the event of a hostile takeover attempt and to encourage a potential acquirer to negotiate with CSW's board of directors before attempting a takeover to assure a fair price for all stockholders. On January 6,1998, CSW made a dividend distribution of one right for each outstanding share ofits common stock. Each right initially entitles the holder to buy one-tenth of one share of CSW Common for $50. Prior to the date upon which the rights become exercisable under the Rights Plan, CSW's outstanding stock ~ certificates will represent both the shares of common stock and the rights, and the rights will trade only together s L. with the shares. i Under the Rights Plan, a " triggering event" would occur ten days after a person or group acquires or announces a tender or exchange offer to acquire fifteen percent or more of CSW's outstanding common stock. Upon such a " triggering event," the rights would become exercisable and trade independently of CSW's common stock. After a person or group acquires fifteen percent or more of CSW's outstanding common stock, each right (except those held by such acquiring person or group, whose rights would become void), entitles the holder to purchase, at the exercise price, CSW common shares having a current market value of two times the exercise price. If CSW was acquired in a merger or other business combination, each right would entitle the holder to purchase, at the exercise price, common stock of the acquirer having a current market value of two times the exercise price. In either case, after a triggedng event occurs but before an acquiring person becomes the owner of 22
at least fifty percent of CSW's outstanding common stock, CSW's board of directors may direct the exchange of one share of CSW's common stock for cach right then outstanding and not exercised. The Rights Plan exempts the AEP Merger transaction. Therefore, neither the execution of the AEP merger agreement nor consummation of the AEP Merger caused, or will cause a " triggering event" or the rights to become exercisable. See PROPOSED i. AEP MERGER for additional information on the proposed merger. CSW's board of directors may redeem the rights for a price of one cent per right prior to the earlier of the rights becoming exercisable or the expiration of the Rights Plan. The rights will expire ten years from the effective date unless they are earlier redeemed or exchanged by CSW. NEW ACCOUNTING STANDARDS SFAS No.12S SFAS No.125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment ofliabilities using a fmancial-components approach that focuses on control. An entity recognizes assets it controls and derecognizes assets when control has been surrendered and liabilities when they I have been extinguished. A transfer of assets in which control of the asset is surrendered is recorded as a sale. Control of an asset is surrendered only when and if certain conditions are met. Likewise, a liability is only extinguished under certain dist;nct conditions. CSW adcpted SFAS No.125 effective January 1,1997. Adoption of this standard has not had a n aterial adverse effect on CSW's results of operations or financial condition. SFAS No.128 On March 3,1997, the FASB issued SFAS No.128, effective for financial statements for periods ending after December 15,1997. SFAS No.128 will simplify the computation of earnings per share for many companies by eliminating calculation provisions which were required by the prior earnings per share standard, Accounting Principles Board Opinion No.15. CSW adopted SFAS No.128 effective December 31,1997. Adoption of SFAS No.128 did not have a material effect on its calculation of earnings per share. SFAS No.130 This statement is effective for fiscal years beginning after December 15,1997 The statement adds the requirement to present comprehensive income and all ofits components (revenues, expenses, gains and losses) in a full set of financial statements, and this new statement must be displayed with the same prominence given other financial statements. Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Though effective at the beginning of 1998, comprehensive income is not required to be disclosed in interim statements in the year adopted. CSW will adopt this statement beginning with 1998 year-end financial lfj statements. SFAS No.131 This statement is effective for fiscal years beginning after December 15,1997, and requires that certain information about operating segments be presented in complete sets of financial statements. It also requires the l presentation ofinformation regarding products and services, geographic areas in which the entity operafes, and concentrations of major customers. l The objective of this statement is to provide information about the different types of business activities in j which an entity engages and the different economic environments in which it operates to help users of fmancial statements better understand an entity's performance and prospects for future cash flows and make more informed I judgments about the enterprise as a whole. l 23 1
An operating segment is a component of an enterprise that eams reven f ial information is results are regularly reviewed by the chief decision maker, and for which discrete inanci 1 available. Separate infomtation is required to be presente i i ith 1998 year-end fmancial statements. RESULTS OF OPERATIONS COMPARISON OF THE YEARS ENDED DECEMBER 31,1997 AND 1996 CSW's earnings decreased to $153 million in 1997 from $429 million in 1996 The primary reason for the lower earnings common stock equity was 4.2% in 1997 compared to 12.1% in 1996. United Kingdom windfall profits tax. and retum on average common stock equity was the accrual of the one-time ll The impact of CSW's final settlement oflitigation with t d ULATORY PROCEEDINGS for the CPL 1997 Final Order. See NOTE 2. LITIGATION AND REG L 1997 Final Order and the additional information on CSW's final settlement oflitigatio li f ti n i on the windfall profits tax. Further reducing earnings for 199 ii f df d tax balances of portion of the U.S. Electric Operating Companies' preferred stock and an adjustm h $15 million resulting from a 2% reduction in the Unite i listed below (in millions). Earnings impact $(176) United KingdomWindfall Profits Tax (48) CPL 1997 Final Order (48) Asset Write-offs and Reserves (27) PSO 1997 Rate Settlement Agreement (23) Settlement of Litigation with El Paso 10 Gain on the Reacquisition of Preferred Stock 15 United Kingdom Deferred Tax Adjustment k in In addition, several items that occurred in 1996 were not present in 1997 CSW also 1996, CSW realized $12 million of earnings from Transok's operations. As a h U.S. Electric Operating recorded an after-tax gain of approximately $120 million i i h INUED OPERATIONS for second quarter of 1996 which decreased earnings. See NOTE 14. DISCONT additional information concerning the effects of the sale of Transok. h Operating revenues increased $113 million in 1997 compared to 1 in the following table. 24
1997 REVENUE VARIANCES Increase (decrease)from pruory2ar, millions U.S. Electric CPL and WrU Transmission Revenues $56 KWH Sales, Growth and Usage 41 Fuel Revenue 23 CPL 1996 Fuel Agreement 18 Sales for Resale 12 CPL 1997 Final Order (45) KWH Sales, Weather-Related (37) PSO 1997 Rate Settlement Agreement (32) Other Electric 37 73 United Kingdom 22 Other Diversified 18 $113 U.S. Electric revenues increased $73 million, or 2%, in 1997 compared to 1996. Retail MWH sales increased 2.5% with increases in all customer classes. U.S. Electric revenues increased primarily due to higher MWH sales resulting from increased customer usage and new transmission access revenues at CPL and WTU in accordance with FERC Order No. 888 and the Texas Commission's mie regarding transmission access and pricing. The new transmission revenues had no material effect on earnings because they were almost completely offset by a corresponding amount of transmission expense. Revenues increased due in part to the absence in 1997 of the revenue decrease in 1996 from the CPL 1996 Fuel Agreement. An increase in fuel revenues, as discussed in fuel expense below, also contributed to the higher revenues. i'ania!!y offsetting the revenue increase was a decrease ia weather-related demand due to milder weather in the first nine months of 1997. Further offsetting the increase in U.S. Electric revenues was the revenue decrease from both the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional info.mation on the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. United Kingdom revenues increased $22 million, or 1%, in 1997 compared to 1996 due primarily to the effect of the exchange rate movement between the British pound and the U.S. dollar, partially offset by a reduction in the fossil fuel levy collected on behalf of the United Kingdom. Other diversified revenues increased $ 18 million, or 31%, in 1997 compared to 1996 due primarily to increased revenues from CSW International, C3 Communications, CSW Credit and EnerShop. During 1997 and 1996 the U.S. Electric Operating Companies generated 93% of their electric energy requirements. U.S. Electric fuel expense increased $26 million to $1.3 billion in 1997 compared to 1996 due primarily to an increase in natural gas fuel costs to $2.67 per MMbtu from $2.50 per MMbtu. Also contributing to the increase was the absence in 1997 of a one-time reduction to fuel expense of pproximately $9 million recorded in the first quarter of 1996 related to the CPL 1996 Fuel Agreement. Partially offsetting these increases in fuel expense was the effect oflower-cost coal. United Kingdom cost of sales decreased approxirnately $40 million to $1.3 billion in 1997 compared to 1996 due primarily to a reduction in the fossil fuel levy collected on behalf of the United Kingdom government, which was partially offset by the effect of the exchange rate movement between the British pound and the U.S. dollar. Other operating expense increased $196 million to $981 million in 1997 compared to 1996 due in part to the absence in 1997 of a $27 million pension adjustment recorded in the second quarter of 1996 at SEEBOARD which decreased pension expense. The effect of the exchange rate movement between the British pound and U.S. l dollar also contributed to the increase in other operating expense of SEEBOARD U.S.A. In addition, approximately $56 million in new transmission access expense was recorded at CPL and WTU in 1997 related to FERC Order No. 888 and the Texas Commission rules regarding transmission access and pricing. Also increasing other operating expense were asset write-offs of approximately $57 million including certain regulatory assets, capitalized demand side management assets and obsolete inventories. In addition, the settlement of 25 i
~ ~ h litigation with El Paso increased other operating expense $35 million. Furth illion impact of the PSO operating expense was the $12 million impact of the CPL f t Partially additionalinformation on the CPL 1997 Final Order and the PSO 1997 Rate Settleme 6 l d to inventory write-offs of offsetting these increases were the absence in 1997 of exp ti nse was reduced associated with restructuring costs. Also partially offsetting the increase in other opera ng ex d i l yees. See pension expense in 1997 resulting from changes made to the pension plan for C NOTE 5 BENEFIT PLANS for additionalinformation related to the changes in the Depreciation and amortization expense increased $33 million, or 7%, in 1 l f implementation of depreciation and amortization in accordance with the CP that order, the increase in depreciation due to the accelerated recovery of ECO d $17 million, or 10%, in 1997 the implementation oflower depreciation rates. Taxes other than income increase 997 of a CPL Texas compared to 1996 due primarily to higher property taxes at li f ma primarily to lower pre-tax income and a $15 million adjustment to deferred in 2% reduction in the United Kingdom corporation tax rate. Other income and deductions increased to a gain of $32 million in 1997 fro f 1996 due primarily to the absence in 1997 of charges for certain investments re CSW 1996 of approximately $84 million, after tax, at the U.S. Electric Operating Com I Energy. Long-term interest expense increased $8 million, or 2%, m 1997 due prim h it t xpense resulting from a fourth quarter 1996 debt issuance by CSW Energy. Short-term and ot decreased $8 million to $86 million m l997 when comp 7 l d f d million in 1997, which was partially ofTset by lower dividend requirements resulting fro T PREFERRED stock reacquisitions at the U.S. Electric Operating Companies. See NOTE 10. TRUS SECURITIES for additional information on the new securities. COMPARISON OF THE YEARS ENDED DECEMBER 31,1996 AND 1995 CSW's eamings increased to $429 million in 1996 compared to $402 millio increased, earnings per share decreased from $2.10 in 1995 to $2.07 in 1 12.1% in 1996 compared shares of common stock during 1996. The return on average common stock equity was l i in 1996 and to 13.1% in 1995. U.S. Electric operations contributed approximately 57% of tota earn ngs i i mostly approximately 105% of total earnings in 1995. The lower p dh di g of EBOARD U.S.A. charges at each of the U.S. Electric Operating Companies i i 1996 compared to only a partial quarter in 1995. Earnings increased in 1996 compared to 1995 due primarily to the gain h i tion of the additional camings from SEEBOARD U.S.A., the absence of charges in 1996 related to t ib i to the proposed El Paso Merger in June 1995 and the effect of h h b the U.S. Electric related demand. Partially ofTsetting thest mreases in earnings were the recording of c a Operating Companies in June 1996 associated with certain investments CPL 1996 Fuel and other project development costs for CSW Energ 26
~. -~. made in 1995. Additional information related to the reserves recorded in June 1996 is discussed below. For further discussion of CPL's regulatory activities, see NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. Increased depreciation and amortization, increased other operating expense, increased interest expense and the loss of Mirror CWIP earnings also reduced the increase in earnings. Significant items impacting 1996 earnings are listed below (in millions). Eamings Impact Gain on the Sale of Transok $120 Charges for Certain Investments (104) CPL Pending Rite Case Write-offs (8). CPL 1996 Fuel Agreement (7) Revenues increased approximately $2.0 billion or 64% in 1996 when compared to 1995. The revenue variances are shown in the following table. 1996 REVENUE VARIANCES Increase (decrease)fmm prioryear, millions U.S. Electric Fuel Revenues $181 CPL 1995 Agreement 112 KWH Sales, Growth and Usage 83 2~/ KWH Sales, Weather-Related 21 WTU 1995 Stipulation and Agreement 21 Other Electric (35) CPL 1996 Fuel Agreement (18) 365 United Kingdom 1,640 Other Diversified 7- $2,012 U.S. Electric revenues increased $365 million or 13% in 1996 compared to 1995. Total U.S. Electric KWH sales increased 4.2%, with increases in sales among all retail customer classes. Customer growth, increased usage and weather-related demand contributed to the increased revenues along with higher fuel revenues as discussed below. Also contributing to the increase was the absence in 1996 of reserves for refunds recorded in 1995 in accordance with the CPL 1995 Agreement and the WTU 1995 Stipulation and Agreement. KWH sales to retail customers increased in 1996 as a result of customer growth, increased customer usage and weather-related demand. CSW's operating revenues also include approximately $1.8 billion from a full year of revenues from l:Q SEEBOARD U.S.A. for 1996 compared to $208 million of revenues for a partial quarter of operations in 1995. Other diversified revenues increased 13% to $59 million in 1996 as compared to $52 million in 1995 due ~ pnmarily to increased revenues from CSW Energy projects, increased factoring revenues at CSW Credit and new l revenues from C3 Communications and EnerShop. l During 1996 and 1995 the U.S. Electric Operating Companies generated 93% and 95%, respectively, of their electric energy requirements. U.S. Electric fuel expense increased 15% to approximately $1.1 billion in 1996 at the U.S. Electric Operating Companies due primarily to an increase in the average unit cost of fuel to $1.81 per MMbtu in 1996 from $1.58 per MMbtu in 1995, reflecting higher natural gas prices. Partially offsetting this increase was a reduction in the delivered cost of coal at the U.S. Electric Operating Companies resulting from lower coal transportation costs and lower spot market coal prices. U.S. Electric purchased power i i increased $36 million to $77 million in 1996 due primarily to increased economy energy purchases at a higher cost per MWH. CSW's operating expenses include $1.3 billion for cost of sales from a full year of United 27
Kingdom operations in 1996 compared to $150 million recorded in United Kingdom c quarter of operations in 1995. Other operating expenses in 1996 increased $228 million, or 41%, from 19% due prima addition in 1996 of a full year of operating expenses from SEEBOARD U.S.A. as well as th reduced expenses in 1995 related to $28 million of regulatory assets established for previou restructuring charges and the reversal of rate case costs pursuant to the CPL 1995 Agre to the increase was the recognition in 1995 of a $13 million regulatcry asset for previously charges in accordance with the WTU 1995 Stipulation and Agreement. Another factor other operating expense was a CSW restructuring charge recorded in 1996. A S42 millio merger and acquisition costs was recorded in 1995 from the terminated El Paso merger. Maint decreased $5 million to $150 million in 1996 from $155 million in 1995 due primarily to a $10 million de in maintenance expense at CPL resulting from lower production and distribution maintenance costs. offsetting this decrease was a $7 million increase in maintenance expense due to a write-down o distribution inventories at the U.S. Electric Operating Companies in 1996. Depreciation and amortization increased 31% to $464 million in 1996 from $353 million in 19 primarily to the addition of depreciable fixed assets and the goodwill amortization related to t SEEBOARD, as well as increases in depreciable fixed assets at the U.S. Electric Operating Companies. contributing to the increase were the amortization of the regulatory assets established in 1995 assoc CPL 1995 Agreement and the WTU 1995 Stipulation and Agreement along with accelerated amortizat deferred Oklaunion plant costs in accordance with the WTU 1995 Stipulation and Agreement. Taxes, other than income increased 10% to $178 million in 1996 from $162 million in 1995. The increase was due primarily to lower 1995 ad valorem taxes resulting from revisions of prior year estimates recorded in 1995. Also contributing to the increase were higher ad valorem and state franchise taxes at SWEPCO in 1996. The higher ad valorem taxes resulted primarily from a higher state assessed value in Louisiana and the addition of the HVdc tie in Texas. The state franchise taxes increased due mainly to higher federal taxable income associated with Texas franchise tax. Income taxes increased $13 during 1996 compared to 1995. During 1995, income taxes were lower primarily due to adjustments relat l prior year taxes, as well as the tax effect from both the CPL 1995 Agreement and the WTU 1995 Agreement. Income taxes of $46 million were recorded for SEEBOARD U.S.A. from a full year of op l 1996 compared to S6 million for a partial quarter of operations in 1995. l Other income and deductions decreased $160 million in 1996 when compared to 1995 due pnmarily to charges recorded in June 1996 associated with certain investments for plant sites, engineering studies reserves for the U.S. Electric Operating Companies. See the table below for additional detail on these charges. Other income and deductions was also lower as a result of certain write-offs recorded by CSW Energy. In addition, CPL's Mirror CWIP liability, which has now been fully amortized, contributed $41 million to inco 1995. Pre. tax effect Income tax Net income on income benefit effect (thousands) } l CFL $(21,509) $5,940 5(15,569) PSD (51,109) 15,401 (35,708) STEPCO (29,700) 7,885 (21,815) RTU (14,949) 4.003 (10,946) 5(l17,267) 533,229 5(84,038) Interest on long-term debt increased $102 million or 46% during 1996 compared to 1995 due to higher levels oflong-term debt outstanding related to the SEEBOARD acquisition. CSW's 1996 embedded cost oflong 28 l 1
-.~.. -. - -.. ~.... ~ --.--.- l term debt was unchanged from 1995 at 7.2%. Interest on short-terra debt decreased $7 million or 7% in 1996 compared to 1995 due to lower interest rates and lower levels of short-term debt outstanding. CSW used a portion of the proceeds from the sale of Transok to reduce short-term debt. The 5120 million gain on the sale of Transok as well as Transok's 1996 operations are shown separately in discontinued operations. Transok's earnings for the first five months of 1996 were $12 million compared to $25 million from a full year of operations for 1995. See NOTE 15. TRANSOK DISCONTINUED OPERATIONS for information, including comparative statements ofincome, related to the sale of Transok. t l 3,. - I ) i t i t i.. ~ ?..:e b .ek l 1 29 i i i
N Consolidated Statements ofIncome CentralandSouth West Corporation For the Years Ended C- =ber 31, 1997 1996 1995 ($ in millions, except share amounts) Operating Revenues $ 3,321 S 3,248 5 2,883 U.S. Electric 1,870 1,848 208 United Kingdom 77 59._ 52_ Other diversifica 5.268 5,155 3,143 Operating Expenses and Taxes 1,177 1,151 1,004 U.S. Electric fuel 89 77 41 . U.S. Electric purchased power 1,291 1,331 158 United Kingdom cost of sales 981 785 557 Other operating 152 150 155 Maintenance 497 464 353 Depreciation and amertization 195 178 162 Taxes, other than income 151-224 92 Income taxes 4,533 _ 4,360 2,522 _735 795_ 621 OperatingIncome Other Income and Deductions 41 Mirror CWIP liability amortization (3) (117) U.S. Electric charges for investments and plant development costs 29 16 56 2~ 7 Other 6 40 2 Non-operating income taxes 32 (61) 99 767 734 720 Income Before Interest and Other Charges Interest and Other Charges 333 325 223 Interest onlong term debt 17 Distributions on Trust Preferred Securiues 86 - 94 101 Interest on short-term debt nr.d other 12 18 19 Preferred dividend requirements of subsidiaries (10) Oain on reacquired preferred stock 438_ 437 343 329 297 377 Income from Continuing Operations Discontinued Operations Income from discontinued operations, net of tax of $6 12 25 for 1996 and $13 for 1995 120 Osin on the sale of discontinued operations, net of tax of $72 132 25 329 429 402 Income Before Extraordinary item t Extraordinary Item - United Kingdom windfall pro 6ts tax (176) 3 153 429 402 NetIncome for Common Stock 212.1 207.5 191.7 Average Common Shares Outstanding Basic and Diluted EPS from Continuing Operations $1.55 St.43 31.97 i 0.64 0.13 Basic and Diluted EPS from Discontinued Operations 0 Basic and Diluted EPS before Extraordinary Item 1.55 2.07 2.10 Basic and Diluted EPS from Extraordinary Item (0.83) $0.72 32.07 32.10 Basic and Diluted EPS l S t.74 $1.74 31.72 l Dividends Paid per Share ofCommon Stock i The accompanying notes to consolidated financial statements are an integral part of these statements. I i I 30 i
.~ ~.... N CcIsolidated Statements of Stockholders' Equity j CentralandSouth West Corporation For the Years Ended December 31, 1997 1996 1995 (millions) Common Stock at Beginning of Year S 740 S 675' S 667 Sale of Common Stock 3 65 8 Common Stock at End of Year 743 740 675 Paid-in Capital at Beginning of Year 1,022 610 561 Sale of Common Stock 17 412 49 Paid-in Capital at End of Year 1,039 1,022 610 Retained Earnings at Beginning of Year 1,963 1,893 1,824 Net income for common stock 153 429 402 Deduct: Conunon stock dividends 369 358 329 Deduct: Other 1 1 4 Retained Earnings at End of Year 1,746 1,963 1,893 Foreign Currency Translation and Other at Beginning of Year 77 ..~. Net Change (49) 77 Foreign Cuircrey Translation and Other at End of Year 28 77 Total Stockholders' Equity 5 3,556 $ 3,802 S 3,178 i i The accompanying notes to consolidated financial statements are an integral part of these statements. 31
F N Consolidated Balance Sheets CentralandSouth West Corporation As of December 31, 1997 1996 (millions) ASSETS Fixed Assets Electric S 5,824 S 5,830 Production 1,558 1,538 .l Transmission 4,453 %,237 Distribution 1,381 1,318 Generaj 184 230 Construction workin progress 196 184 Nuclear fuel 13,596 13,337 250 84 Other diversified 13,846 13,421 5,218 4,940 Less - Accumulated depreciation and amortization 8,628 8,481 Current Assets 75 254 Cash and temporary cash investments 916 837 Accounts receivable 172 185 Materials and supplies, at average cost 65 102 Electric utility fuel inventory 84 46 Under-recovered fuel costs 78 85 Prepayments and other 1,390 1,509__ Deferred Charges and Other Assets 503 509 Deferred plant costs 285 299 Mirror CWIP asset 448 371 Other non-utility investments 103 Securities available for sale 329 236 Income tax related regulatory assets, net 1,428 1,525 Goodwill 337 402 Other 3,433 3,342 13,451 13,332 4 The accompanying notes to consolidated financial statements are an integral part of these statements. 32
D Consolidated Balance Sheets CentralandSouth West Corporation As of December 31, 1997 1996 CAPITALIZATION AND LIABILITIES (millions) Capitalization Common stock: $3.50 par value Authorized shares: 350.0 million shares Issued and outstanding: 212.2 million shares in 1997 and 211.5 million shares in 1996 S 743 740 Paid-in capital 1,039 1,022 Retained earnings 1,746 1,963 Foreign currency translation and other 28 77 3,556 45% 3,802 47% Preferred Stock Not subject to mandatory redemption 176 292 Subject to mandatory redemption 26 33 202 2% 325 4% Certain Subsidiary-obligated, mandatorily redeemable preferred securities of subsidiary trusts holding solely Junior Subordinated Debentures of such Subsidiaries 335 4% 7 Long-term debt 3,898 49% 4,024 49% Total Capitalization 7,991 100 % 8,151 100 % Current Liabilities Long-term debt and preferred stock due within twelve months 32 204 Short-term debt 721 364 Short-term debt - CSW Credit, Inc. 636 579 Loan notes 56 76 Accounts payable 558 630 Accrued taxes 171 324 Accrued interest 87 82 Other 238 166 2,499 2,425 Deferred Credits Accumulated deferred income taxes 2,432 2,272 Investment tax credits 278 291 Other 251 193 2,961 2,756 13,451 S 13,332 The accompanying notes to consolidated financial statements are an integral part of these statements. 33
./h Consolidated Statements of Cash Flows Central andSouth West Corporation For the Years Ended December 31, 1997 1996 1995 (millions) OPERATING ACTIVITIES 153 429 402 Net income for common stock 529 521 425 i Non-cash Items and Adjustments Depreciation and amortization 110 62 (11) i Deferred income taxes and investment tax credits 12 18 19 ' Preferred stock dividends (10) Gain on reacquired preferred stock (41) Mirror CWIP liability amortization 53 147 Charges for investments and assets (192) Gain on ssle of subsidiary Changes in Assets and Liebilities (140) (86) (36) Accounts receivable 45 23 (32) Accounts payable (153) (14) 25 Accrued taxes (37) (89) 76 Fuel recovery 164 56 (28) Other 726 875 799 INVESTING ACTIVITIES (507) ($21) (474) Construction expenditures (1,394) (421) Acquisitions expenditures (382) (124) 109 CSW Energy /CSW International projects 99 Sale of National Grid assets Cash proceeds from sale of subsidiary 690 (15) (36) (26) Other (904) (1,286) (812) FINANCING ACTIVITIES 20 477 57 Common stock sold Proceeds from issuance oflong-term debt 437 456 350 731 SEEBOARD acquisition financing Reacquisition / Maturity oflong-term debt (253) (239) (363) Redemption of preferred stock (114) (1) (1) 323 Trust Preferred Securites Sold Other financing activities (3) 67 414 (395) (226) Change in short-term debt (383) (376) (348[ Payment of dividends 4 320 306_ Effect of exchange rate changes on cash and cash equivalents (5) (56)_ Net Change in Cash and Cash Equivalents (179) (147) 293 254 401 108 Cash and Cash Equivalents at Beginning of Year S 75 254__ 401 Cash and Cash Equivalents at End of Year 4 i. SUPPLEMENTARY INFORMATION 5 396 356 301 Interest paid less amounts capitalized 5 301 196 77 Income taxes paid The accompanying notes to consolidated financial statements are an integral part of these statements. 34
~-. l NOTES TO CONSOLIDATED FINANCIAL STATEMENTS l 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. l CSW's U.S. Electric Operating Companies are also regulated by the SEC under the Holding Company Act. The principal business of CSW's U.S. Electric Operating Companies is the generation, transmission, and distribution of electric power and energy. These companies are subject to regulation by the FERC under the Federal Power Act and follow the Uniform System of Accounts prescribed by the FERC. They are subject to further regulation with regard to rates and other matters by state regulatory commissions as follows: CPL and l WTU are subject to the Texas Commission; PSO is subject to the Oklahoma Commission; and SWEPCO is subject to the Arkansas Commission, Louisiana Commission, Oklahoma Commission and Texas Commission. The principal business of CSW's United Kingdom electric operating subsidiary, SEEBOARD, is the distribution and supply of electric power and energy in Southeast England. SEEBOARD is subject to rate regulation by the DGES. In addition to electric utility operations, CSW has subsidiaries involved in a variety of business actisities. CSW Energy and CSW Intemational pursue cogeneration and other energy-related ventures; CSW Credit factors the accounts receivable of affiliated and non-affiliated companies; C3 Communications pursues telecommunications projects; CSW Leasing has investments in leveraged leases; EnerShop offers energy-management services and CSW Energy Services will pursue retail energy markets outside of CSW's traditional service territory. The more significant accounting policies of the CSW System are summarized below. 1 Principles of Consolidation The consolidated financial statements include the accounts of CSW and its subsidiary companies. 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 assets and liabilities along with disclosure of contingent liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2 Fixed Assets and Depreciation U.S. Electric fixed assets are stated at the original cost of construction, which includes the cost of contracted services, direct labor, materials, overhead items and allowances for borrowed and equity funds used during construction. SEEBOARD's fixed assets are stated at their original fair market value which existed on the date of acquisition plus the original cost of property acquired or constructed since the acquisition, less disposals. Provisions for depreciation of plant are computed using the straight-line method, generally at indisidual rates applied to the various classes of depreciable property. CSW's annual average consolidated composite rates were 3.4% for the years 1995-1997. l CPL Nuclear Decommissioning ofSIP 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 35
decontamination activities occur as scan as possible after the end of plant operations. Co cleaned and removed to a permanent disposal location, and the site is generally returned to its pre-CPL's decommissioning costs are accrued and funded to an external trust over the expected s of the STP units. The existing NRC operating licenses will allow the operation of STP Unit I until Unit 2 until 2028. The accrual for decommissioning costs is an annual level cost based on the cost to decommission STP, including escalations for expected inflation to the expected time o and is net of expected eamings on the trust fund. CPL's portion of the costs of decommissioning STP were estimated to be $258 million in 1 based on a site specific study completed in 1995. CPL is recovering these decommissioning cos u based on the service life of STP at a rate of $8.2 million per year. The $8.2 million annual cost of decommissioning is reflected on the income statement in other operating expense. Due to the f are deposited with a trustee under the terms of an irrevocable trust and because of the o FASB project, as described below, management believes it inappropriate to reflect the fmancial statements. At December 31,1997, the trust balance was $45.7 million. The FASB is currently reviewing the utility industry's accounting treatment of nuclear and certa plant decommissioning costs. An exposure draft regarding this related to decommissioning and other environmental remediation costs. It is not known at this time w pronouncement would result from this project. Electric Revenues and Fuel The U.S. Electric Operating Companies record revenues based upon cycle-billings. Electric servic I provided subsequent to billing dates through the end of each calendar month are accrued unbilled revenues in accordance with industry standards. CPL, SWEPCO and WTU recover retail fuel costs in Texas as a fixed component of base over-recoveries of fuel are payable to customers and under-recoveries may be billed to customers Commission approval. The cost of fuel is charged to expense as incurred, with resulting fue under-recoveries recorded as regulatory assets and liabilities. PSO recovers fuel costs in Oklaho SWEPCO recovers fuel costs in Arkansas and Louisiana through automatic fuel recovery mec application of these mechanisms varies byjurisdiction. See NOTE 2. LITIGATION A PROCEEDINGS, for further information about fuel recovery. CPL, PSO and WTU recover fuel costs applicable to wholesale customers, which are re FERC, through an automatic fuel adjustment clause. SWEPCO recovers fuel costs applicab customers through formula rates. CPL amortizes direct nuclear fuel costs to fuel expense on the basis of a ratio of the estimated en used in the core to the energy expected to be derived from such fuel assembly over its life in to fuel amortization, CPL also records nuclear fuel expense as a result of other items, including disposal fees assessed on the basis of net MWHs sold from STP and DOE special asses decontamination and decommissioning of the enrichment facilities on the basis of prior usage of services. Accounts Receivable CSW Credit, as a wholly owned subsidiary of CSW, purchases, without recourse, t i d accounts receivable of the U.S. Electric Operating Companies, certain non-affiliated public utility c prior to its sale by CSW in June 1996, Transok. f 36
. ~ .. ~. -. - -. _ ~. ~ . -.. -. -. ~. - Regulatory Assets and Liabilities For their regulated activities, the U.S. Electric Operating Companies follow SFAS No. 71, which defines the criteria for establishing regulatory assets and regulatory liabilities. Regulatory assets represent probable future revenue to the company associated with certain costs which will be recovered from customers throu ratemaking process. Regulatory liabilities represent probable future refunds to customers. The regulatory are currently being recovered in rates or are probable of being recovered in rates. The unamortized asset balances l l are included in the table below. 1997 1996 j A: of December 31, (millions) Regulatory Assets Deferred plant costs (1) 5503 $509 Mirror CWIP asset 285 299 Income tax related regulatory assets, net 329 236 Deferred restructuring and rate case costs (2) 36 46 Deferred storm costs (3) 2 OPEBs 3 3 Demand side management costs 10 15 Under-recovered fuel costs (4) 84 47 i Loss on reacquired debt 166 180 - Fuel settlement (5) 16 17 Other -8 13 ~s $1,440 $1,367 ~* Regulatory Liabilities Refunds due customers $64 $43 Oma 1 2 565 545 (1) $19 in 1997 and $22 in 1996 camiag no return, amortized through 2002 (2) $24 in 1997 and $31 in 1996 earning no return, amortized by the era af 2000; $12 in 1997 and $15 in 199 retum, amortized through 2002 j - (3) Item earning no return, amortized by the end of 1997 i (4) $15 in 1997 and $3 in 1996 earning no return, amortized over 12 month period, recalculated semiannual (5) Item carning no return, amortized by the end of 2006 In accordance with orders of the Texas Commission, CPL and WTU deferred carrying costs, as well costs, depreciation and tax costs incurred for STP and Oklaunion, respectively. These deferrals were for the period beginning on the date when the plants began commercial operation until the date the plants were inc y l rate base. CPL is amortizing and recovering these deferred costs through rates over the life of the plant. W i began amortizing and recovering such costs over a seven year period begmnmg January 1,1996. In accord with Texas Commission orders, CPL previously recorded a Mirror CWIP asset, which is being amortized ov [ life of STP. For further information regarding the deferred plant costs at CPL and WTU, reference is made to ) NOTE 2, LITIGATION AND REGULATORY PROCEEDINGS. For additionalinformation regarding regulatory accounting, reference is made to NEW ACCOUNTING STANDARDS and MD&A-RECENT DEVELOPMENTS AND TRENDS, Regulatory Accounting. SEEBOARDAcquisition The acquisition of SEEBOARD was accounted for as a purchase combination. An allocation of the purchase price has been performed and is reflected in the consolidated fmancial statements. The goodwill i amortized on a straight-line basis over 40 years. The unamortized balance of the SEEBOARD goodwill at December 31,1997 was $1.4 billion. CSW continually evaluates whether circumstances have occurred that j indicate the remaining useful life of goodwill may warrant revision or that the remaining balance of goodw not be recoverable. 37 l l
~ --~~ ld f Pursuant to a December i1,1995 distribution by SEEBOARD, CSW (UK National Grid Assets b 2 1996, SEEBOARD, received approximately 32.5 million shares of National Grid all of these shares were sold for approximately $99 million. i il The fmancial statements of SEEBOARD U.S.A., which are included in C Foreign Currency Translation d with SFAS No. 52. All statements, have been translated from British pounds to U t items b 31,1997 the current exchange are translated at the average exchange rate for the applicable period. At Decem er onth l rate was approximately f1.00=S t.65, and the average exchange rate for the twe ve m imately 31,1997 was approximately f1.00=S1.58. At December 31,1996 the curre 1996 was f1.00=S1.71, and the average exchange rate for the twelve month period e i d ended December 31,1995 h approximately f1.00=S1.56. The average exchange rate for the nvelve mont per o d d directly to Foreign currency was approximately I1.00=S1.58. All resulting translation adjustments are recor et ment fl translation and other on CSW's Consolidated Balance Sheets. Cash ow st f the changes in exchange i combination of average, historical and current exchange rates. The non-cash mpact o rates on cash and cash equivalents, resulting from the translation ofitems at t e h nges on cash and cash shown on CSW's Consolidated Statements of Cash Flows in Effect of exchange rate I equivalents. Cash equivalents are considered to be highly liquid instruments wi Statements of Cash Flows Accordingly, temporary cash investments are considered cash equivalents. h CSW has been exposed to currency and interest rate risks which refle Risk Management f SEEBOARD in 1995. CSW has exists between the U.S. dollar and the British pound since its purchase o futures and foreign utilized certain risk management tools, including cross currency swaps, foreign curren fi i currency options, to manage adverse changes in exchange rates and to facilitate n from CSW's acquisition of SEEBOARD. i f SEEBOARD has entered into contracts for differences to reduce exp l established at electricity purchased from the United Kingdom's electricity power paol. This poo wa ii bt en generators and privatization of the United Kingdom's electric industry for the bulk trading suppliers. ih h CSW accounts for these transactions as hedge transactions and an hhd transactions are settled. risk management tools are recognized in the financial s dNOTE
- 7. FINANCIAL INSTRUMENTS for additionalinformation.
CSW accounts for its investments in equity securities in accordance Securities Availablefor Sale l Unrealized holding investments have been designated as available for sale, and as a result are s l ti and other on CSW's gains and losses, net of related taxes, are included withi D b r 31,1997 is presented in the following table. 38
- - -. ~ - _~ _ Original Unrealized Holding Gains / Cost (l.osses) Fair Value (nullions) Securities available for sale $110 $5 $(12) $103 Accounting Change Effective January 1,1997, CPL and WTU began utilizing the LIFO method for the valuation of all fossil fuelinventories. Previously, CPL had used the weighted average cost method and WTU had used t!'e LIFO method for coal and the weighted average cost method for other fuel inventories. PSO utilizes the UFO method. SWEPCO continues to utilize the weighted average cost method pending approval of the Arkansas Commission to utilize the LIFO method. The change in accounting did not affect the results of operations due to the regulatory treatment of such costs. Reclassification Certain financial statement items for prior years have been reclassified to conform to the 1997 presentation. See NOTE 15. TRANSOK DISCONTINUED OPERATIONS for information related to the classification of Transok activities. 2. LITIGATION AND REGULATORY PROCEEDINGS Settlement ofLitigation Relatedto Termination ofElPaso Merger In May 1993, CSW entered into a merger agreement pursuant to which El Paso would have emerged from bankruptcy as a wholly owned subsidiary of CSW. In June 1995, following its notification that CSW was terminating the El Paso Merger Agreement, El Paso filed suit against CSW seeking a $25 million termmation fee from CSW, as well as, unspecified damages for various contract and tort claims. Subsequently, CSW filed suit against El Paso seeking a $25 million termination fee from El Paso and recovery of certain rate case expenses incurred by CSW on behalf of El Paso. The United States Bankruptcy Court for the Western District of Texas, Austin Division, consolidated the El Paso suit and the CSW suit into one adversary proceeding. On April 11,1997, the court issued an interim l order in which it ruled that CSW owed El Paso a $25 million termination fee and reserved judgment on certain disputed interest. 1 In July 1997, CSW and El Paso reached a settlement agreement that resolved all of the pending litigation. Under the terms of the settlement agreement, CSW and El Paso dismissed all pending claims in the litigation and CSW paid $35 million to El Paso, various ofits creditor groups under its plan of reorganization, and its l attomeys. CSW recorded a charge of $25 million in the first quarter of 1997 following the court's interim order l and recorded an additional charge of $10 million in the second quarter of 1997 to fully recognize the S35 million settlement amount. The bankruptcy court vacated the interim order and approved the settlement agreement. l Litigation Related to the Rights Plan andAEPMerger l Two lawsuits have been filed in Delaware state court seeking to enjoin the AEP Merger. CSW and each i ofits directors have been named as defendants in both cases. The first suit alleges that the Rights Plan, approved by the CSW Board of Directors on September 27,1997 and which became effective after SEC approval under the Holding Company Act on December 19,1997, constitutes a " poison pill" precluding acquisition offers and resulting in a heightened fiduciary duty on the part of the CSW Board of Directors to pursue an auction-type sales process to obtain the best value for CSW stockholders. The second suit alleges that the AEP Merger is unfair to CSW stockholders in that it does not recognize the underlying intrinsic value of CSW's assets and its future l profitr.bilay. The second suit also seeks an auction-type sale process. CSW believes that both suits are without merit and intends to defend them vigorously. 39 t
CPL Rate Review - Docket No. N96S In November 1995, CPL filed with the Texas Commission a request to increase its retail base rates by $71 million, and in May 1996, CPL placed a $70 million base rate increase into effect under bond, subject to refund based on the receipt of a final order of the Texas Commission. On March 31,1997, the Texas Commission issued the CPL 1997 Original Rate Order in CPL's rate review, Docket No.14965. Thereafter, CPL filed a motion for rehearing which requested the reconsideration of numerous provisions of the order. Motions for rehearing were also filed by other parties to the rate proceeding. In response to the motions for rehearing, in June 1997, the Texas Commission made several modifications to the CPL 1997 Original Rate Order and also agreed to rehear on remand seseral other issues. CPL restored its rates in July 1997, with two exceptions, to levels existing prior to the May 1996 implementation of bonded rates. On August 21,1997, after reconsidering the issues on remand, the Texas Commission voted to issue a revised final order and on September 10,1997, CPL received a revised final order. CPL filed its second motion for rehearing on September 30,1997. The second motion for rehearing again requested reconsideration of numerous issues in the rate case. On October 16,1997 the Texas Commission issued the CPL 1997 Final Order. The CPL 1997 Final Order lowers the annual retail base rates of CPL by approximately S19 million, or 2.5%, from CPL's rate level existing prior to May 1996. The Texas Commission also included a " Glide Path" rate methodology in the CPL 1997 Final Order pursuant to which CPL's annual rates will be reduced by an additional $13 million in mid-1998 and another $13 million in mid-1999. The CPL 1997 Original Rate Order established a separate docket, Docket No.17280, to consider the recoverability of $20 million of rate case expenses incurred in the current rate case and in two prior dockets. CPL reached a settlement with all parties to resolve Docket No.17280 which provides for CPL to recover $14 million out of the total $20 million of rate case expenses originally requested. Approximately $8 million of the rate case expenses will be recovered as an offset to the refund in the rate case, and the remaining $6 million of expenses will be surcharged to customers over three years. CPL expensed the $6 million in foregone rate case expenses during the first quarter of 1997 CPL implemented bonded rates subject to refund in May 1996. On July 17,1997, CPL restored its rates, with two exceptions, to levels existing prior to the implementation of the bonded rates. The two exceptions are for industrialinterruptible rates and customer service charges for which the Texas Commission approved the increases requested by CPL. On October 31,1997, CPL filed with the Texas Commission a proposed methodology for issuing an interim refund to customers in December 1997. A second refund was made in March 1998. The different components that were all incorporated into the December 1997 refund made to customers, a breakdown of the December 1997 refund, as well as the March 1998 refund, including interest, is shown below (millions). December 1997 Amount collected from customers under bond $81.7 Surcharge for rate case expenses (13.3) Surcharge for fuel cost under-recovery (23.6) Net refund to customers $44.8 March 1998 (estimated) Remaining refund available $59.0 Anucipated surcharge for fuel cost under-recovery (34.3) Net refund to customers $24.7 The following table details the financial impact of the CPL 1997 Final Order as compared to the rates existing prior to CPL placing bonded rates into effect. Although the entire impact has been recorded in CSW's 1997 results of operations, the financialimpact on its results of operations for 1996 and for the year 1997 is shown below. 1 40
I996 Retroactive 1997 Only Impact Impact _ (rr.illions) Decrease in revenue $f20.7) $(24.2) Items included in decrease in revenue with ofTsetting etTect on expense: Accelerated recovery of STP (ECOM) 13.3 20.0 Change in depreciation (7.5) (11.3) Decommissioning 1.9 4.3 Other 6.8 7.7 19.8 Change in current year income before tax (28.4) (44.0) Federalincome taxes 9.5 14.8 Impact on net income. all recorded in 1997 5(18.9) 5(29.2) CPL appealed the CPL 1997 Final Order to the State District Court of Travis County to challenge the resolution of several issues in the rate case. The primary issues include: (i) the classification of $800 million of invested capital in STP as ECOM which was also assigned a lower return on equity than non-ECOM property, (ii) the Texas Commission's use of the " Glide Path" rate reduction methodology to be applied to rates in mid-1998 and mid-1999, and (iii) the $18 million of disallowed affiliate transactions from CSW Services. As part of the appeal, CPL seeks a temporary injunction to prohibit the Texas Commission from implementing the " Glide Path" rate reduction methodology, currently scheduled to begin in May 1998. A hearing has been set for the temporary injunction on April 3,1998. Management is unable to predict how the final resolution of these issues will ultimately affect CSW's results of operations and financial condition. Sn MD&A - RATES AND REGULATORY MATTERS, CPL Rate Rctiew -Docket No. N965 for additional discussion of the CPL 1997 Final Order, including the estimated ongoing financial impact of the final order and information regarding the difference between the rates originally requested by CPL and those ordered by the Texas Commission. CPL 1995 Agreement On April 5,1995, CPL reached an agreement in principle with other parties to pending regulatory proceedinbs involving base rate, fuel and prudence issues relating to an outage experienced at STP during 1993 and 1994. 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 prunarily 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. The Texas Commission approved the CPL 1995 Agreement on October 4,1995. Details of the items in the CPL 1995 Agreement and the total 1995 earnings impact, including certain accounting provisions, are set forth in the following table. 41
~ Pre-tax After-tax (rtullions) i 5(50.0) 5(32.5) Base rate refund (62.3) (40.5) Fuel disallowance (3.2) (2.1) Wholesale fuel refund Current flowback of excess deferred federal 34.3 34.3 income taxes Capitalization of previously expensed 27.6 17.9 restructuring and rate case costs 16.1 10.5 Recognition of factoring income (6.6) (4.4) Amortization, interest and other i STP Unit I By orders issued in 1989 and 1990, the Texas Commission authorize CPL Deferred Accounting fh and Unit 2 costs incurred between the commercial operation dates o t oseCPL order, and a reflecting the operation of those units. Upon appeal of the 1989 as an appropriate mechanism for the i utility, the Supreme Court of Texas in 1994 sustained deferred account ng CPL's case to the Court of Texas Commission to use in preserving the financialintegrity of CPL, but rem h Court of Appeals. Appeals to consider certain substantial evidence po d ffirmedtheTexas Commission's order in all respects. i d h STP Unit I By orders issued in October 1990 and December 1990, the Texas i and Unit 2 deferred accounting costs and authorized the inclus on o l d to the Travis County District Court return in CPL's retail rates. These Texas Commission orders were appea eCourt of Texas' f d unting costs in where the appeals are still pending. Language in the Supremed i hich the deferred STP costs are rates charged to customers is dependent on a fmding in the first case n w the utility's financial i recovered through rates that the deferral was actually necessary to preservets decide that s h the appeals of the October 1990 and Dccember 1990 rate orders, t e courd rs such rate o h the financial integrity standard is required and was not made in t ose or e,l ing the fmancialin to the Texas Commission for the purpose of entering findings app yPL is unable to predict how its d the ultimate resoluuon of CPL's deferred accounting issues, C orders will ultimately be resolved by the Texas Commission. t ial If CPL's deferred accounting matters are not favorably resolved, CSW adverse effect on its results of operations and financial condition. Whi eh t CPL will rec ih the ultimate outcome of these matters, management believes e t er t a d s so that there will be no accounting amounts or that CPL will be successfulin renegotiation ofits rate or er, dii material adverse effect on CSW's results of operation or financial con t on. i l $41.4 million In January 1998, CPL filed a request with the Texas Commission to rec CPL Fuel Proceeding d to increase the fuel in uncollected fuel and purchased power costs and h ill be subtracted d by the Texas from the remaining base rate refund totaling appro i i d as a one-time adjustment to customers' March 1998 bills. Inthe same filing with the ff ti e with March 1998 bills. The i permission to increase its fixed fuel factors by approximately $23.4 mill on i primary cause of CPL's current fuel cost under-recovery and the need to nc unanticipated increase in the price of natural gas. 42
In February 1998, stipulations were reached on both the fuel factor and surcharge. The fuel factor increase is being reduced to $ 15.4 million, and the fuel surcharge including interest is being reduced to $34.3 million. The reductions are not a disallowance and will be considered as part of CPL's fuel reconciliation filing be made in December 1998. CPL NuclearInsurance Claims in 1994, CPL filed a claim under its NEIL 1 policy relating to the 1993-1994 outage at STP Units I and
- 2. NEIL denied CPL's claim in 1995. CPL filed an action in April 1996 against both NEIL and Johnson &
Higgins of Texes, Inc., the former insurance broker for STP, seeking recovery under the policy and other relief. l Subsequently, CPL and NEIL agreed to dismiss all litigation between them conceming CPL's claim for NEIL coverage, and they agreed to submit their disputes over coverage to a non-binding, neutral evaluation process. Hearings were held by the neutral evaluator in February 1997 and April 1997. On April 22,1997, the neutral evaluator made the recommendation that CPL's claim was not covered by its NEIL I policy. CPL abided by this recommendation. 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, were pending in federal and state court in Corpus Christi, Texas. The plainti complaints sought damages for alleged property damage and health impairment as a result of operations on the site and cleanup activities. During 1997, these suits were settled with no material adverse effect on CSW's results of operation or financial condition. CPL Municipal Franchise Fee Litigation In May 1996, the city of San Juan, Texas filed a purported class action in Hidalgo County, Texas District Court on behalf of all cities served by CPL based upon CPL's alleged underpayment ofmunicipal l franchise fees. The plaintiff's petition asserts various contract and tort claims against CPL as well as certain audit rights. The suit seeks unspecified damages and attorneys' fees. CPL filed a counterclaim for any overpayment of franchise fees it may have made as well as its attorneys' fees. CPL also filed a motion to transfer venue to Nueces County, Texas, and a plea to the jurisdiction and pleas in abatement asserting that the Texas Commission has primary jurisdiction over the claims. In May 1996 and December 1996, respectively, the cities of Pharr, Texas and San Benito, Texas filed individual suits making claims virtually identical to those claimed the city of San Juan. In January,1997, CPL filed an original petition at the Texas Commission requesting the Texas Commission to declare its jurisdiction over CPL's collection and payment of municipal franchise fees. In April 1997, the Texas Commission issued a declaratory order in which it declined to assertjurisdiction over the claims of the City of San Juan. CPL appealed the Texas Commission's decision to the Travis County, Texas District Court. After the Texas Commission's order, the Hidalgo County court overruled CPL's plea to the jurisdiction and plea in abatement. In July 1997, the Hidalgo County court entered an order certifying the case as a class action. CPL appealed this order to the Corpus Christi Court of Appeals. In February 1998, the court of l appeals' affirmed the trial court's order certifying the class. CPL appealed the court of appeals mling to the Texas Supreme Court. Although CPL believes that it has substantial defenses to the cities' claims and intends to defend itself 1 against the cities' claims and pursue its counterclaims vigorously, management cannot predict the outcome of these lawsuits. CPL and WR1 Texas Utilities Complaint (Docket No.17285) A Proposal for Decision was received in February 1998 in a joint CPL /WTU complaint at the Texas Commission that sin:e January 1,1997, Texas Utilities was effectively double charging for transmission sersice within the Electric Reliability Council of Texas. The Proposal recommends approval of a CPIAVTU proposed 43
i offset of $15.5 million annually of payments to Texas Unlities under FERC-approved transmission serv agreements against amounts that CPL and WTU would otherwise owe Texas Utilities pursuant to Commission rules for transmission service in ERCOT. The Texas Commission will consider the Proposal in April 1998. PSO Rate Review In July 1996, the Oklahoma Commission staff filed an application seeking a review of PSO's e In accordance with the established schedule, PSO subsequently filed financial data, cost of service and testimony supporting both its current rates and an increase in annual depreciation expense of $ 1997, the Oklahoma Commission staff and other intervenors to the proceeding filed their revenue requ testimony. In its filing, the Oklahoma Commission staff recommended a rate reduction of $76.8 m On October 15,1997, PSO reached a stipulated agreement with parties to settle the rate inquiry that was pending before the Oklahoma Commission. On October 23,1997, the Oklahoma Commission issued approving the agreement. The PSO 1997 Rate Settlement Agreement calls for PSO to lower its retail b beginning with the December 1997 billing cycle by approximately $35.9 million annually, or a 5.3 percent decrease below the current level of retail rates. Part of the rate reduction includes a reduction i depreciation expense of approximately $10.9 million. In addition, the PSO 1997 Rate Settlement Agreement resulted in PSO making a one-time $29 million refund to customers in December 1997. The PSO 1997 Rate Settlement Agreement also calls for PSO to eliminate or amortize before its next rate filing approximately $41 million in certain deferred assets, approximately $26 million of which had been expe in 1996. The remaining $15 million of deferred assets, which included approximately $9 million of costs incurred for customer energy management incentive programs, were written offin 1997. The following table represents the financialimpact of the PSO 1997 Rate Settlement Agreement on CSW's 1997 results of operations. 1997 Impact (nullions) I Decrease in revenues l Refund to customers $(29.0) Change in rates (2.5) (31.5) Changes in expenses (offsetting impact included in revenues) Depreciation (6.3) Rate case deferred costs 2.2 Income tax (10.2) (l4.3) l (17.2) Write-off of deferred assets, net of tax (10.2) $(27.4) The PSO 1997 Rate Settlement Agreement resulted in an adverse effect on CSW's results of operations for 1997 that will have a continuing impact because of the rate decrease. However, it reduced significant risks for l PSO related to this regulatory proceeding and should allow PSO's rates to remain competitive for the foreseeable l future. See MD&A - RATES AND REGULATORY MATTERS, PSO 1997 Rate Settlement Agreemer.t for additional discussion of the PSO 1997 Rate Settlement Agreement, including the estimated ongoing financial impact of the agreement. 44
PSO PCB Cases PSO has been named a defendant in petitions filed in state court in Oklahoma in February and August, 1996. The petitions allege that the plaintiffs suffered personal injury and fear future injury as a result of contamination by PCBs from a transformer malfunction that occurred in April,1982 at the.Page Belcher Federal Building in Tulsa. Each of the plaintiffs seeks actual and punitive damages in excess of $10,000. As previously reported, other claims arising from this incident have been settled and the suits dismissed. hianagement believes that PSO has defenses to the remauung complaints and intends to defend the suits vigorously. hianagement { believes that the remaining claims are covered by insurance. hianagement also believes that the ultimate i resolution of the remanung lawsuits will not have a material adverse effect on CSW's results ofoperations or fmancial condition. PSO Sand Springs /Grandfield, Oklahoma Sites In 1989, PSO found PCB contammation in a Sand Springs, Oklahoma PCB storage facility. The EPA-approved cleanup began in 1994. In 1996, the EPA filed a complaint against PSO alleging that PSO failed to comply with provisions of the Toxic Substances Control Act. The EPA alleged improper disposal of PCBs at the Sand Springs site due to the length of time between discovery of the contammation and the actual cleanup at the site. The complaint also alleged failure to date PCB articles at a Grandfield, Oklahoma site. The total proposed penalty, which was accrued by PSO in 1996, was $479,000. PSO settled all claims in the suit by hf arch 1998. The settlement did not have a material adverse effect on CSW's results of operations or financial condition. SWEPCO FuelProceeding In April 1997, SWEPCO filed with the Texas Commission an application concerning fuel cost under-recoveries and a possible fuel surcharge. The application included a motion to either abate the requested interim surcharge and consolidate the surcharge with a filed fuel reconciliation as discussed below, or alternatively, implement an interim surcharge in the months of July 1997 through June 1998. The Texas Commission's Office of Policy Development, on behalf of the Texas Commission, approved the consolidation. In addition, the Texas Commission has waived the requirement for SWEPCO to file biannual surcharge requests while this proceeding is pending, and has deferred the implementation of any surcharge and interest until after final disposition. In hiay 1997, SWEPCO filed with the Texas Commission an application to reconcile fuel costs and implement a 12 month surcharge of fuel cost under-recoveries. Because of the uncertainty as to when a surcharge may commence, SWEPCO did not establish in its filing a proposed surcharge period or a total surcharge amount which would reflect interest through the entire surcharge penod. However, SWEPCO indicated that it had an under-recovered Texas jurisdictional fuel cost balance of approximately $16.8 million, including interest through December 1996. Included in the $16.8 million balance are fuel related litigation expenses of $5.0 million and an interest retum of $2.0 million on the unamortized balance of a fuel contract tennination payment. On December 8,1997, SWEPCO and the other parties to the above consolidated proceedings before the Texas Commission filed a settlement on all issues except for one issue which will be decided by the Texas Commission. The outstanding issue concerns transmission equalization payments and whether they should be included in fuel or base revenues. The settlement is subject to approval by the Texas Commission. Of the $16.8 million in under-recovered fuel costs as of December 31,1996, the settlement would result in a decrease of the ( under-recovered fuel costs, and the resulting surcharge recovery, by approximately $6.0 million. This I disallowance will not result in an increase to fuel expense since the $5.0 million oflitigation expense and the interest return of $2.0 million included in the requested surcharge amount were previously expensed. However, should SWEPCO not prevail on the outstanding issue, SWEPCO would be required to reduce eamings by approximately $1.8 million. The settlement also provide:: that SWEPCO's fuel and fuel-related expenses during the reconciliation period were reasonable and necessary and would allow them to be reconciled as eligible fuel. i Also, the settlement provides that SWEPCO's actions in litigating and renegotiating certain fuel contracts, together with the prices, terms and conditions of the renegotiated contracts were pmdent. The $6.0 million 45 l
-~~ i h f lproceedings. Managementcannot reduction is not associated with any particular activity or issue with n t e ue ii predict whether approval of the settlement will be granted by the Texas Comm s SWEPCO Burlington Northern Transportation Contract jd t in favor of SWEPCO in January 1995, a state district court in Bowie County, Texas entered u gmenil tra d against Burlington Northern in a lawsuit regarding rates cha d SWEPCO d approximately $72 million that would benefit customers, if ' fees and granted l d the state district court's certain declaratory relief requested by SWEPCO. Burlington Northern appea e d the judgment of the judgment to the Texarkana, Texas Court of Appeals and, in April 1996, that c state district court. In October 1996, SWEPCO filed an application w t Court of Appeals. In Jun writ of error to review and reverse the judgment of the Texarkana, Texas h ld before the Supreme Court of Texas granted SWEPCO's applic i d the I judgment of the court of appeals. SWEPCO Lignite Mining Agreement LitigationSWEPCO and CLE li i EPCO and CLECO entered into a lignite reserves in the Dolet Hills area of northwestern Louisiana. In 1982, SW flignite from a portion of these mining agreement with the DHMV, a partnership for the mining and delivery o reserves. dStates On April 15,1997, SWEPCO and CLECO filed suit against DHMV e f DHMV to District Court for the Western District of Louisiana seeking to enforce various ob li fthe SWEPCO and CLECO under the lignite mining agre d nyingthe l allegations in the suit and filed a counterclaim asserting various contract-re ate c a CLECO. SWEPCO and CLECO have denied the allegations in the counterclaims. SWEPCO intends to vigorously prosecute the claims against DHMV and i h ltimate outcome of this counterciaims which DHMV has asserted. Although management cannot pred ct t e u i l d rse effect on CSW's matter, management believes that the resolution of this matter will not have a mate results of operations or financial condition. l In March 1997, WTU filed with the Texas Commission an Application fo WTU FuelProceedings increase in fuel factors of $4.2 million, or 4.2%, on an l i der-recovered fuel costs. WTU requested authority to implement the revised ue 7 ment in principle was and to commence the surcharge with its June 1997 billings. On April 14,199, an agr l reached among the parties to settle this docket. Under the h February 1999. The Texas Commission approved the settlement in May 1997. l ts and On December 31,1997, WTU filed with the Texas Conunission an ap h t to request authorization to carry the reconciled balance forward into t e nex re seek a surcharge of the reconciled balance in the December 31,1997 filing. 46
During the reconciliation pericd of July 1,1994 through June 30,1997 WTU incurred approximately $418 million in eligible fuel and fuel-related expenses to generate and purchase electricity. The Texas jurisdictional allocation of such fuel and fuel-related expenses is approximately $292 ndllion. In March 1998, WTU filed with the Texas Commission an Application for Authority to Implement an increase in fuel factors of $7,4 million, or 7.3%, on an annual basis. Additionally, WTU proposed to implement fuel surcharge of $6.8 million, including accumulated interest, over a six month period to collect its under-recovered fuel costs. WTU requested authority to implement the revised fuel factors and to commence the surcharge with its June 1998 billings. WTU1995 Stipulation andAgreement The WTU 1995 Stipulation and Agreement which was approved by the Texas Commission in October 1996 has affected WTU's results of operations for 1996 and 1997. Details of the items with significant earnin impact for 1995, including certain accounting treatments, are set forth in the following table. Pre-tax After-tax (millions) Refund to retail customers $(21.0) $(13.7) EfTect of retail rate reduction (2.4) (1.6) Current flowback ofproperty related excess deferred federalincome taxes 6.9 6.9 Five year flowback of non-property related _~ i excess deferred federal income taxes 0.1 0.1 I Capitalization and amortization ofpresusly i expensed restructuring costs 12.7 8.2 Other amortization (0.2) (0.1) Other one-time items 1.0 0.7 The WTU 1995 Stipulation and Agreement also elindnated several significant 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 CSW 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 CSW's I x results of operations or financial condition. 3. COMMITMENTS AND CONTINGENT LIABILITIES ^ Constrt.ction and Capital Expenditures l It is estimated that CSW, including the U.S. Electric Operating Companies, SEEBOARD and other diversified operations, will spend approximately $569 million in capital expenditures (but excluding capital that may be required for acquisitions) during 1998. Substantial commitments have been made in connection with these programs. ~ Fuel and Related Commitments To supply a portion of their fuel requirements, the U.S. Electric Operating Companies han entered into various commitments for the procurement of fuel. t 47 I L
SWEPCO Henry W. Pirkey Power Plant In connection with the South Hallsville lignite mining contract for its Hemy W. Pirkey SWEPCO has agreed, under certain conditions, to assume the obligations of the m December 31,1997, the maximum amount SWEPCO b actual obligation outstanding at December 31,1997 was $59 million. SWEPCO South Hallsville Lignite Mine As part of the process to receive a renewal of a Texas Railroad Commission j SWEPCO has agreed the South Hallsville lignite mine and expansion into the Marshall South Ligmte Pro ect area,WE to provide guarantees of mine reclamation in the amount of $85 million. Since S h h k guarantee provides for SWEPCO to conunit to use its resources to complete the is not completed by the third party miner. The current cost to reclaim the mine $36 million. Other Commitments and Contineencies In connection with the licensing and operation of STP, the owners have purchas CPL Nuclear Insurance f liability insurance coverage as required by law, and have executed indemnific l accordance with the fmancial proection requirements of the Price-Anderson Act. I The Price-Anderson Act, a comprehensive statutory arrangement providing limitations liability and governmental indenmities, is in effect until A The owners of STP are insured for their share of this liability through a combination of priv $8.72 billion. The amounting to $200 million and a mandatory industry-wide program for self-insurance tota maximum amount that each licensee may be assessed under the industry-wide program following a nuclear incident at an insured facility is $75.5 million per reactor, which inflation, plus a five percent charge for legal expenses For other owners have agreed will be allocated on the basis of their respective ovmership purposes of these assessments, STP has two licensed reactors. ~ The owners of STP currently maintain on-site decontammation liability and prop in the amount of $2.75 billion provided by ANI and NEIL. Policies ofinsurance is i d to stipulate that policy proceeds must be used first to pay httl cost of decontammation liability and property insurance for STP, including premiums rata basis, according to each owner's respective ownership interest in STP. insurance will reimburse CPL for extra expenses inc h 23' result of a covered accident that shuts down production at one or both of the STP Units for consecutive weeks. In the event of an outage of STP Units 1 and 2 and the outage i bl f accident, such insurance will reimburse CPL up to 80% of the recovery. The maxim $ 1.8 single unit outage is $118.6 million for both Unit I and 2. CPL is subject to an NEIL I million for the current policy year in the event that insured losses at a nuclear fac policy exceeds the accumulated funds available under the policy. CPL r Interruption and/or Extra Expense policy September 15,1997. 48
For further information relating to litigation associated with CPL nuclear insurance claims, reference is nude to NOTE 1 LITIGATION AND REGULATORY PROCEEDINGS. SWEPCO Cajun Asset Purchase Proposal Cajun filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code on December 21,1994 and is currently operating under the supersision of the United States Bankruptcy Court for the Middle District of Louisiana. On March 18,1998, SWEPCO, together with the Cajun Members Committee, which currently represents 7 of the 12 Louisiana member distribution cooperatives that are served by Cajun, filed the SWEPCO Plan in the bankruptcy court. Under the SWEPCO Plan, a SWEPCO affiliate or subsidiary would acquire all of the non-nuclear assets of Cajun, comprised of the two-unit Big Cajun I natural gas-fired plant, the three-unit Big Cajun II 3al-fired plant, and related non-nuclear assets, for $940.5 million in cash, subject to adjustment pursuant to terms of the asset purchase agreement proposed as part of the SWEPCO plan. The SWEPCO Plan incorporates the terms of a settlement between the RUS, Cajun Members Committee, Claiborne Electric Cooperative, Inc. and SWEPCO. In addition, the SWEPCO Plan provides for SWEPCO and the Cajun member cooperatives to enter into long-term power supply agreements which will provide the Cajun member cooperatives with rate plan options and market access provisions designed to ensure the long-term competitiveness of the cooperatives. Eight cooperatives and CLECO, successor to Teche Electric Cooperative, already have agreed to purchase power from SWEPCO if SWEPCO's plan is confirmed by the bankruptcy court. Entergy Texas is no longer a co-plan proponent with SWEPCO and the Cajun Members Committee, as it had been under SWEPCO plans filed prior to the January 15,1998 plan. SWEPCO continues to work with Entergy Texas to resolve its objection to the plan. The SWEPCO Plan filed March 18,1998 replaces plans filed previously by SWEPCO on January 15,1998, October 26,1996, September 30,1996 and April 19,1996. Two competing plans of reorganization for the non-nuclear assets of Cajun have been filed with the bankmptcy court, each with different purchase prices, rate paths and other provisions. Confirmation hearings in Cajun's bankruptcy case are now scheduled through April 1998. Consummation of the SWEPCO Plan is conditioned upon confirmation by the bankruptcy court, and the receipt by SWEPCO and CSW of all requisite state and federal regulatory approvals in addition to their board approvals. If the SWEPCO Plan is confirmed, the $940.5 million required to consummate the acquisition of Cajun's non-nuclear assets is expected to be financed through a combination of external borrowings and internally generated funds with approximately 70% of the extemal borrowings funded with non-recourse debt. There can be no assurance that the SWEPCO Plan will be confirmed by the bankruptcy court or, ifit is confirmed, that it will be approved by federal and state regulators. SWEPCO RentalandLease Commitments SWEPCO has entered into various financing arrangements primarily with respect to coal transportation and related equipment, which are treated as operating leases for rate-makmg purposes. At December 31,1997, leased assets of $45.7 million, less accumulated amortization of $39.0 million, were included in Electric Utility Plant on the Consolidated Balance Sheets and at December 31,1996, leased assets were 546.0 million, less accumulated amortization of $36.9 million. SWEPCO Biloxi, MississippiMGPSite SWEPCO was notified by Mississippi Power in 1994 that it may be a PRP at a MGP site in Biloxi, Mississippi, which was fonnerly owned and operated by a predecessor of SWEPCO. Since then, SWEPCO has worked with Mississippi Power on both the investigation of the extent of contamination on the site as well as on the subsequent sampling of the site. The sampling results indicated contamination at the property as well as the possibility of cont:unination of an adjacent property. A risk assessment was submitted to the MDEQ, and the MDEQ requested that a future residential exposure scenario be evaluated for comparison with commercial and industrial exposure scenarios. However, Mississippi Power and SWEPCO do not believe that cleanup to a residential scenario is appropriate since this site has been industrial / commercial for more than 100 years, and 49
Afississippi Power plans to continue this type of usage. Mississippi Power and SWEPCO also pr to the h!DEQ demonstrating that the ground water on the site was not potable, further demonstrating th to residential standards is not necessary. The MDEQ has not agreed to a non-residential future land use scenario and has requested further Following the additional testing and resolution of whether cleanup must meet a residential usage sc commercial / industrial scenario, a feasibility study will be conducted to more definitively evaluate remedial strategies for the property. The feasibility study process will require public input prior to a final decis made. At the present time, SWEPCO has not had any further substantive discussions with MDEQ regardi ultimate resolution of this issue. Therefore, a final range of cleanup costs is not yet determinable. SWEPCO has incurred approximately $200,000 to date for its portion of the cleanup of this site, and based on its prelim estimates, anticipates that an additional $2 million may be incurred. Accordingly, SWEPCO has accrued $2 million for the cleanup of the site. SWEPCO Voda Petroleum Superfund Site In April 1996, SWEPCO received correspondence from the EPA notifying SWEPCO that it is a PRP to a cleanup action planned for the Voda Petroleum Superfund Site located in Clarksville, Texas. SWEPCO is conducting a records review to compile documentation relating to SWEPCO's past use of the Voda Petroleum site. The proposed cleanup of the site is estimated by the EPA to cost approximately $2 million and to take approximately twelve months to complete. An option for over 30 PRPs to conduct the cleanup in lieu of EPA conducting the cleanup is under consideration. Any liability associated with this project is not expected to have a material adverse effect on CSW's results of operations or financial condition. CSWEnergy Loans and Commitments CSW Energy has agreed to provide construction financing and other credit support up to $235 million for the 330 MW Phillips Sweeny project. CSW Energy obtained the funds for this project through CSW's short-temi borrowing program. Con;truction of this plant began in September 1996 and commenced commercial operations in February 1998. At December 31,1997, CSW Energy had provided $163 million, including development, construction and financing, of the total estimated $189 million in project costs. CSW Energy expects to obtain permanent project Snancing in the second quaner of 1998 at which time the project will return a significant portion of the investment and the short-term borrowings will be repaid. In addition, CSW has provided letters of credit and guarantees on behalf of other independent power projects totaling approximately $27 million. l CSWInternational Enertek Project In July 1996, CSW International announced a joint venture with Alpek, through a subsidiary, to build, own and operate a 109 MW, gas-fired cogeneration project at Alpek's Petroce! industrial complex in Altamira, Tamaulipas, Mexico. CSW International and Alpek each will have 50% ownership in the project, Enertek, which will cost approximately $75 million. CSW International has agreed to provide construction financing for the project of which $62 million had been funded at December 31,1997. The Enertek project began operations in the first quarter of 1998. 4. FNCOME TAXES l CSW files a consolidated United States federal income tax retum and participates in a tax sharing agreement with its subsidiaries. Income tax includes United States federal income taxes, applicable state income taxes and SEEBOARD's United Kingdom corporation taxes. Total income taxes differ from the amounts computed by applying the United States federal statutory income tax rate to income before taxes for a number of reasons which are presented in the INCOME TAX RA TE RECONCILIA TION table below. Information 50
l l concerning income taxes, including total income tax cxpcnse, the reconciliation between the United States federa statutory tax rate and the effective tax rate and significant components of deferred income taxes follow. INCOME TAXEXPENSE l991 1996 1995 (millions) included in Operating Expenses and Taxes Current (1) $47 $118 $105 Deferred (1) 117 120 1 Deferred TTC (2) (13) (14) (14) 151 224 92 Included in Otherincome and Deductions Current (1) 2 Deferred (6) (39) (4) (6) (40) (2) l Income TaxesforDiscontinuedOpemtions (includes $72 resulting from the gain on the sale of Transok for 1996) 78 13 $145 $262 $103 (1) Approximately $30 million,349 million and $7 million ofCSW's Current Income Tax Expense was attributable to SEEBOARD U.S.A. and was recognized as United Kingdom corporation tax expense for 1997,1996 and 19 l In addition, approximately $7 million and $19 million of CSW's Deferred Income Tax Expense in 1997 and 1996I l respectively, was attributed to SEEBOARD U.S.A. (2) ITC deferred in prior years are included in income over the lives of the related properties. INCOME TAXR4TERECONCILL4 TION 1997 1996 1995 ($ in millions) Income before taxes attributable to: Domestic operations $327 $562 $506 Foreign operations 147 146 13 Income before taxes $474 $708 $519 l Tax at U.S. statutory rate $166 $248 $182 Di1Terences Amortization ofITC (13) (14) (14) Mirror CWIP 5 5 (11) Non-deductible goodwill amortization 12 13 Tax credit on foreign operations dividend (3) (18) United Kingdom deferred income tax adjustment (16) CPL 1995 Agreement (34) WTU 1995 Stipulation and Agreement (7) Adjustments (4) 10 (22) Other (2) 18 9 $145 $262 3103 Effective tax rate 31 % 37 % 20 % I l l I l l 51 1
j I997 1996 _l DEFERRED INCOME TAXES (1) (millions) Deferred Income Tax Liabilities $1,920 $1,867 Depreciable utility plant 176 178 Deferred plant costs 100 105 Mirror CWIP asset 211 207 Income tax related regulatory assets 307 371 Other 2,778 2,664 DeferredIncomeTax Assets income tax related regulatory liability (123) (126) (100) (105) Unamortized ITC Altemative minimum tax carryforward (27) (83) (76) (99)___ Other (326) (413) 52,452 $2.2 51 __ Net Accumueted Deferred income Taxes Net Accumulate 1 Deferred Income Taxes $2,432 $2,272 Noncurrent 20 (21) _ Current $2,452 52,251 (1) In 1996, CSW generated $33 million of excess foreign tax credits agains l f f reign as of December 31,1996. In 1997, the valuation reserve was reduced to $17 million due to low i th tax credits. Other than excess foreign tax credits, CSW did not have other valuation allowa deferred tax assets at December 31,1997 and 1996 due to a favorable earnings history. 5. BENEFIT PLANS Prior to June 30,1997, CSW maintained a tax qualified, non-contributory defmed Pension Plans covering substantially all CSW employees in the United States. Benefits were b credited service, age at retirement, and final average annual earnings with an offset Social Security benefit. The CSW board of directors approved an amendment, effe converted the present value of accrued benefits under the existing pension plan in Under the cash balance formula, each participant has an account, for recordkeeping credits are allocated annually based on a percentage of the participant's pay. The app determined by age and years of vested service the participant has with CSW as of De The purpose of the plan change is to continue to provide retirement income benefi competitive both within the utility industry as well as with other companies within the U As the plan sponsor, CSW will continue to reflect the costs of the pension plan acco provisions of SFAS No. 87 and allocate such costs to each of the participating e July 1,1997 amendment, CSW realized a savings in 1997 of approximately $20 m will also realize significant ongoing reductions in operating and maintenance expense be change to the pension plan was applied retroactively to the beginning of 1997, so th evenly throughout 1997 with a portion being capitalized. Pension plan assets consist primarily of common stocks and short-term and intermed income investments. 52
l l The majority of SEEBOARD's employees jomed a pension plan that is administered for the United Kingdom's electricity industry. The assets of this plan are held in a separate tmstee-administered fund that is actuarially valued every three years. SEEBOARD and its participating employees both contribute to the pla 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-administj Information about the two separate pension plans (the U.S. plan and the non-U.S. plan), including: (i) pension plan net periodic costs and contributions; (ii) pension plan participation; (iii) a reconciliation of the funded status of the pension plan to the amounts recognized on the balance sheets; and (iv) assumptions used in accountmg for the pension plan follow. NETPERIODICPENSIONPIAN 1997 1996 1995 i COSTSAND CONTRIBUTIONS 1997 1997 NON-1996 1996 NON. U.S. l CSW U.S. U.S. CSW U.S. U.S. PLAN PLANS PLAN PLAN PLANS PLAN PLAN ONLY (millions) Net Periodic Pension Costs Service cost $34 $20 $14 $37 $23 $14 $20 Interest cost on projected l benefit obligation 137 65 72 136 69 67 64 Actual return on plan assets (245) (163) (82) (184) (110) (74) (117) Net amortization and deferral 68 66 2 27 27 44 $(6) $(12) $6 $16 $9 $7 $11 a Pension Plan Centributions $6 3-36 $35 $28 $7 $29 APPROXISiATENU3fBER NON. OFPARTICIPANTSIN CSW U.S. U.S. PIANSDURING1pp7 PLANS PLAN PLAN ) Active employees 10,l00 7,200 2,900 Retirees 10,200 4,200 6,000 i Terminated employees 6,800 2,000 4,800 RECONCILIATIONOF1TINDED 1997 1996 STATUS OFPLAN TOASIOUNTS 1997 1997 NON. I996 1996 NON. RECOGNIZED ON THE CSW CSW U.S. U.S. CSW U.S. U.S. i CONSOUDATED RAIANCESHEETS PIANS PLAN PLAN PLANS PLAN PLAN (milhons) Actuarial present value of Accumulated benefit obligation for service rendered to date $1,860 $896 $964 $1,748 $781 $967 Additional benefit for future s salary levels 94 35 59 200 141 59 ^ Projected benefit obligation 1,954 931 1,023 1,948 922 1,026 Plan assets, at fair value 2,290 1,109 1,181 2,077 991 1,086 Plan assets in excess of the projected benefit obligation 336 178 158 129 69 60 Unrecognized net loss (86) 12 (98) 30 27 3 Unrecognized prior service cost (93) (88) (5) (12) (7) (5) Unrecognized net obligation 15 11 4 16 12 4 Prepaid pension cost $172 SI13 $59 $163 $101 $62 The vested portion of the accumulated benefit obligations for the combined plans was $1.8 billion at j December 31,1997 and $1.7 billion for the combined plans at December 31,1996. The unrecognized net 53
f l s or 15 years. obligation for the U.S. plan is being amortized over the average remaining service l Prepaid pension cost is included in Deferred Charges and Other Assets on the bala In addition to the amounts shown in the above table, CSW has a non-qual CSW whichis plan is available to all pension plan participants who are W's 996 and 1995 was 53.7 net periodic cost for this non-qualified plan for the years ended December 31,1997 million,54.8 million and $2.4 million, respectively. Long-Terni ASSUMPTIONS USEDIN Compensation Retum on Plan ACCOUNTING FOR TIIE Discount Rate increase Assets PENSIONPLAN 7.50 % 5.46 % 9.00 % 6.75 % 4.75 % 7.25 % 1997 U.S. Plan Non-U.S. Plan 5.46 % 9.50 % 8.00 % 7.75 % 5.75 % 8.25 % 1996 U.S. Plan f Non U.S. Plan 5.46 % 9.50 % 8.00 % i 1995 U.S. Plan f Postretirement Benefits Other Than Pensions (U.S. Companies Only) CSW, including each of the U.S. Electric Operating Companie,, adopted SFA I January 1,1993. The transition obligation establish $5 million in 1993 an order by the Oklahoma Commission, PSO established recovering the amortization of this regulatory asset over a ten year period. Information about the non-pension postretirement benefit plan, including: (i) net benefit costs; (ii) a reconciliation of the funded status of the postretirement l f ll on the balance sheets; and (iii) assumptions used in accounting for the postretiremen NET PERIODIC POSTRETIRE1[ENT 1997 1996 1995 BENEFIT COSTS (nullions) $8 $8 $8 18 19 18 Service cost Interest cost on APBO (22) (7) (8) Actualreturn on plan assets 9 9 9 Amortization of transition obligation (2) 2 11 Net amortization and deferral $24 $27 $29 54
l l l RECONCILIA TION OFETINDED STATUS i 0FPIANTO AMOUNTSRECOGNIZED ON Tile BAIANCESIIEETS 1997 1996 (millions) APBO Retirees $158 3163 Other fully eligible participants 24 18 Other active participants 59 1 Total 241 236 Plan assets at fair value (159) (123) AFBO in excess of plan assets 82 113 Unrecognized transition obligation (135) (144) Unrecognized gain 53 32 Accrued Cost 31 ASSUMPTIONS USED IN TIIE Return on Plan Tax Rate for ACCOUNTING FOR SFAS NO.106 Discount Rate Assets Taxable Trusts 1997 7.50 % 9.00 % 39.6 % 1996 8.00 % 9.50 % 39.6*A 1995 8.00 % 9.50 % 39.6 % Health care cost trend rates 1997 Average Rate of 7.0% grading down.50% per year to an ultimate average rate of 5.00% in 2001. 1996 Average Rate of 9.0% grading down.75% per year to an ultimate average rate of 5.25% in 2001. 1995 Average Rate of 10.25% grading down.75% per year to an ultimate average rate of 5.75% in 2001. Increasing the assumed health care cost trend rates by one percentage point in each year would increase the APB0 by approximately $25.2 million and the aggregate of the service and interest costs components on net postretirement benefits by approximately $3.6 million. l Health and Welfare Plans CSW provides medical, dental, group life insurance, dependent life insurance, and accidental death and dismemberment insurance plans for substantially all active CSW System employees in the United States. The total contributions, recorded on a pay-as-you-go basis, for the years ended December 31,1997,1996, and 1995 were $35.6 million, $28.4 million and $27.0 million, respectively. Employer provided health care benefits are not common in the United Kingdom due to the country's national health care system. Accordingly, SEEBOARD does not provide health care benefits to the majority ofits employees. l 6. JOINTLY OWNED ELECTRIC UTILITY PLANT 'T' The U.S. Electric Operating Companies are parties to various joint ownership agreements with other non-affiliated entities. Such agreements provide for thejoint ownership and operation of generating stations and related facilities, whereby each participant bears its share of the project costs. At December 31,1997, the U.S. Electric Operating Companies had undivided interests in five such generating stations and related facilities as shown in the following table. l STP Flint Creek Pirkey DoletHills Oklaunion j NuclearPlant CoalPlant Lignite Plant Lignite Plant Coal Plant ($ in millions) Plant in service $2,336 $80 $437 $230 $398 Accumulated depreciation $517 $47 $176 $84 $122 Plau capacity-MW 2,501 528 675 650 676 Participation 25.2 % 50.0 % 85.9 % 40.2 % 78.1 % i Share efcapacityMV 630 264 580 262 528 l 55
- 7. FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the following fair values of each fmancial instruments for which it is practicable to estimate fair value. The fair value does not affect any of th liabilities unless the issues are redeemed prior to their maturity dates.
Cash, temporary cash investments, accounts receivable, otherfinancialinstruments and short-term debt The fair value equals the carrying amount as stated on the balance sheets due to the short maturity of those instruments. Securities heldfor sale The fair values, which are based on quoted market prices, equal the carrymg amounts as stated on the balance sheet because the accounting treatment prescribed under SFAS No. I15. Long-term debt The fair value oflong-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to CSW for debt of the same remaining maturities. Trust PreferredSecurities The fair value of the Tmst Preferred Securities are based on quoted market prices on the New York Stock Exchange. Preferred stock subject to mandatory redemption The fair value of preferred stock subject to mandatory redemption is estimated based on quoted market prices for the same or similar issues or on the current rates offered to CSW for preferred stock with the same or similar remaining redemption provisions. Long-term debt andpreferred stock due within U n,:nths 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 remauung redemption provisions. CARRYING VALUEAND ESTIMA TED FAIR VALUE 1991 1996 (millions) Long-tenn debt Carrying amount $3,898 $4,024 Fair value 4,052 4,065 ^ ~, Trust Preferred Secun' ties Carrying amount 335 Fair value 344 Preferred stock subject to mandatory redemption Carrying amount 26 33 Fakvdue 27 34 Long-tenn debt and preferred stock due within 12 months Carrying amount 32 204 Fair value 32 204 56
Cross-currency swaps and SEEBOARD 's electricity contractsfor differences The fair value of cross currency swaps reflect third-party valuations ct.lculated using proprietary pricing models. Based on these valuations, CSW's position in these cross currency swaps represented an unrealized loss of $43 million at December 31,1997 This unrealized loss is offset by unrealized gains related to the underlying transactions being hedged. CSW expects to hold these contracts to maturity. The fair value of SEEBOARD's contracts for differences is not determinable due to the absence of a trading market. DERIVA TIVE CONTRACTSNOTIONAL AMOUNTS National Fair AND ESTIMATED FAIR VALUES Amount Value (millions) Cross currency swaps Maturities: 2001 and 2006 $400 $443 8. LONG-TERM DEBT The CSW System's long-term debt outstanding as of the end of the last two years is presented in the following table. Maturities Interest Rates December 31, From To From To 1997 1996 (millions) Secured bonds 1998 2025 5.25% 7.75 % $2,080 $2,108 Unsecured bonds 2001 2030 3.9% (1) 8.88 % 1,353 1,384 Notes and Lease Obligations 1999 2003 5.54 % 9.75 % 641 724 Unamortized discount (10) (12) Unamortized cost of reacquired debt (166) (180) 33,898 $4,024 (1) Variable rate The mortgage indentures, as amended and supplemented, securing FMBs issued by the U.S. Electric Operating Companies, constitute a direct first mortgage lien on substantially all electric utility plant. The U.S. Electric Operating Companies may offer additional FMBs, medium-term notes and other securities subject to market conditions and other factors. CSW's year end weighted average cost oflong-term debt was 7.2% for 1995-1997. AnnualRequirements Certain series of outstanding FMBs have annual sinking fund requirements, which are generally 1% of the amount of each such series issued. These requirements may be, and generally have been, satisfied by the application ofnet expenditures for bondable property in an amount equal to 166-2/3% of the annual requirements. Certain series of pollution control revenue bonds also have sinking fund requirements. At December 31,1997, the annual sinking fund requirements and annual maturities (including sinking fund requirements) for all long-term debt for the next five years are presented in the following table. 57
Sinkin3 und Annual F Requirements Matunties (millions) $1 $31 1998 1 195 1999 2000 1 208 2001 1 517 2002 1 181 Dividends At December 31,1997, approximately $1.4 billion of CSW's subsidiary companies' r were available for payment of cash dividends by such subsidiaries to CSW. The mortgage ind amended and supplemented, at CPL and PSO contain certain restrictions on the use cash dividends on their common stock. These restrictions do not currently limit the ability of CS dividends to its shareholders. Reacquired Long-term Debt During 1996 and 1995, the U.S. Electric Operating Companies reacquired $205 mil oflong-term debt, respectively, including reacquisition premiums, prior to maturity. The reacquisition costs and discounts are included in long-term debt on the balance sheets over periods consistent with their expected ratemaking treatment. The remaining amortiz items range from 2 to 33 years. No long-term debt was reacquired prior to maturity during 1997. Reference is made to MD&A, LIQUIDITY AND CAPITAL RESOURCES for further information related to long-term debt, including new issues and reacquisitions oflong-term debt during 1997 as we information related to the fmancing of the SEEBOARD acquisition. 9. PREFERRED STOCK The outstanding preferred stock of the U.S. Electric Operating Companies as of the end of the last two years is presented in the following table. Current Dividend Rate December 31, Redemption Price From - To 1997 1996 From - To (millions) Not subject to mandatory redemption 1,352,900 shares 4.00 % 8.72 % $19 $135 $102.75 - $109 00 1,600,000 shares auction 160 160 $100.00 Issuance expenses / premiums (3) (3) $176 $292 Subject to mandatory redemption 340,000 shares 6.95 % $27 $34 $102.32 To be redeemed within one year (1) (1) $26 $33 Tctal authorized shares 6,405,000 All of the outstanding preferred stock is redeemable at the option of the U.S. Electric Operating Companies upon 30 days notice at the current redemption price per share. During 1997,1996 and 1995, SWEPCO redeemed $1.2 million annually pursuant to its annual sinking fund requirement. In addition during 1997, each of the U.S. Electric Operating Companies reacquired a significant portion ofits outstanding preferred stock. As a result of differences between the dividend rates on the reacquired securities and prevailing market rates, CSW realized an overall gain of approximately $10 million on the transactions. This gain is shown 58
scparately, as Gain on reacquired preferred stock, on the Consolidated Statements ofIncome. The following table l shows the results of the tender offers of the U.S. Electric Operating Companies' preferred stock. l Shares Shares Reacquired Remaining ? CPL l Series 4.00% $7,952 42,048 i Series 4.20% 57,524 17,476 L Series 7.12% 260,000 Series 8.72% 500,000 PSO Series 4.00% $3,260 44,640 Series 4.24% 91,931 8,069 SWEPCO Series 4.28% 52,614 7,386 Series 4.65% 23,092 1,908 Series 5.00% 37,261 37,739 Series 6.95% 65,990 274,010 MTU Series 4.40% 36,325 23,675 d The dividends on CPL's $160 million auction aac money market preferred stocks are adjusted every 49 days, based on current market rates. The divicend rates everaged 4.3%,4.1% and 4.5% during 1997,1996 and 1995, respectively. The minimum annual sinking fund requirement for SWEPCO's preferred stock subject to l mandatory redemption is $1.2 million for the ye.ars 1997 through 2001. This sinking fund retires 12,000 shares l annually. 10. TRUST PREFERRED SECURITIES l The following Trust Preferred Securities issued by the wholly-owned statutory business trusts of CPL, PSO and SWEPCO were outstanding at December 31,1997. They are classified on the balance sheet as Certain Subsidiary-obligated, mandatority redeemable preferred securities of subsidiary trusts holding solely Junior Subordinated Debentures of such Subsidiaries. E Arnount Description of Underlying Business Trust Security Units (millions) Debentures CPL CapitalI 8.00%, Series A 6,000,000 $150 CPL, $154.6 rnillion. 8 00%, Series A PSO CapitalI 8.004, Series A 3,000,000 75 PSO, $77.3 million,8 W%, Series A ~'- SWEPCO CapitalI 7.875%, Series A 4,400,000 110 SWEPCO, $113.4 milla. 7.875%, Series A 13,400,000 $335 Each of the business trusts will be treated as a subsidiary ofits parent company The only assets of the business trusts are the subordinated debentures issued by their parent company as specifimi above. In addition to the obligations under their subordinated debentures, each of the parent companies has also agreed to a security obligation which represents a full and unconditional guarantee ofits capital trust's obligation.
- 11. -
SHORT-TERM FINANCING i l The CSW System uses short-term debt, primarily commercial paper, to meet fluctuations in working capital requirements and other interim capital needs. CSW has established a money pool to coordinate short-term 59
borrowings for certain subsidiaries and also incurs borrowings outside the mon of December 31,1997, CSW had revolving credit facilities totaling $1.4 billion to back u program. At December 31,1997, CSW had $721 million outstanding in short-amount of such short-term borrowings outstanding during the year, which had a we for the year of 5.8%, was S725 million during December 1997. CSW Credit, which does not participate in the money pool, issues commercial paper basis. At December 31,1997, CSW Credit had a $900 million revolving credit agreeme i assignment ofits receivables to back up its commercial paper program which had maximum amount of such commercial paper outstanding during the year, which had a weig yield for the year of 5.6%, was $890 million during September 1997. 12. COMMON STOCK CSW adopted SFAS No.128 during 1997. SFAS No.128 requires the computation of eamings share on both a basic as well as a diluted basis. CSW's basic eamings per share of common stock by dividing net income for common stock by the average number of common shares outs periods. Diluted eamings per share reflect the potential dilution that could occur if all option CSW's stock incentive plan were converted to common stock and then shared in the income for comm CSW's basic and diluted earnings per share were the same for the years 1995 - 1997. CSW's dividends per W common share reflect per share amounts paid for each of the periods. CSW can issue common stock, either through the purchase and reissuance of shares from the open market or original issue shares, through the LTIP, a stock option plan, PowerShare and ThriftPlus. Following the issuance of the CPL 1997 Original Rate Order and the decline in the market price of CSW's common stock, which CSW believes is attributable in part to the CPL 1997 Original Rate Order, the determinatica was made that it was appropriate for CSW to begin funding these plans through open market purchases, effutive April 1,1 Prior to that time, CSW had issued $20 million in new common stock in 1997. Information concerning common stock activity issued through the LTIP, the stock option plan, PowerShare and ThriftPlus is presented in the following table. 1997 1996 1995 Number of new shares issued (millions) 0.8 2.9 2.3 Range of stock price for new shares $21 1/4 - $25 5/8 $24 3/8 $28 7/8 $22 $/8 - $2S 3/8 New conunon stock equity (millions) $20 $79 $57 During February 1996, CSW sold 15,525,000 shares of CSW Common in a primarf stock offering and received net proceeds of approximately S398 million. These proceeds were used to repay a portion of indebtedness incurred during the acquisition of SEEBOARD. l 13. STOCK-BASED COMPENSATION PLANS CSW has a key employee incentive plan. This plan is accounted for under Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for this plan ) I been determined consistent with SFAS No.123, pro forma calculations of CSW's net income for common stock l and earnings per share as required by SFAS No.123 would not have changed significantly from amounts reported. I ( ( i 60
l i Because the SFAS No.123 method of accounting has not been applied to options granted prior to January 1,1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. CSW may grant options for up to 4.0 million shares of CSW Common under the stock option plan. l Under the stock option plan, the option exercise price equals the stock's market price on the date of grant. The grant vests over three years, one-third on each of the three anniversary dates of the grant, and expires 10 years l after the original grant date. CSW has granted 2.8 million shares through December 31,1997. A summary of the status of CSW's stock option plan at December 31,1997,1996 and 1995 and the changes during the years then ended is presented in the following table. l 1997 1996 1995 l Weighted Weighted Weighted Shares Average. Shares Average Shares Average (thousands) Exercise Price (thousands) Exercise Price (thousands) Exercise Price Outstanding at beginning ofyear 1,412 $26 1,564 $26 1,616 $26 Granted 694 21 70 27 Exercised 22 (147) 24 (23) 22 Canceled (204) 28 (75) 27 (29) 27 Outstanding at end of ,.y-;j year 1,902 24 1,412 26 1,564 26 Exercisable at end of year 1,162 n/a 1,004 n/a 828 n/a Weighted average fair value of options $2.24 - $2.39 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1997: (i) risk-free interest rate of 5.9%; (ii) expected dividend rate of 6.5%; (iii) and expected volatility of 19%. The expected life of the options ~ granted did not materially impact the values produced. 14.- BUSINESS SEGMENTS CSW's business segments at December 31,1997 included the U.S. Electric operations (CPL, PSO, SWEPCO, WTU) and the United Kingdom Electric operations (SEEFOARD U.S.A.). See NOTE 1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES for a discussion of the accounting for the SEEBOARD acquisition. Eight additional non-utility companies are included with CSW in Corporate items and Other (CSW Energy, CSW Intemational, C3 Communications, CSW Credit, CSW Leasing, CSW Services, L 61
EnerShop and CSW Energy Scryices). Gas Operations (Transok) were sold on June 6,1996. See NO TRANSOK DISCONTINUED OPERATIONS for additionalinformation. CSW's business segment information is presented in the following tables. 1997 1996 1995 (millions) Opemting Revenues Electric Operations United States $3,321 $3,248 $2,883 United Kingdom (1) 1,870 1,848 208 77 59 52 Corporate items and Other 55,268 $5,155 $3,143 = Opentingincome Electric Operations United States $661 $768 $719 United Kingdom (1) 255 236 21 Corporate items and Other (30) 15 (27) Operating income before taxes 886 1,019 713 Income taxes (151) (224) (92) $735 $795 5621 Depreciation andAmortization Electric Operations United States $389 $362 $335 United Kingdom (1) 92 88 7 Corporate items and Other 16 14 11 'J l $497 $464 $353 Identsfiable Assets Electric Operations United States $9,172 $9,142 $9,278 United Kingdom (l) 2,931 3,061 2,821 Corporate items and Other 1,348 1,129 1,004 13,451 13,332 13,103 Oas Operations (Discontinued) 766 513,451 513,332 $13,869 Capital expenditures and acquisitions Electric Operations United States $346 $356 $398 United Kingdom (l),(2) 126 1,543 731 Corporate items and Other(3) 276 109 19 748 2,008 1,148 Gas Operations (Discontinued) 23 66 3748 52,031 $1,214 (1) Represents equity method of accounting for November 1995 (27.6%) and full consolidation accounting for December 1995 (76.45%). (2) Includes $1,394 million and $731 million in 1996 and 1995, respectively, used to ~ purchase SEEBOARD. (3) Includes CSW Energy and CSW Intemational equity investments. l l l 62
15. TRANSOK DISCONTINUED OPERATIONS On June 6,1996, CSW sold Transok to Tejas. Accordingly, the results of operations for Transok have been reported as discontinued operations and prior periods have been restated for consistency. As a wholly owned subsidiary of CSW, Transok operated as an intrastate natural gas gathertng, transmission, marketing and processing company that provided natural gas services to the U.S. Electric Operating Companies, predominantly PSO, and to other gas customers throughout the United States. CSW sold Transok to Tejas for approximately $890 million, consisting of $690 million in cash and $200 l million in existing long-term debt that remained with Transok after the sale. A portion of the cash proceeds was used to repay borrowings incurred related to the SEEBOARD acquisition and the remaining proceeds were used to repay commercial paper borrowings. CSW recorded an after tax gain on the sale of Transok of approximately $120 million in 1996. Transok's operating results for 1996 and 1995 are summarized in the following table (transactions with l CSW have not been eliminated). 1996 1995 Total revenue $362 $721 Operating income before income taxes 23 52 Earnings before income taxes 18 38 Income taxes (6) (13) Net income from discontinued operations $12 $25 16. PROPOSED AEP MERGER In December 1997, CSW and AEP entered into a definitive merger agreement for a tax-free, stock-for stock transaction with AEP being the surviving corporation. The transaction is subject to the approval of various state and federal regulatory agencies. The shareholders of CSW will be asked to approve the AEP Merger and the shareholders of AEP will be asked to approve the issuance of shares of AEP common stock pursuant to the AEP Merger Agreement and to amend AEP's certificate ofincorpostion to increase the number of authorized shares of AEP common stock from 300 million shares to 600 million shares. The proposed AEP Merger, with a targeted completion date in the first half of 1999, is expected to be accounted for as a pooling ofinterests. Upon completion of the AEP Merger, CSW conunon stockholders will receive 0.6 shares ofAEP common stock for each share of CSW common stock. At that time, CSW common stockholders will own ~ approximately 40% of the outstanding common stock of AEP. Under the AEP Merger Agreement, there will be i no changes required with respect to the outstanding debt, preferred stock or Trust Preferred Securities of CSW or its subsidiaries. The transaction must satisfy many conditions, some of which may not be waived by the parties. There can be no assurance that the AEP Merger will be consummated. I 17. EXTRAORDINARY ITEM ] In the general election held in the United Kingdom on May 1,1997, the United Kingdom's Labour Party won control of the government with a considerable majority. Prior to the general election, the Labour Party had announced that, if elected, it would impose a windfall profits tax on certain industries in the United Kingdom, 63 i i
including the privatized utilities, to fund a variety of social improvement programs. O windfall profits tax was introduced in the Labour Party's Budget and the legislation e was passed during the third quarter of 1997. Accordingly, during the third quarter of accrued, as an extraordinary item, f109.5 million (or $176 million when converted at f1.00=$1.61) time, windfall profits tax enacted by the United Kingdom government. The windfall profits tax is payable in two equal installments, due December 1,1997 and Decem 1998. The tax was charged at a rate of 23% on the difference between nine times the average profits the four years following flotation in 1990, and SEEBOARD's market capitalization calculated as shares issued at flotation multiplied by the flotation price per share. On December 1,1997, SEEBOARD the first such pannent. As enacted, the windfall profits tax is not tax deductible for United Kingdom purposes. To date, no United States income tax benefit has been recognized due to the uncertainty as to the impact on the use o tax credits. CSW continues to analyze the potential United States income tax benefit from the use of foreig credits. 18. PRO FORMA INFORMATION (UNAUDITED) CSW secured effective control of SEEBOARD in December 1995. The unaudited pro forma information is presented in response to applicable accounting rules 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 as if the transadon had been consummated at th begmnmg of the period presented. The unaudited pro forma infonnation 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 specified, nor is it necessarily indicative o future operating results. He following pro forma information has been prepared reflecting the February 1996 issuance of CSW Common, and has been converted at an exchange rate ofI1.00=$1.58 for the twelve months ended December 31,1995. 1995 (millions except EPS) Operating Revenues $5,404 Operating Income 750 Net income for Common Stock 445 EPS of Common Stock $2.15 64
19. QUARTERLY INFORMATION (UNAUDITED) The following unaudited quarterly information includes, in the opinion of management, all adjustments necessary for a fair presentation of such amounts. Information for quarterly periods is affected by seasonal variations in sales, rate changes, timing of fuel expense recovery and other factors. QUARTER ENDED 1997 (1) 1996 (2) (millions, except EPS) March 31 Operating Revenues $1,278 $1,215 Operating Income 127 144 Income from Continuing Operations 25 43 Net Income for Common Stock 25 51 Basic and Diluted EPS from Contirming Operations $0.12 30.22 Basic and Diluted EPS $0.12 $0.26 June 30 Operating Revenues $1,184 $1,267 Operating Income 169 214 Income from Continuing Operations 83 11 NetIncome for Common Stock 83 128 Basic and Diluted EPS from Continuing Operations $0.39 $0.05 Basic and Diluted EPS $0.39 $0.61 ..;., y September 30 Operating Revenues $1,477 $1,438 Operating Income 303 284 Income from Continuing Operations 196 190 ExtraordinaryItem - (176) Net Income for Common Stock 20 190 Basic and Diluted EPS from Continuing Operations $0.93 $0.90 . Basic and Diluted EPS from Extraordinary Item $(0.83) Basic and Diluted EPS $0.10 $0.90 December 31 Operating Revenues $1,329 $1,235 Operating Income _ 136 153 Income from Continuing Operations 25 53 Net Income for Common Stock 25 60 Basic and Diluted EPS from Continuing Operations $0.11 $0.26 1 Basic and Diluted EPS $0.11 $0.28 Total Operating Revenues $5,268 $5,155 Operating Income 735 795 Income from Continuing Operations 329 297 Extraordinary Item (176) Net Income for Common Stock 153 429 Basic and Diluted EPS from Continuing Operations $1.55 $1.43 Basic and Diluted EPS from Extraordinary Item $(0.83) Basic and Diluted EPS $0.72 $2.07 (1) "Ihe first, second and third quarters of 1997 include the effect of certain reclassifications to conform with the 1997 year end fmancial statement presentation. (2) In 1996, CSW EPS of Common Stock for the year do not sum to the total of the individual quarters
- EPS of Common Stock due to different levels of average shares outstanding for the different periods.
L 65 4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board ofDirectors ofCentralandSouth West Corporation: We have audited the accompanymg consolidated balance sheets of Central and South We (a Delaware corporation) and subsidiary companies as of December 31,1997 and 1996 consolidated statements ofincome, stockholders' equity and cash flows, for each of the three y These fmancial statements are the responsibility of the Corporation's management. Our December 31,1997. responsibility is to express an opinion on these financial statements based on our aud fmancial statements of CSW Finance Company (1997 - which includes CSW Investments) and (1996), which statements reflect total assets and total revenues of 22 percent and 35 perc percent and 36 percent in 1996, respectively, of the consolidated totals. Those stateme auditors whose reports have been furnished to us and our opinion, insofar as it relates to the a those entities, is based solely on the reports of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standa require that we plan and perform the audit to obtain reasonable assurance about whether the are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the a and disclosures in the financial statements. An audit also includes assessing the accounting principles u signiftcant estimates made by management, as well as evaluating the overall financial stateme believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the financial statements refer above present fairly, in all material respects, the financial position of Central and South West Corporatio subsidiary companies as of December 31,1997 and 1996, and the related consolidated statements ofincom stockholders' equity and cash flows for each of the three years ended December 31,1997, in conformity w generally accepted accounting principles. Arthur Andersen LLP l Dallas, Texas February 16,1998 l l 66
AUDITOR'S REPORT TO THE MEMBERS OF CSW UK FINANCE COMPANY We have audited the consolidated balance sheets of CSW UK Finance Company and subsidiaries as of 31 December 1997 and the related consolidated statement of earnings and statements of cash flows for the ye ended. These consolidated fmancial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated fmancial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the fmancial t l statements are free of material misstatement An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the fmancial statements. An audit also includes assessing the accounting principles used in and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated fmancial statements referred to above present fairly, in all material respects, th fmancial position of CSW UK Finance Company and subsidiaries at 31 December 1997 and the result of their operations and cash flows for the year then ended in confonnity with generally accepted accounting principle i the United Kingdom. Generally accepted accounting principles in the United Kingdom vary in certain significant respects from
- J,
generally accepted accounting principles in the United States. Application ofgenerally accepted accounting principles in the United States would have affected results of operations and shareholders' equity as of and for the year ended 31 December 167 to the extent summarised in Note 23 to the consolidated financial statements. KPMG Audit Plc Chartered Accountants London, England Registered Auditor 19 January 1998 l l l I 9 e 67 I I
AUDITOR'S REPORT TO THE MEMBERS OF CSW INVESTMENTS We have audited the consolidated balance sheets of CSW Investments and su and the related consolidated statement of eamings and statements of cash flows for the year then en consolidated fmancial statements are the responsibility of the Company's management. Our respo express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in the United State standards require that we plan and perform the audit to obtain reascnable assurance about w statements are free of material misstatement. An audit includes exanuning, on a test basis, eviden the amounts and disclosures in the financial statements. An audit also includes assessing the accounting ) principles used in and significant estimates made by management, as well as evaluating the statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material financial position of CSW Investments and subsidiaries at 31 December 1996 and the result of their op and cash flows for the year then ended in confonnity with generally accepted accounting principles in the U Kingdom. Generally accepted accounting principles in the United Kingdom vary in certain significant respects from generally accepted accounting principles in the United States. Application of generally accepted accounting g,.i principles in the United States would have affected results of operations and shareholders' equity as of year ended 31 December 1996 to the extent summarised in the notes to the consolidated financial statements. KPMG Audit Plc Chartered Accountants London, England Registered Auditor 22 January 1997 I y 4 9 e 68
REPORT OF MANAGEMENT Management is responsible for the preparation, integrity and objectivity of the consolidated fmancial statements of Central and South West Corporation and subsidiary companies as well as other information contained in this Annual Report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reflect amounts based on the best estimates and judgments of management, giving due consideration to materiality. Financial information contained elsewhere in this Annual Report is consistent with that in the consolidated financial statements. The consolidated financial statements have been audited by CSW's independent public accountants who were given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the board of directors and committees of the board. CSW and its subsidiaries believe that representations made to the independent public accountants during their audit were valid and appropriate. The reports ofindependent public accountants are presented elsewhere in this report. CSW, together with its subsid.iary companies, 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 ,." -J ', that the assets of CSW and its subsidiaries are properly safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that the companies will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees. Internal auditors continuously monitor the effectiveness of the interral 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 conunittee, which is comprised entirely of directors J 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 ofinternal controls, no intemal 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 deriwad. l CSW and its subsidiaries believe that, in all material respects, its system ofinternal controls over i financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31,1997. E. R. Brooks Glenn D. Rosilier Lawrence B. Connors Chairman and Executive Vice President and Controller Chief Executive Officer Chief Financial Officer 69
GLOSSARY OF TERMS The following abbreviations or acronyms used in this Financial Report are defined below: Definition Abbreviation or Acronym ...American Customer SatisfactionIndex (Survey conducted by the University of M ACSI.. Business School and the American Society of Quality Control) J ..American Electric Power Company, Inc. 1 .. Proposed Merger between AEP and CSW where CSW would become a who AEP.. AEP Merger.. subsidiary of AEP ... Accumulated Postretirement Benefit Obligation APBO.. ... Allowance for funds used durir3 construction AFUDC ..Alpek S.A. de C.V. ,Alpek.. ...American Nuclear Insurance ANL. ... Arkansas Public Service Commission Arkansas Commission.. .. British themial unit Btu... ..Burlington Northem Railroad Company Burlington Northern.. ..C3 Communications,Inc., Austin, Texas (formerly CSW Communications,Inc.) C3 Communications.. .. Clean Air Act/ Clean Air Act Amendm sts CAAA.. .. Cajun Electric Power Cooperative, Inc. Cajun.. .. Comprehensive Environmental Response, Compensation and Liability Act of 1980 CERCLA. ..CSW/ICG ChoiceCom, L.P., a joint venture between C3 Communications and ICG Choicecom.. Communications,Inc. .. Central Louisiana Electric Company, Inc. CLECO.. Court of Appeals.. .. Court of Appeals, Third District of Texas, Austin, Texas .. Central Power and Light Company, Corpus Christi, Texas CPL. .. Final orders received from the Texas Commission in CPL's rate case Docket No.14965, CPL 1997 Final Order.. including both the order received on September 10,1997 and the revised order received on October 16,1997 .. Final order issued on March 31,1997 by the Texas Commission in CPL's rate case Docket CPL 1997 Original Rate Order.. No.14965 .. Settlement agreemcat filed by CPL with the Texas Commission to settle certain CPL CPL 1995 Agreement.. regulatory matters CPL 1996 Fuel Agreement.. .. Fuel settlement agreement entered into by CPL and other parties CSW., .. Central and South West Corporation, Da!!as, Texas ..CSW common stock, $3.50 par value per share CSW Common.. CSW Credit. ..CSW Credit, Inc., Dallas, Texas CSW Energy.. ..CSW Energy, Inc., Dallas, Texas CSW Energy Services. ..CSW Energy Services, Inc., Dallas, Texas CSW International.. ..CSW International, Inc., Dallas, Texas ,.CSW Investments, an unlimited company organized in the United Kingdom through which CSW Investments.. CSW International owns SEEBOARD CSW Leasing.. ..CSW Leasing, Inc., Dallas, Texas CSW Power Marketing. ..CSW Power Marketing, Inc., Dallas, Texas CSW Se.$es.. .. Central and South West Services, Inc., Dallas, Texas and Tulsa, Oklahoma CSW System.. ..CSW and its subsidiaries t i' UK Finance Company.. ..CSW Finco, an unlimited company organized in the United Kingdom through which CSW Intemational owns CSW Investments CSW U.S. Electric System.. ..CSW and the U.S. Electric Operating Companies CWIP.. .. Construction work in progress DGES. .. Director General Electricity Supply DHMV.. ..Dolet Hills Mi ling Venture DOE. .. United States Department of Energy ECOM.. .. Excess cost over market El Paso.. ..El Paso Electric Company .1 Paso Merger Agreement.. .. Agreement and Plan of Merger between El Paso and CSW, dated as of May 3,1993, as amended Energy Policy Act.. .. National Energy Policy Act of 1992 EnerShop.. ..EnerShop Inc., Dallas, Texas Entergy Texas.. ..Entergy Texas Utilities Company EPA.. .. United States Environmental Protection Agency EPS.. .. Earnings per share of common stock ERCOT.. .. Electric Reliability Council of Texas 70
GLOSSARY OF TERMS (centinued) The following abbreviations or acronyms used in this Financial Report are defined below: Abbreviation or Acronym Definition ERISA.. .. Employee Retirement Income Security Act of 1974, as amended Exchange Act.. .. Securities Exchange Act of 1934, as amended EWG.. ... Exempt Wholesale Generator FASB... .. Financial Accounting Standards Board FCC.. .... Federal Communications Commission FERC.. ... Federal Energy Regulatory Commission FMB.. First mortgage bond FUCO.. .. Foreign utility company as defined by the Holding Company Act Guadalupe.. .....Guadalupe-Blanco River Authority pollution control revenue bond issuing authority HL&P... .. Houston Lighting & Power Company Holding Company Act.. ..Public Utility Holding Company Act of 1935, as amended HVdc.. ..High-voltage direct-current IBEW... .. International Brotherhood of Electrical Workers ISO., .. Independent system operator ITC.. .. Investment tax credit KW.. ... Kilowatt LIFO. ..Last-in first-out (inventory accounting method) Louisiana Commission.... .. Louisiana Public Service Commission LTIP.. ..Long-Term Incentive Plan MD&A.. .. Management's Discussion and Analysis of Financial Condition and Results of Operations \\. MDEQ.. .. Mississippi Department of Environmental Quality . 1J MGA .. Manufactured gas plant or coal gasification plant Mirror CWIP.. .. Mirror construction work in progress Mississippi Power.. .. Mississippi Power Company MMbtu.. ..Million Btu MW.. .. Megawatt MWH. .. Megawatt-hour National Grid..- .. National Grid Group plc NEIL.. .. Nuclear Electric Insurance Limited NRC.. .. Nuclear Regulatory Commission OASIS... ..Open access same time information system Oklahoma Commission. .. Corporation Commission of the State of Oklahoma Oklaunion.. ..Okla.mion Power Station Unit No.1 OPEB. ..Other postretirement benefits (other than pension) PCB.. ..Polychlorinated biphenyl PowerShare.. ..CSW's PowerShare8M Dividend Reinvestment and Stock Purchase Plan PRP.. ..Potentially responsible party PSO.. ..Public Service Company of Oklahoma, Tulsa, Oklahoma PSO 1997 Rate Settlement Agreement.... Joint stipulation agreement reached by PSO and other parties to settle PSO's rate inquiry PURA.. ..Public Utility Regulatory Act of Texas (including amendments to the law) PURPA.. ..Public Utility Regulatory Policies Act of 1978 y - RCRA.. .. Federal Resource Conservation and Recovery Act of 1976 Retirement Plan.. ..CSW's tax-qualified Cash Balance Retirement Plan Rights Plan.. .. Stockholders Rights Agreement between CSW and CSW Services, as Rights Agent RUS.. . Rural Utilities Service of the federal government SEC.. .. United States Securities and Exchange Commission SEEBOARD- ...SEEBOARD plc., Crawley, West Sussex, United Kingdom SEEBOARD U.S.A.. ..CSW's investment in SEEBOARD consolidated and converted to U.S. Generally Accepted Accounting Principles SFAS.. .. Statement of Financial Accounting Standards SFAS No. 52.. .. Foreign Currency Translation SFAS No. 71.. ... Accounting for the Effects of Certain Types of Regulation SFAS No. 87.. ... Employers' Accounting for Pensions SFAS No.106.. ... Employers' Accounting for Postemployinent Benefits SFAS No. I15. ... Accounting for Certain Investments in Debt and Equity Securities SFAS No.123.. ... Accounting for Stock-Based Compensation 71
GLOSSARY OFTERMS (continued) De following abbreviations or acronyms used in this Financial Report are defined below: Abbreviation or Acronym Definition ... Accounting for Transfers and Servicing of Financial Assets and Extinguishment of SFAS No.125.. Liabilities SFAS No.128.. .. Earnings Per Share SFAS No.130.. ..Reponing Comprehensive Income .. Disclosure about Segments of an Enterprise and Related Information SFAS No.131. .. Southwest Power Pool SPP.. .. South Texas Project nuclear electric generating station STP.. ..STP Nuclear Operating Company, a non-profit Texas corporation, jointly STPNOC.. owned by CPL, HL&P, City of Austin, and City of San Antonio .. Southwestern Electric Power Company, Shreveport, Louisiana SWEPCO.. ..The plan of reorganization for Cajun filed by the Members Committee and SWEPCO SWEPCO Plan.. on January 15,1998 with the U.S. Bankruptcy Court for the Middle District of Louisiana Tejas.. ..Tejas Oas Corporation Texas Commission.. -.Public Utility Commission of Texas ..Transok, Inc. and subsidiaries, Tulsa, Oklahoma Transok.. .. Collective term for securities issued by business trusts of CPL, PSO sad SWEPCO Trust Preferred Securities.. classified on the balance sheet as "Certain Subsidiary-obligated, mandatorily redeemable preferred securities of subsidiary trusts holding solely Junior Subordinated Debentures of such Subsidiaries" Union Pacific _ .. Union Pacific Railroad Company M. - ;. U.S. Electric or U.S. Electric ' ' ~ Operating Companies.. .. CPL, PSO, SWEPCO and WTU .!dmpresa De Electricidade Vale Paranapanema S/A Vale.. ..WestTexas Utilities Company, Abilene, Texas WIU., WIU 1995 Stipulation and Agreement.... Stipulation and Agreement to settle certain WTU regulatory matters ~, a 72 -}}