ITEM 1. BUSINESS.
CSW, incorporated under the laws of Delaware in 1925, is a Dallas-based public utility holding company registered under the Holding Company Act. CSW owns all of the outstanding shares of common stock of the U.S. Electric Operating Companies, CSW Services, CSW Credit, CSW Energy, CSW International, C3 Communications, EnerShop, and CSW Energy Services, 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. In 1999, CSW's operating segments, including its four registrants that form the U.S. Electric segment, contributed the following percentages to aggregate operating revenues, operating income and net income.
U.S. U.K. CPL PSO SWEPCO WTU Electric Electric Other Total ---------------------------------------------------------- Operating 26% 13% 17% 8% 64% 31% 5% 100% Revenues Operating 35% 15% 14% 8% 72% 23% 5% 100% Income Net Income (1) 37% 15% 18% 7% 77% 24% (1)% 100% (1) Net Income before Extraordinary Items
The relative contributions of the U.S. Electric, U.K. Electric and Diversified Electric segments and other non-utility subsidiaries to the aggregate operating revenues, operating income and net income differ from year to year due to variations in weather, fuel costs, timing and amount of rate changes and other factors, including but not limited to changes in business conditions and the results of non-utility businesses. 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. The sale of electricity by the U.K. Electric segment tends to increase during colder winter months because of a higher demand for power. For additional detail related to CSW's reportable business segments, see ITEM 8. - NOTE 14. BUSINESS SEGMENTS. For financial results showing CSW's seasonality, see ITEM 8. - NOTE 19. QUARTERLY INFORMATION.
The CSW System is subject to the jurisdiction of the SEC under the Holding Company Act with respect to the issuance, acquisition and sale of securities, the acquisition and sale of utility assets, the acquisition of or any interest in any other business and accounting practices, including certain affiliate transactions, and other matters. See RATES AND REGULATION below, and ITEM 7. MD&A for additional information regarding the Holding Company Act.
PROPOSED AEP MERGER
Background Information On December 22, 1997, CSW and AEP announced that their boards of directors had approved a definitive merger agreement for a tax-free, stock-for-stock transaction creating a company with a total market capitalization of approximately $28 billion at that time. At December 31, 1999, the total market capitalization of the combined company would have been $19 billion ($9 billion in equity; $10 billion in debt). The combined company will serve more than 4.7 million customers in 11 states and approximately 4 million customers outside the United States. On May 27, 1998, AEP shareholders approved the issuance of the additional shares of stock required to complete the merger. On May 28, 1998, CSW stockholders approved the merger. On December 16, 1999, the AEP merger agreement was amended to extend the date of the agreement to June 30, 2000, after which either party may terminate the agreement.
Under the merger agreement, each common share of CSW will be converted into 0.6 share of AEP common stock. Based upon AEP's closing price immediately prior to the merger announcement, this represented a premium of 20% over the CSW closing price, and AEP would have issued approximately $6.6 billion in stock to CSW stockholders to complete the transaction. At December 31, 1999, AEP would have issued approximately $4.1 billion in stock to CSW stockholders to complete the transaction. CSW plans to continue to pay dividends on its common stock until the closing of the AEP Merger at approximately the same times and rates per share as in 1999, subject to the continuing evaluation of CSW's earnings, financial condition and other factors by the CSW board of directors.
Under the merger agreement, there will be no changes required with respect to the public debt issues, the outstanding preferred stock or the Trust Preferred Securities of CSW's subsidiaries.
AEP and CSW anticipate net savings related to the merger of approximately $2 billion over a 10-year period from the elimination of duplication in corporate and administrative programs, greater efficiencies in operations and business processes, increased purchasing efficiencies, and the combination of the two work forces. AEP and CSW continue to seek opportunities for additional savings and anticipate significant additional savings will be achieved after the merger.
The electric systems of AEP and CSW will operate on an integrated and coordinated basis as required by the Holding Company Act. Any fuel savings resulting from the coordinated operation of the combined company will be passed on to customers.
The merger agreement contains covenants and agreements that restrict the manner in which the parties may operate their respective businesses until the time of closing of the merger. In particular, without the prior written consent of AEP, CSW may not engage in a number of activities that could affect its sources and uses of funds. Pending closing of the merger, CSW's and its subsidiaries' strategic investment activity, capital expenditures and non-fuel operating and maintenance expenditures are restricted to specific agreed upon projects or agreed upon amounts. In addition, prior to consummation of the merger, CSW and its subsidiaries are restricted from: (i) issuing shares of common stock other than pursuant to employee benefit plans; (ii) issuing shares of preferred stock or similar securities other than to refinance existing obligations or to fund permitted investment or capital expenditures; and (iii) incurring indebtedness other than pursuant to existing credit facilities, in the ordinary course of business or to fund permitted projects or capital expenditures. These restrictions are not expected to limit the ability of CSW and its subsidiaries to make investments and expenditures in amounts previously budgeted. (The foregoing statements constitute forward-looking statements 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).
Merger Regulatory Approval The merger is conditioned, among other things, upon the approval of several state and federal regulatory agencies. In order to be closed, the merger must satisfy many conditions, including the condition that it must be accounted for as a pooling of interests. The parties may not waive some of these conditions. AEP and CSW have initiated the process of seeking regulatory approvals, but there can be no assurance as to when, on what terms or whether the required approvals will be received. The proposed AEP Merger has a targeted completion date in the second quarter of 2000. However, there can be no assurance that the AEP Merger will be consummated.
See ITEM 7. MD&A and ITEM 8. - NOTE 15. PROPOSED AEP MERGER.
U.S. ELECTRIC
The U.S. Electric Operating Companies generate, purchase, transmit, distribute and sell electricity. The U.S. Electric Operating Companies serve approximately 1.8 million customers in one of the largest combined service territories in the United States covering approximately 152,000 square miles in portions of Texas, Oklahoma, Louisiana and Arkansas. The customer base includes a mix of residential, commercial and diversified industrial customers. 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 northeastern Texas, northwestern Louisiana and western Arkansas. Information concerning each of the U.S. Electric Operating Companies for 1999 is presented in the following table.
The largest cities in CPL's service territory are Corpus Christi, Laredo and McAllen. The economic base of CPL's service territory includes manufacturing, mining, agricultural, transportation and public utilities sectors. Major activities in these sectors include oil and gas extraction, food processing, apparel, metal refining, chemical and petroleum refining, plastics and machinery equipment. 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.
The largest cities in PSO's service territory are Tulsa, Lawton, Broken Arrow and Bartlesville. The economic base of PSO's service territory includes petroleum products, manufacturing and agriculture. The principal industries in the territory include natural gas and oil production, oil refining, steel processing, aircraft maintenance, paper manufacturing and timber products, glass, chemicals, cement, plastics, aerospace manufacturing, telecommunications and rubber goods.
The largest cities in SWEPCO's service territory are Shreveport/Bossier City, Longview and Texarkana. 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 refining, manufacturing of pulp and paper, chemicals, food processing and metal refining. The territory also has several military installations, colleges and universities.
The largest cities in WTU's service territory are Abilene and San Angelo. 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. Significant gains have been made in economic diversification through value added processing of these products. The natural resources of the territory include oil, natural gas, sulfur, gypsum and ceramic clays. Important manufacturing and processing plants served by WTU produce cottonseed products, oil products, electronic equipment, precision and consumer metal products, meat products, gypsum products and carbon fiber products. The territory also has several military installations and state correctional institutions.
The U.S. Electric Operating Companies operate on an interstate basis to facilitate exchanges of power. PSO and WTU are interconnected through the 200 MW North HVdc transmission interconnection located at Vernon, Texas. SWEPCO and CPL are interconnected through the 600 MW East HVdc transmission interconnection located at Pittsburg, Texas.
CPL and WTU are members of the ERCOT power grid that operates in Texas. Other ERCOT members include Texas Utilities Electric Company, HL&P, Texas Municipal Power Agency, 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 power grid that includes 12 investor-owned utilities, 7 municipalities, 7 cooperatives, 3 state agencies and 1 federal agency as well as IPPs and power marketers operating in the states of Arkansas, Kansas, Louisiana, Oklahoma and parts of Mississippi, Missouri, New Mexico and Texas. ERCOT members interchange power and energy with one another on a firm, economy and emergency basis, as do the members of the SPP.
CSW Services performs, at cost, various accounting, engineering, tax, legal, financial, electronic data processing, centralized economic dispatching of electric power and other services for the CSW System, primarily for the U.S. Electric Operating Companies. The U.S. Electric Operating Companies are functionally organized into power generation, energy delivery and energy services business units, which are centrally managed by CSW Services. Currently, CSW is developing management information systems to report segment information along these business lines. See RECENT DEVELOPMENTS AND TRENDS - Texas Business Separation Plan for an explanation of CSW's future plans to unbundle its vertically integrated electric services.
U.K. ELECTRIC
SEEBOARD is one of the 12 regional electricity companies formed as a result of the restructuring and subsequent privatization of the United Kingdom electricity industry in 1990. CSW acquired indirect control of SEEBOARD in April 1996. SEEBOARD's principal businesses are the distribution and supply of electricity. In addition, SEEBOARD is engaged in other businesses, including gas supply, electricity generation, and electrical contracting.
SEEBOARD's service area covers approximately 3,000 square miles in Southeast England. The service area extends from the outlying areas of London to the English Channel, and includes large towns such as Kingston-upon-Thames, Croydon, Crawley, Maidstone, Ashford and Brighton, as well as substantial rural areas. The area has a population of approximately 4.7 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 grown in importance, while the industrial sector has declined. Considerable commercial development has occurred 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.
In 1998, the electricity market in the U.K. began a phased opening of competition, allowing domestic and small business customers in selected areas to choose their electric suppliers. During 1999, competition was extended to the entire country. SEEBOARD became one of the first regional electricity companies to compete in the open marketplace, with part of its service area being opened to competition in October 1998. SEEBOARD is actively competing to retain its existing customers and win new customers in other regions.
In a joint venture, SEEBOARD Powerlink won a 30-year contract for $1.6 billion to operate, maintain, finance and renew the high-voltage power distribution network of the London Underground, the largest metropolitan rail system in the world. SEEBOARD Powerlink will be responsible for distributing high voltage electricity supply to all 270 London Underground stations and to some 250 miles of the rail system's track. SEEBOARD's partners in the Powerlink consortium are an international electrical engineering group and an international cable and construction group.
On June 30, 1999, SEEBOARD purchased the 50% interest in Beacon Gas held by BP Amoco. Beacon Gas was a joint venture between SEEBOARD and BP Amoco set up for the supply of gas.
See RATES AND REGULATION - U.K. ELECTRIC and ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Regulatory Price Proposal for SEEBOARD for additional information related to scheduled changes in SEEBOARD's prices and expected effects thereof.
OTHER CSW BUSINESS OPERATIONS
CSW continually seeks opportunities to expand its non-utility business in areas related to energy and energy services. This expansion frequently occurs through strategic domestic and international acquisitions, through marketing initiatives inside and outside of the service territories of the U.S. Electric Operating Companies and through new business investments. Acquisitions of any new assets, or development of any new business opportunities, must meet defined criteria, including the potential to lower CSW System costs, increase long-term efficiency and competitiveness, and provide an acceptable return on investment to CSW. See ITEM 7. MD&A, PROPOSED AEP MERGER and ITEM 8. NOTE 15. PROPOSED AEP MERGER for information related to covenants and restrictions on certain business activities.
Diversified Electric
CSW Energy CSW Energy presently owns interests in seven operating power projects totaling 1,308 MW which are located in Colorado, Florida and Texas. In addition to these projects, CSW Energy has other projects in various stages of development.
CSW Energy began construction in August 1998 of a 500 MW power plant, known as Frontera, in the Rio Grande Valley, near the city of Mission, Texas. The natural gas-fired facility began simple cycle operation of 330 MW in July 1999 and is scheduled to commence combined cycle operation in early 2000. Pursuant to AEP's and CSW's stipulated agreement with several intervenors in the state of Texas related to the AEP Merger, CSW Energy may sell 250 MW of Frontera upon completion of the merger, subject to certain conditions. See ITEM 7. MD&A, PROPOSED AEP MERGER and ITEM 8. NOTE 15. PROPOSED AEP MERGER for additional information.
CSW Energy also has entered into an agreement with Eastman Chemical Company to construct and operate a 440 MW cogeneration facility in Longview, Texas. This facility will be known as the Eastex Cogeneration Project. Construction of the facility began in the fourth quarter of 1999, with expected operation in early 2001. CSW Energy will sell excess electricity generated by the plant in the wholesale electricity market.
In October 1999, GE Capital Structured Finance Group purchased 50% of the equity ownership of Sweeny Cogeneration Limited Partnership. CSW Energy's after-tax earnings from the proceeds of the transaction were approximately $33 million. The agreement between CSW Energy and GE Capital Structured Finance Group provides for additional payments to CSW Energy subject to completion of a planned expansion of the Sweeny cogeneration facility, which may be operational in the fourth quarter of 2000.
CSW International CSW International pursues investment opportunities in EWGs and FUCOs and currently holds investments in the United Kingdom, Mexico and South America.
CSW International and its 50% partner, Scottish Power plc have entered into a joint venture to construct and operate the South Coast power project, a 400 MW combined cycle gas turbine power station in Shoreham, United Kingdom. CSW International has guaranteed approximately (pound)19 million of the (pound)190
million construction financing. Both the guarantee and the construction financing are denominated in pounds sterling. The U.S. dollar equivalent at December 31, 1999 would be $31 million and $308 million respectively, using a conversion rate of (pound)1.00 equals $1.62. The permanent financing is unconditionally guaranteed by the project. Construction of the project began in March 1999, and commercial operation is expected to begin in late 2000.
Through November 1999, CSW International had purchased a 36% equity interest in Vale for $80 million. In 1998, CSW International also extended $100 million of debt convertible into equity in Vale. In December of 1999, CSW International converted $69 million of that $100 million of debt into equity, thereby raising its equity interest in Vale to 44%. CSW International anticipates converting the remaining debt to equity over the next two years. See ITEM 7. MD&A - DIVERSIFIED ELECTRIC - CSW International for additional information about these investments.
As of December 31, 1999, CSW International had invested $110 million in common stock of a Chilean electric company.
Energy Services
C3 Communications C3 Communications has two active business units, C3 Networks and C3 Utility Automation. C3 Networks offers wholesale, high capacity, long-haul regional and metropolitan fiber and collocation services to telecommunications carriers and Internet service providers in Texas and Louisiana.
C3 Networks has approximately 1,500 miles of fiber network in Texas and Louisiana and offers collocation services to carriers and Internet service providers through sites in Dallas, Houston, Austin, San Antonio, Abilene, San Angelo, Corpus Christi, Harlingen, Laredo, and McAllen, Texas and Tulsa, Oklahoma.
C3 Communications plans to expand existing Texas and Louisiana routes and to expand its fiber network to include Oklahoma and Arkansas. The network expansion is expected to include additional sites in Victoria, Longview and Bryan, Texas; Shreveport and Monroe, Louisiana; Lawton and Oklahoma City, Oklahoma and Fayetteville and Fort Smith, Arkansas. C3 Communications also plans to add two additional products to its offerings: cost-effective, reliable wholesale Internet access and wholesale managed modem services.
C3 Utility Automation services include meter reading, validation and settlement services; automated meter reading equipment sales and leasing; energy information services and equipment sales and services. In 1999, C3 Communications launched a new energy information service, PurView(TM). In addition, EnerACT(TM) advisory services, was transferred from EnerShop to better align products and marketing. PurView(TM) is a service for collecting meter data and interactively viewing and analyzing consumption information over the Internet. EnerACT(TM), transferred from EnerShop, is an energy information and advisory service for multi-site building owners and managers who want to increase property value, control operating expenses and prepare for utility deregulation. Additionally, C3 Utility Automation shifted away from efforts to sell large-scale capital intensive mass-market automated meter reading deployments in favor of more distributed methods for collecting meter data and providing energy information services. While currently providing service for over 90,000 direct access customers in California, C3 Communications plans to leverage its experience providing meter data services by expanding into eight other states where electric restructuring allows competition for metering services.
C3 Communications believes that electric industry restructuring will continue to fuel interest in its energy information services. Evaluation of partnerships and acquisitions will also be a key element of growth for C3 Communications in 2000. 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.
EnerShop EnerShop's two product lines in 1999 were performance contracting and EnerACT(TM) advisory services until August 1999, when EnerACT(TM) was transferred to C3 Communications to better align products and marketing.
EnerShop continues to provide energy services to customers in Texas and Louisiana that are designed to help reduce customers' operating costs through increasing energy efficiency and improving equipment operations. EnerShop utilizes the skills of local trade allies in offering services that include energy and facility analysis, project management, engineering design, equipment procurement and construction and performance monitoring.
Business Ventures The CSW Services' Business Ventures is comprised of companies that pursue energy-related businesses. Projects include providing energy management systems, electric substation automation software and the marketing and distribution of electric bikes and associated accessories under the TotalEV(TM) name.
In late 1997, CSW Energy Services was launched to explore the electric utility industry's emerging retail supply markets as they were deregulated on a state-by-state basis. In January 1999, CSW Energy Services announced that it was ceasing its business as a retail electric supplier and that it would assign its existing electricity supply contracts to other suppliers or terminating them. In the fourth quarter of 1999, the CSW Business Ventures group's investment in an energy-related company that provides staffing services for nuclear power plants was transferred from PSO to CSW Energy Services.
Other Diversified CSW Credit was originally formed to purchase, without recourse, accounts receivable from the U.S. Electric Operating Companies to reduce working capital requirements. In addition, because CSW Credit's capital structure is more highly leveraged than that of the U.S. Electric Operating Companies, CSW's overall cost of capital is lower. Subsequent to its formation, CSW Credit's business has expanded to include the purchase, without recourse, of accounts receivable from certain non-affiliated utilities, subject to limitations imposed by the SEC under the Holding Company Act.
CSW Leasing, Inc. is a subsidiary which is 80% owned by CSW, and makes investments in leveraged leases of transportation equipment.
COMPETITION AND INDUSTRY CHALLENGES
Competitive forces at work in the electric utility industry are affecting the CSW System and electric utilities generally. Current legislative and regulatory initiatives are aimed at creating greater competition in both the wholesale and retail markets in the future. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility Restructuring Legislation for further information. 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 will be at risk of losing 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 to compete effectively in the marketplace. In light of these anticipated changes, CSW continues to seek opportunities to expand its business operations that are not regulated by state utility commissions (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).
To address the anticipated changes in the electric utility industry and to properly align its business operations with its non-regulated activities, CSW manages its business operations in five distinct lines of business. These business lines fall into both the regulated and non-regulated categories. In addition, given the expected restructuring of the utility industry, certain aspects of the business lines will eventually cease to be regulated. Consequently, CSW's operating structure is designed to accommodate both the current business environment as well as the anticipated future environment. The five business lines are: (i) power generation; (ii) energy delivery; (iii) energy services; (iv) international energy operations; and (v) telecommunications. Currently, CSW is developing management information systems to report segment information along these business lines.
Code of Conduct Under Customer Choice Legislation was enacted in Arkansas and Texas in 1999 to restructure the electric utility industry in those states. These two new laws require that the CSW System begin to operate its utilities as separate power generation entities, retail electric providers and transmission and distribution entities. Power generation entities and retail electric providers will be non-regulated; transmission and distribution entities will continue to be regulated. On or before September 1, 2000, the Texas operations of each of the U.S. Electric Operating Companies will separate their regulated and non-regulated utility activities.
The purpose of these laws and the separation they impose is to create financial and informational firewalls between regulated and non-regulated activities of the CSW System so that competitive sensitive information cannot be shared by regulated and non-regulated entities.
In order to comply with the new Texas and Arkansas laws, the Registrants will follow a "code of conduct," which requires the non-regulated business activities to be separate from the regulated activities. Transactions between the regulated and non-regulated activities will be subject to an information-sharing "firewall" and the requirement to act on an arm's-length basis.
For additional information regarding competition and industry challenges, including legislative initiatives at both the state and federal level, see ITEM 7. MD&A - RECENT DEVELOPMENTS AND TRENDS - Competition and Industry Challenges - Code of Conduct Under Customer Choice and ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS.
RATES AND REGULATION
The CSW System is subject to the jurisdiction of the SEC under the Holding Company Act with respect to the issuance of securities, certain acquisition and divestiture activities, certain affiliate transactions and other matters. The Holding Company Act generally limits the operations of a registered holding company to that of a single integrated public utility system, plus such additional businesses as are functionally related to such system. The U.S. Electric Operating Companies have been classified as public utilities under the Federal Power Act. Accordingly, the FERC has jurisdiction, in certain respects, over their electric utility facilities and operations wholesale rates, and certain other matters. The U.S. Electric Operating Companies are subject to the jurisdiction of various state commissions as to retail rates, accounting matters, standards of service and, in some cases, issuances of securities, certification of facilities and extensions or divisions of service territories. For a discussion of regulation by the various environmental agencies that applies to the CSW System, see ENVIRONMENTAL MATTERS below.
U.S. Electric
Franchises The U.S. Electric Operating Companies hold franchises to provide electric service in various municipalities within their service areas. These franchises have varying provisions and expiration dates, including, in some cases, termination and buy-out provisions. CSW considers the franchises of the U.S. Electric Operating Companies to be adequate for the conduct of their business. However, due to electric utility restructuring legislation, which is phasing in competition to retail markets in Arkansas and Texas, the U.S. Electric Operating Companies expect additional competition in their franchise areas. See ITEM 7. MD&A - Securitization of Generation-related Regulatory Assets and Stranded Costs and ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility Restructuring Legislation for additional information on electric utility restructuring.
Texas Rates - CPL, SWEPCO and WTU The Texas Commission has original jurisdiction over retail rates in the unincorporated areas of Texas. The governing bodies of incorporated municipalities have original jurisdiction over rates within their incorporated limits. Municipalities may elect, and some have elected, to surrender this original jurisdiction 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 certificated to one utility, to one of several competing electric cooperatives or investor owned utilities, to one of the competing municipal electric systems, or it may be certificated to two or more of these entities. The Texas Commission has changed these certificated areas only slightly since 1976.
Effective with the passage of the Texas Legislation, in areas in which each certificated retail electric utility is providing customer choice, the Texas Commission, if requested by a retail electric utility, shall examine all areas within the service area of the retail electric utility that are also certificated to one or more other retail electric utilities and amend the certificates so that only one retail electric utility is certificated to provide distribution services in any such area.
Three parties have filed applications at the Texas Commission requesting authority to provide retail electric service in CPL's currently certificated areas. Two of the parties requested that the Texas Commission order CPL to permit them to use CPL's distribution facilities, which management believes to be unlawful. Hearings on the matter were held in December 1999, and a final order is anticipated in the second quarter of 2000. A third party sought to operate as a distribution utility serving an economic development project, part of which was in CPL's certificated territory. CPL and the third party entered into a settlement agreement ending the dispute. The settlement provided that the other party could serve the area, but would reimburse CPL on a per KW basis for any stranded costs to the new system.
In a separate docket, the Texas Commission has determined that three large naval bases, which are currently served as industrial customers by CPL, may qualify as wholesale customers. A second phase of the proceeding has been docketed to analyze all issues pertinent to the bases being able to take electric service from other wholesale providers. Among the issues to be addressed is the extent to which the U.S. Navy would have to compensate CPL for costs that may be stranded if the naval facilities were to obtain electric service from another wholesale provider. The procedural schedule has been suspended to allow the parties time to finalize a settlement agreement.
Oklahoma Rates - PSO PSO currently 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 maps in all unincorporated areas for all regulated retail electric suppliers serving Oklahoma. In accordance with RESCTA, a retail electric supplier may not extend retail electric service into the certified territory of another supplier, except to serve its own facilities or to serve a new customer with an initial full load of 1,000 KW or more. RESCTA provides that when any territory certified to a retail electric supplier or suppliers is annexed and becomes part of an incorporated city or town, the certification becomes null and void. However, once established in the annexed territory, a supplier may generally continue to serve within the annexed area. See ITEM 7. MD&A, RECENT DEVELOPMENTS AND TRENDS.
Arkansas and Louisiana Rates - SWEPCO SWEPCO is subject to the jurisdiction of the Arkansas Commission and Louisiana Commission with respect to retail rates, as well as the Texas Commission as described above. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility Restructuring Legislation for information on electric utility restructuring.
Nuclear Regulation - CPL Ownership of an interest in a nuclear generating unit exposes CPL and, indirectly, CSW to regulation not common 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 broad power to impose licensing and safety-related requirements. Along with other federal and state agencies, the NRC also has extensive regulations pertaining to the environmental aspects of nuclear reactors. The NRC has the authority to impose fines and/or shut down a unit until compliance is achieved, depending upon its assessment of a particular situation. For additional information regarding STP, see ITEM 7. MD&A.
U.K. Electric
SEEBOARD Rates and Franchise Area The distribution and supply businesses of SEEBOARD are principally regulated by the Electricity Act of 1989 and by the conditions contained in SEEBOARD's public electricity supply license. The public electricity supply license generally continues until at least 2025, although it may be revoked upon 25 years' prior notice after 2000. In addition, the public electricity supply license may be revoked by the United Kingdom's Secretary of State in certain specified circumstances. Prior to October 1998, SEEBOARD had the sole right to supply substantially all of the consumers in its authorized area, except where demand exceeded 100 KW. However, since October 1998, on a phased-in basis, SEEBOARD no longer has monopoly supply rights in its franchise area. At December 31, 1999, 15% of SEEBOARD's domestic customers had elected to switch to an alternative supplier.
Most of the income of the distribution business is regulated by a formula set by the DGEGS based upon, among other factors, the United Kingdom Retail Price Index. The formula generally sets a cap on the average price per unit of electricity distributed, with allowed annual increases based upon changes in the United Kingdom Retail Price Index minus a percentage factor set from time to time by the DGEGS. The prices charged by SEEBOARD in its franchise supply business are also determined from a formula set from time to time by the DGEGS. However, as competition increases, the regulatory cap is likely to be removed. The formula provides for a price cap derived from the forecast electricity purchase costs, transmission charges, distribution costs and overheads, together with an allowed margin as determined by the DGEGS. All holders of a second-tier license, including SEEBOARD, who supply electricity to non-franchise customers must pay charges to the host regional electricity company for the use of its distribution network.
In 1999, OFGEM completed its review of price controls for both the distribution and supply businesses. Despite SEEBOARD being identified as one of the three most efficient electricity suppliers, OFGEM's final proposals will result in substantial reductions in revenue for the distribution business, effective from April 1, 2000, for five years. In addition, supply prices to retail customers will be capped from April 1, 2000, for two years. Overall, these changes to the supply business are viewed as broadly neutral to earnings. A year-end study of projected SEEBOARD cash flows demonstrated that the recorded value of goodwill was not impaired by these regulatory developments. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information related to the review of SEEBOARD's prices.
FUEL RECOVERY - U.S. ELECTRIC
The recovery of fuel costs from retail customers by the U.S. Electric Operating Companies is subject to regulation by the state utility commissions in the states in which they operate. All of the contracts of the U.S. Electric Operating Companies with their wholesale customers contain FERC approved fuel-adjustment provisions for recovery of fuel costs.
Texas Fuel Recovery - 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 its jurisdiction may petition to revise its fuel factor every six months according to a specified schedule. Fuel factors may also be revised in the case of emergencies or in a general rate proceeding. Fuel factors are in the nature of temporary rates and the utility's collection of revenues by such factors is subject to adjustment at the time of a fuel reconciliation. Under these procedures, at its semi-annual adjustment date, a utility 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 defined as variances of four percent or more of the most recent Texas Commission adopted annual estimated fuel cost for the utility. A utility does not have to revise its fuel factor when requesting a surcharge or refund. An interim emergency fuel factor order must be issued by the Texas Commission within 30 days after such petition is filed by the utility. Final reconciliation of fuel costs is made through a reconciliation proceeding, which may contain a maximum of three years and a minimum of one year of reconcilable data, and must be filed with the Texas Commission no later than six months after the end of the period to be reconciled. In addition, a utility must include a reconciliation of fuel costs in any general rate proceeding regardless of the time since its last fuel reconciliation proceeding. Any fuel costs that are determined to be unreasonable in a reconciliation proceeding are not recoverable from retail customers.
Beginning January 1, 2002, fuel costs will not be subject to Texas Commission fuel reconciliation proceedings. Pursuant to the Texas Legislation, after January 1, 2002, the date that retail customer choice commences, each electric utility will file a final fuel reconciliation for the period ending December 31, 2001. These final fuel balances will be included in each company's true-up proceeding in 2004. See ITEM 7. MD&A - Securitization of Generation-related Regulatory Assets and Stranded Costs and ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility Restructuring Legislation.
Oklahoma Fuel Recovery - PSO In general, MWH sales to PSO's retail customers are made at rates which include a service level fuel cost adjustment factor reflecting the difference between projected fuel and purchased power costs and the fuel rate embedded in PSO's base rates. The factors are determined twice each year and are based upon projected fuel, natural gas transportation, and purchased power costs. Any difference between projected and actual costs is included in the fuel recovery calculation for future periods. Oklahoma law requires that an examination of
PSO's retail fuel cost adjustment factor is performed annually by the Oklahoma Commission, which approves the utility's embedded fuel rate per KWH.
Arkansas and Louisiana Fuel Recovery - SWEPCO SWEPCO's fuel recovery mechanisms are subject to the jurisdiction of the Arkansas Commission and the Louisiana Commission. SWEPCO's retail rates currently in effect in Louisiana are adjusted based 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.
A new SWEPCO fuel adjustment rider, as approved by the Arkansas Commission, was implemented in December 1999. Under this fuel adjustment rider, an annual fuel cost factor is developed each year based on the previous year's actual fuel cost. This factor is then applied to each billing month's sales, which allows SWEPCO to recover fuel costs from its customers. Any difference between actual fuel cost for the month and the revenues collected from customers, including interest, will be included in the determination of the annual factor for the following year.
Recoverability of Fuel Costs Under current regulation, the U.S. Electric Operating Companies recover all their material fuel costs from their customers. The inability of any of the U.S. Electric Operating Companies to recover its fuel costs under the procedures described above could have a material adverse effect on such company's results of operations and financial condition.
See ITEM 7. MD&A and ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for further information with respect to regulatory, rate and fuel proceedings.
FUEL SUPPLY AND PURCHASED POWER - U.S. ELECTRIC
The U.S. Electric Operating Companies' net dependable summer rating, power generation capabilities and the type of fuel used are set forth in ITEM 2.
ITEM 2. PROPERTIES.
U.S. ELECTRIC
The total capacity (MW, net dependable summer rating) of each of the U.S. Electric Operating Companies, as of December 31, 1999 is shown in the following table. The U.S. Electric Operating Company properties are all located in either Arkansas, Louisiana, Oklahoma or Texas.
Natural Coal MW Lignite Nuclear Other Total Company Stations(a) Gas MW MW MW MW(b) MW(c) - -------------------------------------------------------------------------------- CPL 12 3,188 686 630 6 4,510 PSO 8 2,867 1,008 25 3,900 SWEPCO 9 1,795 1,848 842 4,485 WTU 11 1,005 377 11 1,393 -------------------------------------------------------------- CSW 40 8,855 3,919 842 630 42 14,288 --------------------------------------------------------------
(a) CSW owns 38 power stations. CPL, PSO and WTU each reflect their joint ownership of the Oklaunion power station in their respective ownership count. (b) Some plants have the capability to burn oil in combination with gas. However, the use of oil in facilities primarily designed to burn gas results in increased maintenance expense and a slight reduction in capacity. PSO and WTU have 25 MW and 11 MW, respectively, of facilities primarily designed to burn oil. CPL has 6 MW of hydroelectric generation. (c) Data reflects only the U.S. Electric Operating Companies' portion of plants which are jointly owned with non-affiliates. For additional information concerning jointly owned facilities see ITEM 8. NOTE 6. JOINTLY OWNED ELECTRIC UTILITY PLANT.
All of the generating facilities described above are located on land owned by the U.S. Electric Operating Companies or, in the case of jointly owned facilities, 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, easements or licenses have been obtained (which the U.S. Electric Operating Companies believe to be satisfactory, but without examination of underlying land titles). 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' FMBs are issued.
DIVERSIFIED ELECTRIC
In addition to the generating facilities described above, CSW has ownership interests in other electrical generating facilities, both foreign and domestic. Information concerning these facilities at December 31,1999 is listed below.
Capacity Ownership Company Location Total Interest Status ------------------------------------------------- Operating Facilities - United States Brush II CSW Energy Colorado 68 47% QF Ft. Lupton CSW Energy Colorado 272 50% QF Mulberry CSW Energy Florida 120 50% QF Orange Cogen CSW Energy Florida 103 50% QF Newgulf CSW Energy Texas 85 100% EWG Sweeny (1) CSW Energy Texas 330 50% QF Frontera (2) CSW Energy Texas 330 100% EWG --------- 1,308 --------- Operating Facilities - International CSW United Medway International Kingdom 675 37.5% n/a CSW Altamira International Mexico 109 50% FUCO --------- ---------
(1)During 2000, additional development at the Sweeny facility is expected to add approximately 150 MW to current capacity. (2)Frontera was operational during the summer of 1999 with a capacity of 330 MW. During the fourth quarter of 1999, construction continued to bring the plant to combined cycle operation in the second quarter of 2000 at which time the facility is expected to have a capacity of 500 MW.
CAPITAL EXPENDITURES
The CSW System, including the U.S. Electric Operating Companies, maintains a continuing construction program, the nature and extent of which is based upon current and estimated demands upon the system. In addition, the CSW System requires capital to invest in new enterprises, either through equity investments or loans to projects, when deemed appropriate. See ITEM 7. MD&A for detailed information related to historical and projected capital expenditures. See ITEM 7. MD&A - PROPOSED AEP MERGER and ITEM 8. NOTE 15. - PROPOSED AEP MERGER for a discussion of capital expenditures limitations related to the AEP Merger.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Registrants are parties to various legal claims, actions and complaints arising in the normal course of business which 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. BUSINESS, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
CSW None. CPL None. PSO None. SWEPCO None. WTU None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
CSW COMMON STOCK INFORMATION
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. Market prices were obtained from the composite listing of all closing prices on CSW common stock trades as reported on Bloomberg Financial Commodities News.
CSW plans to continue to pay dividends on its common stock until the closing of the AEP Merger at approximately the same times and rates per share as were paid during 1999, subject to continuing evaluation of CSW's earnings, financial condition, and other factors by the CSW board of directors. Traditionally, the CSW board of directors has declared dividends to be payable on the last business day of February, May, August and November.
In January 2000, CSW's board of directors elected to maintain the quarterly dividend for the quarter ended December 31, 1999, payable on March 1, 2000, to stockholders of record on February 5, 2000, at $0.435 per share, or an indicated rate of $1.74 per year. As a result, CSW anticipates the payment of the second quarter dividend to shareholders of record on or about May 5, 2000 unless the merger closes prior to that date.
There were approximately 53,000 record holders of CSW's common stock as of March 13, 2000. See ITEM 8. NOTE 12. COMMON STOCK for information on CSW common stock.
U.S. ELECTRIC 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 by the U.S. Electric Operating Companies to CSW on their respective common stock for 1999 and 1998 are presented in the following table.
CPL PSO SWEPCO WTU ----------------------------------------------------- (thousands)
1999 $148,000 $65,000 $96,000 $28,000 1998 249,000 69,000 120,000 40,000
Reference is made to the page numbers in the table below for the location of the following items:
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ITEM 7a.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. See ITEM 7. MD&A - RISK MANAGEMENT and ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page Number CSW CPL PSO SWEPCO WTU ------------------------------------- Selected Financial Data 2-4 2-101 2-115 2-129 2-143 Combined MD&A (1) 2-5 2-5 2-5 2-5 2-5 Results of Operations 2-36 2-102 2-116 2-130 2-144 Quantitative and Qualitative Disclosures 2-2 2-2 2-2 2-2 2-2 About Market Risk Financial Statements and Supplementary Data 2-40 2-105 2-119 2-133 2-146 Report of Independent Public Accountants 2-96 2-112 2-126 2-140 2-153 Report of Management 2-99 2-113 2-127 2-141 2-154
(1) CSW combines the MD&A sections of the Registrants except for the Results of Operations which are located at the page numbers indicated in the table above.
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CENTRAL AND SOUTH WEST CORPORATION
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SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended December 31 is provided to highlight significant trends in the financial condition and results of operations for CSW. CSW reported an extraordinary loss at SWEPCO and WTU in 1999 resulting from legislation enacted in Arkansas and Texas under which the electric generation portion of CPL's, SWEPCO's and WTU's business in those states no longer meet the criteria to apply SFAS No. 71. CSW also recorded an extraordinary item at CPL in 1999 for the loss on reacquired debt from two debt issues related to generation assets and the discontinuance of SFAS No. 71. CSW recorded the United Kingdom windfall profits tax in the third quarter of 1997 as an extraordinary item. CSW sold Transok in 1996. Accounting rules require the classification of both the sale and the actual operating results prior to such sale as discontinued operations. In addition to these reclassifications, certain other financial statement items for prior years have been reclassified to conform to the 1999 presentation.
1999 (1) 1998 (1) 1997 (1) 1996 1995 ------------------------------------------------ (millions, except per share and ratio data) INCOME STATEMENT DATA Revenues $5,537 $5,482 $5,268 $5,155 $3,143 Income from continuing operations 469 440 329 297 377 Income before extraordinary items 469 440 329 429 402 Net income for common stock 455 440 153 429 402 Basic and diluted EPS from continuing operations $2.21 $2.07 $1.55 $1.43 $1.97
Basic and diluted EPS before extraordinary items $2.21 $2.07 $1.55 $2.15 $2.20
Basic and diluted EPS $2.14 $2.07 $0.72 $2.07 $2.10 Dividends paid per share of common stock $1.74 $1.74 $1.74 $1.74 $1.72 Average common shares outstanding 212.6 212.4 212.1 207.5 191.7
BALANCE SHEET DATA Assets $14,162 $13,897 $13,616 $13,512 $14,055 Long-term obligations (2) 4,156 4,273 4,424 4,237 4,134 Capitalization ratios Common stock equity 47% 45% 44% 46% 42% Preferred stock -- 2 2 4 4 Trust Preferred Securities 4 4 4 -- -- Long-term debt 49 49 50 50 54
(1)See CENTRAL AND SOUTH WEST CORPORATION - RESULTS OF OPERATIONS for factors affecting earnings. (2)Long-term obligations include long-term debt, Trust Preferred Securities and preferred stock subject to mandatory redemption.
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REGISTRANTS' COMBINED MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND CENTRAL AND SOUTH WEST CORPORATION'S RESULTS OF OPERATIONS
Reference is made to CSW's Consolidated Financial Statements and related Notes to Consolidated 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. The RESULTS OF OPERATIONS of CSW and the U.S. Electric Operating Companies precede their financial statements.
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 strategic plan designed to help position CSW to be competitive in this rapidly changing environment and in developing a global energy business.
CSW has undertaken key initiatives in the implementation of this overall strategy. The centerpiece of these initiatives is the proposed merger between AEP and CSW that was announced in December 1997 pursuant to which CSW would become a wholly owned subsidiary of AEP. The proposed merger would join two companies which are low cost providers of electricity and is expected to achieve greater economies of scale than either company could achieve on its own. In addition, CSW International continues to make investments in South America. These initiatives are discussed in more detail below and elsewhere in this report. See RECENT DEVELOPMENTS AND TRENDS - PROPOSED AEP MERGER and OTHER INITIATIVES - DIVERSIFIED ELECTRIC.
Most states have considered the adoption of various legislative and regulatory initiatives to restructure the electric utility industry and enact retail competition, and several states, like Texas and Arkansas, have already passed legislation that requires the implementation of retail access for customers. In response to these changes, the CSW System is developing strategies to appropriately deal with the changing environment. For example, the Texas Electric Operating Companies have recently filed an unbundling plan in response to legislation recently enacted in Texas. See RECENT DEVELOPMENTS AND TRENDS - Industry Restructuring Initiatives in Arkansas, Oklahoma, Louisiana and Texas, Texas Business Separation Plan and Securitization of Generation-related Regulatory Assets and Stranded Costs.
CSW believes that compared to other electric utilities, the CSW System is well positioned to capitalize on the opportunities resulting from an increasingly deregulated and competitive market for the generation, transmission and distribution of electricity. The CSW System should benefit from economies of scale by virtue of its size and is a reliable and relatively low-cost provider of electric power in its service area. Specifically, CSW will seek competitive advantages through its diverse and stable customer base, competitive prices for electricity, diversified fuel mix, extensive transmission interconnections, diversity of regulation and financial flexibility. See RECENT DEVELOPMENTS AND TRENDS for additional information. (The foregoing discussion contains forward-looking statements 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).
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LIQUIDITY AND CAPITAL RESOURCES
Overview of Operating, Investing and Financing Activities Net cash inflows from operating activities decreased $139 million to $803 million for the twelve month period ended December 31, 1999 compared to the same period last year due primarily to increased payments on accounts payable, less favorable fuel recovery positions and higher levels of fuel inventories related to year 2000 contingency plans. Partially offsetting the decrease in cash flows from operating activities was a lower change in accounts receivable balance in 1999 compared to 1998. Further offsetting the decrease in cash flows from operating activities was the absence in 1999 of a refund paid to CPL customers in 1998.
Net cash outflows from investing activities increased $123 million to $758 million during the twelve months ended December 31, 1999 compared to the same period a year ago. The increase in net cash outflows from investing activities was due primarily to higher levels of construction spending in 1999 at the U.S. Electric Operating Companies and SEEBOARD. Also contributing to the increase in cash outflows from investing activities were two transactions that occurred in 1998: (1) the sale of a portion of C3 Communication's interest in ChoiceCom and, (2) the payment by CSW International's Altamira partner, Alpek, of a 50% obligation related to the power plant project. The increase in net cash outflows from investing activities was partially offset by cash inflows related to the sale of a 50% interest in CSW Energy's Sweeny plant. Also partially offsetting the increase in cash outflows from investing activities was the absence in 1999 of CSW International loans to Vale.
Net cash inflows from financing activities for the twelve months ended December 31, 1999 were $71 million, a $296 million increase compared to a cash outflow of $225 million for the same period in 1998. The increase in net cash flows from financing activities was due primarily to higher proceeds from the issuance of long-term debt and a higher level of change in short-term debt. Also contributing to the increase in cash inflows from financing activities was the absence in 1999 of the repayment of a $60 million variable rate bank loan at CSW Services and the redemption of $28 million of preferred stock at SWEPCO. Partially offsetting the increase in net cash inflows was a higher level of long-term debt maturities and reacquisitions in 1999 compared to 1998 as well as the redemption of $160 million of preferred stock at CPL.
The non-cash impacts of exchange rate differences on the translation of foreign currency denominated assets and liabilities were recorded on a separate line on the cash flow statement.
Internally Generated Funds Internally generated funds, which consist of cash flows from operating activities less common and preferred stock dividends, should meet most of the capital requirements of the CSW System. However, CSW's strategic initiatives, including expanding CSW's core electric utility and non-utility businesses through acquisitions or otherwise, may require additional capital from external sources. For a description of certain restrictions on CSW's ability to raise capital from external sources, see ITEM 7. MD&A, PROPOSED AEP MERGER and ITEM 8. NOTE 15. PROPOSED AEP MERGER. Productive investment of net funds from operations in excess of capital expenditures and dividend payments is necessary to enhance the long-term value of CSW for its investors. CSW is continually evaluating the best use of internally generated funds, which totaled $426 million, $564 million and $343 million for 1999, 1998 and 1997, respectively. The amounts of internally generated funds for the U.S. Electric Operating Companies are detailed in the following table.
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1999 1998 1997 -------------------------------- (millions) CPL Internally Generated Funds $147 $183 $172 Construction Expenditures Provided by Internally Generated Funds 70% 148% 136%
PSO Internally Generated Funds $47 $124 $62 Construction Expenditures Provided by Internally Generated Funds 46% 180% 78%
SWEPCO Internally Generated Funds $59 $105 $108 Construction Expenditures Provided by Internally Generated Funds 53% 127% 100%
WTU Internally Generated Funds $38 $20 $69 Construction Expenditures Provided by Internally Generated Funds 77% 53% 217%
On December 2, 1999, OFGEM published its final price proposals from its United Kingdom electricity distribution review. OFGEM has proposed revenue reductions in SEEBOARD's distribution business of 21%. In addition, OFGEM has proposed the reallocation of a further 12% of costs out of SEEBOARD's distribution business into its supply business. These proposals were accepted on December 20, 1999, and will take effect on April 1, 2000, and remain in effect for five years. OFGEM's proposals will reduce net income for SEEBOARD in the year 2000 by approximately $40 million, dependent upon the level of further cost reductions that can be achieved, and by approximately $60 million in 2001. CSW's net income from SEEBOARD U.S.A., its United Kingdom business segment, was $113 million for the twelve months ended December 31, 1999.
OFGEM's price proposals for SEEBOARD will have a material adverse effect on the future results of operations of SEEBOARD U.S.A. and CSW, but are not be expected to adversely affect the financial condition of CSW.
Capital Expenditures The CSW System's need for capital results primarily from its construction of facilities to provide reliable electric service to its customers. The historical capital requirements of the CSW System have been primarily for the construction of electric utility plant. However, current projected capital expenditures are expected to be primarily for existing production, transmission and distribution systems and for various non-utility investments. The U.S. Electric Operating Companies maintain a continuing construction program, the nature and extent of which is based upon current and estimated future demands upon the system. Planned construction expenditures for the U.S. Electric Operating Companies for the next three years are primarily to improve and expand production, transmission and distribution facilities. These improvements will be required to meet the anticipated needs of new customers and the growth in the requirements of existing customers. These improvements will be funded primarily through internally generated funds. However, some long-term financing will likely be required.
CSW regularly evaluates its capital spending policies and generally seeks to fund only those projects and investments that management believes will offer satisfactory returns in the current environment. Consistent with this strategy, the CSW System is likely to continue to make additional investments in energy-related and non-utility businesses and will continue to search for other electric utility properties to acquire. Primary sources of capital for these expenditures are long-term debt, trust preferred securities and preferred stock issued by the U.S. Electric Operating Companies, long-term and short-term debt issued by CSW, as well as internally generated funds. Historically, the issuance
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of common stock by CSW has also been a source of capital. CSW Energy and CSW International typically use various forms of non-recourse project financing to provide a portion of the capital required for their respective projects as well as utilizing long-term debt for other investments. Although CSW and each of the U.S. Electric Operating Companies expect to fund the majority of their respective capital expenditures for their existing utility systems through internally generated funds, for any significant investment or acquisition, additional funds from the capital markets may be required. For a description of certain restrictions on CSW's ability to make investments and raise capital from external sources, including through the issuance of common stock, see ITEM 7. MD&A PROPOSED AEP MERGER and ITEM 8. NOTE 15. PROPOSED AEP MERGER.
The historical and estimated capital expenditures for the CSW System, including the U.S. Electric Operating Companies, SEEBOARD and other operations are shown in the CAPITAL EXPENDITURES table. The amounts include construction expenditures for the U.S. Electric Operating Companies and, for SEEBOARD and CSW's other operations, construction expenditures and net equity investments. The majority of the capital expenditures for the U.S. Electric Operating Companies for 1997 through 1999 were spent on transmission and distribution facilities. It is anticipated that the majority of the estimated capital expenditures for 2000 through 2002 will be for production, transmission and distribution facilities. For a description of certain restrictions on CSW's ability to make capital expenditures, including through the issuance of common stock, see PROPOSED AEP MERGER. (The table and statements below contain forward-looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION).
CAPITAL EXPENDITURES Estimated Expenditures 1997 1998 1999 2000 2001 2002 - -------------------------------------------- -------------------------------- (millions including AFUDC)
CSW $901 $669 $774 $1,071 $817 $643 CPL 130 127 215 229 266 191 PSO 82 71 105 174 121 86 SWEPCO 110 86 113 159 163 137 WTU 33 38 50 55 71 72
Estimated capital expenditures for 2000 - 2002 do not include expenditures for acquisition-type investments.
Although CSW does not believe that the U.S. Electric Operating Companies will require substantial additions of generating capacity over the next several years, the U. S. Electric's internal resource plan presently anticipates that any additional capacity needs will come from a variety of sources including power purchases.
Inflation Annual inflation rates, as measured by the U. S. Consumer Price Index, have averaged approximately 2.0% during the three years ended December 31, 1999. CSW believes that inflation, at this level, does not materially affect CSW's results of operations or financial position. However, under existing regulatory practice, only the historical cost of plant is recoverable from customers. As a result, cash flows designed to provide recovery of historical plant costs may not be adequate to replace plant in future years.
Financial Structure, Shelf Registrations and Credit Ratings As of December 31, 1999, the capitalization ratios of CSW were 47% common stock equity, 4% Trust Preferred Securities and 49% long-term debt. CSW is committed to maintaining financial flexibility through a strong capital structure and favorable securities ratings in order to access capital markets
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opportunistically or when required. CSW continually monitors the capital markets for opportunities to lower its cost of capital through refinancing activities. The estimated embedded cost of long-term debt for CSW and the U.S. Electric Operating Companies at December 31, 1999, is shown below.
CSW 7.0% CPL 6.4 PSO 6.4 SWEPCO 6.9 WTU 6.6
CSW can issue common stock, either through the purchase and reissuance of shares from the open market or by issuing original shares, to fund its LTIP, stock option plan, PowerShare plan and Retirement Savings Plan. CSW began funding these plans through open market purchases on April 1, 1997. CPL has shelf registration statements on file for the issuance of up to $60 million of FMBs and up to $75 million of preferred stock. PSO has a shelf registration statement on file for the issuance of up to $35 million of senior notes. SWEPCO has a shelf registration statement on file for the issuance of up to $250 million of senior notes, of which $150 million was issued in the first quarter of 2000. For a description of certain restrictions on CSW's ability to raise capital from external sources, see PROPOSED AEP MERGER.
The current securities ratings for each of the Registrants is presented in the following table, including the securities rating on the Trust Preferred Securities issued by CPL Capital I, PSO Capital I and SWEPCO Capital I.
Moody's Duff & Phelps Standard & Poor's --------------------------------------- CPL First mortgage bonds A3 A A Senior unsecured Baa1 A- A- Preferred stock Baa1 BBB+ BBB+ Trust preferred (CPL Capital I) Baa1 BBB+ BBB+ Junior subordinated deferrable Interest debentures Baa2 -- --
PSO First mortgage bonds A1 AA- AA- Senior unsecured A2 A+ A Preferred stock a3 A+ A- Trust preferred (PSO Capital I) a2 A+ A- Junior subordinated deferrable Interest debentures A3 -- --
SWEPCO First mortgage bonds Aa3 AA AA- Senior unsecured A1 AA- A Preferred stock a1 AA- A- Trust preferred (SWEPCO Capital I) aa3 AA- A- Junior subordinated deferrable Interest debentures A2 -- --
WTU First mortgage bonds A2 A+ A Senior unsecured A3 -- A- Preferred stock a3 A BBB+
CSW Commercial paper P-2 D-2 A-2
These securities ratings may be revised or withdrawn at any time, and each rating should be evaluated independently of any other rating.
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Long-Term Financing On May 1, 1999, $100 million of CPL's 7.50% Series JJ FMBs matured, and on December 1, 1999, $25 million of CPL's 7.125% Series DD FMBs matured. In June 1999, CPL reacquired $25 million of its 7.50% Series II FMBs, due April 1, 2023, and in November and December 1999, CPL called $75 million of its money market preferred stock and $85 million of its Series A and Series B preferred stock, each at par.
In November 1999, CPL issued $200 million of unsecured floating rate notes maturing November 23, 2001 and callable at par November 23, 2000. The interest rate will reset quarterly at the then current three-month LIBOR plus 0.60%.
The reacquisition, redemptions and maturities were funded with short-term debt and with proceeds from the issuance of the floating rate notes.
In November and December 1999, Matagorda County Navigation District No. 1 (Texas) sold for the benefit of CPL $111.7 million of 4.90% Series 1999A and $50 million of 4.95% Series 1999B unsecured tax exempt PCRBs. The bonds mature in 2030 but will be subject to remarketing and an interest rate reset in two years. The proceeds were used to refund $111.7 million aggregate principal amount of outstanding 7.50% Series T due December 15, 2014 and will be used to refund $50 million aggregate principal amount of outstanding 7.50% Series AA due March 21, 2020.
On January 1, 1999, $25 million of PSO's 7.25% Series K, FMBs matured. In July 1999, the Oklahoma Development Finance Authority sold for the benefit of PSO $33.7 million of 4.875% unsecured tax exempt PCRBs. The bonds mature in fifteen years but will be subject to remarketing and an interest rate reset in five years. In August 1999, the proceeds were used to refund $33.7 million aggregate principal amount of outstanding Oklahoma Environmental Finance Authority 5.9% Series A bonds due December 1, 2007.
On September 1, 1999, $40 million of SWEPCO's 6.125% Series W FMBs matured.
On February 16, 2000, CPL sold $150 million of unsecured floating rate notes. The bonds will have a two-year final maturity of February 22, 2002, but may be redeemed at par after one year. The interest rate will reset quarterly at the then current three-month LIBOR plus 0.45%. The initial rate, which was set February 18, 2000, was 6.56%. Net proceeds of $149.6 million will be used to refund $100 million of FMBs maturing April 1, 2000 and repay a portion of short-term debt. CPL is replacing FMBs with unsecured debt, which provides more financial flexibility as CPL unbundles its electric operations.
In the first quarter of 2000, SWEPCO sold $150 million of unsecured floating rate notes. The notes will have a two-year final maturity at March 1, 2002, but may be redeemed at par after one year. The interest rate will reset quarterly at the then current three-month LIBOR plus 0.23%. The initial rate, which was set March 1, 2000, was 6.34%. Net proceeds of $149.6 million will be used to refund $45 million of FMBs maturing April 1, 2000 and repayment of a portion of outstanding short-term indebtedness.
Short-Term Financing and Accounts Receivable Factoring The CSW System uses short-term debt, primarily commercial paper, to meet fluctuations in working capital requirements and other interim capital needs. CSW has established a system money pool to coordinate short-term borrowings for certain of its subsidiaries, primarily the U.S. Electric Operating Companies. In addition, CSW also incurs borrowings for other subsidiaries that are not included in the money pool. As of December 31, 1999, CSW had revolving credit facilities totaling $1.4 billion to back up its commercial paper program. At
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December 31, 1999, CSW had $1.3 billion outstanding in short-term borrowings. The maximum amount of short-term borrowings outstanding during the year, which had a weighted average interest yield for the year of 5.5%, was $1.4 billion during December 1999. Information concerning short-term borrowings for each of the U.S. Electric Operating Companies is presented in the following table.
Borrowing Borrowing Limit at date Limit at of Maximum Maximum Date of Maximum December 31, 1999 Borrowed Borrowed Borrowed -------------------------------------------------------------- (millions)
CPL $600 $600 $322 December 31, 1999 PSO 300 300 79 April 30, 1999 SWEPCO 250 250 141 December 31, 1999 WTU 165 165 26 March 3, 1999
CSW Credit purchases, without recourse, the accounts receivable of the U.S. Electric Operating Companies and certain non-affiliated electric utility companies. The sale of accounts receivable provides the U.S. Electric Operating Companies with cash immediately, thereby reducing working capital needs and revenue requirements. In addition, CSW Credit's capital structure contains greater leverage than that of the U.S. Electric Operating Companies, so CSW's cost of capital is lowered. CSW Credit issues commercial paper to meet its financing needs. At December 31, 1999, CSW Credit had a $1.2 billion revolving credit agreement, secured by the assignment of its receivables, to back up its commercial paper program, which had $754 million outstanding. The $1.2 billion facility will expire on June 23, 2000.
The maximum amount of such commercial paper outstanding during the year, which had a weighted average interest yield for the year of 5.3%, was $1.0 billion during August 1999. The average and year-end amounts of accounts receivable sold during 1999 by the U.S. Electric Operating Companies to CSW Credit are shown in the following table.
1999 1999 Average End of Year ----------------------- (millions)
CPL $139 $107 PSO 78 61 SWEPCO 97 73 WTU 44 26
CSW Energy and CSW International CSW Energy has 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 subject to limitations contained in the AEP merger agreement. See ITEM 8. NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES, for a discussion of CSW's investments and commitments in CSW Energy projects at December 31, 1999.
In January 1997, CSW received authority from the SEC under the Holding Company Act to spend an amount up to 100% of consolidated retained earnings on EWG or FUCO investments, subject to certain restrictions. As of December 31, 1999, CSW had invested an amount equal to 54% of consolidated retained earnings, as defined by Rule 53 of the Holding Company Act, on EWG and FUCO investments. For a description of certain restrictions on the ability of CSW and its
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subsidiaries to make capital expenditures in respect of QFs and independent power facilities and to make EWG and FUCO investments, see PROPOSED AEP MERGER.
RECENT DEVELOPMENTS AND TRENDS
PROPOSED AEP MERGER
On December 22, 1997, CSW and AEP announced that their boards of directors had approved a definitive merger agreement for a tax-free, stock-for-stock transaction. The combined company would serve more than 4.7 million customers in 11 states and approximately 4 million customers outside the United States. On May 27, 1998, AEP shareholders approved the issuance of the additional shares of stock required to complete the merger. On May 28, 1998, CSW stockholders approved the merger. On December 16, 1999, the merger agreement was amended to extend the term of the agreement to June 30, 2000. After June 30, 2000, either party may terminate the merger agreement if the merger has not been consummated.
AEP is subject to the information requirements of the Securities and Exchange Act of 1934, as amended, and in accordance therewith, files reports and other information with the SEC. For additional information related to AEP, see AEP's Current Reports on Form 8-K, its Quarterly Reports on Form 10-Q and its Annual Report on Form 10-K and the documents referenced therein.
Under the AEP merger agreement, each common share of CSW will be converted into 0.6 share of AEP common stock. CSW stockholders will own approximately 40% of the combined company. CSW plans to continue to pay dividends on its common stock until the closing of the AEP Merger at approximately the same times and rates per share as in 1999, subject to the continuing evaluation of CSW's earnings, financial condition and other factors by the CSW board of directors.
Under the AEP merger agreement, there will be no changes required with respect to the public debt issues, the outstanding preferred stock or the Trust Preferred Securities of CSW's subsidiaries.
AEP and CSW anticipate net savings related to the merger of approximately $2 billion over a 10-year period from the elimination of duplication in corporate and administrative programs, greater efficiencies in operations and business processes, increased purchasing efficiencies and the combination of the two work forces. As a result of the approved settlement and agreement with the state commissions in CSW and AEP's respective service territories, AEP and CSW have agreed to guarantee that approximately 55% of those savings will be passed through to their customers. AEP and CSW continue to seek opportunities for additional savings and expect to realize significant additional savings based upon the work of the merger transitions teams over the last two years. The preceding discussion constitutes forward-looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information. See FORWARD-LOOKING INFORMATION.
The electric systems of AEP and CSW will operate on an integrated and coordinated basis as required by the Holding Company Act. AEP and CSW project fuel savings of approximately $98 million over a 10-year period resulting from the coordinated operation of the combined company, which will be passed through to customers.
The AEP merger agreement contains covenants and agreements that restrict the manner in which the parties may operate their respective businesses until the time of closing of the merger. In particular, without the prior written consent of AEP, CSW may not engage in a number of activities that could affect its sources and uses of funds. Pending closing of the merger, CSW's and its
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subsidiaries' strategic investment activity, capital expenditures and non-fuel operating and maintenance expenditures are limited to specific agreed upon projects and in agreed upon amounts. In addition, prior to consummation of the merger, CSW and its subsidiaries are restricted from:
- - Issuing shares of common stock other than pursuant to employee benefit plans;
- - Issuing shares of preferred stock or similar securities other than to refinance existing obligations or to fund permitted investment or capital expenditures; and
- - Incurring indebtedness other than pursuant to existing credit facilities, in the ordinary course of business, or to fund permitted projects or capital expenditures. These limitations do not preclude CSW and its subsidiaries from making investments and expenditures in amounts previously budgeted.
Cook Nuclear Plant On June 25, 1999, AEP announced a comprehensive plan to restart the idle Cook nuclear power plant. Unit 2 is scheduled to return to service in April 2000, and Unit 1 is scheduled to return to service in September 2000. AEP stated that its announcement follows a comprehensive systems readiness review of all operating systems at Cook nuclear power plant and a cost/benefit analysis of whether to restart the plant or shut it down completely. Plant officials originally shut down both units of the facility, located in Bridgman, Michigan, in September 1997 because of questions raised during a design inspection by the NRC. AEP estimated that its costs to restart the idle plant should be approximately $574 million, of which $373 million has been spent through December 31, 1999.
On February 24, 2000, AEP announced a three-week delay in the planned April 1, 2000 restart. The delay is due to issues encountered during testing of equipment necessary for core reload and power operations of its Cook Unit 2. The testing process continues and may still encounter additional items that could extend the delay.
Merger Regulatory Approvals The merger is conditioned, among other things, upon the approval of several state and federal regulatory agencies. Some of the merger conditions cannot be waived.
State Regulatory Commissions The U.S. Electric Operating Companies have received approval for the merger from their respective state regulatory commissions in Arkansas, Louisiana, Oklahoma and Texas.
FERC On April 30, 1998, AEP and CSW jointly filed a request with the FERC for approval of their proposed merger. On May 25, 1999, AEP and CSW announced they had reached a settlement with the FERC trial staff resolving competition and rate issues that related to the proposed merger. On July 13, 1999, AEP and CSW reached an additional settlement with the FERC trial staff resolving energy exchange pricing issues. The settlements were submitted to the FERC for approval. Hearings at the FERC concluded on July 19, 1999. On November 23, 1999, the ALJ who presided over the FERC merger hearing issued a recommendation to the FERC that the merger be approved and found that the proposed merger is in the public interest.
On March 15, 2000, the FERC conditionally approved the merger. Conditions placed on the merger include:
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- - Transfer operational control of AEP's east and west transmission systems to a fully-functioning, FERC-approved regional transmission organization by December 15, 2001, which is the same implementation date included in the FERC's general order for regional transmission organizations that applies to all transmission-owning utilities.
- - Two interim transmission-related mitigation measures consisting of market monitoring and independent calculation and posting of available transmission capacity to monitor the operation of AEP's east transmission system.
- - Divestiture of 550 MW of generating capacity comprised of 300 MW of capacity in SPP and 250 MW of capacity in ERCOT. The FERC will require AEP and CSW to divest their entire ownership interest in the generating facilities that are to be divested. Alternatively, AEP and CSW may choose to divest the same or greater amount of capacity from different generating plants in their entirety. However, such generating plants must be of similar cost, operation and location characteristics of generating plants AEP and CSW originally proposed.
- - AEP and CSW must complete divestiture of the ERCOT capacity by March 15, 2001 and divestiture of the SPP capacity by July 1, 2002.
The FERC found that certain energy sales in SPP and ERCOT would be reasonable and effective interim mitigation measures until completion of the required SPP and ERCOT divestitures. The FERC will require the proposed interim energy sales to be in effect when the merger is consummated.
AEP and CSW must notify the FERC by March 30, 2000 whether they accept the condition that they transfer operational control of their transmission facilities to a fully-functioning, FERC-approved regional transmission organization by December 15, 2001 and the condition requiring the interim mitigation measures. If AEP and CSW accept the conditions, then AEP and CSW must make a compliance filing at least 60 days prior to consummation of the merger describing their plan to implement the interim mitigation measures. AEP and CSW intend to make this compliance filing on a date that would permit completion of the merger in the second quarter of 2000. AEP and CSW believe they can address the conditions.
NRC On June 19, 1998, CPL filed a license transfer application with the NRC requesting the NRC's consent to the indirect transfer of control of CPL's interests in the NRC licenses issued for STP from CSW to AEP. CPL would continue to own its 25.2% interest in STP, and CPL's name would remain on the NRC operating license. On November 5, 1998, the NRC approved the license transfer application with a condition that the merger must be completed by December 31, 1999. The NRC has extended the condition relating to completion of the merger to June 30, 2000.
Other Federal On October 13, 1998, AEP and CSW jointly filed an application with the SEC for approval of the proposed merger. The SEC merger filing requests approval of the merger and related transactions and outlines the expected combined company benefits of the merger to AEP and CSW customers and shareholders. Since then, AEP and CSW have filed several amendments to the application. Several parties have filed petitions opposing the proposed merger at the SEC which have not been withdrawn.
On July 29, 1999, applications were made with the FCC to authorize the transfer of control of licenses of several CSW entities to AEP. In February 2000, the FCC authorized the transfer which will be effective upon the completion of the proposed merger.
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On July 26, 1999, AEP and CSW submitted filings to the Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. On February 2, 2000, AEP and CSW announced that their proposed merger received antitrust clearance from the Department of Justice.
United Kingdom CSW has a 100% interest in SEEBOARD, and AEP has a 50% interest in Yorkshire. The proposed merger of CSW into AEP would result in common ownership of these United Kingdom entities. On January 25, 2000, the United Kingdom's Department of Trade and Industry approved the common ownership of the United Kingdom entities that would result from the proposed merger, subject to certain conditions concerning the separate operation of their respective distribution and supply businesses.
Other On April 20, 1999, AEP reached a settlement with the Indiana Utility Regulatory Commission staff addressing matters pertinent to Indiana regarding the proposed merger. The Indiana Utility Regulatory Commission approved the settlement on April 26, 1999. The settlement agreement resulted from an investigation of the proposed merger between AEP and CSW initiated by the Indiana Utility Regulatory Commission.
On April 21, 1999, AEP and CSW announced that they had reached separate settlements with six wholesale customers that address issues related to the proposed merger.
On April 28, 1999, AEP and CSW announced that they ratified a settlement agreement with local unions of the IBEW representing employees of AEP and CSW. The settlement agreement covered issues related to the pending merger between AEP and CSW. As part of the settlement, the IBEW local unions have withdrawn their opposition to the merger.
On May 26, 1999, AEP and CSW announced that they had reached a settlement agreement with the Kentucky Attorney General and several AEP customers in Kentucky addressing matters pertinent to Kentucky regarding the pending merger between AEP and CSW. The Kentucky Public Service Commission has approved the settlement.
On August 6, 1999, AEP announced that it had ratified a settlement agreement with local unions of the UWUA representing employees of AEP. The settlement agreement covered issues raised in the pending merger between AEP and CSW. As part of the settlement, the UWUA local unions will not oppose the merger.
On October 21, 1999, the Public Utility Commission of Ohio issued a decision stating that it will notify the FERC that it is no longer opposed to AEP's proposed merger with CSW and that it will no longer seek conditions to the merger.
AEP and CSW also have reached settlements with the Missouri Public Service Commission, the Michigan Public Service Commission and various wholesale customers and intervenors in the FERC merger proceeding.
Completion of the Merger AEP and CSW have targeted consummation of the AEP Merger in the second quarter of 2000. The merger is conditioned, among other things, upon the approval of several state and federal regulatory agencies. All of such approvals, except from the SEC, have been obtained. The transaction must satisfy many conditions, including the condition that it must be accounted for as a pooling of interests. The parties may not waive some of these conditions. AEP and CSW continue the process of seeking regulatory approvals, but there can be
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no assurance as to when, on what terms or whether the required approvals will be received. After June 30, 2000, either CSW or AEP may terminate the merger agreement if all of the conditions to its obligation to close have not been satisfied. There can be no assurance that the AEP Merger will be consummated.
Merger Costs As of December 31, 1999, CSW had deferred $43 million in costs related to the AEP Merger on its consolidated balance sheet, which will be charged to expense if AEP and CSW do not complete their proposed merger. If the merger is consummated, such costs would be recovered in rates pursuant to merger sharing provisions contained in the state settlement agreements.
See ITEM 8. NOTE 15. PROPOSED AEP MERGER.
COMPETITION AND INDUSTRY CHALLENGES
Competitive forces at work in the electric utility industry are affecting the CSW System and other electric utilities, generally. Increased competition facing electric utilities is driven by complex economic, political and technological factors. These factors have resulted in legislative and regulatory initiatives that are likely to result in even greater competition at both the wholesale and retail levels in the future. As competition in the industry increases, the U.S. Electric Operating Companies will have the opportunity to seek new customers and at the same time be at risk of losing 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 less expensive than electricity. In the United Kingdom, the franchised electricity supply business opened to full competition on a phased-in basis beginning October 1998. As a result, SEEBOARD is able to seek new customers while risking the loss of existing customers to other competitors. CSW believes that, overall, its prices for electricity and the quality and reliability of its service currently place it in a position to compete effectively in the energy 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). See RATES AND REGULATORY MATTERS for a discussion of several current issues affecting the CSW System.
Electric industry restructuring and the development of competition in the generation and sale of electric power requires resolution of several important issues, including, but not limited to:
- - Who will bear the costs of prudent utility investments or past commitments incurred under traditional cost-of-service regulation that will not be economically viable in a competitive environment, sometimes referred to as stranded costs;
- - Whether all customers have access to the benefits of competition;
- - How, and by whom, the rules of competition will be established;
- - What the impact of deregulation will be on conservation, environmental protection and other regulator-imposed programs; and
- - 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,
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including the proposals' competitive position and treatment of stranded utility investment, primarily at CPL, resulting from such proposals. In CSW's service territory, the states of Arkansas and Texas have passed legislation addressing most of these issues while work continues on the remaining issues. The U.S. Electric Operating Companies believe they are in a position to compete effectively in a deregulated, more competitive marketplace. However, if events and circumstances arise in the future that would indicate all costs previously incurred are not recoverable from customers, then the U.S. Electric Operating Companies may be required by existing accounting standards to recognize potentially significant losses from unrecovered costs. (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 Regulatory Accounting for additional information. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility Restructuring Legislation for information on electric utility restructuring.
Wholesale Electric Competition in the United States The Energy Policy Act, which was enacted in 1992, significantly altered the way in which electric utilities compete. The Energy Policy Act created exemptions from regulation under the Holding Company Act and permits utilities, including registered utility holding companies and non-utility companies, to own EWGs.
EWGs are wholesale power producers that are free from most federal and state regulation, including restrictions under the Holding Company Act. These provisions enable broader participation in wholesale power markets by reducing regulatory hurdles to such participation.
The Energy Policy Act also allows the FERC, on a case-by-case basis and with certain restrictions, to order wholesale transmission access and to order electric utilities to enlarge their transmission systems. A FERC order requiring a transmitting utility to provide wholesale transmission service must include provisions generally that permit the utility to recover from the FERC applicant all of the costs incurred in connection with the transmission services and any enlargement of the transmission system and associated services.
Wholesale energy markets, including the market for wholesale electric power, have been 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, QFs, EWGs and others for sales of electric power. While CSW believes the Energy Policy Act will continue to make the wholesale markets more competitive, CSW is unable to predict how the Energy Policy Act will ultimately impact the U.S. Electric Operating Companies.
FERC Orders No. 888 and No. 889 The FERC issued Order No. 888 in 1996, which is the final comparable open access transmission service rule. The provisions of FERC Order No. 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 wholesale sales and purchases and by requiring utilities to rely on the same transmission information that their transmission customers rely on to make wholesale purchases and sales.
In addition, the Texas Commission adopted amendments to its transmission rule in 1999 that requires 100% postage stamp pricing in ERCOT which began in September 1999. Postage stamp pricing is fixed rate pricing regardless of transmission distance traveled. CPL and WTU began recording transmission revenues and expenses in accordance with the Texas Commission's transmission rule on January 1, 1997.
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In 1996, the FERC issued Order No. 889 requiring transmitting utilities to establish and operate an OASIS for the dissemination of information regarding available transfer capability for their respective transmission systems. The OASIS is an on-line information system that provides the same information about the utility's transmission system to all transmission customers. The U.S. Electric Operating Companies utilize, and participate in the OASIS systems for ERCOT and SPP. FERC Order No. 889 also created standards of conduct requiring utilities to operate any wholesale power sales business separately from their transmission operations. The standards of conduct are designed to ensure that utilities and their affiliates, as sellers of power, do not have preferential access to information about wholesale transmission prices and availability.
Independent System Operators On December 20, 1999, the FERC issued Order No. 2000 relating to RTOs. FERC Order No. 2000 describes the characteristics that an RTO should have as well as the functions an RTO should perform. Every jurisdictional utility must file at the FERC either:
- - A proposal to participate in an RTO;
- - A petition asking whether a proposed transmission entity would qualify as an RTO, or
- - An alternative filing describing the utility's efforts to participate in an RTO and the reasons those efforts were unsuccessful.
Such filings must be made by October 15, 2000 for utilities that are not members of a FERC approved ISO. Utilities that are members of a FERC approved ISO have until January 15, 2001, to file with the FERC demonstrating compliance of their ISOs with FERC Order 2000. On December 30, 1999, the SPP filed at the FERC a proposal for recognition as an ISO and an RTO. In addition, on September 7, 1999, the SPP submitted various tariff revisions to the FERC that resulted in an SPP open access tariff offering all of the services required by FERC Order No. 888 as of February 1, 2000.
Retail Electric Competition in the United States Most states have considered the adoption of various legislative and regulatory initiatives to restructure the electric utility industry and enact retail competition, and several states have already passed legislation that requires the implementation of retail access for customers.
Industry Restructuring Initiatives in Arkansas, Oklahoma, Louisiana and Texas Several initiatives to restructure the electric utility industry and enact retail competition legislation have been undertaken in the four states in which the U.S. Electric Operating Companies operate. Arkansas, Oklahoma and Texas have enacted restructuring legislation.
Arkansas In April 1999, legislation was enacted for electric utility restructuring in Arkansas. Some major provisions of that legislation include:
- - Retail competition begins January 1, 2002. The Arkansas Commission can delay implementation, but not beyond June 30, 2003.
- - Companies with transmission lines must operate those facilities through a transmission organization approved by FERC.
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- - A one-year rate freeze after restructuring will be implemented for default service customers of companies that do not apply for stranded cost recovery. A three-year rate freeze will be implemented for companies with stranded costs.
- - The Arkansas Commission has authority to address market power issues.
Oklahoma In 1997, the Oklahoma legislature passed restructuring legislation providing for retail access by July 1, 2002. That legislation called for a number of studies to be completed on a variety of restructuring issues, including independent system operator, technical, financial, transition and consumer issues. The study on independent system operator issues was completed in January 1998.
In 1998, the Oklahoma Legislature passed Senate Bill 888, which accelerated the schedule for completion of the remaining studies to October 1999. Those studies were conducted under the direction of the Legislative Joint Electric Utility Task Force. The task force organized the study effort into several working groups, which were directed to evaluate assigned issues. On October 1, 1999, the task force completed its report to the Oklahoma Legislature based on the work performed by these working groups. The report primarily is a compilation of the positions taken by the various parties participating in the working groups. The information, in the report, is expected to be used in the development of additional industry legislation during the 2000 legislative session.
Several additional electric industry restructuring bills have been filed in the 2000 Oklahoma Legislative session. The proposed bills generally supplement the industry restructuring legislation previously enacted in Oklahoma. CSW is unable to predict what, if any, additional legislation will be passed on industry restructuring.
Louisiana In 1998, a special legislative committee created by the Louisiana Senate studied the impact of retail competition on the state of Louisiana. No legislation was enacted as a result of that effort. In addition, during 1998 and 1999, the Louisiana Commission conducted a proceeding to study restructuring and retail competition. Since the Louisiana Commission is a constitutionally created body, it can implement industry restructuring on its own without additional legislation. Parties submitted comments, and hearings were held on a number of specific restructuring topics. Also, as a part of that proceeding, utilities filed rate unbundling information with the Louisiana Commission staff.
As a result of those hearings, the Louisiana Commission staff released its report on industry restructuring, including its recommendations regarding retail competition in Louisiana. In its report, the Louisiana Commission staff recommended that electric industry restructuring should not proceed at this time because it is not in the public interest. However, the Louisiana Commission staff proposed a restructuring plan as an alternative, in the event the Louisiana Commission decides to move forward with electric industry restructuring and competition. The Louisiana Commission voted to begin additional study and analysis of the issues associated with restructuring and has adopted a procedural schedule that will result in a final restructuring plan by January 1, 2001.
Texas On June 18, 1999, legislation was signed into law in Texas that will restructure the electric utility industry in that state. The new law gives Texas customers of investor-owned utilities the opportunity to choose their electric provider beginning January 1, 2002. The legislation also provides a rate freeze until that date followed by a 6% rate reduction for residential and small
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commercial customers, additional rate reductions for low income customers and a number of customer protections. Rural electric cooperatives and municipal electric systems can choose whether to participate in retail competition.
Some of the key provisions of the legislation include:
- - Each utility must unbundle its business activities into a retail electric provider, a power generation company and a transmission and distribution utility. Beginning January 1, 2002, retail customers of investor-owned electric companies will be able to choose their retail electric provider. The affiliated retail electric provider of the utility that serves the customer on December 31, 2001 will serve the customer unless the customer chooses another retail electric provider. Delivery of the electricity will continue to be the responsibility of the transmission and distribution utility company at regulated prices.
- - Retail electric cooperatives and municipal electric systems can choose whether to participate in retail competition.
- - Investor-owned utilities must freeze their rates effective September 1, 1999, through the start of competition on January 1, 2002. Investor-owned utilities at January 1, 2002 will lower rates for residential and small commercial customers by 6%. This reduced rate is known as the "Price to Beat," which will be available to those customers for five years.
- - The legislation establishes a system benefit fund for low-income customer assistance, customer education and to offset reductions in school property tax revenues. The fund will be funded through a charge on retail electric providers that can be set by the Texas Commission up to $0.65 per MWH.
- - Electric utilities are allowed to recover all of their net, verifiable, non-mitigable stranded costs that otherwise may not be recoverable in the future competitive market. A majority of those regulatory assets and stranded costs can be recovered through securitization, which is a financing to recover generation-related regulatory assets and stranded costs through the use of debt that lowers the carrying cost of assets compared to conventional utility financing methods.
- - Each year during the 1999 through 2001 rate freeze period, utilities with stranded costs are required to apply any earnings in excess of the most recently approved cost of capital (if issued on or after January 1, 1992) to reduce stranded costs. Utilities without stranded costs must either flow such amounts back to customers or make capital expenditures to improve transmission or distribution facilities or to improve air quality.
- - The affiliated power generation company of the utility that serves the customer on December 31, 2001 will be required to auction entitlements to at least 15% of its generating capacity for five years or until 40% of the residential and small commercial consumption of electricity in the utility's service area is provided by nonaffiliated retail electric providers.
- - Grandfathered power plants, those built or started prior to implementation of the Texas Clean Air Act of 1972, must reduce emissions of nitrogen oxide by 50% and sulfur dioxide by 25% by May 2003. The law also requires an additional 2,000 MW of renewable power generation in Texas by 2009 from retail electric providers, municipally owned utilities and electric cooperatives.
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- - A legislative oversight committee will monitor the implementation and effectiveness of electric utility restructuring and make recommendations for any necessary further legislative action.
The Texas Commission has established numerous rulemakings and other processes to address various issues associated with the restructuring legislation and to provide for further guidance regarding implementation of the restructuring.
Restructuring Readiness CSW has initiated a restructuring readiness effort to prepare for competition in the states served by the U.S. Electric Operating Companies. This effort includes the development and implementation of a business separation plan and the system and process changes required to prepare for competition. The business separation plan filed with the Texas Commission in January, 2000, is discussed below. An analysis of the processes and systems in place and those needed in the future has been completed, and CSW is beginning the implementation phase of the restructuring readiness effort.
Texas Business Separation Plan On January 10, 2000, CSW filed with the Texas Commission its business separation plan required by the Texas Legislation on electric utility restructuring. The business separation plan describes the approach proposed by CSW to unbundle the business activities of each of its Texas Electric Operating Companies into three entities: the PGC, the EDC and the REP. Under CSW's business separation plan, all three new entities would continue to be owned by CSW. The PGC would own a CPL PGC and a WTU PGC. The EDC would own CPL, WTU and SWEPCO EDCs. Although the plan is directed to meet the requirements of the Texas Legislation, CSW expects the plan will also meet the restructuring requirements anticipated to be enacted in Arkansas, Louisiana and Oklahoma.
As a result of rulings by the Texas Commission on March 16, 2000, CSW's unbundling will include full structural separations for CPL and WTU by January 1, 2002. This includes the structural separation of the management and control of the EDCs from the PGCs as well as the creation of a separate REP. For CPL and WTU, unbundling will require that legal ownership of generation, transmission and distribution assets will be separated and transferred to or vested in new entities , the CPL and WTU PGCs and EDCs, respectively. The CPL and WTU EDC's would be regulated utilities under Texas law. Office systems, computer systems, accounting systems and similar equipment would be segregated and an employee code of conduct would restrict information exchanges between employees of the regulated entities and the other business units. Because SWEPCO also is regulated in Arkansas and Louisiana, the Texas Commission deferred its decision on the appropriate separation for SWEPCO until interested parties have an opportunity to discuss issues that could result in a separation plan acceptable in each state. CSW believes that its total cost to restructure the CSW System, which includes costs for the EDC, PGC and REP, in implementing retail competition in its service territory is approximately $200 million, including refinancing costs of approximately $70 million. Recognition in rates of the Texas jurisdictional EDC portion of these costs will be sought in the Texas Electric Operating Companies' cost unbundling filings to establish new EDC regulated rates during the year 2000.
Code of Conduct Under Customer Choice Legislation was enacted in Arkansas and Texas in 1999 to restructure the electric utility industry in those states. These two new laws require that the CSW System begin to operate its utilities as separate power generation entities, retail electric providers and transmission and distribution entities. Power generation entities and retail electric providers will be non-regulated; transmission and distribution entities will continue to be regulated. On or before September 1, 2000, the Texas operations portion of each of the U.S. Electric Operating Companies will functionally separate their regulated and non-regulated utility activities.
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The purpose of these laws and the separation they impose is to create financial and informational firewalls between regulated and non-regulated activities of the CSW System so that competitive sensitive information cannot be shared by regulated and non-regulated entities.
In order to comply with the new Arkansas and Texas laws, the Registrants will follow a "code of conduct," which requires the non-regulated business activities to be separate from the regulated activities. Transactions between the regulated and non-regulated activities are subject to an information-sharing "firewall" and the requirement to act on an arm's-length basis.
Other Management cannot predict the ultimate outcome of the initiatives concerning restructuring and retail competition in Arkansas, Louisiana, Oklahoma and Texas, or their ultimate impact on results of operations, financial condition, or competitive position of CSW and the U.S. Electric Operating Companies.
Holding Company Act and Electric Industry Restructuring Legislation In 1995, the SEC issued a report to the U.S. Congress advocating repeal of the Holding Company Act, which restricts certain activities of CSW and other registered holding companies, finding the Holding Company Act anachronistic and duplicative of other federal and state regulatory regimes.
HR 2944, "The Electricity Competition and Reliability Act," was reported by the House Commerce Subcommittee on Energy and Power on October 27, 1999. If enacted, the legislation would repeal the Holding Company Act twelve months after the bill is signed into law and clarifies that states have the authority to order retail competition without a federal mandate.
The U.S. Congress continues to consider legislative initiatives, which provide for the restructuring and/or deregulating of the electric utility industry. Several similar bills have been introduced in the 106th Congress. Most of the bills seek to clarify state authority to mandate retail choice, repeal the Holding Company Act, repeal the Public Utility Regulatory Policies Act of 1978, expand FERC authority over public power entities, address transmission reliability and other issues. Management cannot predict the ultimate outcome of any legislative initiatives.
Regulatory Accounting Consistent with industry practice and the provisions of SFAS No. 71, which allows for the recognition of regulatory assets, the U.S. Electric Operating Companies have recognized significant regulatory assets and liabilities. As a result of legislation passed in Arkansas and Texas, the retail electricity generation business of CPL, SWEPCO and WTU, in those jurisdictions, no longer meets the criteria to apply SFAS No. 71. Instead, the principles of SFAS No. 101, as interpreted by EITF 97-4, have been applied. Management believes that CPL, SWEPCO and WTU currently meet the criteria for following SFAS No. 71 for the remainder of their electric utility business.
Additional non-cash write-offs of regulatory assets and liabilities would be required if additional portions of the electric utility business of the U.S. Electric Operating Companies no longer meet the criteria for applying SFAS No. 71, absent a means of recovering such assets or settling such liabilities. For additional information regarding regulatory accounting, reference is made to ITEM 8. NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
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Securitization of Generation-related Regulatory Assets and Stranded Costs Electric utilities under the Texas Legislation are allowed to recover generation-related regulatory assets and stranded costs that otherwise may not be recoverable in the future competitive market. All or a majority of those costs can be refinanced through securitization, which is a financing structure designed to provide lower financing costs than is available through the conventional utility cost of capital model. The securitized amounts are then recovered through a non-bypassable wires charge. On October 18, 1999, CPL filed an application with the Texas Commission to securitize approximately $1.27 billion of its retail generation-related regulatory assets and approximately $47 million in other qualified costs. The Texas Commission held hearings on December 7 and 8, 1999 on CPL's securitization application.
On February 10, 2000, the Texas Commission tentatively approved a settlement, which will permit CPL to securitize approximately $764 million of regulatory assets. The Texas Commission is expected to grant final approval by March 27, 2000. If approval is received from the Texas Commission, CPL expects to issue the securitization bonds in 2000, depending on market conditions and the timing of any appeals of the Texas Commission order.
The settlement calls for CPL to reduce its proposed amount to be securitized from $1.27 billion to approximately $764 million of regulatory assets plus an estimated $29 million of other qualified costs. The settlement also calls for $290 million of the amount originally requested to be included in the calculation of stranded costs in CPL's April 2000 transmission and distribution cost filing. This filing will establish stranded costs, of which 75% can be securitized and 25% can be recovered through a competitive transition charge.
The securitization amount was reduced by $186 million from the amount originally requested to reflect customer benefits associated with accumulated deferred income taxes. CPL previously had proposed to flow these benefits back to customers over a 14-year term of the bonds.
CPL could issue the bonds associated with securitization as early as April 2000, depending on timing of receipt of a non-appealable financing order from the Texas Commission and depending on market conditions. A second phase of securitization could occur when the Texas Commission makes a preliminary determination of stranded costs, currently expected to occur in the first half of 2001. CPL's stranded costs are subject to a final determination by the Texas Commission in 2004.
Under the provisions of EITF 97-4, CPL's generation-related net regulatory assets were transferred to the transmission and distribution portion of the business and will be amortized as they are recovered through charges to customers. Management currently believes all generation-related regulatory assets for CPL will be recovered as provided under the Texas Legislation. If future events were to occur that made the recovery of these assets no longer probable, CPL would write-off any non-recoverable portion of such assets as a non-cash charge to earnings.
CPL believes it will also have stranded costs, which are the excess of net book value of generation assets as defined over the market value of those assets. CPL's amount of regulatory assets and stranded costs are subject to a final determination by the Texas Commission in 2004. The Texas Legislation provides that all such finally determined stranded costs will be recovered. Since SWEPCO and WTU are not expected to have net stranded costs, all generation-related non-recoverable net regulatory assets were written off and are reflected on their statements of income as an extraordinary loss in 1999. See ITEM 8. NOTE 16. EXTRAORDINARY ITEMS.
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CPL, SWEPCO and WTU performed an accounting impairment analysis of generation assets under SFAS No. 121 at September 30, 1999, and concluded there was no impairment of generation assets at that time. An impairment analysis involves estimating future net cash flows arising from the use of an asset. If the net cash flows exceed the net book value of the asset, then there is no impairment of the asset for accounting purposes. CPL, SWEPCO and WTU will continue to review their assets for potential impairment if events or changes in circumstances indicate the carrying cost of an asset may not be recoverable.
Beginning January 1, 2002, fuel costs will not be subject to Texas Commission fuel reconciliation proceedings. Consequently, CPL, SWEPCO, and WTU will file a final fuel reconciliation with the Texas Commission reconciling fuel costs through the period December 31, 2001. These final fuel balances will be included in each company's true-up proceeding in 2004.
CPL - Wholesale Customers Certain CPL wholesale customers have given notice of their intent to terminate their contracts when they expire in 2001 through 2004. During 1999, these customers represented 3% of CPL's total electric operating revenues.
PSO Union Negotiations In March 1999, PSO and its Local Union 1002 of the IBEW reached an agreement for contract negotiations, which began in July 1996. In December 1996, PSO had implemented portions of its then final proposal after declaring an impasse. The principal issue of disagreement involved PSO's need for flexibility in a deregulated environment. In April 1997, Oklahoma's governor signed into law an electric industry restructuring bill. The law mandates the implementation of retail competition to begin on July 1, 2002. Following the passage of the law, PSO negotiated a new contract with the union. The new contract allows PSO to be in a better position to compete in a deregulated environment. The effective date of the new agreement was April 4, 1999, and it will remain in effect until September 30, 2000. As a result of the agreement, the union agreed to withdraw its opposition to the AEP Merger proceedings.
In October 1998, PSO received an adverse ruling from a NLRB ALJ on the union's unfair labor practice charge against PSO. The ALJ ruled that PSO did negotiate in good faith but that PSO's position on some issues was too harsh, and therefore the December 1996 implementation of PSO's then final proposal should be rolled back and employees made whole from that date. The ALJ upheld PSO's right to cease collecting union dues through payroll deductions. Additionally, the ALJ ruled that PSO improperly solicited employees to withdraw from the union. In December 1998, PSO appealed the ALJ's ruling to the NLRB. In June 1999, PSO made a settlement offer to the union to resolve the pending charges against PSO. The union rejected this offer and indicated it would wait for a ruling from the NLRB before deciding on further action. Should PSO receive an adverse ruling from the NLRB, PSO will have the option of appealing that decision to a circuit court. At this time, PSO cannot predict the ultimate outcome of the NLRB matter. However, PSO believes that it will not have a material adverse effect on its results of operations or financial condition. The preceding discussion constitutes forward-looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information. See FORWARD-LOOKING INFORMATION.
WTU Changes in Operations On February 22, 2000, WTU announced that as a result of an operational review, the WTU Merchandise Program was being discontinued as of September 30, 2000, since the merchandise program no longer fits WTU's business strategy. Under the merchandise program, WTU sold electric appliances and other items at local offices across the WTU service territory.
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WTU also announced that as part of the operational review, bill payments and other traditional customer transactions would no longer be accepted at local offices as of September 30, 2000. Due to improvements in technology, WTU offers bill payment service through the Internet as well as other alternative payment programs.
WTU estimates that 65 employees will be affected by the changes in operations, including 49 merchandise employees. Although WTU has not completed its analysis, the cost of these changes is not expected to have a material adverse effect on WTU's results of operations or financial condition.
SEEBOARD - Third Party Pension Litigation In the U.K., National Grid and National Power PLC have been involved in continuing litigation regarding their use of actuarial surpluses disclosed in the 1992 and 1995 valuations of the electricity industry's occupational pension plan, the ESPS. A High Court decision in favor of the National Grid and National Power PLC was appealed. On February 10, 1999, the U.K. Court of Appeal ruled that the particular arrangements made by these corporations to dispose of part of the surplus were invalid due to procedural defects. This decision was confirmed at a later hearing of the U.K. Court of Appeal held in May 1999. The National Grid has appealed to the House of Lords, the highest court of appeal in the U.K., and a decision is expected in late 2000 or early 2001. The final outcome of this appeal cannot presently be determined.
SEEBOARD employees are members of the ESPS, and SEEBOARD has made similar use of actuarial surpluses disclosed in the 1992 and 1995 valuations. As a result of subsequent legal clarification of certain issues arising from the hearing held in May 1999, the potential impact of the ruling on SEEBOARD has increased. The amount of the payments cancelled by SEEBOARD in recognition of these surpluses amounts to approximately $78 million, excluding any accrued interest.
The U.K. Court of Appeal did not order the National Grid or National Power PLC to make payment into the ESPS, and the court indicated that any requirement to make such payments would be harsh since the relevant sections of the ESPS already have a surplus. In the event the court decides a payment by SEEBOARD into the ESPS is necessary, such a payment is likely to create additional pension fund surplus, which SEEBOARD would be able to utilize over the next several years to reduce pension expense.
Management is unable currently to predict the amount of any payment that it may be required to make to ESPS, but the payment should not have a material adverse affect on CSW's results of operations or financial condition.
The foregoing discussion constitutes forward-looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information. See FORWARD - LOOKING INFORMATION.
RATES AND REGULATORY MATTERS
U.S. ELECTRIC
CPL Rate Review - Docket No 14965 In November 1995, CPL filed with the Texas Commission a request to increase its retail base rates by $71 million. On October 16, 1997, the Texas Commission issued the CPL 1997 Final Order which lowered the annual retail base rates of CPL by approximately $19 million, or 2.5%, from CPL's rate level existing prior to May 1996. The Texas Commission also included a "glide path" rate methodology in the CPL 1997 Final Order pursuant to which CPL's annual
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rates were reduced by $13 million beginning May 1, 1998 with an additional reduction of $13 million on May 1, 1999.
CPL filed an appeal of the CPL 1997 Final Order to the State District Court of Travis County to raise several issues related to the rate case. The primary issues include: (i) the classification of $800 million of invested capital in STP as ECOM which was also assigned a lower return on equity than non-ECOM property; (ii) the Texas Commission's use of the "glide path" rate reduction methodology applied on May 1, 1998 and May 1, 1999; and (iii) the $18 million of disallowed affiliate expenses from CSW Services. As part of the appeal, CPL sought a temporary injunction to prohibit the Texas Commission from implementing the "glide path" rate reduction methodology. The court denied the temporary injunction and the "glide path" rate reduction was implemented in May 1998 and May 1999. Hearings on the appeal were held during the third quarter of 1998, and a judgment was issued in February 1999 affirming the Texas Commission order, except for a consolidated tax issue in the amount of $6 million, which was remanded to the Texas Commission. CPL filed an appeal of this most recent order to the Third District of Texas Court of Appeals and management is unable to predict how the final resolution of these issues will ultimately affect CSW's and CPL's results of operations and financial condition.
On May 4, 1999, AEP and CSW announced that they had reached a stipulated agreement with the General Counsel of the Texas Commission and other intervenors in the state of Texas related to the AEP/CSW merger case. The Texas Commission approved the AEP Merger in early November 1999. If the AEP Merger is ultimately consummated, CSW will withdraw its appeal with respect to the "glide path" rate reduction methodology as discussed above as issue "(ii)" but will continue seeking the appeal of issues "(i) and (iii)" as discussed above. See ITEM 8. NOTE 15. PROPOSED AEP MERGER for a discussion of the stipulated agreement.
See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for information on the CPL 1997 Final Order.
SWEPCO Louisiana Rate Review In December 1997, the Louisiana Commission announced it would review SWEPCO's rates and service. In October 1999, SWEPCO and the staff of the Louisiana Commission reached an Agreement and Stipulation, which was filed on October 14, 1999. The significant provisions of the Agreement and Stipulation are as follows:
- - SWEPCO's Louisiana retail jurisdictional revenues were reduced by $11 million, effective with the December 1999 billing cycle;
- - SWEPCO is allowed to earn an 11.1% return on common equity;
- - SWEPCO is allowed to recover certain regulatory assets totaling $7.1 million;
- - SWEPCO will be subject to a two-year base rate freeze, which includes force majeure provisions; and
- - SWEPCO will be allowed to increase depreciation rates for transmission, distribution and generation plant.
The Louisiana Commission approved the Agreement and Stipulation in November 1999 which was implemented in December 1999.
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SWEPCO Arkansas Rate Review In July 1998, the Arkansas Commission began a review of SWEPCO's earnings. On July 30, 1999, SWEPCO entered into a settlement agreement with the general staff of the Arkansas Commission and the Arkansas Attorney General's Office. The settlement agreement reduces SWEPCO's Arkansas annual revenues by $5.4 million or 3%. Additionally, the stipulation and settlement agreement provides for a 10.75% return on common equity, an increase in depreciation rates, and an agreement by SWEPCO not to seek recovery of generation-related stranded costs.
On September 23, 1999, the Arkansas Commission issued an order approving the stipulation and settlement agreement. On October 25, 1999, SWEPCO filed compliance rate tariffs with the Arkansas Commission, which are consistent with the Arkansas Commission order. The provisions of the settlement agreement were implemented in December 1999.
Other Reference is made to ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for information regarding fuel proceedings at CPL, SWEPCO and WTU.
U.K. ELECTRIC
SEEBOARD Recent Regulatory Actions Following the commencement of the phased-in opening of the United Kingdom domestic and small business electricity market to competition, since September 1998, many customers are now able to choose their electricity supplier. SEEBOARD competes for customers in its own area as well as throughout the rest of the United Kingdom. The DGEGS has allowed a significant portion of the system development costs associated with the introduction of competition to be recovered by the regional electricity companies through a charge to all customers over the next five years. The DGEGS has also announced price restraints which set a maximum amount that existing electricity supply companies can charge their domestic and small business customers, taking into account its view of future electricity purchase costs. For SEEBOARD, these price restraints reduced prices in real terms by 6% for the regulatory year ending March 31, 1999, and a further 3% for the following regulatory year ending March 31, 2000.
Regulatory Price Proposal for SEEBOARD On December 2, 1999, OFGEM published its final price proposals from its United Kingdom electricity distribution review. OFGEM has proposed revenue reductions in SEEBOARD's distribution business of 21%. In addition, OFGEM has proposed the reallocation of a further 12% of costs out of SEEBOARD's distribution business into its supply business. These proposals were accepted on December 20, 1999, and will take effect on April 1, 2000, and remain in effect for five years. OFGEM's proposals will reduce net income for SEEBOARD in the year 2000 by approximately $40 million, dependent upon the level of further cost reductions that can be achieved, and by approximately $60 million in 2001. CSW's net income from SEEBOARD U.S.A., its United Kingdom business segment, was $113 million for the twelve months ended December 31, 1999.
OFGEM's price proposals for SEEBOARD will have a material adverse effect on the future results of operations of SEEBOARD U.S.A. and CSW, but are not be expected to adversely affect the financial condition of CSW.
OFGEM also published the final price proposals for the electricity supply price review. OFGEM has recommended that the price cap for charges levied to electricity supply domestic and small business customers should be extended for
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two years from April 1, 2000. Overall, these proposals are expected to have a broadly neutral effect on the results of SEEBOARD U.S.A.
In the fourth quarter of 1999, a rating agency downgraded SEEBOARD's credit rating to BBB+ due to recent U.K. regulatory action.
The foregoing discussion constitutes forward-looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information. See FORWARD-LOOKING INFORMATION.
OTHER INITIATIVES
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 combined with the previously mentioned industry factors have resulted in CSW pursuing other initiatives. These initiatives have taken a variety of forms; however, they are all consistent with the overall plan for CSW to develop a global energy business. CSW has restrictions on the amounts it may invest under the AEP merger agreement. 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 OVERVIEW and RECENT DEVELOPMENTS AND TRENDS.
DIVERSIFIED ELECTRIC
CSW Energy CSW Energy presently owns interests in seven operating power projects totaling 1,308 MW which are located in Colorado, Florida and Texas. In addition to these projects, CSW Energy has other projects in various stages of development.
CSW Energy began construction in August 1998 of a 500 MW power plant, known as Frontera, in the Rio Grande Valley, near the city of Mission, Texas. The natural gas-fired facility began simple cycle operation of 330 MW in July 1999 and is scheduled to commence combined cycle operation in early 2000. Pursuant to AEP's and CSW's stipulated agreement with several intervenors in the state of Texas related to the AEP Merger, CSW Energy may sell 250 MW of Frontera upon completion of the merger. See ITEM 7. - MD&A, PROPOSED AEP MERGER and ITEM 8. NOTE 15. PROPOSED AEP MERGER for additional information.
CSW Energy also has entered into an agreement with Eastman Chemical Company to construct and operate a 440 MW cogeneration facility in Longview, Texas. This facility will be known as the Eastex Cogeneration Project. Construction of the facility began in the fourth quarter of 1999, with expected operation in early 2001. Excess electricity generated by the plant will be sold by CSW Energy in the wholesale electricity market.
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In October 1999, GE Capital Structured Finance Group purchased 50% of the equity ownership of Sweeny Cogeneration Limited Partnership. CSW Energy's after-tax earnings from the proceeds of the transaction were approximately $33 million and were recorded in the fourth quarter of 1999. The agreement between CSW Energy and GE Capital Structured Finance Group also provides for additional payments to CSW Energy, subject to completion of a planned expansion of the Sweeny cogeneration facility, which may be operational in the fourth quarter of 2000.
The preceding discussion contains forward-looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION.
CSW International CSW International was organized to pursue investment opportunities in EWGs and FUCOs and currently holds investments in the United Kingdom, Mexico and South America.
CSW International and its 50% partner, Scottish Power plc have entered into a joint venture to construct and operate the South Coast power project, a 400 MW combined cycle gas turbine power station in Shoreham, United Kingdom. CSW International has guaranteed approximately (pound)19 million of the (pound)190 million construction financing. Both the guarantee and the construction financing are denominated in pounds sterling. The U.S. dollar equivalent at December 31, 1999 would be $31 million and $308 million respectively, using a conversion rate of (pound)1.00 equals $1.62. The permanent financing is unconditionally guaranteed by the project. Construction of the project began in March 1999, and commercial operation is expected to begin in late 2000.
Through November 1999, CSW International had purchased a 36% equity interest in Vale for $80 million. CSW International also extended $100 million of debt convertible into equity in Vale in 1998. In December 1999, CSW International converted $69 million of that $100 million into equity, thereby raising its equity interest in Vale to 44%. CSW International anticipates converting the remaining debt into equity over the next two years.
In January 1999, amid market instability, the Brazilian government abandoned its policy of pegging the Brazilian Real in a range against the U.S. dollar. This action resulted in a 49% devaluation of the Brazilian currency by the end of December 1999. Vale is unfavorably affected by the devaluation due primarily to the revaluation of foreign denominated debt.
CSW International has a put option, which, if exercised, requires Vale to purchase CSW International shares at a minimum price equal to the U.S. dollar equivalent of the purchase price for Vale. As a result of the put option arrangement, CSW International's investment carrying amount will not be reduced below the put option value unless there is deemed to be a permanent impairment. Pursuant to this arrangement, CSW International will not recognize its proportionate share of any future earnings until its proportionate share of any losses of Vale is recognized. At December 31, 1999, CSW International had deferred losses, after tax, of approximately $21 million related to its Vale investment. CSW International views its investment in Vale as a long-term investment, which has significant long-term value. Management will continue to closely evaluate the changes in the Brazilian economy and its impact on CSW International's investment in Vale.
As of December 31, 1999, CSW International had invested $110 million in common stock of a Chilean electric company. The investment is classified as securities available for sale and accounted for by the cost method. Based on the current market value of the shares and the year-end foreign exchange rate, the value of the investment at December 31, 1999 was $62 million. The reduction in
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the carrying value of this investment has been reflected in Other Comprehensive Income in CSW's Consolidated Statements of Stockholders' Equity. Management views its investment in Chile as a long-term investment strategy and believes this investment continues to have significant long-term value and that it is recoverable. Management will continue to closely evaluate the changes in the South American economy and its impact on CSW International's investment in the Chilean electric company.
In addition to these projects, CSW Energy and CSW International have other projects in various stages of development. CSW, CSW Energy and CSW International have provided letters of credit and guarantees on behalf of CSW Energy and CSW International projects of approximately $62 million, $41 million and $233 million, respectively, as of December 31, 1999.
The preceding discussion contains forward-looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION.
ENERGY SERVICES
C3 Communications C3 Communications has two active business units, C3 Networks and C3 Utility Automation. C3 Networks offers wholesale, high capacity, long-haul regional and metropolitan fiber and collocation services to telecommunications carriers and Internet service providers in Texas and Louisiana.
C3 Networks has approximately 1,500 miles of fiber network in Texas and Louisiana and offers collocation services to carriers and Internet service providers through sites in Dallas, Houston, Austin, San Antonio, Abilene, San Angelo, Corpus Christi, Harlingen, Laredo, and McAllen, Texas and Tulsa, Oklahoma.
In 1999, C3 Utility Automation launched a new energy information service, PurView(TM). In addition, EnerACT(TM) advisory services was transferred from EnerShop to better align products and marketing. PurView(TM) is a service for collecting meter data and interactively viewing, manipulating and analyzing consumption information over the Internet. EnerACT(TM) is an energy information and advisory service for multi-site building owners and managers.
C3 Communications believes that electric utility industry restructuring will continue to fuel interest in its energy information services. Evaluation of partnerships and acquisitions will also be a key element of growth for C3 Communications in 2000. 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).
EnerShop EnerShop's two product lines in 1999 were performance contracting and EnerACT(TM) advisory services until August 1999, when EnerACT(TM) was transferred to C3 Communications to better align products and marketing.
EnerShop continues to provide energy services to customers in Texas and Louisiana that help reduce customers' operating costs through increased energy efficiencies and improved equipment operations. EnerShop utilizes the skills of local trade allies in offering services that include energy and facility
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analysis, project management, engineering design, equipment procurement and construction and performance monitoring.
Business Ventures The CSW Services' Business Ventures is comprised of companies that pursue energy-related businesses. Projects include providing energy management systems, electric substation automation software and the marketing and distribution of electric bikes and associated accessories under the TotalEV name.
In late 1997, CSW Energy Services was launched to explore the electric utility industry's emerging retail supply markets as they were deregulated on a state-by-state basis. In January 1999, CSW Energy Services announced that it was ceasing its business as a retail electric supplier and that it would assign its existing electricity supply contracts to other suppliers or terminate them. In the fourth quarter of 1999, the CSW Business Ventures group's investment in an energy-related company that provides staffing services for nuclear power plants was transferred from PSO to CSW Energy Services.
SOUTH TEXAS PROJECT
CPL owns 25.2% of STP, a two-unit nuclear power plant that is located near Bay City, Texas. Reliant Energy Resources Corporation owns 30.8%, the City of San Antonio owns 28.0%, and the City of Austin owns 16.0% of STP. STP Unit 1 was placed in service in August 1988, and STP Unit 2 was placed in service in June 1989. In November 1997, STPNOC assumed the duties of STP operator. Each of the four STP co-owners are represented on the STPNOC board of directors.
STP Unit 1 and Unit 2 were removed temporarily from service during 1999 for scheduled refueling and ten-year inspection outages. During 1999, Units 1 and 2 operated at net capacity factors of 88.0% and 89.4%, respectively.
For additional information regarding STP and the accounting for the decommissioning of STP, see ITEM 8. NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES and ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS.
ENVIRONMENTAL MATTERS
The operations of the CSW System, like those of other utility systems, generally involve the use and disposal of substances subject to environmental laws. CERCLA, the federal "Superfund" law, addresses the cleanup of sites contaminated by hazardous substances. Superfund requires that PRPs fund remedial actions regardless of fault or the legality of past disposal activities. PRPs include owners and operators of contaminated sites and transporters and/or generators of hazardous substances. Many states have similar laws. 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 believes 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 financial condition. Although the reasons for this expectation differ from site to site, factors that are the basis for the expectation for specific sites include the volume and/or type of waste allegedly
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contributed by the U.S. Electric Operating Company, the estimated amount of costs allocated to the U.S. Electric Operating Company and the participation of other parties. (The foregoing statements constitute forward-looking statements 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 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and ITEM 8. NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES for additional discussion regarding environmental matters.
The EPA recently promulgated revised, more stringent ambient air quality standards for ozone and particulates. While these standards do not mandate emission constraints or reductions for facilities such as electricity generating power plants, they may result in more areas being designated as non-attainment for these two pollutants. States will be required to develop strategies to achieve compliance in these areas, strategies that may include lower emission levels for electricity generating power plants, possibly including facilities within the CSW System. The impact, if any, on CSW or the U.S. Electric Operating Companies cannot yet be determined, but the impact could be significant.
At the Kyoto, Japan Conference on Global Warming held in December 1997, U.S. representatives agreed to a treaty which could require new limitations on "greenhouse gases" from power plants. CSW and the U.S. Electric Operating Companies could be affected if this treaty, in its present form, is approved by the United States Congress. The impact, if any, on CSW or the U.S. Electric Operating Companies cannot be determined because most of the greenhouse gas emission reduction would come from coal generation that would have to be switched to natural gas or retired. During 1999, 50% of the U.S. Electric Operating Companies' MWH generation of which, at December 31, 1999, 33% of its installed generating capacity was coal and lignite.
RISK MANAGEMENT
In 1997, CSW's board of directors adopted a risk management resolution authorizing CSW to engage in currency, interest rate and energy spot and forward transactions and related derivative transactions on behalf of CSW with foreign and domestic parties as deemed appropriate by executive officers of CSW. The risk management program is necessary to meet the growing demands of CSW's customers for competitive prices and price stability, to enable CSW to compete in a deregulated power industry, to manage the risks associated with domestic and foreign investments and to take advantage of strategic investment opportunities.
The U.S. Electric Operating Companies experience commodity price exposures related to the purchase of fuel supplies for the generation of electricity and for the purchase of power and energy from other generation sources. Contracts that provide for the future delivery of these commodities can be considered forward contracts which contain pricing and/or volume terms designed to stabilize the cost of the commodity. Consequently, the U.S. Electric Operating Companies manage their price exposure for the benefit of customers by balancing their commodity purchases through a combination of long-term and short-term or spot market agreements.
In response to the development of a more competitive electric energy market, CSW has received regulatory approval, which authorizes the U.S. Electric Operating Companies to conduct a pilot program offering power sales agreements at tariffed rates with a fixed fuel cost. To offset the commodity price risk associated with these contracts, CSW has purchased natural gas swaps and futures contracts. These arrangements cover estimated natural gas deliveries beginning in January 2000 and continuing for the remainder of 2000. Natural gas volumes purchased to serve these contracts, for which CSW has secured swap or futures contracts, represents approximately 1% of annual natural gas purchases.
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Based on year-end contractual commitments, CSW's natural gas futures and swap contracts and electricity forward contracts that are sensitive to changes in commodity prices include fair value of assets of $157,260 and fair value of liabilities of $396,440. These swap and future contracts hedge their related commodity price exposure for 2000. Cash outflows on the swap agreements should be offset by increased margins on electricity sales to customers under tariffed rates with fixed fuel costs. The electricity forward contracts hedge a portion of CSW's energy requirements through February 2000. The average contract price for forward purchases is $30 per MWH and $2.32 per MMbtu. The average price for natural gas futures contracts is $2.47 per MMbtu and $2.37 per MMbtu for swaps.
SEEBOARD has entered into contracts for differences to reduce exposure to fluctuations in the price of electricity purchased from the United Kingdom's electricity power pool. This pool was established at privatization of the United Kingdom's electric industry for the bulk trading of electricity between generators and suppliers. At December 31, 1999, the gross value of such contracts for differences was approximately 83% of the expected power purchases for 2000.
CSW has, at times, been exposed to currency and interest rate risks which reflect the floating exchange rate that exists between the U.S. dollar and the British pound. CSW has utilized certain risk management tools to manage adverse changes in exchange rates and to facilitate financing transactions resulting from CSW's acquisition of SEEBOARD. At December 31, 1999, CSW had positions in two cross currency swap contracts. The following table presents information relating to these contracts. The fair value of cross currency swaps reflect third party valuations calculated using proprietary pricing models. Based on these valuations, CSW's position in these cross currency swaps represented an unrealized loss of $41.8 million at December 31, 1999. This unrealized loss is offset by unrealized gains related to the underlying transactions being hedged. CSW expects to hold these contracts to maturity. At current exchange rates, this liability is included in long-term debt on CSW's consolidated balance sheet at a carrying value of approximately $418 million.
Expected Expected Cash Cash Inflows Outflows Contract Maturity Date (Maturity Value) (Market Value) - -------------------------------------------------------------------------------- (millions) Cross currency swaps August 1, 2001 $200 $213 Cross currency swaps August 1, 2006 $200 $229
For information related to currency risk in South America see OTHER INITIATIVES, DIVERSIFIED ELECTRIC, CSW International and ITEM 8. NOTE 18. SOUTH AMERICAN INVESTMENTS. For information on commodity contracts see ITEM 8. NOTE 7. FINANCIAL INSTRUMENTS.
OTHER MATTERS
Year 2000 On a system-wide basis, CSW initiated and implemented a year 2000 project to prepare internal computer systems and applications for the year 2000. These systems and applications include management information systems that support business operations such as customer billing, payroll, inventory and maintenance. Other systems with computer-based controls such as telecommunications, elevators, building environmental management, metering, plant, transmission, distribution and substations were included in this project as well.
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Cost to Address Year 2000 Issues As of December 31, 1999, cost incurred for the year 2000 project amounted to approximately $33 million, including $21 million in 1999. Remaining activities are expected to cost an additional $3 million in the first quarter of 2000.
In the first quarter of 1999, a software version upgrade to provide contract management features to the materials management information system was deferred until 2000 in order to minimize risk. The financial impact of this deferral was minimal, as minor enhancements to the current design provided an alternative, interim solution for the needed functionality. The deferred system upgrade is now scheduled for implementation in the May to November 2000 time frame. No other planned CSW computer information system projects were affected by the year 2000 project, even though a moratorium was implemented during the month of December 1999 to further minimize risk. Accordingly, no estimate was made for the financial impact of any future projects foregone due to resources allocated to the year 2000 project.
Contingency Plans Contingency plans have been in place in CSW's domestic electric operation for years to address problems resulting from weather. These plans were updated to include year 2000 issues. Contingency planning is engineered into the transmission and distribution systems as it is designed with the capability to bypass failed equipment. A margin of power generation reserve above what is needed is normally maintained. This reserve is a customary operating contingency plan that allows CSW to operate normally even when a power plant unexpectedly quits operating. Backup supplies of fuels are normally maintained at CSW power plants. Natural gas plants have fuel oil as a backup and multiple pipelines provide redundant supplies. At coal plants about 40 to 45 days of extra coal is kept on hand.
SEEBOARD also has well established contingency plans to address problems resulting from weather. These plans are covered effectively within the distribution and customer service business areas and were updated to include year 2000 scenarios.
Transition Results to Date The results of the readiness activities described in the foregoing have all been positive. The CSW System completed the year 2000 transition without any year 2000 related electric system problems. The business support systems in each of CSW and its subsidiaries also made the transition from 1999 to 2000 without any year 2000 related impact on the operations they support or the customers they serve. CSW continues to closely monitor its electric and business support systems.
Portions of the preceding discussion contain forward-looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION.
NEW ACCOUNTING STANDARDS
SFAS No. 133 as amended by SFAS No. 137 SFAS No. 133 as amended by SFAS No. 137 is effective for fiscal years beginning after June 15, 2000 or January 1, 2001, for calendar year entities. SFAS No. 133 replaces existing pronouncements and practices with a single integrated accounting framework for derivatives and hedging activities and eliminates previous inconsistencies in generally accepted accounting principles. SFAS No. 133 expands the accounting definition of derivatives, which had focused on freestanding contracts (futures, forwards, options and swaps) to include embedded derivatives and many commodity contracts. All derivatives will be reported on the balance sheet either as an asset or liability measured at fair value. Changes in a derivative's fair value will be recognized currently in
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earnings unless specific hedge accounting criteria are met. CSW has established a project team to implement SFAS No. 133. CSW has not yet quantified the effects of adopting SFAS No. 133 on its financial statements, although application of SFAS No. 133 could increase volatility in earnings and other comprehensive income. See NOTE 17. NEW ACCOUNTING STANDARDS.
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CENTRAL AND SOUTH WEST CORPORATION RESULTS OF OPERATIONS
Reference is made to CSW's Consolidated Financial Statements, Notes to Consolidated Financial Statements and Selected Financial Data. Referenced information should be read in conjunction with, and is essential to understanding, the following discussion and analysis. CSW's results fluctuate, in part, with the weather. Also, other than certain one-time items, as discussed throughout the results of operations, CSW's income statement line items as a percentage of total revenues remain fairly consistent, due primarily to the regulatory environment in which CSW operates. The preceding discussion contains forward-looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information due to changes in the underlying assumptions. See FORWARD-LOOKING INFORMATION.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998
CSW's earnings increased to $455 million in 1999 from $440 million in 1998. CSW's return on average common stock equity was 12.8% in 1999 compared to 12.4% in 1998. The primary reason for the higher earnings and higher return on average common stock equity was the previously planned sale of 50% of CSW's 100% equity ownership interest in a cogeneration partnership. CSW's after-tax earnings recorded in the fourth quarter of 1999 from the proceeds of the transaction were $33 million. Earnings also increased due to the absence in 1999 of a charge for accelerated capital recovery of STP and the absence of asset write-offs at several of CSW's business segments recorded in 1998.
Partially offsetting the higher earnings was higher operations and maintenance expense at SEEBOARD, CSW Energy and the U.S. Electric Operating Companies. Also partially offsetting the higher earnings was a charge to earnings at CPL, SWEPCO and WTU that was made to reflect the excess earnings provision of the Texas Legislation enacted in 1999. Another factor partially offsetting higher 1999 earnings was the extraordinary loss resulting from legislation enacted in Texas and Arkansas under which the electricity generation portion of CPL's, SWEPCO's and WTU's business in those states no longer meets the criteria to apply SFAS No. 71. See ITEM 7. MD&A - Securitization of Generation-related Regulatory Assets and Stranded Cost, ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility Restructuring Legislation and NOTE 16. EXTRAORDINARY ITEMS for additional information.
Operating revenues increased $55 million in 1999 compared to 1998. The revenue variances are shown in the following table.
1999 REVENUE VARIANCES Increase (decrease) from prior year, millions
U.S. Electric KWH Sales, Weather-Related $(64) KWH Sales, Growth and Usage 65 Fuel Revenue 37 Sales for Resale 22 Other Electric (24) ------------ United Kingdom (64) Other Diversified 83 ------------ $55 ------------
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U.S. Electric revenues increased $36 million, or 1% in 1999 compared to 1998. Retail U.S. Electric revenues increased due to higher customer usage and growth and higher off-system sales. An increase in fuel revenues due to higher fuel prices and purchased power expense, discussed below, also contributed to the higher revenues. Milder weather in 1999 when compared to the previous year partially offset the increase in revenues. MWH sales decreased 1.5% due primarily to a decrease in sales to the residential customer class as a result of the milder weather.
United Kingdom revenues decreased $64 million in 1999 compared to 1998 due to lower sales volumes in the business market and the loss of domestic customers following the opening of the electricity market to competition. Also contributing to the decrease in U.K. electric revenues were the absence in revenues in 1999 from SEEBOARD's retail business, which was sold in June 1998, and unfavorable British pound to U.S. dollar exchange rate movements. Other diversified revenues increased $83 million in 1999 compared to 1998 due primarily to increased business activity at CSW Energy.
During 1999 and 1998, the U.S. Electric Operating Companies generated 86% and 92% of their electric energy requirements, respectively. U.S. Electric fuel expense decreased $14 million in 1999 compared to 1998 due primarily to a $41 million decrease in the recovery of deferred fuel costs that resulted from a significant difference in fuel factors used to recover fuel expense from customers at PSO. The decrease in fuel expense was offset in part by an increase in fuel prices to $1.78 per MMbtu in 1999 from $1.67 per MMbtu in 1998. U.S. Electric purchased power expense increased $46 million, or 41% due primarily to an increase in economy energy purchases.
United Kingdom cost of sales decreased $71 million in 1999 compared to 1998 due primarily to a lower level of sales of electricity and the absence in 1999 of cost of sales for SEEBOARD's retail business and a lower British pound to U.S. dollar exchange rate compared to 1998.
Other operating expense increased $27 million in 1999 compared to 1998 due in part to increased expenses at SEEBOARD. Expenses increased at SEEBOARD as a result of additional operating costs from SEEBOARD's Powerlink joint venture to operate and maintain the electricity assets for the London Underground Rail System as well as increased expenses associated with operating in the competitive electricity market in the United Kingdom. CSW Energy's operating expenses also increased as a result of increased business activity at several of its plants. Operating expenses increased at the U.S. Electric Operating Companies due primarily to a settlement with a transmission service provider and increased power plant operating costs. Maintenance expense increased $31 million due primarily to increased expenses associated with the 10-year inspection of STP Unit 1 and 2, higher scheduled maintenance at other CSW System power plants and higher tree trimming expenses.
Depreciation and amortization expense increased $31 million in 1999 due primarily to accelerated capital cost recovery under the excess earnings provisions of the Texas Legislation, as well as increases in depreciable property.
Other income and deductions increased to $59 million in 1999 from $42 million in 1998 due primarily to gains from the sale of investments at SEEBOARD and interest income recognized by CSW Energy related to the Sweeny power plant. The gain was offset, in part, by the absence in 1999 of the gain from the sale of investments by C3 Communications in 1998. Long-term interest expense decreased $11 million in 1999 due primarily to the maturity and reacquisition of long-term debt.
The extraordinary losses resulted from legislation enacted in Arkansas and Texas under which the electricity generation portion of CPL's, SWEPCO's and WTU's business in those states no longer meet the criteria to apply SFAS No. 71.
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These legislative changes resulted in an extraordinary loss at SWEPCO and WTU, which had a cumulative effect of decreasing net income by $8.0 million. These legislative changes also resulted in an extraordinary loss at CPL of $6.0 million associated with a loss on reacquired debt and the discontinuance of SFAS No. 71.See ITEM 7. MD&A - Securitization of Generation-related Regulatory Assets and Stranded Costs.and ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility Restructuring Legislation, and NOTE 16. EXTRAORDINARY ITEMS for additional information.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997
CSW's earnings increased to $440 million in 1998 from $153 million in 1997. CSW's return on average common stock equity was 12.4% in 1998 compared to 4.2% in 1997. The primary reason for the higher earnings and higher return on average common stock equity was the absence in 1998 of the accrual of $176 million for the one-time United Kingdom windfall profits tax. Hotter than normal summer weather and increased customer growth and usage at the U.S. Electric Operating Companies were also factors in the increase in earnings over 1997. Additionally, the sale of a telecommunications partnership interest in 1998 and a decrease in the United Kingdom corporate tax rate contributed to the earnings increase. The absence of the impact of CSW's final settlement of litigation with El Paso in 1997 contributed to the increase in earnings in 1998 as well. Also contributing to the increase in earnings was the absence in 1998 of the effect of both the PSO 1997 Rate Settlement Agreement and the CPL 1997 Final Order. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. See ITEM 8. NOTE 16. EXTRAORDINARY ITEMS for additional information on the windfall profits tax. Partially offsetting the higher earnings was a charge for accelerated capital recovery of STP and asset write-offs at several of CSW's business segments.
Operating revenues increased $214 million in 1998 compared to 1997. The revenue variances are shown in the following table.
1998 REVENUE VARIANCES Increase (decrease) from prior year, millions
U.S. Electric KWH Sales, Weather-Related $72 KWH Sales, Growth and Usage 53 Fuel Revenue 31 Sales for Resale 6 Other Electric 5 ----------- United Kingdom (101) Other Diversified 148 ----------- $214 -----------
U.S. Electric revenues increased $167 million, or 5%, in 1998 compared to 1997. Retail MWH sales increased 6% with increases in all customer classes. U.S. Electric revenues increased due primarily to higher MWH sales resulting from hotter than normal summer weather and increased customer usage and growth. An increase in fuel revenues due to an increase in fuel expense, discussed below, also contributed to the higher revenues. United Kingdom revenues decreased $101 million, or 5%, in 1998 compared to 1997 due to the loss of revenues associated with the sale of its retail stores in the second quarter of 1998 and the effect of price control on the supply business. Other diversified revenues increased $148 million in 1998 compared to 1997 due primarily to increased revenues from CSW Energy, CSW Credit and EnerShop.
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During 1998 and 1997 the U.S. Electric Operating Companies generated 92% and 93% of their electric energy requirements, respectively. U.S. Electric fuel expense increased $13 million in 1998 compared to 1997 due primarily to increased generation offset in part by a decrease in fuel prices to $1.67 per MMbtu in 1998 from $1.83 per MMbtu in 1997. United Kingdom cost of sales decreased $87 million in 1998 compared to 1997 due primarily to lower cost of sales associated with the sale of SEEBOARD's retail stores and a decrease in the cost of purchased power reflecting lower business volumes.
Other operating expense increased $48 million in 1998 compared to 1997 due in part to a CSW Energy power plant that went into service in February 1998. The increase in other operating expense was offset in part by the absence in 1998 of the settlement of litigation with El Paso which increased other operating expense $35 million in 1997. Further offsetting the increase in other operating expense in 1998 was the absence of the $12 million impact of the CPL 1997 Final Order and the $4 million impact of the PSO 1997 Rate Settlement Agreement. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information on the CPL 1997 Final Order and the PSO 1997 Rate Settlement Agreement. Also partially offsetting the increase in other operating expense was reduced pension expense in 1997 resulting from changes made to the pension plan for CSW's domestic employees. See ITEM 8. NOTE 5. BENEFIT PLANS for additional information related to the changes in the pension plan.
Depreciation and amortization expense increased $24 million, or 5% in 1998 due primarily to accelerated recovery of ECOM property recorded in 1998 related to the CPL 1997 Final Order, a charge for accelerated capital recovery of STP, as well as increases in depreciable property. Income tax expense increased $52 million due primarily to higher pre-tax income.
Other income and deductions increased to $42 million in 1998 from $32 million in 1997 due primarily to the sale of a telecommunications partnership interest. Long-term interest expense decreased $22 million in 1998 due primarily to the prepayment of a $60 million variable rate bank loan due December 1, 2001; the maturity of $200 million of CPL FMBs on October 1, 1997 and $28 million of CPL FMBs on January 1, 1998; and the redemption of $91 million of FMBs of certain of the U.S. Electric Operating Companies on September 1, 1998. See ITEM 8. NOTE 8. LONG-TERM DEBT for additional information on the redemption of these securities. Short-term debt was used to prepay the variable rate bank loan in two $30 million installments on January 28, 1998 and April 27, 1998. Short-term borrowings and internal cash generation were used to fund the maturities and redemption of the previously mentioned FMBs. Short-term and other interest expense increased $35 million in 1998 when compared to 1997 due primarily to higher levels of short-term borrowings. Distributions on Trust Preferred Securities increased interest and other charges by $10 million in 1998. The Trust Preferred Securities were outstanding for all of 1998, while they were outstanding for only part of 1997. See ITEM 8. NOTE 10. TRUST PREFERRED SECURITIES for additional information on these securities.
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Consolidated Statements of Income Central and South West Corporation - -------------------------------------------------------------------------------- For the Years Ended December 31, --------------------------------- 1999 1998 1997 -------- ------- -------- ($ in millions, except share amounts) Operating Revenues U.S. Electric $ 3,524 $ 3,488 $ 3,321 United Kingdom 1,705 1,769 1,870 Other diversified 308 225 77 -------- ------- -------- 5,537 5,482 5,268 -------- ------- -------- Operating Expenses and Taxes U.S. Electric fuel 1,176 1,190 1,177 U.S. Electric purchased power 157 111 89 United Kingdom cost of sales 1,133 1,204 1,291 Other operating 1,056 1,029 981 Maintenance 200 169 152 Depreciation and amortization 552 521 497 Taxes, other than income 193 189 195 Income taxes 204 203 151 -------- ------- -------- 4,671 4,616 4,533 -------- ------- -------- Operating Income 866 866 735 -------- ------- --------
Other Income and Deductions Other 78 60 26 Non-operating income taxes (19) (18) 6 -------- ------- -------- 59 42 32 -------- ------- -------- Income Before Interest and Other Charges 925 908 767 -------- ------- --------
Interest and Other Charges Interest on long-term debt 300 311 333 Distributions on Trust Preferred Securities 27 27 17 Interest on short-term debt and other 119 121 86 Preferred dividend requirements of subsidiaries 7 8 12 Gain (Loss) on reacquired preferred stock 3 1 (10) -------- ------- -------- 456 468 438 -------- ------- --------
Income before Extraordinary Items 469 440 329 -------- ------- --------
Extraordinary loss - Discontinuance of SFAS No. 71(net of tax of $5) (8) -- -- Extraordinary loss - Loss on Reacquired Debt (net of tax of $3) (6) -- -- Extraordinary loss - United Kingdom windfall profits tax -- -- (176) -------- ------- --------
Net Income for Common Stock $ 455 $ 440 $ 153 ======== ======= ========
Average Common Shares Outstanding 212.6 212.4 212.1
Basic and Diluted EPS before Extraordinary Items $2.21 $2.07 $1.55 Basic and Diluted EPS from Extraordinary Items (0.07) -- (0.83) -------- ------- -------- Basic and Diluted EPS $2.14 $2.07 $0.72 ======== ======= ========
Dividends Paid per Share of Common Stock $1.74 $1.74 $1.74 ======== ======= ========
The accompanying notes to consolidated financial statements are an integral part of these statements.
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Consolidated Statements of Stockholders' Equity Central and South West Corporation (millions)
The accompanying notes to consolidated financial statements are an integral part of these statements.
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Consolidated Balance Sheets Central and South West Corporation - ------------------------------------------------------------------------ As of December 31, -------------------- 1999 1998 --------- --------- (millions) ASSETS Fixed Assets Electric Production $ 5,901 $ 5,887 Transmission 1,663 1,594 Distribution 4,896 4,681 General 1,437 1,380 Construction work in progress 205 166 Nuclear fuel 227 207 ------- ------- 14,329 13,915 Other diversified 353 333 ------- ------- 14,682 14,248 Less - Accumulated depreciation and amortization 6,008 5,652 ------- ------- 8,674 8,596 ------- ------- Current Assets Cash and temporary cash investments 270 157 Special deposits for reacquisition of long-term debt 50 -- Accounts receivable 1,140 1,110 Materials and supplies, at average cost 149 191 Electric utility fuel inventory 129 90 Under-recovered fuel costs 52 4 Notes receivable 53 109 Prepayments and other 84 90 ------- ------- 1,927 1,751 ------- ------- Deferred Charges and Other Assets Regulatory assets 219 1,113 Regulatory assets designated for securitization 953 -- Other non-utility investments 454 432 Securities available for sale 62 66 Benefit costs 202 185 Goodwill 1,330 1,402 Other 341 352 ------- ------- 3,561 3,550 ------- ------- $14,162 $13,897 ======= =======
The accompanying notes to consolidated financial statements are an integral part of these statements.
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Consolidated Balance Sheets Central and South West Corporation - --------------------------------------------------------------------------- As of December 31, ---------------------- 1999 1998 -------- -------- CAPITALIZATION AND LIABILITIES (millions) Capitalization Common stock: $3.50 par value Authorized shares: 350.0 million shares Issued and outstanding: 212.6 million shares in 1999 and 212.6 million shares in 1998 $ 744 $ 744 Paid-in capital 1,051 1,049 Retained earnings 1,906 1,823 Accumulated other comprehensive income (18) 8 -------- -------- 3,683 47% 3,624 45% ------------- -------------
Preferred Stock 18 --% 176 2% Certain Subsidiary-obligated, mandatorily redeemable preferred securities of subsidiary trusts holding solely Junior Subordinated Debentures of such Subsidiaries 335 4% 335 4% Long-term debt 3,821 49% 3,938 49% ------------- ------------- Total Capitalization 7,857 100% 8,073 100% ------------- -------------
Current Liabilities Long-term debt due within twelve months 256 169 Short-term debt 1,346 811 Short-term debt - CSW Credit 754 749 Loan notes 24 32 Accounts payable 581 624 Accrued taxes 187 190 Accrued interest 64 84 Other 175 218 -------- -------- 3,387 2,877 -------- -------- Deferred Credits Accumulated deferred income taxes 2,431 2,410 Investment tax credits 254 267 Other 233 270 -------- -------- 2,918 2,947 -------- -------- $14,162 $13,897 ======== ========
The accompanying notes to consolidated financial statements are an integral part of these statements.
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Consolidated Statements of Cash Flows Central and South West Corporation - -------------------------------------------------------------------------------- For the Years Ended December 31, -------------------------------- 1999 1998 1997 -------- ------ ------- (millions) OPERATING ACTIVITIES Net income for common stock $ 455 $ 440 $ 153 Non-cash Items and Adjustments Depreciation and amortization 580 552 529 Deferred income taxes and investment tax credit 24 (56) 110 Preferred stock dividends 7 8 12 Gain on reacquired preferred stock 3 1 (10) Charges for investments and assets -- 39 53 Extraordinary loss - Discontinuance of SFAS No. 71 8 -- -- Extraordinary loss - Loss on Reacquired Debt 6 -- -- Gain on sale of investments (35) (13) -- Changes in Assets and Liabilities Accounts receivable (49) (187) (140) Accounts payable (19) 69 59 Accrued taxes -- 20 (153) Fuel recovery (75) 109 (37) Fuel inventory (38) (25) 37 Other (64) (15) 113 ----- ----- ----- 803 942 726 ----- ----- ----- INVESTING ACTIVITIES Construction expenditures (639) (492) (507) Disposition of plant (1) (5) 6 CSW Energy/CSW International projects (182) (184) (382) Cash proceeds from sale of investments 80 56 -- Other (16) (10) (21) ----- ----- ----- (758) (635) (904) ----- ----- ----- FINANCING ACTIVITIES Common stock sold 1 11 20 Proceeds from issuance of long-term debt 500 154 -- Reacquisition/Maturity of long-term debt (342) (182) (253) Redemption of preferred stock (160) (28) (114) Trust Preferred Securites sold -- -- 323 Special deposits for reacquisitions of long-term debt (50) -- -- Other financing activities (41) (4) (3) Change in short-term debt 541 202 414 Payment of dividends (378) (378) (383) ----- ----- ----- 71 (225) 4 ----- ----- -----
Effect of exchange rate changes on cash and cash equivalents (3) -- (5) ----- ----- -----
Net Change in Cash and Cash Equivalents 113 82 (179) Cash and Cash Equivalents at Beginning of Year 157 75 254 ----- ----- ----- Cash and Cash Equivalents at End of Year $ 270 $ 157 $ 75 ===== ===== =====
SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized $ 466 $ 446 $ 413 ===== ===== ===== Income taxes paid $ 175 $ 258 $ 412 ===== ===== =====
The accompanying notes to consolidated financial statements are an integral part of these statements.
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CENTRAL AND SOUTH WEST CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations CSW is a registered holding company under the Holding Company Act subject to regulation by the SEC. The U.S. Electric Operating Companies are also regulated by the SEC under the Holding Company Act.
The principal business of the U.S. Electric Operating Companies is the generation, transmission, and distribution of electric power and energy. These companies are subject to regulation by the FERC under the Federal Power Act and follow the Uniform System of Accounts prescribed by the FERC. They are subject to further regulation with regard to rates and other matters by state regulatory commissions as follows: CPL and WTU are subject to the Texas Commission; PSO is subject to the Oklahoma Commission; and SWEPCO is subject to the Arkansas, Louisiana, Oklahoma and Texas Commissions.
The principal business of SEEBOARD is the distribution and supply of electricity and gas in South East England. SEEBOARD is subject to rate regulation by the DGEGS.
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. C3 Communications pursues telecommunications projects. CSW Leasing has investments in leveraged leases. EnerShop offers energy-management services. CSW Energy Services pursued retail energy markets outside of CSW's traditional service territory, until these activities were discontinued in early 1999. In the fourth quarter of 1999, CSW Energy Services began operating a staffing services company for electric utility nuclear power plants, which was previously a PSO investment.
The more significant accounting policies of the CSW System are summarized below.
Principles of Consolidation The consolidated financial statements include the accounts of CSW and its subsidiary companies. The consolidated financial statements for CPL, PSO and SWEPCO include their respective capital trusts. All significant intercompany transactions have been eliminated.
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities along with disclosure of contingent liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Fixed Assets and Depreciation U.S. Electric fixed assets are stated at the original cost of construction, which includes the cost of contracted services, direct labor, materials, overhead items and allowances for borrowed and equity funds used during construction. SEEBOARD's fixed assets are stated at their original fair
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market value which existed on the date of acquisition plus the original cost of property acquired or constructed since the acquisition, less disposals.
Provisions for depreciation of plant are computed using the straight-line method, generally at 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.
CSW CPL PSO SWEPCO WTU -------------------------------------------------- 1999 3.3% 3.1% 3.1% 3.3% 3.3% 1998 3.4% 3.0% 3.1% 3.3% 3.2% 1997 3.4% 3.0% 3.3% 3.2% 3.3%
CPL Nuclear Decommissioning of STP At the end of STP's service life, decommissioning is expected to be accomplished using the decontamination method, which is one of the techniques acceptable to the NRC. Using this method, the decontamination activities occur as soon as possible after the end of plant operations. Contaminated equipment is cleaned and removed to a permanent disposal location, and the site is generally returned to its original condition.
CPL's decommissioning costs are accrued and funded to an external trust over the expected service life of the STP units. The existing NRC operating licenses will allow the operation of STP Unit 1 until 2027 and Unit 2 until 2028. CPL pays annual decommissioning costs based on the estimated future cost to decommission STP, including escalation for expected inflation to the expected time of decommissioning.
CPL estimates its portion of the costs of decommissioning STP to be $289 million in 1999 dollars based on a study completed in 1999. CPL is accruing and recovering these decommissioning costs through rates based on the service life of STP at a rate of $8.2 million per year. The funds are deposited with a trustee under the terms of an irrevocable trust and are reflected in CPL's consolidated balance sheets as Nuclear decommissioning trust, with a corresponding amount accrued in Accumulated depreciation. On CSW's consolidated balance sheets, the irrevocable trust is included in Deferred Charges and Other Assets, Other, with a corresponding amount accrued in Accumulated depreciation. In CSW's and CPL's consolidated statements of income, the income related to the irrevocable trust is recorded in Other Income and Deductions, Other. In CPL's consolidated statements of income, the interest expense related to the irrevocable trust is recorded in Interest Charges, Interest on short-term debt and other. In CSW's consolidated statements of income the interest expense related to the irrevocable trust is recorded in Interest and Other Charges, Interest on short-term debt and other. At December 31, 1999, the nuclear trust balance was $86.1 million.
Electric Revenues and Fuel The U.S. Electric Operating Companies record revenues based upon cycle-billings. Electric service provided subsequent to billing dates through the end of each calendar month are accrued for by estimating unbilled revenues in accordance with industry standards.
CPL, SWEPCO and WTU recover retail fuel costs in Texas as a fixed component of rates whereby over-recoveries of fuel are payable to customers and under-recoveries may be billed to customers after Texas Commission approval. The cost of fuel is charged to expense as incurred, with resulting fuel over-recoveries and under-recoveries recorded as regulatory liabilities and assets. PSO recovers fuel costs in Oklahoma through service level fuel cost adjustment factors, and SWEPCO recovers fuel costs in Arkansas and Louisiana through automatic fuel recovery mechanisms. The application of these mechanisms varies by jurisdiction. See ITEM 1. BUSINESS, FUEL RECOVERY - U.S. Electric and ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS, for further information about fuel recovery.
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CPL, PSO and WTU recover fuel costs applicable to wholesale customers, which are regulated by the FERC, through an automatic fuel adjustment clause. SWEPCO recovers fuel costs applicable to wholesale customers through formula rates.
CPL amortizes direct nuclear fuel costs to fuel expense on the basis of a ratio of the estimated energy used in the core to the energy expected to be derived from such fuel assembly over its life in the core. In addition to fuel amortization, CPL also records nuclear fuel expense as a result of other items, including spent fuel disposal fees assessed on the basis of net MWHs sold from STP and DOE special assessment fees for decontamination and decommissioning of the enrichment facilities on the basis of prior usage of enrichment services.
Accounts Receivable CSW Credit purchases, without recourse, the billed and unbilled accounts receivable of the U.S. Electric Operating Companies and certain non-affiliated public utility companies.
Regulatory Assets and Liabilities For their regulated activities, the U.S. Electric Operating Companies follow SFAS No. 71, which defines the criteria for establishing regulatory assets and regulatory liabilities. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility Restructuring Legislation for a discussion of the continued application of SFAS No. 71 to the Texas Electric Operating Companies. Regulatory assets represent probable future revenue to the company associated with certain costs, which will be recovered from customers through the ratemaking process. Regulatory liabilities represent probable future refunds to customers. The regulatory assets are currently being recovered in rates or are probable of being recovered in rates. The unamortized balances are included in the table below.
Note: The footnote references to the table above are found on the following page.
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(1)See discussion of Securitization in ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. (2)Earning no return, amortized by the end of 2000. (3)Earning no return, amortized over twelve-month period, recalculated twice each year. (4)Earning no return, amortized through 2001. (5)Earning no return, amortized by the end of 2006.
Under provisions of the Texas Legislation, CPL filed an application with the Texas Commission to securitize generation-related regulatory assets. Management believes the unamortized regulatory asset amounts at December 31, 1999 will either be recovered through: (1) regulated rates; (2) stranded cost recovery; or (3) FERC jurisdictional rates. The legislation provides for securitization of 100% of regulatory assets and 75% of ECOM. Regulatory assets in the amount of $763.7 million have been approved for securitization by the Texas Commission, and a draft order has been prepared in this case. The Texas Commission has indicated that it expects to issue a final order in late March 2000. The settlement also calls for $290 million of the amount originally requested to be included in the calculation of stranded costs in CPL's March 2000 transmission and distribution cost filing. The securitization amount was reduced by $186 million from the amount originally requested to reflect customer benefits associated with accumulated deferred income taxes. CPL previously had proposed to flow these benefits back to customers over the 14-year bond term. See ITEM 7. MD&A Securitization of Generation-related Regulatory Assets and Stranded Costs and ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility Restructuring Legislation for a discussion of CPL's securitization application and the Texas Legislation.
Discontinuance of SFAS No. 71 Application of SFAS No. 71 was discontinued in 1999 for CPL's and WTU's generation business in Texas and SWEPCO's generation business in Arkansas and Texas resulting from legislation passed in those states. See ITEM 7. MD&A - Securitization of Generation-related Regulatory Assets and Stranded Costs and ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEDURES - Electric Utility Restructuring Legislation for additional information. The following table summarizes the net assets included in Electric Utility Plant related to each company's generation plant for which the application of SFAS No. 71 was discontinued, compared to total assets at December 31, 1999.
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Generation Net Assets Company For Which Total Assets SFAS No. 71 Was Discontinued ------------------------------------------------------------ (millions) CPL $1,872 $4,848 SWEPCO 226 2,108 WTU 168 861
Goodwill Resulting from SEEBOARD Acquisition The acquisition of SEEBOARD was accounted for as a purchase combination. The purchase price has been allocated and is reflected in the consolidated financial statements. The goodwill, resulting from the SEEBOARD acquisition, is being amortized on a straight-line basis over 40 years. The unamortized balance of the SEEBOARD goodwill at December 31, 1999 was $1.3 billion. CSW continually evaluates whether circumstances have occurred that indicates the remaining useful life of goodwill warrants revision.
Long-Term Contract In a joint venture, SEEBOARD Powerlink won a 30-year, $1.6 billion contract to operate, maintain, finance and renew the high-voltage power distribution network of the London Underground. Revenues from this contract are recognized under the percentage of completion method in line with progress on defined contract segments.
Foreign Currency Translation The financial statements of SEEBOARD U.S.A., 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 asset and liability accounts are translated at the exchange rate at the end of the period, and all income statement items are translated at the weighted average exchange rate for the applicable period. All the resulting translation adjustments are recorded directly to "Accumulated other comprehensive income" on CSW's Consolidated Balance Sheets. Cash flow statement items are translated at a combination of average, historical and current exchange rates. The non-cash impact of the changes in exchange rates on cash and cash equivalents, resulting from the translation of items at the different exchange rates, is shown on CSW's Consolidated Statements of Cash Flows in "Effect of exchange rate changes on cash and cash equivalents."
One British pound equals the following U.S. dollar amounts:
1999 1998 1997 --------- ---------- ----------- At December 31 $1.62 $1.66 $1.65
Weighted average for the 2 months ended December 31 $1.62 $1.66 $1.58
See ITEM 8. NOTE 18. SOUTH AMERICAN INVESTMENTS for information regarding CSW's investments in Brazil and Chile.
Cash Equivalents Cash equivalents are considered to be highly liquid instruments with a maturity of three months or less. Accordingly, temporary cash investments and advances to affiliates are considered cash equivalents.
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Risk Management CSW has, at times, been exposed to currency and interest rate risks which reflect the floating exchange rate that exists between the U.S. dollar and the British pound. CSW has utilized certain risk management tools, including cross currency swaps, foreign currency futures and foreign currency options, to manage adverse changes in exchange rates and to facilitate financing transactions resulting from CSW's acquisition of SEEBOARD.
SEEBOARD has entered into contracts for differences to reduce exposure to fluctuations in the price of electricity purchased from the United Kingdom's electricity power pool. This pool was established at privatization of the United Kingdom's electric industry for the bulk trading of electricity between generators and suppliers.
CSW accounts for these transactions as hedge transactions and any gains or losses associated with the risk management tools are recognized in the financial statements at the time the hedge transactions are settled. CSW believes its credit risk in these contracts is negligible. See ITEM 7. MD&A, RISK MANAGEMENT, ITEM 8. NOTE 7. FINANCIAL INSTRUMENTS; NOTE 17. NEW ACCOUNTING STANDARDS and ITEM 8. NOTE 18. SOUTH AMERICAN INVESTMENTS for additional information.
Securities Available for Sale CSW accounts for its investments in equity securities in accordance with SFAS No. 115. The investments have been designated as available for sale, and as a result are stated at fair value. Unrealized holding gains and losses, net of related taxes, are included in Accumulated other comprehensive income on CSW's Consolidated Balance Sheets. Information related to these securities available for sale as of December 31, 1999 is presented in the following table.
Original Unrealized Holding Cost Gains / (Losses) Fair Value --------------------------------------------------------------- (millions)
Securities available for sale $110 $(48) $62
As of December 31, 1999, CSW International has invested $110 million in stock of a Chilean electric company. The investment is classified as securities available for sale and accounted for by the cost method. Based on the year-end market value of the shares and foreign exchange rates, the value of the investment at December 31, 1999 is $62 million. The reduction in the carrying value of this investment has been reflected in Accumulated other comprehensive income in CSW's Consolidated Balance Sheets. Management views its investment in Chile as a long-term investment strategy and believes this investment continues to have significant long-term value and that it is recoverable. Management will continue to closely evaluate the changes in the South American economy and its impact on CSW International's investment in the Chilean electric company. See ITEM 8. NOTE 18. SOUTH AMERICAN INVESTMENTS.
Inventory CPL, PSO and WTU utilize the LIFO method for the valuation of all fossil fuel inventories. SWEPCO continues to utilize the weighted average cost method pending approval of the Arkansas Commission to utilize the LIFO method. At December 31, 1999, none of the U.S. Electric Operating Companies had LIFO reserves. LIFO reserves are the excess of the inventory replacement cost over the carrying amount on the balance sheet.
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Comprehensive Income Consistent with the requirements of SFAS No. 130, CSW discloses comprehensive income. Comprehensive income is defined as the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.
Components of Other Comprehensive Income The following table provides the components that comprise the balance sheet amount in Accumulated other comprehensive income.
Components 1999 1998 1997 ---------------------------------------------------------------- (millions)
Foreign Currency Adjustments $6 $34 $27 Unrealized Losses on Securities (20) (20) 1 Minimum Pension Liability (4) (6) (5) --------------------------- $(18) $8 $23 ---------------------------
Segment Reporting CSW has adopted SFAS No. 131, which requires disclosure of select financial information by business segment as viewed by the chief operating decision-maker. See ITEM 8. NOTE 14. BUSINESS SEGMENTS.
Reclassification Certain financial statement items for prior years have been reclassified to conform to the 1999 presentation.
2. LITIGATION AND REGULATORY PROCEEDINGS
Litigation Related to the Rights Plan and AEP Merger Two lawsuits were filed in Delaware state court seeking to enjoin the AEP Merger. CSW and each of its directors were named as defendants in both cases. The first suit alleged that the Rights Plan, approved by the CSW Board of Directors on September 27, 1997, constituted a "poison pill" precluding acquisition offers and resulting in a heightened fiduciary duty on the part of the CSW Board of Directors to pursue an auction-type sales process to obtain the best value for CSW stockholders. The second suit alleged that the AEP Merger was unfair to CSW stockholders in that it did not recognize the underlying intrinsic value of CSW's assets and its future profitability. Both suits were dismissed in 1999.
Electric Utility Restructuring Legislation On June 18, 1999, legislation was signed into law in Texas that will restructure the electric utility industry in the state. The new law, among other things,
- - gives Texas customers of investor-owned utilities the opportunity to choose their electric provider beginning January 1, 2002;
- - provides for the recovery of stranded costs, which are defined as the excess of net book value of generation assets over the defined market value of those assets;
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- - requires reductions in nitrogen oxide and sulfur dioxide emissions;
- - provides a rate freeze until January 1, 2002 followed by a 6% rate reduction for residential and small commercial customers, an additional rate reduction for low-income customers and a number of customer protections; and
- - sets certain limits on capacity owned and controlled by power generation companies.
Rural electric cooperatives and municipal electric systems can choose whether to participate in retail competition. Delivery of the electricity at regulated prices will continue to be the responsibility of the local electric transmission and distribution utility company. Each utility must unbundle its business activities into a retail electric provider, a power generation company and a transmission and distribution utility.
CPL, SWEPCO and WTU filed their business separation or "unbundling" plans with the Texas Commission on January 10, 2000. The filing gives an overview of how the Texas Electric Operating Companies could separate into three separate companies to meet the requirements of the Texas Legislation. Specifically, the filing describes the financial aspects of separating the companies, lists the functions each of the new business entities will perform, describes how the companies will physically separate their operations, discusses the accounting aspects, describes how the companies will handle competitive energy services, and introduces interim and permanent codes of conduct. The main issues the Texas Commission will determine in this case are whether CSW's proposed business separation method and the proposed code of conduct are in compliance with the Texas Legislation. Other separation issues will be presented in a March 31, 2000 cost unbundling filing. CPL, SWEPCO and WTU expect an order from the Texas Commission on this case in the second quarter of 2000.
During 1999, legislation was also enacted in Arkansas that will ultimately restructure the electric utility industry in that state. SWEPCO will file a business unbundling plan in Arkansas in mid-2000.
The financial statements of the U.S. Electric Operating Companies have historically reflected the effects of applying the requirements of SFAS No. 71. Pursuant to those requirements, the U.S. Electric Operating Companies have recorded regulatory assets and liabilities (probable future revenues and refunds) to reflect the economic effect of cost-based regulation. When a company determines that its operations or a segment of its operations no longer meets the criteria for applying SFAS No. 71, it is required to apply the requirements of SFAS No. 101. Pursuant to those requirements and further guidance provided in EITF 97-4, a company is required to write-off regulatory assets and liabilities related to deregulated operations, unless recovery of such amounts is provided through rates to be collected in a continuing regulated portion of the company's operations. Additionally, it is required to determine if any plant assets are impaired under SFAS No. 121.
As a result of the scheduled deregulation of generation in Texas and Arkansas, CSW concluded that it should discontinue the application of SFAS No. 71 for the Texas generation portion of the business for CPL and WTU and the Texas and Arkansas jurisdictional portions of the generation business for SWEPCO. Consequently, WTU recorded an extraordinary charge to earnings of $5.5 million and SWEPCO recorded an extraordinary charge to earnings of $3.0 million to reflect the effects of discontinuing the application of SFAS No. 71 and to write-off net regulatory assets that are not probable of recovery.
The discontinuance of SFAS No. 71 for CPL did not result in a net charge to earnings as such net regulatory assets, pursuant to the legislation, are expected to be recovered from transmission and distribution customers through rates that will continue to be regulated.
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Electric utilities who have stranded costs under the Texas Legislation are allowed to recover generation-related regulatory assets that otherwise may not be recoverable in the future competitive market. All or a majority of those costs can be refinanced through securitization, which is a financing structure designed to provide lower financing costs than is available through the conventional utility cost of capital model. The securitized amounts are then recovered through a non-bypassable wires charge. On October 18, 1999, CPL filed an application with the Texas Commission to securitize approximately $1.27 billion of its retail generation-related regulatory assets and approximately $47 million in other qualified costs. CPL expects to issue the securitization bonds in 2000, depending on market conditions and the timing of an order from the Texas Commission. Hearings were held in December 1999. CPL reached settlement agreements which resolved all issues except the role of the Texas Commission's financial advisor.
On Feburary 10, 2000, the Texas Commission tentatively approved a settlement, which will permit CPL to securitize approximately $764 million of regulatory assets. The Texas Commission is expected to grant final approval by March 27, 2000. The settlement calls for CPL to reduce its proposed amount to be securitized from $1.27 billion to approximately $764 million of regulatory assets plus an estimated $29 million of other qualified costs. The settlement also calls for $290 million of the amount originally requested to be included in the calculation of stranded costs in CPL's March 2000 transmission and distribution cost filing. This filing will establish stranded costs, of which 75% can be securitized and 25% can be recovered through a competitive transition charge. The securitization amount was reduced by $186 million from the amount originally requested to reflect customer benefits associated with accumulated deferred income taxes. CPL previously had proposed to flow these benefits back to customers over the 14-year bond term. A second phase of securitization could occur when the Texas Commission makes a preliminary determination of stranded costs, currently expected to occur in the first half of 2001. A non-bypassable charge will be used to recover additional unsecuritized stranded cost amounts.
Under the provisions of EITF 97-4, CPL's generation-related net regulatory assets were transferred to the transmission and distribution portion of the business and will be amortized as they are recovered through charges to customers. Management currently believes all generation-related regulatory assets for CPL will be recovered as provided under Texas Legislation. If future events were to occur that made the recovery of these assets no longer probable, CPL would write-off any non-recoverable portion of such assets as a non-cash charge to earnings.
The discontinuance of SFAS No. 71 for CPL's and WTU's Texas generation business and SWEPCO's Texas and Arkansas generation business requires that these businesses no longer defer costs or recognize liabilities strictly resulting from the actions of a regulator. For example, operations and maintenance expenditures will be expensed as incurred regardless of regulatory treatment. In addition, the equity component of allowance for funds used during construction can no longer be accrued for generation-related capital projects. Instead, the businesses will be required to follow the interest capitalization rules in SFAS No. 34. SFAS No. 71 also allowed for the deferral of the loss on any reacquired debt. In December 1999, CPL incurred a loss totaling approximately $8.5 million that was expensed as an extraordinary item, since CPL is no longer able to apply the provisions of SFAS No. 71 to its Texas generation-related operations.
CPL's amount of regulatory assets and stranded costs are subject to a final determination by the Texas Commission in 2004. The Texas Legislation provides that all such finally determined stranded costs will be recovered. Since SWEPCO and WTU are not expected to have net stranded costs, all generation-related non-recoverable net regulatory assets were written off and reflected on the statement of income as an extraordinary loss. See ITEM 8. NOTE 16. EXTRAORDINARY ITEMS.
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Additionally, CPL, SWEPCO and WTU performed an accounting impairment analysis of generation assets under SFAS No. 121 and concluded there was no impairment of generation assets at that time. An impairment analysis involves estimating future net cash flows arising from the use of an asset. If the net cash flows exceed the net book value of the asset, then there is no impairment of the asset for accounting purposes. CPL, SWEPCO and WTU will continue to review their assets for potential impairment if events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
The Texas Legislation also provides that each year during the 1999 through 2001 rate freeze period, utilities with stranded costs are required to apply any earnings in excess of the most recently approved cost of capital in a company's last rate case (if issued on or after January 1, 1992) to reduce stranded costs. As a result, CPL recorded a net charge to earnings of $12.0 million for 1999 to reflect the impact of this provision. Utilities without stranded costs must either flow such amounts back to customers or make capital expenditures, at no charge to customers, to improve transmission or distribution facilities or to improve air quality. As a result, WTU recorded a net charge to 1999 earnings of $3.9 million and SWEPCO recorded a net charge of $4.2 million to 1999 earnings from the effect of the excess earnings under the Texas Legislation. The charges were based on estimates for the current year and are subject to final determination by the Texas Commission.
Beginning January 1, 2002, fuel costs will not be subject to Texas Commission fuel reconciliation proceedings. Consequently, CPL, SWEPCO, and WTU will file a final fuel reconciliation with the Texas Commission reconciling fuel costs through the period December 31, 2001. These final fuel balances will be included in each company's true-up proceeding in 2004.
CSW continues to analyze the impact of the electric utility industry restructuring legislation on the U.S. Electric Operating Companies. The Texas Commission has established numerous task forces, including representatives from CPL, SWEPCO and WTU, to address various issues associated with the Texas Legislation and to provide guidance regarding implementation of restructuring.
As previously discussed, as a result of the Texas Legislation, CPL filed its application for securitization on October 18, 1999 with the Texas Commission. CPL, SWEPCO and WTU filed business separation plans with the Texas Commission on January 10, 2000, and will file excess earnings reports and cost unbundling plans in March 2000 and CPL will file its ECOM report in March 2000.
Also see ITEM 7. MD&A - RECENT DEVELOPMENTS AND TRENDS, Electric Utility Restructuring Legislation for a discussion on restructuring legislation.
CPL Rate Review - Docket No. 14965 In November 1995, CPL filed with the Texas Commission a request to increase its retail base rates by $71 million. On October 16, 1997, the Texas Commission issued the CPL 1997 Final Order which lowered the annual retail base rates of CPL by approximately $19 million, or 2.5%, from CPL's rate level existing prior to May 1996. The Texas Commission also included a "glide path" rate methodology in the CPL 1997 Final Order pursuant to which CPL's annual rates were reduced by $13 million beginning May 1, 1998 with an additional reduction of $13 million on May 1, 1999.
CPL filed an appeal of the CPL 1997 Final Order to the State District Court of Travis County to raise several issues related to the rate case. The primary issues include: (i) the classification of $800 million of invested capital in STP as ECOM which was also assigned a lower return on equity than non-ECOM property; (ii) the Texas Commission's use of the "glide path" rate
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reduction methodology applied on May 1, 1998 and 1999; and (iii) the $18 million of disallowed affiliate expenses from CSW Services. As part of the appeal, CPL sought a temporary injunction to prohibit the Texas Commission from implementing the "glide path" rate reduction methodology. The court denied the temporary injunction and the "glide path" rate reduction was implemented in May 1998 and May 1999. Hearings on the appeal were held during the third quarter of 1998, and a judgment was issued in February 1999 affirming the Texas Commission order, except for a consolidated tax issue in the amount of $6 million, which was remanded to the Texas Commission.
CPL filed an appeal of this most recent order to the Third District of Texas Court of Appeals and management is unable to predict how the final resolution of these issues will ultimately affect CSW's and CPL's results of operations and financial condition. On May 4, 1999, AEP and CSW announced that they had reached a stipulated agreement with the General Counsel of the Texas Commission and other intervenors in the state of Texas related to the AEP/CSW merger case. The Texas Commission approved the AEP Merger in early November 1999. If the AEP Merger is ultimately consummated, CSW will withdraw its appeal with respect to the "glide path" rate reduction methodology as discussed above as issue "(ii)" but will continue seeking the appeal of issues "(i) and (iii)" as discussed above. See ITEM 8. NOTE 15. PROPOSED AEP MERGER and ITEM 7. MD&A - PROPOSED AEP MERGER for a discussion on the stipulated agreement.
See ITEM 7. MD&A - RATES AND REGULATORY MATTERS, CPL Rate Review - Docket No. 14965 for a discussion of the CPL 1997 Final Order.
CPL Deferred Accounting By orders issued in 1989 and 1990, the Texas Commission authorized CPL to defer certain STP Unit 1 and Unit 2 costs incurred between the commercial 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 utility, the Supreme Court of Texas in 1994 sustained deferred accounting as an appropriate mechanism for the Texas Commission to use in preserving the financial integrity of CPL, but remanded CPL's case to the Third District of Texas Court of Appeals to consider certain substantial evidence points of error not previously decided by the Third District of Texas Court of Appeals. On August 16, 1995, the Third District of Texas Court of Appeals rendered its opinion in the remand proceeding and affirmed the Texas Commission's order in all respects.
By orders issued in October 1990 and December 1990, the Texas Commission quantified 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 Texas Commission orders were appealed to the Travis County District Court where the appeals are still pending. Language in the Supreme Court of Texas' opinion in the appeal of the deferred accounting authorization case suggests that the appropriateness of including deferred accounting costs in rates charged to customers is dependent on a finding 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 outcome 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.
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The deferred accounting amounts are included in the amounts to be securitized as part of the settlement amount approved by the Texas Commission in its October 18, 1999 securitization filing. See ITEM 7. MD&A - Securitization of Generation-related Regulatory Assets and Stranded Costs.
CPL Fuel Reconciliation On December 31, 1998, CPL filed with the Texas Commission an application to reconcile fuel costs and to request authorization to carry the reconciled balance forward into the next reconciliation period. During the reconciliation period of July 1, 1995 through June 30, 1998, CPL incurred $828.5 million in eligible fuel and fuel-related expenses. The Texas jurisdictional allocation of such fuel and fuel-related expenses is $783.4 million.
In addition to requesting reconciliation of its fuel and fuel-related expenses for the reconciliation period, CPL requested authority from the Texas Commission to recover the reward earned during the reconciliation period under the performance standard adopted in the CPL 1997 Final Order for CPL's share of STP. The Texas Commission adopted a three-year average capacity factor of 83% performance standard for STP in that order. During the reconciliation period, STP operated at a net capacity factor of 93.1%, resulting in a reward of $19.2 million.
CPL requested authority to recover the Texas portion of 50% of the reward by including 1/36th of this amount in Texas retail eligible fuel expense each month for the three-year period following the Texas Commission's order in the fuel reconciliation case. CPL further requested authority to apply the amounts of the reward recovered through Texas retail eligible fuel expense toward additional amortization of its STP deferred accounting regulatory asset. The remaining 50% of the reward would be "banked" to be used against potential future penalties or other disallowance of fuel costs. Hearings were held before an ALJ in June 1999. In July 1999, all parties reached a settlement in principle. The settlement resolves all disputed issues and includes a disallowance of $7.44 million recorded in the third quarter of 1999. The settlement provides for no STP performance reward either now or in the future. The Texas Commission issued its final order on September 23, 1999 approving the settlement.
CPL Fuel Factor Filing In January 2000, CPL filed with the Texas Commission an Application for Authority to implement an increase in fuel factors of $55.4 million, or 16.5% on an annual basis effective with the March 2000 billing month. Additionally, CPL proposed to implement an interim fuel surcharge of $36.5 million, including accumulated interest over a six-month period to collect its under-recovered fuel costs beginning in April 2000. CPL entered into a settlement providing for an increase in fuel factors of $43.3 million or 12.9% and a surcharge of $24.7 million. The settlement will be implemented in March and April 2000.
CPL Municipal Franchise Fee Litigation In May 1996, the City of San Juan, Texas filed a class action suit in Hidalgo County, Texas District Court on behalf of all cities served by CPL based upon CPL's alleged underpayment of municipal franchise fees. The plaintiffs' third amended petition, filed in January 2000, asserts various contract and tort claims against CPL as well as certain audit rights. The third amended petition seeks actual damages of up to $200 million, punitive damages of up to $100 million and attorneys' fees. CPL filed a counterclaim for any overpayment of franchise fees it may have made as well as its attorneys' fees. CPL also filed a motion to transfer venue to Nueces County, Texas, and a plea to the jurisdiction and pleas in abatement asserting that the Texas Commission has primary jurisdiction over the claims. In May 1996 and December 1996, respectively, the Cities of Pharr, Texas and San Benito, Texas filed individual suits making claims virtually identical to those claimed by the City of San Juan. The suit filed by the City of San Benito has been voluntarily dismissed.
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In January 1997, CPL filed an original petition at the Texas Commission requesting the Texas Commission to declare its jurisdiction over CPL's collection and payment of municipal franchise fees. In April 1997, the Texas Commission issued a declaratory order in which it declined to assert jurisdiction over the claims of the City of San Juan. CPL appealed the Texas Commission's decision to the Travis County, Texas District Court, which affirmed the Texas Commission ruling on February 19, 1999. CPL appealed this ruling to the Austin Court of Appeals; oral argument was heard on this appeal in November 1999.
After the Texas Commission's order, the Hidalgo County District Court overruled CPL's plea to the jurisdiction and plea in abatement. In July 1997, the Hidalgo County District Court entered an order certifying the case as a class action. CPL appealed this order to the Corpus Christi Court of Appeals. In February 1998, the Corpus Christi Court of Appeals affirmed the trial court's order certifying the class. CPL appealed the Corpus Christi Court of Appeals ruling to the Texas Supreme Court, which declined to hear the case. In August 1998, the Hidalgo County District Court ordered the case to mediation and suspended all proceedings pending the completion of the mediation. The mediation was completed in December 1998, but the case was not resolved.
On January 5, 1999, a class notice was mailed to each of the cities served by CPL. Over 90 of the 128 cities declined to participate in the lawsuit. However, CPL has pledged that if any final, non-appealable court decision in the litigation awards a judgement against CPL for a franchise underpayment, CPL will extend the principles of that decision, with regard to the franchise underpayment, to the cities that decline to participate in the litigation. The plaintiffs filed a motion to extend the time for the cities to decide whether to participate in the lawsuit. In December 1999, the court ruled that the class would consist of 30 cities, and the plaintiffs' motion to extend the time for the cities to participate in the lawsuit was withdrawn. The City of Weslaco has recently joined as an additional class representative.
Although CPL believes that it has substantial defenses to the cities' claims and intends to defend itself against the cities' claims and pursue its counterclaims vigorously, CPL cannot predict the outcome of the municipal franchise fee litigation or its impact on CPL's results of operations or financial position.
CPL Anglo Iron Litigation In April 1998, CPL was sued by Anglo Iron in the United States District Court for the Southern District of Texas, Brownsville Division, for claims arising from the clean-up of a site owned and operated by Anglo Iron in Harlingen, Texas. Anglo Iron sought reimbursement pursuant to CERCLA and common law contribution and indemnity for alleged response and clean-up costs of $328,139 and damages of $150,000 for "loss of fair market value" of the site. In 1999, the parties settled the case for $137,500, and the case was dismissed with prejudice.
CPL Sinton Landfill Litigation CPL, along with over 30 others, was named as a defendant in the district court in San Patricio County, Texas. The plaintiffs are approximately 500 current and former landowners in the vicinity of a landfill site near Sinton, Texas. Each plaintiff alleges $10 million property damage and personal injury as a result of alleged contamination from the site. Plaintiffs made a collective settlement demand upon CPL for $1.1 million. In January 1999, in exchange for a de minimus sum, CPL reached an agreement with Browning Ferris Industries, Inc., the operator of the site, to indemnify CPL for any judgment or settlement amount that CPL may owe to the plaintiffs in this case, as well as CPL's attorney's fees incurred after the agreement. In August 1999, the trial court granted summary judgment for CPL. The plaintiffs appealed the summary judgment ruling. Management believes that the ultimate resolution of this matter will not have a material adverse impact on CSW's or CPL's consolidated results of operations or financial condition.
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CPL Valero Litigation In April 1998, Valero filed suit against CPL in Nueces County, Texas District Court, alleging claims for breach of contract and negligence. Valero's suit seeks in excess of $11 million as damages for property loss and lost profits allegedly incurred after an interruption of electricity to its facility in Corpus Christi, Texas in April 1996. The parties held a settlement conference in August 1999, but no progress was made toward settlement of the case. The case is currently in discovery. Management cannot predict the outcome of this litigation. However, management believes that CPL has valid defenses to Valero's claims and intends to defend the matter vigorously. Management also believes that the claims are covered by insurance and that the ultimate resolution of this matter will not have a material adverse impact on CSW's or CPL's consolidated results of operations or financial condition.
CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No. 17285) A joint complaint filed by CPL and WTU with the Texas Commission asserted that since January 1, 1997, Texas Utilities Electric Company had been effectively double charging for transmission service within ERCOT. A proposal for decision received in February 1998 recommended approval of a proposal by CPL and WTU to reduce by $15.5 million annually their payments to Texas Utilities Electric Company. The Texas Commission approved the proposal in September 1998. Although Texas Utilities Electric Company appealed the Texas Commission final order, it refunded $26.6 million to CPL and WTU in November 1998. Prior to the Texas Commission's September 1998 decision, the $15.5 million annual payment to Texas Utilities Electric Company was allocated to the U.S. Electric Operating Companies. As a result of this order, the payment continues to be recorded on CPL's and WTU's books as a reduction to ERCOT transmission expense and there will be no future expenses recorded on the books of PSO and SWEPCO.
On November 15, 1999, CPL and WTU reached a settlement with Texas Utilities Electric Company. This settlement resulted in the execution of two new Transmission Service Agreements retroactive to January 1, 1997. As a result of this settlement, all pending litigation between Texas Utilities Electric Company and CSW will be terminated and Texas Utilities Electric Company will withdraw its appeal in Docket No. 17285. CPL and WTU agreed to pay Texas Utilities Electric Company $12 million during 2000. The $12 million liability was accrued on CPL's and WTU's books during the fourth quarter of 1999. CPL accrued $6.4 million and WTU accrued $5.6 million. In addition, the two new Transmission Service Agreements require CPL and WTU to pay for export transmission service along with the ERCOT transmission charges approved by the Texas Commission.
Transmission Coordination Agreement The transmission coordination agreement provides the means by which the U.S. Electric Operating Companies plan, operate and maintain the four separate transmission systems as a single unit. The agreement also establishes the method by which the U.S. Electric Operating Companies allocate revenues received under open access transmission tariffs. In August 1998, the FERC accepted the transmission coordination agreement for filing, suspended it for a nominal period, and made it effective retroactive to January 1, 1997, subject to refund and investigation. In the fourth quarter of 1998, the U.S. Electric Operating Companies and supporting intervenor signatories filed an uncontested offer of settlement. The FERC issued an order on June 18, 1999, accepting the offer of settlement. The FERC further ordered that appropriate refunds be made to reflect the terms of the revised transmission coordination agreement. In the second quarter of 1999, the FERC also issued an order accepting the U.S. Electric Operating Companies' compliance filing of their open access transmission tariff. The FERC previously had ordered the compliance filing to review the method by which certain open access transmission tariff customers were to be charged for transmission service. As a result of that order, certain changes were made in the transmission coordination agreement related to the allocation of certain open access transmission tariff revenues. Each U.S. Electric Operating Company will be allocated revenue in proportion to each company's respective revenue requirement for the service it provides under the revised open access transmission tariff. The U.S. Electric Operating Companies requested and
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received from the FERC a deferral of their refund obligation until the FERC issues an order accepting the revised transmission coordination agreement.
On October 29, 1999, CSW filed with the FERC a revised transmission coordination agreement. The revised transmission coordination agreement includes changes to the original transmission coordination agreement to ensure the above-mentioned allocation of revenues to each U.S. Electric Operating Company. In 1999, each of the U.S. Electric Operating Companies recorded the estimated impact of the reallocation of open access transmission tariff revenues, which increased CSW's income before taxes by approximately $2.4 million. The earnings increase was related to additional non-affiliated revenues resulting from the open access transmission tariff. On December 16, 1999, the FERC accepted the revised transmission coordination agreement, which is retroactive to January 1, 1997.
PSO Rate Review In July 1996, the Oklahoma Commission staff filed an application seeking a review of PSO's earnings and in July 1997 recommended a rate reduction of $76.8 million for PSO.
On October 23, 1997, the Oklahoma Commission issued a final order approving a stipulated agreement with parties to settle the rate inquiry. The PSO 1997 Rate Settlement Agreement called for PSO to lower its retail base rates beginning with the December 1997 billing cycle by approximately $35.9 million annually, or a 5.3% decrease below the then current level of retail rates. Part of the rate reduction included a reduction in annual depreciation expense of approximately $10.9 million. In addition, the PSO 1997 Rate Settlement Agreement resulted in PSO making a one-time $29 million refund to customers in December 1997.
The PSO 1997 Rate Settlement Agreement also called for PSO to eliminate or amortize before its next rate filing approximately $41 million in certain deferred assets, approximately $26 million of which had been expensed in 1996. The remaining $15 million of deferred assets, which included approximately $9 million of costs incurred for customer energy management incentive programs, were written off in 1997. The financial impact of the PSO 1997 Rate Settlement Agreement on PSO's 1997 results of operations was a reduction in revenues of $31.5 million and a reduction in expenses of $4.1 million which included the write-off of the previously mentioned deferred assets.
The PSO 1997 Rate Settlement Agreement resulted in a material adverse effect on PSO's results of operations for 1997 that will have a continuing impact because of the rate decrease. However, it reduced significant risks for PSO related to this regulatory proceeding and should allow PSO's rates to remain competitive for the foreseeable future.
PSO PCB Cases PSO was named a defendant in petitions filed in state court in Oklahoma in 1996. The petitions allege that the plaintiffs suffered personal injury and fear future injury as a result of contamination by PCBs from a transformer malfunction that occurred in April 1982 at the Page Belcher Federal Building in Tulsa, Oklahoma. Each of the plaintiffs seeks actual and punitive damages in excess of $10,000. Other claims arising from this incident were settled and the suits dismissed. During 1999, eleven cases were settled for a nominal amount covered by PSO's insurance, and two cases were dismissed for failure to prosecute. At December 31, 1999, nine cases remain pending. Management believes that PSO has defenses to the remaining cases and intends to defend them vigorously. Management believes that the remaining claims, excluding claims for punitive damages, are covered by insurance and that the ultimate resolution of the remaining lawsuits will not have a material effect on CSW's or PSO's results of operations or financial condition.
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SWEPCO Louisiana Rate Review In December 1997, the Louisiana Commission announced it would review SWEPCO's rates and service. In October 1999, SWEPCO and the staff of the Louisiana Commission reached an agreement and stipulation, which was filed on October 14, 1999. The significant provisions of the agreement and stipulation follow:
- - SWEPCO's Louisiana retail jurisdictional revenues were reduced by $11 million, effective with the December 1999 billing cycle;
- - SWEPCO is allowed to earn an 11.1% return on common equity;
- - SWEPCO is allowed to recover certain regulatory assets totaling $7.1 million;
- - SWEPCO will be subject to a two-year base rate freeze, which includes force majeure provisions; and
- - SWEPCO will be allowed to increase depreciation rates for transmission, distribution and general plant.
The Louisiana Commission approved the agreement and stipulation in November 1999, which was implemented in December 1999.
SWEPCO Arkansas Rate Review In July 1998, the Arkansas Commission began a review of SWEPCO's earnings. On July 30, 1999, SWEPCO entered into a settlement agreement with the general staff of the Arkansas Commission and the Arkansas Attorney General's Office. The settlement agreement reduces SWEPCO's Arkansas annual revenues by $5.4 million, or 3%. Additionally, the stipulation and settlement agreement provides for a 10.75% return on common equity, an increase in depreciation rates, and an agreement by SWEPCO not to seek recovery of generation-related stranded costs.
On September 23, 1999, the Arkansas Commission issued an order approving the stipulation and settlement agreement. On October 25, 1999, SWEPCO filed compliance rate tariffs with the Arkansas Commission, which are consistent with the Arkansas Commission order. The provisions of the settlement agreement were implemented in December 1999.
SWEPCO Fuel Proceeding In May 1997, SWEPCO filed with the Texas Commission an application to reconcile fuel costs and implement a 12-month surcharge of fuel cost under-recoveries. Because of the uncertainty as to when a surcharge may be implemented, SWEPCO did not propose a surcharge period or a total surcharge amount, which would include interest through the entire surcharge period. However, SWEPCO indicated that it had under-recovered Texas jurisdictional fuel costs of approximately $16.8 million, including interest through December 1996. Included in the $16.8 million balance are fuel-related litigation expenses of $5.0 million and an interest return of $2.0 million on the unamortized balance of a fuel contract termination payment.
On December 8, 1997, SWEPCO and the other parties to the proceedings before the Texas Commission filed a settlement on all issues except as to whether transmission equalization payments should be included in fuel or base revenues. The settlement resulted in a decrease of the under-recovered fuel costs, and the resulting surcharge recovery, by $6.0 million, which was recorded in 1997. The settlement also provides that SWEPCO's fuel and fuel-related expenses during the reconciliation period were reasonable and necessary and
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recoverable as fuel expense. Also, the settlement provides that SWEPCO's actions in litigating and renegotiating certain fuel contracts, together with the prices, terms and conditions of the renegotiated contracts, were prudent.
On April 8, 1998, the ALJ issued a proposal for decision regarding the only outstanding issue, recommending that SWEPCO be allowed to include transmission equalization expense in eligible fuel expense. On May 19, 1998, the Texas Commission reversed the ALJ and ordered an earnings reduction of approximately $1.8 million, recorded in the second quarter of 1998. On June 8, 1998, SWEPCO filed a motion for rehearing on the transmission equalization issue, which was denied through operation of law. After the Texas Commission's order on May 19, 1998, SWEPCO had still under-recovered its fuel and fuel related expenses. On July 1, 1998, the Texas Commission issued an order allowing SWEPCO to surcharge its Texas retail customers $6.9 million of under-recovered fuel and fuel-related expenses and associated interest. The surcharge began in July 1998 and ended in June 1999. SWEPCO has filed an appeal regarding this matter in the State District Court of Travis County, Texas. Management is unable to predict the ultimate outcome of this litigation. However, SWEPCO has agreed to withdraw the appeal if the AEP Merger is consummated. See ITEM 8. NOTE 15. PROPOSED AEP MERGER for additional information.
SWEPCO Interim Fuel Refund On August 24, 1999, SWEPCO filed an application at the Texas Commission to make an interim refund of fuel cost over-recoveries of $7.5 million received by SWEPCO from its Texas retail jurisdictional customers. The application requested that the refund be made in October 1999. On September 20, 1999, a stipulation between all parties was filed with the Texas Commission, which preserved SWEPCO's application to refund $7.5 million to SWEPCO's Texas retail customers. An order granting interim approval to make the refund in October 1999 was issued by the hearing examiner on September 24, 1999. SWEPCO began implementing the refund on customer bills during the first billing cycle of October 1999. On October 21, 1999, the Texas Commission issued a final order which affirmed approval to refund the fuel cost over-recoveries.
SWEPCO Lignite Mining Agreement Litigation SWEPCO and CLECO are each a 50% owner of Dolet Hills Power Station Unit 1 and jointly own lignite reserves in the Dolet Hills area of northwestern Louisiana. In 1982, SWEPCO and CLECO entered into a lignite mining agreement with the DHMV, a partnership for the mining and delivery of lignite from a portion of these reserves.
On April 15, 1997, SWEPCO and CLECO sued DHMV and its partners in the United States District Court for the Western District of Louisiana seeking to enforce various obligations of DHMV to SWEPCO and CLECO under the lignite mining agreement, including provisions relating to the quality of the delivered lignite, pricing, and mine reclamation practices. On June 15, 1997, DHMV filed an answer denying the allegations in the suit and filed a counterclaim asserting various contract-related claims against SWEPCO and CLECO. SWEPCO and CLECO have denied the allegations contained in the counterclaims. On January 8, 1999, SWEPCO and CLECO amended the claims against DHMV in the lawsuit to include a request that the lignite mining agreement be terminated. The parties engaged in unsuccessful settlement discussions in the third quarter of 1999 and early 2000. The trial date is May 22, 2000.
Although SWEPCO cannot predict the ultimate outcome of this matter, management believes that the resolution of this matter will not have a material effect on SWEPCO's results of operations or financial condition.
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Withdrawal of SWEPCO Cajun Asset Proposal Cajun filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code on December 21, 1994 under the supervision of the United States Bankruptcy Court for the Middle District of Louisiana. Both SWEPCO and Louisiana Generating LLC had filed competing plans of reorganization for the non-nuclear assets of Cajun with the bankruptcy court.
On August 26, 1999, SWEPCO, together with the Cajun Members Committee and Washington-St. Tammany Electric Cooperative, reached a settlement agreement to withdraw the jointly filed July 1999 SWEPCO Plan to acquire all of the non-nuclear assets of Cajun. SWEPCO had deferred approximately $13.0 million in costs related to the Cajun acquisition on its consolidated balance sheet. Under the settlement agreement, SWEPCO received $7.5 million on November 8, 1999. The remaining balance was written off in the third quarter of 1999, resulting in a $3.7 million after tax charge to earnings.
WTU Fuel Factor and Interim Fuel Surcharge Filing In March 1998, WTU filed with the Texas Commission an application for authority to implement an increase in fuel factors of $7.4 million, or 7.3% on an annual basis. Additionally, WTU proposed to implement a fuel surcharge of $6.8 million, including accumulated interest over a six-month period to collect its under-recovered fuel costs. WTU implemented the revised fuel factors with its June 1998 billing.
In September 1999, WTU filed with the Texas Commission an application for authority to implement an increase in fuel factors of $13.5 million or 12.2% on an annual basis. Additionally, WTU proposed to implement an interim fuel surcharge of $6.5 million, including accumulated interest over a six-month period to collect its under-recovered fuel costs. WTU proposed to implement the revised fuel factors with its December 1999 cycle billing. On November 4, 1999, the Texas Commission approved WTU's application. The order allows an increase in fuel factors of 12.2% on an annual basis beginning in the billing cycle for December 1999 and to surcharge customers to recover $6.5 million of under-recovered fuel costs and associated interest for six months beginning in the billing cycle for January 2000.
Regulatory Price Proposal for SEEBOARD On December 2, 1999, OFGEM published its final price proposals from its United Kingdom electricity distribution review. OFGEM has proposed revenue reductions in SEEBOARD's distribution business of 21%. In addition, OFGEM has proposed the reallocation of a further 12% of costs out of SEEBOARD's distribution business into its supply business. These proposals were accepted on December 20, 1999 and will take effect from April 1, 2000, and remain in effect for five years. OFGEM's proposals will reduce net income for SEEBOARD in the year 2000 by approximately $40 million, dependent upon the level of further cost reductions that can be achieved, and by approximately $60 million in 2001. CSW's net income from SEEBOARD U.S.A., its United Kingdom business segment, was $113 million for the twelve months ended December 31, 1999.
OFGEM also published the final price proposals for the electricity supply price review. OFGEM has recommended that the price cap for charges levied to electricity supply domestic and small business customers should be extended for two years from April 1, 2000. Overall, these proposals are expected to have a broadly neutral effect on the results of SEEBOARD U.S.A.
The foregoing discussion constitutes forward-looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information. See FORWARD-LOOKING INFORMATION.
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CSW Energy, Texas-New Mexico Power Company Phillips Litigation In May 1997, equipment operated by an an unrelated third party allegedly came in contact with a Texas-New Mexico Power Company transmission line rendering Texas-New Mexico Power Company's Old Ocean switching station inoperable. As a result, Phillips' refinery, located in Sweeny, Texas, lost power.
In October 1997, Phillips filed suit against Texas-New Mexico Power Company in the District Court of Brazoria County, Texas seeking damages in excess of $36 million associated with the loss of power to its refinery in Sweeny, Texas. Texas-New Mexico Power Company denies any liability to Phillips.
In June 1999, Sweeny Cogeneration Limited Partnership was notified that Texas-New Mexico Power Company had joined Sweeny Cogeneration Limited Partnership as a third party defendant to the pending litigation. Texas-New Mexico Power Company is claiming that during the construction of Sweeny Cogeneration Limited Partnership's cogeneration facility, adjacent to Phillips refinery, Sweeny Cogeneration Limited Partnership modified Texas-New Mexico Power Company's equipment which was supplying power to the Phillips refinery. In this connection, Texas-New Mexico Power Company alleges that Sweeny Cogeneration Limited Partnership was negligent in the construction of the cogeneration facility.
Sweeny Cogeneration Limited Partnership believes these allegations are without merit and intends to contest vigorously any claims made against it by Phillips or Texas-New Mexico Power Company. Management is unable to predict the ultimate outcome of this pending litigation. If Texas-New Mexico Power Company prevailed in the litigation, then CSW could experience a material adverse effect on its results of operations but not on its financial condition.
Other The Registrants are party to various other legal claims, actions and complaints arising in the normal course of business. Management does not expect disposition of these matters to have a material adverse effect on the Registrants' results of operations or financial condition.
3. COMMITMENTS AND CONTINGENT LIABILITIES
Construction and Capital Expenditures
It is estimated that CSW, including the U.S. Electric Operating Companies, SEEBOARD and other operations, will spend approximately $1,071 million in capital expenditures (but excluding capital that may be required for acquisitions) during 2000. Substantial commitments have been made in connection with these programs. See ITEM 7. MD&A - LIQUIDITY AND CAPITAL RESOURCES for expected use of these expenditures.
CPL - $229 million PSO - $174 million SWEPCO - $159 million WTU - $55 million
Fuel and Related 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 contractor. As of December 31, 1999, the amount SWEPCO may have to assume is $69 million, which is the contractor's actual obligation outstanding at December 31, 1999.
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 and expansion into the Marshall South Lignite Project area, SWEPCO has agreed to provide
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guarantees of mine reclamation in the amount of $85 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. At December 31, 1999 the cost to reclaim the mine is estimated to be approximately $36 million.
Other Commitments and Contingencies
CPL Nuclear Insurance In connection with the licensing and operation of STP, the owners have purchased nuclear property and liability 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 liability and governmental indemnities, is in effect until August 1, 2002. The limit of liability under the Price-Anderson Act for licensees of nuclear power plants is $8.92 billion per incident, effective as of December 1997. The owners of STP are insured for their share of this liability through a combination of private insurance amounting to $200 million and a mandatory industry-wide program for self insurance totaling $9.145 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 $83.9 million per reactor, for any one nuclear incident payable at $10 million per year per reactor. An additional surcharge of 5% of the maximum may be payable if the total amount of public claims and legal costs exceeds the limit. CPL and each of the other STP owners are subject to such assessments, which CPL and the other owners have agreed will be allocated on the basis of their respective ownership interests in STP. For purposes of these assessments, STP has two licensed reactors. CPL owns 25.2% of each reactor.
The owners of STP currently maintain on-site decontamination liability and property damage insurance in the amount of $2.75 billion provided by NEIL. Policies of insurance issued by NEIL stipulate that policy proceeds must be used first to pay decontamination and cleanup costs before being used to cover direct losses to property. Under project agreements, CPL and the other owners of STP will share the total cost of decontamination liability and property insurance for STP, including premiums and assessments, on a pro rata basis, according to each owner's respective ownership interest in STP.
CPL purchases, for its own account, a NEIL 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 23 consecutive weeks. In the event of an outage which is the result of the same accident, insurance will reimburse CPL up to 80% of the recovery. The maximum amount recoverable for a single unit outage is $133.8 million for both Units 1 and 2. CPL is subject to an additional assessment of up to $1.54 million for the current policy year in the event that insured losses at a nuclear facility covered under the NEIL I policy exceed the accumulated funds available under the policy. CPL renewed its current NEIL I Business Interruption and/or Extra Expense policy on October 1, 1999.
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, 1999, leased assets of $45.7 million, less accumulated amortization of $45.7 million, were included in Electric Utility Plant on the Consolidated Balance Sheets, and at December 31, 1998, leased assets were $45.7 million, less accumulated amortization of $41.4 million.
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SWEPCO Biloxi, Mississippi MGP Site SWEPCO was notified by Mississippi Power in 1994 that it may be a PRP at a MGP site in Biloxi, Mississippi, which was 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 contamination on the site as well as 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, and the MDEQ requested that a future residential exposure scenario be evaluated for comparison with commercial and industrial exposure scenarios. However, Mississippi Power and SWEPCO do not believe that clean-up 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 clean-up to residential standards is not necessary. Resolution of this issue is still pending.
A feasibility study was conducted to evaluate remedial strategies and costs associated with cleanup activities. SWEPCO and Mississippi Power agreed to a buyout agreement for the amount of $1.5 million, in which SWEPCO received full indemnification for any liabilities associated with contamination and/or any clean-up efforts.
SWEPCO Marshall Street Site SWEPCO owns a tract of land known as the Marshall Street site in Shreveport, Louisiana, which was previously a MGP site. The City of Shreveport may acquire the Marshall Street site from SWEPCO to expand its convention center. In 1999, environmental testing was performed at the site and contaminants were discovered that could be related to a MGP. SWEPCO is negotiating with the City of Shreveport to determine under what terms the city may acquire the Marshall Street site and who would pay for any potential clean-up costs related to the site. In the fourth quarter of 1999, SWEPCO accrued $4.0 million for SWEPCO's portion of any potential clean-up costs related to the Marshall Street site.
SWEPCO Wilkes Power Plant Copper Limit Compliance The EPA has issued to SWEPCO's Wilkes power plant, an administrative order for wastewater permit violations related to copper limits. Planned compliance activities, including activities that have been conducted to determine the source of copper, were presented by SWEPCO to the EPA during an administrative meeting, held on August 13, 1998. SWEPCO and the EPA negotiated a $41,500 penalty pending final approval from the EPA.
Clean Air Provisions of the Texas Legislation The Texas Legislation requires that grandfathered electric generating facilities be permited to reduce emission levels 50% and provides for a cost recovery mechanism. Final regulations are still being developed. The estimated total costs to comply with the expected regulations are approximately $4.2 million, $4.8 million and $10 million for CPL, SWEPCO and WTU, respectively. Expenditures have begun to meet the requirements of the legislation.
Proposed Regional Control Strategy Regulations The TNRCC released for comment proposed regulations that, if adopted as proposed, would require reductions in nitrogen oxide emissions for existing permited electric generating facilities in the East Texas Region in addition to the Clean Air provisions of the Texas Legislation discussed above. The final regulations could be issued in April 2000 with an implementation date of May 2003. The current estimate for compliance with the proposed rules could be as much as $38 million for CPL and $151 million for SWEPCO in capital projects costs and as much as $3 million for CPL and $11 million for SWEPCO in additional annual operating costs.
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The foregoing discussion constitutes forward-looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information. See FORWARD-LOOKING INFORMATION.
SEEBOARD London Underground Commitment SEEBOARD has committed (pound)57 million, or $92 million (converted at (pound)1.00 equals $1.62), for costs associated with its contract related to the London Underground transportation system. In 1998, SEEBOARD, through its subsidiary, SEEBOARD Powerlink, signed a $1.6 billion, 30-year contract as a joint venture partner to operate, maintain, finance and renew the high-voltage power distribution network of the London Underground.
SEEBOARD - Third Party Pension Litigation In the U.K., National Grid and National Power PLC have been involved in continuing litigation regarding their use of actuarial surpluses disclosed in the 1992 and 1995 valuations of the electricity industry's occupational pension plan, the ESPS. A High Court decision in favor of the National Grid and National Power PLC was appealed. On February 10, 1999, the U.K. Court of Appeal ruled that the particular arrangements made by these corporations to dispose of part of the surplus were invalid due to procedural defects. This decision was confirmed at a later hearing of the U.K. Court of Appeal held in May 1999. The National Grid has appealed to the House of Lords, the highest court of appeal in the U.K., and a decision is expected in late 2000 or early 2001. The final outcome of this appeal cannot presently be determined.
SEEBOARD employees are members of the ESPS, and SEEBOARD has made similar use of actuarial surpluses disclosed in the 1992 and 1995 valuations. As a result of subsequent legal clarification of certain issues arising from the hearing held in May 1999, the potential impact of the ruling on SEEBOARD has increased. The amount of the payments cancelled by SEEBOARD in recognition of these surpluses amounts to approximately $78 million, excluding any accrued interest.
The U.K. Court of Appeal did not order the National Grid or National Power PLC to make payment into the ESPS, and the court indicated that any requirement to make such payments would be extreme since the relevant sections of the ESPS are already in surplus. In the event that the court finally decides a payment by SEEBOARD into the ESPS is necessary, such a payment is likely to create additional pension fund surplus, which the company should then be able to utilize over the next several years to reduce pension expense.
Management is unable currently to predict the amount of any payment that it may be required to make to ESPS, but the payment should not have a material adverse affect on CSW's results of operations or financial condition.
The foregoing discussion constitutes forward-looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information. See FORWARD-LOOKING INFORMATION.
Diversified Electric - Commitments and Contingencies In June 1998, the 330 MW Sweeny cogeneration facility, an entity 50% owned by CSW Energy, obtained permanent project financing. The $149 million of debt, with an effective interest rate of 7.4%, is unconditionally guaranteed by the project and is non-recourse to CSW Energy and CSW. Concurrently, the project repaid its outstanding note to CSW Energy for construction financing.
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In October 1999, GE Capital Structured Finance Group purchased 50 percent of the equity ownership of Sweeny Cogeneration Limited Partnership. CSW Energy's after-tax earnings from the proceeds of the transaction were approximately $33 million and were recorded in the fourth quarter of 1999. The agreement between CSW Energy and GE Capital Structured Finance Group also provides for additional payments to CSW Energy subject to completion of a planned expansion of the Sweeny cogeneration facility.
CSW Energy began construction in August 1998 of a 500 MW power plant, known as Frontera, in the Rio Grande Valley, near the city of Mission, Texas. The natural gas-fired facility began simple cycle operation of 330 MW in July 1999 and is scheduled to commence combined cycle operation in early 2000. Pursuant to AEP's and CSW's stipulated agreement with several intervenors in the state of Texas related to the AEP Merger, CSW Energy may sell 250 MW of Frontera. See ITEM 8. NOTE 15. PROPOSED AEP MERGER and ITEM 7. MD&A, PROPOSED AEP MERGER for a discussion including timing of sale.
CSW International and its 50% partner, Scottish Power plc have entered into a joint venture to construct and operate the South Coast power project, a 400 MW combined cycle gas turbine power station in Shoreham, United Kingdom. CSW International has guaranteed approximately (pound)19 million of the (pound)190 million construction financing. Both the guarantee and the construction financing are denominated in pounds sterling. The U.S. dollar equivalent at December 31, 1999 would be $31 million and $308 million respectively, using a conversion rate of (pound)1.00 equals $1.62. The permanent financing is unconditionally guaranteed by the project. Construction of the project began in March 1999, and commercial operation is expected to begin in late 2000.
CSW Energy's Colorado facilities are cogeneration plants with steam as a by-product of its electricity generation. In February 2000, notice was received that the lessee of the facilities utilizing the steam had filed for reorganization under Chapter 11 of the Bankruptcy Code, which could result in the lessee rejecting the leases. Should that occur, management is positioned to pursue other lease arrangements. Management believes the resolution of this matter will not have a material adverse effect on CSW's results of operations or financial condition.
CSW, CSW Energy and CSW International have provided letters of credit and guarantees on behalf of CSW Energy and CSW International projects of approximately $62 million, $41 million, and $233 million, respectively, as of December 31, 1999.
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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 income taxes and SEEBOARD's United Kingdom corporation taxes. Total income taxes differ from the amounts computed by applying the United States federal statutory income tax rate to income before taxes for a number of reasons which are presented in the INCOME TAX RATE RECONCILIATION table below. Information concerning income 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)Approximately $3 million, $14 million and $30 million of CSW's Current Income Tax Expense was attributable to SEEBOARD U.S.A. operations and was recognized as United Kingdom corporation tax expense for 1999, 1998 and 1997, respectively. In addition, approximately $16 million, $9 million and $7 million of CSW's Deferred Income Tax Expense in 1999, 1998 and 1997, respectively, was attributed to SEEBOARD U.S.A. (2)ITC deferred in prior years are included in income over the lives of the related properties.
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(1)Other than excess foreign tax credits, CSW did not have other valuation allowances recorded against other deferred tax assets at December 31, 1999 and 1998 due to a favorable earnings history. At December 31, 1999, CSW had $117 million of foreign tax credits, for which a 100% valuation allowance has been provided. At December 31, 1998, CSW had $145 million of foreign tax credits, for which a 100% valuation allowance has been provided.
CSW has not provided for U.S. federal income and foreign withholding taxes on $62 million of non-U.S. subsidiaries' undistributed earnings as of December 31, 1999, because such earnings are intended to be reinvested indefinitely.
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If these earnings were distributed, foreign tax credits should become available under current law to reduce or eliminate the resulting U.S. income tax liability.
5. BENEFIT PLANS
Cash Balance and Non-qualified Pension Plans
CSW maintains a tax qualified, non-contributory defined benefit cash balance pension plan covering substantially all CSW employees in the United States. Under the cash balance formula, each participant has an account, for recordkeeping purposes only, to which credits are allocated annually based on a percentage of the participant's pay. The applicable percentage is determined by age and years of vested service the participant has with CSW as of December 31 of each year. The fair value of the plan assets are measured as of September 30 of each year. Pension plan assets consist primarily of stocks and short-term and intermediate-term fixed income investments.
In addition, CSW has a non-qualified excess benefit pension plan. This plan is available to all pension plan participants who are entitled to receive a pension benefit from CSW which is in excess of the limitations imposed on benefits by the Internal Revenue Code through the qualified plan.
As the plan sponsor, CSW will continue to reflect the cost of the pension plans according to the provisions of SFAS No. 87 and allocate such costs to each of the participating employers. SFAS No. 132, adopted by CSW in 1998, amended the disclosure requirements of SFAS No. 87 and SFAS No. 88 and have been incorporated in the following disclosures.
U.K. Pension Plans
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.
CSW Retirement Savings Plan
The CSW System Retirement Savings Plan is a defined contribution plan offered to all full time employees and certain part time employees who meet plan eligibility requirements. Company contributions to this plan totaled $15 million in 1999, $15 million in 1998 and $11 million in 1997.
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Additional Information for Plans With Unfunded Accumulated Benefit Obligations
Non Qualified Plan ------------------------------ (thousands)
1999 1998 ---------- ---------- Projected benefit obligation $ 24,676 $ 27,379 Accumulated benefit obligation 22,875 25,137 Plan assets at fair value - -
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Pension Retirement Plans CSW U.S. U.K. Components of Net Periodic Benefit Costs TOTAL PLANS PLANS ------------------------------------- 1999 (millions) Service cost $ 35 $ 21 $ 14 Interest cost 123 65 58 Expected return on plan assets (167) (98) (69) Amortization of: Unrecognized transition obligation 2 2 - Prior service cost (6) (6) - ------------------------------------- Net periodic benefit cost $ (13) $ (16) $ 3 -------------------------------------
Weighted-average assumptions as of year end Discount rate 7.50% 6.00% Expected return on plan assets 9.00% 6.50% Rate of compensation increase 4.96% 4.00%
U.S. PLANS ---------------------------------------------- CPL PSO SWEPCO WTU ---------------------------------------------- (thousands) Service cost $ 4,510 $ 3,304 $ 3,943 $ 2,346 Interest cost 14,108 10,336 12,334 7,338 Expected return on plan assets (21,885) (16,035) (19,135) (11,384) Amortization of: Unrecognized transition obligation 338 248 296 176 Prior service cost (1,341) (982) (1,172) (697) ---------------------------------------------- Net periodic benefit cost $ (4,270) $ (3,129) $ (3,734) $ (2,221) ----------------------------------------------
CSW U.S. U.K. TOTAL PLANS PLANS ----------------------------------- 1998 (millions) Service cost $ 36 $ 22 $ 14 Interest cost 137 69 68 Expected return on plan assets (174) (97) (77) Amortization of: Unrecognized transition obligation 2 2 - Prior service cost (6) (6) - ----------------------------------- Net periodic benefit cost $ (5) $ (10) $ 5 -----------------------------------
Weighted-average assumptions as of year end Discount rate 6.75% 5.50% Expected return on plan assets 9.00% 6.25% Rate of compensation increase 4.96% 3.50%
U.S. PLANS --------------------------------------------- CPL PSO SWEPCO WTU --------------------------------------------- (thousands) Service cost $ 4,537 $ 3,485 $ 4,109 $ 2,352 Interest cost 14,693 11,283 13,302 7,614 Expected return on plan assets (21,107) (16,211) (19,111) (10,940) Amortization of: Unrecognized transition obligation 328 252 297 170 Prior service cost (1,301) (999) (1,178) (674) --------------------------------------------- Net periodic benefit cost $ (2,850) $ (2,190) $ (2,581) $ (1,478) ---------------------------------------------
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Pension Retirement Plans CSW U.S. U.K. Components of Net Periodic Benefit Costs TOTAL PLANS PLANS ------------------------------------- 1997 (millions) Service cost $ 34 $ 20 $ 14 Interest cost 139 66 73 Expected return on plan assets (173) (92) (81) Amortization of: Unrecognized transition obligation 2 2 - Prior service cost (6) (6) - Net actuarial (gain) loss 1 1 - ------------------------------------- Net periodic benefit cost $ (3) $ (9) $ 6 -------------------------------------
Weighted-average assumptions as of year end Discount rate 7.50% 6.75% Expected return on plan assets 9.00% 7.25% Rate of compensation increase 5.46% 4.75%
U.S. PLANS ---------------------------------------------- CPL PSO SWEPCO WTU ---------------------------------------------- (thousands) Service cost $ 4,602 $ 3,421 $ 4,260 $ 2,488 Interest cost 15,085 11,214 13,965 8,156 Expected return on plan assets (21,410) (15,892) (19,839) (11,597) Amortization of: Unrecognized transition obligation 328 252 297 170 Prior service cost (1,301) (999) (1,178) (674) ---------------------------------------------- Net periodic benefit cost $ (2,696) $ (2,004) $ (2,495) $ (1,457) ----------------------------------------------
As permitted, the amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the plan.
Post-retirement Benefits Other Than Pensions CSW, including each of the U.S. Electric Operating Companies, adopted SFAS No. 106 effective January 1, 1993. The transition obligation established at adoption is being amortized over twenty years, with thirteen years remaining. Prior to 1993, these benefits were accounted for on a pay-as-you-go basis. Pursuant to an order by the Oklahoma Commission, PSO established a regulatory asset of approximately $5 million in 1993 for the difference between the pay-as-you-go basis and the costs determined under SFAS No. 106. PSO is recovering the amortization of this regulatory asset over a ten year period.
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Weighted-average assumptions as of year end Discount rate 7.5% Expected return on plan assets 9.0% Health care cost trend rate 6.0% Ultimate rate of 5.0% in 2001
Weighted-average assumptions as of year end Discount rate 6.75% Expected return on plan assets 9.00% Health care cost trend rate 6.50% Ultimate rate of 5.0% in 2001
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Weighted-average assumptions as of year end Discount rate 7.50% Expected return on plan assets 9.00% Health care cost trend rate 7.00% Ultimate rate of 5.0% in
As permitted, the amortization of any prior service cost is determined using a straight-line amortization of the cost over the average remaining service period of employees expected to receive benefits under the plan.
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6. JOINTLY OWNED ELECTRIC UTILITY PLANT
The U.S. Electric Operating Companies are parties to various joint ownership agreements with other non-affiliated entities. Such agreements provide for the joint ownership and operation of generating stations and related facilities, whereby each participant bears its share of the project costs. At December 31, 1999, the U.S. Electric Operating Companies had undivided interests in five such generating stations and related facilities as shown in the following table.
(1) CPL, PSO and WTU have joint ownership agreements with each other and other non-affiliated entities. Such agreements provide for the joint ownership and operation of Oklaunion Power Station. Each participant provided financing for its share of the project, which was placed in service in December 1986. CPL's 7.8%, PSO's 15.6% and WTU's 54.7% ownership interest represents CSW's 78.1% participation in the plant. The statements of income reflect CPL's, PSO's and WTU's respective portions of the operating costs of Oklaunion Power Station. The total investments, including AFUDC, in Oklaunion Power Station for CPL, PSO and WTU were $37 million, $81 million and $282 million, respectively, at December 31, 1999. Accumulated depreciation was $13 million, $36 million and $94 million for CPL, PSO and WTU, respectively, at December 31, 1999.
7. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the following fair values of each class of financial instruments for which it is practicable to estimate fair value. The fair value does not affect any of the liabilities unless the issues are redeemed prior to their maturity dates.
Cash, temporary cash investments, accounts receivable, other financial instruments and short-term debt The fair value equals the carrying amount as stated on the balance sheets due to the short maturity of those instruments.
Securities available for sale The fair values, which are based on quoted market prices, equal the carrying amounts as stated on the balance sheet as prescribed by SFAS No. 115. See ITEM 8. NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Long-term debt The fair value of 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.
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Trust Preferred Securities The fair value of the Trust Preferred Securities are based on quoted market prices on the New York Stock Exchange.
Long-term debt and preferred stock due within 12 months The fair value of current maturities of long-term debt and preferred stock due within 12 months are estimated based on quoted market prices for the same or similar issues or on the current rates offered for long-term debt or preferred stock with the same or similar remaining redemption provisions.
Commodity Contracts CSW utilizes commodity forward contracts which contain pricing and/or volume terms designed to stabilize market risk associated with fluctuations in the price of natural gas used in generation and electric energy sold under firm commitments with certain of our customers.
During 1999 and 1998, CSW did not utilize any contracts for commodities that would be classified as a financial instrument under generally accepted accounting principles, since physical delivery of natural gas and electricity may, and most frequently does, occur pursuant to these contracts. These contracts are, however, the major part of CSW's risk management program.
Based on year-end contractual commitments, CSW's natural gas futures and swap contracts and electricity forward contracts that are sensitive to changes in commodity prices include fair value of assets of $157,260 and fair value of liabilities of $396,440. These swap and future contracts hedge their related commodity price exposure for 2000. Cash outflows on the swap agreements should be offset by increased margins on electricity sales to customers under tariffed rates with fixed fuel costs. The electricity forward contracts hedge a portion of CSW's energy requirements through February 2000. The average contract price for forward purchases is $30 per MWH and $2.32 per MMbtu. The average price for natural gas futures contracts is $2.47 per MMbtu and $2.37 MMbtu for swaps.
Cross-currency swaps and SEEBOARD's electricity contracts for differences The fair value of cross currency swaps reflect third-party valuations calculated using proprietary pricing models. Based on these valuations, CSW's position in these cross currency swaps represented an unrealized loss of $41.8 million at December 31, 1999. This unrealized loss is offset by unrealized gains
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related to the underlying transactions being hedged. CSW expects to hold these contracts to maturity. The fair value of SEEBOARD's contracts for differences is not determinable due to the absence of a trading market.
Expected Expected Cash Cash Inflows Outflows Contract Maturity Date (Maturity Value) (Market Value) - ----------------------------------------------------------------------------- (millions) Cross currency swaps August 1, 2001 $200 $213 Cross currency swaps August 1, 2006 $200 $229
8. LONG-TERM DEBT
The CSW System's long-term debt outstanding as of the end of the last two years is presented in the following table.
Maturities Interest Rates December 31, From To From To 1999 1998 ----------------------------------------------------------------------------- (millions) Secured bonds 2001 2025 5.25% 7.75% $1,452 $1,824
Unsecured bonds 2001 2030 3.33%(1) 8.88% 1,701 1,359
Notes and Lease Obligations 2001 2021 5.91% 9.25% 672 765
Unamortized discount (4) (10) ------------------------- $3,821 $3,938 ------------------------- (1) Variable rate. --------------------------
The mortgage indentures, as amended and supplemented, securing FMBs issued by the U.S. Electric Operating Companies, constitute a direct first mortgage lien on substantially all electric utility plants. The U.S. Electric Operating Companies may offer additional FMBs, medium-term notes and other securities subject to market conditions and other factors.
CSW's year end weighted average cost of long-term debt was 7.0% for 1999, 7.3% for 1998 and 7.2% for 1997. For additional information about the U.S. Electric Operating Companies' long-term debt, see their Statements of Capitalization in the Financial Statements.
Annual Requirements Certain series of outstanding FMBs have annual sinking fund requirements, which are generally 1% of the amount of each such series issued. These requirements may be, and generally have been, satisfied by the application of net expenditures for bondable property in an amount equal to 166-2/3% of the annual requirements. Certain series of pollution control revenue bonds also have sinking fund requirements. At December 31, 1999, the annual sinking fund requirements and annual maturities (including sinking fund requirements) for all long-term debt for the next five years are presented in the following table.
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CSW CPL PSO SWEPCO WTU -------------------------------------------------- (millions) (thousands) ----------------------------------------- Sinking fund Requirements
2000 $1 $-- $-- $595 $-- 2001 1 -- -- 595 -- 2002 1 -- -- 595 -- 2003 1 -- -- 595 -- 2004 1 -- -- 595 --
Annual Maturities
2000 $256 $150,000 $20,000 $45,595 $40,000 2001 421 -- 20,000 595 -- 2002 151 115,000 -- 595 35,000 2003 388 50,000 100,000 55,595 -- 2004 271 100,000 50,000 40,595 80,000
Dividends At December 31, 1999, approximately $1.5 billion of CSW's subsidiary companies' retained earnings were available for payment of cash dividends by such subsidiaries to CSW. The amounts of retained earnings available for dividends attributable to each of the U.S. Electric Operating Companies at December 31, 1999.
CPL - $764 million PSO - $142 million SWEPCO - $288 million WTU - $116 million
Long-term Debt
CPL On February 16, 2000, CPL sold $150 million of unsecured floating rate notes. The notes will have a two-year final maturity of February 22, 2002, but may be redeemed at par after one year. The interest rate will reset quarterly at the then current three-month LIBOR plus 0.45%. The initial rate, which was set February 18, 2000, was 6.56%. Net proceeds of $149.6 million will be used to refund $100 million of FMBs maturing April 1, 2000 and repay a portion of short-term debt. CPL is replacing FMBs with unsecured debt, which provides more financial flexibility as CPL unbundles its electric operations.
On May 1, 1999, $100 million of CPL's 7.50% Series JJ FMBs matured and on December 1, 1999, $25 million of CPL's 7.125% Series DD FMBs matured. In June 1999, CPL reacquired $25 million of its 7.50% Series II FMBs due April 1, 2023.
In November 1999, CPL issued $200 million of unsecured floating rate notes maturing November 23, 2001 and callable at par November 23, 2000. The interest rate will reset quarterly at the then current three-month LIBOR plus 0.60%.
In November and December 1999, Matagorda sold, for the benefit of CPL, $111.7 million of 4.90% Series 1999A and $50 million of 4.95% Series 1999B unsecured tax exempt PCRBs. The bonds mature in 2030 but will be subject to remarketing and an interest rate reset in two years. The proceeds were used to refund $111.7 million aggregate principal amount of outstanding 7.50% Series T due December 15, 2014 and will be used to refund $50 million aggregate principal amount of outstanding 7.50% Series AA due March 21, 2020.
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In September 1998, CPL reacquired $36 million principal amount outstanding of Series L FMBs, in its entirety, at a call price of 100.53.
PSO In July 1999, the Oklahoma Development Finance Authority sold for the benefit of PSO $33.7 million of 4.875% unsecured tax exempt pollution control revenue refunding bonds. The bonds mature in fifteen years but will be subject to remarketing and an interest rate reset in five years. In August 1999, the proceeds were used to refund $33.7 million aggregate principal amount of outstanding Oklahoma Environmental Finance Authority (PSO Project) 5.9% Series A bonds due December 1, 2007.
In September 1998, PSO reacquired $25 million principal amount outstanding of Series K and $30 million principal amount outstanding of Series L FMBs, in their entirety, at call prices of 100 and 100.77, respectively.
SWEPCO In the first quarter of 2000, SWEPCO sold $150 million of unsecured floating rate notes. The bonds will have a two-year final maturity of March 1, 2002, but may be redeemed at par after one year. The interest rate will reset quarterly at the then current three-month LIBOR plus 0.23%. The initial rate, which was set March 1, 2000, was 6.34%. Net proceeds of $149.6 million will be used to refund $45 million of FMBs maturing April 1, 2000 and to repay of a portion of outstanding short-term indebtedness.
On September 1, 1999, $40 million of SWEPCO's 6.125% Series W FMBs matured.
The reacquisitions and maturities were funded with short-term debt and with proceeds from the issuance of the floating rate notes.
Reference is made to ITEM 7. MD&A, LIQUIDITY AND CAPITAL RESOURCES for further information related to long-term debt, including new issues and reacquisitions of long-term debt during 1999.
9. PREFERRED STOCK
The outstanding preferred stock of the U.S. Electric Operating Companies as of the end of the last two years is presented in the following table.
Current Dividend December 31, Redemption Price Rate From To 1999 1998 From - To -------------------------------------------- (millions) Not subject to mandatory redemption 182,907 shares 4.00% - $18 $19 $103.19 - $107.00 5.00% Auction -- 160 Issuance expenses/premiums -- (3) ------------- $18 $176 ------------- Total authorized shares 6,405,000
All of the outstanding preferred stock is redeemable at the option of the U.S. Electric Operating Companies upon 30 days' notice at the current redemption price per share. During November and December 1999, CPL called $75 million of
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its money market preferred stock and $85 million of its Series A and Series B preferred stock at par. During 1997, SWEPCO redeemed $1.2 million pursuant to its annual sinking fund requirement. During 1997, each of the U.S. Electric Operating Companies reacquired a significant portion of its outstanding preferred stock. As a result of differences between the dividend rates on the reacquired securities and prevailing market rates, CSW realized an overall gain of approximately $10 million on the transactions. This gain is shown separately, as Gain on Reacquired Preferred Stock, on the Consolidated Statements of Income.
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 averaged 4.3%, 4.4% and 4.3% during 1999, 1998 and 1997, respectively. In November and December 1999, CPL called $75 million of its money market preferred stock and $85 million of its Series A and Series B Auction Preferred Stock at par.
SWEPCO On April 1, 1998, SWEPCO called the remaining 274,010 shares of its $100 par value 6.95% preferred stock. SWEPCO used short-term debt to fund the redemption.
For additional information about the U.S. Electric Operating Companies' preferred stock, see their Statements of Capitalization in the Financial Statements.
10. TRUST PREFERRED SECURITIES
The following Trust Preferred Securities issued by the wholly-owned statutory business trusts of CPL, PSO and SWEPCO were outstanding at December 31, 1999. They are classified on the balance sheets as CPL, PSO or SWEPCO Obligated, Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Junior Subordinated Debentures of CPL, PSO or SWEPCO, respectively.
Each of the business trusts will be treated as a subsidiary of its parent company. The only assets of the business trusts are the subordinated debentures issued by their parent company as specified above. In addition to the obligations under their subordinated debentures, each of the parent companies has also agreed to a security obligation which represents a full and unconditional guarantee of its capital trust obligation.
11. SHORT-TERM FINANCING
The CSW System uses short-term debt, primarily commercial paper, to meet fluctuations in working capital requirements and other interim capital needs. CSW has established a money pool to coordinate short-term borrowings for certain subsidiaries and also incurs borrowings outside the money pool for other subsidiaries. As of December 31, 1999, CSW had revolving credit facilities totaling $1.4 billion to backup its commercial paper program. At December 31, 1999, CSW had $1.3 billion outstanding in short-term borrowings. The maximum amount of such short-term borrowings outstanding during the year, which had a
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weighted average interest yield for the year of 5.5%, was $1.4 billion during December 1999.
CSW Credit, which does not participate in the money pool, issues commercial paper on a stand-alone basis. At December 31, 1999, CSW Credit had a $1.2 billion revolving credit agreement that is secured by the assignment of its receivables to back up its commercial paper program which had $754 million outstanding. The maximum amount of such commercial paper outstanding during the year, which had a weighted average interest yield for the year of 5.3%, was $1.0 billion during August 1999.
12. COMMON STOCK
CSW's basic earnings per share of common stock are computed by dividing net income for common stock by the average number of common shares outstanding for the respective periods. Diluted earnings per share reflect the potential dilution that could occur if all options outstanding under CSW's stock incentive plan were converted to common stock and then shared in the income for common stock. CSW's basic earnings per share equalled diluted earnings per share for each of the years 1997-1999. CSW's dividends per common share reflect per share amounts paid for each of the periods.
CSW can issue common stock, either through the purchase and reissuance of shares from the open market or by issuing original shares, through the LTIP, a stock option plan, PowerShare and Retirement Savings Plan. CSW began funding these plans through open market purchases, effective April 1, 1997. Information concerning common stock activity issued through the LTIP, the stock option plan, PowerShare and the Retirement Savings Plan is presented in the following table.
13. STOCK-BASED COMPENSATION PLANS
CSW has a key employee incentive plan. This plan is accounted for under Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for this plan been determined 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 SFAS No. 123 would not have changed significantly from amounts reported.
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years.
CSW may grant options for up to 4.0 million shares of CSW common stock 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 each of the three anniversary dates of the grant and expires 10 years after the original grant date. CSW has granted 2.8 million shares through December 31, 1999. A summary of the status of CSW's stock option plan at December 31, 1999, 1998, and 1997 and the changes during the years then ended is presented in the following table.
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14. BUSINESS SEGMENTS
CSW's business segments at December 31, 1999, included U.S. Electric and U.K. Electric. Eight additional non-utility companies are included with CSW in Other and Reconciling Items (CSW Energy, CSW International, C3 Communications, EnerShop, CSW Energy Services, CSW Credit, CSW Leasing and CSW Services). CSW's business segment information is presented in the following tables.
U.S. U.K. Other Reconciling CSW Electric Electric Segments Items Consolidated ------------------------------------------------- (millions) Operating revenues $3,524 $1,705 $342 $(34) $5,537 Depreciation and amortization 400 128 24 -- 552 Interest income 10 6 92 (54) 54 Interest expense 196 105 159 (54) 406 Operating income tax expense 191 6 7 -- 204 Net income from equity method subsidiaries -- -- -- -- -- Income before extraordinary item 370 113 508 (522) 469 Extraordinary loss - discontinuance of SFAS No. 71 (8) -- -- -- (8) Extraordinary loss - loss on reacquired debt (6) -- -- -- (6) Total assets 9,391 3,024 7,217 (5,470) 14,162 Investments in equity method subsidiaries 17 -- -- -- 17 Capital expenditures 474 153 138 -- 765
Operating revenues $3,488 $1,769 $258 $(33) $5,482 Depreciation and amortization 399 95 27 -- 521 Interest income 6 6 73 (55) 30 Interest expense 197 116 160 (57) 416 Operating income tax expense 235 1 (33) -- 203 Net income from equity method subsidiaries (1) -- -- -- (1) Income before extraordinary item 374 117 441 (492) 440 Total assets 9,151 3,032 6,656 (4,942) 13,897 Investments in equity method subsidiaries 15 -- -- -- 15 Capital expenditures 313 106 100 -- 519
Operating revenues $3,321 $1,870 $112 $(35) $5,268 Depreciation and amortization 389 92 16 -- 497 Interest income 8 12 34 (34) 20 Interest expense 212 120 105 (23) 414 Operating income tax expense 144 31 (24) -- 151 Net income from equity method subsidiaries (1) -- -- -- (1) Income before extraordinary item 289 117 149 (226) 329 Extraordinary loss U.K. windfall profits tax -- (176) -- -- (176) Total assets 9,337 2,931 6,267 (4,919) 13,616 Investments in equity method subsidiaries 15 -- -- -- 15 Capital expenditures 346 126 279 -- 751
Products and Services The U.S. Electric Operating Companies' products and services primarily consist of the generation, transmission and distribution of electricity. The U.K. Electric segment's primary lines of business are the supply and distribution of electricity. CSW is currently developing computer systems to provide information by product and services rather than by legal entity.
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Geographic Areas
Revenues ---------------------------------------------------- United United CSW States Kingdom Other Foreign Consolidated ---------------------------------------------------- (millions) 1999 $3,828 $1,705 $4 $5,537 1998 3,705 1,769 8 5,482 1997 3,390 1,870 8 5,268
Long-Lived Assets ---------------------------------------------------- United United CSW States Kingdom Other Foreign Consolidated ---------------------------------------------------- (millions)
1999 $7,850 $2,499 $257 $10,606 1998 7,831 2,530 201 10,562 1997 7,801 2,551 254 10,606
15. PROPOSED AEP MERGER
On December 22, 1997, CSW and AEP announced that their boards of directors had approved a definitive merger agreement for a tax-free, stock-for-stock transaction. The combined company would serve more than 4.7 million customers in 11 states and approximately 4 million customers outside the United States. On May 27, 1998, AEP shareholders approved the issuance of the additional shares of stock required to complete the merger. On May 28, 1998, CSW stockholders approved the merger. On December 16, 1999, the merger agreement was amended to extend the term of the agreement to June 30, 2000. After June 30, 2000, either party may terminate the merger agreement if the merger has not been consummated.
AEP is subject to the information requirements of the Securities and Exchange Act of 1934, as amended, and in accordance therewith, files reports and other information with the SEC. For additional information related to AEP, see AEP's Current Reports on Form 8-K, its Quarterly Reports on Form 10-Q and its Annual Report on Form 10-K and the documents referenced therein.
Under the AEP merger agreement, each common share of CSW will be converted into 0.6 share of AEP common stock. CSW stockholders will own approximately 40% of the combined company. CSW plans to continue to pay dividends on its common stock until the closing of the AEP Merger at approximately the same times and rates per share as in 1999, subject to continuing evaluation of CSW's earnings, financial condition and other factors by the CSW board of directors.
Under the AEP merger agreement, there will be no changes required with respect to the public debt issues, the outstanding preferred stock or the Trust Preferred Securities of CSW's subsidiaries.
AEP and CSW anticipate net savings related to the merger of approximately $2 billion over a 10-year period from the elimination of duplication in corporate and administrative programs, greater efficiencies in operations and business processes, increased purchasing efficiencies and the combination of the two work forces. As a result of the approved settlement and agreement with the state commissions in CSW and AEP's respective service territories, AEP and CSW have agreed to guarantee that approximately 55% of those savings will be passed through to their customers. AEP and CSW continue to seek opportunities for additional saving and expect to realize significant additional savings based upon the work of the merger transitions teams over the last two years. The
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preceding discussion constitutes forward-looking information within the meaning of Section 21E of the Exchange Act. Actual results may differ materially from such projected information. See FORWARD-LOOKING INFORMATION.
The electric systems of AEP and CSW will operate on an integrated and coordinated basis as required by the Holding Company Act. AEP and CSW project fuel savings of approximately $98 million over a 10-year period resulting from the coordinated operation of the combined company, which will be passed through to customers.
The AEP merger agreement contains covenants and agreements that restrict the manner in which the parties may operate their respective businesses until the time of closing of the merger. In particular, without the prior written consent of AEP, CSW may not engage in a number of activities that could affect its sources and uses of funds. Pending closing of the merger, CSW's and its subsidiaries' strategic investment activity, capital expenditures and non-fuel operating and maintenance expenditures are limited to specific agreed upon projects and in agreed upon amounts. In addition, prior to consummation of the merger, CSW and its subsidiaries are restricted from:
- - Issuing shares of common stock other than pursuant to employee benefit plans;
- - Issuing shares of preferred stock or similar securities other than to refinance existing obligations or to fund permitted investment or capital expenditures; and
- - Incurring indebtedness other than pursuant to existing credit facilities, in the ordinary course of business, or to fund permitted projects or capital expenditures. These limitations do not preclude CSW and its subsidiaries from making investments and expenditures in amounts previously budgeted.
Cook Nuclear Plant On June 25, 1999, AEP announced a comprehensive plan to restart the idle Cook nuclear power plant. Unit 2 is scheduled to return to service in April 2000, and Unit 1 is scheduled to return to service in September 2000. AEP stated that its announcement follows a comprehensive systems readiness review of all operating systems at Cook nuclear power plant and a cost/benefit analysis of whether to restart the plant or shut it down completely. Plant officials originally shut down both units of the facility, located in Bridgman, Michigan, in September 1997 because of questions raised during a design inspection by the NRC. AEP estimated that its costs to restart the idle plant should be approximately $574 million, of which $373 million has been spent through December 31, 1999.
On February 24, 2000, AEP announced a three-week delay in the planned April 1, 2000 restart. The delay is due to issues encountered during testing of equipment necessary for core reload and power operations of its Cook Unit 2. The testing process continues and may still encounter additional items that could extend the delay.
Merger Regulatory Approvals The merger is conditioned, among other things, upon the approval of several state and federal regulatory agencies. Some of the merger conditions cannot be waived by the parties.
State Regulatory Commissions Arkansas On June 12, 1998, AEP and CSW jointly filed a request with the Arkansas Commission for approval of the proposed merger. The Arkansas Commission issued an order approving the merger on August 13, 1998, subject to approval of the associated regulatory plan. On December 17, 1998, the Arkansas Commission issued a final order granting conditional approval of a stipulated agreement related to
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a proposed merger regulatory plan. The stipulated agreement calls for SWEPCO to reduce rates through a net merger savings rider for its Arkansas retail customers by $6 million over the five-year period following completion of the merger. The Arkansas Commission order notes the possibility of decisions in other jurisdictions adversely affecting provisions of the stipulated agreement. Consequently, the Arkansas Commission conditioned its final order on its consideration of approval of the merger in other state and federal jurisdictions.
Louisiana On May 15, 1998, AEP and CSW jointly filed a request with the Louisiana Commission for approval of the proposed merger and for a finding that the merger is in the public interest.
On September 27, 1999, the Louisiana Commission issued a final order granting conditional approval of the pending merger between AEP and CSW. In granting approval, the Louisiana Commission also approved a stipulated settlement with the Louisiana Commission staff. Under the stipulated settlement, AEP and CSW have agreed to share with SWEPCO's Louisiana customers merger savings created as a result of the merger over the eight years following its completion. A savings mechanism will be implemented to calculate merger savings annually. AEP and CSW estimate that the customer rate credits in Louisiana will total more than $18 million during that eight-year period. During the second year following completion of the merger, customers will begin receiving a monthly rate credit for 50% of calculated merger savings. This credit will be updated annually and continue for the remainder of the eight-year period following the merger's completion.
Oklahoma On August 14, 1998, AEP and CSW jointly filed a request with the Oklahoma Commission for approval of their proposed merger.
An amended application was filed with the Oklahoma Commission on February 25, 1999. On May 11, 1999, the Oklahoma Commission approved the proposed merger between AEP and CSW. The approval follows a partial settlement between the Oklahoma Commission Utility Division Staff, the Oklahoma Commission Consumer Services Division, the Office of the Attorney General for Oklahoma, PSO, AEP and CSW. The Oklahoma Commission order was appealed by the Municipal Electric Systems of Oklahoma, Inc. and the Oklahoma Association of Electric Cooperatives. On October 13, 1999, the Oklahoma Supreme Court dismissed the appeal of the Oklahoma Association of Electric Cooperatives. The Municipal Electric System of Oklahoma, Inc. withdrew its appeal and the Oklahoma Association of Electric Cooperatives filed a motion to dismiss its appeal of the Oklahoma Commission order approving the merger.
Under the partial settlement agreement, AEP and CSW would:
- - Share merger savings with Oklahoma customers as well as AEP shareholders, effective with the merger closing;
- - Not increase Oklahoma base rates prior to January 1, 2003;
- - File by December 31, 2001 with the FERC an application to join a regional transmission organization; and
- - Establish additional quality of service standards for PSO's retail customers. Oklahoma's share of the $50.2 million in guaranteed net merger savings over the first five years after the merger is consummated would be split between Oklahoma customers and AEP shareholders, with customers receiving approximately 55% of the savings.
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The Oklahoma Commission has withdrawn its opposition to the merger at the FERC.
Texas On April 30, 1998, AEP and CSW jointly filed a request with the Texas Commission for a finding that the merger is in the public interest.
On May 4, 1999, AEP and CSW announced a proposed settlement with several intervenor groups for the proposed merger between AEP and CSW. The settlement would result in combined rate reductions totaling $221 million over a six-year period for Texas customers of the three CSW Texas Electric Operating Companies if the merger is completed as planned and issues are resolved associated with the three CSW Texas Electric Operating Companies rate and fuel reconciliation proceedings.
The settlement was reached with the General Counsel of the Texas Commission, the State of Texas, the Texas Industrial Energy Consumers, the Low Income Intervenors, the Office of Public Utility Counsel of Texas and the steering committee of the Cities of McAllen, Corpus Christi, Victoria, Abilene, Big Lake, Vernon and Paducah. The settlement expands upon a previous Texas settlement announced on November 12, 1998, with the Office of Public Utility Counsel of Texas and the cities' steering committee. That prior settlement agreement provided for Texas retail rate reductions of $180 million over the six years following completion of the merger. The new settlement agreement proposes additional rate reductions totaling $41 million for a total of $221 million. The settlement also calls for the divestiture of a total of 1,604 MW of existing and proposed generating capacity within Texas.
The first rate-reduction rider provides for $84.4 million in net-merger savings. The amounts are to be credited to Texas customers' bills through a net-merger-savings rate-reduction rider over six years following completion of the merger.
Additional rate-reduction riders will be implemented to resolve issues associated with the three CSW Texas Electric Operating Companies rate and fuel reconciliation proceedings and court appeals in Texas. The settlement provides for an additional reduction of $136.6 million, which will be implemented over the six years following completion of the merger.
Hearings on the merger in Texas began August 9, 1999 and concluded on August 10, 1999. As the hearings began, settlements were reached with all but one of the parties in the case. The settling parties are all wholesale electric customers of the three CSW Texas electric operating companies, and the settlements call for the withdrawal of their opposition to the merger in all regulatory approval proceedings. On October 1, 1999, an ALJ for the Texas State Office of Administrative Hearings issued a proposal for decision recommending that the Texas Commission approve the pending merger between AEP and CSW. In the proposal for decision, the ALJ determined that, consistent with the terms of the proposed settlement, the merger is in the public interest. On November 2, 1999, the Texas Commission approved the proposed merger with AEP.
FERC On April 30, 1998, AEP and CSW jointly filed a request with the FERC for approval of their proposed merger. On May 25, 1999, AEP and CSW announced they had reached a settlement with the FERC trial staff resolving competition and rate issues that related to the proposed merger. On July 13, 1999, AEP and CSW reached an additional settlement with the FERC trial staff resolving energy exchange pricing issues. The settlements were submitted to the FERC for approval. Hearings at the FERC concluded on July 19, 1999. On November 23, 1999, the ALJ who presided over the FERC merger hearing issued a recommendation to the FERC that the merger be approved and found that the proposed merger is in the public interest.
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On March 15, 2000, the FERC conditionally approved the merger. Conditions placed on the merger include:
- - Transfer operational control of AEP's east and west transmission systems to a fully-functioning, FERC-approved regional transmission organization by December 15, 2001, which is the same implementation date included in the FERC's general order for regional transmission organizations that applies to all transmission-owning utilities.
- - Two interim transmission-related mitigation measures consisting of market monitoring and independent calculation and posting of available transmission capacity to monitor the operation of AEP's east transmission system.
- - Divestiture of 550 MW of generating capacity comprised of 300 MW of capacity in SPP and 250 MW of capacity in ERCOT. The FERC will require AEP and CSW to divest their entire ownership interest in the generating facilities that are to be divested. Alternatively, AEP and CSW may choose to divest the same or greater amount of capacity from different generating plants in their entirety. However, such generating plants must be of similar cost, operation and location characteristics of generating plants AEP and CSW originally proposed.
- - AEP and CSW must complete divestiture of the ERCOT capacity by March 15, 2001 and divestiture of the SPP capacity by July 1, 2002.
The FERC found that certain energy sales in SPP and ERCOT would be reasonable and effective interim mitigation measures until completion of the required SPP and ERCOT divestitures. The FERC will require the proposed interim energy sales to be in effect when the merger is consummated.
AEP and CSW must notify the FERC by March 30, 2000 whether they accept the condition that they transfer operational control of their transmission facilities to a fully-functioning, FERC-approved regional transmission organization by December 15, 2001 and the condition requiring the interim mitigation measures. If AEP and CSW accept the conditions, then AEP and CSW must make a compliance filing at least 60 days prior to consummation of the merger describing their plan to implement the interim mitigation measures. AEP and CSW intend to make this compliance filing on a date that would permit completion of the merger in the second quarter of 2000. AEP and CSW believe they can address the conditions.
NRC On June 19, 1998, CPL filed a license transfer application with the NRC requesting the NRC's consent to the indirect transfer of control of CPL's interests in the NRC licenses issued for STP from CSW to AEP. CPL would continue to own its 25.2% interest in STP, and CPL's name would remain on the NRC operating license. On November 5, 1998, the NRC approved the license transfer application with a condition that the merger must be completed by December 31, 1999. The NRC has extended the condition relating to completion of the merger to June 30, 2000.
Other Federal On October 13, 1998, AEP and CSW jointly filed an application with the SEC for approval of the proposed merger. The SEC merger filing requests approval of the merger and related transactions and outlines the expected combined company benefits of the merger to AEP and CSW customers and shareholders. Since then, AEP and CSW have filed four amendments to the application. Several parties have filed petitions opposing the proposed merger at the SEC which have not been withdrawn.
On July 29, 1999, applications were made with the FCC to authorize the transfer of control of licenses of several CSW entities to AEP. In February 2000, the FCC approved the transfer which will be effective upon completion of the proposed merger.
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On July 26, 1999, AEP and CSW submitted filings to the Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. On February 2, 2000, AEP and CSW announced that their proposed merger received antitrust clearance from the Department of Justice.
United Kingdom CSW has a 100% interest in SEEBOARD, and AEP has a 50% interest in Yorkshire. The proposed merger of CSW into AEP would result in common ownership of these United Kingdom entities. On January 25, 2000, the United Kingdom's Department of Trade and Industry approved the common ownership of the United Kingdom entities that would result from the proposed merger, subject to certain conditions concerning the separate operation of their respective distribution and supply businesses.
Other On April 20, 1999, AEP reached a settlement with the Indiana Utility Regulatory Commission staff addressing matters pertinent to Indiana regarding the proposed merger. The Indiana Utility Regulatory Commission approved the settlement on April 26, 1999. The settlement agreement resulted from an investigation of the proposed merger between AEP and CSW initiated by the Indiana Utility Regulatory Commission.
On April 21, 1999, AEP and CSW announced that they had reached separate settlements with six wholesale customers that address issues related to the proposed merger.
On April 28, 1999, AEP and CSW announced that they ratified a settlement agreement with local unions of the IBEW representing employees of AEP and CSW. The settlement agreement covered issues related to the pending merger between AEP and CSW. As part of the settlement, the IBEW local unions have withdrawn their opposition to the merger.
On May 26, 1999, AEP and CSW announced that they had reached a settlement agreement with the Kentucky Attorney General and several AEP customers in Kentucky addressing matters pertinent to Kentucky regarding the pending merger between AEP and CSW. The Kentucky Public Service Commission has approved the settlement.
On August 6, 1999, AEP announced that it had ratified a settlement agreement with local unions of the UWUA representing employees of AEP. The settlement agreement covered issues raised in the pending merger between AEP and CSW. As part of the settlement, the UWUA local unions will not oppose the merger.
On October 21, 1999, the Public Utility Commission of Ohio issued a decision stating that it will notify the FERC that it is no longer opposed to AEP's proposed merger with CSW and that it will no longer seek conditions to the merger.
AEP and CSW also have reached settlements with the Missouri Public Service Commission, the Michigan Public Service Commission and various wholesale customers and intervenors in the FERC merger proceeding.
Completion of the Merger AEP and CSW have targeted consummation of the AEP Merger in the second quarter of 2000. The merger is conditioned, among other things, upon the approval of several state and federal regulatory agencies. All of such approvals, except from the SEC, have been obtained. The transaction must satisfy many conditions, including the condition that it must be accounted for as a pooling of interests. The parties may not waive some of these conditions. AEP
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and CSW continue the process of seeking regulatory approvals, but there can be no assurance as to when, on what terms or whether the required approvals will be received. After June 30, 2000, either CSW or AEP may terminate the merger agreement if all of the conditions to its obligation to close have not been satisfied. There can be no assurance that the AEP Merger will be consummated.
Merger Costs As of December 31, 1999, CSW had deferred $43 million in costs related to the AEP Merger on its consolidated balance sheet, which will be charged to expense if AEP and CSW do not complete their proposed merger. If the merger is consummated, such costs would be recovered in rates pursuant to merger sharing provisions contained in the state settlement agreements.
16. EXTRAORDINARY ITEMS
Texas Electric Operating Companies Discontinuance of SFAS No. 71 The discontinuance of SFAS No. 71 in 1999 for SWEPCO's Arkansas and Texas generation business and WTU's Texas generation business created certain write-offs for those companies, which are categorized as extraordinary losses on their income statements. The extraordinary loss at SWEPCO was $3.0 million. The extraordinary loss at WTU was $5.5 million. The extraordinary loss in 1999 at CPL was $5.5 million as a result of the write-off of losses on the reacquisition of long-term debt associated with generation-related assets. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility Restructuring Legislation for additional discussion of discontinuing SFAS No. 71.
United Kingdom Windfall Profits Tax In the general election held in the United Kingdom on May 1, 1997, the United Kingdom's Labour Party won control of the government with a considerable majority. Prior to the general election, the Labour Party had announced that if elected, it would impose a windfall profits tax on certain industries in the United Kingdom, including the privatized utilities, to fund a variety of social improvement programs. On July 2, 1997, the one-time windfall profits tax was introduced in the Labour Party's budget and the legislation enacting the tax subsequently was passed during the third quarter of 1997. Accordingly, during the third quarter of 1997, SEEBOARD U.S.A. accrued, as an extraordinary item, (pound)109.5 million (or $176 million when converted at (pound)1.00 = $1.61) for a one-time windfall profits tax enacted by the United Kingdom government.
The windfall profits tax was payable in two equal installments, due December 1, 1997 and December 1, 1998. The tax was charged at a rate of 23% on the difference between nine times the average profits after tax for the four years following flotation in 1990, and SEEBOARD's market capitalization calculated as the number of shares issued at flotation multiplied by the flotation price per share.
17. NEW ACCOUNTING STANDARDS
SFAS No. 133 as amended by SFAS No. 137 SFAS No. 133 as amended by SFAS No. 137 is effective for fiscal years beginning after June 15, 2000 or January 1, 2001, for calendar year entities. SFAS No. 133 replaces existing pronouncements and practices with a single integrated accounting framework for derivatives and hedging activities and eliminates previous inconsistencies in generally accepted accounting principles. SFAS No. 133 expands the accounting definition of derivatives, which had focused on freestanding contracts (futures, forwards, options and swaps) to include embedded derivatives and many commodity contracts. All derivatives will be reported on the balance sheet either as an asset or liability measured at fair value. Changes in a derivative's fair value will be recognized currently in
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earnings unless specific hedge accounting criteria are met. CSW has established a project team to implement SFAS No. 133. CSW has not yet quantified the effects of adopting SFAS No. 133 on its financial statements, although application of SFAS No. 133 could increase volatility in earnings and other comprehensive income. See ITEM 7. MD&A - NEW ACCOUNTING STANDARDS.
18. SOUTH AMERICAN INVESTMENTS
Through November 1999, CSW International had purchased a 36% equity interest in Vale for $80 million. CSW International also extended $100 million of debt convertible to equity in Vale in 1998. In December of 1999, CSW International converted $69 million of the $100 million into equity, thereby raising the equity interest to 44%. CSW International anticipates converting the remaining debt into equity over the next two years.
In January 1999, amid market instability, the Brazilian government abandoned its policy of pegging the Brazilian Real in a range against the dollar. This action resulted in a 49% devaluation of the Brazilian currency by the end of December 1999. Vale is unfavorably affected by the devaluation due primarily to the revaluation of foreign denominated debt.
CSW International has a put option, which, if exercised, requires Vale to purchase CSW International shares at a minimum price equal to the U.S. dollar equivalent of the purchase price for Vale. As a result of the put option arrangement, management has concluded that CSW International's investment carrying amount will not be reduced below the put option value unless there is deemed to be a permanent impairment. Pursuant to the put option arrangement, CSW International will not recognize its proportionate share of any future earnings until its proportionate share of any losses of Vale is recognized. At December 31, 1999, CSW International had deferred losses, after tax, of approximately $21 million related to its Vale investment. CSW International views its investment in Vale as a long-term investment, which has significant long-term value and is recoverable. Management will continue to closely evaluate the changes in the Brazilian economy and its impact on CSW International's investment in Vale.
As of December 31, 1999, CSW International had invested $110 million in stock of a Chilean electric company. The investment is classified as securities available for sale and accounted for by the cost method. Based on the current market value of the shares and the year end foreign exchange rate, the value of the investment at December 31, 1999 was $62 million. The reduction in the carrying value of this investment has been reflected in Other Comprehensive Income in CSW's Consolidated Statements of Stockholders' Equity. Management views its investment in Chile as a long-term investment strategy and believes this investment continues to have significant long-term value and that it is recoverable. Management will continue to closely evaluate the changes in the South American economy and its impact on CSW International's investment in the Chilean electric company.
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19. QUARTERLY INFORMATION (UNAUDITED)
The following unaudited quarterly information includes, in the opinion of management all adjustments necessary for a fair presentation of such amounts. Information for quarterly periods is affected by seasonal variations in sales, rate changes, timing of fuel expense recovery and other factors.
QUARTER ENDED 1999 1998 ----------------------------------------------------------------- (millions, except EPS) March 31 Operating Revenues $1,225 $1,257 Operating Income 147 163 Net Income for Common Stock 45 60 Basic and Diluted EPS $0.21 $0.28
June 30 Operating Revenues $1,319 $1,344 Operating Income 206 214 Net Income for Common Stock 103 107 Basic and Diluted EPS $0.49 $0.50
September 30 Operating Revenues $1,618 $1,581 Operating Income 335 344 Income before Extraordinary Item 230 233 Extraordinary Loss (8) -- Net Income for Common Stock 222 233 Basic and Diluted EPS before Extraordinary Item $1.08 $1.10 Basic and Diluted EPS from Extraordinary Loss ($0.04) $-- Basic and Diluted EPS $1.04 $1.10
December 31 Operating Revenues $1,375 $1,300 Operating Income 178 145 Income before Extraordinary Item 91 40 Extraordinary Loss (6) -- Net Income for Common Stock 85 40 Basic and Diluted EPS before Extraordinary Item $0.43 $0.19 Basic and Diluted EPS from Extraordinary Loss ($0.03) $-- Basic and Diluted EPS $0.40 $0.19
Total Operating Revenues $5,537 $5,482 Operating Income 866 866 Income before Extraordinary Item 469 440 Extraordinary Loss (14) -- Net Income for Common Stock 455 440 Basic and Diluted EPS before Extraordinary Item $2.21 $2.07 Basic and Diluted EPS from Extraordinary Loss ($0.07) $-- Basic and Diluted EPS $2.14 $2.07
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Central and South 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, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows, for each of the three years in the period ended December 31, 1999. These financial 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 UK Holdings (1999) and CSW UK Finance Company (1998 and 1997) which statements reflect total assets and total revenues of 20 percent and 31 percent in 1999, 22 percent and 32 percent in 1998 and 22 percent and 35 percent in 1997, respectively, of the related consolidated totals. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to the amounts included for those entities, is based solely on the reports of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the financial statements 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, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Dallas, Texas February 25, 2000
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AUDITOR'S REPORT TO THE MEMBERS OF CSW UK HOLDINGS
We have audited the consolidated balance sheets of CSW UK Holdings and subsidiaries as of 31 December 1999 and the related consolidated statement of earnings 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 financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes assessing, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our 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 UK Holdings and subsidiaries at 31 December 1999 and the result of their operations and cash flows for the year then ended in conformity with generally accepted accounting principles in the United 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 shareholders' equity as of and for the year ended 31 December 1999 to the extent summarised in Note 23 to the consolidated financial statements.
KPMG Audit Plc Chartered Accountants London Registered Auditor 17 January 2000
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AUDITOR'S REPORT TO THE MEMBERS OF CSW UK FINANCE COMPANY
We have audited the consolidated balance sheets of CSW UK Finance Company and subsidiaries as of 31 December 1998 and 1997 and the related consolidated statement of earnings and statements of cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our 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 UK Finance Company and subsidiaries at 31 December 1998 and 1997 and the results of their operations and cash flows for the years then ended in conformity with generally accepted accounting principles in the United 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 shareholders' equity as of and for the years ended 31 December 1998 and 1997 to the extent summarised in Note 23 to the consolidated financial statements.
KPMG Audit Plc Chartered Accountants London, England Registered Auditor 18 January 1999
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REPORT OF MANAGEMENT
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 information contained in this annual report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reflect amounts based on the best estimates and judgments of management giving due consideration to materiality. Financial information contained elsewhere in this annual report is consistent with that in the consolidated financial statements.
The consolidated financial statements have been audited by CSW's independent public accountants who were given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the board of directors and committees of the board. CSW and its subsidiaries believe that representations made to the independent public accountants during their audit were valid and appropriate. The reports 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 transactions are executed in accordance with management's authorization, that the consolidated financial statements are prepared in accordance with generally accepted accounting principles and that the assets of CSW and its subsidiaries are properly safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that the companies 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 of Internal Auditors. Actions are taken by management to respond to deficiencies as they are identified. The board, operating through its audit committee, which is comprised entirely of directors who are not officers or employees of CSW or its subsidiaries, provides oversight to the financial reporting process.
Due to the inherent limitations in the effectiveness of internal controls, no internal control system can provide absolute assurance that errors will not occur. However, 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 of internal controls over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31, 1999.
E. R. Brooks Glenn D. Rosilier Lawrence B. Connors Chairman and Executive Vice President and Controller Chief Executive Officer Chief Financial Officer
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CENTRAL POWER AND LIGHT COMPANY
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SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended December 31 is provided to highlight significant trends in the financial condition and results of operations for CPL. The extraordinary loss was a result of a loss associated with the reacquisition of production-related long-term debt. Certain financial statement items for prior years have been reclassified to conform to the most recent period presented.
(1) See CENTRAL POWER AND LIGHT COMPANY - RESULTS OF OPERATIONS for major factors affecting earnings. (2) Long-term obligations include long-term debt and Trust Preferred Securities.
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CENTRAL POWER AND LIGHT COMPANY RESULTS OF OPERATIONS
Reference is made to CPL's Consolidated Financial Statements, related Notes to Consolidated Financial Statements and Selected Financial Data. Referenced information should be read in conjunction with, and is essential to understanding, the following discussion and analysis.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998
CPL's net income for common stock increased $18.5 million to $173.2 million during 1999 from $154.7 million in 1998. The increase was primarily the result of higher non-fuel-related revenues partially offset by an increase in other operating and maintenance expenses. Also, lower depreciation and amortization expenses, lower income tax expenses and lower interest charges contributed to the increase in net income for common stock.
Electric operating revenues increased $76.4 million, or 5% in 1999 as compared to 1998. Fuel-related revenues increased $44.2 million due to higher fuel and purchased power expenses as discussed in the following paragraph. Non-fuel-related revenues increased $32.2 million due mainly to higher retail MWH sales resulting from increased customer demand offset in part by lower sales attributable to milder weather in 1999 and lower base rates resulting from the CPL 1997 Final Order. Additionally, non-fuel-related revenues increased resulting from changes to CSW's transmission coordination agreement offset in part by the absence in 1999 of a transmission service agreement adjustment in 1998. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Transmission Coordination Agreement and CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No. 17285) and CPL Rate Review - Docket No. 14965.
Fuel expense increased to $404.0 million, or $18.0 million higher in 1999 when compared to 1998 resulting primarily from a rise in the average unit fuel cost. The average unit fuel cost increased from $1.59 per MMbtu in 1998 to $1.72 per MMbtu in 1999, resulting primarily from higher spot market natural gas prices. Purchased power expense rose $28.1 million in 1999 to $68.2 million when compared to 1998. The increase was due primarily to higher economy energy purchases.
Other operating expenses were $290.1 million during 1999, an increase of $29.2 million when compared to 1998. The increase was due primarily to higher outside service expenses associated with the Texas Legislation and securitization, as well as higher transmission expenses. The increase in transmission expense was due primarily to the settlement of the complaint with Texas Utilities Electric Company and the absence in 1999 of a transmission service agreement adjustment made in 1998 related to the final order in Texas Commission Docket No. 17285. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No. 17285). Maintenance expenses increased $6.4 million in 1999 to $70.2 million due primarily to scheduled power plant repairs and maintenance, including the refueling and a 10-year inspection of STP Units 1 and 2. Depreciation and amortization expenses decreased $7.1 million, or 4% in 1999 as compared to last year due primarily to the absence of 1999 amortization associated with regulatory assets designated for securitization as well as the absence in 1999 of an accelerated capital recovery charge in 1998. Partially offsetting this decrease is a charge to reflect the excess earnings provision of the Texas Legislation and increases to depreciable plant. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility Restructuring Legislation and ITEM 7. MD&A Securitization of Generation-related Regulatory Assets and Stranded Costs.
Taxes, other than income increased $2.9 million to $73.8 million due primarily to higher franchise tax expenses in 1999 when compared to 1998. Income tax expense associated with utility operations decreased $12.9 million for the
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year compared to 1998 as a result of lower taxable income in 1999, the reclassification of certain income tax related regulatory assets designated for securitization consistent with the Texas Legislation, and prior year income tax liability adjustments. The decrease in income tax expense was offset in part by the income portion of the Texas state franchise taxes. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility Restructuring Legislation. and ITEM 7. MD&A Securitization of Generation-related Regulatory Assets and Stranded Costs.
Other income and deductions increased $7.4 million resulting from higher interest income and lower non-operating income tax expense.
Interest charges decreased $7.7 million for 1999, when compared to 1998 due primarily to lower average interest rates associated with the maturity and reacquisition of long-term debt during 1999 and 1998. See ITEM 8. NOTE 8. LONG-TERM DEBT for additional information related to the reacquisition of long-term debt. The extraordinary loss of $5.5 million was the result of the write-off of unamortized expenses associated with the reacquisition of production-related long-term debt. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility Restructuring Legislation, NOTE 8. LONG-TERM DEBT, and NOTE 16. EXTRAORDINARY ITEMS. The redemption of $160 million of preferred stock resulted in a reduction of net income of $2.8 million. See ITEM 8. NOTE 9. PREFERRED STOCK for further information.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Net income for common stock increased $33.4 million to $154.7 million during 1998 from $121.4 million in 1997. This increase was due primarily to increased non-fuel revenues related to weather-related demand and the absence in 1998 of the provision for the CPL 1997 Final Order. The increase in net income for common stock was partially offset by a reduction in base rates associated with the CPL 1997 Final Order. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for more information related to the CPL 1997 Final Order.
Total electric operating revenues increased $29.8 million, or 2% in 1998 as compared to 1997. This increase was mainly attributed to increased non-fuel revenue of $91.6 million, which was a result of a 3% increase in weather-related MWH sales and the absence in 1998 of the $76.4 million provision for rate refund in 1997. In addition, electric operating revenues increased due in part to a transmission service agreement adjustment related to the final order in Texas Commission Docket No. 17285. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No. 17285). The increase was partially offset by decreased fuel revenues of $30.8 million and by lower base rates resulting from the CPL 1997 Final Order.
Fuel and purchased power expenses decreased approximately $27.1 million in 1998 as compared to 1997. Fuel expense decreased $10.7 million as a result of lower average unit cost of fuel declining from $1.83 per MMbtu in 1997 to $1.59 per MMbtu in 1998 due to lower spot market natural gas prices. Purchased power expenses decreased approximately 29% from $56.4 million in 1997 to $40.1 million in 1998 due to decreases in economy energy purchases.
Other operating expenses were $260.8 million during 1998, a decrease of $22.8 million when compared to 1997. The decrease is primarily due to a transmission service agreement adjustment related to the final order in Texas Commission Docket No. 17285. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No. 17285). Also contributing to the decrease is the absence in 1998 of a $15 million write-off of previously capitalized energy efficiency incentives, and rate case-related expenses. Maintenance expenses increased $4.0 million due primarily to flood damage, power plant repairs and storm-related tree
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maintenance. Depreciation and amortization expenses increased $13.5 million, or 8% in 1998 as compared to 1997 due primarily to the accelerated recovery of ECOM property recorded in 1998 related to the CPL 1997 Final Order as well as increases in depreciable and amortizable plant. Partially offsetting the increase in depreciation and amortization expenses was lower depreciation rates on non-ECOM property related to the CPL 1997 Final Order.
Taxes, other than income decreased $12.0 million for 1998 due to a decrease in Texas ad valorem taxes. Operating income taxes increased $42.8 million for the year compared to 1997 as a result of higher pre-tax income.
Other income and deductions decreased approximately $7.5 million due to reduced interest income associated with lower levels of short-term investments in 1998 as well as reduced non-operating taxes.
Interest charges decreased $9.1 million during 1998 when compared to 1997 primarily as a result of the maturity of CPL's $200 million Series BB, 6% FMBs in October 1997 and $28 million Series J, 6 5/8%, FMBs that matured January 1, 1998 and the reacquisition of $36 million Series L 7% FMBs in September 1998. See ITEM 8. NOTE 8. LONG-TERM DEBT for additional information related to the reacquisition of long-term debt. The decrease was offset in part by increased distributions on Trust Preferred Securities, which were outstanding for a portion of 1997.
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The accompanying notes to consolidated financial statements as they relate to CPL are an integral part of these statements.
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CPL Consolidated Statements of Retained Earnings Central Power and Light Company - -------------------------------------------------------------------------------- For the Years Ended December 31, ---------------------------------------- 1999 1998 1997 ------------ ------------ ---------- (thousands)
Retained Earnings at Beginning of Year $ 739,031 $ 833,282 $ 868,932 Net income for common stock 173,194 154,749 121,350 Deduct: Common stock dividends 148,000 249,000 157,000 ------------ ------------ ---------- Retained Earnings at End of Year $ 764,225 $ 739,031 $ 833,282 ============ ============ ==========
The accompanying notes to consolidated financial statements as they relate to CPL are an integral part of these statements.
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CPL Consolidated Balance Sheets Central Power and Light Company
As of December 31, -------------------------- 1999 1998 ----------- ------------ (thousands) ASSETS Electric Utility Plant Production $ 3,152,319 $ 3,146,269 Transmission 566,629 527,146 Distribution 1,157,091 1,090,175 General 307,378 298,352 Construction work in progress 101,550 67,300 Nuclear fuel 226,927 206,949 ----------- ------------ 5,511,894 5,336,191 Less - accumulated depreciation 2,263,925 2,072,686 ----------- ------------ 3,247,969 3,263,505 ----------- ------------ Current Assets Cash 5,830 5,195 Special deposits for reacquisition of long-term debt 50,000 -- Accounts receivable 64,482 51,056 Materials and supplies, at average cost 58,196 59,814 Fuel inventory at LIFO cost 26,434 20,340 Under-recovered fuel costs 30,911 -- Accumulated deferred income taxes -- 713 Prepayments and other 5,353 2,952 ----------- ------------ 241,206 140,070 ----------- ------------ Deferred Charges and Other Assets Regulatory assets 215,302 1,099,631 Regulatory assets designated for securitization 953,249 -- Nuclear decommissioning trust 86,122 65,972 Other 104,002 167,011 ----------- ------------ 1,358,675 1,332,614 ----------- ------------ $ 4,847,850 $ 4,736,189 =========== ============
The accompanying notes to consolidated financial statements as they relate to CPL are an integral part of these statements.
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CPL Consolidated Balance Sheets Central Power and Light Company
The accompanying notes to consolidated financial statements as they relate to CPL are an integral part of these statements.
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Consolidated Statements of Cash Flows Central Power and Light Company - --------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements as they relate to CPL are an integral part of these statements.
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CPL Consolidated Statements of Capitalization Central Power and Light Company
As of December 31, ------------------------ 1999 1998 ----------- ----------- (thousands) COMMON STOCK EQUITY $ 1,338,113 $ 1,312,919 ----------- ----------- PREFERRED STOCK Cumulative $100 Par Value, Authorized 3,035,000 shares
Number of Shares Current Series Outstanding Redemption Price - ------------------------------------------------------------- Not Subject to Mandatory Redemption 4.00% 42,038 $105.75 4,204 4,205 4.20% 17,476 $103.75 1,748 1,748 Auction Money Market -- 75,000 Auction Series A -- 42,500 Auction Series B -- 42,500 Issuance Expense 15 (2,749) ----------- ----------- 5,967 163,204 ----------- ----------- TRUST PREFERRED SECURITIES CPL-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of CPL, 8.00%, due April 30, 2037 150,000 150,000 ----------- ----------- LONG-TERM DEBT First Mortgage Bonds Series T, 7 1/2%, due December 15, 2014 (Matagorda) * -- 111,700 Series AA, 7 1/2%, due March 1, 2020 (Matagorda) * 50,000 50,000 Series CC, 7 1/4%, due October 1, 2004 100,000 100,000 Series DD, 7 1/8%, due December 1, 1999 -- 25,000 Series EE, 7 1/2%, due December 1, 2002 115,000 115,000 Series FF, 6 7/8%, due February 1, 2003 50,000 50,000 Series GG, 7 1/8%, due February 1, 2008 75,000 75,000 Series HH, 6%, due April 1, 2000 100,000 100,000 Series II, 7 1/2%, due April 1, 2023 75,000 100,000 Series JJ, 7 1/2%, due May 1, 1999 -- 100,000 Series KK, 6 5/8%, due July 1, 2005 200,000 200,000 Installment Sales Agreements - PCRBs * Series 1993, 6%, due July 1, 2028 (Matagorda) 120,265 120,265 Series 1995, 6.10%, due July 1, 2028 (Matagorda) 100,635 100,635 Series 1995, variable rate, due November 1, 2015 (Guadalupe) 40,890 40,890 Series 1996, 6%, due June 1, 2020 (Red River) 6,330 6,330 Series 1996, 6 1/8%, due May 1, 2030 (Matagorda) 60,000 60,000 Series 1999A, 4.90%, due May 1, 2030 (Matagorda) 111,700 -- Series 1999B, 4.95%, due May 1, 2030 (Matagorda) 50,000 -- Senior Unsecured Floating Rate Notes, 6.07125%, due November 23, 2001 200,000 -- Unamortized Discount (279) (4,114) Amount to be Redeemed Within One Year (150,000) (125,000) ----------- ----------- 1,304,541 1,225,706 ----------- ----------- TOTAL CAPITALIZATION $ 2,798,621 $ 2,851,829 =========== ===========
*Obligations incurred in connection with the sale by public authorities of tax-exempt PCRBs.
The accompanying notes to consolidated financial statements as they relate to CPL are an integral part of these statements.
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CENTRAL POWER AND LIGHT COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See CSW's NOTE 1.
2. LITIGATION AND REGULATORY PROCEEDINGS See CSW's NOTE 2.
3. COMMITMENTS AND CONTINGENT LIABILITIES See CSW's NOTE 3.
4. INCOME TAXES See CSW's NOTE 4.
5. BENEFIT PLANS See CSW's NOTE 5.
6. JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6.
7. FINANCIAL INSTRUMENTS See CSW's NOTE 7.
8. LONG-TERM DEBT See CSW's NOTE 8.
9. PREFERRED STOCK See CSW's NOTE 9.
10. TRUST PREFERRED SECURITIES See CSW's NOTE 10.
11. SHORT-TERM FINANCING See CSW's NOTE 11.
12. STOCK BASED COMPENSATION PLANS See CSW's NOTE 13.
13. EXTRAORDINARY ITEMS See CSW's NOTE 16.
14. NEW ACCOUNTING STANDARDS See CSW's NOTE 17.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Central Power and Light Company:
We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Central Power and Light Company (a Texas corporation and a wholly-owned subsidiary of Central and South West Corporation) and subsidiary company as of December 31, 1999 and 1998, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of Central Power and Light Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Central Power and Light Company and subsidiary company as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Dallas, Texas February 25, 2000
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REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements of Central Power and Light Company and subsidiary company as well as other information contained in this annual report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reflect amounts based on the best estimates and judgments of management, giving due consideration to materiality. Financial information contained elsewhere in this annual report is consistent with that in the consolidated financial statements.
The consolidated financial statements have been audited by CPL's independent public accountants who were given unrestricted access to all financial records and related data, including minutes of all meetings of shareholders, the board of directors and committees of the board. CPL and its subsidiary company believe that representations made to the independent public accountants during their audit were valid and appropriate. The report of independent public accountants is presented elsewhere in this report.
CPL, together with its subsidiary company, maintains a system of internal controls to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the consolidated financial statements are prepared in accordance with generally accepted accounting principles and that the assets of the companies are properly safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that CPL will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees.
Internal auditors continuously monitor the effectiveness of the internal control system following standards established by the Institute of Internal Auditors. Actions are taken by management to respond to deficiencies as they are identified. The board, operating through its audit committee, which is comprised entirely of directors who are not officers or employees of CPL or its subsidiary company, provides oversight to the financial reporting process.
Due to the inherent limitations in the effectiveness of internal controls, no internal control system can provide absolute assurance that errors will not occur. However, management strives to maintain a balance, recognizing that the cost of such a system should not exceed the benefits derived.
CPL and its subsidiary believe that, in all material respects, their system of internal controls over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31, 1999.
J. Gonzalo Sandoval R. Russell Davis General Manager/President - CPL Controller - CPL
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PUBLIC SERVICE COMPANY OF OKLAHOMA
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SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended December 31 is provided to highlight significant trends in the financial condition and results of operations for PSO. Certain financial statement items for prior years have been reclassified to conform to the most recent period presented.
(1) See PUBLIC SERVICE COMPANY OF OKLAHOMA - RESULTS OF OPERATIONS for major factors affecting earnings. (2) Long-term obligations include long-term debt and Trust Preferred Securities.
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PUBLIC SERVICE COMPANY OF OKLAHOMA RESULTS OF OPERATIONS
Reference is made to PSO's Consolidated Financial Statements, related Notes to Consolidated Financial Statements and Selected Financial Data. Referenced information should be read in conjunction with, and is essential to understanding, the following discussion and analysis.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998
PSO's net income for common stock decreased 19% during 1999 to $62.4 million from $76.6 million in 1998. The decrease resulted primarily from lower non-fuel-related revenues and higher other operating and maintenance expenses offset in part by lower income tax expense.
Electric operating revenues were $749.4 million during 1999, a $30.8 million or 4% decrease from $780.2 million in 1998. The decrease was due primarily to lower fuel-related revenues of $24.6 million resulting from lower combined fuel expense and purchased power expense as discussed in the following paragraph. Non-fuel-related revenues decreased $16.5 million due primarily to an 8% decline in residential sales attributable to milder weather in 1999. The decrease in operating revenues was partially offset by a $6.3 million increase in sales for resale to other utilities as a result of increased demand and a $4.0 million increase in transmission-related revenues resulting primarily from changes to CSW's transmission coordination agreement. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Transmission Coordination Agreement.
Fuel expense decreased $40.7 million, or 13% to $269.3 million from $310.0 million in 1998. This decline resulted primarily from a $52.3 million decrease in the recovery of deferred fuel costs due to a significant difference in fuel factors used to recover fuel expense from customers. The decrease in recovery of deferred fuel was partially offset by higher average unit fuel costs. The average unit cost of fuel increased from $1.77 per MMbtu in 1998 to $1.96 per MMbtu in 1999 due primarily to higher spot market natural gas prices. Purchased power expenses increased 31% to $74.9 million in 1999 from $57.2 million in 1998. This increase is due primarily to an increase in economy energy and firm contract purchases.
Other operating expenses increased $10.7 million in 1999 to $120.1 million from $109.4 million in 1998. The increase was due primarily to higher transmission expenses of $13.4 million partially offset by $4.0 million in reduced administrative and general expenses. The higher transmission expenses resulted primarily from a $6.1 million change in the CSW transmission coordination agreement, and the absence in 1999 of a $4.0 million transmission service agreement adjustment made in 1998 related to the final order in Texas Commission Docket No. 17285. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Transmission Coordination Agreement and CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No. 17285).
Maintenance expense of $45.8 million in 1999 was $8.8 million or 24% higher than 1998 due primarily to higher production and distribution maintenance expenses. The production maintenance expense increase of $6.8 million related to scheduled power plant maintenance as well as the restart of a power plant generating unit and an unscheduled outage. Distribution maintenance expense increased $1.4 million primarily from an increase in tree trimming maintenance activities in 1999.
Income tax expense associated with utility operations of $34.2 million for 1999 was $14.9 million, or 30% lower than 1998 due primarily to lower taxable income in 1999 and prior year income tax liability adjustments.
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Interest on long-term debt was $2.6 million or 9% lower in 1999 than 1998 due primarily to the reacquisition of $55 million of FMBs during the third quarter of 1998. An increase of $3.0 million on short-term debt and other was primarily a result of increased short-term borrowings and interest expense related to the changes to CSW's transmission coordination agreement. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Transmission Coordination Agreement and NOTE 8. LONG-TERM DEBT.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Net income for common stock increased 53% during 1998 to $76.6 million from $50.1 million in 1997. The increase resulted primarily from higher non-fuel revenues, decreased transmission expenses and the absence in 1998 of the impact of recording the effects associated with the outcome of the PSO 1997 Rate Settlement Agreement. The increase was offset in part by the absence in 1998 of the $4.2 million gain on the reacquisition of preferred stock recorded in 1997. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for additional information related to the PSO 1997 Rate Settlement Agreement.
Electric operating revenues were $780.2 million during 1998, a 9% increase from $712.7 million for the same period in 1997. This increase was due primarily to higher non-fuel revenues of $39.2 million and fuel-related revenues of $28.3 million. The increase in non-fuel revenues was due primarily to a 9% increase in retail MWH sales resulting from warmer weather as well as the absence in 1998 of a $29.0 million provision for rate refund. The increase in revenues was offset in part by lower base rates resulting from the PSO 1997 Rate Settlement Agreement and a decrease in transmission-related revenues resulting from changes to a transmission coordination agreement pending before the FERC. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Transmission Coordination Agreement. The increase in fuel revenues was due primarily to higher fuel expense, as discussed below.
Fuel expense increased $31.0 million, or 11%, during 1998 when compared to 1997 due primarily to a $43.3 million increase in the recovery of deferred fuel costs and a 7% increase in generation due primarily to higher weather-related demand. The increase in fuel expense was offset in part by lower average unit fuel costs. The average unit cost of fuel declined from $1.98 per MMbtu in 1997 to $1.77 per MMbtu in 1998 due primarily to lower spot market natural gas and coal prices. Purchased power expenses increased 11% to $57.2 million in 1998 from $51.6 million in 1997. This increase was due primarily to higher off-system and emergency energy purchases associated with higher weather-related demand in 1998 and a plant outage in the first quarter of 1998, partially offset by lower cogeneration purchases.
Other operating expenses were $109.4 million in 1998, a decrease of $26.5 million from $135.9 million in 1997. The decrease was due primarily to the absence in 1998 of a write-off of previously capitalized energy efficiency incentives and the write-off of rate case-related expenses, both associated with the previously mentioned rate settlement agreement. Also contributing to the decline in other operating expenses were lower transmission expenses resulting from a transmission service agreement adjustment related to the final order in Texas Commission Docket No. 17285. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No. 17285). The decrease in other operating expenses was offset in part by additional environmental expenses.
Maintenance expenses increased 10% to $37.0 million in 1998 from $33.6 million in 1997. The increase was due primarily to higher production and distribution maintenance activities.
Depreciation and amortization expense decreased $8.6 million, or 11% during 1998 when compared to the prior year. This decrease was due primarily to lower depreciation rates and the absence in 1998 of a write-off of regulatory
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assets, both resulting from the PSO 1997 Rate Settlement Agreement. This decrease was offset in part by higher depreciable plant.
Taxes, other than income, were $29.8 million in 1998, a 4% increase from $28.8 million in 1997 as a result of higher ad valorem tax expenses.
Operating income taxes were $49.1 million in 1998 compared to $20.8 million in 1997 due primarily to higher pre-tax income in 1998.
Other income and deductions decreased $1.7 million in 1998 when compared to 1997 primarily as a result of lower miscellaneous non-operating income.
Interest charges increased $0.9 million in 1998 when compared to the same period in 1997 due primarily to a full year of distributions in 1998 on Trust Preferred Securities offset in part by a decrease in long-term interest expenses in 1998 as a result of a reduction of long-term debt outstanding during 1998. See ITEM 8. NOTE 8. LONG-TERM DEBT.
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PSO Consolidated Statements of Income Public Service Company of Oklahoma
For the Years Ended December 31, -------------------------------- 1999 1998 1997 --------- --------------------- (thousands) Electric Operating Revenues Residential $ 294,407 $ 329,058 $ 297,265 Commercial 226,687 236,258 226,525 Industrial 161,148 162,773 161,974 Sales for resale 39,187 27,413 30,896 Other 27,961 24,657 (3,970) ------- ------- ------- 749,390 780,159 712,690 ------- ------- ------- Operating Expenses and Taxes Fuel 269,316 309,969 278,976 Purchased power 74,893 57,222 51,619 Other operating 120,123 109,393 135,943 Maintenance 45,809 36,981 33,608 Depreciation and amortization 74,736 72,671 81,227 Taxes, other than income 30,519 29,816 28,778 Income taxes 34,184 49,099 20,763 ------- ------- ------- 649,580 665,151 630,914 ------- ------- ------- Operating Income 99,810 115,008 81,776 ------- ------- ------- Other Income and (Deductions) Allowance for equity funds used during construction 201 860 995 Charges for investments and plant development costs -- -- (123) Other (1,470) (1,044) (1,503) Non-operating income taxes 2,215 93 2,280 ------- ------- ------- 946 (91) 1,649 ------- ------- ------- Income Before Interest Charges 100,756 114,917 83,425 ------- ------- ------- Interest Charges Interest on long-term debt 26,528 29,136 30,474 Distributions on Trust Preferred Securities 6,000 6,000 3,967 Interest on short-term debt and other 7,058 4,107 4,100 Allowance for borrowed funds used during construction (1,435) (1,169) (1,322) ------- ------- ------- 38,151 38,074 37,219 ------- ------- -------
Net Income 62,605 76,843 46,206 Less: Preferred stock dividends 213 213 364 Gain on reacquired preferred stock -- -- 4,211 ------- ------- ------- Net Income for Common Stock $ 62,392 $ 76,630 $ 50,053 ======= ======= =======
The accompanying notes to consolidated financial statements as they relate to PSO are an integral part of these statements.
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PSO Consolidated Statements of Retained Earnings Public Service Company of Oklahoma - -------------------------------------------------------------------------------- For the Years Ended December 31, ---------------------------------- 1999 1998 1997 ---------- ----------- -------- (thousands)
Retained Earnings at Beginning of Year $ 144,626 $ 136,996 $ 145,943 Net income for common stock 62,392 76,630 50,053 Deduct: Common stock dividends 65,000 69,000 59,000 ---------- ----------- -------- Retained Earnings at End of Year $ 142,018 $ 144,626 $ 136,996 ========== =========== ========
The accompanying notes to consolidated financial statements as they relate to PSO are an integral part of these statements.
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PSO Consolidated Balance Sheets Public Service Company of Oklahoma - ------------------------------------------------------------------------- As of December 31, -------------------------- 1999 1998 ----------- ------------ (thousands) ASSETS Electric Utility Plant Production $ 916,889 $ 913,083 Transmission 392,029 378,719 Distribution 897,516 855,277 General 217,368 211,124 Construction work in progress 35,903 33,519 ----------- ------------ 2,459,705 2,391,722 Less - Accumulated depreciation 1,114,255 1,082,081 ----------- ------------ 1,345,450 1,309,641 ----------- ------------ Current Assets Cash 3,077 4,670 Accounts receivable 34,584 32,916 Materials and supplies, at average cost 34,289 33,006 Fuel inventory, at LIFO cost 24,143 16,441 Under-recovered fuel costs 6,469 -- Accumulated deferred income taxes 19,145 11,789 Prepayments and other 1,668 2,881 ----------- ------------ 123,375 101,703 ----------- ------------
Deferred Charges and Other Assets 75,046 71,384 ----------- ------------ $ 1,543,871 $ 1,482,728 =========== ============
The accompanying notes to consolidated financial statements as they relate to PSO are an integral part of these statements.
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Consolidated Balance Sheets Public Service Company of Oklahoma - ------------------------------------------------------------------------------ As of December 31, ------------------------------ 1999 1998 ----------- ----------- CAPITALIZATION AND LIABILITIES (thousands) Capitalization Common stock: $15 par value Authorized shares: 11,000,000 shares Issued 10,482,000 shares and outstanding 9,013,000 shares $157,230 $157,230 Paid-in capital 180,000 180,000 Retained earnings 142,018 144,626 ----------- ----------- Total Common Stock Equity 479,248 52% 481,856 51% ----------- ------ ----------- -----
Preferred stock 5,286 -- % 5,287 -- % PSO-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of PSO 75,000 8% 75,000 8% Long-term debt 364,516 40% 384,064 41% ----------- ------ ----------- ----- Total Capitalization 924,050 100% 946,207 100% ----------- ------ ----------- ----
Current Liabilities Long-term debt due within twelve months 20,000 -- Advances from affiliates 79,169 15,892 Payables to affiliates 34,043 33,489 Accounts payable 44,088 52,888 Customer deposits 17,752 17,368 Accrued taxes 18,480 23,095 Accrued interest 5,420 7,606 Over-recovered fuel costs -- 15,240 Other 5,085 6,599 ----------- ----------- 224,037 172,177 ----------- ----------- Deferred Credits Accumulated deferred income taxes 302,727 277,181 Investment tax credits 37,574 39,365 Income tax related regulatory liabilities, net 32,826 35,818 Other 22,657 11,980 ----------- ----------- 395,784 364,344 ----------- ----------- $1,543,871 $ 1,482,728 =========== ===========
The accompanying notes to consolidated financial statements as they relate to PSO are an integral part of these statements.
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PSO Consolidated Statements of Cash Flows Public Service Company of Oklahoma - ----------------------------------------------------------------------------- For the Years Ended December 31, -------------------------------- 1999 1998 1997 -------- ---------- ---------- (thousands) OPERATING ACTIVITIES Net Income $ 62,605 $ 76,843 $ 46,206 Non-cash Items Included in Net Income Depreciation and amortization 77,472 75,693 85,459 Deferred income taxes and investment tax credtis 13,407 (3,488) 6,169 Charges for investments and assets -- 4,159 12,803 Inventory reserve -- -- 838 Changes in Assets and Liabilities Accounts receivable (1,668) (13,308) (11,190) Fuel inventory (7,702) (5,014) 2,634 Accounts payable (9,604) 4,895 1,009 Payables to affiliates 554 (2,314) 7,916 Accrued taxes (4,615) 23,095 (12,306) Other deferred credits 10,677 5,865 (585) Fuel recovery (21,709) 30,605 (12,715) Other (6,825) (3,938) (4,584) -------- ---------- ---------- 112,592 193,093 121,654 -------- ---------- ---------- INVESTING ACTIVITIES Construction expenditures (103,122) (68,897) (79,568) Other (8,659) (8,271) (6,008) -------- ---------- ---------- (111,781) (77,168) (85,576) -------- ---------- ---------- FINANCING ACTIVITIES Proceeds from issuance of long-term debt 33,232 -- -- Reacquisition of long-term debt (33,700) (55,231) -- Redemption of preferred stock (1) -- (10,329) Proceeds from issuance of Trust Preferred Securities -- -- 72,450 Change in advances from affiliates 63,277 11,018 (37,993) Payment of dividends (65,212) (69,213) (59,514) -------- ---------- ---------- (2,404) (113,426) (35,386) -------- ---------- ----------
Net Change in Cash and Cash Equivalents (1,593) 2,499 692 Cash and Cash Equivalents at Beginning of Year 4,670 2,171 1,479 -------- ---------- ---------- Cash and Cash Equivalents at End of Year $ 3,077 $ 4,670 $ 2,171 ======== ========== ==========
SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized (includes distributions on Trust Preferred Securities $ 37,081 $ 37,772 $ 35,557 ======== ========== ========== Income taxes paid $ 23,871 $ 33,712 $ 34,244 ======== ========== ==========
The accompanying notes to consolidated financial statements as they relate to PSO are an integral part of these statements.
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PSO Consolidated Statements of Capitalization Public Service Company of Oklahoma - -------------------------------------------------------------------------------- As of December 31, ---------------------- 1999 1998 ---------- ---------- (thousands) COMMON STOCK EQUITY $479,248 $481,856 ---------- ----------
PREFERRED STOCK (Cumulative $100 Par Value, Authorized 700,000 shares, redeemable at the option of PSO upon 30 days notice) Number Current of Shares Redemption Series Outstanding Price - ----------------------------------------------------
4.00% 44,631 $105.75 4,463 4,464 4.24% 8,069 $103.19 807 807 Premium 16 16 ---------- ---------- 5,286 5,287 ---------- ----------
TRUST PREFERRED SECURITIES PSO-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of PSO, 8.00%, due April 30, 2037 75,000 75,000 ---------- ----------
LONG-TERM DEBT First Mortgage Bonds Series S, 7 1/4%, due July 1, 2003 65,000 65,000 Series T, 7 3/8%, due December 1, 2004 50,000 50,000 Series U, 6 1/4%, due April 1, 2003 35,000 35,000 Series V, 7 3/8%, due April 1, 2023 100,000 100,000 Series W, 6 1/2%, due June 1, 2005 50,000 50,000 Medium-term Notes, 5.89%-6.43%, due December 15, 2000 March 1, 2001 40,000 40,000 Installment sales agreement - PCRBs * Series A, 5.9%, due December 1, 2007 (OEFA) 34,700 34,700 Series 1996, 6.0%, due June 1, 2020 (Red River) 12,660 12,660 Unamortized discount (2,844) (3,296) Amounts to be redeemed within one year (20,000) -- ---------- ---------- 364,516 384,064 ---------- ---------- TOTAL CAPITALIZATION $924,050 $946,207 ========== ==========
*Obligations incurred in connection with the sale by public authorities of tax-exempt PCRBs.
The accompanying notes to consolidated financial statements as they relate to PSO are an integral part of these statements.
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PUBLIC SERVICE COMPANY OF OKLAHOMA NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See CSW's NOTE 1.
2. LITIGATION AND REGULATORY PROCEEDINGS See CSW's NOTE 2.
3. COMMITMENTS AND CONTINGENT LIABILITIES See CSW's NOTE 3.
4. INCOME TAXES See CSW's NOTE 4.
5. BENEFIT PLANS See CSW's NOTE 5.
6. JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6.
7. FINANCIAL INSTRUMENTS See CSW's NOTE 7.
8. LONG-TERM DEBT See CSW's NOTE 8.
9. PREFERRED STOCK See CSW's NOTE 9.
10. TRUST PREFERRED SECURITIES See CSW's NOTE 10.
11. SHORT-TERM FINANCING See CSW's NOTE 11.
12. STOCK BASED COMPENSATION PLANS See CSW's NOTE 13.
13. NEW ACCOUNTING STANDARDS See CSW's NOTE 17.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Public Service Company of Oklahoma:
We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Public Service Company of Oklahoma (an Oklahoma corporation and a wholly-owned subsidiary of Central and South West Corporation) and subsidiary companies as of December 31, 1999 and 1998, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of Public Service Company of Oklahoma's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Public Service Company of Oklahoma and subsidiary companies as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Dallas, Texas February 25, 2000
2-126 PSO
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements of Public Service Company of Oklahoma and its subsidiary companies as well as other information contained in this annual report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reflect amounts based on the best estimates and judgments of management, giving due consideration to materiality. Financial information contained elsewhere in this annual report is consistent with that in the consolidated financial statements.
The consolidated financial statements have been audited by PSO's independent public accountants who were given unrestricted access to all financial records and related data, including minutes of all meetings of shareholders, the board of directors and committees of the board. PSO and its subsidiaries believe that representations made to the independent public accountants during their audit were valid and appropriate. The report of independent public accountants is presented elsewhere in this report.
PSO, together with its subsidiary companies, maintains a system of internal controls to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the consolidated financial statements are prepared in accordance with generally accepted accounting principles and that the assets of the companies are properly safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that PSO will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees.
Internal auditors continuously monitor the effectiveness of the internal control system following standards established by the Institute of Internal Auditors. Actions are taken by management to respond to deficiencies as they are identified. The board, operating through its audit committee, which is comprised entirely of directors who are not officers or employees of PSO or its subsidiaries, provides oversight to the financial reporting process.
Due to the inherent limitations in the effectiveness of internal controls, no internal control system can provide absolute assurance that errors will not occur. However, management strives to maintain a balance, recognizing that the cost of such a system should not exceed the benefits derived.
PSO and its subsidiaries believe that, in all material respects, their system of internal control over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31, 1999.
T. D. Churchwell R. Russell Davis President - PSO Controller - PSO
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SOUTHWESTERN ELECTRIC POWER COMPANY
2-128 SWEPCO
SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended December 31 is provided to highlight significant trends in the financial condition and results of operations for SWEPCO. SWEPCO recorded an extraordinary loss as a result of legislation passed in Texas and Arkansas where the electricity generation portion of SWEPCO's business no longer meets the criteria to apply SFAS No. 71. Certain financial statement items for prior years have been reclassified to conform to the most recent period presented.
(1) See SOUTHWESTERN ELECTRIC POWER COMPANY - RESULTS OF OPERATIONS for major factors affecting earnings. (2) Long-term obligations include long-term debt and Trust Preferred Securities.
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SOUTHWESTERN ELECTRIC POWER COMPANY RESULTS OF OPERATIONS
Reference is made to SWEPCO's Consolidated Financial Statements, related Notes to Consolidated Financial Statements and Selected Financial Data. Referenced information should be read in conjunction with, and is essential in understanding, the following discussion and analysis.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 AND 1998
SWEPCO's net income for common stock for 1999 was $83.4 million, which was $13.1 million, or 14% lower than in 1998. The decrease resulted primarily from increased other operating and maintenance expenses, the write-off of Cajun acquisition expenses, increased interest charges and the effect of an extraordinary loss offset in part by increased electric operating revenues.
Electric operating revenues for 1999 were $965.0 million, which is $12.1 million higher than in 1998. This increase resulted from increased fuel-related revenues of $3.1 million due to higher fuel expense and purchased power as discussed in the following paragraph and increased sales for resale to other utilities of $14.2 million as a result of increased demand. The increase in revenues was also affected by the absence in 1999 of a $3.9 million transmission service agreement adjustment in 1998 related to the final order in Texas Commission Docket No. 17285. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL AND WTU Complaint versus Texas Utilities Electric Company (Docket No. 17285). Additionally, revenues were affected by the absence in 1999 of a 1998 provision for rate refund of $5.3 million primarily in connection with the annual determination of cost of service formula rates for SWEPCO's wholesale customers and a reversal in 1999 of a previous provision for rate refund of $1.7 million. Also affecting revenues was the absence in 1999 of a 1998 reduction in fuel revenues of $3.2 million in accordance with a Texas Commission order in SWEPCO's fuel reconciliation regarding transmission equalization expense recovery. These increases were partially offset by decreased non-fuel-related revenues of $5.3 million and a $7.5 million adjustment related to changes to CSW's transmission coordination agreement. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Transmission Coordination Agreement. Non-fuel-related retail revenues were affected by a 3% decrease in retail MWH sales due primarily to decreased weather-related customer demand. Revenues in 1999 also decreased due to a $6.5 million charge to reflect the excess earnings provision of the Texas Legislation. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility Restructuring Legislation.
Fuel and purchased power expense increased in 1999 compared to 1998. Fuel expense increased $8.2 million, or 2% due primarily to an increase in average unit fuel costs and a 3% increase in generation. Average unit fuel costs increased from $1.63 per MMbtu in 1998 to $1.66 per MMbtu in 1999 due primarily to higher spot market natural gas prices. Fuel expense was affected by the absence in 1999 of a transmission service agreement adjustment in 1998 related to the final order in Texas Commission Docket No. 17285. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No. 17285). Purchased power expenses for 1999 increased $1.9 million, or 5%, compared to 1998 due primarily to an increase in economy energy purchases.
Other operating expenses for 1999 were $141.7 million, an increase of $1.2 million compared to 1998 as a result of increased transmission and customer-related expenses. The increase was offset in part by a decrease in administrative and general expenses. The increase in transmission expenses was due to the absence in 1999 of a transmission service agreement adjustment in 1998 related to the final order in Texas Commission Docket No. 17285. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint versus
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Texas Utilities Electric Company (Docket No. 17285). Transmission expenses were also affected by expenses related to changes to CSW's transmission coordination agreement. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Transmission Coordination Agreement. The decrease in administrative and general expenses was due primarily to establishment of certain regulatory assets in connection with the settlement and approval of rate proceedings in Arkansas and Louisiana. See ITEM 7. MD&A - RATES AND REGULATORY MATTERS and ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - SWEPCO Louisiana Rate Review and SWEPCO Arkansas Rate Review. Administrative and general expenses were also affected by lower employee-related expenses in 1999.
Maintenance expenses for 1999 were $64.2 million, which was $13 million, or 25% higher than 1998. This increase was due to higher power station maintenance, increased tree-trimming maintenance and higher overhead line maintenance.
Depreciation and amortization expenses for 1999 were $102.3 million, an increase of $3.9 million, or 4% when compared to 1998 due primarily to increased depreciable plant.
Taxes, other than income for 1999 were $53.8 million, a decrease of $3.3 million, or 6% below 1998. This decrease was due primarily to lower ad valorem taxes.
Income tax expenses associated with utility operations during 1999 were $38.5 million, which decreased $9.5 million, or 20% compared to 1998 due to lower taxable income and prior year income tax liability adjustments.
Other income and deductions decreased as a result of the write-off in the third quarter of 1999 of Cajun acquisition expenses of $3.7 million, net of tax. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEDURES - Withdrawal of SWEPCO Cajun Asset Proposal.
Interest charges for 1999 were $58.9 million an increase of $3.8 million, or 7% when compared to 1998 due primarily to increased levels or short-term borrowing and additional interest expense in connection with changes to CSW's transmission coordination agreement. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Transmission Coordination Agreement.
The extraordinary loss of $3.0 million was the result of legislation passed in Texas and Arkansas where the electricity generation portion of SWEPCO's business no longer meets the criteria to apply SFAS No. 71. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility Restructuring Legislation and ITEM 8. NOTE. 16. EXTRAORDINARY ITEMS.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 AND 1997
Net income for common stock increased 5% during 1998 to $96.5 million from $92.3 million in 1997. The increase resulted primarily from increased non-fuel revenue and the absence in 1998 of certain operating expense charges in 1997.
Electric operating revenues increased $13.1 million, to $953.0 million in 1998 from $939.9 million in 1997. The increase was due primarily to higher non-fuel revenues of $26.8 million resulting from a 5% increase in weather-related MWH sales. The increase in electric operating revenues was offset in part by a transmission service agreement adjustment related to the final order in Texas Commission Docket No. 17285, a provision for rate refund of $5.3 million primarily in connection with the annual determination of cost of service formula rates for SWEPCO's wholesale customers and a $3.2 million reduction in fuel revenues in accordance with a Texas Commission order in SWEPCO's fuel reconciliation regarding transmission equalization expense recovery. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and
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WTU - Complaint versus Texas Utilities Electric Company (Docket No. 17285). Electric operating revenues were also affected by a decrease in fuel revenues of $1.3 million.
Fuel expense decreased $11.0 million for 1998 when compared to 1997 due primarily to a decrease in average unit fuel costs for natural gas from $1.69 per MMbtu in 1997 to $1.63 per MMbtu in 1998 as a result of lower priced spot market natural gas. The decrease in fuel expenses was offset in part as a result of a transmission service agreement adjustment related to the final order in Texas Commission Docket No. 17285. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint Versus Texas Utilities Electric Company (Docket No. 17285). Fuel expense was also affected by an increase in natural gas generation associated with weather-related demand. Purchased power expense increased $9.6 million for 1998 compared to 1997 due primarily to an increase in economy energy purchases.
Other operating expenses decreased $16.7 million, or 11% to $140.5 million during 1998 when compared to 1997. The decrease is due primarily to a transmission service agreement adjustment related to the final order in Texas Commission Docket No. 17285. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No. 17285). The decrease was also affected by the absence in 1998 of costs in 1997 associated with a canceled transmission project of $10.2 million, the write-off of previously capitalized energy efficiency incentives of $4.2 million and the write-off of obsolete inventory of $1.2 million. The decrease was offset in part by increased expenses in 1998 related to a transmission coordination agreement. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Transmission Coordination Agreement.
Maintenance expenses increased $7.2 million, or 16% as a result of increased power station maintenance, wind storm damage and additional tree-trimming maintenance expenses.
Depreciation and amortization expense increased $3.3 million, or 3% during 1998 when compared to 1997 due primarily to increases in depreciable and amortizable plant. Operating income taxes increased $8.3 million, or 21%, as a result of increased pre-tax income.
Other income and deductions decreased $1.6 million for 1998 compared to 1997 due primarily to the absence in 1998 of a $ 1.1 million, net of tax, gain on the sale of lignite properties recorded in 1997.
Interest charges increased $4.6 million due primarily to distributions on Trust Preferred Securities, which were outstanding for a portion of 1997.
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SWEPCO Consolidated Statements of Income Southwestern Electric Power Company - -------------------------------------------------------------------------------- For the Years Ended December 31, --------------------------- 1999 1998 1997 -------- --------- --------- (thousands) Electric Operating Revenues Residential $294,743 $314,600 $289,723 Commercial 198,222 197,737 192,115 Industrial 255,038 253,458 263,207 Sales for resale 172,076 139,869 146,916 Other 44,948 47,288 47,908 -------- --------- --------- 965,027 952,952 939,869 -------- --------- --------- Operating Expenses and Taxes Fuel 379,597 371,414 382,404 Purchased power 37,371 35,483 25,928 Other operating 141,674 140,460 157,188 Maintenance 64,241 51,219 44,038 Depreciation and amortization 102,331 98,479 95,228 Taxes, other than income 53,783 57,128 55,962 Income taxes 38,506 47,982 39,712 -------- --------- --------- 817,503 802,165 800,460 -------- --------- ---------
Operating Income 147,524 150,787 139,409 -------- --------- ---------
Other Income and (Deductions) Charges for investments and plant development costs -- -- (743) Allowance for equity funds used during construction 35 1,336 934 Other (6,826) (753) 1,616 Non-operating income taxes 4,826 1,868 2,222 -------- --------- --------- (1,965) 2,451 4,029 -------- --------- ---------
Income Before Interest Charges 145,559 153,238 143,438 -------- --------- ---------
Interest Charges Interest on long-term debt 38,380 39,233 40,440 Distributions on Trust Preferred Securities 8,662 8,662 5,582 Interest on short-term debt and other 13,800 8,591 5,736 Allowance for borrowed funds used during construction (1,949) (1,351) (1,222) -------- --------- --------- 58,893 55,135 50,536 -------- --------- ---------
Income Before Extraordinary Item 86,666 98,103 92,902
Extraordinary Loss (net of tax of $1,621) (3,011) -- -- -------- --------- ---------
Net Income 83,655 98,103 92,902 Less: Preferred stock dividends 229 705 2,467 Gain (Loss) on reacquired preferred stock -- (856) 1,819 -------- --------- --------- Net Income for Common Stock $ 83,426 $ 96,542 $ 92,254 ======== ========= =========
The accompanying notes to consolidated financial statements as they relate to SWEPCO are an integral part of these statements.
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SWEPCO Consolidated Statements of Retained Earnings Southwestern Electric Power Company - -------------------------------------------------------------------------------- For the Years Ended December 31, -------------------------------- 1999 1998 1997 --------- --------- --------- (thousands)
Retained Earnings at Beginning of Year $300,592 $324,050 $321,801 Net income for common stock 83,426 96,542 92,254 Loss on reacquisition of preferred stock -- -- (5) Deduct: Common stock dividends 96,000 120,000 90,000 --------- --------- --------- Retained Earnings at End of Year $288,018 $300,592 $324,050 ========= ========= =========
The accompanying notes to consolidated financial statements as they relate to SWEPCO are an integral part of these statements.
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SWEPCO Consolidated Balance Sheets Southwestern Electric Power Company
As of December 31, ------------------------- 1999 1998 ----------- ----------- (thousands) ASSETS
Electric Utility Plant Production $ 1,402,062 $ 1,397,924 Transmission 484,327 474,035 Distribution 958,318 916,293 General 333,949 321,136 Construction work in progress 52,775 48,523 ----------- ----------- 3,231,431 3,157,911 Less - Accumulated depreciation 1,384,242 1,317,057 ----------- ----------- 1,847,189 1,840,854
Current Assets Cash and temporary cash investments 2,018 4,444 Accounts receivable 45,511 33,014 Receivables from affiliates 6,053 7,416 Materials and supplies, at average cost 26,420 25,135 Fuel inventory, at average cost 60,844 40,238 Accumulated deferred income taxes 1,583 4,869 Prepayments and other 16,978 16,651 ----------- ----------- 159,407 131,767 ----------- -----------
Deferred Charges and Other Assets 101,202 108,770 ----------- ----------- $ 2,107,798 $ 2,081,391 =========== ===========
The accompanying notes to consolidated financial statements as they relate to SWEPCO are an integral part of these statements.
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SWEPCO Consolidated Balance Sheets Southwestern Electric Power Company
The accompanying notes to consolidated financial statements as they relate to SWEPCO are an integral part of these statements.
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SWEPCO Consolidated Statements of Cash Flows Southwestern Electric Power Company For the Years Ended December 31, -------------------------------- 1999 1998 1997 --------- --------- --------- (thousands) OPERATING ACTIVITIES Net Income $ 83,655 $ 98,103 $ 92,902 Non-cash Items Included in Net Income Depreciation and amortization 107,863 104,047 100,015 Deferred income taxes and investment tax credits (21,663) (16,481) (6,907) Extraordinary Loss related to SFAS No.71 3,011 -- -- Charges for investments and assets -- 2,140 16,493 Inventory reserve -- -- 1,150 Changes in Assets and Liabilities Accounts receivable (11,134) 41,077 (13,367) Fuel inventory (20,606) (13,823) 29,360 Accounts payable (12,240) 260 24,374 Payables to affiliates (442) (25,788) (5,125) Accrued taxes 1,185 10,305 (12,357) Other current liabilities 1,336 2,987 (17,699) Fuel recovery (2,490) 18,391 (3,893) Other deferred credits 24,420 8,067 (1,851) Other 2,047 (2,822) (2,607) --------- --------- --------- 154,942 226,463 200,488 --------- --------- --------- INVESTING ACTIVITIES Construction expenditures (111,019) (83,120) (108,126) Other (4,167) (5,202) (4,545) --------- --------- --------- (115,186) (88,322) (112,671) --------- --------- --------- FINANCING ACTIVITIES Redemption of preferred stock (1) (27,988) (16,043) Proceeds from issuance of Trust Preferred Securities -- -- 106,231 Retirement of long-term debt (46,144) (2,354) (52,600) Change in advances from affiliates 100,192 15,530 (32,320) Payment of dividends (96,229) (121,183) (92,666) --------- --------- --------- (42,182) (135,995) (87,398) --------- --------- ---------
Net Change in Cash and Cash Equivalents (2,426) 2,146 419 Cash and Cash Equivalents at Beginning of Year 4,444 2,298 1,879 --------- --------- --------- Cash and Cash Equivalents at End of Year $ 2,018 $ 4,444 $ 2,298 ========= ========= ========= SUPPLEMENTARY INFORMATION Interest paid less amounts capitalized (includes distributions on Trust Preferred Securities $ 55,254 $ 50,341 $ 49,847 ========= ========= ========= Income taxes paid $ 55,677 $ 57,977 $ 57,715 ========= ========= =========
The accompanying notes to consolidated financial statements as they relate to SWEPCO are an integral part of these statements.
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SWEPCO Consolidated Statements of Capitalization Southwestern Electric Power Company - ---------------------------------------------------------------------------- As of December 31, --------------------- 1999 1998 --------- --------- (thousands) COMMON STOCK EQUITY $ 668,678 $ 681,252 --------- ---------
PREFERRED STOCK Cumulative $100 Par Value, Authorized 1,860,000 shares
Number of Shares Current Series Outstanding Redemption Price - ---------------------------------------------------------- Not Subject to Mandatory Redemption 5.00% 37,727 $109.00 3,772 3,773 4.65% 1,907 $102.75 191 191 4.28% 7,386 $103.90 739 739 Premium 4 4 --------- --------- 4,706 4,707 --------- ---------
TRUST PREFERRED SECURITIES SWEPCO-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of SWEPCO, 7.875%, due April 30, 2037 110,000 110,000 --------- ---------
LONG-TERM DEBT First Mortgage Bonds Series V, 7 3/4%, due June 1, 2004 40,000 40,000 Series W, 6 1/8%, due September 1, 1999 -- 40,000 Series X, 7%, due September 1, 2007 90,000 90,000 Series Y, 6 5/8%, due February 1, 2003 55,000 55,000 Series Z, 7 1/4%, due July 1, 2023 45,000 45,000 Series AA, 5 1/4%, due April 1, 2000 45,000 45,000 Series BB, 6 7/8%, due October 1, 2025 80,000 80,000 1976 Series A, 6.20%, due November 1, 2006 (Siloam Springs)* 5,940 6,085 1976 Series B, 6.20%, due November 1, 2006 (Siloam Springs)* 1,000 1,000 Installment Sales Agreements - PCRBs * 1978 Series A, 6%, due January 1, 2008 (Titus County) 13,970 14,420 1991 Series A, 8.2%, due August 1, 2011 (Titus County) 17,125 17,125 1991 Series B, 6.9%, due November 1, 2004 (Titus County) 12,290 12,290 Series 1992, 7.6%, due January 1, 2019 (DeSoto) 53,500 53,500 Series 1996, 6.1%, due April 1, 2018 (Sabine) 81,700 81,700 Railcar lease obligations -- 5,549 Unamortized discount and premium 1,043 1,004 Amount to be redeemed within one year (45,595) (43,932) --------- --------- 495,973 543,741 --------- --------- TOTAL CAPITALIZATION $ 1,279,357 $ 1,339,700 ========= =========
*Obligations incurred in connection with the sale by public authorities of tax-exempt PCRBs.
The accompanying notes to consolidated financial statements as they relate to SWEPCO are an integral part of these statements.
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SOUTHWESTERN ELECTRIC POWER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See CSW's NOTE 1.
2. LITIGATION AND REGULATORY PROCEEDINGS See CSW's NOTE 2.
3. COMMITMENTS AND CONTINGENT LIABILITIES See CSW's NOTE 3.
4. INCOME TAXES See CSW's NOTE 4.
5. BENEFIT PLANS See CSW's NOTE 5.
6. JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6.
7. FINANCIAL INSTRUMENTS See CSW's NOTE 7.
8. LONG-TERM DEBT See CSW's NOTE 8.
9. PREFERRED STOCK See CSW's NOTE 9.
10. TRUST PREFERRED SECURITIES See CSW's NOTE 10.
11. SHORT-TERM FINANCING See CSW's NOTE 11.
12. STOCK BASED COMPENSATION PLANS See CSW's NOTE 13.
13. EXTRAORDINARY ITEMS See CSW's NOTE 16.
14. NEW ACCOUNTING STANDARDS See CSW's NOTE 17.
2-139 SWEPCO
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Southwestern Electric Power Company:
We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Southwestern Electric Power Company (a Delaware corporation and a wholly-owned subsidiary of Central and South West Corporation) and subsidiary company as of December 31, 1999 and 1998, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of Southwestern Electric Power Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Southwestern Electric Power Company and subsidiary company as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Dallas, Texas February 25, 2000
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REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements of Southwestern Electric Power Company and its subsidiary company as well as other information contained in this annual report. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reflect amounts based on the best estimates and judgments of management, giving due consideration to materiality. Financial information contained elsewhere in this annual report is consistent with that in the financial statements.
The consolidated financial statements have been audited by SWEPCO's independent public accountants who were given unrestricted access to all financial records and related data, including minutes of all meetings of shareholders, the board of directors and committees of the board. SWEPCO and its subsidiary company believe that representations made to the independent public accountants during their audit were valid and appropriate. The report of independent public accountants is presented elsewhere in this report.
SWEPCO, together with its subsidiary company, maintains a system of internal controls to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the consolidated financial statements are prepared in accordance with generally accepted accounting principles and that the assets of the companies are properly safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that SWEPCO will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees.
Internal auditors continuously monitor the effectiveness of the internal control system following standards established by the Institute of Internal Auditors. Actions are taken by management to respond to deficiencies as they are identified. The board, operating through its audit committee, which is comprised entirely of directors who are not officers or employees of SWEPCO or its subsidiary, provides oversight to the financial reporting process.
Due to the inherent limitations in the effectiveness of internal controls, no internal control system can provide absolute assurance that errors will not occur. However, management strives to maintain a balance, recognizing that the cost of such a system should not exceed the benefits derived.
SWEPCO and its subsidiary believe that, in all material respects, their system of internal controls over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31, 1999.
Michael H. Madison R. Russell Davis President - SWEPCO Controller - SWEPCO
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WEST TEXAS UTILITIES COMPANY
2-141 WTU
SELECTED FINANCIAL DATA
The following selected financial data for each of the five years ended December 31 is provided to highlight significant trends in the financial condition and results of operations for WTU. The extraordinary loss was a result of legislation passed in Texas where the electricity generation portion of WTU's business no longer meets the criteria to apply SFAS No. 71. Certain financial statement items for prior years have been reclassified to conform to the most recent period presented.
(1) See WEST TEXAS UTILITIES COMPANY - RESULTS OF OPERATIONS for major factors affecting earnings.
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WEST TEXAS UTILITIES COMPANY RESULTS OF OPERATIONS
Reference is made to WTU's Financial Statements, related Notes to Financial Statements and Selected Financial Data. Referenced information should be read in conjunction with, and is essential to understanding, the following discussion and analysis.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1999 AND 1998
WTU's net income for common stock for 1999 was $26.7 million, which was $11.0 million, or 29% lower than 1998. The decrease was primarily the result of an increase in other operating expense, maintenance expense and taxes, other than income and the effect of an extraordinary loss. The decrease in earnings was partially offset by a reduction in income tax expense as well as an increase in electric operating revenues.
Electric operating revenues for 1999 were $439.7 million, which was $14.8 million or 3% higher than in 1998. Fuel-related revenues increased $13.5 million due to higher net fuel and purchased power expense as discussed below. Non-fuel-related revenues increased $1.3 million due to increases in wholesale sales and transmission-related revenues related to CSW's transmission coordination agreement. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No. 17285). This increase was nearly offset by a 5% decrease in residential MWH and a 7% decrease in industrial MWH sales and electric service rendered but not yet billed. Revenues were also lower due to a charge to reflect the excess earnings provision of the Texas Legislation. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility Restructuring Legislation.
Fuel expense was nearly unchanged in 1999 when compared to 1998, increasing to $123.3 million from $122.8 million. The average unit fuel cost increased from $1.83 per MMbtu in 1998 to $1.98 MMbtu in 1999 primarily as a result of an increase in the spot market price of natural gas. As as result of an increase in average unit fuel costs, generation declined 5%. Purchased power for 1999 increased to $61.5 million, which was $13.4 million, or 28% higher than in 1998 due primarily to an unscheduled outage at a coal-fired generating plant.
Other operating expenses for 1999 were $93.7 million, which was $3.8 million, or 4% higher than in 1998 due to higher transmission expenses. The increase in transmission expense was due to the absence in 1999 of a transmission service agreement adjustment made in 1998 related to the final order in Texas Commission Docket No. 17285. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No. 17285).
Maintenance expense for 1999 was $19.6 million, which was $2.9 million or 18% higher than the comparable period in 1998 due primarily to increased power plant maintenance and overhead line maintenance.
Taxes, other than income, for 1999 increased $3.6 million, or 15% when compared to 1998 primarily due to higher state franchise tax expense.
Income taxes associated with utility operations for 1999 were $14.3 million, which was $6.4 million, or 31% lower than in 1998 as a result of lower taxable income in 1999 as well as prior year income tax liability adjustments.
2-144 WTU
The extraordinary loss of $5.5 million was a result of legislation passed in Texas where the electricity generation portion of WTU's business no longer meets the criteria to apply SFAS No. 71. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Electric Utility Restructuring Legislation.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1998 AND 1997
Net income for common stock for 1998 was $37.7 million compared to $22.4 million for 1997, an increase of $15.3 million, or 68%. The increase in net income was due primarily to higher non-fuel revenue. This increase was partially offset by higher maintenance expenses and income taxes. The increase in net income was also offset in part by the absence in 1998 of the recognition of the gain on reacquired preferred stock in 1997.
Electric operating revenues were $425.0 million for 1998, an increase of $27.2 million, or 7% when compared to the year ended 1997. This increase was due primarily to an increase in fuel and non-fuel related revenues of $4.5 million and $22.7 million, respectively. The increase in non-fuel-related revenues was due primarily to a 4% increase in retail MWH sales resulting from favorable weather-related demand. Included in non-fuel-related revenues were additional transmission-related revenues resulting from changes to open access tariff transmission and a transmission coordination agreement. Conversely, non-fuel-related revenues were decreased by a transmission service agreement adjustment related to the final order in Texas Commission Docket No. 17285. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Transmission Coordination Agreement and CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No. 17285). The increase in fuel-related revenues was attributable to higher fuel costs as discussed below.
Fuel expense increased to $122.8 million for 1998 from $119.2 million compared to 1997 due primarily to a 6% increase in generation. The increase in generation was due largely to a 4% increase in MWH sales. Partially offsetting the increase was lower average unit cost of fuel. The average unit cost of fuel declined from $1.98 per MMbtu in 1997 to $1.83 per MMbtu in 1998. This decline in the average unit costs of fuel was due primarily to lower spot market natural gas and coal prices. Purchased power expense declined $2.4 million, or 5%, for 1998 compared to 1997 as a result of decreased economy energy purchases.
Other operating expenses declined $3.9 million in 1998 when compared to 1997 due primarily to a reduction in transmission expenses resulting from a transmission service agreement adjustment related to the final order in Texas Commission Docket No. 17285. See ITEM 8. NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint Versus Texas Utilities Electric Company (Docket No. 17285) for additional information on the transmission service agreement. Additionally, other operating expenses also decreased due to lower employee-related expenses. The decrease was offset in part by higher production related expenses resulting from the increased utilization of generating stations to meet increased weather-related customer demand. Maintenance expenses rose $2.7 million from 1997 as a result of increased unplanned power plant maintenance activity.
Operating income taxes were $20.6 million for 1998 compared to $9.4 million in 1997 for an increase of $11.2 million as a result of higher pre-tax income.
Other income and deductions increased $1.2 million due to an increase in interest income on temporary cash investments, merchandise sales and under-recovered fuel cost.
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WTU Statements of Income West Texas Utilities Company - --------------------------------------------------------------------------------
The accompanying notes to financial statements as they relate to WTU are an integral part of these statements.
2-146 WTU
WTU Statements of Retained Earnings West Texas Utilities Company - -------------------------------------------------------------------------------- For the Years Ended December 31, -------------------------------- 1999 1998 1997 --------- --------- --------- (thousands)
Retained Earnings at Beginning of Year $117,189 $119,479 $123,077 Net income for common stock 26,667 37,710 22,402 DeductCommon stock dividends 28,000 40,000 26,000 --------- --------- --------- Retained Earnings at End of Year $115,856 $117,189 $119,479 ========= ========= =========
The accompanying notes to financial statements as they relate to WTU are an integral part of these statements.
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WTU Balance Sheets West Texas Utilities Company - ------------------------------------------------------------------------------- As of December 31, ------------------------- 1999 1998 ----------- ----------- (thousands) ASSETS
Electric Utility Plant Production $ 429,783 $ 429,896 Transmission 220,479 213,630 Distribution 403,206 382,373 General 113,945 108,878 Construction work in progress 15,131 11,805 ----------- ----------- 1,182,544 1,146,582 Less - Accumulated depreciation 495,847 473,503 ----------- ----------- 686,697 673,079 ----------- ----------- Current Assets Cash 3,810 2,093 Accounts receivable 50,579 31,689 Materials and supplies, at average cost 14,029 14,191 Fuel inventory, at LIFO cost 17,133 13,186 Accumulated deferred income taxes -- 366 Under-recovered fuel costs 14,652 3,980 Prepayments and other 2,883 5,988 ----------- ----------- 103,086 71,493 ----------- ----------- Deferred Charges and Other Assets Deferred Oklaunion costs 8,352 14,910 Other 63,070 60,330 ----------- ----------- 71,422 75,240 ----------- -----------
$ 861,205 $ 819,812 =========== ===========
The accompanying notes to financial statements as they relate to WTU are an integral part of these statements.
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WTU Balance Sheets West Texas Utilities Company - --------------------------------------------------------------------------------
The accompanying notes to financial statements as they relate to WTU are an integral part of these statements.
2-149 WTU
WTU Statements of Cash Flows West Texas Utilities Company - --------------------------------------------------------------------------------
The accompanying notes to financial statements as they relate to WTU are an integral part of these statements.
2-150 WTU
Statements of Capitalization West Texas Utilities Company - -------------------------------------------------------------------------------- As of December 31, --------------------- 1999 1998 --------- --------- (thousands) COMMON STOCK EQUITY $255,306 $ 256,639 --------- ---------
PREFERRED STOCK Cumulative $100 Par Value, Authorized 810,000 shares Number Current of Shares Redemption Series Outstanding Price - ----------------------------------------------------
4.40% 23,673 $107.00 2,367 2,367 Premium 115 115 --------- --------- 2,482 2,482 --------- ---------
LONG-TERM DEBT First Mortgage Bonds Series P, 7 3/4%, due June 1, 2007 25,000 25,000 Series Q, 6 7/8%, due October 1, 2002 35,000 35,000 Series R, 7%, due October 1, 2004 40,000 40,000 Series S, 6 1/8%, due February 1, 2004 40,000 40,000 Series T, 7 1/2%, due April 1, 2000 40,000 40,000 Series U, 6 3/8%, due October 1, 2005 80,000 80,000 Installment Sales Agreements - PCRBs * Series 1996, 6%, due June 1, 2020 (Red River) 44,310 44,310 Unamortized discount (624) (791) Amount to be redeemed within one year (40,000) -- --------- --------- 263,686 303,519 --------- ---------
TOTAL CAPITALIZATION $521,474 $ 562,640 ========= =========
*Obligations incurred in connection with the sale by public authorities of tax-exempt PCRBs.
The accompanying notes to financial statements as they relate to WTU are an integral part of these statements.
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WEST TEXAS UTILITIES COMPANY NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES See CSW's NOTE 1.
2. LITIGATION AND REGULATORY PROCEEDINGS See CSW's NOTE 2.
3. COMMITMENTS AND CONTINGENT LIABILITIES See CSW's NOTE 3.
4. INCOME TAXES See CSW's NOTE 4.
5. BENEFIT PLANS See CSW's NOTE 5.
6. JOINTLY OWNED ELECTRIC UTILITY PLANT See CSW's NOTE 6.
7. FINANCIAL INSTRUMENTS See CSW's NOTE 7.
8. LONG-TERM DEBT See CSW's NOTE 8.
9. PREFERRED STOCK See CSW's NOTE 9.
10. SHORT-TERM FINANCING See CSW's NOTE 11.
11. STOCK BASED COMPENSATION PLANS See CSW's NOTE 13.
12. EXTRAORDINARY ITEMS See CSW's NOTE 16.
13. NEW ACCOUNTING STANDARDS See CSW's NOTE 17.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of West Texas Utilities Company:
We have audited the accompanying balance sheets and statements of capitalization of West Texas Utilities Company (a Texas corporation and a wholly-owned subsidiary of Central and South West Corporation) as of December 31, 1999 and 1998, and the related statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of West Texas Utilities Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of West Texas Utilities Company as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Dallas, Texas February 25, 2000
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REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and objectivity of the financial statements of West Texas Utilities Company as well as other information contained in this annual report. The financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis and, in some cases, reflect amounts based on the best estimates and judgments of management, giving due consideration to materiality. Financial information contained elsewhere in this annual report is consistent with that in the financial statements.
The financial statements have been audited by WTU's independent public accountants who were given unrestricted access to all financial records and related data, including minutes of all meetings of shareholders, the board of directors and committees of the board. WTU believes that representations made to the independent public accountants during their audit were valid and appropriate. The report of independent public accountants is presented elsewhere in this report.
WTU maintains a system of internal controls to provide reasonable assurance that transactions are executed in accordance with management's authorization, that the financial statements are prepared in accordance with generally accepted accounting principles and that the assets of the companies are properly safeguarded against unauthorized acquisition, use or disposition. The system includes a documented organizational structure and division of responsibility, established policies and procedures including a policy on ethical standards which provides that WTU will maintain the highest legal and ethical standards, and the careful selection, training and development of our employees.
Internal auditors continuously monitor the effectiveness of the internal control system following standards established by the Institute of Internal Auditors. Actions are taken by management to respond to deficiencies as they are identified. The board, operating through its audit committee, which is comprised entirely of directors who are not officers or employees of WTU, provides oversight to the financial reporting process.
Due to the inherent limitations in the effectiveness of internal controls, no internal control system can provide absolute assurance that errors will not occur. However, management strives to maintain a balance, recognizing that the cost of such a system should not exceed the benefits derived.
WTU believes that, in all material respects, its system of internal controls over financial reporting and over safeguarding of assets against unauthorized acquisition, use or disposition functioned effectively as of December 31, 1999.
Paul J. Brower R. Russell Davis General Manager/President - WTU Controller - WTU
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ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
CSW None. CPL None. PSO None. SWEPCO None. WTU None.
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PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS.
(a) (1) Directors of CSW, together with certain information with respect to each of them, are listed below. Ages are as of March 1, 2000.
CSW or an affiliate of CSW has employed each of the executive officers listed in the table below in an executive or managerial capacity for at least the last five years, except as stated below.
Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director - --------------------------------------------------------------------------------
MOLLY SHI BOREN AGE - 55 1991 Ms. Boren, of Norman, Oklahoma, has been an attorney since prior to 1994 and is a former Special District Judge in Pontotoc County, Oklahoma. She served as a Director of Liberty Bank Corporation, Tulsa, Oklahoma, and of Pet Incorporated prior to and during 1994. She is currently The University of Oklahoma First Lady.
E. R. BROOKS AGE - 62 1988 Mr. Brooks has served as Chairman and CEO of CSW since February 1991. He served as CSW's President from February 1991 to July, 1997. He is also a member of the Board of Directors of each of CSW's subsidiaries, as well as a Director of Hubbell, Inc, Orange, Connecticut. Mr. Brooks is a Trustee of Baylor Health Care Center, Dallas, Texas, and Hardin-Simmons University, Abilene, Texas.
DONALD M. CARLTON AGE - 60 1994 In January 1996, Mr. Carlton was named President and CEO of Radian International LLC, Austin, Texas, and retired as of December 31, 1998. Mr. Carlton served as the President and Chairman of Radian Corporation, an engineering and technology firm, from 1969 through December 1995. He is a member of the Board of Directors of Valero Energy, San Antonio, Texas; Concert Investment Series Funds, New York, and National Instruments, Austin, Texas.
T. J. ELLIS AGE - 57 1996 Mr. Ellis served as the Commercial Director of SEEBOARD plc in 1985 and became the Chief Executive of SEEBOARD plc , Crawley, West Sussex, after privatization of the United Kingdom's national electric distribution system. In 1996, he was appointed Chairman and Chief Executive of SEEBOARD plc following its acquisition by CSW and is a director of British-Borneo Oil and Gas plc, a Director of the Sussex Chamber of Commerce Training and Enterprise and a Director of the Brighton West Pier Trust. In the 1998 Queen's Birthday Honours List, he was made a Commander of the Order of the British Empire for his services to the United Kingdom electricity industry.
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Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director - --------------------------------------------------------------------------------
JOE H. FOY AGE - 72 1974 Mr. Foy, retired, is currently a member of the Board of Directors of Enron Corporation, Houston, Texas.
WILLIAM HOWELL AGE - 63 1997 Mr. Howell served as Chairman of the Board of J.C. Penney Company, Plano, Texas, from 1983 to January 1997 and also as its CEO from 1983 to January 1996. He is currently Chairman Emeritus of J.C. Penney Company. He has been Chairman of the Board of Trustees of Southern Methodist University, Dallas, Texas, since the summer of 1996 and serves on the Chairman's Advisory Council of the National Minority Suppliers Development Council. He is a member of the Board of Directors of Exxon Corporation, Irving, Texas; Warner-Lambert Company, Morris Plains, New Jersey; Bankers Trust, New York; Halliburton Company, Dallas, Texas and The Williams Companies, Inc., Tulsa, Oklahoma.
ROBERT W. LAWLESS AGE - 62 1991 Dr. Lawless served as the President and CEO of Texas Tech University and Texas Tech University Health Sciences Center in Lubbock, Texas from July, 1989 through April 1996. He has served as the president of the University of Tulsa since May 1996. He is a member of the Board of Directors of Salomon Smith Barney Mutual Funds, New York.
JAMES L. POWELL AGE - 69 1987 Mr. Powell has been involved in ranching and investments in Ft. McKavett, Texas since prior to 1994. He is a Director of Southwest Bancorp of Sanderson, Texas, a Director and member of the Executive Committee of National Finance Credit Corporation, and an Advisory Director of First National Bank, Mertzon, Texas.
RICHARD L. SANDOR AGE - 56 1997 Dr. Sandor has served as Chairman and CEO of Environmental Financial Products Ltd., formerly Centre Financial Products Limited, Chicago, Illinois, since prior to 1994 and also as Chairman of the Board of Hedge Financial Products, Inc., Chicago, Illinois, since May 1997. He is a member of the Board of Directors of Sustainable Performance Group, Zurich, Switzerland, an investment company, and is on the board of governors of The School of the Art Institute of Chicago.
THOMAS V. SHOCKLEY, III AGE - 53 1991 Mr. Shockley was elected President and Chief Operating Officer of CSW in July 1997. He joined CSW as Senior Vice President in January, 1990, and became an Executive Vice President in September of that same year. Mr. Shockley continues to serve as a Director of each of CSW's non-electric subsidiaries.
The directors and executive officers of CSW are elected to hold office until the first meeting of CSW's Board of Directors after the respective Annual Meeting of Stockholders by class and year as follows: Class I Directors (Ms. Boren, Mr. Carlton, Mr. Ellis and Mr. Shockley) in July 2000; Class II Directors (Mr. Brooks, Dr. Lawless and Mr. Powell) in April 2001; and Class III Directors (Mr. Files, Mr. Foy, Mr. Howell and Dr. Sandor) in April 2002. All outside directors have engaged in their principal occupations listed above for a period of more than five years, unless otherwise indicated.
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(a) (2) Directors of each of the U.S. Electric Operating Companies, together with certain information with respect to each of them, are listed below. Ages are as of March 1, 2000.
Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director - --------------------------------------------------------------------------------
CPL
JOHN F. BRIMBERRY AGE - 67 1995 CEO of Professional Insurance Agents, Inc., Victoria, Texas.
E. R. BROOKS AGE - 62 1991 Chairman and CEO of CSW since 1991. Director of CSW and each of its subsidiaries. President of CSW from 1991 to 1997. Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor Health Care Center, Dallas, Texas and Hardin-Simmons University, Abilene, Texas.
GLENN FILES AGE - 52 1996 Senior Vice President of CSW since 1996. President and CEO of WTU from 1992 to 1996.
RUBEN M. GARCIA AGE - 68 1981 President and CEO of Modem Construction Inc. and Modem Machine Shop, Inc., Laredo, Texas.
ALPHONSO R. JACKSON AGE - 54 1998 President of CSW-Texas since February 1998. Vice President of CSW Energy, Inc., from 1996 to 1998. President and CEO of The Housing Authority of the City of Dallas, Texas, from 1989 to 1996. Director of Chase Bank of Texas N.A., Dallas, Texas. Director of Chase Bank of Texas, N.A., Houston, Texas.
ROBERT A. McALLEN AGE - 65 1983 Owner of Robert A. McAllen Insurance Agency, Weslaco, Texas.
PETE MORALES, JR. AGE - 59 1990 President of Morales Feed Lots, Inc., Devine, Texas. Director of The Bank of Texas, Devine, Texas.
H. LEE RICHARDS AGE - 66 1987 Chairman of the Board of Hygeia Dairy Company, Harlingen, Texas.
J. GONZALO SANDOVAL AGE - 51 1992 General Manager/President of CPL since February 1998. General Manager of CPL from 1996 to 1998. Vice President, Operations and Engineering of CPL from 1993 to 1996.
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Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director - --------------------------------------------------------------------------------
GERALD E. VAUGHN AGE - 57 1993 Chairman for the STPNOC since its formation in September 1997. Vice President, Nuclear of CSW Services since 1994.
Each of the directors and executive officers of CPL is elected to hold office until the first meeting of CPL's Board of Directors after the 2000 Annual Meeting of Stockholders. CPL's 2000 Annual Meeting of Stockholders is presently scheduled to be held on April 13, 2000. All outside directors have engaged in their principal occupations listed above for a period of more than five years, unless otherwise indicated.
PSO
E. R. BROOKS AGE - 62 1991 Chairman and CEO of CSW since 1991. Director of CSW and each of its subsidiaries. President of CSW from 1991 to 1997. Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor Health Care Center, Dallas, Texas and Hardin-Simmons University, Abilene, Texas.
T. D. CHURCHWELL AGE - 55 1996 President of PSO since 1996. Executive Vice President of WTU from 1993 to 1996.
HARRY A. CLARKE AGE - 71 1972 General Partner and President of HAC Investments, Afton, Oklahoma.
GLENN FILES AGE - 52 1996 Senior Vice President of CSW since 1996. President and CEO of WTU from 1992 to 1996.
PAUL K. LACKEY, JR. AGE - 56 1992 President of The University of Oklahoma - Tulsa, Tulsa, Oklahoma. Chief of Staff for the Governor of the State of Oklahoma from 1997 to 1999. Secretary of Health and Human Services, Executive Director of the Office of Juvenile Affairs, State of Oklahoma, from 1995 to 1997. Consultant, Flint Industries, Inc., a construction, electronics manufacturing, and environmental services company, Tulsa, Oklahoma, during a portion of 1995. President, Flint Industries, Inc. from 1986 to 1995. Director of Bank South, Tulsa, Oklahoma.
PAULA MARSHALL-CHAPMAN AGE - 46 1991 President and CEO of Bama Companies, a baked goods products company, Tulsa, Oklahoma.
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Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director - --------------------------------------------------------------------------------
WILLIAM R. McKAMEY AGE - 53 1993 General Manager of PSO since 1996. Vice President, Marketing and Business Development of PSO from 1993 to 1996.
DR. ROBERT B. TAYLOR, JR. AGE - 71 1975 Dentist, Okmulgee, Oklahoma.
Each of the directors and executive officers of PSO is elected to hold office until the first meeting of PSO's Board of Directors after the 2000 Annual Meeting of Stockholders. PSO's 2000 Annual Meeting of Stockholders is presently scheduled to be held on April 18, 2000. All outside directors have engaged in their principal occupations listed above for a period of more than five years, unless otherwise indicated.
SWEPCO
KAREN C. ADAMS AGE - 39 1996 General Manager of SWEPCO since 1996. Director of Regulatory Services at CSW from 1995 to 1996. Administrative Director of the El Paso Transition Team at CSW from 1993 to 1995.
E. R. BROOKS AGE - 62 1991 Chairman and CEO of CSW since 1991. Director of CSW and each of its subsidiaries. President of CSW from 1991 to 1997. Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor Health Care Center, Dallas, Texas and Hardin-Simmons University, Abilene, Texas.
JAMES E. DAVISON AGE - 62 1993 President and CEO of Davison Terminal Services, Inc. President and CEO of Davison Motor Company, Inc. President and CEO of Davison Insurance Company, Inc. All of the above entities are located in Ruston, Louisiana. Director of Bank One, Louisiana, Baton Rouge, Louisiana.
GLENN FILES AGE - 52 1996 Senior Vice President of CSW since 1996. President and CEO of WTU from 1992 to 1996.
DR. FREDERICK E. JOYCE AGE - 65 1990 President of Chappell-Joyce Pathology Association, P.A., Texarkana, Texas. President of Doctors Diagnostic Laboratory, Inc., Texarkana, Texas. Director of New Boston Bank Shares, Inc., New Boston, Texas. Director of Century Bank, New Boston, Texas.
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Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director - --------------------------------------------------------------------------------
JOHN M. LEWIS AGE - 60 1997 Chairman and CEO of The Bank of Fayetteville, Fayetteville, Arkansas.
MICHAEL H. MADISON AGE - 51 1998 President of SWEPCO since April 1998. Programme Director of SEEBOARD from 1996 to 1998. Vice President, Operations and Engineering of SWEPCO from 1993 to 1996.
WILLIAM C. PEATROSS AGE - 56 1990 President and CEO of United Title of Louisiana, Inc. Director of Deposit Guaranty Bank. Both entities are located in Shreveport, Louisiana.
MAXINE P. SARPY AGE - 60 1996 Vice President and Office Manager for Sarpy Medical Clinic, Shreveport, Louisiana.
Each of the directors and executive officers of SWEPCO is elected to hold office until the first meeting of SWEPCO's Board of Directors after the 2000 Annual Meeting of Stockholders. SWEPCO's 2000 Annual Meeting of Stockholders is presently scheduled to be held on April 12, 2000. All outside directors have engaged in their principal occupations listed above for a period of more than five years, unless otherwise indicated.
WTU
E. R. BROOKS AGE - 62 1991 Chairman and CEO of CSW since 1991. Director of CSW and each of its subsidiaries. President of CSW from 1991 to 1997. Director of Hubbell, Inc., Orange, Connecticut. Trustee of Baylor Health Care Center, Dallas, Texas and Hardin-Simmons University, Abilene, Texas.
PAUL J. BROWER AGE - 51 1991 General Manager/President of WTU since February 1998. General Manager of WTU from 1996 to 1998. Vice President, Marketing and Business Development of WTU from 1991 to 1996.
GLENN FILES AGE - 52 1996 Senior Vice President of CSW since 1996. President and CEO of WTU from 1992 to 1996.
ALPHONSO R. JACKSON AGE - 54 1998 President of CSW-Texas since February 1998. Vice President of CSW Energy, Inc., from 1996 to 1998. President and CEO of The Housing Authority of the City of Dallas, Texas, from 1989 to 1996. Director of Chase Bank of Texas N.A., Dallas, Texas. Director of Chase Bank of Texas, N.A., Houston, Texas.
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Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director - --------------------------------------------------------------------------------
TOMMY MORRIS AGE - 65 1976 President of The Tommy Morris Agency, an independent insurance and investment agency, Abilene, Texas.
DIAN G. OWEN AGE - 59 1994 Chairperson, Mansfeldt Investment Corporation, since 1997. Chairperson, Dian Graves Owen Foundation, a general purpose private foundation, since 1996. Consultant, Owen Healthcare, Inc., a hospital pharmacy management services company from 1997 to present. Corporate Executive/Founder of Owen Healthcare, Inc., from 1976 to 1997.
JAMES M. PARKER AGE - 69 1987 President and CEO of J. M. Parker and Associates, Inc., an investment company, Abilene, Texas. Director of First Financial Bankshares, Inc. and First National Bank of Abilene, Abilene, Texas.
F. L. STEPHENS AGE - 61 1980 Served as Chairman and CEO of Town & Country Food Stores, Inc., San Angelo, Texas until his retirement in June 1999.
Each of the directors and executive officers of WTU is elected to hold office until the first meeting of WTU's Board of Directors after the 2000 Annual Meeting of Stockholders. WTU's 2000 Annual Meeting of Stockholders is presently scheduled to be held on March 28, 2000. All outside directors have engaged in their principal occupations listed above for a period of more than five years, unless otherwise indicated.
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(b) (1) The following is a list of officers, who are not directors, of CSW, together with certain information with respect to each of them:
Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director - -------------------------------------------------------------------------------- CSW
FERD C. MEYER, JR. AGE - 60 1998 Executive Vice President and General Counsel since 1998. Senior Vice President and General Counsel from 1990 to 1998.
GLENN D. ROSILIER AGE - 52 1998 Executive Vice President and Chief Financial Officer since 1998. Senior Vice President and Chief Financial Officer from 1990 to 1998.
THOMAS M. HAGAN AGE - 55 1996 Senior Vice President, External Affairs since 1996. Vice President, Governmental Relations and Regulatory Affairs from 1995 to 1996. Vice President, Governmental Relations from 1993 to 1995.
VENITA MCCELLON-ALLEN AGE - 40 1996 Senior Vice President, Customer Relations and Corporate Development and Assistant Corporate Secretary since 1996. Vice President, Corporate Services from 1995 to 1996. SWEPCO Division Manager from 1994 to 1995. SWEPCO Director Corporate Communications and Governmental Affairs from 1993 to 1994.
KENNETH C. RANEY, JR. AGE - 48 1996 Vice President, Associate General Counsel and Corporate Secretary since 1996. Vice President, Assistant General Counsel from 1989 to 1996.
WENDY G. HARGUS AGE - 42 1996 Treasurer since 1996. CSW Controller from 1993 to 1996.
LAWRENCE B. CONNORS AGE - 48 1996 Controller since 1996. CSWS Vice President, Administration from 1993 to 1996.
STEPHEN J. MCDONNELL AGE - 49 1998 Vice President, AEP Merger since 1998. Vice President, Mergers and Acquisitions from 1996 to 1998. CSWS Treasurer from 1989 to 1996.
MICHAEL D. SMITH AGE - 48 1998 Vice President, Business Opportunities since 1998. SWEPCO President from 1996 to 1997. Vice President, Mergers and Acquisitions from 1995 to 1996. Vice President, Corporate Services from 1993 to 1995.
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(b) (2) The following is a list of officers, who are not directors, of the U.S. Electric Operating Companies, together with certain information with respect to each of them:
Name, Age, Principal Year Occupation, Business Experience First Became and Other Directorships Director - --------------------------------------------------------------------------------
U.S. Electric Operating Companies WENDY G. HARGUS AGE - 42 1996 Treasurer of CSW, CPL, PSO, SWEPCO, WTU and CSW Services since 1996. Controller of CSW from 1993 to 1996.
R. RUSSELL DAVIS AGE - 43 1994 Controller of CPL, PSO, WTU, SWEPCO and CSW Services since 1994.
CPL BRENDA L. SNIDER AGE - 46 1996 Corporate Secretary of CPL since 1996. Manager of Planning and Analysis at CPL since 1996. Senior Financial Consultant at CPL from 1994 to 1996.
PSO LINA P. HOLM AGE - 59 1997 Corporate Secretary and Executive Secretary to the President of PSO since 1997. Executive Secretary to the President and Assistant Corporate Secretary of PSO from 1992 to 1997.
SWEPCO MARILYN S. KIRKLAND AGE - 52 1995 Corporate Secretary of SWEPCO since 1995. Executive Administrator since 1997. Senior Executive Secretary to the President, from 1992 to 1997.
WTU MARTHA MURRAY AGE - 54 1992 Corporate Secretary of WTU since 1992.
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ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Cash and Other Forms of Compensation
CSW and the U.S. Electric Operating Companies
CSW's executive compensation program has as its foundation the following objectives:
- - Maintaining a total compensation program consisting of base salary, performance incentives and benefits designed to support the corporate goal of providing superior value to our stockholders and customers;
- - Providing comprehensive programs which serve to facilitate the recruitment, retention and motivation of qualified executives; and
- - Rewarding key executives for achieving financial, operating and individual objectives that produce a return to CSW's stockholders in both the long-term and the short-term.
The Executive Compensation Committee of the CSW Board of Directors, which consists of four independent outside directors, has designed CSW's executive compensation programs around a strong pay-for-performance philosophy. The Executive Compensation Committee strives to maintain competitive levels, at average, of total compensation as compared to peers in the utility industry. The Executive Compensation Committee performs its functions for the U.S. Electric Operating Companies as well. The U.S. Electric Operating Companies do not have Executive Compensation Committees nor committees performing similar functions.
Each year, the Executive Compensation Committee conducts a comprehensive review of CSW's executive compensation programs. The Executive Compensation Committee is assisted in these efforts by an independent consultant and by CSW's internal staff, who provide the Executive Compensation Committee with relevant information and recommendations regarding the compensation policies, programs, and specific compensation practices. This review is designed to ensure that the programs are in place to enable CSW to achieve its strategic and operating objectives and provide value to its stockholders, CSW's customers, and to document CSW's relative competitive position.
The Executive Compensation Committee reviews a comparison of CSW's compensation programs with those offered by comparable companies within the utility industry. For each component of compensation as well as total compensation, the Executive Compensation Committee seeks to ensure that CSW's level of compensation for expected level of performance approximates the average or mean for executive officers in similar positions at comparable companies. In most years, this means that the level of total compensation for expected performance will be near the average for comparable companies. Performance above or below expected levels is reflected in a corresponding increase, reduction, or no award in the incentive portion of our compensation program.
The amounts of each of the primary components of executive compensation-salary, annual incentive plan awards and long-term incentive plan awards will fluctuate according to individual, business unit, and/or corporate performance, as described in detail in this report. Corporate performance for these purposes is measured against a peer group of selected companies in the utility industry. The utility peer group consists of the companies listed in the Standard & Poor's Electric Utility Index as well as large regional competitors. The Executive Compensation Committee believes that using the utility peer group provides an objective measure to compare performance benchmarks appropriate for compensation purposes.
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CSW's executive compensation program includes several components serving long-term and short-term objectives. CSW also provides its senior executive officers with benefits under the Special Executive Retirement Plan and all executive officers with certain executive perquisites, as noted later in this section.
In addition, CSW maintains for each of its executive officers a package of benefits under its pension and welfare benefit plans that are generally provided to all employees, including group health, life, disability and accident insurance plans, tax-advantaged reimbursement accounts, a defined benefit pension plan and the 401(k) savings plan. There is no relationship between this package and corporate performance.
The following describes the relationship of compensation to performance for the principal components of executive officer compensation.
Base Salary: Each executive officer's corporate position is matched to a comparable position within the utility industry and is valued at the 50th percentile market level. In some cases, these positions are common in both the utility industry as well as general industry. In these cases, comparisons are made to both markets, although pay decisions are influenced only by the utility industry data. Once these market values are determined, the position is then evaluated based on the position's overall contribution to corporate goals. This internal weighting is combined with the value the market places on the associated job responsibilities and a salary is assigned to that position. Each year the assigned values are reviewed against market conditions, including compensation practices in the utility peer group, inflation, and supply and demand in the labor markets. If these conditions change significantly there may be an adjustment to base salary. Finally, the results of the executive officer's performance over the past year becomes part of the basis of the Executive Compensation Committee's decision to approve, at its discretion, base salaries of executive officers.
Incentive Programs - General: The executive incentive programs are designed to strike an appropriate balance between short-term accomplishments and CSW's need to effectively plan for and perform over the long-term.
Incentive Programs - Annual Incentive Plan: The AIP is a short-term bonus plan rewarding annual performance. AIP awards are determined under a formula that directly ties the amount of the award with levels of achievement for specific corporate and individual performance. Business unit executives' awards are also based on specific business unit performance. The amount of an executive officer's AIP equals the corporate results plus business unit results, if applicable, times their individual performance results times their target award.
Corporate performance is currently determined by two equally weighted measures-earnings per share and cash flow. Threshold, target and exceptional levels of performance are set by the Executive Compensation Committee in the first quarter of each year. The Executive Compensation Committee considers both historic performance and budgeted, or expected levels of performance in setting these targets.
Performance for a given business unit represents the weighted average of performance indices that measure the achievement of specific financial and/or operational goals that are set and weighted at the beginning of the year for that business unit.
The individual performance component represents the average of results achieved on several individual goals and a subjective evaluation of overall job performance. Although individual performance goals do not repeat corporate performance measures, these goals are constructed to support corporate performance goals or initiatives.
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If an individual fails to achieve a minimum threshold performance level on individual performance goals, that individual does not earn an AIP award for that year.
Target awards for executive officers have been fixed at 50 percent of salary for the CEO, President and Executive and Senior Vice Presidents, 45 percent of salary for Business Unit Presidents and 35 percent of salary for other officers. The award can vary from 0 to a maximum of 150 percent of target. These targets are established by a review of competitive practice among the utility peer group.
Performance under the AIP is measured or reviewed by each executive officer's superior officer, or in the case of the CEO by the Executive Compensation Committee, with the assistance of internal staff. The results are reviewed and are subject to approval by the Executive Compensation Committee. Under the terms of the AIP, the Executive Compensation Committee in the exercise of its discretion, may vary corporate or company performance measures and the form of payment for AIP awards from year-to-year prior to establishing the awards, including payment in cash or restricted stock, as determined by the Executive Compensation Committee.
In 1999, AIP awards were determined based on the corporate performance, business unit performance, if applicable, and individual performance. The Executive Compensation Committee reviewed the results of this calculation in determining the size of awards.
Incentive Programs - Long-Term Incentive Plan: Amounts realized by CSW's executive officers under awards made pursuant to the CSW 1992 LTIP depend entirely upon corporate performance. The Executive Compensation Committee selects the form and amount of LTIP awards based upon its evaluation of which vehicles then are best positioned to serve as effective incentives for long-term performance.
Since 1992, the Executive Compensation Committee has established LTIP awards in the form of performance units. These awards provide incentives both for exceptional corporate performance and to encourage retention. Each year, the Executive Compensation Committee has set a target award of a specified number of performance units based on a percentage of salary and the stock price on the date the award is established.
The payout of such an LTIP award is based upon a comparison of CSW's total stockholder return over a three-year period, or "cycle," against total stockholder returns of utilities in the utility peer group over the same three-year period. If CSW's total stockholder return for a cycle falls in one of the top three quartiles of total stockholder returns achieved at companies in the utility peer group, CSW will make a payout to participants for the three-year cycle then ending. First, second and third quartile performance will result in payouts of 150 percent, 100 percent and 50 percent of target, respectively. Performance in the fourth quartile yields no payout under the LTIP.
A new three-year performance cycle begins each year. In January 1999, the Executive Compensation Committee reviewed total stockholder return results for the period covering 1996-1998, and because performance was in the fourth quartile, no restricted stock awards were granted.
CSW from time to time has also granted stock options and restricted stock under the LTIP. Stock options and restricted stock are granted at the discretion of the Executive Compensation Committee. Stock options, once vested, allow grantees to buy specified numbers of shares of CSW Common Stock at a specified stock price, which to date has been the market price on the date of grant. In determining grants to date, the Executive Compensation Committee has considered both the number and value of options granted by companies in the utility peer group with respect to both the number and value of options awarded by CSW, and the relative amounts of other long-term incentive awards at CSW and such peers. The executive officers' realization of any value on the options depends upon
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stock appreciation. No executive officer owns in excess of one percent of CSW's Common Stock. Further, the amounts of LTIP awards are measured against similar practices at other companies in the utility peer group.
Tax Considerations: Section 162(m) of the Internal Revenue Code, as amended, generally limits CSW's federal income tax deduction for compensation paid in any taxable year to any one of the five highest paid executive officers named in Part III of this Form 10-K to $1 million. The limit does not apply to specified types of payments, including, most significantly, payments that are not includible in the employee's gross income, payments made to or from a tax-qualified plan, and compensation that meets the Internal Revenue Code definition of performance-based compensation. Under the tax law, the amount of a performance-based incentive award must be based entirely on an objective formula, without any subjective consideration of individual performance, to be considered performance-based.
The Executive Compensation Committee has carefully considered the impact of this law. At this time, the Executive Compensation Committee believes it is in CSW's and its stockholder's best interest to retain the subjective determination of individual performance under the AIP. Consequently, payments under the AIP, if any, to the named executive officers may be subject to the limitation imposed by the Internal Revenue Code section 162(m). In 1997, stockholders approved the restated LTIP and re-qualified the plan for Internal Revenue Code section 162(m) purposes.
Rationale for CEO Compensation
In 1999, Mr. Brooks' compensation was determined as described above for all of CSW's executive officers.
Mr. Brooks' annual salary increased in 1999 to $806,000 from $775,000. The Executive Compensation Committee reviewed Mr. Brooks' salary as a part of its overall annual review of executive compensation. His salary is based on market information for similar positions, as well as changes in the salaries of chief executive officers at comparable regional utilities (not limited to the utility peer group).
For 1999, CSW achieved earnings per share of $2.14. Based on corporate and individual results Mr. Brooks' AIP for 1999, which was paid in 2000, was 150% of target.
In 1999, the Executive Compensation Committee established Mr. Brooks' target performance units for LTIP for the 1999-2001 cycle of 19,572 units to be paid in shares of restricted stock in 2001 if performance measures are met. Mr. Brooks' target amount was derived by reference to the number and value of grants to chief executive officers at comparable companies.
CSW EXECUTIVE COMPENSATION COMMITTEE
Joe H. Foy, Chairman Molly Shi Boren William R. Howell Richard L. Sandor
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Comparison of Five Year Cumulative Total Return Among Central and South West Corporation, the Standard & Poors 500 Index and the Standard & Poors Electric Companies Index
GRAPH OMITTED
CSW, S&P Electric & S&P 500
Year CSW S&P Electric S&P 500 - ---- --- ------------ ------- 1994 100 100 100 1995 131 131 138 1996 128 131 169 1997 144 166 226 1998 156 193 290 1999 123 162 351
The total return performance shown on the graph above is not necessarily indicative of future performance.
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CSW SUMMARY COMPENSATION TABLE
(1)Amounts in these columns are paid or awarded in a calendar year for performance in a preceding year. (2)The following are the 1999 perquisites and other personal benefits required to be identified in respect of the following Named Executive Officer: none. (3)Grants of restricted stock are administered by the Executive Compensation Committee of the CSW Board of Directors, which has the authority to determine the individuals to whom and the terms upon which restricted stock grants, including the number of underlying shares, shall be made.
As of the end of 1999, the aggregate restricted stock holdings of each of the Named Executive Officers were:
Restricted Stock Held Market Value at At December 31, 1999 December 31, 1999 --------------------------------------------- --------------------- E. R. Brooks 8,153 $163,060 T. V. Shockley, III 4,844 96,880 Ferd. C. Meyer, Jr. 3,799 75,980 Glenn D. Rosilier 3,799 75,980 Glenn Files 2,904 58,080
(4)The awards reflected in this column are the value of restricted shares paid out under the LTIP in 1998. The awards have a two-year vesting period with 50 percent of the stock vesting on each anniversary date. Upon vesting, shares of CSW Common Stock are re-issued without restrictions. The individual receives dividends and may vote shares of restricted stock, even before they are vested. The amount reported in the Summary Compensation Table represents the market value of the shares at the date of grant. (5)Amounts shown in this column consist of (i) the annual employer matching payments to CSW's Retirement Savings Plan, (ii) premiums paid per participant for personal liability insurance and (iii) average amounts of premiums paid per participant in those years under CSW's memorial gift program. In 1999,
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1998 and 1997, Messrs. Brooks, Shockley ,Files, Meyers and Rosilier participated in the memorial gift program. See Meetings and Compensation for a description of CSW's memorial gift program.
U.S. ELECTRIC OPERATING COMPANIES
The following table sets forth the aggregate cash and other compensation for services rendered for the fiscal years of 1999, 1998 and 1997 paid or awarded to the President of each of the U.S. Electric Operating Companies and the Named Executive Officers as defined below.
Because of the functional restructuring undertaken by CSW during 1996, certain of the Executive Officers of the U.S. Electric Operating Companies, Messrs. Files, Zemanek and Verret, are not actually employed by any of the U.S. Electric Operating Companies. Instead, they are employed by CSW Services and manage CSW business units and perform policy-making functions that are integral to the U.S. Electric Operating Companies. Therefore, these individuals are included in the Summary Compensation Table as Named Executive Officers due to the functional perspective regarding the management of the companies.
Summary Compensation Table
(1) Amounts in these columns are paid or awarded in a calendar year for performance in a preceding year.
(2) The following are the perquisites and other personal benefits required to be identified in respect of each Named Executive Officer: None.
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(3) Grants of restricted stock are administered by the Executive Compensation Committee of the CSW Board of Directors, which has the authority to determine the individuals to whom and the terms upon which restricted stock grants, including the number of underlying shares, shall be made.
As of December 31, 1999, the aggregate restricted stock holdings of each of the Named Executive Officers are presented in the following table.
Restricted Stock Market Value at Name at December 31, 1999 December 31, 1999 --------------------------------------------------------------- Glenn Files 2,904 $58,080 Richard H. Bremer -- -- Robert L. Zemanek 3,009 60,180 Richard P. Verret 1,754 35,080 J. Gonzalo Sandoval 725 14,500 T. D. Churchwell 1,076 21,520 Michael H. Madison 725 14,500 Paul J. Brower 725 14,500
(4)The awards reflected in this column are the value of restricted shares paid out under the LTIP in 1998. The awards have a two-year vesting period with 50 percent of the stock vesting on each anniversary date. Upon vesting, shares of CSW Common Stock are re-issued without restrictions. The individual receives dividends and may vote shares of restricted stock, even before they are vested. The amount reported in the Summary Compensation Table represents the market value of the shares at the date of grant.
(5)Amounts shown in this column consist of: (i) the annual employer matching payments to CSW's Retirement Savings Plan; (ii) premiums paid per participant for personal liability insurance; and (iii) average amounts of premiums paid per participant in those years under CSW's memorial gift program. In 1999, 1998 and 1997, Messrs. Bremer, Files and Zemanek participated in the memorial gift program. See Meetings and Compensation for a description of CSW's memorial gift program. In 1999, $2,500,000 was paid to Mr. Bremer upon his resignation.
(6)Mr. Bremer was President of the CSW Energy Services business unit until he resigned in 1999.
Option/SAR Grants
No stock options or appreciation rights were granted to any officer or director of CSW or the U.S. Electric Operating Companies in 1999.
CSW Option/SAR Exercises and Year-End Value Table
Shown below is information regarding option/SAR exercises during 1999 and unexercised options/SARs as of December 31, 1999, for the Named Executive Officers.
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Aggregated Option/SAR Exercises in 1999 and Fiscal Year-End Option/SAR Values
(1) Calculated based upon the difference between the closing price of CSW's Shares on the New York Stock Exchange on December 31, 1999 ($20.00 per share) and the exercise price per share of the outstanding unexercisable and exercisable options ($20.750, $24.813 and $29.625, as applicable).
U.S. ELECTRIC OPERATING COMPANIES Option/SAR Exercises and Year-End Value Table
Shown below is information regarding option/SAR exercises during 1999 and unexercised options/SARs at December 31, 1999 for the Named Executive Officers for the U.S. Electric Operating Companies.
Aggregated Option/SAR Exercises in 1999 and Fiscal Year-End Option/SAR Values
(1)Calculated based upon the difference between the closing price of CSW's Shares on the New York Stock Exchange on December 31, 1999 ($20.00 per share) and the exercise price per share of the outstanding unexercisable and exercisable options ($20.750, $24.813 and $29.625, as applicable).
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CSW Long-Term Incentive Plan Awards in 1999
The following table shows information concerning awards made to the Named Executive Officers for CSW during 1999 under the LTIP:
(1) Vesting period for awards paid at end of three-year cycle.
Payouts of the awards are contingent upon CSW achieving a specified level of total stockholder return, relative to a peer group of utility companies, for a three-year period or cycle and exceeding a certain defined minimum threshold. If the Named Executive Officer's employment is terminated during the performance period for any reason other than death, total and permanent disability or retirement, then the award is canceled. The LTIP contains provision-accelerating awards upon a change in control of CSW. If a change in control of CSW occurs, all options and SARs become fully exercisable and all restrictions, terms and conditions applicable to all restricted stock are deemed lapsed and satisfied and all performance units are deemed to have been fully earned, as of the date of the change in control. The LTIP also contains provisions designed to prevent circumvention of the above acceleration provisions through coerced termination of an employee prior to a change in control. See Cash and Other Forms of Compensation - CSW for additional discussion of the terms of the LTIP.
U.S. Electric Operating Companies Long-term Incentive Plan Awards in 1999
The following table shows information concerning awards made to the Named Executive Officers during 1999 under the CSW LTIP.
(1) Vesting period for awards paid at end of three year cycle.
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Payouts of these awards are contingent upon CSW achieving a specified level of total stockholder return, relative to a peer group of utility companies, for a three-year period, or cycle, and exceeding a certain defined minimum threshold. If the Named Executive Officer's employment is terminated during the performance period for any reason other than death, total and permanent disability or retirement, then the award is canceled. The CSW LTIP contains a provision accelerating awards upon a change in control of CSW. If a change in control of CSW occurs, all options and SARs become fully exercisable and all restrictions, terms and conditions applicable to all restricted stock are deemed lapsed and satisfied and all performance-based units are deemed to have been fully earned, as of the date of the change in control. The CSW LTIP also contains provisions designed to prevent circumvention of the above acceleration provisions through coerced termination of an employee prior to a change in control.
Cash Balance Retirement Plan
The CSW System maintains the Cash Balance Plan for eligible employees. In addition, the CSW System maintains the SERP, a non-qualified ERISA excess plan, that primarily provides benefits that cannot be payable under the Cash Balance Plan because of maximum limitations imposed on such plans by the Internal Revenue Code. Under the cash balance formula, each participant has an account for recordkeeping purposes only, to which dollar amount credits are allocated annually based on a percentage of the participant's pay. Pay for the Cash Balance Plan includes base pay, bonuses, overtime, and commissions. The applicable percentage is determined by the age and years of vesting service the participant has with CSW and its affiliates as of December 31 of each year (or as of the participant's termination date, if earlier). The following table shows the applicable percentage used to determine dollar amount credits at the age and years of service indicated.
Sum of Age plus Years of Service Applicable Percentage ------------------------------------------------ <30 3.0% 30-39 3.5% 40-49 4.5% 50-59 5.5% 60-69 7.0% 70 or more 8.5%
As of December 31, 1999, the sum of age plus years of service of the Named Executive Officers for CSW for the cash balance formula is as follows: Mr. Brooks, 100; Mr. Shockley, 77; Mr. Files, 80; Mr. Meyer, 78; and Mr. Rosilier, 75. As of December 31, 1999, the sum of age plus years of service of the Named Executive Officers for the U.S. Electric Operating Companies for the cash balance formula are as follows: Mr. Zemanek, 77; Mr. Verret, 80; Mr. Sandoval, 76, Mr. Churchwell, 76; Mr. Madison, 79; Mr. Brower, 73.
All dollar amount balances in the accounts of participants earn a fixed rate of interest, which is also credited annually. The interest rate for a particular year is the average rate of return of the 30-year Treasury Rate for November of the prior year. For 1999, the interest rate was 5.25%. For 2000, the interest rate is 6.15%. Interest continues to be credited as long as the participant's balance remains in the plan.
At retirement or other termination of employment, an amount equal to the vested balance (including qualified and SERP benefit) then credited to the account is payable to the participant in the form of an immediate or deferred lump sum or annuity. Benefits, (both from the Cash Balance Plan and the SERP)
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under the cash balance formula, are not subject to reduction for Social Security benefits or other offset amounts. The estimated annual benefit payable to each of the Named Officers as a single life annuity at age 65 under the Cash Balance Plan and the SERP is:
CSW E.R. Brooks $467,246 T.V. Shockley, III 244,999 Ferd. C. Meyer, Jr. 146,311 Glenn D. Rosilier 255,520 Glenn Files 279,398
U.S. Electric Operating Companies Robert L. Zemanek $241,035 Richard P. Verret 177,290 Richard H. Bremer -- J. Gonzalo Sandoval 98,903 T.D. Churchwell 108,313 Michael H. Madison 124,924 Paul J. Brower 81,665
These projections are based on the following assumptions: (1) participant remains employed until age 65; (2) salary used is base pay paid for calendar year 1999 assuming no future increases plus bonus at 1999 target level; (3) interest credit at 6.15% for 2000 and future years; and (4) the conversion of the lump-sum cash balance to a single life annuity at normal retirement age is based on an interest rate of 6.15% and the 1983 Group Annuity Mortality Table, which sets forth generally accepted life expectancies.
In addition, certain employees who were 50 or over and had completed at least 10 years of service as of July 1, 1997, also continue to earn a benefit using the prior pension formula. For CSW, at commencement of benefits, Mr. Brooks, Mr. Shockley and Mr. Meyer have a choice of their accrued benefit using the cash balance formula or their accrued benefit using the prior pension formula. For the U.S. Electric Operating Companies, at commencement of benefits, Mr. Verret and Mr. Churchwell have a choice of their accrued benefit using the cash balance formula or their accrued benefit using the prior pension formula. Once the participant selects either the earned benefit under the cash balance formula or the earned benefit under the prior pension formula, the other earned benefit is no longer available.
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The table below shows the estimated combined benefits payable from both the prior pension formula and the SERP based on retirement age of 65, the average compensation shown, the years of credited service shown, continued existence of the prior pension formula without substantial change and payment in the form of a single life annuity.
Annual Benefits After Specified Years of Credited Service Average Compensation 15 20 25 30 or more ----------------------------------------------------------------
$100,000 $25,050 $33,333 $41,667 $50,000 150,000 37,575 50,000 62,500 75,000 200,000 50,100 66,667 83,333 100,000 250,000 62,625 83,333 104,167 125,000 300,000 75,150 100,000 125,000 150,000 350,000 87,675 116,667 145,833 175,000 450,000 112,725 150,000 187,500 225,000 550,000 137,775 183,333 229,167 275,000 650,000 162,825 216,667 270,833 325,000 750,000 187,875 250,000 312,500 375,000 850,000 212,500 283,333 357,000 425,000 950,000 237,975 316,667 395,833 475,000
Benefits payable under the prior pension formula are based upon the participant's years of credited service (up to a maximum of 30 years), age at retirement, and covered compensation earned by the participant. The annual normal retirement benefit payable under the prior pension formula and the SERP are based on 1.67 percent of "Average Compensation" times the number of years of credited service (reduced by no more than 50 percent of a participant's age 62 or later Social Security benefit). "Average Compensation" is covered compensation for the prior pension formula and equals the average annual compensation, reported as salary in the Summary Compensation Table, during the 36 consecutive months' highest pay during the 120 months prior to retirement.
Respective years of credited service and ages, as of December 31, 1999, for the following officers of CSW, who continue to earn a benefit under the prior pension formula are: Mr. Brooks, 38 and 62, Mr. Shockley, 23 and 54 and Mr. Meyer, 30 and 60. Respective years of credited service and ages, as of December 31, 1999, for the following officers of the U.S. Electric Operating Companies, who continue to earn a benefit under the prior pension formula are: Mr. Verret, 27 and 53, Mr. Churchwell, 21 and 55.
Change in Control Agreements
Pursuant to approval by the CSW Board of Directors in October 1996, CSW also has Change in Control Agreements with the Named Executive Officers of CSW and certain other CSW System officers. The purpose of the Change in Control Agreements is to assure the objective judgment and to retain the loyalty of these individuals in the event of a Change in Control of CSW. A Change in Control includes, among other things, any person gaining ownership or control of 25% or more of the outstanding shares of CSW's voting stock or the closing of any merger, acquisition or consolidation following which the former stockholders of CSW own less than 75% of the surviving entity.
The Change in Control Agreements entitle the Named Executive Officers, in certain circumstances, including but not limited to, a termination by CSW within three years after a Change in Control (prior to the expiration of the Change in Control Agreements), to receive: (i) a lump sum payment equal to two to four times their base salary plus target bonus; (ii) enhanced non-qualified retirement benefits; (iii) continued health and other welfare benefits for up to three years and (iv) various other non-qualified benefits. The participating CSW
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System officers are also eligible for an additional payment, if required, to make them whole for any excise tax imposed by Section 4999 of the Internal Revenue Code.
CSW's LTIP provides for awards of stock options, stock appreciation rights, restricted stock, phantom stock and performance unit awards to employees selected by the CSW Executive Compensation Committee, including those individuals named in the CSW Summary Compensation Table. Upon a Change in Control (as defined in the LTIP), the awards previously granted to those employees will become fully exercisable, fully vested, or fully earned.
Meetings and Compensation
CSW
The CSW Board of Directors held six regular meetings and four special meetings during 1999. Directors who are not officers or employees of CSW receive annual cash directors' fees of $12,000 for serving on the CSW Board and a fee of $1,250 per day plus expenses for each meeting of the CSW Board or committee meeting attended. CSW also has the Directors' Compensation Plan which awards non-employee directors an annual award of 600 phantom stock shares. Pursuant to the Directors' Compensation Plan, all phantom stock was vested and immediately converted, on a share-for-share basis, to Common Stock after stockholder approval of the proposed merger with AEP, on May 28, 1998. For 1999, and any future awards of phantom stock, all awards were and will be immediately vested, converted to common stock and issued. The CSW Board has standing Policy, Audit, Executive Compensation and Nominating Committees. Chairmen of the Audit, Executive Compensation, and Nominating Committees receive annual fees of $6,000, $3,500 and $3,500, respectively, to be paid in cash in addition to regular director and meeting fees. Any committee chairman who is also an officer of CSW receives no annual fees.
CSW maintains a memorial gift program for all of its current directors, directors who have retired since 1992 and certain executive officers. There are 17 current directors and executive officers and 15 retired or resigned directors and officers eligible for the memorial gift program. Under this program, CSW will make donations in a director's or executive officer's name for up to three charitable organizations in an aggregate of $500,000, payable by CSW upon such person's death. CSW maintains corporate-owned life insurance policies to fund the program. The annual premiums paid by CSW are based on pooled risks and averaged $15,454 per participant in 1999, $15,363 per participant for 1998 and $15,803 per participant for 1997.
Non-employee directors are provided the opportunity to defer some or all of their directors' fees by participating in either the Central and South West Deferred Compensation Plan for Directors or the Directors' Deferred Savings Plan. The Compensation Plan allows participants to defer up to $20,000 of board and committee fees. Participants receive a ten-year annuity, based on the amount deferred, beginning at the participant's normal retirement date from the CSW Board. The Savings Plan is unlimited as to the amount of participating fees which are returned, with accrued interest, as a lump sum or over a period not to exceed 15 years following retirement.
Non-employee directors are provided the opportunity to enroll in a medical and dental program offered by CSW. This program is identical to the employee plan, and directors who elect coverage pay the same premium as active employee participants in the plan. If a non-employee director terminates his service on the CSW Board with ten or more years of service and is over 70 years of age, that director is eligible to receive retiree medical and dental benefits coverage from CSW.
All current directors attended more than 75% of the total number of meetings held by the CSW Board and each committee on which such directors served in 1999.
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U.S. Electric Operating Companies
Meetings and Directors Fees
Those directors who are not also officers of CPL, PSO, SWEPCO and WTU receive annual directors' fees and a fee of $300 plus expenses for each board or committee meeting attended, as described below. They are also eligible to participate in a deferred compensation plan. Under this plan such directors may elect to defer payment of annual directors' and meeting fees until they retire from the board or as they otherwise direct. The number of board meetings and annual directors' fees are presented in the following table.
CPL PSO SWEPCO WTU ---------------------------------------------
Number of regular board meetings 4 4 4 4 Number of special board meetings 1 -- 2 1 Annual directors' fees $6,000 $6,000 $6,600 $6,000
All of CPL's directors attended 75% or more of the scheduled and special board meetings. PSO and SWEPCO each had one director who attended only 50% of the meetings. WTU had one director who attended only 25% of the meetings.
Board Committees
CSW
Policy Committee. The Policy Committee, currently consisting of Messrs. Brooks (Chairman), Foy, Lawless and Powell, held two meetings in 1999. The Policy Committee reviews and makes recommendations to the CSW Board concerning major policy issues, considers the composition, structure and functions of the CSW Board and its committees and reviews existing corporate policies and recommends changes when appropriate. The Policy Committee has authority to act on behalf of the CSW Board when the full CSW Board is not in session, except as otherwise provided under Delaware law.
Audit Committee. The Audit Committee, currently consisting of Ms. Boren and Messrs. Carlton, Lawless (Chairman), and Sandor, held seven meetings in 1999. The Audit Committee recommends to the CSW Board the independent public accountants to be selected; discusses with the internal auditors and independent public accountants the overall scope, plans and results of their audits, and their evaluations of internal controls and the overall quality of CSW's accounting and financial reporting practices; facilitates any private communication with the Audit Committee desired by the internal auditors or independent public accountants; discusses with management, internal auditors and the independent public accountants CSW's accounting and financial reporting principles and policies; monitors the program to ensure compliance with CSW's business ethics policy; and may direct and supervise an investigation into any significant matter brought to its attention within the scope of its duties.
Executive Compensation Committee. The Executive Compensation Committee, currently consisting of Ms. Boren and Messrs. Foy (Chairman), Howell, and Sandor, held three meetings in 1999. The Executive Compensation Committee determines the executive compensation philosophy of CSW and the U.S. Electric Operating Companies, reviews benefit programs and management succession programs, sets the salaries for the executive officers of CSW and the U.S. Electric Operating Companies and reviews and recommends salaries for the chief executive officers of CSW principal subsidiaries.
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Nominating Committee. The Nominating Committee, currently consisting of Messrs. Carlton, Howell and Powell (Chairman), held two meetings in 1999. The Nominating Committee reviews and recommends qualified candidates for election to the Board of Directors. The Nominating Committee welcomes stockholder suggestions for Board nominations. Such suggestions should be directed to Mr. Brooks, Chairman and CEO, who will forward them to the Nominating Committee.
U.S. Electric Operating Companies
Committees
Each of the four U.S. Electric Operating Companies has an audit committee. Except for CPL, each of the other companies also has an executive committee which addresses policy matters that arise between scheduled board meetings.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 and Section 17(a) of the Public Utility Holding Company Act of 1935 require CSW's and the U.S. Electric Operating Companies' officers and directors, and persons who beneficially own more than ten percent of CSW's Common Stock, or any class of equity security (other than an exempted security) which is registered pursuant to Section 12 of the Exchange Act, to file reports of ownership and changes in ownership with the SEC and the New York Stock Exchange. Officers, directors and greater-than-ten-percent stockholders are required by SEC regulation to furnish CSW with copies of all Section 16(a) reports they file. Based solely on CSW's review of the copies of such forms received and written representations from certain reporting persons, CSW and the U.S. Electric Operating Companies believe that during 1999 all such filing requirements applicable to its officers, directors and greater-than-ten-percent stockholders were complied with.
Compensation Committee Interlocks and Insider Participation
No person serving during 1999 as a member of the Executive Compensation Committee of the Board of Directors of CSW served as an officer or employee of any Registrant during or prior to 1999. No person serving during 1999 as an executive officer of the U.S. Electric Operating Companies serves or has served on the compensation committee or as a director of another company whose executive officers serve or have served as a member of the Executive Compensation Committee of CSW or as a director of one of the U.S. Electric Operating Companies. The U.S. Electric Operating Companies have no Executive Compensation Committees or committee performing similar functions.
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ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Security Ownership of Certain Beneficial Owners
Set forth below are the only persons or groups known to CSW as of December 31, 1999, which have beneficial ownership of five percent or more of CSW's Common Stock.
-------------------------------------------------------------------------- (3) Amount and (2) Nature of (4) (1) Name and Address of Beneficial Percent of Title of Class Beneficial Owners Ownership Class -------------------------------------------------------------------------- Common Stock Sanford C. Berstein & Co. 18,290,965 8.6% 767 Fifth Avenue New York, NY 10153-0185
Common Stock Barrow, Hanley, Mewhinney & 16,090,800 7.6% Strauss, Inc. 1 McKinney Plaza 3232 McKinney Avenue, 15th Floor Dallas, TX 75204-2429 (A)
Common Stock Capital Research & Management 15,715,800 7.4% Company 333 South Hope Street Los Angeles, CA 90071-1447
(A) Vanguard Windsor Funds, Inc., P.O. Box 2600, Valley Forge, PA 19482, reported beneficial ownership of 12,443,000 shares of Common Stock, or 5.9%. The 7.6% block of shares reported by Barrow, Hanley, Mewhinney & Strauss, Inc. includes the Vanguard shares, based upon the information contained in the Vanguard Windsor II Fund Annual Report dated October 31, 1999.
U.S. Electric Operating Companies All of the outstanding shares of common stock of each of the U.S. Electric Operating Companies, presented in the following table, is owned beneficially and of record by CSW.
Company Shares Par Value ------------------------------------------------- CPL 6,755,535 $25 PSO 9,013,000 15 SWEPCO 7,536,640 18 WTU 5,488,560 25
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CSW
Security Ownership of Management
The following table shows securities beneficially owned as of December 31, 1999 by each director and nominee, certain executive officers and all directors and executive officers as a group. Share amounts shown in this table include options exercisable within 60 days after December 31, 1999, restricted stock, shares of Common Stock credited to Retirement Savings Plan accounts and all other shares of Common Stock beneficially owned by the listed persons.
Beneficial Ownership as of December 31, 1999
CSW Common Underlying CSW Restricted Immediately Name Common Stock Exercisable (1) (2) (3) Options (3) --------------------------------------------------------------- CSW Molly Shi Boren 5,663 E.R. Brooks 161,237 8,153 86,842 Donald M. Carlton 10,120 T.J. Ellis 41,395 542 37,733 Glenn Files 65,636 2,904 44,319 Joe H. Foy 2,834 Thomas M. Hagan 27,984 779 21,818 William Howell 1,220 Robert W. Lawless 5,433 Venita McCellon-Allen 21,747 751 15,267 Ferd. C. Meyer, Jr. 60,229 3,799 42,556 James L. Powell 6,101 Glenn D. Rosilier 93,004 3,799 51,555 Richard L. Sandor 620 T. V. Shockley, III 101,692 4,844 69,564 Lawrence B. Connors 28,700 779 15,597 Wendy G. Hargus 16,944 725 12,650 Stephen J. McDonnell 40,169 725 15,145 Kenneth C. Raney, Jr. 16,881 725 9,476 Michael D.Smith 19,892 751 16,445
---------------------------------- TOTAL 727,501 29,276 438,967
(1)Beneficial ownership percentages are all less than one percent and therefore are omitted. (2)These individuals currently have voting power, but not investment power, with respect to these shares. (3)These shares are included in the CSW Common column.
The following tables show securities beneficially owned as of December 31, 1999, by each director, the President, Executive Officers and all directors and Executive Officers as a group for each of the U.S. Electric Operating Companies. Share amounts shown in this table include options exercisable within 60 days after December 31, 1999, restricted stock, CSW Common Stock credited to CSW Retirement Savings Plan accounts and all other CSW Common Stock beneficially owned by the listed persons.
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Each of the U.S. Electric Operating Companies has one or more series of preferred stock outstanding. As of December 31, 1999, none of the individuals listed in the following tables owned any shares of preferred stock of any of the U.S. Electric Operating Companies.
Beneficial Ownership as of December 31, 1999 CSW Common Underlying CSW Restricted Immediately Name Common Stock Exercisable (1) (2) (3) Options (3) ---------------------------------------------------------------- CPL John F. Brimberry 1,542 - -- E. R. Brooks 161,237 8,153 86,842 Glenn Files 65,636 2,904 44,319 Ruben M. Garcia -- -- -- Robert A. McAllen 250 -- -- Pete Morales, Jr. -- -- -- H. Lee Richards 1,400 -- -- J. Gonzalo Sandoval 12,758 725 2,916 Gerald E. Vaughn 21,699 725 15,010 Wendy Hargus 16,944 725 12,650 Alphonso R. Jackson 7,151 221 6,666 R. Russell Davis 1,406 -- 1,406 Brenda L. Snider 834 -- -- ----------------------------------- TOTAL 290,857 13,453 169,809 -----------------------------------
PSO E. R. Brooks 161,237 8,153 86,842 T. D. Churchwell 17,137 1,076 13,601 Harry A. Clarke -- -- -- Glenn Files 65,636 2,904 44,319 Paul K. Lackey, Jr. -- -- -- Paula Marshall-Chapman -- -- -- William R. McKamey 15,655 725 3,323 Dr. Robert B. Taylor, Jr. -- -- -- Wendy Hargus 16,944 725 12,650 R. Russell Davis 1,406 -- 1,406 Lina P. Holm 789 -- -- ------------------------------------ TOTAL 278,804 13,583 162,141 ------------------------------------
SWEPCO Karen C. Adams 2,601 -- 880 E. R. Brooks 161,237 8,153 86,842 James E. Davison 34,175 -- -- Glenn Files 65,636 2,904 44,319 Dr. Frederick E. Joyce -- -- -- John M. Lewis -- -- -- William C. Peatross -- -- -- Maxine P. Sarpy 100 -- -- Michael H. Madison 14,100 725 6,802 Wendy Hargus 16,944 725 12,650 R. Russell Davis 1,406 -- 1,406 Marilyn S. Kirkland 289 -- -- ------------------------------------ TOTAL 296,488 12,507 152,899 ------------------------------------
WTU E. R. Brooks 161,237 8,153 86,842 Paul J. Brower 10,338 725 7,145 Glenn Files 65,636 2,904 44,319 Tommy Morris 2,000 -- -- Dian G. Owen -- -- -- James M. Parker -- -- -- F. L. Stephens 15,215 600 -- Alphonso R. Jackson 7,151 221 6,666 Wendy Hargus 16,944 725 12,650 R. Russell Davis 1,406 -- 1,406 Martha Murray 3,583 -- -- ------------------------------------ TOTAL 283,510 13,328 159,028 ------------------------------------ (1)Beneficial ownership percentages are all less than one percent and therefore are omitted. (2)These individuals currently have voting power, but not investment power, with respect to these shares. (3)These shares are included in the CSW Common column.
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ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
CSW None.
U.S. Electric Operating Companies None.
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PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report on this Form 10-K.
(1) Financial Statements. Reports of Independent Public Accountants on the financial statements for CSW and subsidiary companies, CPL, PSO, SWEPCO and WTU are listed under ITEM 8 herein.
The financial statements filed as a part of this report for CSW and subsidiary companies, CPL, PSO, SWEPCO and WTU are listed under ITEM 8 herein.
(2) Exhibits. Exhibits for CSW, CPL, PSO, SWEPCO and WTU are listed in (c) Index to Exhibits below.
(b) Reports on Form 8-K.
CSW Date of earliest event reported: October 8, 1999 Date of report: October 18, 1999 Item 5. Other Events and Item 7. Financial Statements and Exhibits, news release related to the sale of 50% equity interest in the Sweeny electric generating plant.
CSW CPL, PSO, SWEPCO and WTU Date of earliest event reported: November 17, 1999 Date of report: December 7, 1999 Item 5. Other Events and Item 7. Financial Statements and Exhibits, news release reporting a FERC ALJ finding that the AEP Merger is in the public interest and a news release reporting the Louisiana Commission's approval of an agreement and stipulation covering rates to retail customers.
CSW CPL, PSO, SWEPCO and WTU Date of earliest event reported: December 16, 1999 Date of report: December 17, 1999 Item 5. Other Events and Item 7. Financial Statements and Exhibits, news release reporting amendment of the AEP Merger agreement extending the term for closing until June 30, 2000.
CSW CPL, SWEPCO and WTU Date of earliest event reported: January 10, 2000 Date of report: January 25, 2000 Item 5. Other Events and Item 7. Financial Statements and Exhibits, copies of news release and Texas Commission filing by CSW and its three electric utilities
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serving Texas jurisdictional customers announcing a business separation plan for "unbundling" Texas electrical utilities into three entities: a retail electric provider, a power generation company and an energy delivery company.
SWEPCO Date of earliest event reported: February 4, 2000 Date of report: February 4, 2000 Item 5. Other Events and Item 7. Financial Statements and Exhibits, reporting SWEPCO's 1999 earnings in anticipation of filing a Form S-3 registration statement with the SEC for a new debt offering. Exhibits include a ratio of earnings to fixed charges and a financial data schedule.
CSW CPL, PSO, SWEPCO and WTU Date of earliest event reported: January 25, 2000 Date of report: February 14, 2000 Item 5. Other Events and Item 7. Financial Statements and Exhibits, news releases reporting regulatory approvals of AEP Merger from United Kingdom's Department of Trade and Industry and United States Department of Justice; news release reporting a settlement between CPL and the Texas Commission relating to the initial securitization of stranded costs; and the reporting of CPL's 1999 earnings in anticipation of a new debt offering. Exhibits include a ratio of earnings to fixed charges and a financial data schedule.
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CSW SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 21, 2000. The signature of the undersigned registrant shall be deemed to relate only to matters having reference to such registrant and any subsidiaries thereof.
CENTRAL AND SOUTH WEST CORPORATION
By: Lawrence B. Connors Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 21, 2000. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant and any subsidiaries thereof.
Signature Title - --------- ----- E. R. Brooks Chairman, CEO and Director (Principal Executive Officer)
Glenn D. Rosilier Executive Vice President and Chief Financial Officer (Principal Financial Officer)
Lawrence B. Connors Controller (Principal Accounting Officer)
*Molly Shi Boren Director *Dr. Donald M. Carlton Director *T. J. Ellis Director *Joe H. Foy Director *William R. Howell Director *Dr. Robert W. Lawless Director *James L. Powell Director *Dr. Richard L. Sandor Director *T. V. Shockley, III President, Chief Operating Officer and Director
*Lawrence B. Connors, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a power of attorney duly executed by each such person.
*By: Lawrence B. Connors Attorney-in-Fact
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CPL SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 21, 2000. The signature of the undersigned registrant shall be deemed to relate only to matters having reference to such registrant.
CENTRAL POWER AND LIGHT COMPANY
By: R. Russell Davis Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 21, 2000. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant.
Signature Title - --------- ------ J. Gonzalo Sandoval General Manager/President and Director (Principal Executive Officer)
R. Russell Davis Controller (Principal Accounting and Financial Officer)
*John F. Brimberry Director *E. R. Brooks Director *Glenn Files Director *Ruben M. Garcia Director *Alphonso R. Jackson Director *Robert A. McAllen Director *Pete Morales, Jr. Director *H. Lee Richards Director *Gerald E. Vaughn Director
*R. Russell Davis, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a power of attorney duly executed by each such person.
*By: R. Russell Davis Attorney-in-Fact
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PSO SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 21, 2000. The signature of the undersigned registrant shall be deemed to relate only to matters having reference to such registrant.
PUBLIC SERVICE COMPANY OF OKLAHOMA
By: R. Russell Davis Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 21, 2000. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant.
Signature Title - --------- ----- T. D. Churchwell President and Director (Principal Executive Officer)
R. Russell Davis Controller (Principal Accounting and Financial Officer)
*E. R. Brooks Director *Harry A. Clarke Director *Glenn Files Director *Paul K. Lackey, Jr. Director *Paula Marshall-Chapman Director *William R. McKamey General Manager and Director *Dr. Robert B. Taylor, Jr. Director
*R. Russell Davis, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a power of attorney duly executed by each such person.
*By: R. Russell Davis Attorney-in-Fact
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SWEPCO SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 21, 2000. The signature of the undersigned registrant shall be deemed to relate only to matters having reference to such registrant.
SOUTHWESTERN ELECTRIC POWER COMPANY
By: R. Russell Davis Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 21, 2000. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant.
Signature Title - --------- ----- Michael H. Madison President and Director (Principal Executive Officer)
R. Russell Davis Controller (Principal Accounting and Financial Officer)
*Karen C. Adams General Manager and Director *E. R. Brooks Director *James E. Davison Director *Glenn Files Director *Dr. Frederick E. Joyce Director *John M. Lewis Director *William C. Peatross Director *Maxine P. Sarpy Director
*R. Russell Davis, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a power of attorney duly executed by each such person.
*By: R. Russell Davis Attorney-in-Fact
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WTU SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 21, 2000. The signature of the undersigned registrant shall be deemed to relate only to matters having reference to such registrant.
WEST TEXAS UTILITIES COMPANY
By: R. Russell Davis Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 21, 2000. The signature of each of the undersigned shall be deemed to relate only to matters having reference to the above named registrant.
Signature Title - --------- ----- Paul J. Brower General Manager/President and Director (Principal Executive Officer)
R. Russell Davis Controller (Principal Accounting and Financial Officer)
*E. R. Brooks Director *Glenn Files Director *Alphonso R. Jackson Director *Tommy Morris Director *Dian G. Owen Director *James M. Parker Director *F. L. Stephens Director
*R. Russell Davis, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a power of attorney duly executed by each such person.
*By: R. Russell Davis Attorney-in-Fact
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(c) Index to Exhibits
The following exhibits indicated by an asterisk (*) preceding the exhibit number are filed herewith. The balance of the exhibits have heretofore been filed with the SEC, respectively, as the exhibits and in the file numbers indicated and are incorporated herein by reference. The exhibits marked with a plus (+) are management contracts or compensatory plans or arrangements required to be filed herewith and required to be identified as such by ITEM 14 of Form 10-K. Reference is made to a duplicate list of exhibits being filed as a part of this Form 10-K, which list, prepared in accordance with Item 102 of Regulation S-T of the SEC, immediately precedes the exhibits being filed with this Form 10-K.
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession.
CSW, CPL, SWEPCO and WTU 1 Business separation plan for "unbundling" Texas electrical utilities into three separate entities: a retail electric provider, a power generation company and an energy delivery company filed with the Texas Commission on January 10, 2000, (incorporated herein by reference to CSW's, CPL's, SWEPCO's and WTU's Form 8-K dated January 10, 2000).
(3) Articles of Incorporation and Bylaws.
CSW 1 Certificate of Amendment to Second Restated Certificate of Incorporation of CSW (incorporated herein by reference to Item 10, Exhibit B-1.2 to the 1993 CSW annual report on Form U5S, File No. 1-1443). 2 Bylaws of CSW, as amended January 20, 1999 (incorporated herein by reference to Exhibit 3.2 to CSW's Form 10-K dated December 31, 1998, File No. 1-1443).
CPL 3 Restated Articles of Incorporation Without Amendment, Articles of Correction to Restated Articles of Incorporation Without Amendment, Articles of Amendment to Restated Articles of Incorporation, Statements of Registered Office and/or Agent, and Articles of Amendment to the Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to CPL's Form 10-Q dated March 31, 1997). 4 Bylaws of CPL, as amended (incorporated herein by reference to Exhibit 3.1 to CPL's Form 10-Q dated September 30, 1996, File No. 0-346).
PSO 5 Restated Certificate of Incorporation of PSO (incorporated herein by reference to Exhibit B-3.1 of CSW's 1996 Form U5S, File No. 1-1443). 6 Bylaws of PSO, as amended (incorporated herein by reference to Exhibit 3.1 of PSO's Form 10-Q, dated March 31,1998, File No. 0-343).
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SWEPCO 7 Restated Certificate of Incorporation, as amended through May 6, 1997, including Certificate of Amendment of Restated Certificate of Incorporation (both incorporated herein by reference to Exhibit 3.4 to SWEPCO's Form 10-Q dated March 31, 1997, File No. 1-3146). 8 Bylaws of SWEPCO, as amended (incorporate herein by reference to Exhibit 3.3 to SWEPCO's Form 10-Q dated September 30, 1996, File No. 1-3146).
WTU 9 Restated Articles of Incorporation, as amended, and Articles of Amendment to the Articles of Incorporation (both incorporated herein by reference to Exhibit 3.5 to WTU's Form 10-K dated March 31, 1997, File No. 0-340). 10 Bylaws of WTU, as amended (incorporated herein by reference to Exhibit 3.4 to WTU's Form 10-Q dated September 30, 1996, File No. 0-340).
(4) Instruments defining the rights of security holder, including indentures.
CSW (a) Rights Agreement dated as of December 22, 1997 between CSW and CSW Services, Inc., as Rights Agent (incorporated herein by reference to Exhibit 1 to CSW Form 8-A/A dated March 19, 1998, File No. 1-1443).
CPL (a) Indenture of mortgage or deed of trust dated November 1,1943, executed by CPL to the First National Bank of Chicago and Robert L. Grinnell as trustee, as amended through October 1, 1977 (incorporated herein by reference to Exhibit 5.01 in File No. 2-60712).
Supplemental Indentures to the First Mortgage Indenture:
Dated File Reference Exhibit September 1, 1978 2-62271 2.02 December 15, 1984 Form U-1, No. 70-7003 17 July 1, 1985 2-98944 4 (b) May 1, 1986 Form U-1, No. 70-7236 4 November 1, 1987 Form U-1, No. 70-7249 4 June 1, 1988 Form U-1, No. 70-7520 2 December 1, 1989 Form U-1, No. 70-7721 3 March 1, 1990 Form U-1, No. 70-7725 10 October 1, 1992 Form U-1, No. 70-8053 10 (a) December 1, 1992 Form U-1, No. 70-8053 10 (b) February 1, 1993 Form U-1, No. 70-8053 10 (c) April 1, 1993 Form U-1, No. 70-8053 10 (d) May 1, 1994 Form U-1, No. 70-8053 10 (e) July 1, 1995 Form U-1, No. 70-8053 10 (f)
(b) CPL-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of CPL.
(1) Indenture, dated as of May 1, 1997, between CPL and the Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.1 of CPL's Form 10-Q dated March 31, 1997, File No. 0-346).
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(2) First Supplemental Indenture, dated as of May 1, 1997, between CPL and the Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.2 of CPL's Form 10-Q dated March 31, 1997, File No. 0-346). (3) Amended and Restated Trust Agreement of CPL Capital I, dated as of May 1, 1997, among CPL, as Depositor; the Bank of New York, as Property Trustee; the Bank of New York (Delaware), as Delaware Trustee; and the Administrative Trustee (incorporated herein by reference to Exhibit 4.3 of CPL's Form 10-Q dated March 31, 1997, File No. 0-346). (4) Guarantee Agreement, dated as of May 1, 1997, delivered by CPL for the benefit of the holders of CPL Capital I's Preferred Securities (incorporated herein by reference to Exhibit 4.4 of CPL's Form 10-Q dated March 31, 1997, File No. 0-346).
(c) Agreement as to Expenses and Liabilities dated as of May 1, 1997, between CPL and Capital I (incorporated herein by reference to Exhibit 4.5 of CPL's Form 10-Q dated March 31, 1997, File No. 0-346).
(d) Senior Notes Indenture dated November 15, 1998 between CPL and The Bank of New York as Trustee (incorporated herein by reference to Exhibit 4 of CPL's Form S-3 dated November 18, 1998, File No. 333-67525). (1) First Supplemental Indenture dated November 15, 1999, between CPL and The Bank of New York, as Trustee, for $200 million Floating Rate Notes due November 23, 2001 (incorporated herein by reference to Exhibit 4 of CPL's Form S-3 dated November 18, 1998, File No. 333-67525). (2) Second Supplemental Indenture dated February 16, 2000, between CPL and the Bank of New York, as Trustee, for $150 million Floating Rate Notes due February 22, 2002, (incorporated herein by reference to Exhibit 4 of CPL's Form S-3 dated November 18, 1998, File No. 333-67525).
PSO (a) Indenture dated July 1, 1945, as amended, of PSO (incorporated herein by reference to Exhibit 5.03 in Registration No. 2-60712).
Supplemental Indentures to the First Mortgage Indenture:
Dated File Reference Exhibit June 1, 1979 2-64432 2.02 December 1, 1979 2-65871 2.02 March 1, 1983 Form U-1, No. 70-6822 2 May 1, 1986 Form U-1, No. 70-7234 3 July 1, 1992 Form S-3, No. 33-48650 4 (b) December 1, 1992 Form S-3, No. 33-49143 4 (c) April 1, 1993 Form S-3, No. 33-49575 4 (b) June 1, 1993 Form 10-K, No. 0-343 4 (b) February 1, 1996 Form 8-K, March 4, 1996, No.0-343 4.01 February 1, 1996 Form 8-K, March 4, 1996, No.0-343 4.02 February 1, 1996 Form 8-K, March 4, 1996, No.0-343 4.03
(b) PSO-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of PSO.
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(1) Indenture, dated as of May 1, 1997, between PSO and The Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.6 of PSO's Form 10-Q dated March 31, 1997, File No. 0-343). (2) First Supplemental Indenture, dated as of May 1, 1997, between PSO and The Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.7 of PSO's Form 10-Q dated March 31, 1997 File No. 0-343). (3) Amended and Restated Trust Agreement of PSO Capital I, dated as of May 1, 1997, among PSO, as Depositor; The Bank of New York, as Property Trustee; The Bank of New York (Delaware), as Delaware Trustee; and the Administrative Trustee (incorporated herein by reference to Exhibit 4.8 of PSO's Form 10-Q dated March 31, 1997, File No. 0-343). (4) Guarantee Agreement, dated as of May 1, 1997, delivered by PSO for the benefit of the holders of PSO Capital I's Preferred Securities (incorporated herein by reference to Exhibit 4.9 of PSO's Form 10-Q dated March 31, 1997, File No. 0-343). (5) Agreement as to Expenses and Liabilities, dated as of May 1, 1997, between PSO and PSO Capital I (incorporated herein by reference to Exhibit 4.10 of PSO's Form 10-Q dated March 31, 1997, File No. 0-343).
SWEPCO (a) Indenture dated February 1, 1940, as amended through November 1, 1976 (incorporated herein by reference to Exhibit 5.04 in Registration No. 2-60712).
Supplemental Indentures to the First Mortgage Indenture:
Dated File Reference Exhibit August 1, 1978 2-61943 2.02 January 1, 1980 2-66033 2.02 April 1, 1981 2-71126 2.02 May 1, 1982 2-77165 2.02 August 1, 1985 Form U-1, No. 70-7121 4 May 1, 1986 Form U-1, No. 70-7233 3 November 1, 1989 Form U-1, No. 70-7676 3 June 1, 1992 Form U-1, No. 70-7934 10 September 1, 1992 Form U-1, No. 72-8041 10 (b) July 1, 1993 Form U-1, No. 70-8041 10 (c) October 1, 1993 Form U-1, No. 70-8239 10 (a)
(b) SWEPCO-obligated, mandatorily redeemable preferred securities of subsidiary trust holding solely Junior Subordinated Debentures of SWEPCO. (1) Indenture, dated as of May 1, 1997, between SWEPCO and the Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.11 of SWEPCO's Form 10-Q dated March 31, 1997, File No. 1-3146). (2) First Supplemental Indenture, dated as of May 1, 1997, between SWEPCO and the Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.12 of SWEPCO's Form 10-Q dated March 31, 1997, File No. 1-3146). (3) Amended and Restated Trust Agreement of SWEPCO Capital I, dated as of May 1, 1997, among SWEPCO, as Depositor; the Bank of New York, as Property Trustee; the Bank of New York (Delaware), as Delaware Trustee; and the Administrative Trustee (incorporated herein by reference to Exhibit 4.13 of SWEPCO's Form 10-Q dated March 31, 1997, File No. 1-3146).
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(4) Guarantee Agreement, dated as of May 1, 1997, delivered by SWEPCO for the benefit of the holders of SWEPCO Capital I's Preferred Securities (incorporated herein by reference to Exhibit 4.14 of SWEPCO's Form 10-Q dated March 31, 1997, File No. 1-3146). (5) Agreement as to Expenses and Liabilities, dated as of May 1, 1997 between SWEPCO and SWEPCO Capital I (incorporated herein by reference to Exhibit 4.15 of SWEPCO's Form 10-Q dated March 31, 1997, File No. 1-3146). (6) Senior Note Indenture dated February 4, 2000, between SWEPCO and The Bank of New York as Senior Note Trustee, (incorporated herein by reference to Exhibit 4 of SWEPCO Form S-3 dated February 4, 2000, File No. 333-96213). (a) First Supplemental Indenture, dated February 25, 2000, between SWEPCO and The Bank of New York, as Senior Note Trustee, for $150 million Floating Rate Notes due March 1, 2001 (incorporated herein by reference to Exhibit 4 of SWEPCO's Form S-3 dated February 4, 2000, File No. 333-96213).
WTU (a) Indenture dated August 1, 1943, as amended through July 1, 1973, of WTU, incorporated herein by reference to Exhibit 5.05 in File No. 2-60712.
Supplemental Indentures to the First Mortgage Indenture:
Dated File Reference Exhibit May 1, 1979 2-63931 2.02 November 15, 1981 2-74408 4.02 November 1, 1983 Form U-1, No. 70-6820 12 April 15, 1985 Form U-1, No. 70-6925 13 August 1, 1985 2-98843 4 (b) May 1, 1986 Form U-1, No. 70-7237 4 December 1, 1989 Form U-1, No. 70-7719 3 June 1, 1992 Form U-1, No. 70-7936 10 October 1, 1992 Form U-1, No. 72-8057 10 February 1, 1994 Form U-1, No. 70-8265 10 March 1, 1995 Form U-1, No. 70-8057 10 (b) October 1, 1995 Form U-1, No. 70-8057 10 (c)
(10) Material contracts.
CSW +1 Change in Control Agreement between CSW and E. R. Brooks. +2 Change in Control Agreement between CSW and Thomas V. Shockley, III. +3 Change in Control Agreement between CSW and Ferd. C. Meyer, Jr. +4 Change in Control Agreement between CSW and Glenn D. Rosilier. +5 Change in Control Agreement between CSW and Venita. McCellon-Allen. +6 Change in Control Agreement between CSW and Thomas M. Hagan. +7 Change in Control Agreement between CSW and Glenn Files. +8 Change in Control Agreement between CSW and Robert L. Zemanek. +9 Change in Control Agreement between CSW and Richard H. Bremer. +10 Change in Control Agreement between CSW and Richard P. Verret.
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+11 Change in Control Agreement between CSW and T. J. Ellis. +12 Change in Control Agreement between CSW and Terry D. Dennis. +13 Change in Control Agreement between CSW and Bruce Evans. +14 Change in Control Agreement between CSW and T.D. Churchwell. +15 Change in Control Agreement between CSW and Michael D. Smith. +16 Change in Control Agreement between CSW and Floyd Nickerson. +17 Restricted Stock Plan for Central and South West Corporation (incorporated herein by reference to Exhibit 10 (a) to CSW's 1990 Form 10-K, File No. 1-1443). +18 Central and South West System Special Executive Retirement Plan as amended and restated effective July 1, 1997 (incorporated herein by reference to Exhibit 10 (18) to CSW's 1998 Form 10-K, File No. 1-1443). +19 Executive Incentive Compensation Plan for Central and South West System (incorporated herein by reference to Exhibit 10 (c) to CSW's 1990 Form 10-K, File No. 1-1443). 20 Central and South West Corporation Stock Option Plan (incorporated herein by reference to Exhibit 10 (d) to CSW's 1990 Form 10-K, File No. 1-1443). 21 Central and South West Corporation Deferred Compensation Plan for Directors (incorporated herein by reference to Exhibit 10 (e) to CSW's 1990 Form 10-K, File No. 1-1443).
+22 Central and South West Corporation 1992 Long-Term Incentive Plan (incorporated herein by reference to Appendix A to the Central and South West Corporation Notice of 1992 Annual Meeting of Shareholders and Proxy Statement). 23 Agreement and Plan of Merger, dated as of December 21, 1997, by and among American Electric Power Company, Inc.; a New York Corporation, Augusta Acquisition Corporation, a Delaware Corporation and a wholly-owned subsidiary of AEP; and Central and South West Corporation, a Delaware Corporation (incorporated herein by reference to the 1998 Joint Proxy Statement, File No. 1-1443). 24 Amendment to the AEP Merger agreement extending the term for closing until June 30, 2000. (incorporated herein by reference to CSW, CPL, PSO, SWEPCO and WTU Form 8-K dated December 17, 1999). +25 Central and South West Corporation Executive Deferred Savings Plan as amended and restated effective as of January 1, 1997 (incorporated herein by reference to Exhibit 10 (24) to CSW's 1998 Form 10-K, File No. 1-1443).
(12) Statements re computation of ratios.
CPL, PSO, SWEPCO and WTU * 1 CPL's Statement re computation of Ratio of Earnings to Fixed Charges for the five years ended December 31, 1999. * 2 PSO's Statement re computation of Ratio of Earnings to Fixed Charges for the five years ended December 31, 1999. * 3 SWEPCO's Statement re computation of Ratio of Earnings to Fixed Charges for the five years ended December 31, 1999. * 4 WTU's Statement re computation of Ratio of Earnings to Fixed Charges for the five years ended December 31, 1999.
* (13) Annual report to security holders. * 1 CSW's 1999 Financial Report. * 2 CSW's 1999 Summary Annual Report.
* (21) Subsidiaries of the registrant (CSW).
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(23) Consent of experts and counsel.
CSW, CPL, PSO * 1 CSW's Consent of Independent Public Accountants. * 2 CSW UK Holdings Consent of Independent Public Accountants. * 3 CSW UK Finance Company Consent of Independent Public Accountants * 4 CPL's Consent of Independent Public Accountants. * 5 PSO's Consent of Independent Public Accountants. * 6 SWEPCO's Consent of Independent Public Accountants.
(24) Power of attorney.
CSW * 1 Power of Attorney. * 2 Power of Attorney. * 3 Power of Attorney. * 4 Power of Attorney. * 5 Board Resolution Authorizing Power of Attorney.
CPL * 6 Power of Attorney. * 7 Power of Attorney. * 8 Power of Attorney. * 9 Board Resolution Authorizing Power of Attorney.
PSO * 10 Power of Attorney. * 11 Power of Attorney. * 12 Power of Attorney * 13 Board Resolution Authorizing Power of Attorney.
SWEPCO * 14 Power of Attorney. * 15 Power of Attorney. * 16 Power of Attorney. * 17 Board Resolution Authorizing Power of Attorney
WTU * 18 Power of Attorney. * 19 Power of Attorney. * 20 Power of Attorney. * 21 Board Resolution Authorizing Power of Attorney.
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(27) Financial Data Schedules.
CSW, CPL, PSO, SWEPCO and WTU * 1 CSW's Financial Data Schedules. * 2 CPL's Financial Data Schedules. * 3 PSO's Financial Data Schedules. * 4 SWEPCO's Financial Data Schedules. * 5 WTU's Financial Data Schedules.
(d) Index to Financial Statement Schedules.
Other Schedules.
All other exhibits and schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or related notes to financial statements.
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