ML20217H835
| ML20217H835 | |
| Person / Time | |
|---|---|
| Site: | South Texas  |
| Issue date: | 12/31/1996 |
| From: | Brooks E CENTRAL & SOUTH WEST SERVICES, INC. |
| To: | |
| Shared Package | |
| ML20217H818 | List: |
| References | |
| NUDOCS 9710170096 | |
| Download: ML20217H835 (200) | |
Text
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Emerging. Global. Energy. Servicem Business. Anew Central and South West Corporation is emerging to
.m6et the opportunities of a more competitive electric power industry. CSW has become globalin reach . . . is expanding $its broad capabilities in energy . . . is developing new teleconunu-p nications and energy-management services . . . and -is redefining itself as a customer-focused, market-oriented business designed
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not just to compete, but to win.
- Contents Highlights 2 L1996 Milestones 3 Chairman's Letter: Emerging 4 G!obal 8 Energy- 12 Services 16 BUSINESS 20 Financiannformation - 23 Di:ectors and Officers 27 Shareholderinfarmation 2s c
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m , , , Retsra en Average Catalage sed (Hvidends '
.1996 1995
-- , -- ' Commen Equity Per $bart
-[7@ Cia! 03!J &myiv,4 ( .,
Operating Reienue5 i . ,
. $$.155 - $3.143 - /6 . no ~
- U S Eierric fun!and Purchased Power 1,228 , 1,045
" o o thred Ungen Cest of Sa!es . 1.331 158 2, - m o, o 0:re Doe $ng E9enses - 1.399 1.065 12 o o~o ' g -o
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402 254 fo jj, .g oa '
. _laes ' _ ~ ~
. Opeeng incomo -- 795 621 i.
3
- Other (61)- 99 6
. Intetest and heterred Stoci Dividends .(437), (343) tocore from Discontinued,0petafsns 12 25 4 58 Gain on Ne of Discentinued Operacons: 120 -
Het incorv for Common Stock $ 479 5 402 o o- i
- es a4 ss se et .is 64 ts ss .
imov .m 0 twhA
, Cowton Stxk Dia ri10ivicends .,F,m % w e 4wv.
Earnings per Share
$2.07 - $2.10 ' %
l Dw,&nds per $fea .
. $1.74 $112 Book Vales ;er Shve ' . , $17.98 7 $16 48 3-Amage Commpn Shares Outstan@g rate 207.5 191.7 ,
ReMn on Aeage Common Equity 12.1 % 13.1% ,
' Dmdend Yeld 68% 62%
'DMdend Payout Rabo 84 % 82 %
YerEnd Market Rice $25" $27'*
, S:xk Performance mienur Dividends High low . Paid n_ _
JY!6 - first 0uarter - $28" $26" $0A35
$ecordadaner 28 5 26 " 0.435 Third 0uvter 280 25 " 0 435 Feurth 0uarter 28 25 " 0.435
$174 19'i$
Fast Quader . - $24 rs . $22" : 50 430' Secor<100ath : 26 " 23 " 0430
""#"T i TNd Quaner . ~ 26" - 2'4 " - 0 430
. Foudh ocasc : 28" 24 " 0.430 '"**5 ""* ** *
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' te ow asa nne u amt en amt n,8am ace se e
; $ , 7, .
CSW Tewr uces"scact a wees e sawcet sewy, sta:wm
- k ascris CSit%tdr9 Cid d,srives y pe ne m UmrJ lcarng;Mste-
.IN NEWitt E0MihJt6f MrYW $WlWTr r $43 tr$ntrprysmil qwt wry satwtf 4ctPr!ry - 'f mmatwat suvvn eworm rer da u ncorn stamnt e a twanni i "' ## " " *' * ""*" ""*W
; ocy d s'sreatws Cem M N avwteter! Mnsf4 swmets N Uw neceu d H - i *****V'###'"*N'*' WI
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- CCt.Welif> WCrve%%mrPMisk%rsch Wece ny Lv Newt b CMW Cet$n Smith resun. Wanw1t was htn'esub Me et$t:Wd & metr'4 f%S! C016&W5 h5tur Gernes OtC& Rot 5 $WSU$19' ' W Sus ggv6, ytegged 4r sLck s'enerk ty tusen g R&s sap Js gecnn:
#4 Ak;&y wshtsty Kltdny 04Wt] AMJtit.'Mer5 kgsl4Gn PQdt>
tv kite 4M1 Ltas kn%me wWhms:IJenk*per;ts in N xnt$x Wistemset
, tNdgs M $46 CSW M 45 subsidarg$ Cper3ht d dW con %grus 2N6q vtxtethasmess &tti, eventes ed wkt
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1996 Wiestones complex at Sw eeny, Texas; the plant is expected to be completed in lW8. e Launched a joint venture between SEE-IlOARD and Amoco to market natural gas in e Completed the $2.1 billion purchase of the United Kingdom, where the gas supply SEEllOARD plc, a regional electricity c<unpany
'unket is being opened to full competition.
sening about 2 million customers in Southeast England. e Received franchises to build telecomrmni-cations systems in Austin and Corpus Christi, e Recognized for the second consecutive Texas. year as one of the top U.S. electric utilities in customer satisfaction, based on suncys by the e Sold our i mer intrastate naniral gas Univenity of Michigan School of flusiness pipeline and marketing subsidiary, Transok, Administration and the American Society for Inc., for a total consideration of $890 million Quality Control; CSW ranked 6rst in the 1995 and applied most of the cash proceeds to the survey. purchase of SEEllOARD.
= Named Utility of the Year by Burric Lig/it a Restructured on a functional basis our ek hr magazine, electric utility business in the United States into e SEEllOARD was ranted as the leading Ley lines of business: power generation, enenry regional electricity company in customer sebice delivery and energy senices.
by the U.K. government's Offke of Electricity e EnerShop entered negotiations for its 6rst Regulation. million-dollar contract to provide energy retro-fit senices for a 36-story office tower in Dallas.
= Secured certi6 cation for CSW Commun-ications as the Grst exempt telecommunications e llecame the Gnt American business to use company under the Telecommunications Act Deliberative Polls'" an innovative approach for of 1996, im otving our customers in decisions about a llegan construction on the Grst maior future energy planning.
cogeneration proicct to be built in Mexico; e Named Utility of the Year by the Ameri-CSW International is a 50 percent joint-venture can Wind Energy Association. partner with the Mexican chemical 6rm Alpel , go,mred by U.S. Department of Energy e Acquired for $40 million a minority inter- for our energy ef6ciency and renewable energy est in Vale, a private electric distribution com- programs. pany in lirarit sening approximately 600,000 customers.
= Fonned CSW/ICG ChoiceCom'," a ven-ture equally owned by CSW Communications and ICG Communications;it plans to pn ide
- local and long-distance telephone and data ser-5 ices to customers in Texas, OLlahoma, Louisiana and Arkansas.
a llroke ground for a 330-megawatt cogen-eration plant at Phillips Petroleum Company's 3
c e Chairemen% Letter compank:s abroad. At the same time, several'- )
- national utility systems, from Europe to Australia, are being privatized. These new poli-cies represent unprecedented opportunities. .
- In the United States, federal and state poli-j, i cymalers are reshaping many of the regulations I that govern electric utilities. They are consider- i ing ways to create competitive markets by A new Central and south West Corporation is -
requiring electric utilities to unbundle their Jemerging--one that differs dramatically from major senices. They are being encouraged prin. (- -the CSWof the past. - cipally by large industrial energy users, which j We have become global in scope, and our want s shop for the lowest-cost electricity. L operations now range far beyond the Feneration Accordingly, w e are pursuing two strateFi c 4 L and delivery of electricity. We are competing in prioritim independent power and telecommunication' s Anticipate the new direction of the indus-markets and are developing a wide range of . worldwide and take advantage ofop;mrtuni-g energy-management senices. . ties for enhancing our customer base, our ser-
-For anyone w ho still thinks of CSW simply vices and our financial perfonnance.
[ as a hohling company with four electric utilities e Influence state and federal policies to -
-in the southwestern United States, one fact assure that any new legislation is fair to all of shouhl be eye-opening: our constituencies, including our sharehohiers,
%ow han more astomm eurside the United customers and employees.
Starn shan tu lun in thiiwuntry Our evnlution from a regional electric utility
- system to a global, market-driven business will % issue is more crucial to CSW than the accelerate in 1997 as we build on qqr eyew base electric utility restructuring being considered by 4
' and strengthen our cor}mrate posmomng and state and federal policymakers.
-Identity in the marketplace.- We support fair competition. We are posi-tioned to succeed because we have relatively low hN costs, economically healthy senice areas, a -
The changes we're making in 'our compuy diverse business base, enterprising management ; are being driven by new investment opportuni" and a h;gh credibility with our customers and . i ties amund the world and by increeinF competi-employees. Uut we cannot support initia ives tion among electric utilities in the United States, aimed at increasing competition in ways that do
.Many n tiors talay are opening their bor-not adequately protect our sharehoklers and our ders to foreign imestment m the energy sector.- customers.
- 6 -From Mexico to Thailand, governments are chimsing to fuiance the expansion of their ener-gy infrastructure to sup[mrt economic growth ~
by encouraging partnerships with experienced , 4-1 I _. . . _ _ . . . . _ . _ _ _ _ _ . . _ . _ _ _ _ . _ . - , - , . - _ . - - . _ . . - . _ . _ , . , - . -
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i LR. Brooks Chantman, President and i Chief Docutive Otticer l l 1 [ For that reason, we are supiwirting some ! industry restructuring proiwisals and optwising others,Ivsed on three triteria; e A// classes of customen, not inst the tory, we asked you, our sharehoklers, to help by largest ones, shouhl benefit from restructuring. writing letters to your elected representatives.
= Our shaicholders shouhl be reimbursed We were gratiGed that more than 1,0ml of you l
for imesonents made by our companies on took action. Your letters had a signi6 cent in0u-behalf of our customers and appnn ed by regu- ente on mcmbers of Congress. Although the laton, repeal bill did not reach a door vote last year, e The reliability anilintegrity of the electric the legislation is expected to come before ixm cr system shouhl not be emnpromised. Congress again this year. We are expressing these views to regulatory and legislative bodies in Washington and in the Adapting to the New Era I cepit.ds of the states we sene. In particular, we Though the details are not yet cles r, it is are proposing that existing obstacles to competi- obvious that the electric power industiv of the tion in our industry be removed befme restruc- future will be more competithe and more gloh-turing is considered. alin scope. We have het n preparing to succeed l , t )ne of the most serious obstacles to compe- in this era ofincreased competition, tition is the Public Utility Ilohling Company Our priorities have been to maintain the l Act of 1935. Only 14 aethe registered public loyalty of our current customers by offering , j unhty holdmg companies are regulated under low-cost electricity ami high-quality sen ice; to l this outdated law. Other utilities can develop expand our customer relationship <-our most new lines of business, acquire other companies important strategic asset; to offer innovative or expand their enices at will. Ahhough recent new senices related to our core competencies; actions by the Securities and Exchange and to seek opporninities in giowing markets Commission base liberahied the imestment outside the U.S. We are on track with all four of I rules under PUllCA, utihty holding companies these piiorities. 4 like CSW must still obtain authority from the a We have further reduced our costs and are ) SEC for even the most routine transactions. competitive with other energy providers in sir- i j Signi6cantly, the industrial companies now sdt- tually esery area that we serve. In additior., we j ins power at u holesale are exempt from this law. particularly are proud of our record for quality A coalition of maior utilities, with CSW at customer senice. During the past two years, our l j ihe forefront,is sceling the repeal of PUIICA U.S. utilities have been cited as among the best l In IW6 PUIICA-repeallegislation having in the country in customer service, and SEE-strong hipartisan suplort was introduced in BOARD was named No. I in the United t Congress. For only the second time in our his- Kingdom. Our cortmrate reorganization in IW6, which realigned our electric twmer func- ; tions into separate lines of business, was drisen 5
Our operations - n:w range
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t94 0F 8%NSS - rtPICAt OrtW10N5 EXPtCTE0 8tSNSS Cl2WE far bayond the -e-~ - - - - - - meeded tu genertte he sketsity be sale to C-~ ekctric sterles, mencipa#rms couperatives and other maoissafe puOesers g^nerateion
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detntwter of ekstric4y to esta# costamers
,e,-.4 ant 3 %5hpw a u Wpw Ue twtgy Servicee Energy maketMg sad custener pregwns.
inchmang cusforner serrkes. meter reading. Canpet tive wing and accountmg. energy etnchmes and new servke efferMgn clectr,c,ty. i i .fe- ..e.-t k .~.~ ,e.or ,.- and utintke outskie the ikdted Statse C-,.t..e~.ted Consnunkstens fedecomnwucatens serv 4ee such as Costamet Cwwperftfve Choice ned Courtre!" tekphone. date transmk. scos. btemet and new Wormation senicas twgy tradirg Open market traeng of ekttricky and other knna Competnne et energy askt nnancket Metruments te mannge market risks and comtunotene et etkreet typre of enesgy to ewet customers' demantk I., s.,,m- ne w4., we c--,e s .r., c-in large part by our emphasis on greater cus- Financial Petfennance tomer understanding and service. The overriding goal of our strategy is to
. During the past two years, we have more pnnide long tenn growth for our shareholders.
than doubled the number of electric customers We are pleased that we have been able to main-we serve with our acquisition of SEEllOARD. tain the level of our dhidends in the face of in addition, we have won new contracts to sup- increasing competition. InJanuary 1997 our ply municipalities, cooperatives and other Imard of directors continued the quarterly divi-w holesale customers. dend on common stock at the existing level,
= We have becn developing and marketing having an indicated annual rate of $1.74.
an aruy of additional senices to our existing The board of directors didn't increase the and new cusmmers, heluding teleconununica- dividend r.s it had for many years in the past tions and energy-management services. Our because our payout ratio has risen above 80 per-new joint venture with ICG Communications, cent during the past few years. We plan to through which we intend to pnnide local and reduce it to 75 percent or below in the coming long-distance telephone and data senices, is a years m provide the capital needed for future preview of the . ole we plu to play in communi- rrowth. We believe that our new strategies will cations. support the continuance of the underlying divi-e Ilecause energ 's a relatively mature dend level and our fmancial goal of maintaining industry in the United States, we are placing CSWs position among the best-performing more emphasis on developing business in other companies in our industry, countries, especially those with good growth Largely because of the addition of SEE-rates in their energy demand and stable political flOARD, our operating revenues and operating and economic conditions. In addition to acquir- expt.nses increased significantly owr those of ing SEEllOARD, we have expanded into 1995. Our net income for common stock Mexico and Ilrazil. increased almost 7 percent to $429 million and included a one-time gain from the sale of Transok of $120 million and write-offs of SIN million. Our earnings per share were $2.07, 6
'Centraland South West exhibits unique leadership and vision in an uncertain age. " -ems um nav .w unrron or tucnuc uurt uom uvma are indications of some of our next steps-such as power marLeting, w hich is awaiting federal approval, and possible additional acquisitions, now that our investment authority has been compared to $2.10 m. 1995, when there were 8 increased by the SEC from 50 percent to 100 percent fewer shares outstandm.g. percent of our retained earnings. H,e are proud M,e recogm.re that we face two major finan- . of these accomplishments and plans, but their cial challenges m. 1997, li.irst, two of our sub- . real importance h.es m helping prepare CSM. sidiaries, C,entral Power and Light C,ompany for continued success m. the future. and Public Senice Company of Oklahoma, have All of us at CSW were extremely pleased rate reviews pending before their state utility . .
. . , when a leadm.g mdustry publication, Elecinc comnussions. l'he outcomes of these cases ,
l.ight c Iber, named CSW Utility of the l, ear could affect our ability to earn returns compara- . m December 1996. Our i1,500 employees ' ble to those earned m. the past. Second, we are carned that award by embracing change to pre-taking steps to maintain our earnings in the pare our entire corporation for the new era. short term to provide a bridge oser the next Our goal, however, is not success in 1996 but a ses cral years until our strategic investments continued trend of success m. the future. H.e see begin making significant contributions. that awant as a milestone on the way to emerg-M,e are focused on meeting both of these ing as a successful energy and senices business challenges to increase the overall return. H,e are for the 21st century. ,the ultimate bench. . .eianes placing a greater emphasis on man"Fi ng our
. of that success will be our customers and share-portfoh.o of assets, with the goal ofincreasing
. . holders.
our earnings. This means we will work to main-tain and grow an asset as long as it is perform-ing at an acceptable level; however, we also will harvest gains through divestiture when that will [ achieve greater value.
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.fhat is the approach we took m. selh.ng Chainnan. President and
.I,ransok. M'e also will work to male the most of ChiefEvecative Officer short-term financial opportunities that arise.
February 28,1%7 Onphad on Long Tene Success This report de,eribes our progress in 1996, including the purchase of SEEBOARD, *he restructuring of our operations, our new activi-ties in telceorrmunice .ns, the strategic sale of our former natural mnit, Transok, and our npanding interne aal projects. Aho included
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e 8 source of protits, after Central Power and 1.ight Company, contributing 50 cents per share in CSW continues to invest in projects around the earnings, or approximately 24 percent of corpw world because grow th opportunitu , in other rate earnings. coumries are frequently greater than those in We expect SEEBOARD to make similar the United States, contributions in the future. In addition to sup-The economics and demand for energy ser. plying electric power at among the lowest prices sices are growing much faster in many coun. in the country, SEEllOARD provides natural tries, particularly in I.atin America and Asia, gas to 6.000 business customers, ou ns equity in than in the United States. In addition, other a 675-megawatt independent power plant on highly deseloped countries-from Europe to the Isle of Grain in Kent, provides electrical
\ustralia-are privatizing their government. contracting and management senices and oper. '
owned utilities. We have been working to capi. ates a chain of SEEBOARD shops and super-tahre on the opp >rtunities presented by these stores that sell home appliances. developments where the legal, political and ecir in 1996 SEEllOARD launched a new joint nomic conditions offer a high degree of security, venture with Amoco-Beacon Gas-to market Engl.ind Our greatest milestone in 1996 was completing our purchase of SEEllOARD plc, the leadine electric power distribution and sup-ply company in the United Kingdom. SEEBOARD's 2 million customers nmre l than doubled our total customer base in 1996 SEEBOARD proved to be our second-largest 9
7Mexicos]federa,' government is coordinsting with the state and municipalgovernments to create and implement eco , , nomicpolicies and regulatory reforms that willcreate an efective market-based economy Ihe Enertekproject is the first large cogeneration projea t that will be built in Mexico under the new gas and electricity legalframework. "
~MtX1cAN Pllf3m(NT IILNislo U[inio, sl%MNG iN mon 114tRrY oN JUiV 4 i9% AT THi ANNoVNetMENT or DIE AL13HRA GK;tNTRATIoN PfloJECT Anmcoi North Sea natural gas throughout Englaad. The natural gas industry is being deregulated in Fngland, Scotland and W,les and will be open to full competition in 1998. In 1996 CSW International entered into a Beacon Gas alreidy is becoming a major con.- joint venture agreement to build, own and oper-puitor of firitish Gas in Southeast England bv ste a 109-megawatt gas-fired cogeneration pm-offering prices that are substantially lower, ject at Altamira, Tamaulipas. Our partner in the Independent research shows that Beacon Gas project is Alpek, S.A. de C.V., one of Alexicob has emerged es a market leader, securing more largest privately ,wned petmchemical compa-than oac out of four of the customers changing nics and part of the large Alfa incastrial group.
gas suppliers-almost twice as many as its near. The joint venture, called Er.ertek, will pmvi.ie est competitor. steam and electricity to petmchemical firms at in addition, SEEllOAkD is advising and the Altamira complex and cicetricity to firms in working with utilities and governments of sever- Alonterrey and other areas of Alexico. al countries on energy management. As part of a The project is significant because it is the joint venture, SEEBOARD has secured a con- first major cogeneration pmject to be built in tract to ovence a major pmiect to modernire Alexico under a new legal framework regulating the electrical network for the State of Orissa in power projects. It is the first cogeneration joint India. Other work undertaken has ranged from venture invohing an American firm, and it the training of utility managers for privatization wrks the first time that Comision Federal de in Thailand to advising the Uganda Electricity Eleericidad, the Alexican national electric utili-Board over a three-year period. We view SEE- ty, has allowed a private power prmlucer access BOARD as a springboard for CSW m pursue to its transmission senices. In addition, the pro-business in other countries, particularly in ject has a long-term gas supply contract with Europe. Pemu, another fir;t. Maico For years we have re s gnized that Constniction at the Altamira project began Alexico is strategically important to CSM"s in the fourth quarter of 1996. Commecial grmvth. We serve a large portion of the Texas operation is expected early in 1998. border with Alexico, extendiug fmm liarlingen Bmzil in 1996 we also completed an equity at the southernmost point northwestward nearly investment in Vale, a private Brazilian electric 600 miles along the Rio Grande. We have been distribution company that serves a 118,000-doing business with Alexico for 80 years. square-mile senice area. It has equity interests Because the demam'. for energy is gmwing in five additional electric distribution systems in much famr there than in the United States, the Brazilian states of Sao Paulo, Parana and Alexico is e promising market for many of our Theantins, sening appmximately 600,000 cus-coer ry services.- tomers. Vale pmvides opportunities for CSW International to invest funner in Brazil and elsewhere in Latin America. Also in Brazil, we are part of a consortium that was awarded a contract to conduct a feasi-bility study for an 1,100-megawatt hydropower
l b e1 * ~ The growert demand for electricity in many
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.LI- . humtment Rntrictions. Under the Public Utility llolding Company Act, the SEC restricts the investments by registered utility hohhng companies like CSW in foreign utility companies and exempt wholesale generators, w hether domestic or foreign. That restrictio 1 Because the has bee - . amount equal to 50 percent of the company's most recent 12 months of retained earnings. With our SEEllOARD investment, t demaHd fOr OHergy me were appn, aching the iimits of that ceiiing.
This limitation had been an obstacle in pursu-iS growing much i"s ea><< eeee"""io"- In 1996 we app!ied for authority to increase 4 our investments ut exetnpt v.holesale generators faster isnere than in ana fe,cign euh,y _ganies f,em so penxm to 100 percent of our retained earnings. In the United States, January 1997 the SEC approved the request. MeXIc0 IS a promising market. 11
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,"What is impressive about CSW1 integrated resource plan is that the company voluntarily asked customm what they wanted and then actedaggressively on what they heard. 7he critical thing is that CSWlistened. Most ofthe companies in this state haven't even asked %u wunow ma mmmunwnunurwswsw omsswosu usan moswa oN TM M iu k UTHl.MoMWoN ot l rW We save expanded our U.S. energy business from the operation of our four electrie utilities in the Southwest to include the construction and operation of independent [x>wer plants in 1996 we addressed loth objectives around the country.1)uring the next phase of through our Electric Ilusiness initiatius, a pro-espansion, we intend to become an energy trad- gram that has essentially reshaped our business er once we receive federal regtdatory approval. to meet our customers' changing needs. We reorganised the activities in our conununities to U.S. bect 4 UtWties focus cur employu:s on business development Our core bu iness is our four electric utili- and other conununity programs and to pay ties that operate in Tesas, Oklahoma, l.ouisiana greater attention to the customer. Responsibility and Arkansas, in 1996 they provided 63 percent for 2nsu ering rouune questions and receiving of our resenues and 57 percent of our earnings, payments u as shitied to 24-hour telephone ser-or $1.18 a share. Earnings were affected by the sice centers and h> cal stores that work etmpera-remrding of resenes for utility imestments, tisely with us. These initiatives are helping us restructuring charges and regulatory matters. reduce costs and improve customer service Their combined service areas are economi- through increased value and greater customer cally diverse, ranging f rom agriculture to high- choice. tech firms to petrochemicals and other heavy Comp <titive Pricing. Our utilities continue to industri(i. We forecast that retail Lilowatt-hour be among the low-cost supplie.s in the region sales in our service areas will grow at an aserage we serve. Pt.htie Senice Company of Oklahoma rate of 2.2 percent a year during the nest sells electricity at the lowest aserage retail prices decade, compared to an aserage grow th of 1.6 in the Southwest, and Southwestern Electric percent for the West South Central region of Power Company follows closely behind. the country as a w hole. Our competitise prices helped us add anoth-Gunperision Straigi<t llecause of both regu- er new wholesale customer in 1996. West Texas latory and market changes now taking place, all Utilitics Company won a contract to pnnide electric utilities are feeling the pressures of electricity to the City of Weatherford, Texas. competition. Open conqietition for wholesale The contract is expected to save residents there p.m er customers has benefited CSW because an average of 13 percent on their electric bills. we base gained far more business than we base We currently are competing against two hist. Unless we continue to offer competitive other groups to acquire the non-nuclear gener-prices and become their preferred supplier ating assets of Cajun Electric Power Cooper-based on superior customer serdre, we know we ative, Inc., w hich is operating in bankruptcy. cannot expect to retain our customers-whether With the assets would come the right to serve wholesale or retail. Therefore, we have been Caiun's member electric cooperatives. Our working to reduce our costs and to pnnide only Southwestern Electric Power Company sub-the best in customer senice. sidiary has filed a plan to acquire the Cajun assets for S780 million in cash. An addinonal amount up to $27 million wouhl pay other bankruptcy expenses and wouhl purchase certain other claims. Our proposal to supply Cajun's member cooperatives ti>r 25 years represents the 13
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A wsinnown symbol of the Southwest. the wird
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In all the imih, customers reconunended a mix of options for meeting future energy needs L, west electricity cost of all the bids made. rather than any single strategy. For cumple, Central Power and I.ight Company's custonu rs Cajun sells power to 12 electric cooperatises that serve about I million consumers through- preferred, in onler of preference, energ efb ciency aethities, a new fossil fuel power plant, out 1.ouisiana. J Coromer Service. Our high-quality customer renew ahle eneriny prograins and gumer trans-senice carned us recognition as L. I among Imned fnnu other regions. Nearly three-fourths electric utilities in the country for 1995, and of the participants rated the Deliberative Poll pn>cen a 10 on a scale of 1 to 10 in assessing its best among electric utilitu in our region for 1996. The annual index of customer satisfaction
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We bas e taken these recommendations seri-is compiled jointly by the Unhersity of Alichigan School ofIlusiness Administration ously. They guided us when we deseloped a new integrated resource plan that was filed with the and the American hociety for Quality Control. Texas PUC in early 1997. This plan integrates in additmn to our ongoing customer-senice initiatives, three of our U.S. utilities conducted the resource needs of Central Power and 1.ight Company, Southwestern Electric Power an unprecedented project in IW6. They invohed customers in our enerFy-resource plan- Coinpany and %t Texas Utilities Company. The plan reflects the attitudes of our customers ning pnicess in response to a requirement of the Public Utility Conunission of Texas. Each of the u ho participated in the Deliberathe Polls, pre-senting a diverse mn of strategies and featuring three utilities worked with ProfessorJames Fishkin, chainnan of the Government Depart- renew able energy sources. Alany customers ment at The Unhersity of Texas at Austin, to indicated they are willing to pay a premium for these renewable resources. conduct its un Deliberative Poll'"a process Renewables. In 1996 our nationally recog-Dr. Fishkin developed. nized renewable energy project near Fort Davis, A.s part of the polls, representative groups of Texas, continued to be honored for its pioneer-customers from each company were assembled for a weekend to learn in detail about the ener- ing work. Our renewables project is a $17 mil-gy issues facing the region and the options for ihn, five-year program that ue began in 1993. meeting hose needs. The groups discussed the its purimse is to develop and evaluate a variety of wind, solar and other renewable energy tech-ssues with utility representatives, state utility regulators, leaders of environmental organiza-tions and other energy advocates and then debberated their preferred choices. 14
Our utilities csntinue to be among the low-cost suppliers in the region we serve. nologies on a major utility system. In 1996 the American Wind Energy Association presented CSW with its Utility of the Year award, and the U.S. Department of Energy cited the project as a Special Recognition winner among utilities in its National Aw ards for Energy Ef6ciency and Renewable Energy. In earl > 1997 CSWi renew- megawatts of their total output of 648 able energy program uon Renew America's megawatts. All the plants burn natural gas annual Award for Environmental Sustainability for fuel, in the Renewable Energy Category. 1996Milaronn. In 1996 CSW Energy com-We lelieve our commitment to developing pleted the recommissioning ofits Newgulf and operating renewable energy resources could pow er facility in Wharton, Texas. It is an NS-hase a distinct market advantage because of a megawatt, combined-cycle facility and tee virst preference for green pmer that has appeared exempt wholesale generator developed in Texas, in some of the prototype experiments with open We also broke ground in 1996 for our competition in electric power supply. In the largest independent power project, a 330-integrated remurce plan we filed with the Texas megawatt plant that is being built at Phillips PUC in early 1997, we prolmse to test con- Petroleum Company's complex at Sweeny, sumer attitudes toward renewables to see Texas. It will be the Grst pmer plant in the state w hether their expressed preferences are con- that uses residue gas-a hyproduct of the renn-Grmed by their buying behasior. Part of ing process-as fuel, supplemented by natural our plan also involves educating chihiren aheut gas. When completed in 199:', the proicet will renewable energy by installing solar energy provide steam and power to Phillips' petro-systcms at more than 50 schools in our senice chemical complex and to other purchasers. areas. Ultimately, CSW Energy will own 50 percent of the project. W --'
- Power Plants CSW Energy, our subsidiary that develops, Energy Trading acijuires, constructs, ou ns and operates cogen- We have applied to the Federal Energy eration and independent pmer plants in the Regtdatory Commission for pennission to oper-United States, has 6ve projects in operation and are as an energy trading firm. For years our four is actively working on several others that will electric utilities have imught, sold and traded increase its contribution to our revenues during electricity with many other utilities. Our sys-the next two years, tem's wide geographic expanse, along with the The fhe independent p>wer plants now 39 interconnections we have with other utilities, operating are located in Fort 1.upton and Ilrush, has added to our power trading abilities. Now Colorado; llartow, Florida (twoh and Wharton, we plan to trade electricity on the open market, Texas CSW Energy owns the equivalent of 365 matching supplies with utilities or other cus --
tomers that need them. We expect to begin competitive energy trading and marketing in mid-1997. 15
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g p ,-' N v. _ _ . -w .. ., y l l l l One of the opportunitics that competition presci.ts is the freedom to prmide additional senices to our custouters. Arnong the new ser-vices u e have been descloping, two already are showing considerable promise---conununica-of appliances to use lumer w hen it is least tions ar d energy management. expensise. Our pilot program will continue to Gunmunioniom. For the past two s cars, CSW Conununications has been testing our " "'"~ E'""* 'I""' "I '"" EF '"# " # E'""' ""d teleconunun cations technology. Customers par-Customer Choice & Control'" senice in a ticipatmg in the program has e s ned an average ilesclopment program in I.aredo,'lexas. The of 7 pacent to 10 pacent on their electrn bals. program now includes nuire than 700 home-hokls on its network. We installed a hs brid net, e saw so inuch ;wnennal in senices hLe these +
, only hours after Presi&nt Chnton work of fiber-optic and coaxial cables to provide signed the Teleconununications Act of 1996, a range of senices including automated meter CSW Conununications Ged to become the first reading, power-outage detection, time-of-day pricing of electric power and the progranuning '
' *" P' I"""""""I'"'I""' '"* Pd "F ' PP'"' 'J by the Federal Conununications Commission.
That designation freed us from restrictions that had limited our imohement in telecommunica-tions under the Public Utility lloiding Company <\ct and some state laws. Since then we base reached seseral impor-tant milestones. e in January 1997 CSW Conununications entered a venture to provide teleconununica-tions services, including kwal exchange and long-distance telephone senices and data trans-mission, to customers in Texas, Oklahoma, l nuisiana and ArkansJs. Our partner in the 16 , I
Only hours after President Clinton signed the Telecommunications Act of 1996, CSW Communications filed to become the first exempt telecommunications company. 17
Utilities like the C3W system have long operated giant telecommunicat60n networks to keep power Itowing reliably Now we are planning to offer advanced telepnone and data services to our customers at competitive prices, with addb tkmal espanslott he the htture.
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EnerShop eidered Englewood, Colorado. I he new joint venture company is called CSW/ICG ChoiceCom'" and
,into negot,iat, ions .iii he h-a ie Ae'en. Tm,. it e e, u imio>iix to serve Austin and Corpus Christi, Texas, while for its first million. """"t"*"'"""'""*''"'"""""'"'""
four states u e sen.. m ,, ature also plans to expand CSW Conununications' existing city- ~ dollar contract in -str m ,e eeweraesin~.
= In 1906 CSW Conununications won competitive bids to build wirelew utility man-agement systems in Austin and Georgetown.
7 Texas. The Austin project is a pilot for 800 elec-tric and 400 water customers of the city-owned electric and water departments. For the City of Georgetown, CSW Conununications is installing its Customer Choice & Control ener-gy-matugement service to provide water inan-agement as well as electricity conservation.
= We are moving to establish similar two-u ay wireless communications projects in key cities within the states the CSW vstem serves.
l l 18
4 ."WYdlike to discover whether people really can shift theirpeak load consumption, whether they like it and whether they are com[ortalde. " -<mn crrnNora or mi cm or Atynys nicmc cruin otruturnt wmc ax r mr mm raocaw roa n= ctenas mrt THf IL'D W10 coNIui WTrH OW' CoMMUNICArk)Ns Energy Serrius. EnerShop, a subsidiary we formed in 1995 to help major energy users reduce their costs, entered into negotiations for its first million-dollar contract in 1996. EnerShop provides comprehensive energy-man-agement senices-<lesign, construction, retro-e in 1996 we applied our energy manage. fitting and financing-for commercial, industri-al, institutional and governmental customers in ment and telecommunications skills to a new senice that is making it easier for en customers the Southwest. It also offers performance guar-to understand, analyze and manage their caergy antees for the senices it prmides. use. Ilomeview','our inte active online home in 1996 EnerShop agreed in principle with energy malysis senice, allows customers to sign the IIall Financial Group of Dallas to retrofit the lighting, energy-management system and on to a confidential Internet address and to con. duct a customized analysis ut their energy use. other electrical equipment of Ilarwood Center, llomeriew provides a detailed report to the cus- a 36-story office tower in downtown Dallas, tomer about ways to improve efficiencies and The project is guaranteed to reduce the build-reduce costs. ing's annual electric bill by almost $250,000,
= Under a grant from the U.S. Department providing a ftdl payback to I f all Financial with-of EnerFy, CSW Communications began in four years.
expanthng its Customer Choice & Contml pro. EnerShop also completed its first project in ject in I.aredo to offer energy-management ser. 1996. It installed high-efficiency lighting and sices via the Internet. During an 18-month chillers and provided energy-management ser-study, we will develop an Internet senice vices for the Matagorda County, Texas, court-provider for I.aredo and will offrr certain house and other county buildings. EnerShop had Cmtomer Choice & Control energy-manage. several major proposals pending in early 1997. ment senices over the Internet. Technical assis-tance on the project is being provided by 1.os Alamos National I.aboratories. The Depart-ment of Energy is seeking to learn how Internet access and advanced energy-management ser-sices might he made available by utilities to cities throughout the country. 19
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1 e i "h busincurs e.npand into new intmiational onarkris, they unuit take into amount thefidl range and unraning of dismity ifthey are to suwd u ith regle ofdiprent cultures. "- un a wisnus muuu w snin.n nimsv a n cianumn ou a n su owmov miu m n m u ms no m unhu,nthng in the dcctrie lwm er induury, it is - oin i tent uith our vision of u here the indmtry is going aml how it hLely udi nolve. Aut Maapment. As w e work to increase our The inocasing o mpaition in the deurie power yyning, ,, ,ai gy ,,.mmmin, gi ,,g,n, indmtry has led m to make major thangn in the nm traically to aware that ther are con-w sy we organiic, manage and conduct our adiming ahuady ui om fiandd [iA If we buu nn'" find hat any of our hohhngs would be more Speed has b :ome more important than ner, ,gg,g g, y,is r ow ner than it is 9: m, we ne MIowing m to tale aAantage of windowi of repued us sdlit. \% wdi me 4e pnicera us op;wirtunity before the) cime. As an cumple, x in other awets that we betine will con-ou' wiise negotiation woh Si i 110 \ltl)-from udim nuin un om pA the inatalinceting to completing the tramat- g, g;s;,,n us wH om 6ermer namd gn tion-took plae in only a few tuombs The aqrdimion ed meig uimpnn TumoL tompetitise wothiis much faster pued than the hm is a pid mqde ohb when We regulatnl one' an ir d Tnnd in 149 and began opersing it sunilarly, we base learnni that out opera- n a oriwirate liusinew unist iii PW. since then, tional and financial obiccinn can be a hined we IW nered b mas bs a fxu>r oH'ne. only by a managanent suutture that is eflicient IM n a r incred pdilic mihiv bihhng nimpa-amt rtfinis our broad oirporate goal . There- ny, we me hmiu d in se way we oidd npand fore, w e mmt apply an awet-managn,.. ..t philos- $awil ha mmple, we nidd ma w,e it m *di ophy (llat b Ollutanti) Ic-nanuning our portbi- g g .. j ho of hohhnp to awnre that it is as pnuluctive as a,iom hmiW Tundi Aday m di businm wie P""dile, our own regulatnl utihtin. Corf,<oarr Anmtwr, in 19% we took another We behevnt that Tramok might be a more maior uep m preparing CSW for t ore competi-dudde e m a nimitation that did not hme tion. Continump a realignment of our clearic 6e reurinions M a rmh, we Wd Tund un iwmer operatium begun in 1991, ue implement-
% > h Co naion. We receisnl $690 mil-ni a more suceping rntructuring, one dnignni hm in oA md Ted rmined $200 miHion to anure that our bminnso are organiini t" oGa niui ddit We applint mou of the pro-reflect our unporate strategin and goals. L'nder A ui hdp reay 6e inanm bncing 6ir our new urutture, the sertically integratal par" SEFSOAIR whia we bdim wiH pide a c of our dcctric operatiom-pencreion, trammis- greater long-tenn return than Trand u ouhl
- i. ion and dntribution, and energy seruen-w es e h.x pivded separated by function and reabgunt n 4,eparate We w di continue to manage our lwntfolio of hnn of bminew. The awen of each dectric com- w d se N ohmimiting andud&r pany remain on that companyi books no awet' d= and mimining a umg nest edity changni hana' through a urong balance sheet.
This new uructure, which also inlucal the g,,9 fgf f,a CSW nimnbud layen of management and the nundier of compa-iudy W9 dhon of the purchase price ny ofthers is npected to rnult in more efficient m implete the acquisition of SITilOAlti). operatiam and more effectise businew units. So far,it hn reduced our workforce by about 200 employees. It also has put in place a management struourt to addrew inenning competition and 21
O s of only $7.2 mdlion. 'lhis pro;xesal is estremely disappointing because it would fail to allow CPI, to renn er its reisonable nats, as provided by CSM, initially obtained the funds through inter- , state regulatory laws and prnious rate case $ct-im lorrowinp from a consortium of banks. tlements. 'the proixnal also would defer to the
.lhese born >winp subsequently wcre repaid in future costs that should be charged to ontomers full with the pn ceeds fnnn an offering of now. As a result, CPL has filed esceptions to the approsimately 15.5 million sharn of CSW com-pro;waal for the full conunission to comider, mon stock, w hich ra.ned approximately $3W mil-lion, and from the sale of.Ibnusk. .the .l,essi PUC a. espected to rule on the CPL rate request m. Alarch IW7. (1 or additional
.the remaining $1.3 billion for the purchase
. detad.s, please see Atanagement's Disnmion and of SEEllOARD was obtamed im.tu. lly through .
Analysis ofI.manc al Con lition and Hoults of interim lorrowinp in the U.li. Inun a second Operationsin Appendia A.) osmortium of bants. Ihne torrowinp wcre
. In January IW7 CPI, filed a request to refinanced in full through $ncral tiamactmm .
renwer approsimately $24 milh.on in under-annpleted in IW6, including the inuing of $400 . renwered fuel costs and to increase its fuel fac-million of notes and approximately $156 million . tors because of higher naturalFas costs. the of E.urolonds, a lhnbrate loan, an accounts
.l'exas PUC in February IW7 approved a settle-receivable $ccuritiration and the me of a portion ment that allows C. Pl. to surcharge natomers for of SFEllOARDk cash.
$22 million of underrecovered fuel onts begin.
In adib. ,uon to refinan-ing all of the St.E.
. nmg m the summer of 1997 and to increase its llOARD acquisition debt m 1996, we completed annual fuel factors by $29 million.
the refinancing of $205 million of higher-nat , in July 1996 the Oklahoma C,orporatmn debt, rnulting in net prnent s alue savinp of
.. C<nnminion began a review of the rain and alwmt $25 milh.on. n'e aim began offering our carninp of our Public Scru.ce Company of disidend reintntment and stock purchase pro-Oklahoma sulnidiary, in late IW6 PSO respond-gram, Pow crShare,, nationwide, in the past, it .
ed with its rate filing. Cmtomers, bills, begin-had been available to employen, retiren, share. ning with PSOijune 1997 billing cycle, are sub-holders and other individuals only m. the states ject to refund if the OCC orden a rate decrease, that our utihties serve. H Paw Harric Ling. aria injanuary IW7 liti-Rate lum Our C,entral Power and 1.ight . Fation between CSM, and El Paso Electne Company subsidiary has an application pending
. Company over a tenninated merger between the to raise its retail base ratn by $71 milh.on. Ih.n
. . two onnpanies went to trial in 1. S. llantruptcy a the first rate increase that CPL has sought m .
L,ourt in M,aco, ihas. CS%, nmtends that n more than four years. . nghtfully tenninated the merFer apeement in its intimony in the rate case, the staff of
. . based on a failure of the conditions required to the.lhas PUt mtially reconunended an annual .
be fulfilled and after El Paso Electne breached increase of $30 million but later rnised the the tenm of the agreement and failal to remnly amount to $20 million. Another intenenor, the material advene effects as required under the Office of Public Utility L,oumel, recommended a . % . agreement. El Paso Electne contends that CSW decrease of $75 milh.on m annual rates, and sev. . eralo..nes that L,PL serves asked for a reduction wrongfully terminatnl the agreement the j. udge n espected to issue a decision in Alarch 1997. of atout $52 million annually. (I.or additional detad.s, please see Atanagementi in Alay IW6 L,PL put a base rate increase of , D. iscussion and Analysa. of I..manc al L,ondition appnnimately $70 million into effect under and Results of Operatium in Appendis A.) twmd, subiert to refund depending on the final order of the Tesas PUC. In January' IW7 the adminiscative law judgn uho had tried the case proiwned a decision that would allow CPL a net annual rnenue increase
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<,e,w =ww m n- 1996 1%$ IM4 se rv wIw me .tr 1996 199L 1M4 tmwn exs-wuweu r.,a->
Revenues 0;erahng Activites U S liectrc $3248 $2fa3 $3.065 Net Irrorre $ 447 $ 421 $ 412 UNted hngdom 1.848 208 - Dtpeciation and Amorteahon 521 425 402
-.Ott t e._D.ivers4d . . . . _ . _ , . . _ ,
59 52 40 Otter Adgrstnents to tM trcone and _ _ _ _ _ _ . , _ _ . _ _ _ _ . _ _ _ ~ . _ _ . - fr;enses U S ilettrc luel and Purctased Power 1728 1A15 1,161 lovtshng Achviles United hngdom Cost of Sales . 1.331 - 1$8 - Construthon [4end;tures (521) (414) ($78) 0;crabons and lAatnlerwte 935 712 110 Acquisibon [genditures (1,394) (421) (21) Deprushon and Amortitaten 464 353 324 CSW Energyllniernahonal Projects (124) 109 (115) tares 402 254 355 Cash Proueds trom Sale of Sutsidiary 690 - - 4.360 2.522 2,550 Ottet 63 (26) (2) Other tanne and Deduchons (61) 99 109 Iinancing Activities
!n!aest CJwgeL_ _ _,__,__ _}{l9C,f2fC,J277)
Change in Common Stock 477 $1 50 _inco._n_e fio._m - Coe$nu.ing O_pe_ra_han.s__- _315.
. . _396 38_7 Change in (kbt and heterted Stack 219 597 288 locone itom Duontinued Opetahons 12 25 25 300
~ ~ ~ - ~ ~ ~ ' - - ~ ~ ~ ~3?0 _12) pi,n m sa,tcyDer$nued O; cratons 120 - -
fM bcone 447 421 412 [ffect of [xchange Rate Changes on Cash (56) - -
- PrtWred Skxk 18 19 18 IM trcone for Common Stak $ 429 5 402 $ 394 iM Change in Cash and Cash [quivalents (147) ?93 46 Cash and Cash (quivalents January 1_ _ _ 401 _108 _ _ 62 Amage Common Shares 207.5 1911 189 3 Cash and Cash [auivalents December 31 $ 254 __$ 401 $ 108 f aminguet Stee $ 207 $ 210 $ 208 Div&re Paid rer Share $ 174 $ 1 72 $ 170 V9 hmM4SM hlWDM %!#4tts Yur 4(vwU m NvMht 4 M N prosy 5thnyt kt $r 199?
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Condeseed dM Balance lineets Regioet of Ef:;: f:1 Politic Accountante pw so vann as sr Umwra u== sr 1996 1995 10 the Sha'etetts and Board of Directors of Centra' nd Soutn West Corpo@on Agget3 We have ahtet in accbrdance with gererally accepted auditing standards. the consokMed bfrte stects of Ceritral and SDuth West Corpotahon (a Delaere corporahon) and subsery llectric - $13.337 $12.891 Gas - 869 companies as of Decem!er 31.19% and 194 and ite related consokdated staterrents of Otter Deversited 84 18 incone, stattholders' equity and cash tions for each of tre three years in the penod ended _,Arrumyud Deprecahon .j4940) (4161) Decener 31,191 appeanng in Appendix A to the proxy statenent for tre 1997 anroal neel-Het 8,481 9,017 ing of shareholders of tre Corporahon (not presented terem) Our report dated February 28, 1937, a!so appearing in that proxy statemert contained an explanatory sentence calhng atten-Cunent Assets 1.$33 2 039 hon to tre tad that we did not audit tre hnancial statements of CSW Investnents, wtuch state-rtents reflect total assets and revenues of 23 rercent and 36 percent in 1996 and 20 percent Deterred Charges and Otter Assets and 6 percent in 1995. respect!vely, of tte consohdated totats ihose staterrents were asted Goodwill 1.525 1.074 by otter adtors whose report has been isnished to us and out opms, insofar as it relates One y3_ ._ IJ39 10 the amounts included for those entthes. is based solely on tre report of the other antois
$13 337 $13 869
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la out opmion, based on our adts and the report of other adtors. Ife information set forth Csipitahztton and Ltabibties in the accompanymg condensed conschMed ba'ance sheets as of December 31,1996 and Common Stock $36 e wi 1995 and in the related condensed statements of consondated income and cash tiows for each f%te' red $1ock 3h T.6 of tte three years m the penod ended Decemter 31.19% is fairly stated. in all matenat lorpm Dept __. 4 024 3.914 ress ctsan relation 1o tre consolidated hnancial statements hom which d has teen derived 1041 Capaahuion 8 151 7,418 Cuttent liabihtes 2,425 3 627 hh gfecAA a-) 4 4 P Arthur Andersen LLP DaHas. Texas _Deterted _ Credits . ._ _ _- . 2156 2.824-Ferury 28.1997 Repoet of Manasonient the condensed conschMed hnancial statenents in this summary annual report were denved ham tre conschMed knancial statenients that appear in Append:n A to tre proxy statement for the 1997 annual treeting of sha'eholders Management is responsible lar prepanng tr,e con-schMed hnancial statements. in accordance a @ generaHy accepted a ,countmg pnnciples appmpriate in the circumstances and for mamtammg it.e Corporahont systems of intemal accounhng controls A descripbon of ttese controls, along with managenents opinion about tteir werall ettective-ness is contamed *tthin the Report of Management included in Append n A to the prosy state-ment for the 1997 annual mechng of shareholders The conschdated hnancial statements were audited by ite Corporabon) independent pubhc accountants, whose report on the condensed conschdated financial staterrents appears a!cvt. h &tbV E R Brocis Clerma President and Chief Executive O't(er b . J GlemD Rositer Senior Vce President and Cinet Financiat Othcer X d. C-LawtenceB Connors Controlier
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Comparative St:tleticd end Finackl Record s am w. wa u n,wu . 1996 19 % 1994 1993 1992 US (ininc UtJmes Ileutac Revenues (mdhons) Re@nhal $1243 11,138 $1.1% $1.160 $1.046 Concepal 872 810 836 832 773 hhtnal 781 702 733 736 659 Stes f ar Resale 2% 224 204 179 177 Ut" __ _ . _ . . 9I. ... , 9 ___. 136_ _ ._14B _ _ _135 _ _ - . _ _ _ _ _. _.53248 _ . $2 883__ $3 %5
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$3 055 $2.790 Nics (blewatt hours in mdhons)
Res&nhat 17.883 16.872 16.368 15303 14.593 Concercial 14.2 % 13 755 13.463 12.9 % 12.370 Inktnal 20 2 % 19 321 18 869 18 205 17257 Wes for Resa e 8.428 8 468 1,133 5852 6 262 0"" _ ._.___ _ 2 ___ _ _1 _ 1 3_4 _ _. Averay tbmber of Custones (thousands) Residential 1.443 1 425 1.403 1.378 1.353 Co'imeaat 209 207 203 19B 195 Indu'.it,al 24 24 24 25 25 One _ _._ _,___, _ _ _ _ _ _ _ _ _ _ 1
.. __ _ _ _2 thmte of Custoners Iad of Penod (thousands) 1.704 1 683 1661 1 633 1,599 ResentialSales Averaps Kikraft tbuts per Custone 12.392 11.840 11.% 5 11.541 10.786 Rewnua per Custoire $861 $799 $824 $842 $773 Revenue per Kdow#1 lbur 695t 6 75e 706e 7 298 7 17s letal Electnc Revenue ge Knewatt ibut 5 20s 4 81t 535c 562e 5 3Bt System Peak Denund (megawatts) 12,613 12 314 11.434 11.464 10.006 f uel Data Awtage Blu per Net Kil0*att Hout 10 440 10 299 10 344 10 391 10.482 Cost to M, ikon Btu $181 $158 $182 $211 $192 Cost re kdentt Haur Geruted (md!s) 18 86 16 30 18 80 21 90 20 12 CSWSMn 1Nat haal(mdbons)
Cost $13,421 $13 778 $118K8 $11.343 $10 826 Annual AddMons 583 1.933 616 594 457 Axumulah d Depreciahon 4 940 4 761 3 870 3.550 3 265 Captahiabon (mdhons) Conmon sixk $3 802 $3178 $3.052 $2.930 $2.927 hetened Stak - 325 326 327 350 367 Long lerm Detit 4 024 3 914 2 940 2,749 2.64/ tv aow wwwnm o amms e m mm omwe e es on me avaa.www arms as we e uNw e c4 pen sus enw N rwnwwnm er esAws caws $ N arwove w wm rc N se ct N cmurxs av;ewt Mr Marifatt N'WM ff e be ccfAW h ctYV fet# a kf M $t>f CtW# oat hesAr &wn er ftt#rev s i W5/! 5V
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UNITED STATES SECUltlTIES AND EXCllANGE COMMISSION Washington, D.C. 20549 FOllM 10 K (Mar k One) lXl ANNUAL,IU:l'OltT l'UllSUANT TO SI:CTION 13 Olt 15(cl) Ol'Till SI:CUltlTil:S 1 XCil ANGl ACT Ol' 1934 For the lhcal year ended I)ccernher 31.1996 Olt l l TitANSITION Iti:l'OltT l'UltSUANT TO SI;CTION 13 01115(d) Ol'Till SI Cult lTil:S I:XCil ANGl', ACT OF 1934l For the Transillon l'criod froni to Comrnission llegistrant, State of incorporallon, l.It.S.1:mploy er File Numlier Addeen and Telephor,c Number identification No, 1 1443 Central and South West Corporation $1 0007707 ( A Delawate Corporation) 1616 Woodall llodgers l'reeway Dallas, Texas 752021234 (214) 777 1000 0046 Central Poner and I,lght Comprny 74 0550600 l ( A Texas Corporation) l 539 North Caranenhua Street l Corpus Christi, Texas 784012802 l (512)881 5300 l 0 3J's Public Scnice Company of Oklahoma 73 0410895 ( An Oklahoma Corporation) 212 i:ast 6th Street Tulsa, Oklahoma 741191212 (9I8: 599 2000 l l 3146 Southwestern I:lectric Power Compan) 72 0323455 (A Delaware Corporation) 428 Trasis Street l Shreseport,l.ouisiana 71156 0001 (318) 222 2141 0440 West Tesas Utilities Compan) 75 0646700 ( A Tc Aas Corporation) 301 Cypress Street Abilene,lesas 79601-5820 (915) 674 7000
a l t
$ccurities registered Pursuant to Section 12(b)of the Act:
Name of Each Eschange
!!,fristroM Title of Fach Class on Which Heclitered l Centrat and South West Corporation Common StocL, $l$0 Par Value New York Stock Exchange,Inc. l Chicago Stock Exchange,Inc.
Securities registered pursuant to Section 12(g) of the Act: lLerbttpal Title of Feth Clast , Central Power and Light Company Cumulative Preferred Stw.L. $100 Par Value Public Setvice Company of Oklahoma Cumulative Preferred Stock, $100 Par Value
}
i Southwestern Electric Power Company Cumulative Prefened Stock,5100 Par Value West lesas Utilities Company Cumulative Preferred Stock, $100 Par Value ! Indocate by checa marA whether the Registrants (1) havefiled all reports requsred to befiled by Section 13 or 13(d) ofthe Securttues luchange Act ofI934 during the precedsng 12 months and(2) have been subject to suchJihng requirementsfor the past 90 days Yes X No Indocate by check marA (fdisciature ofdehnquentfilers pursuant to item 403 ofRegulation S K is not contained herein, and well not be contamed, to the best ofRegistrant 's knowledge, in defimtsve proxy or totformation statements incorporated by reference in Part fit nf thus form IthK or any amendment to this form 10 K: , Central andSouth it'ess Corporation (X] Central Power and I.ight Company [ ] Pubhe Servsce Company ofOklahoma ( ) Southwestern Electric Power Company ( ) It'est Te.sas lhthnes Company l } Aggregase marLet value of the Common Stock of Centraland South II*est Corporation at March 4. I997 held by non-aD1 hates was approssmately $3 0 bolhon Number ofshares of Common Stock outstanding at klarch 4. I997:212,140,304. Central and South it'est Cewporanon n the sole holder ofthe common stock ofCentral Power andI.ight Company. Pubhc Sernce Company ofollahoma. Southwestern Electrse Pou er Company and \\'est Te.sas Utihters Company DOCUMENTS INCORPORATED fly HETERENCE Portions of the Notice of Annual Meeting and Prosy Statement of Central and South West Corporation dated March 7,1997 are incorporated by reference into Part til hereof. This combined form 10 K is separately filed by Central and South West Corporation, Central Power and Light Company, Public Settice Campany of Oklahoma, Southwestern Electric Power Company and West TeAas Utilities Company. Information contained herch relating to any individual Registrant is filed by such Registrant on its own behalf. Each Registrant makes no representation as to information relating to the other Registrants.
. . . . - - - . . - ~- - - _-- .. . - - - -- . -
TACLE OF CONTENTS G LO S S A R Y O F T E R M S . ... . ... .. . .. .. . .. . .......... ............ ............ .... ... .. . .. .. .. ...... .. ... ... .. .. . ... . .. . .. .. 11
- FO RWA R D LOO KING I N FORM ATI ON .. .............. .............................. ........................ v PARTI .
ITEM 1. IlUSINESS Overview.................................................................. . .... 1 l ' U.S . U till ry Ope rations ... ........ ....... ............. . .................... ....... ..................... 1 3 United Kingdom Operations............... ..................................... 1 25 l Hon. Utility Operations = ........... ..........................128
..........................,130 Other Information .. ............. ............... x 1 TEM 2. P ROP ERTl ES ......................... ................ .............................; ........... 1 31
- ITEM 3. LEG A L P R OC EEDIN O S .......................... ... ............ .. ......................... ........... 1 3 I l
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......131 4 . PART11 ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY ' AND RELATED STOCKHOLDER MA*ITERS .....................
..............................21
,24 ITEM 6i SELECTED FINANCIAL DATA................. ..
Central Power and Light Company ......................... .........................276 Public Service Company of Oklahoma.......................... ..... ......... ...... 2 102 Southwestem Electric Power Company ............................................................. 2 123 West Texas Utilities Company......... . . . .... .. . ... .... .... ..... 2. I 4 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
;25 CONDITION AND RESULTS OF OPERATIONS = .....
Central Power and Light Company ..'..... .......................................................... 2 77 '
,. Public Service Company of Oklahoma.. .............................. ........ 2 103 ,
Southwestern Electric Power Company ............................................................. 2 124 West Texas Utilities Company .............................. . ............ 2 14 8
- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA .................. 2 34 Central Power and Light Company ..........; ...........................292 Public Service Company of Oklahoma................... ... ... .. . .. . . . .. .. .. . . 2 1 1 3 Southwestern Electric Power Company ......................... ................................. 2 137 West Texas Utilities Company ........................ ................................................. 2 160 ITEM 9. CHANGES IN AND DlSAGREEMENTS WITil ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE = . 2 169 PART 111 ITEM 10. DIRECTORS AND EXECUTIVE OFT 7DS OF T"E REGISTRANTS. ... 31 >
ITEM i1. EXECUTIVE COMPENSATION....... ................................37 ITEM 12. SECURITY OWNERSHIP OF CERTr 4EFICIALOWNERS AND
- MA N A G E M ENT .. . . ... . .... .... ... ... . .. .. . ... .. .. . ...... . ....... ........ ... . ... .. .. .. . ... .. .... .. 3 1 2 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .............. 313 PART IV ITEM 14. EXillBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS O N F O RM 8 K ...... ... ..... . .. . ... ........ ..... ... .. . . . ...... ..... .............. ... . . .. .. . . . 4 1 i
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Gil)SSARY OF TERMS
- The f;llowing abbreviations or acronyms t; sed in this Form 10.K are defined below; Abbreviation or Acronym Definklen APilO. . .. . .. . . . . . . . . . . . .. Accumulated Postretirement Ilenefit Obligation AFUDC ..-... .. .. Allowance for funds used during construction Al) . , ,. ... .. ... Administrative Law Judge Alpek.. . . . .. .. . .. Alpek S.A. de C.V. i
.. American Nuclear Insurance l ANI .. . . . ..
Arkanus Commission . . .. ArLansas Public Service Commisuon Ash Creek . .. ... . . . .. Ash Creek Mining Company, a wholly owned subsidiary of PSO Dig Cajun I.. .. . . .. .. .. A two unit, natural gas. fired power plani owned and operated by Cajun and located in New Roads, laulslana Dig Cajun il , .. . . . . .. . .. A three unit, coal fired power plant owned and operated by Cajun and lo:sted in New
. ... . . . . . .. . .- .. Roads, levisiana j bREMCO . . . . . .. . .. Dossier Rural Electric Membership Cooperative fttu . . .. . . .. . ... British themal unit hurling 1on Northern.. .. . . . . . . ...llurlington Northern Railroad Company CAAA . ., .. . . . . .. Clean Air Act/ Clean Air Act Amendtr( e Cajun.. . . .. . . . . . Cajun Electric Power Cooperatise,Inc.
Cajun Trustee.. . . . . . . . .. Cajun's court appointed trustee in bankruptcy CLO .. . . . . . . . ..ChiciEnecutive Officer CERCLA.. . . . . . . . . . .....Corrytehensive Environmental Hesponse, Compensation and Liability Act of 1980 Coun of Appeals.. . . . .m.. .. Court of Appeals,' third District of Texas, Austin, Texas Cpl... .. . . . ....Cen9al Power and Light Company, Corpus Christi, Texas CPL 199$ Agreement.. . . : Settlement agreement filed by CPL with the Trans Commission to settle certain CPL regulatory matters CPL 1996 Fuel Agreement. ... . .. .. Fuel settlement agreement entered into by CPL and other parties to CPL's current rate
. . . . . . . . . . . - review matters CSW... . . . . .. . ...... Central and South West Corporation, Dallas, Texas CSW Common - .. CSW ccmmon stock, $3.50 par value per share CSW Communications... ....CSW Communications, Inc., Austin. Texas CSW Credit.. . . . . CSW Credit, Inc., Dallas. Texas CSW Credit Agreement. ._ ... :1850 million senior credit agreement previously entered into by CSW with a consortium of banks to partially fund the SEEllOARD acquisition which has since been repaid in full CSW Energy.. .. .. . ...CSW Energy, Inc., Dallas, Texas CSW International . .. . .. CSW International, Inc., Dallas. Texas CSW Investments., ... . ...CSW Investments, an unlimited company organized in the United Kingdom through which CSW International owns SEEBOARD CSW Investments Credit Facility . I1.0 billion senior credit facility previously arranged by CSW Investments with a
... . . . , . ...-. consortium of banks to partially fund the SEEBOARD acquisition which has since been repaid in full CSW Investments Group., Consolidated SEEBOARD, SEEllOARD Group plc (which has repts. :d CSW (UK) plc.)
, , . . .... - and CSW Investments converted to U.S. Generally Accepted Accounting Principles CSW Leasing ., . . .. .CSW Leasing, Inc., Dallas, Texas a
CSW Services .. .. . .... . . _ . . . . ... ..CSW Services, Inc., Dallas, Texas and Tulsa, Oklahoma CSW System.. .. .. . . ..CSW and its subsidiaries CWIP ., .. .. .. Construction work in progress DeSoto ., .. . . . . . . . . . . . . . .. Parish of DeSoto. State of Louisiana pollution control revenue bond issuing authonty DOES.. .. . . . , .. Director General Electricity Supply DOE., . . .. . .. United States Department of Energy El Paso ._ .. . . ,. . ...El Paso Liectric Company El Paso Merger.. . , ..The proposed m rger whereby El Paso would have become a wholly owned subsidiary of CSW EMF... .. . . Electric and Magnetic Fields Energy Policy Act.. ... . . . .. National Energy Policy Act of 1992 EnerShop . .. . ..EnerShop5" inc., Dallas, Texas Entergy Gulf States... . . . . .. Gulf States Utilities Company EPA . ., . .. United States Environmental Protection Agency EPS.. . . . ..Eamings per share ERCOT.. .._ . . .. . Electric Reliability Council of Texas ERISA. . , . .. Employee Retirement income Secunty Act of 1974, as amended Exchang Act.. . . .. Securities Exchange Act of 1934, as amended il
- - ._. .- = -. - -
GLOSSARY OFTT.RMS (c :ti::ed) ne f;llowing abbrevirions or acsonpns used in this form 10-K are defined below. Abbreviation or Acronym Definillon EWG .. .. .
.. Exempt Wholesale Generator
.. Financial Accounting Standards Board TAsil.. . . . .
FCC.. ..
.. rederal Communications Commission i ERC .. . . . . .. Tederal Energy Regulatory Commission Tsrst Amended SWEPCO Plan . . ..nc plan of reorganiistion for Cajun filed by the Members Committee, SWEPCO and Entergy Gulf States on September 30,1996 with the U.S.11ankruptcy Court for the Middle District of Louisiana FM11..
..first Mortgage Ilond Guadalupe .. .. ... Guadalupe-Illanco River Authority pollution control resenue bond issuing authonty llLP.. . .
. ..llouston Lighting & Power Company lloidmg Compariy Act.. . .. . ..Public Utihty llolding Company Act of 1935, as amended llVdc.. . .. . ..lligh-voltage direct-current IPP ... .. . . . -Independent Power Producer IDEW .. . .. . . . .. International llrotherhood of Electrical Workers
.. Independrnt System Operator 150.. . . . . . . .
. . ., Investment tax credit IT C.. ... . .. .
K W., , . . . .. . .. Kilowatt ! Kilowatt. hour l KWil,. . . . . . . .. Lif 0... . . . ..Last in First-out (inventory accounting method) Louisiana Commission.... . . ..leuisiana Pcblic Service Commission LTIP.. . .. . ..Long Term Incentive Plan Magic Valley.. 4 .. .. Magic Valley Electric Cooperative M:tagorda .. .. . ..Matagorda County Navigation District Number One (Teans) pollution control revenue
.. bond issuing authonty MDA A .. . .. Managernent's Discussion and Analysis of Financial Condition and Results of Operations MDEQ... . . .. Mississippi Department of Environmental Quality Members Committec.. . .. The members committee of Cajun, which currently represents 8 of the 12 Louisiana member distribution cooperatises that are served by Cajun Merger Agreement.. .. Agreement and Plan of Merger between El Paso and CSW, dated as of May 3,1993, as amended MGP.. .. . .. Manufactured gas plant or coal gasification plant Mirror CWIP.. . . .. . . . . . .. Mirror construction work in progress Mississippi Power.. . . .. .. Mississippi Power Company MMbtu .. . . ..Million litu Mmc f!d., .
..Million cubic feet of gas per day M1N . -. . . .. Medium-term note MW. . . . . .. Megawatt MWii .. - . . - . .
.. Megawatt.hout National Grid .. . . .. National Grid Group plc NEIL .. . .. Nuclear Electric Insurance Limited NRC.. .. Nuclear Regulatory Commission OEFA.. . .. Oklahoma Environmental finance Authonty potiution control revenue bond issuing authority Oklahoma Commission.. .. Corporation Commission of the State of Oklahoma Oklaanion . . . . . ... Oklaunion Power Station Unit No. I ONEOK Gas.. ..ONEOK Gas Marketing Company OPE 11.. ..Other Postretirement Benefits (other than pension)
Origmal SWEPCO Pian.. ..The plan of reorganization for Cajun filed by the Members Committee, SWEPCO and Entergy Gulf States on April 19,1996 with the U.S. Bankruptcy Court for the Middle
.. District of Louisiana PCD .. ..Polychionnated biphenyt PCRil .. .. Pollution Control Resenue Bond PowerShare .. ..CSW's PowerShare" Dividend Reinsestment and Stock Purchase Plan PRP ., ..Potentially responsible party PSO.. . ..Public Service Company of Oklahoma. Tulsa, Oklahoma PURA.. ..Pubhc Utihty Regulatory Act of Teus(mcluding amendments to the la v)
PURPA. . ..Public Utihty Regulatory Policies Act of 1978 i iii
GLOSSARY OF TF.RMS (c=tl2Ced)- , ne following abbrev;atmns or acronyms used in this Form 10.K are defined below: Abbeevlation or Aeron)m Definition --RCRA - .. ~ m........ ..
. m m .. Federal Resou'ce Conserntion and Recoscry Act of 1976 )
- Red River m..,. . ... . =.m m.. Red River Authority of Texas pollution control revenue bond issuing authority Registrant (s).m...m..~ . - .m. ..CSW. CPL, PSO, SWEPCO and WTU RESCT/. m m..... m. m m..m .m....-... . -. Rural Electric Supplier Certified Tenitary Act RUS m.m.m. ~.m...mm. .. . ~ ..mm. Rural Utihties Service of the federal government ,
- Sabine ... .. - .....m... .. .~.m . .m.... Sabine River Authority of Texas pollution contro lrevenue bond issuing authority l i
Siloam Springs. ...- .m..~.. . City of Siloam Springs. Arkartsu pollution control revenue bond issuing authority SAR..m : ,.m m .m.-......... .. Stock Appreciation Right SEC ..m - ...~.m..~...
. .. mm ... . . ..m United States Securities and Exchange Commission SEEBOARD ....m ... . ..- .. .. .m m..SEEBOARD p!c., Crawley, West Sunex, United Kingdom Second Amended SWEPCO Plan. .... ...... .ne plan of reorgantration for Cajun filed by the Members Conunittee, SWEPCO and Entergy Oulf States on October 26.1996 with the U.S. Bankruptcy Court for the Middle 1 District of Louisiana (amends both the Original SWEPCO Plan and the First Amended :
SWEPCO Plan) SERP.m.m.... .m.. . . ..-.m..m... . .m.Special Executive Retirement Plan i S FAS .. . .,. .... .m..m .- . . . . . . . m. .. m . .. Statement of Financial Accounting Standards SFAS No. 52.e..m .m. .. . ...... Foreign Cunency Translation : SFAS No. 71. .m... . . .. Accoe 'fing for the Effects of Certain Types of Regulation SFAS No.106.. . _ .- , Employers' Accounting for Postemployment Benefits ,
$FAS No 121: . . . . . . ... . .. Accountmg foi the Impairment of Long. Lived Assets
- SFAS No.123... _. ... .... . ... .. .. Accounting for Stock. Based Compensation . .
.. Accour. ting for Transfcts and Servicing of Financial Assets and Extinguishrnent of I SFAS No. 125.. . . . . .m. ..- .~. . . .. .
Liabilities SFAS No.123 = m... ... ..Eamings Per Share S PP ....~....m... .. ~ ... 2.mmm. Southwest Power Pool STB = . -. ....mm ~ Surface Transportation Snard of the United States Department of Transportation S1P.. ...m ... .. .mm. .. .m ...m ..mm. South Texas Project nuclear electric generating station Supreme Court.... .~... m. Supreme Court of Texas SWEPCO .. .m. . .. . . ... - , Southwestern Electric Power Company, Shreveport, Louisiana Tender Offer..... m. ., m....... ... .m.CSW (UK)'s approximately $2.12 billion tender offer in the United Kingdnm for all the outstanding share capital of SEEBOARD
. Tejas... . .- . . . . ~ . xTejas Oas Co poration Texas Commission.. . ... . .. m .m.....Public Utihty Commission of Texas Tex La.m .m ....m...~..... Tex.La Electric Cooperative of Texas, Inc.
Titus County ... ~.. . . .....mz- Titus County Fresh Water Supply District No. I pollution control revenue bond issuing authority ' 1NRCC . . . m.. .m... .. ... .. . .. Texas Natural Resource Conservation Commission Transok . ..m. ~.... = m... ..Transok, Inc. and subsidiaries. Tulsa. Oklahoma 1
- Trustee Plan . .. -, .. ..The plan of reorganization for Cajun filed by the Cajun Trustee on April 22.1996 with the !
. . . . . . . . . . . m.. ...m : . . ..U.S. Bankruptcy Court for the Middle District of Louisiana UK RPl ... m...... ....,. . . ... United Kingdom Retail Price Index :
U.S. Electric or U.S. Electric Operstit.g Companies.. .. . ... .. . .. CPL. PSO SWEPCO and WTU
%TU ...mmm. . West Texas Utilities Company, Abilene, Texu
%TU 1995 Stipulation and Agreement.. . ... Stipulation and Agreement to settle certain W1U regulatory matters ;
i h b s
--.-.m , e ~ c._i.- _ _ . ---_.m_w______ _ --d__.______ m _U sm.il___.___. . - , - ___ . , _ , , . -. .-%.,- - --e
FORWARD LOOKING INFORMATION This report and other presentations made by CSW and its subsidiaries contain forwa*d looking statements within the meaning of Section 21E of the Exchange net. Although CSW and each of its subsidiaries believe that, in making any such statements, its expectations are base.d on reasonable assumptions, any such statements may be influenced by factors that could cause actual outcom6s and results to be materially different from those projected, important factors that could cause actual results to differ materially from those in the forward looking statements include, but are not limited to: the impact of general economic changes in th. U.S. and in countries in which CSW either cunently has made or in the future may make investments; the impact of deregulation on the U.S. electric utility business; increased competition and electric utility industry restructuring in the U.S.; federal and state regulatory developments and changes in law which may have a s:bstantial adverse impact on the value of CSW System assets; timing and adequacy of rate relief; adverse i changes in electric lead and customer growth; climatic changes or unexpected changes in weather pattems; changing fuel prices, generating plant and distribution facility performance; decommissioning costs associated with nuclear generating facilities; uncertainties in foreign operations and foreign laws affecting CSW's investments in those countries; the effects of retail competition in the natural gas and c!cctricity distribution and supply businesses in the United Kingdom; and the timing and success of efforts to deveiop domestic and international power projects. In the non-utility area, the aforementioned factors would also apply, and, in addition, would include: the ability to compete effectively in new areas, including telecommunications, power marketing and brokering, and other energy related services, as well as evolving federal and state regulatory legislation and policies that may adversely affect those industries generally or the CSW Systen's business in areas in which it operates. ( l l l l v
i t PARTI BUSINESS, ITEMI. OVERVIEW
' CSW, incorpmated under the laws of Delaware in 1925, is a Dallas based public utility holding company registered u: t the lloiding Company Act. CSW owns all of the outstanding shares of common stock of the U.S. Electr. Operating Companies, CSW Services, CSW Credit, CSW Energy, CSW Intemational, CSW Communications and EnerShop and indirectly owns all of the outstanding share capital of SEEBOARD.
In addition, CSW owns 80% of the outstanding shares of common stock of CSW Leasing.
.The U.S. Electric Operating Companies are public utility companies engaged in generating, purchasing, transmitting, distributing and selling electricity. Information conceming the incorporation of each of the U.S.
Electric Operating Companies is presented in the following table. State of Year of Registrant incorporation incorporation CFL Texas 1945 PSO Ok%oma 1913 SWErCO Delaware 1912 H7U Texas 1927
. The U.S. Electric Operating Companies serve approximately 1.7 million customers in one of the largest combined service territories in the U.S. covering approximately 152,000 square miles in portions of Texas, Oklahoma,leuisiana and Arkansas. CPL and WTU operate in portions of south and central west Texas, respectively. PSO operates in portions of eastern and southwestern Oklahoma, and SWEPCO operates in portions of nonheastem Texas, northwestem Louisiana and westem Arkansas. The U.S Electric Operating Companies' customer base includes a mix of residential, commercial and diversiGed industrial customers.
SEEBOARD is one of the 12 regional electricity companies which came into existence as a result of the restructuring and subsequent privatization of the United Kingdom electricity industry in 1990. CSW acquired control of SEEBOARD in April 1996, through intermediate subsidiaries, for an aggregate adjusted purchase price of approximately $2.1 billion assuming average exchange rates during the purchase period. SEEBOARD is headqvr.ncred in Crawley, West Susaex and serves approximately two million customers with a distribution territory in Southeast England that covers approximately 3,000 square miles. SEEBOARD's principal regulaud businesses are the distribution and supply of electricity. SEEBOARD is also involved in other activities, including gas supply, electricity generation, electrical contracting and retailing through appliance shops and superstores. On June 6,1996, CSW sold Transok, an intrastate natural gas pipeline and gas marketing company that was previously a wholly owned subsidiary of CSW, to Tejas. See ITEM 7 MD& A and ITEM 8 NOTE 14. TRANSOK DISCONTINUED OPERATIONS for additional information related to the sale of Transok. CSW is committed to expanding its electric utility business through strategic domestic and international acquisitions and through mr keting initiatives inside and outside of the service territories of the U.S. Electric Operating Companies. Acquisitions of utility assets must meet defined criteria, including the potential to lower costs, increase long-tenn ef0ciency and competitiveness and provide an acceptable rate of retum to CSW. 11
CSW continues to seek opportunities to expand its non. utility business in arcos related to its core electric utility business. CSW Energy develops and operates independent power and cogeneration projects. CSW International was formed to invest internationally either alone or with local or other partners. CSW Intemational will continue CSW's efforts in Mexico and Ilratil and will seek to expand into other countries in latin and South America, Europe and Asia that meet CSW's investment criteria (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 FOl(WAltD 1,00 KING INFOlG1ATION). CSW Communications provides communications services to th U.S. Electric Operating Companies and non affiliated companics, including enhancement of services through fiber-optic and other telecommunication technologies. EnerShop provides cornmercial, industrial, institutional and governmental customers with energy management services designed to control energy costs, enhance productivity and improve convenience, safety and comfort. CSW Services performs, at cost, various accounting, engineering, tax, legal, financial, electronic data processing, centralized economic dispatchii.g of electric power and other services for the CSW System, in April 1996, CSW announced organizational and executive changes to help prepare CSW for increased competition and unbuadling of the electric utility industry into generation, transmission, distribution and service segments. As a result of these changes,in 1996 CSW functionally reorganized its domestic utility operations into three organizational units which are centrally managed from CSW Services, l CSW created a power generation business unit to provide energy generation and production services. All phases of management of the U.S. Electric Operating Companies' energy production activities have been consolidated into the power generation business unit. These activities include management of all generating facilities, including nuclear facilities, and fuel procurement. CSW created an energy delivery business unit to provide services for the long distance transmission and local distribution of electricity to retail customers, including attendant customer services such as meter reading, billing and accounting. All phases of management of the U.S. Electric Operating Companies' energy delivery activities have been consolidated into the energy delivery business unit. CSW created an energy services business unit to provide marketing services, along with new energy efficiency products and services as they become available, to existing and future custorners of the U.S. Electric Operating Companies. The energy services unit also manages CSW Communications and EnerShop, Functional unbundling of CSW's vertically integrated structure is expected to provide a more competitive organizational structure for CSW. Some employees have been reassigned from the U.S. Electric Operating Companies to CSW Services to provide these centrally managed services. CSW Credit purchases accounts receivable of the U.S. Electric Operating Companies and certain non-affiliated utilities, and CSW Leasing has investments in levemged leases. De CSW System is subject to thejurisdiction of the SEC under the liolding Company Act with respect to the issuance, acquisition and sale of securities, the acquisition and sale of utility assets or any interest in any business and accounting practices and other matters. See Heculation below, and ITEM 7-MD& A for additional information regarding the llolding Company Act. 12
d
, in 1996, the U.S. Electric Operating Comp:nles, SEEllOARD cnd Tr nsok contributed the following percsntages to aggregate operating revenues, operating income end net income for CSW Cornmon, innstment in Total NTU SEERO.4RD Electric Transoam Other Tartal CFL PSO SHIPCO 25 % 14 % 17 % 7% 36% 99 % .sn 1% 100 %
Operating Revenues 38% 12 % 12 % 10% 24 % 96 % 89 4% 100 % Openting income 7% 15 % 4% 24 % tithy 3th9 16%n 100% Net income for CSW Common 31 % (1) Net income for CSW common reflects a one time charge associated with certain investments for p! ant sites, engir cering studies and lignite reserves. (2) On June 6,1996, CSW sold Transok to Tejas. See ITEM 8 NOTE 14. TRANSOK DISCONTINUED OPERATIONS. J (3) Transok's Opciating Revenues and Operating income are shown as incorne hem Discontinued Operations in UW's Consolidated Statements ofincome. (4) Net income for CSW Common includes camings from Transok for January through May 1996 only. ($) includes CSW's gain on the sale of Transok, The relative contributions of the U.S. Electric Operating Companies and SEEBOARD to the aggregate operating revenues, operating income and net income for CSW Common differ from year to year due to vcriations in weather, fuel costs reflected in charges to customers, timing and amount of rate changes and other factors, including changes in business conditions and the results of non utility businesses. For additional detail rel:ted to CSW's reportable business segments, see ITEM 8 NOTE 13, HUSINESS SEGMENTS. U.S. UTILITY OPERATIONS Gracral Information concerning the service territories of the U.S, Electric Operating Companies at December 31,1996 is set forth in the following table, Estimated Approximate Retail Rural Electric Company and Largest Cities Served Population Squara Miles Customers Municipalities Cooperatives 1,$25,000 44,000 625,000 1 4 CFL Corpus Christi, Texas 278,000 Laredo. Texas 1$8,000 McAllen, Tesas 107,000 I,101,000 30,000 479,000 2 2 PSO Tulsa, Oklahoma 396,000 Lawton, Oklahoma 86,000 Bartlessille, Oklahoma 3$.000 973,000 25,000 414,000 3 8 SHIPCO ShrevroorVBossier City, Louisiana 178,000 Longview Texas 75,000 f i' Texarkana, Texas and Arkansas $6,000 404,000 53,000 186,000 2 13 N7il Abilene, Texas 111,000 San Angelo, Texas 92,000 13
- .. y. ..y -,-,y3- w.--.. -, . . . ,e - . , - y . _ y . , . . , . - + . . . - -m.,..c., . . . . . . - - , - - - . , , .._,,_g-y,- --,i----,.-
in 1996, approxirnctely 64% of the U.S. Elsetric Operoting Componies' electric revenues were ecmed . in Texas,22% in Oklahoma,8% in Louisiana and 6% in Arkansas. CPL The economic base of CPL's service territory includes manufacturing, mining, agricultural, tear.>portation and public utilities sectors. Major activities in these sectors include oil and gas extraction, food processing, apparel, metal re0ning, chemical and petroleun. refining, plastics and machinery equipment. In 1996, excluding the effects of the provisions for rate refunds, industrial customers accounted for approximately 23% of CPL's total operating revenues. Contracts with substantially all large industrial customers provide for both demand and energy charges. Demand charges continue under such contracts even during periods of reduced industrial activity, thus mitigating the effect of reduced activity on operating income. PSO The economic base of PSO's service territory includes mining, petroleum products, manufacturing and agriculture. The principal industries in the ter ritory include natural gas and oil production, oil refining, steel processing, aircraft maintenance, paper rnanufacturing and timber products, glass, chemicals, cement and aircraf t components. SWEPCO The economic base of SWEPCO's service territory includes mining, manufacturing, chemical products, petroleum products, agriculture and tourism. The principal industries in the territory include natural gas and oil production, petroleum renning, manufacturing of pulp and paper, chemicals, food processing and metal tenning. The territory also has several military installations, colleges and universities. IITU The economic base of WTU's service territory includes agricultural businesses, such as the production of cattle, sheep, goats, cotton, wool, mohair and feed crops. Signincant Fains have been made in economic diversi0 cation through value added processing of these products. The natural resources of the territory include oil, natural gas, sulfur, gypsum end ceramic clays. Important manufacturing and processing plants served by WTU produce cotton seed products, oil products, electronic equipment, precision and consumer metal products, meat products and gypsum products. The territory also has several military installations and state correctional institutions. Comtictition and Industry Challences Competitive forces at work in the electric utility industry are affecting the CSW System and electric utilities generally, increased competition facing electric utilities is driven by complex economic, political and technological factors. These factors have resulted in legislative and regulatory initiatives that are likely to result in even greater competition at both the wholesale and retail level in the future. As competition in the industry increases, the 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 alternative forms of energy, such as natural gas, fuel oil and coal, some of which may be cheaper than electricity. As a whole, the U.S. Electric Operating Companies believe that their prices for electricity and the quality and reliability of their service currently place them in a position tc, compete effectively in the marketplace (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). For additional information regarding competition and industry challenges, including legislative initiatives at both the state and federal level, see ITEM 7-MD& A. 1-4
Iterstation ne CSW System is subject to the jurisdiction of the SEC under the llolding Company Act. De llolding Company Act generally limits the operations of a registered holding company to a single integ public utility system, plus such additional businesses as are functionally related to such system. De U.S. Electric Operating Companies have been classified as public utilities under the Federal Power Act, and accordingly, the FERC has jurisdiction in certain respects over their electric utility facilities and operations, wholesale rates, and in certain other matters, ne U.S, Electric Operating Companies are subject to thejurisdiction of various . tate commissions as to retail rates, accounting raatters, standards of service and, in some cases, issuance of securities, certificatio of facilities and extensions and division of service territory. See ITEM 7 MD& A for a discussion of possible changes to the liolding Company Act as well as discussion of current industry restructuring activities that could have a significant impact on the CSW System. Nuclear Regulation . CPL Ownership of an interest in a nuelcar generating unit exposes CPL and, indirectly, CSW to regulation not unmon to a fossil fuel generating unit. Under the Atomic Energy Act of 1954 and the Energy Reorganization Act of 1974, operation of nuclear plants is intensively regulated by the NRC, which has br power to impose licensing and safety related requirements. Along with other federal and state aEenc NRC also has extensive regulations pertaining to the environmental aspects of nuclear reactors. The NRC has the authority to impose fines and/or shut down a unit until compliance is achieved, depending upon its assessment of the severity of the situation. For additional information regarding STP, see ITEM 7 MD&A. EnvironmentalRegulation For a discussion of regulation by the various environmental agencies that applies to the U.S. Electric Operating Companies, see Environmental Matters below. Hates The retall rates of the U.S. Electric Operating Companies are subject to regulation by the state utility commissions in the states in which they operate. As discussed above, the wholesale rates of the U.S. Electric Operating Companies are subject to regulation by the FERC. In addition, SWEPCO has agreements, which have been approved by the FERC, with all of its wholesale customers under which rates are based upon an agreed cost of service formula. These rates are adjusted periodically to reflect the actual cost of providing service. Texas Rates- CPL, SWEPCO and HTU The Texas Commission has originaljurisdiction over retail rates in the unincorporated areas of Texas. He goveming bodies ofincorporated municipalities have originaljurisdiction over rates within their incorporated limits. Municipalities may elect, and some have elected, to surrender thisjurisdiction to the Texas Commission. The Texas Commission has appellate jurisdiction over rates set by incorporated municipalities. In Texas, electric service areas are approved by the Texas Commission. A given tract in a utility's overall service area may be singly certificated to a utility, to one of several competing electric cooperatives, investor owned viilities or to one of the competing municipal electric systems, or it may be dually or triply certificated to these entities. These certificated areas have changed only slightly since the formation of the Texas Commission in 1976. 15
Okl:homa Rates - PSO ,. PSO is subject to the jurisdiction of the Oklahoma Commission with respect to retail prices. Pursuant to authority granted under RESCTA, the Oklahoma Commission established service territorial boundary rnaps in all unincorporated areas for all regulated retail electric suppliers serving Oklahoma, in accordance with RESCTA, a retail electric supplier may not cxtend retail electric senice into the certined territory of another supplier, except to serve its own facilities or to serve a new customes with an initial full load of 1,000 KW or more. RESCTA provides that when any territory certined to a retail electric supplier or suppliers is annexed and becomes part of an incorporated city or town, the certification becomes null and void. liowever, once established in the annexed territory, a supplier may generally continue to serve within the annexed area. Arkansas and Loulslana Rates - SWEPCO SWEPCO is subject to thejurisdiction of the Arkansas Commission and Louisiana Commission with respect to actail rates, as well as the Texas Commission as described above. Fuel Recovery The recovery of fuel costs from retail customers by the U.S. Electric Operating Companies is subject tc, regulation by the state utility commissions in the states in which they operate. All of the U.S. Electric Operating Companies' contracts with their wholasale customers contain FERC approved fuel adjustment provisions for recovery of fuel costs. Texas FuelRecovery CPL, SWEPCO and WTU Electric utilities in Texas, including CPL, SWEPCO and WTU, are not allowed to make automatic adjustments to recover changes in fuel costs from retail customers. A utility is allowed to recover its known or reasonably predictable fuel costs through a fixed fuel factor. The Texas Commission established procedures whereby each utility under itsjurisdiction may petition to revise its fuel factor every six months according to a specified schedule. Fuel factors may also be revised in the case of emergencies or in a general rate proceeding. Fuel factors are in the nature of temporary rates and the utility's collection of revenues by such factors is subject to adjustment at the time of a fuel reconcillation. Under these procedures, at its semi annual adjustment date, a utility is required to petition the Texas Commission for a surcharge or to make a refund when it has materially under or over collected its fuel costs and projects that it will continue to materially under or over-collect Material under or over-collections including interest are denned as variances of four percent or more of the most recent Te m Commission adopted annual estimated fuel cost for the utility. A utility does not have to revise its fuel faaor @ requesting a surcharge or refund. An interim emergency fuel factor order must be issued by the Texas Commiuion within 30 days afler such petition is Gled by the utility. Final reconciliation of fuel costs is made through a reconciliation proceeding, which may contain a maximum of three years and a minimum of one year of reconcilable data, and must be Oled with the Texas Commission no later than six months
- afler the end of the period to be reconciled, in addition, a utihty must include a reconciliation of fuel costs n any general rate proceeding regardless of the time since its last fuel reconciliation proceeding. Any fuel costs that are determined unreasonably incurred in a reconciliation proceeding are not recoverable from retail customers.
Oklahoma Fuct Recovery - PSO All KWil sales to PSO's retail customers were made under rates which include a fuel cost adjustment clause. Oklahoma law requires that an examination of pSO's retail fuel cost adjustment clause be performed armually by the Oklahoma Commission which approves the utility's embedded fuel rate per KWH. The fuel cost adjustment is computed for each month on the basis of the average cost of fuel consumed in the month. The amount of any difference in such cost over or under the embedded rate is applied on a KWil basis and reflected in adjustments to customers' bills during the second month subsequent to the month in which the difference occurred. l 1-6
- .. . . - . ~ - - , - - - . . __- - - - - ..- - ._ - - - .-
Arkansas andLouisione FuelRec:very SN'EPCO SWEPCO'sfetail rates currently in effect in Louisiana are adjusted b: sed on SWEPCO's cost of fuel in accordance with a fuel cost adjustment which is applied to each billing month based on the second previous month's average cost of fuel. Provision for any over. or under recovery of fuel costs is allowed under an automatic fuel clause. Under SWEPCO's fuel adjustment rider currently in effect in Arkansas, the fuel cost adjustment is applied to each billing month on a basis which permits SWEPCO to recover the level of fuel cost experienced two months earlier. SWEPCO's fuel recovery mechanisms are subject to the jurisdiction of the l Arkansas Comml:sfon and the Louisiana Commission. Recoverability ofFuel The inabihty of any U.S. Electric Operating Company to recover its fuel costs undur the procedures described above could have a material adverse effect on such company's results of operati is and financial condition.- See ITEM 7 MDA A and ITEM 8-NOTE 2, LITIGATION AND REGULATORY PROCEEDINGS for further infonnation with respect to regulatory, rate and fuel proceedings. Operatinn Dala Facilities, Plants and Properties At December 31,1996, the U.S. Electric Operating Companies owned the following electric generating pt:nts, or portions thereofin the case ofjointly owned plants, substantially all of which were steam electric : , units. Net Dependable Summer Rating Principal Fuel Capability Source (a) (MW)(b) _ Plant Name and tmention CFL La Palma, San Benito, Texas Gas 205 (c) Victoria, Victoria, Texas Gas 432 (e) Gas $60 Nueces Bay, Corpus Christi, Texas Oas $47 ton C. Ilill, Corpus Christi, Texas Ons 177 Laredo, Laredo, Texas - Oas 182 J.L Bates,Miulon, Texan E.S. Joslin, Point Comfort, Texas Gas 249 Gas 695 Barney M. Davis, Corpus Christi, Texas Ccleto Creek, Goliad. Texas Coal 632 Coal 33 Oklaunton.Vernon Texas (b) Nuclear 630 ST1', Bay City, Texas (b) flydro 6 Eagle Pan, Eagle Pass, Texas 4,368 PSO Tulsa, Tuha, Oklahoma - Gas 165 (c) Oil 8 Riverelde, Jenks. Oklahoma Oas 916 l Oil 3 l Northeastern, Oologah, Oklahoma - Gas 637 Coal 900 Oil 4 E _
- 475 :
Southwestern, Washita, Okinhoma - Gas Oil 2 Cemanche, Lawton, Oklahoma - Gas 273 ,
- Oil 4 ;
Weleetka, Weleetta, Oklahoma Gas 151 E Oil 4 Coal 106_ I l Okinunion, Nemon,1exas (b) 3,64 R l-7
. -- . . - .._.- .- _ _ ._._. _ ,_ ~
Net Dependable Surnmer Rating Principal fuel Capability Plant Name and Iocation Soune (a) (MW)(b) $HEPCO Arsenal 11:11, $hreveport, louisiana Gas i12 L6eberman,Mooringsport touisiana Oas 273 , Knon 14c, Cherokee Lake,1cxas Gas 478 ) Wilkes, Jefierson, Texas Gas 375 lanc $ tar, Dalrigerfield,1 cans Gas 50 Welsh, Cason, T exas Coal 1,584 Thnt Creek, Gentry, Arkansas (b) Coal 240 llenty W. hrkey, llallsville, Temas (b) Lignite $$9 Dolet Ilills, Mansfield, Louisiana (b) Lignite 262 4,433 H7U Paint Creek,Ilaskell,lexas Gu 237 Rio Pecos,06rvin, Temas Gas 137 San Angelo, han Angelo, Texas ou 125 Iort Phantom, Abilene,Temas Ons 362 Oak Creek, llronte, Texas Gas 85 Abilene, Abilene, Texas Gas 7 Lake Pauline, Quanah Texas Oes 45 f t. Stockton, I t. *tockton, Texas ou 5 Vemon, Vernon, Texu Oil 9 Okleunion, Vernon, Texas (b) Coal 370 Presidio, Presidio, Texas Oil 2 1,384 Total, excluding plant in storage 13,833 Plant in storage 358 CSW Total l 4,1 Yl (a} Some plants have the capability of buming oil in combination with gas Use of oil in facihties primarily designed to burn gas results in increased maintenance expense and a reduction of approximately 4% to 10% in capability PSO and WTI) have 25 MW and 1I M'W, respectively, of facilities primarily designed to born oil. (b) Data reflects only the IJ.S. Electric Operating Companies' ponion of plants which are jointly 9wr.ed with non aftiliates. For additiona! Information concerningjointly owned facilities see ITEM 8-NOTE 6. JOINTLY OWNED ELECTRIC UTILITY PLANT, (c) Excludes 358 MW from units in storage, consisting of 48 MW at La Palma and 60 MW at Victoria for CPL and 250 MW at Tulsa for PSO. It is currently anticipated that one unit in storage (85 MW) at Tulsa for PSO will be dismantled in 1998. Refer to ITEM 7-MD& A for additional information. All of the generating plants described above are located on land owned by the U.S. Electric Operating Companies or, in the case ofjointly owwd plants, jointly with other participants. The U.S. Electric Operating Companies' electric transmission and distribution facilities are mostly located over or under highways, streets and other public places or property owned by others, for which permits, grants, casements or licenses (which the U.S, Electric Operating Companies believe to be satisfactory, but without examination of underlying land titles) have been obtained, The principal plants and properties of the U.S. Electric Operating Companies are subject to the liens of the first mortgage indentures under which the U.S. Electric Operating Companies' bonds are issued. Construction Espenditures The U.S. Electric Operating Companies maintain a continuing construction prograra, the nature and extent of which is based upon current and estimated demands upon the system. See ITEM 7 MD& A for additional information related to construction expenditures. 1-8
P:sk Loads and System Capabilities cf the U.S. Electric Operating C;mpanies The following tables set forth for the last three years (i) the net system capability, including the net amounts of contracted purchases and contracted sales, at the time of peak demand,(ii) the maximum coincident system demand on a one hour integrated basis, exclusive of sales to other electric utilities and (iii) the respective amounts and percentages of peak demand generated by the U.S. Electric Operating Companies and net purchases and sales. 1996 1995 1994 Cm' 14,377 (1) 14,168 (I),(2) 13,549 (1),(3) Net system capability (MW) 12,613 12,314 11,434 Maximum coincident system demand (MW)
. 2.4% 7.7% (0.3)%
Percentage increase (decrease) in peak demand over prior period II,625 12.053 11,333 Generation at time of peak (MW) 92.2 % 97.9% 99.3 % Percent of peak demand generstad 988 261 81 Net purchases at time of peak (MW) 7.8% 2.1% 0.7% Pgreent of net purchases at time of pak July 22 July 28 June 27 Date of maximum coincident system demand (I) Doca not include 358 MW of system capability in storage in 1996 as deswibed above in Facilltles, Plants and froperfics,392 MW of system capability in storage in 1995 and 537 MW of system capability in storage in 1994. (2) Does not include 54 MW of SWEPCO capability it 1995 that was not available.at the peak due to fuel procurement issues. (3) Does not include 324 MW of SWEPCO cnpabilo in 1994 that was unavailable due to inefficiencies as a result of slag build-ups and f*ici procurcraent issues. l 1995 1994 1996 CFL l 4,380 (1) 4,200 (1) 3,969 (1) i N t system capability (MW)- 4,046 3,862 3,732 Maximum coincident system demand (MW) 4.8% 3.5% 6.1% Percentage increase (decte, sc) in peak demand over prior period 3,484 3,846 3,074 Generation at time of peak (MW) 86.1% 99,6 % 82.4 % Percent of peak demand generated 562 16 658 Net purchases (sales) at time of peak (MW) 13.9 % 0.4% 17.6 % Pcrcent of net purchsses (sales) at time of peak Date of msximu" :oincident system demand August 13 July 26 Augu:;t 18 (1) Does not inc;ude 108 MW of system capability in storage in 1996 as described above in Facil/ ries, riants and Properfics,142 MW of symm capabin t iin storage in 1995 and 310 MW of system capability in storage in 1994. 1996 1995 1994 PSD Net system capabihty (MW) 3,848 (1) 3,759 (1) 3,664 (I) 3.360 3,292 3,167 Maximum coincident system demand thtW) Percentage increase (decrease) in peak demand over prior period 2,1% 3.9% 0.6% , l 3,009 3,025 2,645 i Generation at time of peak (MW) 89.6 % 91.9 % 83.5% Percent of peak demand generated 351 267 522 Net purchases (siles) at time of ped (MW) 10.4 % 8.1% 16.5 % Percent of net purchases (sales) at time of peak date of maximum coincident system demand August 7 August 28 June 27 (1) Does not include 250 MW of syste n capability in storage in 1996 as described a^oove in fact /iries, Plants and Properrics,250 MW of system capability in storarc 'n 1995 and 187 MW of system capability in storage in 1994. l 1 ! l-9 l
. .. . -~ .- . . . . - - . . . - . . ~ . _ . . . - . . . . - ~ . - .- . .- . . . . .
i i SWEKO 1996 1995~ 1994 -L Net system capabihty(MW) _ _. 4,554 4,783 (1) 4,464 (2). Maaimum coincident pm demand (MW)l 4.018 3.932. 3,526
. Percentage increase (decrease) in peak demand over prior period 2.2% 11.5 % (3.4%)
Generation as time of peak (MW) 3,608 4,022 . 3,987 l Percent of peak demand generated . 89.8 % 102.3 % 113.1 % Net purchases (sales) at tirne of peak (MW) 410 (90) (461) Percent of net purchases (sales) at tims 6.* peak 10.2% . (2.3%) - (13.1%) Date of maximum coincident system demand July 22 - July 28 June 27 -
' (l) Does not include $4 MW of capability in 1995 that was not available at the peak d 3 ed 1 procurement issues.
(2) . Does not include 324 MW of capability in 1994 that was unavailable due to inefficw n:<. .., a result of slag build ups and fuel -
~
procurement issues.-
-RTU 1996 1995 1994
- Net system capability (MW) I,595 . '1,426 1,459 Maximum coincident system demand (MW) I,433 1,435 1,262
- Percentage increase (decrease) in peak demand over prior period (0.I)% 13.7 % 5.1%
Oeneration at time of peak (MW) 1,048 1,167 1,401
- Percent of peak demand generated 73.1 % . 81.3% _ 111.0 % '
Net purchases (sales) at time of peak (MW) 385- 268 (139) Percent of net purchases (sales) at time of peak 26.9 % 18ls% (11.0%) Date of maximum coincident system demand July 8 July 28 June 27 a a h a .b-~ h 1 ;-.
'S. . , - . , _ . . .. _ .. .- .,-. . . , -. - . .-. .-_
1 U.S. Electrk Operating Statsseks Central AndSouth West Corporation andSubsidiary Companies (excludes SEEBOARD) 1996 1995 1994 Kilowart hour sales (millions) 17,883 16,872 16.368 Residential 14,256 13,755 13,463 Commercial
-20,266 19,321 18,869 Industrial -
1,592 1,518 1,501 Other retail -- 53,997 51,466 50,201 Sales to retail customers 8,428 8.468 7,133 Sales for resale 62,425 59,934 57,334 Total Number of electric customers at end of period (thousands) I,456 1,437 1,417 Residential 211 209 205 Comanercial 23 24 24 Industrial 14 13 15 Other I,704 1,683 1,661 Total Residential sales averages - 12,392 II,840 11,665 K%11 per cus'omer
$861 $799 $824.
Revenue per customer (a),(b) 6.95t 6.75# 7.06t Revenue per KWil (a),(b) 5.20t 4.81( 5.35g Revenue per K%11 on total sales (a),(b)
+
Fuel cost data (a)i 10,440 10,299 10,344 Aeerage Btu per net K411
$1.81 $1.58 $1.82 Cost per MMBtu 1.89 1.63t 1.88t - Cost per K%11 generated -
37.4 % 35.0% 36.7%
- Cost, including purchased power, as a percentage of revenue (b)
(a) Dese statistics reticct the outage at STP in early 1994. (b) Dese statistics reDect the refunds and fuel disallowances that occurred as a result of the CPL 1995 Agreement, the CPL 1996 Fuel Agreement, management's judgment concerning the effect of the probable outcome of CPL's pending rate case and the WTU 1995 Stipulation and Agreement. For additionalinformation, see ITEM 8-NOTE 2 LITIGATION AND REGULATORY PROCEEDINGS. 1-1l a
i Operating Statistics : _o.
'CentrolPower nnd Light Company .
1996: 1995- -1994 Kilownti hour sales (millions)- Residential ~ 6,680 6,223 5,954
. Commercial 4,773 4.656 4,523 Industrial . 7,610- 7,250 6,910 Other retail - 499 465- 457~
__ Sales to retail customers 19,562 18,594 17,844 Sales for resale 2,029 1,680 1,286 -
-- Total 21,591 20,274 19.130
- Number of electric customers at end of period Residential 536,504 526,909 516.355' Commercial '78,890 77,743 76,739-Industrial ~ 5,702 -5,731 5,864 3,855 3,561 3,577 ;
} Other J Total 624,951 613,944 602,535 Residential sales sve, ages KWH per customer 12,623 11,985 11,729 Revenue oct customer (a)l(b) $1,000 $8% $935
- Reven' t per KWll (a),(b) 7.92t 7.48g 7.97g Revenue per KWil on total sales (a),(b) 6.02t ' 5.29d 6.37t
_ Fuel cost data (a) Average Blu per net KWll 10,391 10.175 10,289
- Cost per MMBru $1.62 . $1.37 - $1,75 Cost per KW}i 8enerated 1.68d 1.39f 1.80s
- Cost, including purchased power, as a percentage of revenue (b) 30.8 % 28.7 % ~ 30.4%
(a) These statistics reflect the outage at STP in early 1994 (b) These statistics reficct the refund and fuel disallowance that occurred as a result of the CPL 1995 Agreement, the refund associated with the CPL 1996 Fuel Agreement and management's judgment conceming the etTect of the probable outcome of
. CPL's pending rate case. For addit %nal information, see ITEM 8 NOTE 2 LITIGATION AND REGULATORY PROCEEDINGS.
1 1 12
.l Operating Storistks "
Pubik Servke Company of 0$ahoma ' 1996 1995 1994
; Kilowest.bour sales (millions) 5,098' 4,753 4,749-l ' Residential-4,621 4,427 - 4,434 Commercial
- 4,581 4,307 4,360 c 1 Industrial '
81 80 89-Other retail 14,381 13.567 13,632 Sales to retail customers
- 1.487 1,617 1,509 .
Sales foi resale 15,868 15,184 15,141
. Total Number of electric customers at end of period 417.158 412,765 409,675 ~ >
Residential --
' 54,849 54,102 53,454 Commercial-5,158 5,205 5,156
-- Industrial =
1,390 1,353 1,287 Other . . 478,555 473,425 469,572 Total Residential sales averages 12,290 11,563 11,640 KWil per custemer f Revenue per customer $722 $582 $726 Revenue per KWil 5.89t J.89f 6.24# 4.63d 4.55g 4.89g Revenue per KWil on total sales
- Fuel cost data .
' Average Btu per net KWil 10,225 10,151 '- - 10,231
'. Cost per MMBru . $2.04 $1.73 - $1.96 2.09# 1.75f 2.00g Cost per KWH generated '
Cost, including purchased power, as a percentage of revenue 45.1% 43.0 % 47.5 % i 1 i 0 l, lr 1-13 (. r .w,, -- , . .. , -. .
. - .. .~. _ _. - . . - . . . . . - - . _ - . - -. . ~ . - . - -
Operating Statistka .
^
Southwestern Electric Power Conpany 1996 1995- 1994 ;
+
. Kilowatt-hour sales (millions) '
- 4,487 4,40( 4,157 Residential Commerciali 3,658 3,521 3,378
' 6,833 6,531 4.357
. industrial Other retail 432 424 4M 15,410 14,882 14,2I2 '
Sales to retail customers Sales for resale 6,395 5,002 5,189 21,805 19,884 19,481 Total Number of electric customers at end of period , 355,095 351.131 346,227 Residential Commercial 50,091 49,123 48,153 Irdustrial 5,915 5,864 5,747. 2,727 2,615 2,609 Other. Total 413,828 408,733 - 402,736
- Residential sales averages
-~ KWH per customer 12,704 12,627 12,107 Revenue per customer -$821 $798 $776
- Revenue per KWH 6.46d 6.32f 6.41#
Revenue per KWH on total sales 4.22g 4.21f 4.24# Fuel cost data - Average Btu per net KWil 10,606 10,531 10,489 Cost per MMBtu - $1.76 $1.61 $1.75 Cost p.;r KWH generated 1.87# 1.70c 1,84# Cost, including purchased power, as a percentage of revenue 45.1 % 40.3 % 43.2% i: 1-14 ,=
, -+ , - -- - - . - _ . - . _ _ - - - . - _ - _ . . - - - - - - _ _ _ _ _ - - . - - _ _ - . _ _ _ . . _ - - - . . _ . - . . _ _ _ . _ _ - _ - _ . - . _ _ - . . . - - _ - -
- OperatingStatistks
' West Texas Urukses Conpany 1996 1995 1994-Kilowatt hour sales (millions) -
1,620 1,490 1,508 Raidential 1,203 1,152 1,128 Commercial 1,241 1,233 1,241 Industrial 581 589 556
- Other retail -
4.645 4,424 -4,433 Sales to retall customers 2,411 2,261 2,051 Sales for resale 7,056 6,692 6,484 Total Number of electric customers at end of period 146,607 146,235 144,966 Residential 27,645 27,243 26,618 Commercial 6,019 7,317 7.392 Industrial
-5,837 5,685 5,533 Other 186,108 186,480 184,509 Total :
Ruidential sales escrages Kw11 per customer iI,059 10,224 -10,449 Revenue per customer (a)- $848 $784 $822 Revenue per KWH (a) 7.67d 7.67d - 7.86( Revenue per K%11 on total sales (a)- 5.34# 4.78d 5.29# Fuel cost data Average Btu ; et K%11 10,568 10,370 - 10,424 Cost per MMBtu $2.01 $1.83 $1.88 Cost per KWil generated 2.12g 1.90W l.96g Cost, including purchased power, as a percentage of revenue (a) 43.5 % 42.1 % 39.8 % (a) These statistics reflect the refund and lower rates that occurred as a result of the WTU 1995 Stipulation and Agreement. See ITEM 8-NOTE 2 LITIGATION AND REGULATORY PROCEEDINGS.- L l-15 L-.
_ . -~
- Power Purchases and Sales J ,
- Various municipalities, electric cooperatives and public power authorities are scrwd by the U.S.
l Electric Operating Companies. The U.S. Electric Operating Companies exchange power on an emergency or 1 economy basis with various neighboring systems and engage in economy interchanges with each other. in .
- addition, they contract with certain suppliers including power marketers and independent power producers for the purchase or sale of power on a unit capacity basis, fimi energy, responsive reserves and other wholesale services.
CPL Magir Valley Magic Valley, CPL's largest wholesale customer, is currently served under an agreement that requires a
~five year notice of termination. During 1996, Magic Valley exercised such notice of termination.- Pursuant to Texas Commission rules, Magic Valley has issued a solicitation for 250 MW ofload beginning in 2001. CPL has submitted a bid in response to the solicitation. Magic Valley anticipates a final decision regarding the solicitation in late 1997.
SWEPCO - BREMCO As part of the agreement to acquire BREMCO, SWEPCO entered into a long term purchased power contract with Cajun, BREMCO's previous full-requirements wholesale supplier. The contract covered the purchase of o.crby and capacity. SWEPCO and HTU- Tex-La WTU serves approximately 120 MW ofload for Tex La. WTU will serve this load until Tex-La facilities are completed to connect Tex La to SWEPCO, at which time SWEPCO will serve approximately 85 MW and WTU will continue to serve approximately 35 MW of the load. To date, approximately 15 MW of this load has been transferred to SWEPCO. SWEPCO- Cajun See ITEM 7-MD&A for information regarding SWEPCO's pending proposal to acquire all of Cajun's non-nuclear assets. HTU- City of Weatherford, Texas - On January 1,1997, the City of Weatherford, Texas became a new wholesale customer of WTU. WTU initially served 25 MW ofload for the city, until February 1,1997, when L began serving the entire load of approximately 55 MW. Other Operational Information System interconnection The CSW U.S. Electric system operates on an interstate basis to facilitate exchanges of power. PSO and WTU we interconnected through the 200 MW North HVdc transmission :nterconnection. SWEPCO and CPL are interconnected through the 600 MW East HVdc transmission interconnection which became operationalin August,1996. CPL and WTU are members of ERCOT which operates in Texas. Other ERCOT members include Texas Utilities Electric Company, HLP, Texas Municipal Power Agency, Texas Municipal Power Pool, Lower Colorado River Authority, the municipal systems of San Antonio. Austin and Brownsville, the South Texas and Medina Electric Cooperatives, and several other interconnected systems and cooperatives. PSO and SWEPCO are members of the SPP, which is comprised of 43 members, including 17 investor-owned utilities,12 municipalities,10 cooperatives,3 state and 1 federal agency operating in the states of Arkansas, Kansas, Louisiana, Oklahoma and parts of Mississippi, Missouri, New Mexico and Texas. ERCOT members 1-16
interchange power and energy with one another on a firm, economy and emergency basis, es do the members of the SPP, l v Seawnality - , Sales of electricity by the U.S. Electric Operating Companies tend to increase during warmer summer months and, to a lesser extent, cooler winter months, because of higher demand for power. Franchises The U.S. Electric Operating Companies hold franchises to provide electric service in various municipalities in their service areas. These franchises have varying provisions and expiration dates including, in some cases, termination and buy-out provisions. CSW considers the U.S. Electric Operating Companies' franchises to be adequate for the conduct of their business. {yf. lSupply . ,
, General
- The U.S. Electric Operating Companies' present net dependable summer rating power generation capabilities and the type of fuel used are set forth in Facilitics, Plants andProperties above. 'lhe fuel mix of the U.S. Electric Operating Companies' generating capability and generation mix for 1996 is set forth in the tables presented below.
Aggregate Capability, (MW) - CSW CPL PSO SWEPCO HTU 8,455 3,047 2,617 1,788 1,003 Natural Gas 3,885 685 1,006 1,824 370 Coal Lignite 821 - - 821 - Nuclear 630 630 -
,,- [ Ilydro and Oil ,
42' 6 . 25 - 11
, 13,833 4,368 3,648 4,433 1,384 4 ,
. , :Plant in Storage . 358 108 250 - -
14,191 4,476 3,898 4,433 1,384 Total Generation Mix (as a % ct MWin CSW LPL PSO SWEPCO HTU Natura3 Gas 39 49 49 17 57
^
Coal 43 25 51 54 43 Lignite 10 - - 29 .- Nuclear 8 26 - - - Hydro and Oil - - 100 100 100 100 100 While the CSW-installed capacity of natural gas-fired units is higher than the capacity of solid-fuel units, the primary determinant for utilization is fuel cost. Consequently, as solid-fuel prices were substantially less than natural gas in 1996, the utilizatio.n of solid-fuel units was higher than natural gas-fueled units. Natural Gas The U.S. Electric Operating Companies purchase their natural gas from a number of suppliers operating in and around their service territories. In 1996, approximately 45% of the U.S. Electric Operating Companies' total natural gas purchases were made under long-term contracts and approximately 55% came from short-term contracts and spot market purchases. 1-17
I l CPL CPL's eight gas-fired electric g:ncr: ting plants are supplied by a portfolio oflong-term cnd short-term l natural gas purchase agreements through multiple natural gas pipeline systems. Approximately 60% of CPL's total natural gas requirements in 1996 were purchased under long-term arrangements representing both purchase obligations and discretionary purchases. The balance of CPL's natural gas requirements was acquired under shon term arrangements from the spot market. , PSO PSO's six gas fired electric generating plants are supplied by a portfolio oflong-term and shon-term natural gas purchase agreements. In 1996, approximately 54% of PSO's natural gas requirements were provided under firm centracts with the remaining requirements acquired from the spoi market. These natural gas supplies were transported to PSO facilities through the pipeline system of Transok, a former affiliate. In accordance with an order issued by the Oklahoma Commission in 1991, which required a phase-in of competitive bidding of natural gas transportation requirements, PSO has entered into a five-year natural gas transportation and sales agreement with ONEOK Gas. During 1997, ONEOK will build pipelines to three of PSO's six natural gas-fired generating stations and will begin providing natural gas transportation and supply on January 1,1998. CSW and PSO do not expect the sale of Transok to have an adverse impact in its ability to secure natural gas in the future. Negotiations are currently in progress with third party pipelines to provide additional pipeline interconnections to other natural gas suppliers besides Transok. SWEPCO SWEPCO purchased approximately 89% ofits natural gas requirements in 1996 pursuant to spot purchase contracts. Due to the peaking operation of SWEPCO's five gas-fired electric generating plants, a majority of SWEPCO's natural gas requirements will continue to be purchased on the spot arket and will be subject to market conditions. 1970 WTU purchases its natural gas requirements from numerous suppliers. The most significant contract is the long-term firm contract with Lone Star Gas Company which provided approximately 11% of WTU's total l natural gas requirements in 1996. WTU purchased approximately 9% ofits natural gas requirements from supplemental firm contracts with several suppliers and the remaining 80% was purchased from a number of suppliers on the spot market. Coaland Lignite The U.S. Electric Operating Companies purchase coal from a number of suppliers, in 1996, approximately 80% of the U.S. Electric Operating Companies' total coal purchases were supplied under long-term contracts with the balance procured on the spot market. The coal for the CSW U.S. Electric system plants comes primarily from Wyoming or Colorado mines which are located between 1,000 and 1,700 rail miles from the generating plants. Oklaunion - CPL, PSO and llTU The jointly-owned Oklaunion plant is supplied coal under a coal supply contract with Caballo Coal l Company. Approximately 67% of the total 1996 Oklaunion coal requirements for WTU,67% for CPL, and 68% for PSO were supplied under the Caballo Coal Company contract with the balance procured on the spot market. As of December 31,1996, CPL's share of the year-end 1996 coal inventory at Oklaunion was approximately 49,632 tons, representing approximately a 65-day supply. PSO's share was approximately 91,053 tons, representing approximately a 59-day supply. WTU's share was approximately 349,277 tons, representing approximately a 65-day supply. Coal needed at Oklaunion is transported in Burlington Northern supplied rail cars pursuant to a tariff filed with the Interstate Commerce Commission, wl ose authority in the matter was transferred to the STB effective January 1,1996. In a decision issued May 3,1996, the STB declared the rate set forth in Burlington 1-18
Northern's tariff of $19,36 per ton to be t nt=sonably high and made c:rtain other rulings having the effect of limiting the rate to a maximum of $13.68 per ton. On July 2,1996. Burlington Northern cstablished such rate for the transportation of coal to Oklaunion. Burlington Northem has appealed the May 3,1996, decision and a rel:ted June 2$,1996, ecision to the U.S. Court of Appeals for the District of Columbia Circuit. If the STB decisions are upheld, WTU will be entitled to recovery, with interest, of excess charges between the expiration of the contract and July 2,1996. If the STB decisions are not upheld, WTU will be required to reimburse Burlington Northern, with interest, for the amount, if any, by which the rate ultimately determined to apply, up to its tariff rate, exceeds the amount charged to WTU. WTU does not believe resolution of this matter will have a m:terial impact on its results of operations or financial condition. Coleto Creek- CPL CPL has a long term coal supply agreement with Colowyo Coal Company covering approximately 25% of the coal requirements ofits Coleto Creek plant. During 1996, this agreement was suspended and replaced with an agreement pursuant to which both coal and coal transportation, using CPL-owned rail cars, were provided by Colowyo Coal Company which, in turn, entered into transportation arrangements with Southern . P cific Transportation Company. Approximately 70% of Coleto Creek's requirements were furnished under this agreement. The balance of th -lant's requirements consisted of carry-over tonnage shortfalls under the long-term Cc',owyo Contract and wt purchases of Powder River Basin Coal that were delivered under spot rail tr:nsportation agreements. At December 31,1996, CPL had approximately 171,000 tons of coal in inventory at Coleto Creek, representing approximately a 27 day supply. ) 1 I CPL has entered into an agreement with Colowyo Coal Company for deliveries in 1997 that is similar ' to the 1996 agreement. After 1997, CPL intends to utilize Powder River Basin coal for all or a portion of the Coleto Creek plant requirements and will transport such coal either in common carrier rail service or p.rsuant to negotiated rail transportation arrangements. Powder River Basin coal is transported approximately 1,700 miles, using either'Burlington Northern or Union Pacific as the originating carrier and Southem Pacific Transponation Company as the destination carrier. Southern Pacific Transportation Company is currently the only rail carrier with access to the Coleto Creek Plant. In 1994, CPL instituted a proceeding at the Interstate Commerce Commission requesting a resonable rate for the 16 mile movement from Victorin, Texas, a station served by another carrier, to Coleto Cr;ck. Southern Pacific Transportation Company moved to dismiss the complaint and, in a decision issued December 31,1996, the STB granted the motion. CPL has appealed this decision to the U.S. Court of Appeals for the Eighth Circuit. Northeastern Station - PSO PSO has a contract with Kerr-McGee Coal Corporation, which substantially covers the coal supply for PSO's Northeastem Station coal units through at least 2004. Coal delivery is by unit trains from mines located in the Gillette, Wyoming vicinity, a distance of about 1,100 rail miles from Northeastern Station. PSO owns sufficient rail cars and spares for operation of six unit trains. Coal is transported to Northeastern Station pursuant to a long-term contract with Burlington Northern. The plant also has physical access to deliveries from Union Pacific. At December 31,1996, PSO had approximately 321,000 tons of coal in inventory at Northeastern Station representing approximately a 28-day supply. Welsh and Flint Crrek -SWEPCO Long-term coal supply for SWEPCO's Welsh plant and its 50 percent-owned Flint Creek plant is provided under a contract with Cyprus /Amax. Coal under this contract is mined near Gillette, Wyoming, a distance of about 1,500 and 1,100 miles, respectively, from the Welsh and 1 lint Creek plants. Coal is delivered to the plants under rail transportation contracts with Burlington Northern and the Kansas City Southem R:ilroad Company having expiration dates ranging between 1997 and 2007. SWEPCO owns or leases under long-term leases sufficient railcars and spares for operation of twelve unit trains. SWEPCO has supplemented its railcar fleet from time to time with short-term leases. At December 31,1996, SWEPCO had coal inventories 1 19 ) I
of 1,175,000 tons at Welsh representing approxirn:tely a 58-day supply cnd 437,000 tons at Flint Creek representing approximately a 52-day supply. See ITEM 8 NOTE 2. LITIG ATION AND REGULATORY PROCEEDINGS and ITEM 8-NOTE 3 COMMITMENTS AND CONTINGENT LIAlllLITIES for additional infortnation. Piracy and Dolet lillis-SWEPCO SWEPCO has acquired lignite leases covering an aggregate of about 27,000 acres near the llemy W. Pirkey power plant. Sabine Mining Company is the contract miner of these reserves. At December 31,1996, 213,000 tons of lignite were in SWEPCO's inventory at the P4 key plant representing a 19-day supply. Another
*l 25,000 acres are jointly leased in equal portions by SWEPCO and Central Louisiana Electric Company in the Dolet liills area of Louisiana near Dolet flills Power Plant. The Delet Ifills Mining Venture is the contract miner for these reserves. At December 31,1996, SWEPCO had approximately 177,000 tons oflignite in inventory at the Dolet Hills plant representing a 34-day supply. In the opinion of the management of SWEPCO, the acreage under lease in these areas contains sufficient reserves to cover the anticipated lignite requirements for the estimated useful live of the lignite fired plants.
Nuclear Fuel- CPL The supply of fuel for STP involves a complex process. This process includes the acquisition of uranium concentrate, the conversion of uranium concentrate to uranium hexanuoride, the enrichment of I uranium hexafluoride in the isotope U235 and the fabrication of the enriched uranium into fuel rods and incorporation of fuel rods into fuel assemblies. The fuel assemblies are the fmal product loaded into the reactor core. The time associated with this process requires that fuel decisions be made years in advance of the actual need to refuel the reactor. Fuel requirements for STP are being handled by the STP Management Committee, comprised of representatives of all participants in STP. Outages are necessary approximately every 18 months for refueling. Because STP's fuel costs are sign 3.icantly lower than any of the other CPL units, CPL's average fuel costs are expected to be higher whenever an STP unit is down for refueling or maintenance. CPL and the other STP participants have entered into contracts with suppliers for uranium concentrate and conversion service sufficient for the operation of both STP units through May 1998. Additional flexible contracts are in place to provide 50% of the uranium concentrate and 100% of the conversion service needed for STP from mid-1998 through mid 1999. Enrichment contracts were secured for a 30-year period from the initial operation of each unit. The STP participants have canceled the enrichment requirements for the period from October 2000 to September 2006 under a ten year no cost termination provision of the enrichment contract. The STP participants believe that other, lower cost options will be available in the future. Also, fuel ! fabrication services have been contracted for operation through 2005 for Unit I and 2006 for Unit 2. Although l CPL and the other STP owners cannot predict the availability of uranium and related services, CPL and the other STP owners do not currently expect to have ditTiculty obtaining uranium and related services required for the remaining years of STP operution. The Energy Policy Act has provisions for the recovery of a portion of the costs associated with the decommissioning and decontamination of the gaseous diffusion plants used in the enrichment process. These costs are being recovered on the basis of enrichment services purchased by utilities from the DOE prior to October of 1992. The total annual assessment for all domestic utilities is limited to $150 million per federal nscal year and assessable until October 2007. The STP assessment will be approximately S2.0 million each year with CPL's share being 25.2% of the annual STP assessment. The Nuclear Waste Policy Act of 1932, as amended, requires the DOE to develop a permanent high level waste disposal facility for the storage of spent nuclear fuel by 1998, The DOE last estimated tha' the permanent facility will not be available until 2010. The DOE will be taking possession of all spent fuel generated at STP as a result of a contract CPL and other STP participants have entered into with the DOE. STP l-20 , i l
has on-site storage faciliti:s with the capability to store all the spent nuclear fuel generated by the STP units over their lives. Therefore, the DOE delay in providing the disposal facility will nct impact the operation of the STP units. Under provisions of the Nuclear Waste Policy Act of 1992, a one-mill per KWH assessment on electricity generated and sold from nuclear reactors funds the DOE waste disposal program. Risks of substantial liability could arise from the operation of STP and from the use, handling, disposal and possible radioactive emissions associated with nuclear fuel. While CPL carries insurance, the availability, r mount and coverage thereof is limited and may become more limited in the future. The available insurance m:y not cover all types or amounts ofloss or expense which may be experienced in connection with the ownership of STP see ITEM 8-NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for information relating to nuclear insurance. GovernmentalRegulation The price and availability of each of the foregoing fuel types are significantly affected by governmental regulation. Any inability in the future to obtain adequate fuel supplies or adoption of additional regulatory measures restricting the use of such fuels for the generation of electricity might affect the CSW U.S. Electric system's ability to economically meet the needs of its customers and could rt. quire the U.S. Electric Operating Companies to supplement or replace, prior to normal retirement, existing generating capability with units using other fuels. This would be irnpossible to accomplish quickly, would require substantial additional expenditures for construction and could have a significant adverse effect on CSW's and/or the U.S. Electric Operating Companies' financial condition and results of operations. Fuel Costs and Conwntption Additional fuel cost data for the CSW U.S. Electric system appears under U.S. Electric Operating Statistics above. Average fuel :osts and consumption by fuel type for 1996 are presented in the following l table. Average Cost per Consumption Fuel Type MMbtu (millions) M 'btus Mcfs Tons CPL Namral gas $2.25 105 102 1.43 51 3 Coal Nuclear 0.55 54 Composite 1.62 PSO Natural gas 52.84 74 72 1.26 78 4 Coal Composite 2.04 SWEPCO Natural gas $2.64 39 39 Coal 1.77 116 7 Lignite 1.13 63 5 Composite 1.76 H7U Natural gas $2.37 38 38 Coal 1.46 28 2 Composite 2,02 CSW Natural gas 52.50 256 251 f 273 16 i Coal 1.54 Lignite 1.16 63 5 l Nuclear .35 54 l Composite 1.81 l 1 21
The Registrants are unable to reliably predict the future cost of fuel (The fcregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). See ITEM 7-MDA A and ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additionalinformation concerning fuel costs. Environmental Matters ne U.S. Electric Operating Companies and CSW Energy are subject to regulation with respect to air and water quality and solid waste standards and other environmental matters by various federal, state and local authorities. These authorities have continuingjurisdiction in most cases to require modifications in the U.S. Electric Operating Companies' and CSW Energy facilities and operations. Changes in environmental statutes or regulations could require substantial additional expenditures to modify the U.S. Electric Operating Companies' facilities and operations and CSW Energy could have a material adverse effect on CSW's and each of the U.S. Electric Operating Companies' and CSW Energy's results of operations and financial condition. Violations of environmental statutes or regulations can result in fines and other costs. Air Quality Air quality standards and emission limitations are subject to the jurisdiction of state regulatory authorities in each state in which the CSW System operates, with oversight by the EPA. In accordance with regulations of these state authorities, permits are required for all generating units on which construction is commenced or which are substantially modified after the effective date of the applicable regulations. In 1990, the U.S. Congress amended the Clean Air Act. CAAA places varying restrictions on the emission of sulfur dioxide from gas , coal- and lignite-fired generating plants. Beginning in the year 2000, the U.S. Electric Operating Companies will be required to hold allowances in order to emit sulfur dioxide. The EPA issues allowances to owners of existing generating units based on historical operating conditions. Based on the CSW U.S. Electric system facilities plan, CSW believes that the U.S. Electric Operating Companies' allowances are adequate to meet their needs at least through 2008. Public and private markets are developing for trading of excess allowances. As a result of requirements imposed by the CA AA, CSW expects to spend approximately $1.7 million over a three year period from 1995 to 1997 for annual testing of, software modifications to, and maintenance of continuous emission monitoring equipment. Of this, approximately 50.5 million was spent in 1995 and $0.6 million in 1996. The expected expenditures to meet CAAA requirements and the 1996 and 1995 expenddares for each of the U.S. Electric Operating Companies are presented in the following table. CPL PSO SIVEPCO ifTU (thousands) Total eyected enenditures (1995 1997) 1540 $329 $488 $309 Expenditures in 1996 190 108 172 112 Expenditures in 1995 146 98 131 86 The CAAA also directed the EPA to issue regulations governing nitrogen oxide emissions and require government studies to determine what contro's, if any, should be imposed on utilities to control air toxies emissions. The acid rain rules have not been released; accordingly, the impact on CSW and the U.S. Electric Operating Companies cannot be determined at this time. l l-22 l
1 Under the Acid Rain Tith IV rules of the CAAA for nitrog;n oxide control for cc ;l units, the U.S. Electric Operating compani;s have c:rly-elected their units und:r an optional provision. This will eliminate any capital expenses through 2007, if attemate standards are met. Water Quality Water quality is subject to the jurisdiction of each of the state regulatory authorities in which the U.S. Electric Companies operate as well as the EPA. These authorities havejurisdiction over all wastewater discharges into state waters and also for establishing water quality standards and issuing waste control permits covering discharges which might affect the quality of state waters. The EPA hasjurisdiction over point source discharges through the National Pollutant Discharge Elimination System provisions of the Clean Water Act. RCRA and CERCLA The RCRA and the Arkansas, Loulslana, Oklahoma and Texas solid waste rules provide for comprehensive control of all solid wastes from generation to final disposal. The appropriate state regulatory cuthorities in the states in which the U.S. Electric Companies operate have received authorization from the EPA to administer the RCRA solid waste control program for their respective states. The operations of the U.S. Electric Companies,like those of other utility systems, generally involve the use and disposal of substances subject to environmental laws. CERCLA, the federal"Superfund" law, addresses the cleanup of sites contsminated by hazardous substances. Superfund requirca that PRPs fund remedial actions regardless of Cult or the legality of past disposal activities. PRPs include owners and operators of contaminated sites and transporters and/or generators of hazardous substances. Many states have l - similar laws. Theoretically any one PRP can be held responsible for the entire cost of a cleanup. Typically, however, cleanup costs are allocated among PRPs. , l CSW's sulaidiaries incur significant costs for the handling, transportation, storage and disposal of hazardous and non-hazardous waste materials. Unit costs for waste classi0ed as hazardous exceed by a substantial margin unit costs for waste classified as non-hazardous. The U.S. Electric Operating Companies, like other electric utilities, produce combustion and other gen: ration by products, such as ash, sludge, slag, low-level radioactive waste and spent nuclear fuel. The U.S.- Electric Operating Companies own distribution poles treated with creosote or other substances. The EPA currently exempts coal combustion by-products from regulation as hazardous wastes. Distribution poles treated with creosote or other substances are not expected to exhibit characteristics that would cause them to be h zardous wa":. In connection with their operations, the U.S. Electric Operating Compan's also have used asbestos, PCO and materials classiGed as hazardous waste. If additional by-products or r .er materials g;nerated or used by companies in the CSW U.S. Electric system were reclassified as hazardous wastes, or other new laws or regulations concerning hazardous wastes or other materials were put in effect, CSW System disposal and remedial costs could increase materially. The EPA is expected to issue new regulations stating wh;ther certain other materials will be classified as hazardous. PSO Sand Springs / Grand)1 eld, Oklahoma Sites ! In 1989, PSO investigated a Sand Springs, Oklahoma PCB storage facility and found some PCB contamination. The cleanup plan was approved by the EPA and cleanup of the facility began in November 1994. In October 1996 EPA filed a complaint against PSO alleging PSO failed to comply with provisions of the Toxic Substances Control Act. The complaint has three counts, two of which pertain to the Sand Springs facility and the third deals with a substation in Grandfield, Oklahoma. The EPA alleges improper disposal of PCBs at the Sand Springs site due to the length of time between discovery of the contamination and the actual cleanup at the site. The complaint at the Grandfield site relates to failure to date PCB articles at the site. The total proposed penalty for the three counts is $479,500 which has been accrued by PSO. PSO has filed a response to the complaint and is currently awaiting an answer from the EPA. PSO is unable to predict the outcome oIthis mattJr. 1-23
l PSO Compass Industries Superfund Site PSO has received notice from the EPA that it is a PRP under CERCLA and may be required to share in
'he reimbursement of cleanup costs for the Compass Industries Superfund site which has been remediated. PSO has been named defendant in a lawsuit Gled in Federal District Court in Tulsa, Oklahorr.a on August 29,1994, for reimbursement of the cleanup costs. PSO's degree of responsibility, if any, as a de minimis party appears to be insignificant and management expects that PSO will have an opportunity to pay its share of costs and remove itself from the case. Accordingly,in 1995, PSO accrued a $100,000 liability for this matter.
On March 19,1996, a districtjudge ruled in favor of the defendants on a summaryjudgment that the plaintiffs do not have a cause of action under CERCLA and that the only action allowed the plaintiffs is a right to contribution on funds expended after August 29,1991. This severely limits PSO's liability since most of the remediation was completed prior to this date. In October,1996, the plaintifTs appealed this ruling, and PSO is awaiting the outcome of this matter. PSO Ash Creek CoalMine Reclamation in August 1994, PSO received approval from the Wyoming Department of Environmental Quality to begin reclamation of a coal mine in Sheridan, Wyoming, owned by Ash Creek, a wholly owned subsidiary of PSO. Ash Creek recorded a $3 million liability in 1993 for the estimated reclamation costs and subsequently accrued an additional $500,000 in 1995. Actual reclamation work was completed in August,1996, at a total cost of $3.6 million. Surveillance monitoring will continue for ten years after Gnal reclamation. Management believes that ultimate resolution of this matter will not have a material adverse effect on CSW's or PSO's consolidated results of operations or financial condition. SWEPCO Biloxi, MississippiMGPSite SWEPCO was notified by Mississippi Power in 1994 that it may be a PRP at a MGP site in Biloxi, Mississippi, formerly owned and operated by a predecessor of SWEPCO. Since then, SWEPCO has worked with Mississippi Power on both the investigation of the extent of contaminatien 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 contamination of an adjacent property. A risk assessment was submitted to the MDEQ, whose ensuing comments requested that a future residential exposure scenario be evah:ated for comparison with commercial and industrial exposure scenarios, liowever, Mississippi Power and SWEPCO do not feel that cleanup to a residential scenario is appropriate since this site has been industrial / commercial for more than 100 years, and Mississippi Power plans to continue this type of usage. Mississippi Power and SWEPCO also presented a report to the MDEQ demonstrating that the ground water on the site was not potable, further demonstrating that cleanup to residential standards is not necessary. The MDEQ has not agreed to a non-residential future land use scenario as of this drte and has requested further testing. Following the additional testing and resclution of whether cleanup is necessary to meet a residential usage scenario or if cleanup to a conimercial! industrial scenario is appropriate, a feasibility study will be conducted to more definitively evaluate remedial strategies for the property. This will require public input prior to a 6nal decision being made. A 6nal range of cleanup costs has not been determined, but based on preliminary estimates, SWEPCO has incurred to date approximately $200,000 for its portion of the cleanup of this site and anticipates that an additional $2 million may be required. Accordingly, SWEPCO has accrued $2 million for the cleanup. SWEPCO Suspected MGP Sit e in Texarkana, Arkansas SWEPCO owns a suspected former MGP site in Texarkana, Arkansas. The EPA ordered an initial investigation of this site. The contractor who performe :Se investigation of the site recommended to the EPA that no further action be taken. SWEPCO discovered that an underground storage tank in place at the site was leaking and removed the tank in early 1995. Based on soil and ground water quality results, SWEPCO received a closure letter for this project. 1-24
SWEPCO Suspected MGP Site in M:rshall, Texas i
-SWEPCO owns a suspected former MGP site in Marshall, Texas. SWEPCO notified the WRCC that evidence of contamination was found at the site. After soil, groundwater and other testing were completed during 1993 through 1995 with satisfactory results, SWEPCO proceeded with closure of the site with the TNRCC. Costs related to the site were substantially less than the preliminary $2 million estimate that was accrued in 1993. In 1996, both the TNRCC and the EPA approved SWEPCO's closure request.
SWEPCO Voda Petroleum SuperfundSite On April 10,1996, SWEPCO received correspondence from the EPA providing notification that SWEPCO is a PRP to a cleanup action planned for the Voda Petroleum Superfund Site located in Clarksville, Texas. At this time, 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 cpproximately $2 million and to take approximately twelve months to complete. An opportunity for over - 30 PRPs to conduct the cleanup in lieu of EPA conducting the cleanup is under consideration. SWEPCO's li:bility associated with this project is not expected to be material. EMFs -
- Research is ngoing whether exposure to EMFs may result in adverse health effects. Although a few of thi studies to date have suggested certain associations between EMFs and some types of effects, the research to date has not established a cause and-effect relationship between EMFs and adverse health' effects from electric lines. CSW cannot predict the impact on CSW or the electric utility industry if further investigations or proceedings were to establish that the present electricity delivery system is contributing to increased risk or incidence of health problems.
Other EnvironmentalMatters From time to time the Registrants are made aware of various other environmental issues or are named es a party to various other legal claims, actions, complaints or other proceedings related to environmental matt;rs. Management does not expect disposition of any such pending environmental proceedings to have a mat: rial adverse effect on CSW's or any of the U.S. Electric Operating Companies' results of operations or financial condition. See ITEM 7-MD& A, ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and ITEM 8-NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES, for additional information rel ting to environmental mstters. UNITED KINGDOM OPERATIONS . General SEEBOARD's primary regulated businesses are the distribution and supply of electricity within its
- Southeast England service area. During 1996, these two businessesjointly generated approxims'ely 97.6% of SEEBOARD's operating profits on sales of 19.4 billion KWH for the distribution business and 16.0 billion KWH for the supply business. SEEBOARD is also involved in other activities, including gas supply, electricity generation, electrical contracting and retailing. See ITEM 7-MD&A for additional information regarding the acquisition of SEEBOARD and also SEEBOARD's operating results.
1-25
. . _ - - - ~ = _ - - - . - - _ . . - - . - ~ - - -
Distribvtlon add SuppIv Husincues Service Area : . l
. SEEBOARD's service area covers approximately 3,000 square miles in Southeast England, extend %g from the outlying areas of London to the English Channel, and including large towns such as Kingston-upw Thames, Croydon, Crawley, Maidstone, Ashford and Brighton, as well as substantial rural areas. The area has a population of approximately_4.6 million people with significant portions of the area, such as south London, having a high population density. Over the past 25 years, the services sector of the area's economy has become increasingly important, while the industrial sector has been in decline. There has been considerable commercial development in a number of towns in the area over the last ten years, in particular in the areas around Gatwick ;
Airport and the English Channel ports. Distribution Business Distribution is the core business of SEEBOARD and involves the distribution of electricity to consumers over SEEBOARD's distribution system. Electricity is transported from generating plants across the United Kingdom via the National Grid system to supply points within SEEBOARD's geographical area where it is then transformed down and enters SEEBOARD's distribution system. Almost all of the electricity that enters SEEBOARD's system is received at these National Grid supply points. Ilowever, a small amount of electricity is rtceived from power stations within SEEBOARD's geographical area. At December 31,1996, SEEBOARD's distribution system consisted of approximately 7,650 miles of overhead lines and approximately 19,900 miles of underground cables. The bulk of SEEBOARD's tangible fixed assets is currently employed in the distribution business. Supply Business SEEBO ARD's supply business consists of the bulk purchase of electricity and its sale to customers. The majority of electricity sold by SEEBOARD in its supply business is purchased through a pool created in 1990 for the bulk trading of electricity. Pool prices are variable and difGcult to predict. Accordingly, in an effort to control exposure to prices, SEEBOARD has a portfolio cf contracts with major generators as a means of hedging price fluctuations in the pool. The physical delivery of electricity via SEEBOARD's distribution network results in a cost to the supply business and income to the Jistribution business.
- SEEBOARD currently has the sole right to supply substantially all of the consumers in its authorized area, except whera demand is above 100 KW, As a part of the restructuring of the electricity industry in the United Kingdom, competition is being introduced into the market for electricity supply on a phased basis. The threshold for competitive supply was reduced from i MW to 100 KW effective April 1,1994. SEEBOARD, as well as other licensed suppliers (second tier license), are permitted to supply electricity to customers whose peak demand excet-ds 100 KW in the areas of other regional electricity companies. All holders of a second-tier license, including 5 EEBOARD, who supply electricity to non-franchise customers (i.e., demand of 100 KW or above) must pay charges to the host regional electricity company for the use ofits distribution network. It is currently intended that, effective April 1,1998, the regional electricity companies' supply businesses, including SEEBOARD's, will no longer be protected by a franchise. SEEBOARD has always been a strong supporter of
- extending competitian in electricity whenever feasible and practicable. To date, SEEBOARD has established a *
- profitable business it supplying customers outside ofits franchise area. While SEEBOARD is currently unable to predict the impact that the transition in 1998 to full competition will have on its electricity supply business, its primary objective is one of profit and not market share.
Seasonality The sale of electricity by SEEBOARD tends to increase during colder winter months because of a
- higher demand for power.
1-26 e -~.- - - - - , . .--y -. . _ _ . - _ . _ _ . . _ _ . _ _ . , _ _ _ _ _ _ . _ _ . _ , , _ , , _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ , _ _ , _ _ , . _ _ _ _ , _ . _ . _ _ _ _ . _ . _ _ _ _ , , _ _ _,_
Kegulation The distribution and supply businesses of SEEBOARD cre principally regulated by the Electricity Act of 1989 and by the conditions contained in SEEBOARD's public electricity supply license. The public electricity supply license generally continues until at least 2025, although it may be revoked upon 25 years p notice after 2000, in addition, the public electricity supply license may be revoked by the United Kingdom's Secretary of State in certain specified circumstances. Most of the income of the distribution business is regulated by a formula set by the DGES based upon, cmong other factors, the UK RPl. The formula generally sets a cap on the average price per unit distributed with allowed annual increases based upon changes in the UK Rpl plus a percentage factor set from time to time by the DGES, which was initially set at 0.75%. In August 1994, the DGES announced that SEEBOARD's cllowed per unit price would be reduced by 14% effective April 1,1995 and that increases, or if applicable, decreases, in the allowed per unit price in subsequent years would be based upon changes in the UK RPI minus 2%. In July 1995, the DGES announced a further revision to SEEDOARD's price controls which funher reduced the allowed per unit price by 13%, effective April 1,1996, and restricts increases, or if applicable, requires decreases, in the allowed per unit price in each of the three subsequent years based upon changes UK RPI minus 3%. The DGES is not scheduled to review the allowed distribution charges for the regional el:ctricity companies, including SEEBOARD, until 2000, although the DGES may reopen the review before such time under certain circumstances. The prices charged by SEEBOARD in its franchise supply business are also determined from a formula set from time to time by the DGES. The formula generally provides for the pass thn. ugh to customers of certain costs incurred by SEEBOARD in supplying the electricity, which include electricity purchase costs, transmission charges, and distribution cos;.,, together with an allowed margin as determined by the DGES. Under the current formula, SEEBOARD is permitted annual increases, or if applicable, decreases, in its allowed margin by an amount equal to the UK RPI minus 2%. The DGES is not scheduled to review the allowed supp charges for the regional electricity companies, including SEEBOARD, until 1998. The Conservative Party has held power in the United Kingdom since 1979. The next general election in the United Kingdom must be held no later than May 1997, and may be called upon approximately three w:cks notice at any time before then, if the Labour party, which is the main opposition party, takes control,it may introduce certain policies, including a windfall tax on excess profits of privatized utilities. There can be no cssurance that the policies of the United Kingdom's government after the next general election, by whichever party it is controlled, will not have a material adverse effect on CSW's consolidated results of operations or fmancial condition. Other ilusinesse2 in addition to its distribution and supply businesses, SEEBOARD is also engaged in other activities, including gas supply, electricity generation, electrical contracting and retailing. SEEBOARD's gas supply business was established in 1993 to compete in the competitive commercial and industrial markets in 1995, SEEBOARD entered into ajoint venture with Amoco to take advantage of the extension ofcompetition into the United Kingdom natural gas domestic market, Through the joint venture, SEEBOARD will be able to supply natural gas throughout the United Kingdom. SEEBOARD's electricity generation business is conducted through its 37.5% interest in Medway Power Ltd's 675 MW gas-fired power plant located on the Isle of Grain on the Thames estuary in Kent. SEEBOARD also provides electrical contracting se'rvices as both a primary contractor and subcontractor to a variety ofindustrial, commercial and domestic customers. These operations are primarily in Southeast England but include a growing national element. Finally, SEEBOARD conducts an electrical retailing business through its chain of retail appliance shops and superstores. Although the retail business remains concentrated in SEEBOARD's authorized service area, a small number of superstores have been developed successfully outside of the region. 1 27
l Environmental Rect lation l l SEEBOARD's operations are subject to regulation with respect to water quality standards and other environmental matters by various authorities within the United Kingdom. Under certain circumstances, these authorities may require modincations to SEEBOARD's facilities and operations or impose Snes and other costs for violations of applicable statutes and regulations. From time to time SEEBOARD is made aware of various environmental issues or is named as a party to various legal claims, actions, complaints or other proceedings related to environmental matters. Management does not expect disposition of any such pending environmental proceedings to have a material adverse effect on CSW's consolidated results of operations or financial condition. NON UTILITY OPEIMTIONS CSW Encrev CSW Energy develops, owns and operates independent power and cogeneration facilities, subject to regulatory approval. The table below summarizes CSW Energy's participation in projects as of December 31, 1995. Capacity Commerelal (in MW) Operation Ownership Thermal Prolect location Total Committed Date Interest llost 11o5111tility lirush 11 Drush, CO 68 68 January 1994 47% Greenhouse Public Service Company of Colorado Ft. Lupton Ft. Lupton, CO 272 272 June 1994 50'. Greenhouse Public Service Company ofColorado Mulberry Polk County, FL 120 110 August 1994 50% Distilled Florida Power Corporation Water / Ethanol Plant Orange Cogen Polk County, FL 103 97 June 1995 50 % Orante Juice Florida Power Corporation l Processor Tampa Electric Company Newgulf Wharton, TX 85 -- Mid 1997 (2) 100 % IPP Merchant plant Philhps Sweeny Sweeny TX 330 90 (1) Mid 1998 (2) 100 % (3) Refinery Undetermined (1) (1) The Philhps Sweeny project has the unexercised option to sell 90 MW of capacity to Phillips Petroleum Company. (2) Anticipated commercial operation date. (3) CSW Energy presently intends to sell a 50% ownership interest. Please refer to ITEM 7-MD& A for a discussion of Senior Notes issued by CSW Energy during 1996. CSW International CSW International engages in international activities, including developing, acquiring, financing and ow m.g EWGs and foreign utility companies, The company's most significant investment is SEEBOARD. For additional infonnation related to SEEDOARD, see UNITED KINGDOM OPERATIONS, in July 1996, CSW International announced a joint venture with Alpek, through a subsidiary, to build, own and operate a 109 MW, gas-Gred cogeneration project at Alpek's Petrocel industrial complex in Altamira, Tamaulipas, Mexico. CSW International and Alpek each will have a 50% ownership in the project, Enertek, which is expected to commen : commercial operation in the Grst quarter of 1998. In December 1996, CSW International acquired a minority interest in a Brazilian electric utility l company which serves approximately 600,000 customers in an area of approximately 118,000 square miles.
CSW Communications CSW Communications, the first company to be granted " exempt telecommunications company" status by the FCC under the 1996 Telecommunications Act, was formed to provide communication services to the U.S. Elect b Operating Companies, non.amliates and retail customers. C5W communications presently owns and manages three fiber optic lines for the sale of high capacity, city txity circuits to telecommunications service providers. The three fiber-optic lines connect the South Texas cities of Corpus Christi,liarlingen and McAllen; the West Texas cities of Abilene and San Angelo; and Shreveport, Louisiana to IAngview, Texas. CSW Communications is currently engaged in projects to provide communications-based energy managem:nt and utility management services. Since 1994, CSW Communications has been conducting a pilot project in Laredo, Texas to demonstrate the energy emciency and cost savings that result from giving customers greater choice and control over their electric service. The project is based on services provided over a fiber-optic and coaxial cable network passing 5,000 homes. Approximately 800 customers are currently participating. C - During 1996, CSW Communications was awarded contracts to provide communications based utility management systems for the cities of Georgetown and Austin, Texas. These systems will enable advanced energy management, water management and other communications based services to be delivered to electric and water customers of the municipal utilities in those cities. The Georgetown project will cover more than 10,000 customers and is expected to be completed in March 1998. The Austin project is currently a pilot project covering a limited number of customers. EnerShon Enershop currently provides energy services to customers in Texas. These are services that help reduce customers' operating costs through increased energy efficiencies and improved equipment operations. EnerShop utilizes the skills oflocal trade allies in offering services that include energy and facility analysis, project management, engineering design and equipment procurement and construction, third party financing and equipment leasing, savings and performance guarantees and performance monitoring. In 1996 EnerShop secured several contracts and has bids outstanding for several additional projects in 1997. CSW Credit CSW Credit was originally formed to purchase, without recourse, accounts receivable from the U.S. Electric Operating Companies. The cash received by each U.S. Electric Operating Company from the sale of its accounts receivables reduces its working capital requirements. Additionally, CSW Credit's capital structure contains greater leverage than that of the U.S. Electric Operating Companies, consequently lowering CSW's overall cost of capital. Subsequent to its formation, CSW Credit's business expanded to include the purchase, without recourse, of accounts receivable from certain non-afmiated parties as long as the average twelve month rolling average of accounts receivables from non amliates remains less than 50% of the twelve month rolling average of total accounts receivables purchased by CSW Credit, which is a limitation imposed by the SEC under the 1-lolding Company Act. When CSW sold Transok, CSW Credit lost a portion of amliated accounts receivable business as well as the ability to conduct a corresponding amount of non-amliated business, due to the 50% restriction. As a result, CSW Credit has applied for relief from the 50% restriction from the SEC, Until such reliefis granted, CSW Credit may utilize an agreement to sell to a third party certain non amliated accounts receivable in excess 1-29
%%F <deey%ggyp q y g
of the 50% restriction. CSW Credit maintains the cccounts receivables rale agreement to ensure compliance with the SEC restriction. Sale of Trannok For information related to t'ie sale of Transok, a former wholly owned intrastate natural gas pipeline and gas marketing company, reference is made to ITEM 7 MD& A. OTIIElt INFollMATION Employees and Ewentive Officers The number of employees in the CSW System at December 31,1996 is presented in the table below. Of the employees listed below, approximately 560 of the positions at PSO and 740 of the positions at SWEPCO are covered under collective bargaining agreements with the IDEW. In addition, approximately 2,600 employees at SEEBOARD are esvered by collective agreements with several different unions. These unions include the Amalgamated Electrical and Engineering Union, GMB, Electrical Power Engineers Association, Unison and the Transport and General Workers Union. For information related to ongoing union negotiations at PSO, reference is made to ITEM 7 MD& A. CSW SYSTEM EMPI,0YEES CFL 1,801 PSO 1,3.17 Sil'EPCO I,665 llTU 994 SEEBO.4RD 4,154 CSit'Energr 9I CSIl'Comnwnications 26 EnerShop I$ CSil'Senices 1.354 11.437 EXECt1TIVE Age at OFFICERS March I.1997 Present Position E. R. Brooks 59 Chairman, President and CEO, Director T. V. Shockley,111 51 Executive Vice President, Director Glenn Files 49 Executive Vice President, Director Ferd. C. Merr, Jr. 56 Senior Vice President and General Counsel Glenn D. Rusilier 49 Senior Vice President and Chief Financial Omcer Thomas M. llagan 52 Senior Vice President External Affairs Venita McCellon-Allen 37 Senior Vice President Corporate Development Kenneth C. Raney 45 Associate General Counsel and Corporate Secretary Wendy G. liargus 39 Treasurer Lawrence D. Connors 45 Controller
'The information in the foregoing table is included in Part I pursuant to Regulation S.K, item 401(b), instruction 3.
Each of the executise officers of CSW is elected to hold omcc until the first meeting of CS%"s Board of Directors aner the next annual meeting of stockholders. CS%"s ricxt annual meeting of stockholders is scheduled to be held April 17,1997 Each of the executive omccrs listed in the table abose has been employed by CSW or an amliate of CSW in an executive or managerial capacity for more than the last five years. 1-30
i ITEM 2. PROPERTIES. l See ITEM 1. BUSINESS for a description of the Registrants' properties. ITEM 3. LEGAL PROCEEDINGS. The Registrants are party to various legal claims, actions and complaints arising in the r.ormal course of business that are not described herein. Management does not expect disposition of these matters to have a material adverse effect on any of the Registrants' results of operations or financial condition. See ITEM 1 CUSINESS, ITEM 7 MD& A and ITEM 8-NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for information relating to pending legal, environmental and regulatory proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY IIOLDERS. CSil' None. CPL None. PSO None. Sil'EPCO None. IITU Non - 1-31
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKIIOLDER MATTERS. CSW COMMON STOCK INFORMATION 1996 1995 Dividends Market Price Dividends Market Price liigh low Paid llith law Paid 43.0 t 528 1/2 526 ' 43.5 t $24 1/s $22 3/8 ; First Quarter 26 5/8 23 7/3 43.0 Second Quaner 28 7/8 26 ? 43.5 28 1/2 23 34 43.5 26 318 24 1/8 43.0 Third Quaner 28 t/2 24 3/4 43.0 Tourth Quarter 28 23 1/2 43.5 CSW's common stock is traded under the ticker symbol CSR and listed on the New York Stock Exchange,Inc. and Chicago Stock Exchange,Inc. For 1996, the market price for CSW Common consists of closing prices whereas it includes all trades for 1995. Such prices were obtained from the composite listing of CSW Common trades as reported on Illoomberg Financial Commodities News. In January 1997, CSW's board of <lirectors elected to maintain the quarterly dividend, payable on February 28,1997, to stockholders of record on February 7,1997, unchanged at $0.435 per share, or an indicated rate of $1.74 per year. The decision to hold the dividend constant marked an end to 45 years of consecutive increases in CSW's dividend. This decision is based upon reveral factors including CSW's goal to achieve a 75 percent dividend payout ratio and increased regulatory uncmainty facing both CSW and the electric utility industry The decision to retain more camings is expected to permit CSW to further strengthen its enh flow in order to fund utility and non-utility investments and support growing non-utility businesses. Cash dividends in the future will be dependent upon the policies of CSW's board of directors and CSW's earnings, financial condition and other factors. Traditionally, the CSW board of directors has declared di dends to be payable on the last business day of February, May, August, and November. There were approximately 74,000 record holders of CSW's common stock as of March 4,1997. See NOTE 11. COMMON STOCK for a discussion of new common stock issued during 1996. CPL, PSO, SWEPCO AND WTU COMMON STOCK INFORMATION All of the outstanding shares of common stock of the U.S. Electric Operating Companies are owned by CSW. Consequently, there is no market for their common stock. Cash dividends declared and paid to CSW on their common stock for 1996 and 1995 are presented in the following table. cn eso surrco niu (thousands) 1996 5128,000 535.000 544.000 519.000 186,000 55.000 109,000 41,000 1995 During 1996, the common stock dividends paid to CSW by the U.S. Electric Operating Companies were lower than 1995 because of the lower earnings available for common stock during 1996. This resulted primarily from the establishment of reserves for previously incurred plant development costs at each of the U.S. N 2-1
El:ctric Operating Compinies during 1996. For inform: tion rel:ted to restrictions on the ability of the U.S. Electric Operating Compani:s to pay dividends to CSW. see NOTE 8. LONG TERM DEBT. Reference is made to the page numbers noted in the table below for the locations of the following items: ITEM 6. SELECTED FINANCIAL DATA. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. l Page Number CSil' cpl. PSO SHEPCO ISTU . Selected Financial Data 2-4 2 76 2 102 2 123 2 147 MD&A 25 2 77 2 103 2 124 2 148 l Financial Statements and Supplementary Data 2 34 2 92 2 113 2 137 2 160 l Report ofIndependent Public Accountants 2 72 2-99 2 120 2 144 2 167 l Report of Management 2 74 2 100 2 171 2 145 2 168 l 22
CENTRAL AND SOUTH WEST COR. PORATION 2-3 i
l l SELECTED FINANCIAL DATA - ! The following selected Gnancial data for each of the nye years ended December 31 is provided to highlight signincant trends in the Gnancial condition and results of operations for CSW. All common stock
- data have been adjusted to reflect the two-for one common stock split, effected by a 100% stock dividend paid on March 6,1992, CSW sold Transok on June 6,1996 CSW realized an after-tax gain on the sale of $120 million, Accounting rules require the classincation of both the sale and the actual operating results prior to -
such sale as discontinued operations, Accordingly, Transok's operating results have been excluded from (i)
- Revenues,(ii) Income from continuing operations, and (iii) EPS of common stock from continuing operations in all the years presented in the following table, in addition to the Transok reclassifications, certain other Gnancial statement items for prior years have been reclassified to conform to the most recent period presented.
1996 (1) 1995 1994 1993 (2) 1992 (milhons, except per share and ratio data) - INCOME STATEMENT DATA Revenues $5.155 $3,143 $3,105 $3,084 $2,793 Income from continuing operations 315 396 387 268 384 Income before cumulative effect of changes in accounting principles 315 396 387 281 384 Net income for common stock 429 402 394 308 382 EPS of common stock from continuing operations $ 1.43 $1.97 $1.95 $1.32 $1.92 EPS of common stock $2.07 $2.10 $2.08 $1.63 $2.03 Dividends paid per share of common stock $1,74 $ 1.72 $1.70 $1,62 $1.54 Average common shares outstanding '207.5 191.7 189.3 188.4 188.3 IIALANCE SIIEET DATA Assets $13,332 513,869 $11,066 $10,604 9,829 Long-term obligations (3) 4,057 3,948 2 9?* 2,807 2,722-Capitalization ratios Common stock equity 47% 43 % 48 % 49% 49% Preferred stock 4 4 5 6 6 Long-term debt 49 $3 47 45 45 (t) Revenues in 1996 increased signincantly due to the acquisition of SEEBOARD, Earnings in 1996 were significantly impacted by the estabhshment of reserves for certain invcstments at the U.S. Electric Operating Companies, the write ofTof certain investments at CSW Energy and the gain realized on the sale of Transok.
- (2) Earnings in 1993 were significantly alTected by restructuring charges, the $46 million cumulative effect of changes in accounting principles, the establishment of reserves for fuel and other properties and prior year tax adjustments.
(3) Long-term obligations includes long-term debt and preferred stock subject to mandatory redemption. 24
CENTRAL AND SOUTH WEST CORPORATION
. MANAGEMENT'S DISCUSSION AND ANAIJSIS OF FINANCIAL CONDITION AND RESULTS OF GPERATIONS Reference is made to CSW's Consolidated Financial Statements and related Notes to Consolidated Financ al Statements and Selected Financial Data. The information contained therein should be read in conjunction with, and is essential in understanding, the following discussion .
and analysis. . f OVERVIEW The electric' utility industry is changing rapidly as it is becoming more competitive, in anticipation of increasing competition and fundamental changes in the industry, CSW's management is implementing a str:t:gic plan designed to help position CSW to be competitive in this rapidly changing environment and to develop an emerging global energy business. CSW has undertaken key initiatives in the implementation of this overall strategy. In 1996, these initistives were marked by the restructuring of CSW's core U.S. electric business, completion of the acquisition x of SEEBOARD, an investment in a Brazilian electric distribution utility and implementation of an c' ecutive-exchange agreement with a Philippine utility, in addition, CSW has proposed to acquire the non-nuclear g:ner: ting assets of Cajun, a Louisiana rnember electric cooperative in January 1997, CSW armounced that its CSW Communications subsidiary had entered into ajoint venture limited partnership to market ' I tel: communications 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 fur 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 end relatively low-cost provider of electric power More specifically, CSW seeks competitive advantages through its diverse and stable customer base, competitive pdecs for electricity, diversified fuel mix, extensive transmission interconnections, diversity of regulation and financial flexibility. See RECENT DEVELOPMENTS AND TRENDS for additionalinformation. RESULTS OF OPERATIONS COMPARISON OF TIIE YEARS ENDED DECEMBER 31,1996 AND 1995 Or rview of Results i CSW's earnings increased to $429 million in 1996 compared to $402 million in 1995. Although rarnings increased, earnings per share decreated from $2.10 in 1995 to 52.07 in 1996 due to the issuance of (dditional shares of common stock during 1996. The retum on average common stock equity was 12.1% in 1996 compared to 13.1% in 1995. U.S. Electric opentions contributed approximately 57% of total earnings in 1996 and approximately 105% of total earnings in 1995. The lower percent for U.S. Electric operations is mostly attributed to the gain on the sale of Transok, higher earnings from CSW's investment in SEEBOARD and the recording of reserves at each of the U.S. Electric Operating Companies for certain investments and contingencies. CSW's investment in SEEBOARD contributed 24% of total earnings in 1996 as compared to 2% in 1995, reflecting a full year of carvings in 1996 compared to only a partial quarter in 1995. N 25 ; l
Eamings increased in 1996 compared to 1995 due primarily to the gain from the sale of Trcnsox, the additional earnings from CS%"s investment in SEEBOARD, the absenc.e of c} arFes in 1996 related to the teamination of the proposed El Paso Merger in June 1995 and the efreet of the CPL 199$ Agreement. Also cor.tributing to the increase were higher non fuel electric revenues resulting from increased usage, customer growth and weather related demand. Partially off etting these increases in earn'ngs were the recording of , t rentves by the U.S. Electric Operating Companies in June 1996 associated whh certain investments and contingencies, write offs of certain equity investments and other project development costs for CSW Energy, i restructuring changes, the effect of the CPL 1996 Fuel Agreement, the asset reserves for the pending CPL rate case and the absence in 1996 of favorabie tax adjustments made in 1995. For edditional information relating to th reserves .norded in June 1996, see othcc Income and Dcductions. For lunhet discussion of CPL's rescuatory activities, see NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. Increased " depreciation and amortization, increased other operating expense, increased interest expense and the loss of Minor CWIP earnings also reduced the increase in carnings. Significant items impacting 1996 carnings are . listed below (in millions, net of tax). l e ' Gain on the Sale of Transok, $120
-e Reserves for Certain investments and Contingencies, $(104)
- CPL Pending Rate Case Write offs, $(8) i e CPL 1996 Fuel Agreement, $(7) ;
Dyeretime Revenues Revenues increased approximately $2.0 billion or 64% in 1996 when compared to 1995. The revenue
- variances are shown in the following table.
l 1996 REVENUE YARIANCES increase (decrease)from prior year. milhons U.S. Eicettic Fuct Resenues $181 CPL 1995 Agreement 112 KWil Sales, Growth and Usage 83 , KWil Sales, Weather.Related 21
%TU 19a5 Stipulation and Agreement 21 Other Electric 05)
CPL 1996 Fuel Agreement (18)
- United Kingdom 1,640 Other Diversified 7 51012 U.S. Electric Revenues 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 amor.g all retail cunomer classes. Customer growth, ;
increased usage and weather related demand contributed to the incimed revenues along with higher fue! - revenues as discussed below, Also contributing to the increase was the absenet ir '996 of reserves for refunds recorded in 1995 in accordance with the CPL 1995 Agreement and the WTU 1995 Stipulation and Agreement. l N 26
._ - . =_-
t t w -*,-a m =,e-
KWil sales to retail customers increased in 1996 cs a result of customer growth, increased customec usage and weather related demand. 'Ihe percentage incr:;ases/(decreases)in U.S. Electric KWH sales in 1996 from 1995 are listed below.
'e Residential,6.0%
- Commercial,3.6%
Industrial,4.9%
- Sales for Resale,(0.5)%
- Total Sales,4.2%
UnitedKingdom Revenues CSW's operating revenues include $1.8 billion from a full year of revenues from CSW's investment in SEEBOARD for 1996 compared to $208 million of revenues for a partial quarter of operations in 1995. Other DiverWird Revenues Other diversified revenues increased 13% to $$9 million in 1995 as compared to $52 million in 1995 due primarily to increased revenues from CSW Energy projects, increased facte. ring revenues at CSW Credit end new revenues from CSW Communications and EnerShop. Operatlar F.st>enses and Taxes U.S. Electric Fuel , During 1996 and 1995 the U.S. Electric Operating Companies generated most of their electric energy requirements. U.S. Electric fuel expense increased 15% to approximately $1.i billion in 1996 at the U.S. Electric Operating Companies due primanly 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 U.S. Electric parchased power increased $36 million to $77 million in 1996 due primarily to incteraed economy energy purchases at a higher cost per MWil. United Kingdom Cost ofSales CSW's operating expenses include $1.3 billion for cost of sales from a full year of United Kingdom operations in 1996 compared to $158 million recorded in United Kingdom cost of sales for a partial quarter f operations in 1995.
- Other Operating Other operating expenses in 1996 increased $228 million, or 41%, from 1995 due primarily to the addition in 1996 of a full year of operating expenses from CSW's investn'es.t in SLEBOARD as well as the impact in 1995 of $28 million of regulatory assets established for previously expensed restructuring charges and the reversal of rate case costs pursuant to the CPL 1995 Agrement. Also contributing to the increase was y the recognition in 1995 of a $13 million regulatory asset for previously recorded restructuring charges in accordance with the WTU 1995 Stipulation and Agreement. Another factor contributing to increased other operating expense was a CSW restmeturing charge recorded in 1996. For additional information on this restructuring, see CSW Addructuring. A $42 million reserve for deferred merger and acquisition costs was . recorded in 1995 from the terminated El Paso Merger.
N 27 h
?'
Maintenance i Maintenance expense decreased $5 million to $150 million in 1996 from $15$ million in 1995 due ' primarily to a $10 million decrease in maintenance expense at CPL resulting from lower production and distribution maintenance. Par 11 ally offsetting this decrease was a $7 million increase in rnaintenance due to a . write down of production inventory at the U.S. Electric Operating Companies in 1996. ; thepreciation and Amorthation . i Depreciation and amortiration increased 31% to $464 rnillion in 1996 from $353 million in 1995 dua i primarily to the addition of depreciable fixed assets end the goodwill amortiration related to the purchase of SEEDOARD, as well as increases in depreciable fixed assets at the U.S. Electric Operating Companies. Also , contsibuting to the increase were the amortization of the regulatory assets established in 1995 associated with r the CPL 1995 Agreement and the WTU 1995 Stipulation and Agreement along with accelerated amortization of deferred Oklaunion plant costs in accordance with the WTU 1995 Stipulation and Agreement. Tates, Other than income ( Taxes, other than income increased 10% to $178 million in 1996 from $162 million in 1995. The i increase was due primarily to lower 1995 ad valorem taxes resulting from revisions of prior year estimates recorded in 1995i 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 Loulslana and the addition of the llVdc tie in Texas. The state franchise taxes increased due mainly to higher federal taxable income associated with Texas franchise tax. Income Taxes income taxes increased $132 million to $224 million during 1996 compared to 1995. During 1995, , income taxes were lower primarily due to adjustments relating to prior year taxes, as well as the tax effect from both the CPL 1995 Agreement and the WTU 1995 Stipulation and Agreement, income taxes of $46 million were recorded for CSW's investment in SEEBOARD from a full year of op. rations in 1996 compared to $6 million for a partial quarter of operations in 1995. Other items Otherincome andI) eductions Other income and deductions decreased $160 million in 1996 when compared to 1995 due primarily to charges recorded in June 1996 associated with certain investments for plant sites, engineering studies and lignite reserves for the U.S. Electric Operating Companies. See the U.S. ELECTRIC OPERATING COMPANY RESERVES table below for additional detail on these reserves. Other hcome 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 income in 1995. U.S. El.ECTRIC OPERATING COMPANY RESERVES Pre tax effect incorne tax Net incorne on it.come beneAt effret (thousands) CFL $(21,509) $$,940 $(l$,569) PSO ($1.109) 15,401 (35,708) SHIPCO (29,700) 7,885 (21,815) H7U (14,949) 4,003 (10.946) 1[lI7.267) 53).229 $(84.038) 28 j _= = = _ h
__ __ _ - _ _ _ __ _ _ _ __ . _ _ ._ . m.__. _ _ . . _ _ _ ._ _ _ inkrest Charges Interest on long term debt increased $103 million or 46% during 1996 compared to 1995 due to higher levels of long-term debt outstanding related to the SEEBOARD acquisition. CSW's 1996 embedded cost of long term debt was unchanged from 1995 at 7.2%. Interest on short term debt decreased $7 million or 7% in 1996 compared to 1995 due to both lower interest rates and lower levels of short. term debt outstare.ng. CSW used a portion of the proceeds from the sale of Transok to reduce $ hon term debt. Phcontinued Operations ne $120 million gain on the sale of Transok as well a. Transok's 1996 operations are shown separately in discondmied oper.ttions. Transok's earnings for the first five months of 1996 werr $12 mill compared to $25 m thon from a full year of operations for 1995. Since Transok was sold on June 6,1975, CSW's results for 1. <.ti do not reflect a full year of earnings from Transok. See NOTE 14. TRANSOK DISCONTINUED OPERATIONS for information, including comparative statements ofincome, related to the sale of Transok. COMPARISON OF Tile YEARS ENDED DECEMHER 31,1995 AND 1994 overview of Heaulu CSW's earnings increased to $402 million or $2.10 per share in 1995 as compared to $394 million or
$2.08 per share in 1994. The return on average common stock equity was 13.1% in 1995 compared to 13.4% in 1994. U.S. Electric operations contributed approximately 105% of total camings in 1995 and approximately 100% in 1994. In 1995, increased corporate expenses, including $42 million oli e-tax expense related to the terminated El p to Merger, were offset in pan by carnings from Transok, CSw 1Aergy, C'"V's investment in SEE110ARD and CSW Credit, totaling $51 million in the aggregate.
Earnings increased in 1995 compared to 1994 due primarily to higher U.S. Electric revenues resulting from customer growth and increased usage along with lower operation and maintenance expenses. Also contributing to the increase were the 1995 earnings from CSW's investment in SEE!!OARD. panially offsetting these factors were higher depreciation and amonization, higher interest and lower carnings from Mirror CWip. Significant items impacting 1995 carnings are listed below (in millions, net of tax): , e Tax Adjustments, $30
- Merger Termination, $(27)
- Cpl 1995 Agreement, $(16) f 29
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Operatine lies enues , Operating revenues increased 138 million or 1% in 1995 as shown in the table below. 1995 HITI.Ntil. VA RI ANCI.S j Im n ase (darrase)from prwr prar (1 S. I:lectric KWil Sales. Growth and t%ge $62 Other 1:lcctric 3 CI't.1995 Agreernent (112) Tucliteveriues (US) W~IV 1993 Stipulation and Agrectnent (21) KWil Sales, Weather.Related (8) (182) linited Kingdorn 20k Other Darrufied 12 Uk U.S. Electr!c Revenues U.S. Electric revenues decreased $182 million or 6% in 1995 compared to 1994. Total U.S. Electric KWil sales increased 4.5% with increases in sales among all customer classes. During 1995, the average number of customers increased approximately 2%. In addition to customer growth, customer usage increased during 1995 as compared to 1994. Partially offsetting these revenue increases were customer ref unds made by Cpl and WTU resulting from the resolution of rate proceedings during 1995 along with lower fuel revenues and weather related demand. KWil sales to retail customers increased in 1995 as a result of increased customer usage and customer growth. The percentage changes in U.S. Electric KWii sales from 1994 to 1995 are listed below.
- Residential,3.1%
- Commercial, 2.2%
e Industrial,2.4%
- Sales for Resale,18.7%
e Total Sales,4.5% Sales for resale increased in 1995 because STP was operational for the full year in 1995 compared to a partial year in 1994, making more energy available for sale. 'n addition, during 1995, WTU began supplying a major new wholesale customer. The U.S. Electric Operating Companies have maintained relatively low rates in an increasingly competitive marketplace. I]nited Kingdom Revenues CSW's operating revenues include 1208 million of revenues from CSW's investment in SEEBOARD fco a partial quarter in 1995. Pursuant to its effective control of SEEDOARD in December 1995 through its 76.45% ownership interest, CSW began full consolidation accounting for SEEDOARD in its consolidated financial statements, Other Diversified Revenues Other dis ersified revenues increased 30% to $52 million in 1995 as compared to $40 million in 1994 due primarily to two CSW Energy projects that went into operation during the second and third quarters of 1994 along with increased factoring revenues at CSW Credit. l l O 2 10
Oneration Eanenses sad Tases U.S. Electric Fuel During 1995 and 1994, the U.S. Electric Operating Companirs generated most of their electric energy requirements. U.S. Electric fuel expense decreased $109 million duiing 1995 due mainly to a decrease in natural gas prices and increased usage oflower cost nuclear fuel at S'i P. The average unit cost of fuel was
$1.58 per MMbtu during 1995 compared to $1.82 per MMbtu in 1994. This decrease was due primarily to low:r cost spot market natural gas prices, favorable fuct contract negotiations and a greater use oflower unit cost nuclear fuel at STP.
UA Electric Purchased Power C.J. Electric purchased power decreased $7 million during 1995 due primarily to increased generation from STP which replaced power that had been purchased during the Orst six months of 1994 when STP was out of sen' ice. United A'Ingdom Cost ofSales CSW recorded $158 million of cost of sales from CSW's investment in SEEBOARD for a partial qunter in 1995 after taking effective control of that company. Other Operating Other operating expense in 1995 increased $18 million compared to 1994 due primarily to the establishment of a $42 million reserve for expenses incurred for the termina.cd El Paso Merger, the reccrding of a p:rtial quarter of operating expenses of $22 million from CSW's investment in SEEDOARD and increased tr:nsmission expenses associated with the completion of an llVdc tie in 1995. These increases were offset in part by the recording in 1995 of $41 million in regulatory assets in accordance with the CPL 1995 Agreement and the WTU 1995 Stipulation and Agreement. Also partially offsetting the increase were benents realized from a cost reduction initiative that paid CSW System employees a portion of the operating expense savings. Maintenance Maintenance expense decreased $16 million or 9% in 1995 compared to 1994 due primarily to the write-offin 1994 of certain deferred expenses related to PSO's Tulsa Power Station, the postponement of previously scheduled maintenance at CPL and savings from cost containment efforts at the U.S. Electric Operating Companies. Depreciation and Amortization Depreciation and amortiration expense increased $29 million in 1995 when compared to 1994 due . primuity to increases in depreciable plant at the U.S. Electric Operating Companies. Tues, Other than income Taxes other than income decreased $14 million or 8% in 1995 compared to 1994 due piimarily to lower 1995 ad valorem taxes resulting from revisions of prior year estimates recorded in 1995. Income Tues income taxes decreased $87 million in 1995 compared to 1994 due to prior year adjustments recorded in 1995, the reserve established in connection wnh the termination of the El Paso Merger and the tax cifects of
- both the CPL 1995 Agreement and the WTU 1995 Stipulation and Agreement.
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Other iteran Other income and Deductions Other income and deductions decreased $10 million or 9% in 1995 compared to 1994 as a result of decreased Mirror CWIP liability amortization of $27 million offset in part by the recognition of approximately $16 million in factoring income by CPL in 1995 pursuant to the Cpt 1995 Agreement, increased interest income and a $3 million gain on PSO's sale of a non-utility, fiber optic telecommunication property. Interest Charges Interest expense on long term debt increased 10% in 1995 from 1994 due to higher levels of debt outstanding. CSW's embedded cost oflong-term debt decreased to 7.2% in 1995 from 7.7% in 1994. Short. term interest expense increased 36% in 1995 as compared to 1994 due primarily to higher short term interest rates combined with higher general corporate borrowings. Discontinued Operations The results of Transok are shown separately in discontinued operations as a tesult of the sale of Transok in June 1996. Transok's earnings were relatively unchanged in 1995 compared to l994. CSW began r: porting Transok's operations as discontinued operations in the Drst quarter of 1996. Accordingly, the prior comparative periods have been ecstated for consistency. See NOTE 14. TRANSOK DISCONTINUED OPERATIONS for comparative statements of income and information related to the sale of Transok. l l LIQUIDITY AND cal'ITAI RESOURCES Overview of Operating, investing and Financing Activities Net cash provided by operating activities increased $76 million during 1996 compared to 1995. The increase was pnmarily attributable to the inclusion of a full year of operations for CSW's investment in SEEBOARD compared to only one partial quarter of operations for 1995 as well as higher rates, collected under bond, at CPL Re increase was offset in pan by higher natural cas prices not yet recovered from customers in Texas and the loss of approximately seven months of operadons in 1996 for Transok as compared I to 1995. See NOTE 2. LITIGATION AND REGULATORY PROCERDINGS for information related to i the secovery of fuel costs. Net cash used in investing activities was $1.3 billion in 1996 compared to $812 million used in 1995. The change is primarily the result of the culmination of CSW's acquisition of the share capital of SEEBOARD. The investing activities of SEEBOARD also caused CSW's construction expenditures to increase compared to 1993. In addition, a combined total of approximately $100 million was invested in several projects by CSW Energy and CSW International. These uses of ca:h were partially offset by the cash received on the sale of both Transok and the National Grid shares. Net cash flows provided from financing activities totaled $320 million for 1996 compared to $306 million in 1995. Cash proceeds ftom the primary ofTering of CSW Common in February 1996 contributed $398 million m cash. These proceeds were subsequently used to pay down a portion of the interim SEEBOARD acquisition debt. In addition, the Anancing and subsequent refinancing related to CSW's acquisition of SEEBOARD, including the use of a portion of the proceeds from the sale of Transok, had a significant impact on financing activities during 1996. CSW also used a portion of the proceeds from the sale of Transok to reduce its short term borrowings, For additionalinformation sce Capita / Structure and SEER 0ARD Acquistrion l'inancing. Finally, non-cash impacts of exchange rate differences on the translation of British pound denominated assets and liabilities were secorded on a separate line on the cash flow statement in accordance with accounting guidelines. N 2 12 g, wp, ,.i-v- +<.-+- s- = .am .v. . ,, e _ _
internally Generated Funds Internally generated funds, which consist of cash flows from operating activities less cornmon and preferred stock dividends, totaled $499 million,5451 million and $424 million for 1996,1995 and 1994, respectively, should meet most of the capital requirements of the CSW System. Ilowever, CSW's strategic initiatives, including expanding CSW's core electric utilit; and non utiiity businesses through acquisitions or otherwise, may require additional capital from external sources. Productive investment of net funds from operations in excess of capital expenditures and dividend payments are necessary to enhance the long-term value of CSW for its investors. CSW is continually evaluating the tmst use of these funds. Subject to certain exceptions, CSW is required to obtain authorization from various regulators in order to invest in certain new business activities. See Holding Company Act. CSW Capital Enpenditures Total capital expenditures for CSW, including the U.S. Electric Operating Companies, SEEBOARD and other diversified operations, but excluding capital that may be required for acquisitions, are estimated to be approximately $539 million, $546 million and $512 million for the years 1997 through 1999, respectively (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 infonnation due to changes in the und:rlying assumptions. See FORWARD LOOKING INFORMATION). Although the historical capital requirements of the CSW System have been primarily for the construction of electric utility plant, current projected capital expenditures are expected to be primarily for existing distribution systems and non utility investments. Primary sources of capital for these expenditures are long-term debt and preferred stock issued by the U.S. Electric Operating Companies, long-term and short tenn debt and common stock issued by CSW and internally generated funds. CSW Energy and CSW International i typicclly 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. CSW periodically reevaluates 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 th4 strategy, the CSW System is likely to continue to make additional investments in energy-reint:d and non v.ility businesses and will continue to search for electric utility companies or other electric utility properties to acquire. CSW expects to fund the majority ofits capital expenditures through internally g:nerated funds. Ilowever, for any sign:ficant investment or acquisition, additional funds from the capital mark;ts, including from the issuance and sale of additional CSW Common, and short term and long term borrowings, may be required. U.S. Electric Operating Companies' Construction Evpenditures The U.S. Electric Operating Companies maintain a continuini; 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 Companics for the next three years are primarily to improve and exp:nd distribution facilities and will be funded primarily through internally generated funds. These improvements will be required to meet the anticipated needs of new customers and the growth in the requirements of existing customers. Construction expenditures, including AFUDC, for the U.S. Electric Operating Companies were approximately $363 million in 1996, $417 million in 1995 and $505 million in 1994. The estimated total construction expenditures, including AFUDC, for the U.S. Electric Operating Companies for the years 1997 through 1999 are presented in the following table (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Acturl results N 2-13
may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). CONSTRUCTION IWl'ENDITURES 1997 1998 1999 Tog
. (millions)
Production $73 $47 $47 $t67 Transmission - 43 60 67 170 Distribution 182 186 191 $$9 fuel 13 19 2$ $7 Other 44 45 'O 129 1355 5357 $370 11,o82 The U.S. Electric Operating Companics plan to distnantle certain power plant properties during late 1997 rmd 1998. Dismantling includes the removal, disposal and/or salvage of retired equipment and ancillary ' buildings. Of the units anticipated to be dismantled, only one unit currently in storage (85 MW), is considered part of CSW's aggregate capability. The depreciation rates of the U.S. Electric Operating Comnanies include a component for net removal cost and therefore are being recovered from customers currently through rates. As a result, actual dismantling of these units will not have a material impact on net income. Current estimates of , capital resources that will be required to dismantle these units range from $10 million to $15 million and are riot reflected in the above construction numbers. It is anticipated that a request for dismantling bids will be
; issued by mid 1997 (The foregoing statement constitutes a forward looking statement within the meaning of Section 2tB of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION).
Although CSW does not believe that the U.S. Electric Operating Companies will require substantial I additions of generaths capacity over the next several years, the U.S. Electric system's internal ecsource plan presently anticipates that any additional capacity needs will come from a variety of sources including power purchases. Therefore, do:ing 1996, the U.S. Electric Operating Companies recorded reserves and write offs in the amount of $84 millior, net of tax, for certain investments in plant sites, engineering studies and lignite reserves. Refer to lnt+graerd Resource Plan for additional information regarding the U.S. Electric System's ccpacity needs.
, ht allon Armual inflatiori rates, as measured by the Consumer Price Index, have averaged approximately 2.8%
during the three years ended December 31,1996. Management believes that in0ation, at this level, does not materially effect CSW's consolidated results of operations or Gnancial position. Ilowever, under existing
- regulatory practice, only the historical cost of plant is recoverable from customers. As a result, cash Dows designed to provide recovery of historical plant costs may not be adequate to replace plant in future year,s.
FinancialStructure As of December 31,1996, the capitalization ratios of CSW were 47% common stock equity,4% preferred stock and,49% long-term debt. CSW is committed to maintaining Onancial Ocxibility through a ,
- strong capital structure and favorable securities ratings in order to access capital markets opportunistically or when required. CSW continually monitors the capital markets for opportunities to lower its cost of capital
. through rennancing activities. During the period from 1992 to 1996, CSW ha; refinanced approximately $2.2 h
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l billion. At Dec:mber 31.1996, CSW's cmbedd:d cost of debt was 7.2%, CSW's significant financing activiti:s for 1996 are summarind in the following t ble. ISSUED / UTILIZED REACQUIRED (if applitable) I' mancing Amount Financial Amount (milhons) Rate % Matunty Instrument (millioris) Rate % MaturitL gstrument
~$W Common Stock (1) 1397 8 PCRil(2) 63 60 2020 PCRI) 16 3 77/8 2014 c:rt 60 0 77/8 2016 PCRil 60 0 61/8 2030 PCRB s.$p MfN(3) 40.0 various 3 arious none 12.7 6.0 2020 PCRil 12.7 7 7/8 2014 PCRil(2) 81.7 6.1 2018 PCR11 81.7 8.2 2014 tWLrco PCRI!
myy PCRil(2) 44 3 60 2020 PCRB 44 3 77/8 2014 cS W Energy Senior Notes 200 0 6 875 2001 tTEBOARD Aequisition Refl=cing (4)
$ denominated Yankec Notes (5) 1200 0 6 95 2001 200 0 7.45 2006 i denominated Eurobondt 1100.0 8875 2006 Fixed Rate 1.oan 173 8 8.25 2003 Accounts Receisable Securitiration 155.0 (l) In February 1996, CSW sold 15.525,000 shares of CSW Common and received nel proceeds of approxirnately $397.8 million, which were used to repay a portion of the indebtedness incurred by CSW to fund the acquisition of SEEBOARD.
(2) Reflects the individual company's proportionate share of Red River Series PCRBs. (3) PSO issued $30 million in March 199', and an additional $10 million in April 1996. The proceeds wcre used to repay a portion of PSO's shon term borrowings and to reimburse PSO's treasury for the scheduled maturity of $25 million FMBs on March 1,1996. The MINS are a series of PSO's Senior Notes. The rates on the M1Ns range from 5.89% to 6.43% with various maturity dates in 2000 and 2001. , (4) During 1996, several financing transactions wc-re undertaken to refinance borrowings incurred to complete the acquisition of SEE110ARD. Both the CSW Credit Agreement and the CSW Investments Credit Facility, which were utilized during the esquisition penod, wett repaid by the end of 1996. See SEEBOARD Acquisition Maanring for details of these transactions as wcll as the activities related to obtaining permanent financing for the acquisition. (5) Yankee Notes wcre swapped inte lintish pounds using cross c tency swaps uith notional amounts of fl29 million each and Sterhng rates of 7.98% for the 2001 Notes and 8.75% for the 2006 Notes. CSW and the U.S. Electric Operating Companies may issue additional securities subject to mark:t conditions and other factors. 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 regin.ation statement on file for the issuance of up to $35 million of Senior Notes. Additionally, CPL, PSO and SWEPCO, along with certain afnliated capital trusts established by each company, have Gled shelf registration statements with the SEC for the issuance from time to time of up to $150 million, $75 million and $110 millic i, respectively, of prefened securities anNor junior subordinated deferrable interest debentures. N 2 15
The current securities r: tings for CSW and eacn of the U.S. Electric Operating Compani:s is presented in the following table. t)uff A Standard Mmifs Phelps & Poors CFL (1) TMU A2 A A
$cnior unwcured A3 A. A.
Preferred stock al D1111+ A-PSO (l) I'Mll Aa3 AA A+
$cnlor unsecured AI AA- A Prefened stock aa) AA. A SH EPC0 (l)
} Mil Am2 AA+ AA-Senior unsecured Aa1 AA A+
Pacicned stock aa2 AA A+ H7U(l) I Mll Al AA. A+ Senior unsecured A2 A+ A Picfened stock a2 A+ A CSW Cornmercial Paper P2 D.I A.2 (1) Secuntics raungs are on Negative Outlock by both Moody's and Standard & Poors These securities ratings may be revised or withdrawn at any time, and each rating should be evaluated i independently of any other rating. 1 Common Stock . In order to strengthen its capital 6tructure and support growth from time to tirne, CSW may issue additional shares of CSW Common. During 1996, CSW issued new common equity via:(i) a primary public offering;(ii) the PowerShare dividend reinvestment and stock purchase plan; and (iii) the CSW Common option in CSW's 'DiriftPlus plan. On Febmary 27,1996, CSW sold 15,525,000 shares of CSW Common and received net proceeds of approximately $397.8 million. 'Diese proceeds were used to repay a portion of the indebtedness incuned by CSW under the CSW Credit Agreement to fund the acquisition of SEEBOARD. During 1996, CSW's PowerShare dividend reinvestment and stock purchase plan was expanded to make it available to the residents of all Ofty states and the District of Columbia whereas it was previously as allable snly to existing CSW shareholders, employees, cligible retirees, utility customers and other residents of the four states where the U.F. Electric Operating Companies operate. For the expanded PowerShare plan, CSW registered five million shares of new CSW Common with the SEC. CSW raised approximately $62 million, $57 millio i and $50 million in new equity through the PowerShare plan in '996,1995 and 1994, respectively. CSW expects to use the proceed; from such sales to reduce short term and long-term debt and for other general corporate purposes. CSW's ThriftPlus currently permits eligible en'ployees to contribute a portion of their annual compensation to the plan, subject to certain exceptions. Funds contributed to the plan are invested by the plan trustee, at the employee's ducction, in any of Ove investment options, including an option consisting of CSW Common During 1996, the trustee for CSW's ThriftPlus plan began to purchase CSW Common directly from CSW rather than from the open market as historically had been done. Previously, CSW registered Ove million N 2 16
new shares of CSW Common with the SEC for such use. During 1996, CSW raised approxim:tely $14 million in new equity cs a result of such direct purch:ses by the ThriftPlus pt:.n trustee. CSW expects to use the proceeds from such sales to reduce f.hort term and long tenn debt and for other general corporate purposes. Short Term Financing
- The CSW System uses short term debt to meet fluctuatlons in working capital requirements and other int: rim capital needs. The U.S. Electric Operating Companies, together w3 several other subsidiaries of CSW have:(1) established a money pool to coordinate short term bonowings and (ii) incurred bonowings outside the money pool through CSW's issuance of commercial paper. As of December 31,1996, CSW had a revolving credit facility totaling $1.2 billion to back up its commercial paper program. ;
SEEn0ARD Acquisillon Financing CSW. Indirectly through intermediate subsidiaries, acquired 100% control of SEEBOARD during 1996 for en aggregate adjusted purchase price of approximately $2.1 billion assuming average exchange rates during the purchase period. As of December 31,1996, CSW had contributed approximately $829 million of the purchase price for the acquisition of SEEllOARD shares. Those funds, which were initially obtained through borrowings under the CSW Credit Agreemeret, have since been repaid by using the $398 million net p. aceds
- frorn CSW's February 1996 cornmon stock offering and $431 million of the proceeds from the sale of Transok.
Additional acquisition funds were obtained from capital contributions and loans made to CSW (UK) plc (which has been replaced by SEEBOARD Group plc) by its sole shareholder, CSW Investments, which arr:nged the CSW Investments Credit Facility for that purpose. During the second half of 1996, borrowings under the _CSW Investments Credit Facility were tefinanced through several different transactions. CSW ' investments issued $200 million of unsecured notes due 2001 and $200 million of unsecured notes due 2006, ! the proceeds of which were swapped into British pounds through a cross-currency swap and used to repay borrowings outstanding under the CSW Investments Credit Facility. CSW Investments also issued L100 million of unsecured Eurobonds due 2006 to repay a portion of the CSW Investments Credit Facility, The rem:ining borrowing outstanding under the CSW Investments Credit Facility were repaid with proceeds from a SEEDOARD accounts receivable securitization, utilization of SEEBOARD balance sheet cash and proceeds from a fixed rate loan due in 2003. 4 -, . CSWEnergy . In October 1996, CSW Energy issued $200 million,6.875% Senior Notes due 2001. CSW Energy int:nds to use the proceeds from the notes for the acquisition, development and construction of electric g:ntr tion assets in the United States and to make affiliate loans to CSW Intemational. In addition to the amounts already expended for the development of projects, CSW Energy has, subject to certain limitations in the case of EWGs and foreign utility company investments, authority from the SEC to expend up to $250 million for general development activities related to qualifying facilities and independent power facilities. CSW Energy may seek specific authority to spend additional amounts on certain projects. See NOTE 3. COMMITMENTS AND CONTINGENT LIAlllLITIES, for a discussion of CSW's investments and commitments in CSW Energy projects at December 31,1996. CSWInternational As discussed in CSW Energy, CSW Energy issued $200 million in Senior Notes in October 1996. CSW Energy loaned to CSW International a portion of these proceeds to acquire an interest in a Brazilian utility, it is anticipated that CSW Energy will loan additional amounts to CSW Intemational, the guarantor of the Senior Notes, to develop, acquire or construct EWGs or foreign utility company investments.
.In January 1997, CSW received authority from the SEC under the lloiding Company Act to spend an amount up to 100% of consolidated retained earnings on EWGs or foreign utility company investments. This repr:sents a step-up in previous authority under the 11olding Company Act.
N 2 17
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. ~ - - - - - . . - - - - - - - - - - - -- - - - CSW Credit CSW Credit purchases, without recourse, the accounts receivable of the U.S. Electric Operating Companies and certain non. affiliated clectric companies. CSW Credit's capital structure contains greater lescrage than that of the U S. Electric Operating Companies, consequently lowering CSW's cost of capital, CSW Credit ksues commercial paper, secured by the assignment of its receivables, to meet its financing needs. CSW Credit innintains a secured revolving credit agreement which aggregated $830 million at December 31, 1996 to back up its commercial papn program. The sale of accounts receivable provides the U.S. Electric Operating Companies with cash immediately, thereby reducing working capital needs and revenue requirements. HECENT DEVELOPMENTS AND TRENDS Competition and industry Challenges Competitive forces at work in the electric utility industry are impacting the CSW U.S. Electric 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 hkely to resuh in even greater competition at both the wholesale and retail level 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 alternative forms of energy, such as natural gas, fuel oil and coal, some of which may be cheaper than electricity. As a whole, the U.S. Electric Operating Companies believe that, overall, their prices for electricity and the quality and reliability of their service currently place them in a position to compete efTectively in the energy marketplace (The foregoing statemert constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected infomiation oue to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). Electric industry restructuring and the development of competition in the generation and sale of electric power requires resolution of several important issues, including, but not limited to: (i) who will bear the costs of prudent utility investments or past commitments incurred under traditional cost of service regulation that will be uneconomic in a competitive environment, sometimes referred to as stranded costs;(ii) whether all customers have access to the benefits of competition; (iii) how, and by w.om, the rules of competition will be established; (iv) what the impact of deregulation will be on conservation, environmental protection and other regulatordmposed programs; and (v) how transmission system reliability will be ensured. The degree of risk to CSW and the U.S Electric Operating Companies associated with various federal and state restructuring proposals aimed at resolving any or all of these issues will vary depending on many factors, including their competitive position and the treatment of stranded costs. Although the U.S. Electric Operating Companies believe they are in a por. tion to compete effectively in a deregulated, more competitive marketplace, if stranded costs are not recovered from customers, then the U.S. Electric Operating Companies may be required by existing accounting standards to recognize pctentially 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 infonnation due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). See Regulatory Accounting for additional information. At the federal level, several bills have been introduced in Congress in the early part of the 1997 legislative session, and recent reports indicate that other bills are likely to be introduced in the near future, which provide for restructuring anNor deregulating the U.S. electric utility industry. These bills will likely cover many different issues including repeal of the Holding Company Act and PURPA, establishment of full retail customer choice, disaggregation of electric utilities and the restructuring of the electric utility industry. N 2 18
See //olding Company Act. Stat:s that have considered deregulation have been moving increasingly toward requiring some form of retail competition or retail wheeling. CSU and the U.S. Electric Operating Companies c:nnot predict when and if they will be subject to one or more of these legislative initiatives, nor can they predict the scope or effect of such legislation on their results of operations or financial condition. For cdditional information relate I to such initiatives, see industry Restructuring (Oklahoma, Laulslana and Texas). Wholesale Electric Competition in the United States The Energy Policy Act, which was enacted in 1992, signlucantly alters the way in which electric utilities compete. The. Energy Policy Act created exemptions from regulation under the llolding Company Act and permits utilities, including registered utility holding companies and non-utility companies, to own EWGs. EWGs are a new category of non utility wholesale power producers that are free from most federal and state i regulation, including restrictions under the lloiding Company Act. These provisions enable broader p:rticipation in wholesale power markets by reducing regulatory hurdles to such participation. The Energy Policy Act also allows the FERC, on a case by-case basis and with certain restrictions, to order wholesale l transmission access and to order electric utilities to enlarge their transmission systems. A FERC order cquiring a transmitting utility to provide wholesale transmission service must include provisions generally that pernut the utility to recover from the i ERC applicant all of the costs incurred in connection with the transmi;sion services and any enlargement of the transmission system and associated services. Wholesale energy markets, including the market for wholesale electric power, have been increasingly competitive since enactment of the Energy Policy Act. The U.S. Electric Operating Companies must compete in the wholesale energy markets with other public utilities, cogenerators, qualifying facilities, EWGs and others for sales of electric power. While CSW believes that the Energy Pol'.y Act will continue to make the wholesale markets more competitive, CSW is unable to predict whether the Gnergy Policy Act will adversely irnpact the U.S. Electric Operating Companies. FERC Order 888 On April 24,1996, the FERC issued Order 888 which is the Onal comparable open access transmission rule. The provisions of FERC Order 888 provide for comparable transmission service between utilities and their transmission customers by requiring utilities to take transmission service under their open access tariffs for all of their new wholesale sales and purchases and by requiring utilities to rely on the same information that their transmission customers rely on to make wholesale purchases and sales. FERC Order 888 reaffirms the FERC's position that utilities are entitled to recover all legitimate, prudent and verinable stranded costs det:rmined by a formula based upon the revenues lost method through direct assignments charges to departing customers. < FERC Order 888 requires holding companies to offer single system transmission rates, llowever, the rule granted the U.S. Electric Operating Companies an exemption permitting an opportunity to propose a solution that provides comparability to all wholesale users. The Gnal rule does suggest that the terms and conditions for the CSW ERCOT companies (CPL and WTU) would be pennitted to differ from those offered by the CSW SpP companies (PSO and SWEPCO). Transmitting utilities in the SPP are under the exclusive jurisdiction of the FERC while most transmitting utilities in ERCOT are vr.dn the exclusive jurisdiction of the Texts Commission. These two commissions have different approaches to defining end implementing comparable open access transmission service. CSW is the only holding company that owns operating companies in both ERCOT and the SPP. On November 1,1996, the U.S. Electric Operating Companies Gled a system-wide tariff to comply with l FERC Order 888. On December 31,1996, the FERC accepted for Ghng the system wide tariff to become l tfrective on January 1,1997, subject to refund and to the issuance of further orders. CSW and the U.S. Electric Operating Companies believe that their system wide tariff complies with the requirements of the FERC and the Texas Commission, but the tariff does not offer a single system rate for transactions due to the different tr:.nsmission pricing approaches of the FERC and the Texas Commission. Reference is made to Industry b 2 19
Meuruct: ring b Team for infometion relatzd to the transmission pricing approach rules that the Texas Commission cooptId duilng 1996 (Project No.1404$). Metall Electric Competition in the United States , increasing competition in the utility industry has resulted in increasing pressure to stabillic or duce ! I retes. The retail regulatory environment is beginning to shift from traditional rate base regulation to incentise regulation. Incentive rate and performance-based plans encourage efDciencies and increased productivity while permitting utilities to share in the results. Retail wheeling, a major legislative initiative which would require utihties to " wheel" or move power from third parties to their own retail customers, is evolving gradually. Many , states currently 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 and the U.S. Electric Operating Companies' customers and security holders unless CSW and the U.S. Electric Operating Companies receive fair iccovery of the full amount, previously invested to Dnance power plants. These investments, which were acasonably 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 cunent law. CSW intends to strongly oppose attempts to impose retail competition without just compensation for the risks and investments CSW undertook to serve the public's demand for
- electricity, For additional infonnation related to retail wheeling in the United States, sec flolding Company Act snd Industry Restructuring (Oklahoma, Loulslana and Texas).
Competition in the Supply Business in the United Kingdom SEEBOARD currently has the sole right to supply substantially all of the consumers in its authorized area, except where demand is above 100 KW. As a part of the restructuring of the electricity industry in the United Kingdom, cornpetition is being introduced into the market for electricity supply on a phased basis. The threshold for competitive supply was reduced from 1 MW to 100 KW cffective April 1,1994. SEEBOARD, as wr!! as other licensed suppliers (second-tiet license), are permitted to supply electricity to customers whose peak demand exceeds 100 KW in the areas of other regional electricity companics. All holders of a second tier license, including SEEBOARD, who supply electricity to non franchise customers (i.e., demand of 100 KW or above) must pay charges to the host regional electricity company for the use ofits distribution network. It is . currently intended that, effective April 1,1998, the regional electricity companies' supply businesses, including l SEEBOARD's, will no longer be protected by a franchise. SEEBOARD has always been a strong supporter of extending competition in electricity whenever feasible and practicable. To date, SEEBOARD has established a i profitabic business in supplying customers outside of its franchise area. While SEEBOARD is currently unable to predict the impact that the transition in 1998 to full competition will have on its electricity supply business, its primary objective is one of profit and not market share. CSW Restructuring in April 1996, CSW announced organizational and executive changes to help prepare CSW for increased competition and unbundling of the electric utility industry into generation, transmission, distribution and service segments. As a result of these changes, in 1996 CSW functionally reorganized its domestic utility operations into three organizational units which are centrally managed from CSW Services, CSW created a power generation business unit to provide energy generation and production services. All phases of management of the U.S Electric Operating Companies' energy production activities have been consolidated into the power generation business unit. These activities include management of all generating . facilities, including nuclear facilities, and fuel procurement. CSW created an energy delivery business unit to provide services for the long-distance transmission and local distribution of electricity to retail customers, including attendant customer services such as meter N 2 20
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reding. bilknr end accounting. All phaes of m n:pement of the U.S. I'lectric Operating Companies' cnergy delivery activiii:s have been consolidated into the energy deliv:ry busin ss unit. CSW created an energy sen> ices business unit to provide marketing senices, along with new energy efficiency products and services as they become available, to existing and future customers of the U.S. Electric Oper: ting Companies. The energy senices unit also manages CSW Communications and EnerShop. I unctional unbundling of CS%"5 ver1ically integrated structure is expected to provide a more competitive organizational structure for CSW. Some employees have been reassigned from the U.S. Electric Oper: ting Companics to CSW Services to provide these centrally managed services. Through December 31,1996, CSW has incurred approximately 19.6 million in connection with the implementation of the 1996 restructuring. CSW also has reserved approximately 56.7 rnillion for additional expenses associated with tne 1996 restructuring, which is expected to be completed by early 1997. Industry Restructuring in Oklalwmu in June 1996, the Oklaborna Commission initiated a proceeding in which it solicited public comment on sarious inues nuociated with the potential restructuring of the Oklahoma electric utility industry. The Oklahoma Commission requested comment on certain issues including the extent and timing of restructuring. the unbundling of utility services, and the legislative and regulatory requirement for restructuring. The Oklahoma Commission staff conducted a series of infonnal public technical conferences and workshops over the I:st half of 1996 to discuss these issues. After receiving a report from its staff summarizing the comments provided in the restructuring proceeding, the Oklaborna Commission took no immediate action but lef t the proceeding open at this time to allow for the monitoring of other states' activities. In February,1997, a bill was introduced in the Oklahoma Senate which would pennit some fonn of ret:il competition by January 1,1999, with retail competition for all customers soon thereafter. The bill directs the Oldahoma Commission to review the issue of and devise a mechanism for recovery of prudently incurred. unmitigable and verified stranded costs and investments. The bill leaves many detalis to be decided by the Okl:homa Commission and the Oklahoma Tax Commission, but neither can issue any regulations without the prior express authority of the legislature or the Joint Electric Utihty Task Force, a 14 member panel with an equ:1 number of members from each house of the Oklahoma Legislature. CSW is unable to predict whether any retail competition legislation will be enacted by the Oklahoma Legislature and, if enacted, what form such legislation would take. Industry Restructuring in Loulslana in October 1996, the Louisiana Commission requested comments on various electric industry restructuring issues in a docket opened in 1995 to consider aspects of competition in the provision of retail electric service. Specifically, the Louisiana Commission requested input from interested parties on its policy statement on the " principles to guide the investigation into whether electric industry restructuring and retail competition are in the public imerest." SWEPCO filed comments on this matter in November 1996. The louisiana Commission has not taken further action in this matter at this time. CSW expects that legislation reg rding the restructurirg of the Louisiana electric utihty industry will be introduced in the upcoming session of the Louisiana legislature. CSW cannot predict whether any such legislation will be enacted and, if enacted, wh:t form such legislation would take. Industry Restructuring in ArLansas To date, no legislation regarding the restructuring of the Arkansas electric utility industry has been introduced in the Aikansas legislature. N 2 21 l
kdustry Restructurl:g b Tnas Amendtnents to PUR A, the legal found: lion of electric regulation in Tesas, beceme elfcctive on September 1,1995. Among other things, the amendinents deregulate the wholesale bull power market in ERCOT, permit pricing lieribility for utilities fa;mg competitis e challenges, provide for a market. driven integrated resource plant ing process and mandate comparable open access transmission service. PURA also required that the Texas Commission adopt a rule on comparable open transmission access by March 1,1996. In co ijunction with this rulemaking proceeding (Project No.14045), the chainnan of the 1cxas Commission issued a proposal on September 6,1995, for the purpose of maximizing competition in the i RCOI wholesale bulk power mnrket. 'Ihe proposal calls for tht functional unbundling ofintegrated utilities where dis ribution entitit s could purchase their power requirements from any generator or set of generators in ERCOT. Those generators which are cunently regulated would be deregulated af ter provisions are in place to recover stranded costs. The proposal was assigned a separate proceeding (Psoject No.15000) and after a series of workshops and technic al conferences cm.docted during 1996, the icxas Conunission submitted a final Scope of Competition report to the Texas Legi>lature in January 1997. The final report contains numerous recommendations to the Texas Legislature including requnts for additional regulatory authority or clarification of existing authority inch ding, inter alia, authority to certificate electric service resellers, the authority to adopt consumer protection and universal service standards, the authority to detennine and allocate stranded costs to all custorners, the authorit) to promote unbundlion. the authority to allow alternative forms of regulation, increased authority to address mergers, authority to correct market power abuses, nothority over the ERCOT ISO and authority to permit alternative methods for fuel cost recovery, in addition, the final report offers the Texas i epislature four restructuring options. Option 1 maintains the regulatory status quo; Option 2 would pennit utilities to voluntarily of fer retail access; Option 3 provides for full w ho'esale competition; and Option 4 provides for full retail competition, lhe report's Anal recommendation is for 11. Texas Legislature to direct the Texas Conunission to prepare for full retail competition using a careful and deliberate approach on a timetable to be established by the Texas Legislature, but with no retail access before the year 2000. CSW cannot predict the outcome of these proposals. On February 7,15 96, the Texas Commission adopted a rule governing transmission access and pricing (Project No.14045). The pricing method adopted by the Texns 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 enegawatt mile which recovers the remaming 30% of ERCOT transmission costs. The oaen access tariffs filed with the FERC on February 9,1996 did not reflect Project No. 14045 pricing. Ilowever, on Nosember 1,1996, CSW filed tarif fs with the i ERC in accordance with i ERC Order 888 that do conforn. to the Texas Commission's rule. See TERC Order ### for additional information regarding the transmissior; pricing rules prescribed by TERC. By statute the Te> as Commission must submit a report to the 1997 Texas Legislature on " 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 this Project, CPL, SWEPCO, and WTU cach filed infonnation on estimates of potential rtranded costs. While the filings for CPL included estimates oEsignificant potential stranded costs, no significant potential stranded costs were identified in the filings for SWEPCO or WTU. See NOTE 2,1.lTIGATION AND REGULATORY PROCEEDINGS for a d scussion of the potential impact of potential stranded costs relating to CPL. T he lexas Commission t. Project 15002," Scope of Competition Report," is a report that the Texas Commission is required to present to the Texas Legislature in each oJd numbered year detailing the scope of competition in the electric rnarkets and the impact of competition and industry restructuring on customers. In addition, the repon 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. l 2.::
In Pebruary 1997, a retail competition bill was introduced into the Texas Lcgislature. As proposed, the bill would:(i) require utilities to Glc a restructuring plan by January 1,1998;(ii) require a 15 percent rate reduction for all customers ofinvestor owned utilities effectise September 1,1997;(iii) allow public schools and universities to seek alternative electric energy suppliers by August 1,1998;(iv) allow residential and other snnll customers to seek alternative electric energy suppliers by January 1,1999; and O) allow other setail custorners to seek alternative electric energy suppliers by January 1,2000. The proposed bill would also allow utilities to recover stranded costs, but would require a utility to reduce uneconomic investments before recovering any stranded assets. Ins estor owned utilities would be required to allocate the burden of stranded (ast recovery between shareholders and customers, requiring such utilities to write-off some portion of their assets. CSW is unable to predict whether any retail competition legislation will be enacted by the Texas I egislature , and if enacted, the ultimate fonn such legislation would tele. liffect of Federal and State Restructuring Intriarires on CSW CSW and the U.S. Electric Operating Companies cannot predict the form or effect of any federal or state electric utility restructuring initiatives at this time. l~cderal and/or state electric utility restructuring may cause impairment of signincant recorded assets, material reductions of prout margins, and/or increased costs of capital (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 infonnation due to changes in the underlying assumpti.ms. See FOltWAllD LOOKING INi'OllM ATION). No assurance can be rnade that such events would not have a material adserse cifcct on CS%"s or any U.S. Electric Operating Company's results of operations, Gnancial condition or competitive position. Independent System Operator I'lan l In June 1996, CSW, including cpl. and WTU, and more than 20 other parties, including other investor. i owned utilities, municipal power companies, electric cooperatives, independent power producers and power marketers, Gled plans to create an ISO to manage the El(COT power grid. The filing marks a major step towcrds implementing the Texas Commission's overall strategy to create the competitis e wholesale electric m:rket that was mandated by the Texas Legislature in 1995. The Texas Commission approved the ISO in August 1996, Such approval made Texas the Orst state in the nation to implement a regionalISO and a regional competitive wholesale bulk power ma:Let. Integrated Rewurce Plan On January 31,1997, CPL, %TU, and SWEPCO Oled with the Texas Commission a joint integrated resource plan outlining thc companies' future electric needs over a 10-year forecast horiron and the manner in u hich the companies propose to meet those needs. The filing indicates additional resources will be needed within the next 10 years. It is anticipated that l the initial needs will be met through a mix of energy resource options including purchased powcr, generation, energy ef 0ciency programs and renewable energy resources. This integrated resource plan is signincant beccuse this is the Erst time an electric utility has Gled such a plan under the provisions of PURA. In adopting this tr.w, the Texas Legislature required that some type of public participation be incorporated in the planning process. Traditionally, these public participation activities would involve sur cys, focus groups or public meetings. CPL, WTU and SWEPCO ch0sc instead to use a public approach known as Deliberative Polling. Deliberative Polling is designed for the company's customers to develop a truly informed, deliberated opinion, as a way of bringing the customer into the electric utility planning process. Customers at all three polls overwhelmingly detennined that a mix of energy resource options was preferable at means to accomplish several objectives including low cost, reliability, maintenance of the environment and further development of renewable sources. Because of the strong customer interest evidenced l in the Deliberative Polls, CPL, WTU, and SWEPCO have each instituted targeted purchase goals for renewable energy resources and energy ef0ciency pegrams, which, along with the wind resources already on the CSW N 2 23
r U S Electric system, would constitute the largest renewable installation in lesas and woald be a significant wntnbut on toward further desclopment and commercialization of the renewable energy industries The willingness to pay more per month for renewable resources saried considerably, with 80% of customers willing to pay at least $1 more per month to those willing to pay up to $10 more per monthc As a result, tic CSW cornpanies are proposing a program of" green power" choices. cpl., WTU and SWEPCO plan to Gle a green pricing tarif fin 1997 fol'owing additional customer consultation and research which will provide a means for those customers who are interested in acquiring a greater portion of their personal consumption from environmentally beneficial generation to exercise that choice. The CSW companies hm e proposed a pilot program for the installation of rooftop photovoltaic solar systems at schools. lhese installations vrould proside a conuounity focus and would contain educa ional components to teach about renewable resources. Action by the lexas Commission on this integrated resource plan filing is expected by mid 1997. Iloiding Company Act The lloiding Company Act generally has been construed to limit the operations of a registered holding company to a single integrated public utility system, plus such additional businesses as are functionally related to such system. Among other thinp, the llolding Company Act requires CSW and its subsidiaries to seek prior SI:C approval before elIceting mergers and acquisitions or pursuing other types of non utility initiatives. Such persasive regulation may impede or delay CSW's efforts to achieve its strategic and operating objectives. Consequently, CSW continues to support elforts to repeal or modify this legislation. In 1995, the SEC issued a report to the United States Congress ads ocating repeal of the llolding Company Act, either on a conditional and transitional basis or immediate and outright repeal. The basis for the SEC's recommendation for repealis that the lloiding Company Act is anachronistic and duplicative of other federal and state regulatory regimes that have developed over the past sixty years. Following the SEC's report, there were several bills introduced in both the United States Senate and flouse of Representatives in 1996 which would hase repealed the llolding Company Act on a conditional and transitional basis and transferred its oversight functions to the FERC and the states. Another bill was introduced into the United States llouse of Representatives that, in addition to repealing the lloiding Company Act, would have repealed PURPA, which among other things, requires investor owned utilities to purchase power at their avoided cost from qualifying facilities. Although none of these bills was enacted into law, they may suggest the form of future legislation. l Published reports name electric utility restructuring as one of the foremost issues before the United States Congress in 1997. Statements made by proponents of various proposed bills indicate that many of these bills will address repeal of the llolding Company Act. In January 1997, a bill was introduced in the United States Senate providing for comprehensise electric utility industry rest.ucturing and for retail choice by December 2003, repeal of the lloiding Company Act one year after the bill is enacted, as weli as repeal of the requirement that electric utilities purchase power at their avoided cost from coalifying facilities under PURPA. Under this bill, many of the oversight functions performed by the SEC under the lloiding Company Act would be shifted to the FERC and the states. In addition, a bill has been reintroduced in the United States llouse of Representatives providing for choice of electricity suppliers at the retailles el by the year 2000. Under this bill, which is substantially similar to the Senate bill, the application of the llolding Company Act to a particular holding company system would be climinated after each state sened by the electric utility companies in that system made a determination that retail competition existed in that state. There base also been reports of other bills that are likely to be introduced in 1997, many of which deal with retail choice issues and/or repeal of the llolding Company Act ar.d!or PURPA. Given this level of activity, there is some probabihty that Congress will enact legislation in 1997 that amends or repeals vanous portions of the lloiding Company Act and/or PURPA, CSW is unable to predict the form or effects of any such potential legislation et this time. In February 1997, the SEC adopted Rule 58 allowing a holding company registered under the lloiding Company Act or any ofits subsidiaries, to acquire, without prior SEC approval, the securities of any energy. related company subject to certain limits. Under the new rule,invcstment in energy related company securities b
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i 1
k u nhout prior %l C apprm al is limited to the greater of(i) $50 million and (ii) 1W of the consolidated capitalitatmn of the registered holding company as reponed on its most recent l'onn 10-Q or Form 10 K as Gled with the St C llule 58 does not esempt the acquisition by a registered holding company of the securities of an electric utihty company or a pas utihty company, w hich remains subject to the St C's prior approval as does the issuance of securities for the purpose of making such excmpt investments. Regulatory Accounting Consistent with industry practice and the provisions of SI'AS No. 71, which allow s for the recognition and recovery of regulatory anets, the U.S. Electric Operating Companies have reccgnized significant regulatory assets and liabilities. Management belies es that the U.S. Electric Operating Companics will continue to meet the criteria for following SI'AS No. 71, llowever,in the event the U.S. Liectric Operating Companies no longer mtet the criteria for following SI'AS No. 71, a write of f of regulatory assets and liabihties would be tequired. l'or additional information regarding regulatory accounting, reference is made to NEW ACCOUNTING STANDAl(DS and NOTE 1, SUMMAltY OF SIGNIFICANT ACCOUNTING l'OLIC10S, PSO Union Negollations Sinct July 1,1996,l'SO and its Local Union 1002 of the IDEW have been engaged in contract renewal negotiations. 'Ihe underlying agreemem expired September 30,1996 and, to date, the parties have been unable ' to reach an agreement. As a result, PSO implemented ponions of its Onal proposal on December 29,1996 after declari: g an impasse. The principal issue of disagrectnent involves PSO's anticipated need for flexibility in a deregulated enviromnent. At this time, PSO cannot predict the outcome of this matter, llowever, PSO is conndent that, even in the event of a strike, its operations would continue without a significant disruption. CSH' Strategic Responses CSW and the U.S. Electric Operating Companies have from time to time considered, and expect 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 utility industry These strategies may include business combinations with other companies, internal restructurings involving the complete or panial separation of CS%"s peneration, transmission and distribution businesses, acquisitions or dispositions of assets or lines of business, and additions to or reductions of franchised senice territories. See CSW Restructuring. CSW and the U.S. Electric Operating Companies may from time to time engage in discussions, either internally or with third panics, 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 or any U.S. Electric Operating Company'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 resuhs may differ materially from such projected infonnation due to changes in the underlying assumptions. See FOltWAllD LOOKING INFOlG1ATION). Impact of Competition 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 sen ice (Tht, foregoing statement constitutes a forw ard looking sutement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected infonnation due to changes in the underlying assumptions. See FOltWAllD LOOKING INI OllM ATION), I 2 25
ltATI:S AND iti:GUI.ATOlW MA'ITI:ltS CPL Rare Rreicw DocArt No. lHid On November 6,1995 CPL filed with the l exas Commission a request to increase its retail base rates by 571 million and reduce its annual retail fuel f actors by 517 million. T he net effect of these proposals would result in an increase of 554 million, or 46%,in total annual retail res enues based on a test scar ended June 30, 1995. cpl /5 Oling also sought to reconcile 5229 million of fuel costs incu"ed during the period July 1,1994 through June 30,1995. cpl /s previons request to reconcile fort costs from March 1,1940 to June 30,1994 in I)ocket No 1%50 was consolidated wnh the current rate review. If the requested increase and other adjustments in rate structure are approved. CPL will commit not to increase its base rates prior to January 1, 2001, subject to certain force majeure events. On April 30,1996, cpl. implemented new fuel factors that will lower fuel costs to its retail customers by $25 million annually. The lower fuel factors result piimarily f rom the projected decline in cpl /s fuel costs during the twelve month period following the implementation of the new factors. On May 9,1996, CPL placed a F0 million base rate inacase into effect under bond 1he bonded rates are subject to refund based on the final atder of the 1 cxas Commission. When combined uith the f eci factor reduction, the net result is an increase in annual etail revenues of $45 million, or 3.8% on May 10.1996, CPI, and other par 1ies to the fuel reconciliation phase u the current rate review filed the CPL 1996 fo 1 Agreement with the Texas Commission that reconciles cpl /s fuel costs through June 1995. A Anal order implementing the settlement was issued on June 28,1996, approsing a one time fuel refund of 523 million that was refunded to customers in July 1996. As a condition of the settlement, CPL agreed not to sect recovery of 56 milhon of fuel and fuebrelated costs incurred during the reconciliation period. The additional amount of the refund resuhed from an over recoscry of fuel costs during the reconciliation period and did not have a material impact on CPL's results of operations or Gnancial condition. In a preliminary ordcr issued I)ecember 21,1995, the Texas Commission expanded the scope of the rate review to address certain competitive issues facing the electric utility industry. CPL made a supplemental Cling on April 1,1996, addressing a recommended model for restructuring the electric industry min ERCOT. In addition, the supplemental filing included: (i) estimates of CPL's potential stranded costs based upon various possible structures of the c!cctric industry and under several energy price scenarios; and rii) a recommendation that the potential stranded costs not be quantined in rates until any changes in the electricity market and structure of utilities in Texas are known. In this supplemental Cling, CPL estimated its potential stranded costs could range from approximately reto to approxmiately 53.7 billion in a worst-case scenario. The range is dependent upon a number of presently unknown factors, including the extent to which CPL is compensated for its reasonable costs and the extent and timing of any implementation of retail competition. CPL has Gled rebuttal testimony that challenges positions taken by the Texas Commission staff and otbc mrties intervening in this case. cpl.'s testimony challenges the 1exas Commission staff's proposals as unreasonable and contrary to cunent law and regulatory pohey. While the Texas Commission staff reported the use of a " point estimate" of 5850 million for potentially stranded costs, their testimony actually describes their range of potential stranded costs as very uncertain and hasing a range from 5200 million to $2 billion. The Texas Conunission staff subsequently revised their " point estimate" to $1.069 billion and their range from $223 million to 52 9 billion. In addition, the Texas Commission staff recommended (i) a nuclear performance standard that uould penalize CPL unless it operates its nucleat units better than 75 percent of the U.S. nuclear industry; (ii) a fuebrecovery mechanism that is based on prices in an undeveloped energy market; and (iii) a one sided cap on cpl /s carnings that effectisely presents CPL from realizing its authorized level of earnings. A proposal for decision was issued on January 21,1997 by the ALJs hearing the case. The proposal for decision recommends an increase in annual res enues of 57.2 million, the net result of a recommended base rate reduction of 55.2 million plus increased resenues collected through two surcharges. The 57.2 million resenue OTu 2 26
rate ch:nge is made up of the following components: (i) a $10.3 million reduction i. KWlbrelated revenues; (ii) an inctnse of $5.1 million in miscellincous revenues (custom:r connect ch:rps, insuf0cient check charges i and other fees);(iii) a $43 million annual surcharge applied over three years to 'ecos er rate case expenses; and (iv) annual recovery of $8.1 million for demand side management expenditores through a separate surcharge.
' A factor contributing significantly to the difference between the $71 mill on i retail base rate increase originally requested by CPL and the Aus' proposal is the recommended reduction in CPL's return on equity from 12.25% to 10.9% resulting in a reduction of $31 million in CPL's requested base rate increase.
4
! The Aus' decision also recommends no change in the method used by CPL to recover the capitallred costs essociated with CPL's 25.2% ownership interest in STP The Aus have recommended that the Texas Commission reject CFL's request to change the method of recovering STP defened accounting costs from a mongage amortiration methodology to a straight line amonization methodology. Rejection of this request i would reduce CPL's request for rate relief by $14 million. -The Aus also recommended that CPL's current i > depreciation rates be decreased by $8.8 million a year and that the Texas Commission deny CPL's request for a i 2 $3.6 million increase for its catastrophe reserve.
ne proposal for decision also addressed the competitive issues raised in the Texas Commission's preliminary order. The Aus determined that, under cunent law, the 'l exas Commission does not have *
- authority to implement the nuclear performance standard, fuchmovery mennism, or earnings cap proposed l by the Texas Commission staff. Ilowever, the Aus detennined that with legislative authorization, it could be
. appropriate to implement a nuclear performance standard and alternative fuel recovery mechanism for CPL.-
The Aus also detennined that under various structures of a future competitive electric utility industry, CPL
- could have potentially stranded costs from $30 million to $L718 billion. The Aus stated that CPL's
- potentially stranded costs will depend on the structure of the industry in the future and that recovery of these '
~
costs might not be required by law under certain industry structures.
~ A final order from the Texas Commission is expected in March 1997. CPL's management cannot predict the ultimate outcome of CPL's rate case if CPL ultimately is unsuccessful in obtaining adequate rate relief, CPL and CSW could experience a material adverse effect on their results of operations and financial condition.
l'So Rate Erriew + On July 19,1996, the Oklahoma Commission staff Oled an application seekirg a review of PSO's ettnings and rate structure. The review is being initiated to investigate the potential impact on PSO's rates ; from both the sale of Transok and PSO's restructuring efforts as well as PSO's improved Gnancial results. Although rate reviews do not have specine time limitations, a schedule has been established for PSO's response, in accordance with the established schedule, PSO filed a package of Onancial information with the Oklahoma Commission staff on November 1,1996, and cost of service and rate design testimony on January l
-10.1997. A final order from the Oklahoma Commission is expected in the fall of 199 /. PSO's management etnnot predict the ultimate outcome of PSO's rate case, although management believes that the ultimate sesolution will not have a material adverse effect on PSO and CSW's consolidated results of operations or :
n; fin:ncial condition, liowever, if PSO ultimately is unsuccessful in reaffirming adequate rates, PSO and CSW 2 could experience a material adverse effect on their consolidated results of operations and financial condition. On January 14,1997, the Oklahoma Commission approved a joint settlement which provides that all b tis rendered beginning with PSO's June 1997 billing cycle shall be considered interim rates subject to refund , in ;he event that the permanent Onal order grants less than the current revenue produced by the existing rates. J Other See NOTE 2.UTIGATION AND REGULATORY PROCEEDINGS for information regarding , L . these and other regulatory matters, 2 27 i u -v-- r - o_,mi i-- .--rem *, -, s-- - , . . . , , -- iiumm _ww .--e e% %g. , -, m,,, , ,.-- - . , , - .-w - = , .,, .w .. ,-- wh 3 ,, ,,-$n,<- 3 ,, .-- --+ gms-t
, MERGER ANI) ACQUISITION ACTIVITIES SEEBOARDAcquisition in November 1995, CSW announced its intention to commence the Tender OITer in the Unhed Kingdom to acquire all of the outstanding share capital of SEEBOARD. SEEBOARD is one of the 12 regional electricity companies which came into existence as a result of the restructuring and subsequent privatization of the United Kingdom electricity industry in 1990. By April 1996, CSW, through intermediate subsidiaries, had acquired contiel of 100% of SEEllOARD fir an aggregate adjusted purchase price of approximately $2.1 billion assuming average exchange rates during the purchase period. See SEEBOARD Acquialtlon Financlag for additional information. SEEBOARD's Recent Operating Resu!n SEEl10ARD's principal business is the distribution and supply of electricity in Southeast England.
. SEEllOARD has its headquarters in Crawley, West Sussex. It has a distribution territory that covers approximately 3,000 square miles which extends from the outlying areas of London to the Enghh Channel.
SEEllOARD serves approximately 2 million customers. Approximntely 80% of SEEBOARD's sales are to residential and commercial customers, while the remaining 20% are primarily to industrial customers. SEEBOARD is also involved in other business activities, including electrical contracting and retailing, gas supply and electricity generation. .i for the year ended December 31,1996, SEEBOARD had electricity sales of approximately 19A billion KWils and net earnings of $208 million on revenues of approximately $1.8 billion. For the year ended December 31,1995 (unaudited), SEEBOARD had electricity sales of approximately 18 billion KWils and, excluding exceptional items, net earnings of $118 million on revenues of approximately $1.9 billion. SEEBOARD's 1996 pross pront,(revenue less cost of sales), was higher than the comparable period , last year due prirnarily to an increase in sales volume in the distribution business and a 3.3% increase in supply tariffs charged to rustomers beginning in February 1996 to recover supply costs. The increase in 1996 gross t , pront was offset in part by a 13% decrease in regulatory allowed distribution revenue, effective April 1,1996, following the completion of a regulatory price review of SEEBOARD's distribution business and some loss of volume to competition in SEEBOARD's supply business. ' Other factors contributing to SEEBOARD's increase in 1996 earnings were continued cost reduction programs, the Erst year of earnings contribution trom SEEBOARD's 37.5% interest in the 675 MW Medway Power Station, the recognition of a bo. 9t in 1996 of funds required to settle a liability for redundancy costs , and the absence in 1996 of restructur.(. costs incurred in 1995. Partially offsetting the increase in 1996 ' carnings was the receipt in 1995 of dividends from SEEDOAluys interest in the National Grid which did not repeat in 1996. SEEBOARDS results for the calendar years ended December 31,1996 and 1995 are not indicative of the results that will be experienced by SEEBOARD as a subsidiary of CSW due, in part, to the debt incurred in - connection with the Snancing of the acquisition, and the purchase accounting adjustments and the accounting
- adjustments made to adjust SEEBOARD's results for U.S. Generally Accepted Accounting Principles. ,
SEEBOARD's 1996 earnings have been converted into U.S. dollar amounts for illustrative purposes ; only at an exchange rate ofII.00=$1.56, which was the average rate of exchange for 1996. SEEBOARD's 1995 carninp have been converted into U.S. dollar amounts for illustrative purposes only at an exchange rate of fl.00=$1.58, which was the prevailing rate of exchange at the close of business on November 3,1995, the 4
- business day prior to the announi:ement of the CSW's Tender Offer to acquire SEEBOARD.
2 28- , O-. , ,.a. . . . - , a- -.
=
See NOTE 15. PRO FOP.M A INFORM ATION for information required by the SEC related to the pro forma impact on CSW of the SEEl40ARD acquisition. Terminarlon of El Paso 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. On June 9,1995, following CM"s notincation that it w:s terminating the Merger Agreement, El Paso filed a suit against CSW seeking a $25 million tennination fee from CSW, additional unspecified damages, punitive damages, interest as permitted by law and cenain other costs. On June 15,1995, CSW filed suit against El Paso seeking a $25 million tennination fee from El Paso due to El Paso's breach of the Merger Agreement, at least $3.6 million in rate case expenses incurred by CSW on behalf of El Paso related to state regulatory merger proceedings end a declaratory juJgment that CSW properly tenninnted the Merger Agreement. On June 14,1996, CSW filed an amended complaint seeking a first priority administrative expense claim of $50 million from El Paso based upon El Paso's breach of the Merger Agreement. 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. CSW is the named plaintiffin the consolidated adversary proceedin;.. The trial was cornpleted on January 30,1997 and a decision is expected in the case in the first quaner ef 1997. Although CSW believes that it has substantial defenses to El Paso's claims and intends to defend arainst El Paso's claims and pursue CSW's claims vigorously, CSW cannot presently predict the outcome of the kwsuit, llowever, if the lawsuit is decided adversely to CSW,it could have a material adverse effect on CSW's consolidated results of operations and financial condition. Sale of TransoA Transok is an intrastate natural gas gathering, transmission, marketing and processing company, in January 1996, CSW announced it was exploring strategic alternatives for its investment in Transok, including a possible sale. On June 6,1996, CSW sold Transok to Tejas for approximately $890 million, consisting of $690 million in cash and $200 million in existing long-term debt that remained with Transok after the sale. A ponion of the cash proceeds was used to repay the CSW Credit Agreement related to the SEEBOARD acquisition with the remaining proceeds used to repay commercial paper bonowings. CSW and PSO do not expect the sale of Transok to have an adverse impact in its ability to secure n:tural gas in the future. Negotiations are currently in progress with third party pipelines to provide additional pipeline interconnections to other natural gas suppliers besides Transok. SWEPCO Cajun Asset Purcimse Proposal Cajun filed a petition for reorgamiation under Chapter 11 of the United States Bankruptcy Code on December 21,1994 and is cunently operating under the supervision of the United States Bankruptcy Coun for I the Middle District of Louisiana. l On October 26,1996, SWEPCO, together with Entergy Gulf States and the Members Committee, which cunently represents 8 of the 12 Louisiana member distribution cooperatises that are served by Cajun, filed tbc Second Amended SWEPCO Plan in the bankruptcy coun. Under the Second Amended SWEPCO Plan, a SWEPCO subsidiary or afnliate would acquire all of the non nuclear assets of Cajun, comprised of the Big Cajun I gas fired plant, the Big Cajun 11 coal fired plant, and related non-nuclear assets, for approximately 5780 million in cash, up to an additional $20 million to pay cenain other bankruptcy claims and expenses and en cdditionsl $7 million to acquire claim: of unsecured creditors. In addition, the Second Amended SWEPCO Pl:n provides for SWEPCO and the Cajun member c >opeu.om to eater into new 25-year power supply agreements which will provide the Cajun member cooperatives with two wholesele rate options while b 2-29
. - - - -..- -.- .- ~ -..~. - - - - - _ _ - - - .- _ - _ _
permitting the Cajun member cooperatiser, the ficsibility to acquire power on the open market when their requiremrnts exceed mutu:lly agreed upon levels of generating capicity available from SWEPCO. In addition, the cooperatives could cled, once every five years, to move from one option to the other. The Second Amended SWEPCO Plan would settle all claims and htigation in the bankruptcy case, including potentially i protracted litigation over power supply contract rights. ! The Second Amended SWEPCO Plan amends the Original SWEPCO Plan filed on April 19,1996 (as amended by the First Arnended SWEPCO Plan filed on September 30,1996) by the Members Committee, : SWEPCO and Entergy Gulf States in the bankruptcy coun. Under the Original SWEPCO Plan, SWEPCO had ! proposed to acquire all of the non nuclear assets of Cajun for approximately $405 million in cash. In addition, under the Original SWEPCO Plan, the Cajun member cooperatives would have made future payments with a
- nel present value ranging from $497 million to $$67 million to the RUS of the federal govemment, Cajun's {
largest creditor, by t' sing a portion of the cooperatives' future income from their tetail customers. ; Two competing plans of reorganization for the non nuclear assets of Cajun have been Oled with the < bankruptcy court at about the same time as the Oling of the First Amended SWEPCO Plan, one of which offers ' a higher cash bid price. Under one competing plan, Cajim's non nuclear assets would be acquired by Louisiana ; Generating Li,C, which would be owned by afullates of SEI llolding, Inc., NRG Energy, Inc. and Zeigler Coal , lloidings Company, Cajun's court appointed trustee in bankruptcy is supporting this plan as well as RUS, Cajun's largest creditor. -In addition Enron Capital & Trade Remurces Corp. and the Of0cial Comn. ,,a of Unsecured Creditors havejointly Gled a competing plan of reorganization.
- Confinnation hearings in Cajun's bankruptcy case have been postponed until March 10,1997 because a bankruptcy court ruling on January 7,1997 disqualiDed the law firm representing the Members Committee due
- to an irreco.W!able conflict between the firm's representation of both the Members Committee and Southwest Louisiana Electric Membership Corporation. The bankruptcy court postponed the confirmation hearings to :
allow the Members Committee time to obtain new counsel. At a February 24,1997 status conference, the bankruptcy court extended the resumption of full confinnation hearings until April 21,1997. Consummation of the Second Amended SWEPCO Plan is conditioned upon confirmation by the bankruptcy court, and the receipt by SWEPCO and CSW orall requisite state and federal regulatory approvals in addition to the receipt of their corresponding board approvals. If the Second Amended SWEi'CO Plan is > confirmed, CSW and SWEPCO expect initially to finance the $807 million required to consummate the acquisition of Cajun's non nuclear assets through a combination of external borrowings and internally generated funds. 1 NEW INITI ATIVES - As described in OVERVIEW, a vital part of CSW's future strategy involves initiatives that are outside of the traditional United States electric utility industry due to increasing competition and fundamental changes in this industry.-In addition, lower anticipated growth rates in CSW's core United States electric utility business combine with the aforementioned industry factors to cause CSW to pursue new initiatives. These new
; initiatives have taken a variety of forms; however, th'ey are all consistent with the overall plan for CSW to
- develop a global energy business. While CSW believes that such initiatives are necessary to maintain its competitiveness and to supplement its growth in the future, the Holding Company Act may impede or delay its ability to successfully pursue such initiatives (The foregoing statement constitutes a forward looking statement within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). See RECENT DEVELOPMENTS AND TRENDS.
3
- 2 30- -e vs. .*
- u .r,wme b w e 1.-.=.-s-m.--.--+-- ..E E- a -.' x en--- m. , - - -- ---m..n---.~.., ..-ea-,.- ,. ...- n--,.i. .-r-.A---r-er.---ea . m-- ,-,--v------e
CSIl'1:!.crI3 CSW Enerry presently owns interests in Ase operating power projects totaling 618 MW which are loc:ted in Colorado,l'Iorida andlexas. Also,Csw Energy has one 330 MW power pl:nt under construction in l exas. In addition to the projects, CSW Energy has another six projects totaling approximately 1,700 MW in various stages of development, mostly in af0liation with other developers. CSil' International ! CSW International was organized to pursue investment opportunities in EWGS and foreign utility cornpanies. CSW International currently holds inwstments in the United Kingdom, Mexico and Brar.il. In July 1996 CSW International announced a joint venture with Alpek, through a subsidiary, to build, l own and operate a 109 MW, gas. Dred cogeneration project at Alpek's Petrocci industrial complex in Altamira, ' hmaulipas, Mexico. CSW International and Alpek each will have a 50% ownership in the project, Enertek, which is expected to commence commercial operation in the Orst quaner of 1998. In December 1996, CSW International acquired a minority interest in a Brazilian electric u:ility company which serves approximately 600.000 customers in an area of approximately iI8,000 square miles. CSW International continuea to seek to expand into other countries in I stin America, Europe, Australia and Asia that meet its investment criteria. CSIl'Cornmunications CSW Communications was formed to povide communication services to the U.S. Electric Operating Compan;es, non af0liates and directly to retail customers. CSW Communications will continue to market energy management and utility management spiems to other electric companies. The company will also seek regulatory approval to provide similar services to CPL, PSO, SWEPCO and WTU. In January 1997, CSW and ICG Communications, Inc. announced a joint venture limited pannership to market telecommunications services. The new pannership, Choicecom, will be based in Austin, Texas and will develop and market telecommunications senices in the four state region of Texas, Oklahoma, Louisiana, and Arkansas. ChoiceCom initially plans to serve Aust:n and Corpus Christi,7exas with local telephone, long dist:nce and data services. At the same time, ChoiceCom will sect to daclop business opportunities in other cities in the four-state region. In addition to offering local exchange, long distance and data tn.nsmission services, ChoiceCom may expand CSW Communications' exi: ting city.to-city Ober network business depending on market I conditions. CSW Communications currently has franchises in Austin and Corpus Christi, Texas to build Ober networks and provide telecommunications services. ChoiceCom must obtain regulatory reprovals and negotiate business agreements with existing telecommunications providers before it can begin offering telecommunications services in competition with established telecommunications providers. ChoiceCom currently plans to begin offering telecommunications sen ices as soon as appropriate agreements and approvals have been obtained. EnerShop EnerShop currently provides energy services to customers in Texas. These are services that help reduce customers' operating costs through increased energy ef0ciencies and improved equipment operations. EnerShop utilites the skills oflocal trade allies in offering services that include energy and facility analysis, project management, engineering design and equipment procurement and construction, third party financing and equipment leasing, savings and performance guarantees and performance monitosing. In 1996, EnerShop secured several contracts and has bids outstanding for several additional projects in 1997. l OTu 2 31
Other l'r:t:res The CSW Services Business Ventures group pursues energy projects related to the business actwities of the U.S. Electric Operating Companies. One project, Numanco, provides stafGng services for electric utility power plants. Projects ictated to energy management systems and electric substation autornation software are also being pursued. SOUTil TEXAS PROJECT CPL owns 25.2% of STP, a two-unit nuclear power plant which is located near Day City Texas. HLP (the Project Manager of STP) owns 30.8%, San Antonio owns 28.0%, and Austin owns 16.0% of STP. STP . Unit I was placed in service in August 1988 and STP Unit 2 was placed in service in June 1989. The owners of STP are in negotiations to form the South Texas Project Nuclear Operating Company which would replace llLP as the operator and project manager of STP. From February 1993 until May 1994 STP experienced an unscheduled outage resulting from mechanical problems. The outage resulted in signiGeant rate and regulatory proceedings involving CPL, including a base rate case and fuel reconciliation proceedings as previously discussed. Unit I restarted on February 25,1994 and reached 100% power on April 8,1994 and Unit 2 resumed operation on May 30,1994 and reached 100% power on June 16,1994 Durire :.c last six mm l si of 1994, the STP units operated at capacity factors of 98.6% for Unit 1 and 99.2% for Unit 2. For a scussion of regulatory rnatters surrounding the STP outage, see NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS.
. STP Unit I was removed from service during 1996 for a scheduled refueling outage which lasted 22 days. For the year 1996, Unit I and Unit 2 operated at net capacity factors of 93.1% and 95.2%, respectis ely.
For additional information regarding STP and the accounting for the decommissioning of STP, see NOTE 1, SUMM ARY OF SIGNIFICANT ACCOUNTING POLICIES and NOTE 2. LITIGATION AND RLGULATORY PROCEEDINGS. ENVIRONMLNTAL M ATTERS The operations of the CSW System, like those of other utility systems, generally involve the use and disposal of substances subject to environmental laws. CERCLA, the federal "Superftmd" law, addresses the cleanup of sites contaminated by hazardous substances, Superfund requires that PRPs fund remedial actions regardless of fault or the legality of past disposal activities. PRPs include owners and operators of contaminated sites and transporters and/or generators of hazardous substances. Many states have similar laws. Legally, any one PRP can be held responsible for the entire cost of a cleanup. Usually, however, cleanup costs are allocated among PRPs. The U.S. Electric Operating Companies are subject to various pending claims alleging that they are PRPs under federal or state remedial laws for investigating and cleaning up contaminated property. CSW cnticipates that resolution of these claims, individually or in the aggregate, will not have a material adverse effect on CSW's or any U.S. Electric Operating Company's results of operations or Gnancial condition. Although the reasons for this expectation differ from site to site, factors that are the basis for the expectation for specinc sites include the volume t.nd/or type of waste allegedly contrit eted by the U.S. Electric Operating Company, the estimated smount of costs allocated to the U.S. Electric Operating Company and the . p rticipation of other parties. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIAll!LITIES for additional discussion regarding environmental matters. N 2 32
NEW ACCOUNTING CTANDARDS f STAS No,121 CSW adopted SFAS No.121 effective January 1,1996. The statement establishes a two-fold test for identification and quantification of an impaired asset. The adoption cf SFAS No.121 did not have a significan'. imp ct on CS%"s consolidated results of operations or Gnancial constion. Under the current regulatory environment, CSW does not expect SFAS No.121 to have a significant impact on its consol.: lated results of operation or Gnancial condition.11owever, future developments in the electric industry and utility regulation could jeopardire tb full recovery of the carrying cost of certain irrestments. Consequently, CSW is monitoring the changing conditions facing the electric utility industry. SFAS No.12.1 SFAS No.123 providas that if s'ock is granted to an employee or a non-employee in return for services provided to the company, that this stock represents compensation to the recipient. It requires the calculation of a compensation cost, but then allows the company to choose between making the charge to net income or disclosing this information in its notes to its Gnancial statements. CSW has chosen to disclose the information in the Notes to the Consolidated Financial Statements rather than making the charge to Net income. Sec NOTE
- 12. STOCK IIASED COMPENSATION PLANS for CSW's valuation of stock options for 1996 and 1995.
Under prior accounting rules, recognition of compensa: ion for the grant of stock options was not required if the stock price at the time of the grant and the price at which the employee could purchase the stock were the same. SFAS No.125 SFAS No.125 provides accounting and reporting standards for transfers and servicing of Snancial assets and extinguishment ofliabilities using a Onancial-components approach that focuses on control. An entity recognizes assets it controls and derecognizes assets when control has been surrendered and liabilities when they 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 distinct conditions are met. Likewise, a liability is only extinguished under certain distinct conditions. SFAS No.125 is effective for transfers and servicing of Dnancial assets occurring after December 31,1996, and cannot be applied prior to that date. Adoption of this standard will not have a material adveise effect on CSW's consolidated results of operations or Gnancial conoition. SFAS No.128 On March 3,1997, the FASB issued SFAS No.128, effective for Gnancial 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 believes that adoption of SFAS No.128 will not have a mv.tial effect on its cakulation of carnings per share. 1 2-31
Conschdat d Stateme~ ts if 1:cae Centroland,touth iltst Corporati.n I or the Years I nded December 31, 1996 1%5 1994 ($ in millions, escept share amounts) Operating Revenues
".LS 1.lectric $ 3,248 $ 2,883 $ 3,065 United Kinrdom 1,848 208 -
Other diversified 59 52 40 5.155 3,143 3.105 Operating Expenses and Taxes U.S. Electric fuel 1,151 1,004 1,113 U.S Electric purchased power 77 41 48 United Kingdom cost of sales 1,331 158 - Other operating 785 557 539 Maintenance 150 155 17: Depreciation and arnortit.ation 464 353 324 Tnses, other than income 178 162 176 inconxtases 224 92 179 4.360 2.522 2.550 Operating income 795 621 (55 0.her income and Deductions Mirror CWir liability amortization - 41 68 U.S. Electric reserves fo utility plant development costs, net of tax l>enclit of $33 (84) - .. Other 23 58 4) (61) 49 109 income liefore Interest Charges 734 720 664 Interest Charges Interest on long term debt 325 223 203 Interest on short term debt and other 94 101 74 419 324 277 income from ContinuinF OperatiM s 315 396 387 Discontinued Operations income from discontinued operations, net of tas of $6 for 1996,113 for 1995 and $10 for 1994 12 25 25 Gain on the sale of discontinued operations, net of tax of $72 120 - -- 132 25 25 Net income 447 421 412 Preferred stock dkidends 18 19 18 Net income for Comrnon Stock 5 429 5 402 5 394 AveraEt Common Shares Outstanding 207.5 191.7 189.3 Earnings per Share of Common Stock from Continuing Operatbns $1.43 $ 1.97 $1.95 Eamings per Share of Common Stock from Discontinued Operations 0 63 0.13 0.13 Earnings per Share of Common Stock $2 0; $2 to 52 rih Dividends Paid per Share of Common Stock 11.74 $ 1.72 S t .70 The accompanyinc notes to consolidated financial statements are an integral part of these statements. Tm 2-34
b Consolidated Statemerits cf Stockholders' Eq ity Cr: tral and South Fijst Corporation I or the Years Lnded December 3 t, 1996 Iws twa (nullions) 5 675 5 667 5 659 Coinmon Stock at lleginning of Year g l 65 8 Sale of Common Sto;L l 740 675 667 Common Stock at End of Year 610 561 518 Paid in Capital at Beginning of Year 412 49 43 Salt of Common Stock 3r,1 1,022 610 P Id in Capital at End of Yc.it 1,893 1,824 1,753 Retained Earnings at Beginning of Year 429 402 394 Net income for common stock 322 358 329 Deduct: Common stock dividends 4 1 1 Deduct, Preferred stock and other adjustments I,963 1,893 1224 Retained Earnings at frut of Yee' foreign Currency Translation and Other at lleginning of Year - 77 Net CL ep _ 77 .. .. foreign Currency Translation and Other at End of Year 5 3,802 5 3,178 5 3,052 l Total Stockholders' Equity i The accompanying notes to consolidated financial statements are an integral part of these statements. O"m 2 35
Consolidated it:Isnee Sheets CentralandSouth H'r.st Corporation As of December 31 1996 1995 (rnillions) ASSETS Tixed Assets Electric Production 5 5,830 $ 5,888 Transmission 1,538 1,484 Distribution 4,237 3,799 General . 1,318 1,209 Construction work in progress 230 346 Nuclear fuel 184 It>5 Total Electric 13,337 12,h91 Gas - 869 Other diversified 84 18 13,421 13,778
- 1. css . Accumulated depreciation and amortimion 4.940 4.76) 8.481 4.U l ?
Currect Assets Cash and temporary cash investments 254 401 National Grid assets held for sale - 100 Accounts receivable 861 1,035 Materials and supplies, at average cost 185 188 Electric utility fuel inventory, substantie!!y at average cost 102 129 Under recovered fuel costs 46 - Prepayrnents and other 85 IS6 1.533 2.039 Deferred Charges and Other Assets Deferred plant costs 509 514 Mirror CWIP asset 294 312 Other non-utility investments 347 296 Income tax related regulatory assets, net 236 253 Goodwill 1,525 1,074 Other 402 364 3.3'iT 2.813
$ 13.332 5 13.869 The accompanying notes to consolidated financial s:stements are Ln integral part of thew statements.
cpm 2-36
b Conolid. ted 11since Sheets CentralandSouth H'est Corporation As of December 3 l. 1496 1993 (millions) CAPITAll2.ATION AND LI AUlLITIES Capitalization Common stock: $3.50 par value Authorized shares: 350.'i million shares issued and outstanding: 21i.5 million shares
$ 740 $ 6';5 in 1996 and 192.9 million shares in 1995 1,022 610 Paid-in capital 1.963 1,893 Retained earnings 77 -
foreign cunency translation and other 3,178 3.802 Preferred stock 292 292 Not subject to mandatory redemption 33 34 Subject to mandatory edemption 3,914 4f.24 Long term debt 7,418 8.15) Total Capitalization
- 202 Minority Interest Cunent Liabilities 30 204 Long tern debt and prefened stock due within twelve months 364 692 Short term debt 579 646 Short term debt - CSW Credit,:ac.
76 -- Loan notes 630 595 Accounts payable 324 228 Accrued taxes 82 77 Accrued interest - 1,001 Provision for SEEBOARD acceptances
-- 43 Over-recovered fuel costs 166 113 Other 3,425 2.425 Defened Credits 2,272 2,306 Accumulated defened income taxes 291 306 investment tax credits 193 212 Other 2.756 2.824 5 13.332 5 13.869
- =- -
The accompanying notes to consolidated financial statements are an integral part of these statements-S 2-37
. . ~
,. . _ . _ .. ~ . - . - ..- - - - . - ~ . -.. - - - -- .~ - .. , ,.
? O Cc nelid:ted St: tim:nts of Ccsh Flows CentialandSouth M'est Corporation-Fo* the Years Ended December 31,-
1996 1995 1o94: (millions)- OPERATING ACTIVITIES = Net income 5 447 $ T421 S~ -412
- l Non cash items included in Net income -
. Depreciation and amortization 521 425
. 402
- Deferred income taxes and investment tax credits 62 (11) 87 Mirror CWip liability amortization - -
~
~
(41)-- (68) Reserves for_ utility plant and other project development costs 147_ - -
~ Gain on saic of subsidiary . (192) - .
Changes in Assets and 1.fabilities
- Accounts receivable (86) 29 (36)-
t
- Accounts payable 23 (32) (27)_
- Accrued tases -(14) 25 !
21 Fuel recovery -- (89) 76 16
- - - Accrued restructuring charges -
(2) (57)
' Other 56 (26) (51) ,
b 875 799- 764
' INVESTING ACTIVITIES Construction expenditures o(521) (474) (578)
- Acquisitions expenditures (1,394) - (42 l} ; (21)
CSW Energy /CSW International projects (124) 109
; Sale of National Grid asacts (115) ,
99 - Cash proceeds from sale of subsidiary 690 - .. Ober' (36) (26) (2) (1,286) (812) (716) FINANCING ACTIVITIES Common stock sold 477 ' 57 50 Proceeds from issuance oflong temi debt 437 456 199
. SEEBOARD acquisition financing 350 731 Reacquisitior/ Maturity oflong term debt
- (239) (363) ' (31) 1 Redemption of preferred stock (1) (1) (33) _
Other financing activities 67 - Change in short-tenn debt (395) (226) 153 Payment of dividends (376) (348) (3401 320 306 (2) Effect of exchange rate changes on cash and cash equivalents - (56) - - Net Change in _ Cash and Cash Equivalents (147) 293 46 ' Cash and Cash Equivalents at Beginning of Year 401 108 62 Cash and Cash Equivalents at End of Year . 5 254 5 401 '
-$- 108-
- SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized 5 356 5 301 $- 280 :
Income taxes paid i S 196 $ 77 $ 93
- The accompanying notes to consolidated financial statements are an integral pan of these statements.
2 38 7 c- 9 -# - i, t , , -- ------- -r w'
-= __ ..-. . - .-
CENTRAL AND SOUTil WEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1,
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES i l
. Nature of Operations ;
CSW is a registered holding company under the llolding Company Act subject to regulation by the SEC. CS%"s four U.S. Electric Operating Companies are alw regulated by the SEC under the Holding Company Act. The principal business of CS%"s four 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. Tney are subject to further regulation with regard to rates and other matters by state regulatory commissions as follows: CPL and WTU are subject to the Texas Commission; PSO is subject to the Oklahoma Commission; and SWEPCO is subject to the Arkansas Commission, Louisiana Commission, Oklahoma Commission and Tex:s 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 activities. CSW Energy and CSW International pursue cogeneration and other energy-related ventures; CSW Credit factors the accounts receivable of affiliated and non affiliated companies; CSW Communications pursues telecommunications projects; CSW Leasing has investments in leveraged leases and EnerShop offers energy management services. The more significant accounting policies of the CSW System are summarized below: Principles of Consolidation The consolidated financial statements include the accounts of CSW and its subsidiary companies. Use ofEstimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect 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. FixedAssets Electric fixed assets are stated at the original con 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 construction since the acquisition. 2 39
Deprecbtion Prosisions for depreciction of plant cre computed using the straight line method, generally at individual rates applied to the various classes of depreciable property. The annual average consolidated composite rates of the registrants are presented in the following table. CSH
- CI'L l'SO Sit T!*CO HTU 1996 34% 2 va. 3 6*. 3.2*; 32%
1995 34% 29% u% 12% 3.2% 1994 3.2% 3.0% 15% 3.2% 32% CPL Nuclear Decommluloning ofSTP At the end of STP's service hfe, decommissioning is expected to be accomplished using the decontamination method, which is one of the techniques acceptable to the NRC. Using this method, the decontamination activities occur as soon as possible af ter the end of plant operations. Contaminated equipment is cleaned and removed to a permanent disposal location, and the site is generally returned to its pre plant state. CPL's decommissioning costs are accrued and funded to an external trust over the expected service life of the STP units. The existing NRC operating licenses will allow the operation of STP Unit I until 2027 and Unit 2 until 2028. The accrual for decommissioning costs is an annual level cost based on the estimated future cost to decommission STP, including escalations for expected in0ation to the expected time of Jecommissioning, and is net of expected carnings on the trust fund. CPL's portion of the costs of decommissioning STP were estimated to be $85 million in 1986 dollars based on a site specinc study completed in 1986. CPL is recovering these decommissioning costs through rates based on the service life of STP at a rate of 54.2 million per year. The $4.2 million annual cost of decommissioning is renceted on the income statement in other operating expense. Decommissioning costs are paid to an irrevocable external trust and as such are not renected on CPL's balance sheet. At December 31, 1996, the trust balance was $34.7 million. In August 1995, CPL received a new decommissioning study updating the cost estimates to decommission STP that indicated that CPL's share of such costs would increase from $85 million, as stated in 1986 dollars, to $258 million, as stated in 1995 dollars. The increase in costs occurred primarily as a result of extended on-site storage of high level waste, much higher estimates oflow-1: vel waste disposal costs and increased labor costs since the prior study. These costs are expected to be incurred during the years 2027 through 20C. While this is the best estimate available at this time, these costs may change between now and w hen the funds are actually expended because of changes in the assumptions used to derive the estimates, including the prices of the goods and services required to accomplish the decommissioning. Additional studies will be completed periodically to update this information. Based on this projected cost to decommission STP, Cp.L estimates that its annual funding level should increase to $8.2 million. CPL has requested this amount as part ofits cost of service in its current rate filing. Other parties to the proceeding have filed annual projections ranging from 51.4 million to 58.2 million. The presiding AUs ir, CPL's rate case Gled a proposal for decision with the Texas Commission recommending a decommission annual funding of $6 million. CPL expects to fund at the level ultimately ordered by the Texas Commission although CPL cannot predict that level. Historically, the Texas Commission has allowed full recovery of nuclear decommissioning costs. For further information on CPL's current rate filing, see NOTE 2. LITIGATION AND llEGULATOlW PROCEEDINGS The FASB is currently reviewing the utility industry's accounting treatment of nuclear and certain other plant decommissioning costs. The FASB has preliniinarily concluded that decommissioning costs should be accounted for at the present salue as a liability, with a corresponding asset in utility plant, rather than as a component of depreciation. An exposure draft regarding this matter was issued in February 1996. OrIn 2 40 l
Electric Reventes c:d Furt The U.S. Electric _ Operating Companies record revenues based upon cycle billings. Electric servicel provided subsequent to billing dates through the end of each calendar month are accrued for estimatedl revenues in accordance with indastry standards.- 4
~
CPL, SWEPCO and WTU recover retail fuel costs in Texas as a fixed component of base rates - whereby over recoveries of fuel are payable to customers and under recoveries may be billed to custorvers a Texas Commission approval. The cost of fuel is charged to expense as consumed. PSO recovers f uel costs in Okithorna and SWEPCO recovers fuci costs in Arkansas and Louisiana through automatic fuel recovery mtchanisms. The application of these mechanisms _ varies byjurisdiction. See NOTE 2. LIT 1GATION AND
- HEGULATORY PROCEEDINGS, for further information about fuel recovery.
CPL, PSO and WTU recover fuel costs applicable to wholesale customers, which are regulated by the FERC, through an automatic fuel adjustment clause. SWEPCO recovers fuel costs applicable to wholesale - customers through formula rates. cpl amortizes d'irect nuclear fuel costs to fuel expense on the basis of a ratio of the estimated energy . used in the core to the energy expected to be derived from such fuel assembly over its life in the core. In
- addition to fuel amortization, CPL also records nuclear fuel expense as a result of other items, including spent
-- r uel disposal fees assessed on the basis of net KWils sold from STP and DOE special assessment fees for '
contamination and decommissioning of the enrichment facilities on the basis of prior usage of enrichment ices.
- Accounts Receivable .
CSW Credit, as a wholly owned subsidiary of CSW, purchases, without recourse, the billed and
- unbilled accounts receivable of the U.S. Electric Operating Companies, cenain non affiliated companies and, prior to its sale in June 1996, Transok.
Regulatory Assets and Liabilities For their regulated activitics, the U.S. Electric Operating Companies follow SFAS No. 71, which-defines the criteria for establishing regulatory assets and regulatory liabilities. Regulatory assets represent prot.able future revenue to the company associated with certain costs which will be recovered from customers through the ratemaking process. Regulatory liabilities represent probable future refunds to customers. The regulatory assets are currently being recovered in rates and the unrecovered asset balances are included in the table below. ~ PSO SWEPCO- nTU CSW CPL (millions) (thousands) As of December 31,1996 Regulatory Assets -
$509 $486.978 S- 5-- $22,365 Deferred plant costs -
299 298,708 - Mirror CWIP asset Income tax related regulatory assets. net 236 33!,226 --- - - 46 30.965 - - 14,973 Deferred restructuring and rate case costs ' 2 - 2,448 -- - Deferred storm costs l Demand side managemeat costs 15 7,070 8.278 ~ -- -
- 3,325 -- -
OPEBs 3 11- 4,866 - 4,650 - 367 Other - 51,163.813 518.701 $~ . - $37,703
. 51.12 t Regulatory Liabilities .
SI6,918 5-. - $- $46,007 136.106 - Income tax related regulatory liabilities, net - w L
l C.\ H ' cpl. I'w S u l.'Pc0 MTU l (nnlhons) its d4 l As of Decemoer 31,1995 Regulatory Assets Defernd plant costs $514 5488.047 $~ $ $26.092 Mirror CWIP asset 312 311.804 .. .. Income tax related regulatory assets, nel 253 346,993 - - Defened restructunng and rate case costs 46 28.025 . -- 17.577 Defened stonn costs 4 - 3,623 .. .. Demand side management costs 14 7,465 6,419 .. - OPGs 7 - 4.008 2,794 - Other Ii 5,3 k4 4,798 - 431
$1,161 51,157,718 $ 18,848 $2,794 $44,100 Itegulatory 1 iabihties income tax related regulatory liabilities, net $.- $~ $41,820 $37,363 $14,464 in accordance with orders of the Texas Conmission, CPL and WTU deferred carrying costs, as well as operating costs, depreciation and tax costs incurred for STP and Oklaunion, respectively. These deferrals were for the period beginning on the date when the plants began cormnercial operation until the date the plants were included in rate base. CPL is an.ortizing and recosering these deferred costs through rates over the life of the plant. WTU is amortiang and recevering such costs over seven yeart.. In accordance wi% Texas Commission orders, CPL previousl,s recorded a Mirror CWIP asset, which is being amonized over the life of STP. For further information regarding the deferreo plant costs at CPL and WTU, reference is made to NOTE 2.
1.lTIGATION AND REGULATORY PROCEEDINGS. SEEBOARD Acquisition The acqui ition of SEEBOARD was accounted for as a purchase combination. An allocation of the purchase price has been performed and is reDected in the consolidated Gnancial statements. This included an allocation of approximately $1,0 billion to goodwill at December 31,1995. The goodwill is b:ing arnonized on a straight-line basis over 40 years. The unamortized balance of the SEEBOARD goodwill at December 31, 1996 was $1,5 billion including goodwill not recorded at December 31,1995 prior to completion of the SEEBOARD purchase in April 1996. CSW evaluates whether circumstances have occurred that indicate the remaining useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. National GridAssels Pursuant to a December 11,1995 distribution by SEEBOARD, CSW (UK), as a shareholder of SEEBOARD, received approximat:ly 32.5 million shares of Naaonal Grid con mon stock On February 2, 1996, all of the shares of National Grid that CSW (UK) plc held were sold for appmximately $99 million Foreign Currency Translation The financial statements of the CSW Investments Group, which are included in CSW's consolidated financial statements, have been translated from British pounds to U.S. dollars in accordance with SFAS No. 52. All balance sheet accounts are translated at the exchange rate at the end of the period and all income statement items are translated at the avenge exchange rate for the applicable period At December 31,1996 the cunent exchange ratt ovas approximately II.00r51.71, and the average ewhange inte for the twelve month period ended December 31,1996 was approximately fl.00=51.56. All resu,*ing translation adjustments are recorded directly to Foreign cunency translation and other on CSW's consolidved balance sheets. Cash Dow statement items are translated at a combination of average, historical and cunent exchange rates. The non. cash impact of the changes in exchange rates on cash and cash equivalents, resulting 1 'om the translation ofitems at the different exchange rates, is shown an CSW's Consolidated Statements if Cash Flow s in Effect o' exchange rate changes on cash and cash equivalents.
@ l 2--!2
Stateme:Is cf C3h Fl:ws
' Ccsh equivalents tre considered to be highly liquid debt instruments purch: sed with a maturity of three months or less. Accordingly, temporary cash investments are considered cash equivalents.
Reclauljication Certain financial statement items for prior years have been reclassiGed to conform to the 1996 presentation. See NOTE 14. TilANSOK DISCONTINUED Ol'EllATIONS for infonnation related to the classi6 cation of hansok actinties.
- 2. LITIGATION AND REGULATORY PROCEEDINGS Termination of El Paso 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. On June 9,1995, following CSW"s notincation that it was terminating the Merger Agreement, El Paso Sted a suit against CSW seeking a $25 million teimination fee from CSW, additional unspecined damages, punitive damages, interest as permitted by law and certain other costs. On June 15,1995, CSW Gled suit against El Paso seeking a $25 million termination fee from El Paso due to lil Paso's breach of the Merger Agreement, at least $3.6 million in rate case expenses incurred by CSW on behelf of El Paso related to state regulatory rnerger proceedings and a declaratoryjudgment that CSW properly terminated the Merger Agreement. On June 14,1996 CSW Gled an amended complaint seeking a first priority administrative expense claim of $50 million from El Paso based upon El Paso's breach of the Merger Agreement.
The United States Bankruptcy Coun for the Western District of Texas, Austin Division, consolidated the El Paso suit and the CSW suit into one adversary proceeding. CSW is the named plaintitT in the consolidated adversary proceeding. A two week non jury trial of the case was completed on January 30,1997, end a decision is expected in the case in the nrst quarter of 1997. Although CSW believes that it has substantial defenses to El Paso's claims and intends to defend ag inst El Paso's claims and pursue CS%"s claims vigorously, CSW cannot presently predict the outcome of the lawsuit. Ilowever,if the lawsuit is decided adversely to CSW,it could have a material adverse effect on CSW's consolidated results of operations and financial condition. CPL Rate Review On November 6,1995, CPL Gled with the Texas Commission a request to increase its retail base rates by $71 million and reduce its annual retail fuel factors by $17 million. The net effect of these proposals would result in an increase of $54 million, or 4.6%, in total annual retail revenues based on a test year ended June 30, 1995. CPL's Gling also sought to reconcile $229 million of fuel costs incurred during the period July 1,1994 through June 30,1995. CPL's previous request to reconcile fuel costs from March 1,1990 to June 30,1994 in Docket No.13650 was consolidated with the current rate review, if the requested increase and other adjustments in rate structure are approved, CPL will commit not to increase its base rates prior to January 1, 2001, subject to certain force majeure events. On April 30,1996, CPL implemented new fuci factors that will lower fuel costs to its retail customers by $25 million annually. The lower fuel factors result p:imarily from the projected decline in CPL's fuel costs during the twel e-month period following the implementation of the new factors. On May 9,1996, CP' placed a $70 million base rate increase into effect under bond. The bonded rates are subject to refund based on the Gnal order of the Texas Commission. When combined with the fuel factor reduction, the net result is an increase in annual retail revenues of $45 million, or 3.8%. b 2-43
On May 10,1996, CPL and other ptrties to the fuel reconciliation phase of the current rate review filed the CPL 1946 fuel Agreement with the Tesas Commission that reconciles CPL % fuel costs through June 1995. A Onal order implementinF the settlement was issued on June 28,1996, approving a one time fuel refund of
$23 million that was refunded to customers in July 1996. As a condition of the settlement, CPL agreed not to seek recovery of $6 million of fuel and fuel related costs incurred during the reconcdiation period. The additional amount of the refund resulted from an over recovery of fuel costs during the reconciliaton period and did not have a material impact on CPL's results of operations or financial condition.
In a preliminary order issued December 21,1995, the Texas Commission expanded the scope of the rate review to address certain competitive issues facing the electrie utility industry. CPL made a supplemental filing on April 1,1096, addressing a recommended model for restructuring the electric industry within ERCOT. In addition, the supplemental Cling included: (i) estimates of CPL's potential stranded costs based upon various possible structures of the electric industry and under several energy price scenarios; and (ii) a recommendation that the potential stranded costs not be quantified in rates until any changes in the electricity market and structure of utilities in Texas are known. In this supplemental Gling, CPL estimated its potential stranded costs could range from apptoximately zero to approximately $3.7 billion in a worst-case scenario. The range is dependent upon a number of presently unknowa factors, including the extent to which CPL is compensated for its reasonable costs and the extent and timing of any implementation of retail competition. CPL has Gled rebuttal testimony that challenges positions taken by the Texas Commission staff and other parties intervening in this case. CPL's testimony challenges the Texas Commission staff's proposals as unreasonable ano contrary to current law and regulatory policy. While the Texas Commission staff reported the use of a " point estimate" of $850 million for potentially stranded costs, their testimony actually describes their range of potential strandt.d costs as very uncertain and having a range from $200 million to $2 billion. The Texas Commission staff subsequently revised its " point estimate" to 51.069 billion and its range from $223 million to $2.9 billion. In addition, the Texas Commission staff recommended:(i) a nuclear performance standard that would penalize CPL unless it cperates its nuclear units better than 75 percent of the U.S. nuclear industry; (ii) a fuel-recovery mechanism tha, is based or. prices in an undevevped energy market; and (iii) a one-sided cap on CPL's carnings that effectively w ents CPL from realizing its authorized level of earnings. A proposal for decision was issued on January 21,1997 by the ALJs hearing the case. The proposal for decision recommends an increase in annual revenues of 57.2 million, the net result of a recommended base rate reduction of $5.2 million plus increased revenues collected through two st.rcharges. The $7.2 million revenue rate change is made up of the following components: (i) a $10.3 million reduction in KWil-related revenues; (ii) an increase of $5.1 million in miscellaneous revenues (customer connect charges, insuf0cient check charges and other fees);(iii) a $4.3 million annual surcharge applied over three years to recover rate case expenses; and (iv) annual recovery of $8.1 million for demand-side management .xpenditures through a separate surcharge. A factor contributing signi0cantly to the difference between the $71 million retail base rate increase eriginally requested by CPL and the ALJs' proposal is the recommended reducti.m in CPL's return on equity 1:om 12.25% to 10.9% resulting in a reduction of $31 million in CPL's requested base rate increase. The ALJs' decision also recommends no change in the method used by CPL to recover the capitalized costs associated with CPL's 27 2% owntrship interest in STP. The ALJs have recommended that the Texas Commission reject CPL's regnest to change the method of recovering STP deferred accounting costs from a mortgage amortization methodology to a straight-line amortization methodology. Rejection of this request would reduce CPL's request for rate relief by $14 million. The ALJs also recommended that CPL's current depreciation rates be decreased '?y 58.8 million a year and that the Texas Ccmmission deny CPL's reques: for a 53.6 million increase for its catastrophe reserve. The proposal for decision also addressed the competitive issues raised in the Texas Commission's preliminary order. The ALJs determined that, under current law, the Texas Commission does not have VM 2.u
authority to implement the eucle:r perfornunce st:ndard, fuel-recos cry mechanistn, or carnings cap proposed by the lees Commission staff. Howev r, the ALJs det:rmined th:t with legislative authorization, it could be cppropriate to implement a nuclear performance standard and attemative fuel-recovery mechanism for CPL. The ALJs also detennined that under various structures of a future competitive electric utility industry, CPL could have potentially stranded costs from $30 million to $1.718 billion. The ALJs stated that CPL': totentially stranded costs will depend on the structure of the industry in the future and that recovery of these c asts might not he required by law under certain industry structures. A final order from the Texas Commission is expected in March 1997. CPL's management cannot predict the ultimate outcome of CPL's rate case, if CPL ultimately is unsuccessful in obtaining adequate rate relief, CPL and CSW could experience a material adverse effect on their te sults of operations and financial condition. CPL i995 Agreement On April 5,1995, CPL reached an agreement in principle with other parties to pending regulatory proceedings involving base rate, fuel and prudence issues relating to an ( utage experienced at STP during 1993 and 1994. On May 16,1995, CPL filed the CPL 1995 Agreement with the Texas Commission. Pursuant to the CPL 1995 Agreement, base rate refunds, fuel refunds and the reduction of CA's feel factors were implemented during the summer of 1995. Under the CPL 1995 Agreement, CPL provided customers a one-time base rate refund of $50 million, in addition, CPL refunded approximately $30 idtlion in over recovered fuel costs through April 1995. Furthermore, CPL did not charge customers for $62.25 million in replacement pov.cr costs and related interest primarily associated with the 1993-1994 STP outage. The CPL 1995 Agreement did not result in any ongoing change in base rate levels and provided that there would be no new rate review requests filed prior to September 28,1995. CPL also reduced its fuel factors, effective in July 1995, by approximately $55 million on an annual basis due to projections oflower fuel costs, llearings on the CPL 1995 Agreement were held on July 19,1995, and the final written Texas Commission order approving the CPL 1995 Agreement was received on October 4,1995. Details of the items in the CPL 1995 Agreement and the total 1995 camings impact for CPL, including certain accounting provisions, are set forth in the following table. I're-tas After tax (milhons) Base rate refund $(50 0) 1(32.5) Fuct disallowance (62.3) (40 5) Wholesale fuct rcfund (3.2) (2.1) Current flowback of excess deferred federal income taxes 34 3 34.3 Capitalization of previously expensed restructunng and rate case costs 27 6 17.9 Recognition of factoring income 16.1 10 5 Amortaation, interest and other (6.6) (4 4) CPL Deferred Accounting By orders issued in 1989 and 1990, the Texas Commission authorized CPL to defer certain STP Unit I and Unit 2 costs incurred between the crimmercial operation dates of those units and the effective date of rates reflecting the operation of those units. Upon appeal of the 1989 CPL order, and a related order involving another utili:y, the Supreme Court in 1994 sustained deferred accounting as an appropriate mechanism for the Texas Commission to use in preserving the financial int:grity of CPL, but remanded CPL's case to the Court of Appeals to consider certain substantial evidence points of error not previously decided by the Court of Appeals. On August 16,1995, the Cour ot \ppeals rendered its opinion in the remand proceeding and affirmed the Texas Commission's order in all respecto Offs 2-45 _ _ _ _ _ _ _ _ _ l
Hy orders issued in October 1990 and December 1990, the Texas Commission quantiGed the STP Unit 1 and Unit 2 deferred accounting costs and authorized the inclusion of the amortization of the costs and associated return in CPL's retail rates. These lexas Commission orders were appealed to the Travis County i District Court where the appeals are still pending. Language in the Supreme Court's opinion in the appeal of the deferred accounting authorization case suggests that the appropriateness et including deferred accounting i costs in rates charged to customers is dependent on a Gnding in the first case in which the deferred STP costs are recovered through rates that the deferral was actually necessary to preserve the utility's financial integrity. If in the appeals of the October 1990 and December 1990 rate orders, the courts decide that subsequent review under the financial integrity standard is required and was not made in those orders, such rate orders would be remanded to the Texas Commission for the purpose of entering findings applying the financial integrity standard. Pending the ultimate resolution of CPL's deferred accounting issues, CPL is unable to predict how its deferred accounting orders will ultimately be resolved by the Texas Commission. If CPL's deferred accounting matters are not favorably resolved. CSW and CPL could experience a material adverse effect on their respective results of operations and financial condition. While CPL's management is unable to predict the ultimate outei me of these matters, management believes either that CPL will receive approval of its deferred accounting amounts or that CPL will be successful in renegotiation of its rate orders, so that there will be no material adverse effect on CSW's or CPL's results of operation or financial condition. CPL FuelSurcharge On January 3,1997, CPL filed with the Texas Commission an Application for Authority to implement an increase in fuel factors of $34.4 million, or 15.4% on an annual ba.<s. Additionally, CPL proposed to implement a surcharge of $24.3 million, including accumulated interest, over a 12 month period. CPL requested to implement the revised fuel factors by February 28,1997, and to commence the surcharge by April 30,1997. On January 24,1997, CPL filed revised schedules reflecting a revised surcharge of $23.4 million, including accumulated interest. On February 10,1997, CPL filed a Stipulation with the Texas Commission which would surcharge customers $23.4 million including interest over a period not to exceed twelve months and coordinate the surcharge with any refund obligation in Docket No.14965. Additionally, the propose: fuel factors would be implemented in March 1997 resulting in an increase in fuel revenue of approximately $29.4 million , or 13.2% on an annual basis. An order granting interim approval of the stipulated fuel factors was issued February 20,1997, allowing a March 1997 implementation of the fuel factors. CPL CivilPenalties in October 1995, the NRC notified IILP of a Notice of Violation and proposed penalties totaling
$160,000 related to events that occurred at STP in May 1992. The Notice of Violation and penalties reflect the NRC's belief that certain STP employees were terminated as a result of raising safety concerns with the NRC.
IILP paid the penalties in 1996. In September 1996, the NRC notiGed llLP of a Notice of Violation and proposed penalties totaling
$200,000 related to events that occurred at STP in 1991 and 1994. The Notice of Violation and penalties reflect the NRC's belief that certain contractor employces working at STP were discriminated against by their employers as a result of raising safety concerns with the NRC. IILP paid the penalties in 1996.
CPLi share of these penalty payments is 25.2% reflecting its ownership interest in STP. CPL Nuclear Insurance Claims in 1994, CPL filed a claim under its NEIL 1 policy relating to the 1993-1994 outage at STP Units 1 and
- 2. NEIL formally denied CPL's claim on November 21,1995. On April 9,1996, CPL filed an action in state district court in Corpus Christi, Texas, against NEIL and Johnson & Higgins of Texas,Inc., the former insurance broker for STP, seeking recovery under the policy and other relief. NEIL responded by filing a suit against CPL on April 16,1996, in the United States District Court for the Southern District of New York O'iiir 2-46
seeking a dect:ratoryjudgment to enforce an crbitration provision contained in the policy. On May 24,1996, the New York court ordered the dispute, including the issue of whether the arbitration provision is enforceable, to arbitration and r,tayed the Texas proceeding. NEIL also canceled CPL's current'NEIL i policy effective July 31,1996. NEIL also filed a claim in arbitration seeking a determination that NEIL properly terminated CPL's coverage and that CPL has caused NEIL damages by opposing NEIL's attempt to compel arbitration and seeking recovery of NEIL's attomeys' fees. On June 21,1996, CPL filed a notice of appeal of the New York court's order in the United States Court of Appeals for the Second Circuit. Subsequently, CPL and NEIL agreed to dismiss all litigation between them concerning CPL's claim for NEIL (overage. CPL and NEll also agreed to submit their disputes over coserage to a non-binding, neutral evaluatior process, although both CPL and NEIL have reserved the right to take their dispute to binding arbitration. CPI and NEIL also agreed that CPL's NEIL 1 policy would be reinstated. Evidentiary hearings were held by tN neutral evaluator in February 1997. A Onal oral argument is scheduled to be held before the neutral evaluator on April 4,1997. CPL intends to assert its rights to recovery under the NEIL I policy vigorously, but cannot predict the ultimate outcome of thh, matter. CPL's management believes that the resolution of this matter will not have a material adverse effect on CSW's or CPL's results of operations or nnancial condition. CPL Industrial Road and Industrial Aterals Site Three suits naming CPL and others as defendants relating to a third-party owned and opernted site in Corpus Christi, Texas formerly used for commercial reclamation of used electrical transfonners, lead acid batteries and other scrap metals, are currently pending in federal and state court in Corpus Christi, Texas. PI:intiffs' cornplaints seek damages for alleged property damage and health impainnent as a result of operations on the site and cleanup activities. Management cannot predict the outcome of these suits. Ilowever, management believes that CPL has defenses to the plaintiffs' complaints and intends to defend the suits vigorously. Management also believes that the ultimate resolution of these matters will not have a material I adverse effect on CSW's or CPL's results of operations or Unancial condition. PSO Rate Review On July 19,1996, the Oklahoma Commission staff filed an application seeking a review of PSO's carnings and rate structure. The review is being initiated to investigate the potential impact on PSO's rates from both the sale of Transok and PSO's restructuring efforts as well as PSO's improved financial results. Although rate reviews do not have specine time limitations, a schcoale has been established for PSO's response. In accordance with the established schedule, PSO filed a psckage of Anancial information with the Okl .homa Commission staff on November 1,1996, and cost of servic.: and rate design testimony on January 10,1997. A final order from the Oklahoma Commission is expected in the fall of 1997. PSO's management cannot predict the ultimate outcome of PSO's rate case, although management believes that the ultimate resolution will not have a material adverse effect on PSO's or CSW's consolidated results of operations or financial condition. However, if PSO ultimately is unsuccessful in reafGrming adequate rates. PSO and CSW could experience a material adverse effect on their consolidated results of operations and financial condition. On January 14,1997, the Oklahoma Commission approved a joint settlement which provides that all bills rendered beginning with PSO's June 1997 billing cycle shall be considered interim rates subject to refund I in the event that the permanent Onal order grants less than the current revenue produced by the existing rates. 1 i PSO Gas l~ransportation and Fuelblanagement Fees An order issued by the Oklahoma Commission in 1991 required that the level of gas transportation and fuel management fees, paid to Transok by PSO, pennitted for recovery through the fuel adjustment cla' e be reviewed in PSO's 1993 rate proceeding. This portion of the 1993 rate review was subsequently bifurcated. In March 1995, an order was issued by the Oklahoma Commission approving an agreement which allows PSO to recover opproximately $28.4 million of transportaJon and fuel management fees in base rates using 1991 detenninants and approximately $1 million through the fuel adjustment clause. The agreement also requires the phase-in of competitive bidding of natural gas transportation requirements in excess of Iti5 Mmef/d beginning in 1998. Oh 2-47
PSO Gas Purchase Contracts PSO has been named defendant in cornplaints Gled in federal and state courts of Oklahoma and Texas in 1%4 through 1996 by gas suppliers alleging ch.ims arising out of certain gas purchase contracts. The plaintiffs .eek relief through the filing dates as well as attorneys' fees. To date, complaints representing approximately fI I million in claims wcre settled. Remaining complaints currently total approximately
$100,000 in claimed actual damages. The settlements did not have a material effect on PSO's consolidated resultr, of operations or financial condition.
PSO Burlington Northern Transportation Contract in June 1992,'SO Gled suit in the United States Dhtrict Court for the Northern District of Oklahoma agahist Burlington Nonhern seekin declaratory relief under a long-term contract for the transportation of coal. In July 1992, Burlington Nonhern areted counterclaims for unspecified damages against PSO alleging that PSO breached the contract. In December 1993, PSO mnended its suit against Burlington Northem seeking damages and dechratory rehef under federal and state antitrust laws. In December 1995, PSO and Burlington Northern reached a cornpromise settlement of all outstanding claims and counterclaims, and the action was dismissed with prejudice. The settlement did not have a material adverse effect on PSO's consolidated results of operations or Snancial condition. PSO Burlington Northern Arbitration in May 1994, in an arbitration related to the Burlington Northem coal transportation contract described above, an arbitration panel made an award in favor of PSO concerning basic transportation rates under the coal transponation contract and concerning the contract mechanism for adjustment for future transportation rates. This arbitration award was then the subject oflitigation in the United States District Couns for the Northern Districts of Oklahoma and Texas and the United States Court of Appeals for the Tenth Circuit. In December 1994, the United States District Court for the Northern District of Okiahoma entered judgment for PSO con 6nning the arbitration award and granting PSO a $16.4 million moneyjudgment. In December 1995, this ; litigation was settled as part of the compromise <citlement of the related transportation contract litigation I descrioed above. Under the settlement, that portion of the district court'sjudgment panting PSO a $16.4 million moneyjudgment was released and satis 6ed of record, and that ponion of thejudgment confinning the arbitration award as to basic transportation rates for the balance of the contract term and the mechanism for adjustment of future transportation rates became final and is in full force and effect. 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 plaintifft suffered personal injug and fear future injury as a result of contamination by PCBs from a transformer malfunction that occurred in April,1982 at the Page Belcher i ederal 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. Management believes that PSO has defenses to the remaining complaints and intenJs to defend the suits vigorously. Moreover, management beheses that the remaining claims are covered by insurance. Management also believes that the ultimate resolution of the remaining lawsuits will not have t. material adverse effect on CSW's or PSO's consolidated results of operations or financial condition. PSO Ash Creek CoalMine Reclamation In August 1994. PSO received approval from the Wyoming Department of Environmental Quality to begin reclamation of a coal mine in Sheridan, Wyoming. owned by Ash Creek, a wholly owned subsidiary of PSO. Ash Creek recorded a 53 million liabihty in 1993 for the estimated reclamation costs and subsequently accrued an additional $500.000 in 1995. Actual reclamatio. work was completed in August,1996, at a total cost of $3.6 million. Su veillance monitoring will continue for ten years after final reclamation. Management believes that ultimate resolution of this matter will not have a material adverse effect on CSW's or PSO's consolidated results of operations or financial conditiott OTs 2 -18
\ PSO S:cd Spel:gVGr:ndfield, Oki:homs Sites in 1989, PSO investigated a Sand Sptmps, Oklahoma PCB storage facihty and found potential PCII contimination. A clean-up plan of the facility was approved by the EPA and clean-up of the facility began in Nosember 1994. In October 1996. EPA Gled a complaint against PSO alleging PSO failed to comply with provisions of the Toxic Substances Contiol Act. The complaint has three counts, two of which penain to the
. Sand Springs facility and the third dealing with a substation in GrandGeld, Oklahoma. The EPA alleges improper disposal of PCBs at the Sand Springs site due to the length of time between discovery of the contamination and the actual clean up at the site. The complaint at the Grandueld site alleges failure to date PCil articles at the site. The total proposed penalty for the three counts is $479,500 which has been accrued by PSO. PSO has Oled a response to the complaint and is currently awaiting an answer from the EPA.
Man .yement cannot predict the outcome of this matter, llowever, management believes that PSO has defenses to the EPA's claims and intends to defend the matter vigorously Management also believes that the ultimate resolution of this matter will r.ot have a material adverse eft. on CSW's or PSO's consolidated tesults of operations or financial condition. Sil'EPCO Fuel Factor Proceeding On October 31,1996, SWEPCO Gled with the Texas Commission an Application for Authority to implement un Interim Surcharge of Fuel Cost Under Recoveries. SWEPCO proposed to surcharge its customers approximately $10.2 million which included additional interest through the end of the surcharge period. On December 20,1996, SWEPCO Oled a motion for authorization to withdraw its above referenced application and to carry over the under-recovered halance to the fuel reconciliation nroceeding SWEPCO is required to initiate by June 30,1997. On December 30,1996, the Texas Commissio i issued an order approving SWEPCO's motion for wi9.drawal. On December 31,1996, SWEPCO had a Texas,;urisdictional under-recovered fuel balance of approximately $10.5 million, including accumulated interest. SWEPCO Durlington Northern Transportation Contract On January 20,1995, a state district court in Dowie Coimty, Texas, entered judgment in favor of SWEPCO against Burlington Northern in a lawsuit regarding rates charged under two rail transportation contracts for delivery of coal to SWEPCO's Welsh and Flint Creek power plants. The court awarded SWEPCO approximately $72 million covering damages for the period from April 27,1989 through September 26,1994, post judgment interest and attorneys' fees and granted cenain declaratory relief requested by SWEPCO. Burlington Northern appealed the state district court's judgment to the Texarkana, Texas Court of Appeals, and on April 30,1996, that cour reversed the judgment of the state district court. On October 14, 1996. SWEPCO Oled an application w4h the Supreme Court to grant a writ of error to review and reverse the judgment of the Texarkana, Texas Court of Appeals. This application is now pending. If TU FuelSurcharge On February 24,1997, WTU Oled with the Texas Commission an Application for Authority to implement an increase in fuel factors of $4.2 million, or 4.2% on an annual basis Additionally, WTU proposed to implement a surcharge of $133 million, including accuniulated interest, over a twelve month period. WTU requested to i uplement the revised fuel factors in conjunction with the May 1997 billings, and to commence the surcharge in conjunction with the June 1997 billings. An order in this proceedmg is anticipated m early May 1997. If TU 1995 Stipulati,m and Agreement WTU has been the subject of several pending regulatory matters, including the following: (i) a retail rate proceeding and fuel reconciliation before the Texas Commission in Docket No.13369,(ii) Writ of Error to the Supreme Court review of WTU's 1987 Texas rate case in Docket No. 7510; and (iii) the Texas 05its 2-49 i I
Commission's proceeding o, remand in D dr No.13949 regarding deferred cecounting treatment for Oklaunion Power Station Unit No, I originally authorized in the Tex s Commission's Dockei No. 7289. On September 22,1995, WTU, along with other major parties to the above described matters, Oled 4 with the Texas Comm.ssion a joint stipulation and agreement to resolve all of these matters. "Ihe WTU 1995 - Stipulation and Agreement is a uniGed package that included:(i) a retail base rate reduction of approximately
$13.5 million annually starting with WTU's October 1995 revenue month billing cycle;(ii) a $21 million retail refund which was not attributed to any speciGc cause but was inclusive of all claims related to the three above described litigation and regulatory matters and included the effect of the rate reduction to October 1,1994;(iii) ,
a reduction of fixed fuel factors by approximately 2%;(iv) various rate and accounting treatments including a - reasonable return on equity for retail operations of 11.375%; and (v)'a retail base rate freeze until October 1, 1998, subject to certain force majeure provisions.
' On' November 9,1995, the Texas Commission rendered a fmal order that implemented thejoint :
stipulation and agreement, ending the rate proceeding and fuel reconciliation in Docket No.13369 and the . remand, designated Docket No.13949, to the Texas Commission by the Supreme Court for the deferred accounting treatment of Okhunion Power Station Unit No.1 originally Luthorized by the Texas Commission in Docket No. 7289. The Onal oido also set into motion the actions required to seek a remand of the appeal of Docket No. 7510 to the Texas Commission to implement a fmal order consistent with the WTU 1995 Stipulation and Agreement. On December 8,1995, all parties to the appeals Gled ajoint motion with the i Supreme Court and, on December 22,1995, the Supreme Court approved the joint motion to withdraw and dismissed the case.- The Court of Appeals issued a mandate on April 15,1996, directed to the Travis County District Court, that permitted the case to be remanded back to the Texas Commission. On May 23,1996, the Texas Commission assigned it a new proceeding for docketing purposes, Docket No.15988. A prehearing on Docket No.15988 was held on June 24,1996 where parties to Docket No.15988 discussed with the Al) ajoint motion Gled with the AlJ by the parties on June 21,1996 that proposed to adopt a fmding to implement the last outstanding element related to the WTU 1995 Stipulation and Agreement in Docket No.13369, WTU's settled i rate case, On Octoh.r 4,1996, the AIJ issued a proposed order that is fully consistent with the terms of the , WTU 1995 Stipulation and Agreement. The Texas Commission entered a fmal order in Docket No.15988 ' approving this agreement on October 28,1996. The WTU 1995 Stipulation and Agreement is expected to impact %TU's results of operations for the next several years. Details of the items with significant camings impact for 1995, including certain accounting treatments, are set forth in the following table. Pre tax After tax (milhons) Refund to retail customers $(21.0) $(13.7) ' Effect of retail rate reduction . (2 4) (1.6) Current flowback of property related excess 4 deferred federalincome taxes 69 6.9 Five year flowback of nim-property related excess deferred federal income taxes 0.1 0.1 Capitalization and amortization of previously
- expensed restructuring cosu !23 8.2 Other amortiration (0.2) (0.1)
Other one time items 1.0 0.7 The WTU 1995 Stipulation and Agreement also eliminated several signincant 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.
.2 50
Other The Registrants art party to various other legal claims, actions and complaints arising in the nortnal
- course of business. Managen ent does not expect disposition of these matters to have a material adverse effect on the Registrants' results of operations or financial condition.
- 3. COMMITMENTS AND CONTINGENT .
LIABILITIES -
. e . ,
Construction and Capital E1 penditures
-It is estimated that CSW, including the U.S. Electric Operating Companics, SEEBOARD and other div:rsified operations, will spend apprnximately $539 million in capital expenditures (but excluding capital th:t may be required for acquisitions) during 1997. Substantial commitments have been made in connection with these programs.
CPL-- $120 million PSO. $84 million SWEPCO- $118 million WTU $33 million 4 Fuel Commitments To supply a portion of their fuel requirements, the U.S. Electric Operating Companies have entered into various commitments for the procurement of fuel. SWEPCO Henry W. Pirkey Power Plant in connection with the South Hallsville lignite mining contract for its Henry W. Pirkey Power Plant, SWEPCO has agreed, under certain conditions, to assume the obligations of the mining ct. tractor. As of Dectmber 31,1996, the maximuni amount SWEPCO would have to assume was $63.9 million. The' maximum emount may vary as the mining contractor's need for funds Ductuates. The contractor's actual obligation < outstanding at December 31,1996 was $57.7 million. -
' SWEPCO South Hallsville Lignite Mine As part of the process to receive a renewal of a Texas Railroad Commission permit for lignite mining at the South Hallsville lignite mine, SWEPCO has agreed to provide bond guarantees on mine reclamation in the amount of $70 million ' Since SWEPCO uses self bonding, the guarantee provides for SWEPCO to commit to use its resources to complete the reclamation in the event the work is not completed by the third party miner.
. Th3 current cost to reclaim the mine is estimated to be approximately $36 million. Other Commitments and Continneneles b g , g , CPL NuclearInsurance . .
- In connection with the licensing and operation of STP, the owners have purchased nuclear property and litbility insurance coverage as required by law, and have executed indemnification agreements with the NRC in accordance with the financial protection requirements of the Price-Anderson Act.
~ The Price-Anderson Act, a comprehensive statutory arrangement providing limitations on nuclear li-bility and govemmental indemnities, is in efTect until August 1,2002. The limit ofliability under the Price-Anderson Act for licensees of nuclear power plants is $8.92 billion per incident, effective as of December 1996. The owners of STP are insured for their share of this liability through a conibination of private insurance amounting to $200 million and a mandatory industry-wide program for f. elf-insurance totaling $8,72 billion.
The maximum amount that each licensee may be assessed under the industry-wide program of self-insurance following a nuclear incident at an insured facility is $75.5 million per reactor, which may be adjusted for inflation, plus a five percent charge for legal expenses, but not more than $10 million per reactor for each nuclear incident in any one year. CPL and each of the other STP o.vners are subject to such assessments, N 2-51
- . - . -. . - - - - = . _ - - - - . - . - -
which CPL and other owners have agreed will be allocated on the basis of their respective ownership interests in STP. For purposes cf these assessments, STP has two lic:nsed react:rs. The owners of STP currently maintain on site decontamination liability and property damage insurance in the amount of $2.75 billion provided by ANI and NEIL. Policies ofinsurance issued by ANI and NEIL stipulate that policy proceeds must be used first to pay decontamination and cleanup costs before being used to cover direct losses to property. Under project agreements, CPL and the other owners of STP will share the total cost of decontamination liability and property insurance for STP, including premiums and assessments, on a pro rata basis, according to each owner's respective ownership interest in STP. CPL purchased, for its own account, a NEIL I Business Interruption and/or Extra Expense policy. This insurance will reimburse CPL for extra expenses incurred for replacement generation or purchased power as the result of a covered accident that shuts down production at one or both of the STP Units for more than 21 consecutive weeks. In the event of an outage of STP Units 1 and 2 and the outage is the result of the same cccident, such insuwce will reimburse CPL up to 80% of the single unit recovery. The maximum amount recoverable for a single unit outage is $118.6 million for both Unit I and 2. CPL is subject to an additional assessment up to $1.9 million for the current policy year in the event that insured losses at a nuclear facility covered under the NEIL I policy exceeds the accumulated funds available under the policy. CPL renewed its current NEIL 1 Business Interruption and/or Extra Expense policy September 15,1996. For further information relating to litigation associated with CPL nuclear insurance claims, reference is made to NOTE 2. 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 supervision of the United States Bankruptcy Court for the Middle District of Louisiana.
On October 26,1996, SWEPCO, together with Entergy Gelf States and the Members Committee, which currently represents 8 of the 12 Louisiana member distribution cooperatives that are served by Cajun, filed the Second Amended SWEPCO Plan in the bankruptcy court. Under the Second Amended SWEPCO Plan, a SWEPCO subsidiary or aft?liate would acquire all of the non-nuc! car assets of Cajun, comprised of the Big Cajun I gas fired plant, the Big Cajun II coal-fired plant, and related non nuclear assets, for approximately
' 5780 million in cash, up to an additional $20 million to pay certain other bedruptcy claims and expenses and an additional $7 million to acquire claims of unsecured creditors. In a&htion, the Second Amended SWEPCO
' Plan provides for SWEPCO and the Cajun member cooperatives to enter into new 25-year power supply egreements which will provide the Cajun member cooperatives w% two wholesale rate options while permitting the Cajun member cooperatives the flexibility to acquire power on the open market when their requirements exceed mutually agreed upon levels of generating capacity available from SWEPCO. In addition, the cooperatives could elect, once every five years, to move dom one option to the other. The Second
. Amended SWEPCO Plan would settle all claims and litigation in the bankruptcy case, including potentially protracted litigation over power supply contract rights.
The Second Amended SWEPCO Plan amends the Original SWEPCO Plan filed on April 19,1996 (as amended by the First Amended SWEPCO Plan filed on September 30,1996) by the Members Committee, SWEPCO and Entergy Gulf States in the bankruptcy court.. Under the Original SWEPCO Plan, SWEPCO had proposed to acquire all of the non nuclear assets of Cajun for approximately $405 million in cash. In addition, under the Original SWEPCO Plan, the Cajun member cooperatives would have made future payments with a net present value ranging from $497 million to $567 million to the RUS of the federal government, Cajun's largest creditor, by using a portion of the cooperatives' future income from their retail customers. N 2-52
Two competing plans of reorganiation for the non nuclear assets cf Cajun have been filed with the > bankruptcy court at about the same time as the Oling cf the First Amended SWEPCO Plan, one of which offers a higher cash bid price. Under one competing plan, CajunYnon nuclear assets would be acquired by Louisiana , G:nerating LLC, which would be owned by af0liates of SE1 lloiding, Inc., NRG Energy, Inc. and Zeigler Coal lloidings Company. Cajun's court appointed trustee in bankruptcy is supporting this plan as well as RUS, Cajun's largest creditor, in addition, Enron Capital & Trade Resources Corp. and the Official Con,mittee of Unsecured Creditors have jointly filed a competing plan of reorgani7ation. Confirmation hearings in Cajun's bankruptcy case have been postponed until March 10,1997 because a bankmptcy cort ruling on Januay 7,1997 disqualined the law firm representing the Members Committee due to an irreconcilable conflict between the firm's representation of both the Members Committee and Southwest Louisiana Electric Membership Corporation,. The bankruptcy court postponed the confirmation hearings to allow the Members Committee time to obtain new counsel. At a February 24,1997 status conference, the bankruptcy court extended the resumption of full confirmation hearings until April 21,1997. Consummation of the Second Amended 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 the receipt of their corresponding board approvals. If the Second Amended SWEPCO Plan is confirmed, CSW and SWEPCO expect initially to finance the $807 million required to consummate the acquisition of Cajun's non nuclear assets through a combination of external borrowings and internally generated funds.. SWEPCO Rental and Lease Commitments SWEPCO has entered into various financing arrangements primarily with respect to coal transportation and related equipment, which are treated as operating leases for rate-making purposes. At December 31,1996, leised assets of $46 million, less accumulated amortization of $36.9 million, were included in utility plant on the balance sheet and at December 31,1995, leased assets were $46 million, less accumulated amortization of
$33,7 million.
SWEPCO Bilad, MhsiNsippiMGPSite SWEPCO was notified by Mississippi Power in 1994 that it may be a PRP at a MGP site in Biloxi, Mississippi, formerly owed and operated by a predecessor of SWEPCO. Since then, SWEPCO has worked with Mississippi Power et1 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 contamination of an adjacent property. A rish assessment was submitted to the MDEQ, whose ensuing comments requested that a future residential exposure scenario be evaluated for comparison with commercial and industrial exposure scenarios. However, Mississippi Power and SWEPCO do not feel that cleanup to a residential scenario is appropriate since this site has been industrial / commercial for more that 100 ye:rs, and Mississippi Power plans to continue this type of usage. Mississippi Power and SWEPCO also presented a report to the MDEQ demonstrating that the ground water on the site was not potable, further demonstrating that cleanup to residential standards is not necessary. The MDEQ has not agreed to a non-residential future land use scenario as of this date and has requested further testing. Following the additional testing and resolution of whether cleanup is necessary to meet a residential usage scenario or if cleanup to a commercial / industrial scenario is appropriate, a feasibility study will be conducted to more definitively evaluate remedial strategies for the property. This will require public input prior to a final decision being made. A final range of cleanup costs has not been determined, but based on preliminary estimates, SWEPCO hss incurred to date approximately $200,000 for its portion of the cleanup of this site and anticipates that an additional $2 million may be required. Accordingly, SWEPCO has accrued $2 million for the cleanup. 1 2-53
CSWE;:ergy Loans and Cammitme::3 The following table summarizes loans made by CSW Entrgy and commitm:nts provided by CSW at December 31,1996. Letters of ' Credit and NOJECT Guarantees t.onns (milhons) Ft. Lupton $$6 4 5-Mulberry 15.7 - Orange Cogen 1.7 - Philhps Sweeny (1) 234.7 51.8 Various developmenal projects 7.6 5.5 (1) CSW Energy has agreed to provide construction financing for the project which began in September 1996. The project costs (development, construction and financing costs) are estimated at $190 million. CSWInternationalEnertek 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 Petrocci 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 $24 million had been funded at December 31,1996. CSW International has entered into a limited guarantee agreement with the project's engineering, procurement and construction contractor that provides the contractor a guarantee of up to $5 million. The Enertek project is expected to commence commercial operations in the first quarter of 1998.
- 4. INCOME TAXES CSW files a consolidated United States federal income tax return and participates in a tax sharing agreement with its subsidiaries. Income tax includes United States federal income taxes, applicable state l' income taxe's 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 TAXRA TE RECONCILIA TION table below.
Information 'concerning ine'ome taxes, including total income tax expense, the reconciliation between the United States federal statutory tax rate and the effective tax rate and significant components of deferred income taxes follow. 1 2 54
. . -- -. .-. ._ ~ ~. . . , _ - . . . _ - . - . - _ . . . . . . - ~ . . . . - .
d JNCOME TAXEXPEN5E ^ CSC7 CPL F50 SNTPCO NTU
.f (milhons) . (thousands) 1996 . .
.c ,e
- Included n Operanns Expenses and Tazes
$118 $46.588 $26,152 $33,904 $6,953 Cunent (1) 120 57,416 14,190 10,696 9,706 Defened (1) .
(14) (5,553) (2,784) (4,730) - (1,321)
. Defened ITC (2)_
224 98,451 37,558 39,870 15,338
' included in Other income and Deductions Cunent - (1) - 639 (895) (973)- (406)
Deferred (39) (5.940) .(15,518) (7,847) (3,988) i Income Taxesfor Discontinued Operations 78 - -- (includes $72 resulting from the gain on the sale) -
$262 593,150 $21,I45 $31,050 110,944 1995 includedin Operating Espenses and Taxes i $105 $$1,626 ' $37,687 $41,852 $4,892 l Current (1) 1 Deferred 1 (30,025) 2,704 6,287 -1,971 Deferred i1C (2) (14) (5,789) (2,789) (4,786) (1,321) included in Other income and Deductions Current - 2 129 (197) (721) 1,564 Deferred (4) .,
(2) 129 (197) (721) 1,564 Income Taxesfor Discontinued Operations ~l3 - - - , 1103 $15,941 537,405 542,632 57,106 1994 Included in operating Expentes and Taxes Cunent $103 $54,486 $32,083 $24,333 $10,898
- Deferred 90 26,659 7,844 22,248 8,377 Defened !TC (2) (14) (5,789) (2,7E9) (4,278) (1,321) i 179 75,350 37.138 42,303 17,954 included in Other income and Deductiont . . . . .
Current - (13)* (3,157) (4,129) (3,710) (2,998) Deferred (5) - (65) - (18) (3,157) (4,194) (3,710) (2,998) Income Taxesfor Discontinued Operations 10 - - - ' $72,199 $32,944 538,593 514,956 5171 (1) Approximately $49 million and $7 million of CSW's Current income Tax Expense was attributable to CSW Investments Group's operations and was reccgnised as United Kingdom corporation tax expense for 1996 and 1995, respectively, in addition, approximately $19 million of CSW"s 1996 Deferred income Tax Expense was the result of CSW"s foreign investment in SEEBOARD. - (3) ITC deferred in prior years are included in income over the lives of the related properties. l I l 2 55 1-
. , . _ m_, . . . . - _ . . , - _ . . . _ , _-
=_
INCOME TAX RA TE HTU CSW CPI- PSO SHTPCO KlCONCILIA TION _ (5 m milhons) ($ in thousands) 1946 incorne before tases attribuable to: Domestic operations $$62 foreign operations 146 0240,201 $52,622 $97,605 $27,515 income before taxes $708
$84,070 $18,418 35 % $34,162 35 % $9,630 35%
Tax at U.S. statutory tate 1248 35% 35 % Differences (5,553) (2,784) (5) (4,730) (5) (1,321) (5) Amortiration oflTC (14) (2) (2) Minor CWIP 5 1 4,584 2 .. Non deductible goodwill amortiistion 13 2 - - Tas credit on foreign - operations dividend (18) (3) .. - - .. 1,467 10 1 5,127 2 201 - 1,544 2 5 Prior period adjustments 5,310 10 74 - 1,168 5 Other 18 3 4.922 2
$262 37 % $93,150 39% $21,I45 40 % $31,050 32 % $10,944 40 %
1995 Incorne before tues attributable to: D,mestic operations $506 foreign opesations 13
$222,388 $119,233 $159,675 $41,636 income before tases $519 35 % $77,836 35 % $41,732 35 % $55,856 35 % $14,573 35 %
Tas at U.S. statutory rate $18) Differences (5,789) (3) (2,789) (2) (4,786) (3) (1,321) (3) Amortization of!TC (14) (3) .. Mirror CWIP (11) (2) (10,843) (5) - - .. CPL 1995 Agreement (34) (7) (34,289) (15) - .. WTU 1995 Stipulation and (7) (1) - - .. .. - (6,859) (16) Agreement (4) (13,462) (6) (2,949) (2) (2,783) (2) 953 2 1 nor period ajustments (22) 9 2 2,488 1 1,411 - (5,685) (3) (240) (1) Other
$103 20% $15,941 7% $37,405 31 % $42,632 27% $7,106 17 %
1994
$277,640 $101,263 $144,237 $52,323 income before tues $583 Tax at U.S. statutory rate $204 35% $97,174 35 % $35,442 35 % $50,483 35 % $18.313 35 %
Differences Amortiration ofITC (14) (2) (5,789) (2) (2,789) (3) (4,277) (3) (1,321) (3) Mirror CWIP (20) (4) (20,293) (7) - - - - -- - Prior period adjustments (2) - (1,955) (1) (1,272) (1) (2,588) (2) - Other 3 .. 3.062 1 1,563 2 (5,025) (3) (2,036) (3)
$,71 29* . $72,199 26% $32.944 33 % $38,593 27% $ 14,956 29 %
2 56
DETERRE3 INCOME TAXES (I) CW CFL PSO S~'EPC0 GTU (mtllions) - (theusands) ' 399g e s Deferred income Tax Liabilities
$1,867 - $791,693 $275,938 $389,575 $135,215
. Depreciable utility plant 7,237 Deferred plant costs 178 170,442 - - ,
104,548 -- - - Minor CWIP asset . 105 Income tax related regulatory assets 207 156,531 10,976 30,486 9,743 307 72,326 35,626 38,875 26,055 ' > Other 2,664 1,295,540 322,540 458,936 178,250 l
- Deferred h.come Tax Assets
. Income tax related regulatory liability (126) (39,202; (28,771) (42,533) , (15,664)
Unamortized ITC (105) (51,517) (16,802) (26,394) (10,234)
- Alternative minimum tu carryforward (83) (16,129) - - -
(99) (19,331) (28,51Td (13,295) (9,285) Other (413) (126,179) (74,091) (82.222) (35,183) 52,251 $ 1,169,361 $248,449 5376.7i4 5143,% 7 Net Accumulated Defened income Taxes Net Ac. cumulated Deferred Income Taxes
$2,272 $1,162,051 $251,007 $372,552 $144,146 Noncunent (21) 7,310 (2,558) 4.162 (1,079)
Current 52,251 51,169,361 $248,449 $376,714 $143,067 1995 ' Deferred income Tax Liabilities Depreciable utility plant $1,863 $769,888 $277,317 $388,394 $130,490 Deferred plant costs ' 180 170,816 - - 9,132 Mirror CWIP asset ,109 109,132 - Income tax related regulatory assets 220 163,014 14,481 32,462 10.557 Other 290 69,671 24,923 ' 23,441 25,606 2,662 1,282,521 316,721 414,297 175,785 Deferred Income Tax Assets
- Income tax related regulatory liability (133) (41,567) (30,657) (44,914) .(15,619)
Unamortized ITC - (98), (53,460) (17,878) (15,868) (10,6%) Alternative minimum tax canyforward (%) (21 456) - - Other (129) (36,386) (14,222) (10,906) (9,668)
<= (456) (152,869) (62,757) (71,688) (35,983)
^ Net Accumulated Deferred income Taxes 52,206 51,129,652 $253,964 $372,609 5139,802
, = Net Accumulated Defened Income Taxes Noncunent $2,306 $1,151,823 $264,353 $377,245 $145,130 Current (100) (22.171) (10.389) (4,636) (5,328)
$2,206 $1,129,652 5253.964 5372,609 $139,802
- (1) In 1996, CSW generated $33 million of excess foreign tax credits against which a full valuation a!!owance was established as of December 31,1996. O*herwise, as a result of a favorable earnings history, CSW did not have any valuation allowances recorded against any deferred tax assets at December 31,1996 and 1995 other than excess foreign tax credits.
- 5. BENEFIT PLANS -
Pension Plans CSW maintains a t .x qualified, non-contributory defined benefit pension plan covering substantially all CSW employees in the United States. - Benefits are based on employees' years of c. edited service, age at retir: ment, and final averare annual earnings with an offset for the partlcipant's primary Social Security ben: fit. The funding policy is based on actuarially determined contributions, taking into account amounts - which are deductible for income tax purposes and minimum contributions required by ERISA. Pension plan assets consist primarily of common stocks and short-term and intermediate-term fixed income investments. 2-57 l 1
'1
The majority of SEEBOARD's employees joined a pension plan that is administered for the United Kingdom's electricity industry. The assets of this plan are held in a separate trustee-administered fund that is actuarially valued every three years, SEEBOARD and its participating employees both contribute to the plan. Subsequent to July 1,1995, new employees were no longer able to participate in that plan, Instead, two new pension plans were made available to new employees, both of which are also separate trustee administered plans. Information about the 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 rece iciliation of the funded status of the pension plan to the amounts recognized on the balance sheets; and (iv) assumptions used in accounting for the pension plan follow, NET PERIODIC PENSION NON. PMN COSTS AND CSn' U.S. U.S. CONTR1RUTIONS PM NS PL4N PMN CPL PSD SHEPCO H7U (millions) (thousands) 1996 Net Periodic Pension Costs
$37 $23 $14 $$,367 $4,238 $4,891 $3,005 Service cost Interest cost on projected benefit obligation 136 69 67 16,233 12,817 14,793 9,089 Actual return on plan assets (184) (110) (74) (26,033) (20,554) (23,723) (14,576) 27 27 - 6,509 5,139 5,932 3,645 Net amortization and deferral
$16 $9 $7 $2,076 $ 1,640 - $1,893 $1,163 Ptnsion Plan Contributions $35 $28 $7 $6,622 $5,228 $6,034 $3,708 CSH' CPL PSO SHEPCO HTU U.S. PMN ONL)* (milhons) (thousands) 1995 Net Periodic Pension Costs Service cost $20 $4,699 $3,614 $4,220 $2,609 Interest cost on projected benefit obligation 64 14,860 11,428 13.345 8,251 Actual return on plan assets (117) (27,137) (20.869) (24,370) (15,068)
Net amortization and deferral 44 10,136 7,795 9,102 5,628
$11 $2,55R $ 1.968 $2,297 $ 1,420 Pension Plan Contributions $29 $6,754 $5,195 $6,066 $3,751 U.S PUNONLl*
1994 Net Periodic Pension Costs Service cost $22 $5,796 $5,181 $4,843 $3,082 Interest cost on projected benefit obligation 62 15,989 I4,292 13,36I 8,501 Actual return on plan assets (4) (1,131) (1,011) (945) (601) Net amortization at,d deferral (70) (17,972) (16,064) (15,018) (9.556)
$10 $2,682 $2,393 $2,241 $1,426 Pension Plan Contributions $28 $7,099 $6,345 $5,932 $3,744 cpm 2-58
. - . . - - .- .- . ~ , - ._ - _ . ~ . - . - . - .
[ APPROX 1MA TE NUMBER NON. ATPARTIC1PANTSIN CSC7 U.S. U.S. _ PUNSDURINGI996 PMNS PMN PMN. CPL PS0 SWEPCO MTU Acuve employees 10,900 7,900 3,000 1,900 1,500 1,700 1,100 10,100_ 4,203 5,900 1,400 1,200 900 600
. Retirees
- Terminated employees 6,200 1,400 4,800 400 400 200 200-RECONCILIATION OFTUNDED 1996 1995 STATUS OFPMN TO AMOUh7S I996 1996 NON. U.S. ,
RECOGNIZED ON THE CSW CSW U.S.- U.S. PMN CONSOLIDATED RAMNCESHEETS PLANS PUN PUN ONLY (millians) Actuarial present value of .
- Accumulated benc0: obligation for service rendered to date $1,748 $781 $967 $745 Additional benefit for future talary levels 200 141 59 140 Projected benefit obligation 1,948 922 I,026 885 Plan assets, at fait value 2,077 991 1.086 897 Plan assets in excess of the projected ,
benefit oblipuon 129 69 60 12 -
- Unrecognized net loss 30 27 3 64 Unrecognized prior service cost (12) (7) -(5) (8)
Unrecognited net obligation 16 12 4 14 Prepaid pension cost $163 $101 $62 582 l The vested portion of the accumulated benefit obligations for the combined plans was $1,678 million at December 31,1996 and $678 million for the U.S, plan at December 31,1995. The unrecognized net obligation for theD.S. plan is being amortized over the average remaining service life of employees or 16 years. Prepaid pension cost is included in Deferred Charges and Other Assets on the balance sheets. No reconciliation of the funding status of the plan for CPL, PSO, SWEPCO or WTU is presented because the plan is administered for the CSW System as a whole and such information is unavailable for the U.S. Electric Operating Companies individually, in~ addition to the amounts shown in the above table, CSW has a non qualified excess benefit plan. This plan is available to all pension plan participants who are entitled to receive a pension benefit from CSW which is in excess of the limitations imposed on benefits by the Internal Revenue Code through the quM ed plan. CSW's net periodic cost for this non-qualified plan for the years ended December 31,1996,1995 and 1994 was $4.8 million, $2.4 million and $1.8 million, respectively. - ASSUMPTIONS USED IN Long-Term ACCOUNTING FOR THE Compensation Return on Plan PENSIONPMN Discount Rate Increase Assets 1996 U.S. Plan 8.00 % 5.46 % 9.50 % Non-U.S. Plan . ~ 7.75 % 5.75 % 8.25 % 1995 U.0. Plan 8.00 % 5.46% 9.50% 1994 U.S. Plan 8.25% $.46% 9.50 % !- 2-59 r ,
- P:stretiremez!Benej1ts Other Thrn Pe:: slo::s (U.S. Conynnies Only) _
CSW including each of the U.S. Electric Operating Comp:nics, adopted SFAS No,106 efrective January 1,1993, The transition obligation established at adoption is being amortized over twenty years, with sixteen years remaining, Prior to 1993, these benefits were accounted fer on a pay-as you go basis, Pursuant to an order by the Oklahoma Commission, PSO established a regulatory asset of approximately $5 million in
-1993 for the difference between the pay as you-go basis and the costs determined under SFAS No,106, PSO is recovering the amortization of this regulatory asset over a ten year period, ,
Information about the non-pension postretirement benefit plan, including: (i) net periodic postretirement benefit costs; (ii) a reconciliat*on of the funded status of the postretirement benefit plan to the amounts recognized on the balance sheets; and (iii) assumptions used in accounting for the postrctirement benefit plan follow. NETPERIODICPOSTRETIREMENT RENEFIT COSTS CSH' CPL PSO SH'EPCO HTU (millions) (thousands) 1996 Service cost ' $8 $2,077 - $ 1,705 $1,810 $1,111 Interest cost on APDO 19 5,887 5,018 4,321 2,602 Actual retum on plan assets (7) (1,695) (2,236) (2,168). (766) Amortization of transition obligation 9 2,900 2,528 1,%7 1,225 Net amortization and deferral (2) (560) (250) ' (100) (261) i 527 58.609 56,765 55,830 $3.911 , 1995 . Service cost $8 $2,123 $1,986 $1,803 $1,113 Interest cost on APDO 'I8 5,929 5,175 4,299 2,561 Actual retum on plan assets (si (1,948) (2,597) (2,466) (870) Amortization of transition obligation 9 2,900 2,528 1,%7 1,225
. Net amortization and deferral 2 238 631 679 96 4
$29 59,242 57,723 56,282 * $4,125
, 1994 . , '
Service cost $9 $2,435 $2,350 $1,%5 $1,233 Interestcoston APBO 19 6,061 5,317
- 4,266 2,559 Actual retum on plan assets (1) (285) (495) (464) (I13)
Amortization of transition obligation 9 2,900 2.528 1,967 1,225 Net amortization and deferral (4) (913) (917) (765) (418)
$32 510,198 58,783 $6.969 54,486 RECONCILL4 TION OF FUNDED ,
STATUSOFPL4N TO AMOUNTS , RECOGN! ZED ON Tile BALANCE SilEETS CSH' CPL PSD SH'EPCO HTU (millions) (thousands) 1996 APRO~ Retirees . $163 $54,158 545,736 $36,013 $22,880 Other fully eligible participants 18 4,281 3,789 5,302 2.398 Other active participants 55 14.871 12.534 12.694 7.857 Total . 236 73,310 62,059 54,009 33,135
~ Plan assets at fair value -123 34.566 33,748 30,028 15.806 APBO in excess of plan assets -l13 38,744 28.311 23,981 17,329 Unrecognized transition obligation (144) _(46,408) - (40,456) (31,469) (19,597)
Unrecognized gain - 32 8.723 11.569 7,527 2,662 Accrued'(Prepaid) Cost $1 51,059 5f576) 539 5394 2 60
_.__._.__.__.__._.-,m__._ _ . . _ . _ _ . - _ _ _ _ _ - - 4 RECONCillATIONof FUN:E) . SC4TUS Of PL4N TO 4MOUNis RECOGNIZED ON ThC RALANCE CSN' cpl. PSO $HTPCO NTV
$HEETS (millions) tthousarids) 1995 APHO '
$173 $$8,337 $49,130 $38,762 $23,880 Retirees 3,026 ' 2,974 3,622 1,837 Other fully eligible participants 13
$7 14,676 12,691 13,20$ 7,829 Other active participants
. 245 76.039 64,801 $$,$89 33,$46 !
Total 100 27,997 27,904 24,424 12,708 Plan assets at felt value APDO in excess of plan assets 14$ 48,042 36,897 31.165 20,838
- Unrecognited transition obligation (153) (49,308) (42,984) (33,436) (20,822) ?
8 2,325 $,$ll 2,310 378 Unrecognited gain ! Accrued /(Prepaid) Cost $- $1,059 $($76) 139 1394_ ASSUMPTIONS USEDIN THE Return on Plan Tan Rate for ACCOUNTING TN STASNO IN Discount Rate Assets . Taxable Trusts 1996 8.00 % 9.$0% 39.6 % i ,
- 199$ 8 00 % . 9.50% 39.6 %
1994 8.23 % 9.$0% 39.6% ! Ile.alth care cost trend rates 1996 Average Rate of 9 0% grading down .7$% per year to an ultfrante average rate of $.25% in 2001, 1995 Average Rate of 10.2$% grading down .75% per year to an ultimate average rate of $.75% in 2001. Increasing the assumed health care cost trend rates by one percentge point in each year would increase ths APBO and the aggregate of the servins and interest costs components a net postretirement benefits by the amounts presented in the following table, , 1 CSN' ' Ci'l r$0 SnTPCO HTU (milhons) APBO $24 4 $7.$ $6.1 $$.7 $3 4
+
Service and interest costs 3.4 1.0 0.8 0.8 0.5
- Health and We{ fare Mans l CSW provides medical, dental, group life insurance, dependent life insurance, and accidental death and dism:mberment insurance plans for substantially all active CSW System employees in the United States. The tot:1 contributions, recorded on a pay as you go basis, for the years ended December 31,1996,1995 and 1994 ,
tre listed in the following table. - CSn' CPL PSO SMTPCO HTU (milhons) 1996 $28.4 .57 0 $$.5 $6.5 $4.0 1995 - 27.0 66 $.3 6.2 3.6 1994 17.0 4,6 3.6 4.1 2.7 Employer provided health care benefits are not common in the United Kingdom due to the country's :
. national health care system. Accordingly, SEEBOARD does not provide health care benefits to the majority of its employees, '
\. L. N
- 2 61-b
,, ,y v -
cv - m e -e w -,s , , , , . .~.,u- -r ----,---.,n.-- ,,-,---,,,,--,v, .~.e - --- -+<~ ~ ~ ~+
- 6. JOINTLY OWNED ELECTRIC UTILITY PLANT ,
The U.S. Electric Operating Companies are parties to variousjoint ownership agreements with other non affiliated entities. Such agreements provide for thejoint ownership and operation of generating stations ! cnd related facilitics, whereby each participant bears its share of the project costs. At December 31,1996, the .
- U.S. Electric Operating Companies had undivided interests in five such generating stations and related facilities !
as shown in the following table. l CPL SHEPCO SNEPCO SNEPCO CSW(1) STP . Timt Creek helry Delet Ihlis OUaunton Nuclear Plant Coal Plant IJgnire Plant (JgnHe Plant Coal Plant ($ in millions) Plant in servke $2,333 $79 $4)$ $227 $397 Accumulated depreciation $$03 $44 $162 $77 $113 Plant capacity.MW 2,$01 480 6$0 6$0 676 Participation 2$.2% $0.0% 85.9% 40.2 % 78.1% Share of capacity MW (30 240 $$9 262 $28 (1) CPL, PSO and %TU have joint ownership agreements with each other and other non affiliated enthics. Such agreements provide for the joint ownership and operation of Oklaunion Power Station.- Each participant provioed financing for lu share of the project, which was placed in service in December 1986. CPL's 7.8%, PSO's 13.6*4 and %TU's $4.7% ownership intercat represents CSW's 78.1% participation in the plant. The statements of income reflect CPL's, PSO's and %"lV's respective portions of the operating costs of Oklaunion Power Station. The totalinvestments, including ATUDC,in Oklaunion Power Station for CPL, PSO and W1U were $36 million, $h0 million and $281 million, respectively, at December 31,1996. i Accumulated depreciation was $10 million, $30 million and $7) million for CPL, PSO and WTU, respectively, at December 31,1996. l[
- 7. , FINANCIAL INSTRUMENTS ,
Th'e following methods and assumptions were ur,ed to estimate the following fair values of each class of financial instn'ments for which it is practicable to esthante fair value. The fair value does not affect CS%"s or any of the U.S. Electric Operating Companies' liabilities unless the issues are redeemed prior to their maturity dates. Cash, temporary c.nsh Investments, special deposits, accounts reccleable and short-term debt The fair value equals the carrying amount as stated on the balance sheets because of the short maturity of those instruments.
' ong term debt The fair value of CSW"s long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to CSW for debt of the same remaining maturities.
Preferred stock subject to mandatory redemptfor: The fair value of SWEPCO's preferred stock subject to mandatory redemption is estimated based on , quoted market prices for the same or similar issues or on the current rates offered to CSW for preferred stock
- with the same or similar remaining redemption provision. .
Long term debt andpreferredsiock due within H months The fair value of current maturities oflong temt debt and preferred stock due within 12 months are
; estimated based on quoted market prices for the same or similar issues or on the current rates offered for long-term debt or preferred stock with the same or similar remaining redemption provisions.
N 2-62
= .- --- ,. _
-. ... --. _ _ . _ . - . - ~ .~. - . . . - - . . .. .-.- - - .- - - - ... ... - -
C4RBYING VALVE AN) LSTlai4TL)l' AIR VALVE CS,9 CPL P.50 5"'EXO DTV
- ,,, (millions) _ (thousandi) .
Long-term debe 1996 carrying amount $4,024 $1,323,054 $420,301 $597,1$1 $275,070 fair value 4,06$ ' I,346,306 420,$63 605,853 273,335 1993 carrying enount 3,914 1,$17,347 379,250 $98,951 273,24$ fait value 4,090 1,583,959 396,386 627,034 286,648 l'referredstoch subject to . mandatory redemtion 1996 carrying amount 33 - - 32,464 - falt value 34 - 33,$79 -. 1995 carrying amount 34 - - 33,628 falt value '
- 3$ - - 34,648 * -
Long term debt andsyforred , stock due within 12 months '
- 1996 carrying amount 204 200,000 - 3,760 -
felt value 204 200,000 - 3,760 1995 carryitig amount 30 231 2$,000 $,099 - fair value 30 231 2$,000 5,136 - s, LONG. TERM DENT
- CSW's long-term debt outstanding as of the end of the last two years is presented in the following
= table. i Maturities Interest Rates . December 31, From To from To 1996 '1995 (millions) ,
Secured bond 1997 2025 $.2$% 7.73% $1108 $2,308 l Unsecured bond 2001 2030 4,135 % (1) 8.875 % 1,384 754 Notes and 1. case Obligat ons 1997 2003 5.503 % 9.73% 724 321 CSWCredit Agreernent floating - 731 Unamontred discourt (12) (13) t Unamortired cost of I reacquired debt (180) (187) s4,024 $3,914 (1) Varkble rate The mortgage indentures, as amended and supplemented, securing Ph'Bs issued by the U.S. Electric , Operating Companies, constitute a direct first mortgage lien on substantially all electric utility plant. The U.S, 1
- Electric Operating Companies may offer additional FMBs, M1Ns and other securities subject to mauket conditions and other factors.
- CPL CPL's $40,9 million Series 1995 Guadalupe, PCRBs were issued with'a variable rate computed dally, L l The average interest rate for 1996 was 4,1%,
t
.t I
l: 2 ! y y ye v - -.. . ,-.,.w, .w,... ,p w .,.y,, . - - . -. ,w ,y 3 - - , . - r., , y m--rg r--
S ~'EPC0 SWEPCO's $50.0 million bank loan bears int:r:st at a variable rat]. 'the weighted average int: rest rate for 1996 was 5.5%. CSW's year end weighted average cost oflong term debt was 7.2% for 1996 and 1995, and 7.7% for 1994. l'or additional information about the U.S. Electric Operating Companies' long term debt, see their Statements of Capitalir.ation in the Financial Statements. AnnualRequirements Certain series of outstanding first mongage bonds have annual sinking fund requirements, which are generally 1% of the amount of each such series issued. These requiremtnts inay be, and generall,i have been, satisfied by the application of net expenditures for bondable propeny in an amount equal to 1664/3% of the annual requirements. Certain series of pollution control bonds also have sinking fund requireme,its. At December 31,1996, the annual sinking fund requirements and annual rnaturities (including sinking fund requirernents) for all long term debt for the next five years are presented in the following table. 56nking rund je3uirements CSn' cpl. PSU SHTPCO H7U tmittmns) (thouunde 1997 $1 $640 $550 $145 $- 1998 1 360 $$0 14$ . 1999 1 360 300 595 - 2000 1 360 300 $95 - 2001 l - 300 $9$ - Annual Msturities CSH' cpl. PSO SnTPCO HTU (millmns) (thouunds) i 1997 $204 $200,640 $550 $2,560 $~ 1998 31 28.360 $50 2,374 - 1999 195 125.360 25,300 43.962 - 2000 2$8 100,360 20,300 97,826 40,000 2001 $17 36.000 20.300 $95 - Dividends The U.S. Electric Opera:ing Companies' mortgage indentures, as amended and supplemented, contain certain restrictions on the use of their retained earnings for cash dividends on their common stock. These restrictions do not limit the ability of CSW ta pay dividends to its shareholders. At December 31,1996, , approximately $l.5 billion of the subsidiary companies' retained earnings were available for payment of cash l dividends by such subsidiaries to CSW. Of this, the amounts attributable to the U.S. Electric Operating Companies we,e ss follows: CFL $770 million PSO - $140 million Sil'EPCO $322 million llTU $123 million Reacquired Long term Debt i During 1996,1995 and 19N, the U.S. Electric Operat ng Companies reacquired $205 million, $355 million and $27 million oflong tenn debt, respectively, including reacquisition premiums, prior to maturity. The premiums and related reacquisition costs and discounts are included in long term debt on the balance sheets and are being amonized over perieds consistent with their expected ratemaking treatment. The remaining amortization periods for such iterns range from I to 31 years. b 2-64
Reference is rnade to blDO A for further information related to long-term debt, including new issues and reacquisitions oflong-t:rm debt during 1996 as well cs infonnation related to the financing of the SECllOARD acquisition.
- 9. PilEFElti(ED STOCK The outstanding prefened stock of the U.S. Electric Operating Companies as of the end of the last two ycars is presented in the following table.
Current Dividend Rate December 31 Redemption Price l' rom . To 1996 1995 l' rom . To j (milhons) Not subjett to mandatory redemption 1,352,900 shares 4 00W R.72% $135 $135 $100.00. $109.00 1.600,000 share auction 160 160 100 00 lituance cspenses/ premiums (3) (3) 5292 5292__ Subject to mandatory redernption . 340.000 shares 6 93 % $34 $35 To be redeenied within one year (1) (l) 533 534 Total authorired shares 6,405,000 All of the outstanding preferred stock is redeernable at the option of the U.S. Electric Operating Companies upon 30 days notice at the current redemption price per share. Since 1994, when CPL, SWEPCO end,WTU collectively redeemed $33 million of preferred stock including redemption premiums and sinking fund requirements, the only prefened stock redemptions have been for SWEPCO's $1.2 million annual sinking fund requirement. CPL The dividends on CPL's $160 million auction and money market preferred stocks are adjusted every 49 days, based on current market rates. The dividend rates avenged 4,1%,4.5% and 3.5% during 1996,1995 and 1994, r:spectively. Sil'EPCO The minimum annual sinking fund requirement for SWEPCO's preferred stock subject to mandatory redemption is $1.2 million for the years 1997 through 2001. This sinking fund retires 12,000 shares annually. For additional infonnation about the U.S. Electric Operating Companies' preferred stock, see their St:t:ments of Capitallration in the Financial Statements.
- 10. SilOllT-TEllM FINANCING The CSW System uses short tenn debt to meet fluctuations in working capital requirements and other interim capital needs. CSW has established a money pool to coordinat: short term borrowings for certain subsidiaries and also incurs borrowings outside the money pool for other subsidiaries through the issuance ofits commercial paper. As of December 31,1996, CSW had revolving credit facilities totaling $1.2 billion to back up its commercial paper program which, at December 31,1996, had $364 million outstanding. The maximum amount of such commercial paper outstanding during the year, u hich had a weighted average interest rate for the ye:r of 5.6%, was $815 million during April 1996.
N 2-65
CSW Credit, which does not participate in the money pool, issues commercial paper on a stand.alone, basis that is secured by the astignment ofits teceivables. CSW Credit maintains a secured revolving credit agreement which aggregated $830 million to back up its commercial paper program which, at Decernber 31 1996, had $579 million outstanding. The maximum amount of such commercial paper outstanding during the year, which had a weighted average interest rate for the year of 5.4%, was $878 million during August 1996.
!!. COMMON STOCK On February 27,1996, CSW sold 15,525,000 shares ofits CSW Common in the 1996 Stock Offering and received net proceeds of approximately $398 million. These proceeds were used to repay a portion of the indebtedness incurred by CSW under the CSW Credit Agreement to fund the acquisition of SEEBOARD.
CSW maintains a long terrn incentive plan pursuant to which CSW is authorlied to issue shares of restricted common stock, stock options and/or stock appreciation rights to certain eligible employees. Under the long term incentive plan, approximately 3.8 million shares of CSW Cornmon were available for grant as of December 3',1996 and approximately 1.3 million shares were reserved for issuance upon exercise of options which were outstanding at December 31,1996. In January 1996, the compensation committee of she board of directors of CSC authorized a restricted stock grant for the executive officers of CSW. This special award was made to reware mstained, long term corporate performance, to encourage executive retention and to focus on the long term per. ctive. This grant vests in 25 percent increments in 1997,1998,1999 and 2000. Beginning in 1997, non empic,pc directors will receive an annual award of 600 phantom stock shares which vest upon termination as a director and are then converted one for one into shares of CSW Common. After receipt of an order from the SEC in March 1996, the PowerShare plan is now available to CSW shareholders, employees, eligible retirees and other residents of legal age in the fifty states of the United States cnd District of Columbia. .The SEC approval also allows CSW to issue and sell an additions! five million shares of CSW Common through the PowerShare plan. Plan participants are able to make optional cash - payments and reinvest all or any portion of their dividends in additional CSW Common. Beginning in 1996, CSW is able to raise new common stock _cquity through its ThriftPlus plan, whereby the plan trustee purchases CSW Common directly from CSW instead of on the open market. Information conceming new CSW Common equity related to these two plans and stock options for 1996 and 1995 is presented in the table below. PowerShare and ThriftPlus were the primary contributors in 1996 while PowerShare was the main contributor in 1995. See MD&wL1QUIDITY AND CAPITAL RESOURCES for additional detail on these two plans. 1996 1995 Number of new shares issued (millions) 2.9 2.3 Range of stock price for new shares $24 3/8 + $28 7/8 $22 $/8 $28 3/8 New common stock equity (millions) 579 $57
- 12. STOCK HASED 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, llad compensation cost for this plan been determ!ned consistent with SFAS No.123, pro forma calculations of CSW's and each of the U.S. Electric Operating Companies' net income for common stock and earnings per share as required by S
.. No.123 would not have changed from amounts reported.
- N 2 66 -
Because the SFAS Na 123 method of cecounting 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 the future years.
CSW may grant optima for up to 4.0 million shares of CSW Common under the stock option plan. Under the stock option plan, the option exercise price equals the stock's market price on the date of grant. The grant vests over three years, one-third on e'ach of the three anniversary dates of the grant, and expires 10 years aft:r the original grant date. CSW has granted 2.1 million shares through December 31,1996. A summary of the status of CSW's stock option plan at December 31,1996 and 1995 and the changes during the years then ended is presented in the following table. 1996 _ 1993 e
+ Weighted Weighted Shares - Average Shares Average j
- (thousands) Exercise Price (thousands) Exercise Paice Outstanding at beginning of year 1,$64 526 1,616 $26 ,
70 27 - - l Oranted (147) 24 (23) 22 Exercised - 27 (29) -e7 Canceled . . (751 Outstanding at end of year 1,412 26 1,564 26 Esercisable at end of year 1,004 n/a 828 da
$2.66 $2.82 i Weighted average falt value of options 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 1996: (i) risk free interest rate of 6.4%;(ii) expected dividend rate of 6.8%;(iii) and expected volatility of 17%. The expected life of the options granted did n(materially impact the values produced.
I
- 13. BUSINESS SEGMEhTS CSW's business r,cgments at December 31,1996 included the U.S. Electric Operations (CPL, PSO, SWEPCO, WTU) and the United Kingdom Electric Operations (CSW Investments Group). The United Kingdom Electric Operations in .udes the activities of GEEBOARD, as well as the purchase accounting adjustments and financing activities included in the CSW Investments Group. See NOTE 1,
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES for a discussion of the accounting for the SEEBOARD l acquisition. Seven additional non utility comp;mies are included with CSW in Corporate items and Other ! ' (CSW Energy, CSW International, CSW Communications,' CSW Credit lCSW Leasing, CSW Services and En:rShop). Oas Operations (Transok) were sold on June 6,1996. See NOTE 14. TRANSOK DISCONTINUED OPERATIONS for additional information. CSW's business segn ent information is presented in the following tables. N 2-67 c.--.--g w ,.7.m-- - - - - - -p vg w.-- n- -y y.-,w-y ry 72.y w- y- v *-,,g
1996 1995 1991 _ (millions) Operatsng Revenues I.lectric Operations United States $ 3.248 $2,85) $ 3,06$ United Kingdurn (1) 1,848 208 -
- Cgorate stena and Other 59 52 40_ _
55.155 $3,143 $3,105 Operating income Electric Operations , United States $768 $719 ;72 8 United Kingdom (I) 236 21 - Corporate items and Other _15 (27) 6 l Operating income before taxes 1,019 713 734 Income taxes (224) , (92) Q79) 1795 1621 $$$$ 1 Depreciation and Amorhtation Electric Operatinns United States $362 $.133 $316 United Kingdorn (1) 88 7 - Corporate items and Other 14 Il N 5464 5353 5324
/denttflable Assett Electric Operations United States $9,417 $9,201 $9,066 United Kingdom (1) , ),061 2,821 Corporate items and Other $$4 1,0R 1 1,276 13,332 13,103 10,342 Gas Operations (Discominued) - 766 724 513,J 32 113,869 511.066 Cqpital expendstures and acqussuions Electric Operations United States $356 $398 $493 United Kingdom (I),(2) 1,543 731 -
Corporate items and Other (3) 109 19 114 2,008 1.148 607 Gu Operations (Discontinued) _ 23 66 65 52.031 51,214 $672 (1) Represents equity method of accounting for November 1995 (27.6%) and full consolidation accountmg for December 1993(76 45 %). , (2) includes $1,394 million and $731 million in 1996 and 1995, respectively, used to purchav SEEBOARD. (3) Includes CSW Energy and CSW International equity investments. 2-68
- 14. TRANSOK DISCONTINUED OPERATIONS (UNAUDITED)
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. Transok is an intrastate natural gas gathering, transmission, marketing and processing company that provides natural gas services to the U.S. Electric Operating Companies, predominantly PSO, and to other gas i customers throughout the United States. Transok's natural gas facilities are located in Oklahoma, Louisiana 4 and Texas. After the sale, Transok has continued to supply gas to the U.S. Electric Operating Companies. CSW sold Transok to Tejas for approximately $890 million, consisting of $690 million in cash and =
; $200 million in existing long term debt that remained with Transok after the sale. A portion of the cash ,l proceeds was used to repay the CSW Credit Agreement and the temaining proceeds were used to repay couunercial paper borrowingsc CSW recorded an after tax gain on the sale of Transok of approximately $120 million in 1996. As a result of the gain, CSW incurred a current tax liability of approximately $195 million.
Approximately two-thirds of the current tax liability tesults from taxes previously deferred by Transok. 'Ihe
" deferred taxes were generated primarily by the excess of Transok's tax depreciation over its book depreciation.
1 Transok's operating resu'ts for 1996,1995 and 1994 are summarized in the following tab!c (tt:nsactions with CSW have not been eliminated). 1996 199$ 1994 , Totai revenue $362 $721 $647 Operating income before income taxes 23 52 49 rarnings before income ta>es 18 38 ^ 35 , income taxes (6) (13) (10) Not income froin discontinued operations $12 $25 $15 3ince Transok was sold on June 6,1996, the results of operations for 1996 do not reflect a full year's earnings from Transok. The net assets of Transok included in CSW's Consolldated Balance Sheet at December 31,1995, are summarized in the following table. December 31, 1995 (millions)
+
Net gas fixed assets $632 Current assets 81 Deferred charges and other assets $2 Curtent liabilities (123) lang term debt (200)
' Deferted credits and other liabil; ties (116)
- Net assets $326 e
2-69 I o
- L .
!f i
- 15. PHO FORMA INFORMATION (UNAUDITED)
CSW secured effective control of SEE110ARD in December 1995. The unaudited pro forma infonnation la 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 rnonths ended December 31,1995 and the twelve months ended December 31,1994 as if the transaction had been consummated at the beginning of the periods presented. I The unaudited pro forma information is based upon preliminary fair value allocations related to the l purchase of SEEBOARD, 'Ihe allocations are subject to revision after more detailed analyses, appraisals and > evaluations are completed, ne unaudited pro forma information has been prepared in accordance with United ! States generally accepted accounting principles. The pro forma information in the following table is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the SEEBOARD acquisition had taken place at the beginning of the period specined, nor is it necessarily indicative of future operating results. The following pro forma information has been prepared .eDecting the February 1996 issuance of CSW Common, and has been converted at an exchange rate of LI,00=$1.58 and II.00=11.54 for the twelve months ended December 31,1995 and 1994, respectively, 1995 1994 (millions, except EPS) Operating Revenues $$,404 $$,465 Operating Income 750 743 Net income for Common Stock 443 43i EPS of Common Stock $2.15 $2.13
- 16. QUARTERIX INFORMATION (UNAUDITED)
The following unaudited quarterly information includes, in the opinion of management, all adjustments necessary for a fair presentation of such amounts. Information for quarterly periods is affected by seasonal variations in sales, rate changes, timing of fuel expense recovery and other factors, ; OtlARTrR ENDED 1996 to9$ (trji"Gies, except EPS) March 31 Operating Revenues $1,215 $$23 Operating income 144 82 Income from Continuing Operations 47 39 Net Income for Common Stock $1 39 EPS of Common Stock from Continuing Operations $0.22 - 50.18 EPS of Common Stock $0.26 $0.20 June 30 Operating Revenues $1,267 $786 Operating inco'ne 214 164 income ftom Continuing Operations 15 104 Net income for Common Stock 128 103 E.PS of Common Stock from Continuing Operations $0.05 (1) $0.52 EPS of Common Stock $0.61 $0.54 2 70 )? l.
. -- . - ,,-... ----- .. . x-- - - - _. .. - . - . - - _--n.c- ---,n.-.~,-,n -,---.n. e, -
OtlARTER ENDl:D 19N. 1995 (milhons, escept EPS) Septernber 30 Operatirit, Revenues $1,438 $948 Operating income 284 259 locome frorn Contmuing Operations 194 198 Net income for Common Stock 190 199 CPS of Common Stock from Continuing Operation $0 90 $1.01 EPS of Common Stock $0.90 $1.04 December 3I l Operating Revenues $1,235 $886 l Operating income 153 116 loconic from Cor.tinuing Operations $9 $$ ( Net income for Common Stock 60 61 EPS of Common Stock from Continuing Operations $0 26 $D26 EPS of Common Stock $0.28 $0.32 , l Total Operating Revenues $5,155 $3,143 < Operating income 795 62l income imm Continuing Operations 315 396 Net income for Common Stock 429 402 El'S of Common Stock from Continuing Operations $143 (1) $1.97 LPS of Common Stock $2.07 (2) $2.10 ; I (1) Eamings were significantly impacted by the establishment of reserves for certain investments at the U.S. Electric Operating Companies and the wtite-off of certain
, investments at CSW Energy.
(2) In 1996, CSW El'S of Common Stock for the year do not sum to the total o the individual quarters' LPS of Common Stock due to different levels of everage shares outstanding for the different periods. 2 71 l
ItEPoltT OF INDFPENDENT PUllLIC ACCOUNTANTS To the Stockholders and Board of Directors of Central and Scurh West Corporation: We have audited the accompanying consolidated balance sheets of Central and South West Corporation (a Delaware corporation) and subsidiary companies as of December 31,1996 and 1995, and the related consolidated statements ofincome, stockholders' equity and cash flows, for each of the three years ended December 31,1996. These Gnancial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of CSW Investments, which statements reflect total assets and total revenues of 23 percent and 36 percent in 1996 and 20 percent and 6 percent in 1995, respectively, of the consolidated totals, nose statements were audited by other auditors whose report has been furnished to us and our opinion, insofar ss it relates to the amounts included for those entities, is based solely on the report of the other auditors. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable r,ssurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall fir,ancial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Central and South West Corporation and subsidiary companies as of December 31,1996 and 1995, and the related consolidated statements ofincome, stockholders' equity and cash flows for each of the three years ended December 31,1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic Onancial statements taken as a whole. The supplemental Schedule !! is presented for purposes of complying with Securities and Exchange Commission's rules and is not a required part of the basic Onancial statements. This schedule has been subjected to the auditing procedures applied in our audits of the br sic financial statements ar'd, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Arthur Andersen LLp Dallas,Tr as February 28,1997 1 2 72
AUDITOIPS ItEPOllT TO Tile MEMllEllS OF CSW INVESTMENTS We have audited the consolidated balance sheets of CSW Investments and subsidiaries as of 31 December 1996 and the related consolidated statement of camings and statements of cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated Snancial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards in the United States. Those st:nduds require that w e plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the crnounts and disclosures in the Gnancial statements. An audit also includes assessing the accounting principles used in and s!gnificant estimates made by management, as well as evaluating the overall financial statement presentation, We believe that our audit provides a reasonable basis for our opinion, in our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CSW Investments and subsidiaries at 31 December 1996 and the result of their operations end cc.sh flows for the year then ended in conformity with generally accepted accounting principles in the Unit:d Kingdom. Generally accepted accounting principles in the United Kingdom vary in certain significant respects from generally accepted accounting principles in the United States. Application of generally accepted accounting principles in the United States would have affected results of operations and sharche'ders' equity as of and for the year ended 31 December 1996 to the extent summarised in the notes to the consolidated financial striernents. KPMG Audit Plc Chartered Accountants London, England llegistered Auditor 22 January 1997 t 2 73
ltEPol(T OF M AN AGl'. MENT Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements of Central and South West Corporation and subsidiary companies as well as other infonnation contained in this Annual iteport. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles apphed on a consistent basis and, in some cases, tellect amounts based on the best estimates and judgments of management, giving due consideration to materiality. Financial information contained elsewhere in this Annual iteport is consistent with that in the consolidated financial statements. The consolidated financial statements have been :udited by CSW's independent public accountants who were given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the board of directors and committees of the board, CSW and its subsidiaries believe that representations made to the independent public accountants during their audit were valid and appropriate. The reports of independent public accountants are presented elsewhere in this report. CSW, together with its subsidiary companies, maintains a system of internal controls to provide reasonable assurance that tiansactions are executed in accordance with management's authoritation, that the consolidated financial rtatements are prepared in accordance with generally accepted accounting principles and that the assets of CSW and its subsidiariu are properly safeguarded against unauthorized acquisition, use or dispeshion. The system includes a documented organizational structure and di ci> ion of responsibility, established policies and procedures including a policy on ethical standards which provides that the companies will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees. Internal auditors continuously monitor the effectiveness of the internal control system following standards established by the Institute ofInternal Auditors. Actions are taken by management to respond to deficiencies as they are identined. The board, operating through its audit committee, which is comprised entirely of directors who are not officers or employees of CSW or its subsidiatics, provides oversight to the financial reporting pocess. Due to the inherent limitations in the effectiveness of internal controls, no internal control system can provide absolute assurance that errors will not occur, llowever, management strives to maintain a balance, recognizing that the cost of such a system should not exceed the benefits derived. CSW and its subsidiaries believe that, in all material respects, its system ofintemal controls over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31,1996. E. R. Ilrooks Glenn D. Itositier Lawrence 11. Connors Chainnan, president and Senior Vice president and Controller Chief Executive Of ficer Chief Financial Officer
$E0 2 74
e-_. .m-.~_4 ___ .._.a__-a. _. .u,A 4..Am__.u_a_2,_ 4La 6,4-is___,, -_J m A. #_ -_m, __ __ ,,u.a_ma_.2m, sus.am,.4,2-ma_,u,_ a_a w 4w__. a.%.m.m,M4%.am .#+- Am.m. -.4 2,.,__s I 8 CENTRAL POWER AND LIGHT COMPANY . 4 I L b.. l l . 1 i i ( l l \ readL ll l 2-75
_ _ . _ _ . _ ._ ._. _. _ _ .. _ _ _ _ . _. _ ._ . _..~. _ _ _ _ _ - SELECTED FINANCIAL DATA ne following i, elected Onancial data for each of the nye years ended December 31 is provided to F highlight signl0 cant trends in the Gnancial condition and results of operations for CPL. Certain Gnancial statement items for prior years have been reclassined to conform to the most recent period presented. 1996 (1) 1993 1994 1993 (2) 1992 INCOME STATEMENT DATA kevenues $1,300.6R8 $1,073,469 $1,217,979 $1,223,528 $1,113,423
- Income before cumulative effect of changes in ucounting principles 147,051 206,447 20$,439 145,130 218,$11 Net income for common stock 133,488 191,978 191,635 158,422 202,441 BALANCE SHEET DATA Assets 4,828,263 4,881,136 4,822,699 4,781,745 4,5C3.660 leng term obligations (3) 1,32),054 1,517,347 1,466,393 1,384,820 1,376,280 Ccpitalization ratios Common stock equity . 47.8 % 44.9 % 45.5 % 46 6 % 46 9%
' Prefened stock 8.3 7.3 7.9 8.9 9.1 . ,
Long term debt 43.9 47.3 46.6 44.5 44.0 Ratio of enmings to fixed charges 2.86 2,63 3.24 2.69 (4) 3.23 (SEC Method) . (1) Earnings in 19% reflect a $15.6 million one time charge, net of tax, associated with certain investments for plant sites, enginecting , studies and lignite reserves and the expiration in 1995 of Mirror CWIP liability amortization incorne, j (2) Earnings in 1993 were significantly affected by restructuring charges, the $27 million tumulative effect of changes in accounting ,- principles and prior year tax adjustments. CPL changed its method of accounting for unbilled r, - enues in 1993, Pro forma amounts, assuming that the change in accounting for unbilled revenues had been adopted retroactively, are not materially different from amounts reported for prior years and therefore have not been restated. (3) Long term obligations includes long-term debt and, for 1992 and 1993, also preferred stock su'$ect to mandatory redemption. (4) Ratio of camings to fixed charges for 1993 was calculated before cumulative etrest of change in accounting principles. l r ( 2 76-- rf of e- -s --- m e-ow92. + -_,.y g-w -,,,,-,r,.p- --,y9-~-gy w q, "
CENTRAL POWER AND LIGliT COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIA.L CONDITION AND RESULTS OF OPERATIONS Reference is made to CPL's Financial Statements and related Notes to Financial Statements and Selected Financial Data. The information contained therein should be read in conjunction with, and is essential in understanding, the following discussion and analysis. RESULTS OF OPERATIONS COMPARISON OF THE YEARS ENDED DECEMHER 31,1996 AND 1995 Overview i Net income for common stock for 1996 decreased 30% to $133 million from $192 million in 1995, ne decrease was due primarily to the expiration of Mirror CWIP liability amortization, the CPL 1996 Fuel Agreemeint, a charge in 1996 associated with certain investments for plant sites, engineering studies and lignite reserves of approximately $15.6 million, net of taxes,'and management's expectation of the outcome of CPL's pending rate review . Partially offsetting the decline was the absence of the net effect of the CPL 1995 Agreement. See NOTE 2, LITIGATION AND REGULATORY PROCEEDINGS for additional information. Electric Operating Revenues . Electric operating revenues were $1.3 billion in 1996, an increase of 21% when compared to 1995 revenues of $1.1 billion. The increase was due primarily to a $96.6 million increase in fuel revenues resulting l
, primarily from higher average unit fuel costs and purchased power as discussed below. The increase was also " attributable to a one time $50 million base rate refund and a $623 million disallowance of under recovered fuel costs in 1995 as a result of the CPL 1995 Agreement. KWil sales increased 6% resuldng primarily from ,
increased customer and favorable weathe telated demand as well as rcisidential and comrnarcial customer growth. Fuel . .
. Fuel expense increased $53.0 million, or 18%, during 1996 as compared to 1995. He increase in fuel expense was due primarily to an 18% increase in the average unit cost of fuel from $1.37 per MMbtu in 1995 to $1.62 per MMbtu in 1996. The fuel costs reflects an increase in the spot market price of natural gas partially offset by a decrease in the delivered cost of coal and a one time $9.6 million reduction in fuel expense as a result of the CPL 1996 Fuel Agreement.
Purchased Power Purchased power increased $39.9 million during 1996 when compared to the prior year primarily as a result ofincreased economy energy purchases at a higher cost per MWH. Also contributing to this increase w:re additional cogeneration purchases in 1996. Other Operating Other operating expenses increased $22.5 million or 11% during 1996 when compared to 1995. This increase was due primarily to a 59.5 million write off associated with the cancellation of a transmission project, a $2.2 million write-off of demand side management assets as well as increased rate case and decommissioning
. expenses, all associated with management's expectation of the outcome of CPL's pending rate review. Also contributing to the increase was the establishment of a regulatory asset for rate case costs previously expensed l and subsequent amortization of such regulatory asset pursuant to the CPL 1995 Agreement. Further
( contributing to this increase were lower employee-related costs in 1995. l 2 77
Mestructuring Charges . ne overall increase of $25.4 million during 1996 when compared to 1995 was due primarily to the 2 recognition of a $20.7 million regulatory asset established in accordance with the CPL 1995 Agreement for previously recorded restructuring charges. In 1996, the CSW System began implementation of organintional and executive changes which are expected to be, complete in early 1997. CPL recorded its $4.6 million portion of the estimated cost of the restructuring during 1996. . Maintenance - Maintenance expenses decreased $10.1 million or 16% during 1996 when compared to 1995 due primarily lower production and distribution maintenance. ne decrease in production maintenance was the result of fewer scheduled steam maintenance repair projects in 1996 as well as lower nuclear maintenance due to fewer scheduled refueling outages in 1996. The decrease in distribution was due primarily to lower tree trimming expenses in 1996. Depreciation andAmortitati0n Depreciation and amortiution increased $2.3 million, or 2%, during 1996 as compared to 1995 as a result of an increase in depreciable property and the amortintion of regulatory assets associated with the CPL 1995 Agreement. Such increases were partially offset by a decrease in depreciation rates, effective May 1996, in accordance with management's expectation of the outcome of CPL's pending rate review. l Taxes, other than income Taxes, other than income increased $8.1 million during 1996 as compared to 1995 due primarily to lower 1995 ad valorem taxes resulting from revisions of prior year estimates. ,
' l income Taxes , l 1 Income taxes increased $82.6 millfon in 1996 as compared to 1995 due primarily to the accelerated flowback in 1995 of $34.3 'million of unprotected excess deferred income taxes in accordance with the CPL 1995 Agreement. This increase was also attributable to prior year tax adjustments, higher pre tax income, excluding the effects of the' one time charge, as discussed below, and the permanent tax effect associated with the expiration of the Mirror CWIP liability amortintion, also discussed below. ,
Otherincome andDeductions Other income and deductions decreased $67.5 million in 1996 when compared to 1995. Mifroi CWIP liability amortintion, which expired in 1995, contributed $41.0 million to other income and deductions in 1995. Also, a one-time charge in 1996 associated with certain investments for plant sites, engineering studies and - lignite reserves of approximately $15.6 million, net of tax, contributed to this decline. Furthermore, other income and deductions decreased in 1996 cs a result of the recognition of previously deferred factoring income in 1995 pursuant to t!.e CPL 1995 Agreement. Interest Charges ^ Interest on long-term debt decreased $5.8 million during 1996 when compared to 1995 as a result of refinancing activity in 1995. Interest on short term debt and other decreased $1.4 million during 1996 when compared to 1995 primarily as a result oflower levels of short term debt outstanding at lower interest rates partially offset by an increase in the amortization of debt issuance costs and AFUDC for bonowed funds. I 2 78 wmy e-r44 " *y----w-a- ir ~ t---s'--
COMPARISON OF THE YEARS ENDED DECEM:ER 31,1995 AND 1994 Overview Net income for common stock was unchanged in 1995 when cornpared to 1994 at $192 million, although CPL reported lower electric operating revenues, Mirror CWIP liability amonization and higher interest charges offset by lower operating expenses and taxes. Also impacting 1995 was the effect of the CPL - 1995 Agreement.' Electric Operating Revenues Total revenues were $1.1 billion in 1995, a decrease of 12% when compared to 1994 revenues of $1.2 1 l billion. The decline was due primarily to a one time $50 million base rate refund and a $62.3 million disallowance of under recovered fuel costs resulting from the CPL 1995 Agreement. Also contributingin the decrease in revenues was a $66.6 million decrease in fuel revenues resulting primarily from lower average unit . fuel costs and purchased power as discussed below and a wholesale fuel revenue refund. Partially offsetting the decrease in fuel revenues was a $34.4 million increase in non. fuel revenues resulting from a 6% increase in KWil sales. The increase in sales was attributable to increased usage per customer, residential and commercial customer growth and a new contract with an existing wl olesale customer.
' t Fuel ' - ' , .
i Fuel expense decreased $40.5 million, or 12%, during 1995 as compared to 1994. The decrease in fuel expense was due primarily to a 22% decrease in the average unit cost of fuel from $1.75 per MMtr.v in 1994 to #
$1.37 per MMbtu in 1995. The decrease in the average unit cost of fuel resulted from the expiration of higher priced gas contracts that were replaced with lower cost spot market natural gas, the renegotiation .
of a coal contract and increased usage oflower unit cost nuclear fuel. The decrease in the unit cost of fuel was partially offset by a 13% increase in generation. r
., Purchased Power , , ..
~ Purchased power decreased $22.7 million during 1995 when compared to the prior year. The decrease w:s due primarily to increased generation at STP, which replaced power that had been purchased during the first half of 1994 when STP was out of service, and an unscheduled outage at a fossil fueled generating plant during the third quarter of 1994.
Other Operating. .
- w ,Other operating expenses decreased $15.8 million, or 7%, during 1995 when compared to 1994. The decrease was due primarily to a seduction in employce related costs.
Restructuring Charges Restructuring charges decreased $20.8 million during 1995 when compared to 1994. The decrease was due primarily to the recognition of a $20.7 million regulatory asset established in accordance with the CPL
.1995 Agreement for previously recorded restructuring charges.
v Maintenance . . Maintenance expense decreased $5.3 million in 1995 when compared to 1994 as a result of postponement of previously scheduled plant maintenance and savings resulting from cost containment effons. Depreciation and Amortization - Depreciation and amortiution increased $8.9 million, or 6%, during 1995 as compared to 1994 as a r:sult of an increase in depreciable property and the amortintion of reguls:ory assets associated with the CPL 1995 Agreement. 4 2 79 y _-w s, t'#-' )ym- - + e-
Taxes, Other than income Taxes, othef Aan income decreased 514.5 million during 1995 es compared to 1994 due primarily to lower ad valorem tax expense resulting from a true.up of prior year estimates, income Taxes income taxes decreased $59.5 million in 1995 as compared to 1994 due primarily to the reduction of
$34.3 million of unprotected excess deferred income taxes in accordance with the CPL 1995 Agreement, prior year tax adjustments and lower pre tax income.
Otherincome andDeductions Mirror CWIP liability arnortiration decreased $27.0 million in 1995 when compared to 1994, in accordance with the original liability amortiration schedule agreed upon in the settlement ofits rate cases in 1990 and 1991, CPL nmortized its Mirror CWIP liability in declining amounts over the years 1991 through 1995. Other income was higher in 1995 when compared to 1994 due primarily to the recognition of factoring income pursuant to the CPL 1995 Agreement, interest Charges . Interest on long term debt increased $4.8 million during 1995 as compared to 1994 as a result of increased long term debt outstanding. Interest on short term debt and other increased $7.6 million during 1995 ; when compared to 1994 as a result of higher levels of short term debt outstanding at higher interest rates and the recognition ofinterest expense associated with over recovered fuel. LIQUIDITY AND CAPITALS RESOURCES . Overview CPL's need for capital results primarily from its ceustruction of facilities to provide reliable electric service to its customers. Internally generated funds should meet most of the capital requirements, However, if internally generated funds are not sufficient, CPL's financial condition should allow it access to the capital markets. Construction Expenditures CPL maintains a continuing construction program, the nature and extent of which is based upon current and estimated future demands upon the system. Planned construction expenditures for CPL for the next three years are primarily to improve and expand distribution facilities and will be funded primarily through . int 3rnally generated funds, These improvements will be required to meet the anticipated needs of new ' eustomers and the growth in the requirements of existing customers. Construction expenditures, including AFUDC, for CPL were approximately $139 million in 1996, $155 million in 1995 and $179 million in 1994. CPL's estimated total construction expenditures, including AFUDC, for the years 1997 through 1999 are presented in the following table (The foregoing statement constitutes a forward looking statement within the meaning of Section ME of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). CONSTRUCTION EXPENDITURES 1997 1998 1999 Total (milhons) Oeneration $ 19 $ l$ $ 14 $ 48 Transminion 9 11 19 39 Di' thution 68 71 72 211 Fuv. 13 19 2$ $7 Other 11 Il 10 32
=1120 $127 5140 1387 2-80
ne U.S. Electric Operating Companies plan to dismantle certain power plant properties during late 1997 and 1998 Dismantling includes the removal, disposal and/or salvage of retired equipment and ancillary buildings. None of the units to be dismantled is included in CPL's 1996 aggregate capbility, ne depreciation rates of the U.S. Electric Operating Companies include a component for net removal cost a th:refore are being recovered from customers currently through rates. As a result, actual dismantling of these units will not have a material impact on net income. Current estimates of capital resources that will be required by the U.S. Electric Operating Companies to dismantle these units range from $10 million to $15 million an CPL's share of such costs are not reflected in the above construction numbers, it is anticipated that a request for bids will be issued by mid 1997. Although CPL does not believe that it will require subshntial additions of generating capacity over the n:xt several years, the U.S. Electric System's internal resource plan presently anticipates that any additional capacity needs will corne from a vr.riety of sources includir .>ower purchases, nerefore, during 1996, CPL 1, net of tax, for certain investments in plant recorded reserves and write-offs in the araount of $15.6 - i sit:s, cngheering studies and lir, nite reserves. Refer tt < grated Resource P/nn for additional infonnation regarding future capacity need ,. i inflation Annual inflation rates, as measured by the Consumer Price Index, have avera;ed approximately 2.8% during the three years ended December 31,1996. CPL believes that inflation, at this level, does not materially affect its results of operation or financial condition. Ilowever, under existing regulatory practice, only the historical cost of plant is recoverable from customers. As a result, cash Dows designed to provide recovery of historical plant costs may not be adequate to replace plant in future years. Long Term Financing As of December 31,1996, the capitalization ratios of CPL were 48% common stock equity,8% preferred stock and 44% long term debt. CPL's embedded cost oflong-term debt was 6.9% at December 31, 1996. CPL continually monitors the capital markets for opportunities to lower its cost of capital through r: financing. CPL is committed to maintaining financial Dexibility through a strong capital stmeture and favorable securities ratings in order to access the capital markets opportunistically or when required. See CSW's ITEM 7-MD& A for CPL'c securities' ratings, in August 7996, $63.3 million of Red River,6.0%, Series 1996 PCRBs were issued for the bnefit of CPL, PSO and WTU. The proceeds from this issuance were used to refund the $63.3 million of Red River,7 7/8% Series 1984 PCRBs. CPL's portion of th}}