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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 1-1443
Central and South West Corporation
(Exact name of registrant as specified in its charter)
Delaware 51-0007707
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1616 Woodall Rodgers Freeway, Dallas, Texas 75202
(Address of principal executive offices)
(Zip Code)
(214) 777-1000
(Registrant's telephone number, including area code)
___________________________________________________
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares of Common Stock outstanding at April 30, 1994: 188,886,853
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CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. (Unaudited)
Consolidated Statements of Income for the Three Months Ended
March 31, 1994 and 1993 3
Consolidated Balance Sheets as of March 31, 1994
and December 31, 1993 4 - 5
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1994 and 1993 6
Notes to Consolidated Financial Statements 7 - 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 13 - 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 16 - 17
Item 2. Changes in Securities. Inapplicable
Item 3. Defaults upon Senior Securities. Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders. 18
Item 5. Other Information. 18 - 19
Item 6. Exhibits and Reports on Form 8-K. 19
Signature. 20
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PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
1994 1993
(as restated)
(Millions, except per share
amounts)
OPERATING REVENUES $ 850 $ 810
OPERATING EXPENSES AND TAXES
Fuel and purchased power 289 251
Gas purchased for resale 110 122
Other operating 166 162
Maintenance 41 38
Depreciation and amortization 87 80
Taxes, other than Federal income 49 46
Federal income taxes 15 14
757 713
OPERATING INCOME 93 97
OTHER INCOME AND DEDUCTIONS
Mirror CWIP liability amortization 17 19
Other 6 (2)
23 17
INCOME BEFORE INTEREST CHARGES 116 114
INTEREST CHARGES
Interest on long-term debt 53 58
Interest on short-term debt and other 15 10
68 68
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES 48 46
Cumulative effect of changes in accounting principles - 46
NET INCOME 48 92
Preferred stock dividends 5 5
NET INCOME FOR COMMON STOCK $ 43 $ 87
AVERAGE COMMON SHARES OUTSTANDING 188.5 188.3
EARNINGS PER SHARE OF COMMON STOCK
BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES $ 0.23 $ 0.23
CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING PRINCIPLES - 0.24
EARNINGS PER SHARE OF COMMON STOCK $ 0.23 $ 0.47
DIVIDENDS PAID PER SHARE OF COMMON STOCK $ 0.425 $ 0.405
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1994 1993
(Millions)
ASSETS
PLANT
Electric Utility
Production $ 5,779 $ 5,775
Transmission 1,238 1,228
Distribution 2,402 2,362
General 726 709
Construction work in progress 384 371
Nuclear fuel 160 160
Gas 767 752
11,456 11,357
Less - Accumulated depreciation 3,624 3,550
7,832 7,807
CURRENT ASSETS
Cash and temporary cash investments 71 62
Special deposits 1 2
Accounts receivable 662 813
Materials and supplies, at average cost 150 149
Fuel inventory, substantially at average cost 90 102
Gas inventory/products for resale,
substantially at LIFO 3 28
Unrecovered fuel cost 80 70
Prepayments and other 51 53
1,108 1,279
DEFERRED CHARGES AND OTHER ASSETS
Deferred plant costs 517 518
Mirror CWIP asset 329 332
Other non-utility investments 244 253
Income tax related regulatory assets 190 182
Other 270 252
1,550 1,537
$ 10,490 $ 10,623
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
1994 1993
(Millions)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock, $3.50 par value, authorized
350,000,000 shares in 1994 and 1993; issued and
outstanding 188,738,000 shares in 1994 and
188,405,000 shares in 1993 $ 661 $ 659
Paid-in capital 525 518
Retained earnings 1,716 1,753
Total Common Stock Equity 2,902 2,930
Preferred stock
Not subject to mandatory redemption 292 292
Subject to mandatory redemption 55 58
Long-term debt 2,788 2,749
Total Capitalization 6,037 6,029
CURRENT LIABILITIES
Long-term debt/preferred stock due within
twelve months 14 26
Short-term debt 800 769
Short-term debt - CSW Credit, Inc. 580 641
Accounts payable 265 306
Accrued taxes 55 98
Accrued interest 45 55
Accrued restructuring charges 97 97
Other 158 168
2,014 2,160
DEFERRED CREDITS
Income taxes 1,965 1,935
Investment tax credits 331 335
Mirror CWIP liability and other 143 164
2,439 2,434
$ 10,490 $ 10,623
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
1994 1993
(as restated)
(Millions)
OPERATING ACTIVITIES
Net income $ 48 $ 92
Non-cash items included in net income
Depreciation and amortization 94 85
Deferred income taxes and investment tax credits 20 6
Cumulative effect of changes in accounting
principles - (46)
Mirror CWIP liability amortization (17) (19)
Changes in assets and liabilities
Accounts receivable 41 (4)
Unrecovered fuel costs/fuel refunds due
customers (9) 4
Accounts payable (32) (52)
Accrued taxes (43) (23)
Other 5 83
107 126
INVESTING ACTIVITIES
Capital expenditures and acquisitions (121) (100)
Non-affiliated accounts receivable collections
(purchases) 49 (248)
CSW Energy projects 68 (26)
Other (9) (3)
(13) (377)
FINANCING ACTIVITIES
Common stock sold 9 -
Proceeds from issuance of long-term debt 40 203
Redemption of preferred stock (4) (7)
Retirement of long-term debt (1) (17)
Reacquisition of long-term debt (14) (379)
Change in short-term debt (30) 248
Special deposits for reacquisition of long-term
debt - 199
Payment of dividends (85) (81)
(85) 166
NET CHANGE IN CASH AND CASH EQUIVALENTS 9 (85)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 62 110
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 71 $ 25
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $ 72 $ 69
Income taxes paid $ 6 $ -
The accompanying notes to consolidated financial statements are an integral part
of these statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPLES OF PREPARATION
The condensed consolidated financial statements included herein have been
prepared by Central and South West Corporation (Corporation or CSW), pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC).
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, although
the Corporation believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these condensed
consolidated financial statements be read in conjunction with the consolidated
financial statements and the notes thereto included in the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1993.
The unaudited financial information furnished herewith reflects all
adjustments (consisting only of normal recurring adjustments, except for the
1993 cumulative effect of changes in accounting principles discussed below)
which are, in the opinion of management, necessary for a fair statement
of the results of operations for the interim periods. Information for
quarterly periods is affected by seasonal variations in sales, rate changes,
timing of fuel expense recovery and other factors.
Certain financial statement items for 1993 have been reclassified
or restated to conform to the 1994 presentation. Pursuant to
changes in accounting principles made in December 1993, but effective January
1, 1993, CSW has restated 1993 first quarter information to reflect the change
in its method of accounting for unbilled revenues and for the adoption of
Statement of Financial Accounting Standards (SFAS) No. 112, Employers'
Accounting for Postemployment Benefits. The effect of restating net income for
the quarter ended March 31, 1993 is as follows:
Earnings
Operating Operating Net per Share
Revenues Income Income of Common
Quarter Ended (millions) Stock
1993
March 31-Reported $817 $102 $ 57 $0.28
Adjustment (7) (5) 35 0.19
March 31 - Restated $810 $ 97 $ 92 $0.47
2. LITIGATION AND REGULATORY PROCEEDINGS
See the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1993 for additional discussion of litigation and regulatory
proceedings.
Central Power and Light Company (CPL)
South Texas Project (STP) Outage
CPL owns 25.2% of STP, a two unit nuclear power plant. In February 1993,
Units 1 and 2 of STP were shut down by Houston Lighting & Power Company (HLP),
the Project Manager, in an unscheduled outage resulting from mechanical problems
relating to two auxiliary feedwater pumps. HLP determined that the units would
not be restarted until the equipment failures had been corrected and the Nuclear
Regulatory Commission (NRC) briefed on the causes of these failures and the
corrective actions that were taken. The NRC formalized that commitment in a
confirmatory action letter, and sent an Augmented Inspection Team to STP to
review the matter. In March 1993 the NRC began a diagnostic evaluation of STP.
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Conducted infrequently, diagnostic evaluations are broad-based evaluations of
overall plant operations and are intended to review the strengths and weaknesses
of the licensee's performance and to identify the root cause of performance
problems. During and subsequent to the June 1993 completion of the evaluation,
the NRC supplemented its confirmatory action letter to identify additional
issues to be resolved and verified by the NRC before restart of STP. Such
issues included the need to reduce backlogs of engineering and maintenance work
and to simplify work processes which placed excessive burdens on operating and
other plant personnel. The report also identified the need to strengthen
management communications, oversight and teamwork as well as the capability to
identify and correct the root causes of problems.
The NRC announced in June 1993 that STP was placed on its "watch list" of
plants with "weaknesses that warrant increased NRC attention." Plants on the
watch list are subject to closer NRC oversight. STP will remain on the NRC's
watch list until both units have returned to service and a period of good
performance demonstrated.
During the outage, the necessary improvements have been made by HLP to
address the issues in the confirmatory action letter, as supplemented. On
February 15, 1994, the NRC agreed that the confirmatory action letter issues had
been resolved with respect to Unit 1, and that it supported HLP's recommendation
that Unit 1 was ready to restart. Unit 1 restarted in late February 1994 and
operated at low power for three days. The Project Manager then shut down Unit 1
due to a problem with a steam generator feedwater valve and a steam generator
tube leak. The Project Manager has made the necessary repairs and restarted
Unit 1, which reached the 100 percent output level in early April.
While many of the corrective actions taken are common to both units, HLP
must demonstrate to the NRC that these issues are also resolved with respect to
Unit 2 before it is restarted. Unit 2 reloading of nuclear fuel was completed
in early April and the unit is expected to resume service during the second
quarter of 1994. The outage has not affected CPL's ability to meet customer
demands because of existing capacity and CPL's ability to purchase additional
energy from affiliates and nonaffiliates.
During the outage, CPL's fuel and purchased power costs have been, and are
expected to continue to be, increased as the power normally generated by STP
must be replaced through sources with higher costs. It is unclear how the
Public Utility Commission of Texas (Texas Commission) will address the
reasonableness of higher costs associated with the outage. At January 31, 1993,
before the start of the STP outage, CPL had an over-recovered fuel balance of
$5.2 million, exclusive of interest. At April 30, 1994, CPL's under-recovered
fuel balance was $66.8 million, exclusive of interest. This under-recovery of
fuel costs, while due primarily to the STP outage, was also affected by changes
in fuel prices and timing differences. CPL cannot accurately estimate the
amount of any future under- or over-recoveries due to the unpredictable nature
of the above factors. Although there is the potential for disallowance of fuel-
related costs, such determination cannot be made until fuel costs are reconciled
with the Texas Commission. If a significant portion of fuel costs were
disallowed by the Texas Commission, the Corporation could experience a material
adverse effect on its consolidated results of operations in the year of
disallowance. CPL is required to file a reconciliation of its fuel costs by the
last quarter of 1994 in accordance with a Texas Commission order.
Management believes that the operating outage at STP will not have a
material effect on the Corporation's financial condition or on its consolidated
results of operations.
Rate Cases
During December 1993 and January 1994, several cities (Cities) in CPL's
service territory, which together account for approximately 40% of CPL's base
revenues, exercised their rights to require CPL to file rate cases to determine
if its rates are fair, just and reasonable. The Cities informed CPL that this
rate review was precipitated by the outage at STP, leading the Cities to
question whether STP should continue to be included in CPL's rate base.
Further, the Cities question whether CPL is earning an excessive return on
equity. The governing bodies of these Cities have original jurisdiction over
rates only within their incorporated limits.
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In February and March 1994, certain Cities passed resolutions ordering CPL
to reduce rates by amounts ranging from $73 million to $137 million, if applied
on a total company basis. The rate reductions are based on removal of a portion
of STP costs from base rates. The orders only affect the rates of customers who
take service within these Cities' limits. CPL has appealed all of these
actions, and intends to timely appeal any others, to the Texas Commission, which
has authority to stay their effectiveness.
Similar challenges to CPL's rates were filed with the Texas Commission by
the Office of Public Utility Counsel (OPUC), the Texas Commission General
Counsel, and affected customers (collectively Customer Cases). In its
complaint, OPUC has alleged CPL is overearning by amounts ranging from $16
million to $214 million annually, if applied on a total company basis, based on
a range of returns on common equity, removal of the investment in STP Unit 2
from rate base and certain other matters. The Texas Commission has
exclusive original jurisdiction over the rates and services of CPL in the
areas outside municipal limits of cities who retain original jurisdiction.
On March 25, 1994, a Texas Commission administrative law judge
consolidated CPL's appeals of the Cities' Cases with the Customer Cases filed at
the Texas Commission and set a procedural schedule calling for CPL to file its
rate case by April 11, 1994.
CPL contends that both units of STP belong in rate base. This
contention is based on Unit 1 providing electrical output at 100 percent level
in early April and the expectation that Unit 2 will restart in the second
quarter of 1994. Additionally, the long-term benefits nuclear generation
provides to customers further support their inclusion in rate base. There are
no Texas Commission precedents addressing the removal of a nuclear plant from
rate base. CPL's base rates were last set in 1990. Based on inclusion of both
units of STP in rate base, CPL believes it is not collecting excessive revenues,
even when considering market rates of return on common equity that are generally
lower than they were in 1990 when base rates were last set. If CPL ultimately
is unsuccessful in maintaining rates at their current level, the Corporation
could experience a material adverse effect on its financial condition or
consolidated results of operations.
On March 31, 1994, a scheduling and procedural settlement agreement
(Agreement), relating to the above matters, was filed with the Texas
Commission. The Agreement was executed by CPL and each of the eight parties to
the proceedings. The eight parties are: a group of eleven Cities, the Texas
Commission General Counsel, OPUC, Texas Industrial Energy Consumers, the Lower
Colorado River Authority, Occidental Chemical Corporation, H. E. Butt Grocery
Company and James O. Bryant, a CPL customer. On April 1, 1994, a Texas
Commission administrative law judge approved the Agreement. The Agreement
allows CPL more time to prepare a rate case defending its rates as reasonable
and its earnings as being within established regulatory guidelines. The
Agreement moved the filing deadline for the rate case from April 11, 1994,
to July 1, 1994, and the start of the hearings from June 8, 1994, to October 31,
1994.
The parties also agreed that CPL's existing rates will remain in effect
until the Texas Commission's final order in the case. The other parties thus
agreed not to pursue lower interim rates in an interim rate proceeding. As part
of the Agreement, CPL agreed that any reductions in rates, if any are
implemented as a result of the rate case, would be effective retroactive to June
15, 1994. CPL also agreed not to seek a base rate increase in the proceeding.
The rate case will be based on a test year ending September 30, 1993. CPL
expects that a Texas Commission decision will occur near the end of the first
quarter of 1995.
In April 1994, the General Counsel and Staff of the Texas Commission
issued a Request for Proposal for an audit of the STP outage, to evaluate the
prudence of the management of STP, including the actions of HLP and the STP
management committee, of which CPL is a participant. Such review will include
the time from original commercial operation of each unit until they are returned
<PAGE> 10
from the outage to full commercial operation. CPL and HLP will pay the costs of
the audit but will have no control over the ultimate work product of the
consultant. The results of this audit are expected to be used by the General
Counsel and Staff in the CPL's fuel reconciliation proceeding, which CPL must
file by the last quarter of 1994, and may also have implications for the issues
considered in the base rate case proceedings.
Management cannot predict the ultimate outcome of these rate proceedings,
although management believes that their ultimate resolution will not have a
material adverse effect on the Corporation's financial condition or
consolidated results of operations.
Public Service Company of Oklahoma (PSO)
In March 1993, the Corporation Commission of the State of Oklahoma
(Oklahoma Commission) issued an order allowing PSO an
interim increase in retail prices of $10.1 million on an annual basis, subject
to refund. In December 1993, the Oklahoma Commission issued an order allowing
PSO an increase in retail prices of $14.4 million on an annual basis which
became effective with the billing month of February 1994.
An order issued by the Oklahoma Commission in 1991 required that the level
of gas transportation and agency fees paid to Transok Inc. (Transok), a wholly
owned subsidiary of the Corporation, permitted for recovery through the fuel
adjustment clause be reviewed in the aforementioned price proceeding. This
portion of the price review was bifurcated and is expected to be heard in late
1994. In March 1994, PSO filed testimony requesting that gas transportation
and agency fees up to $35 million annually be included in the fuel adjustment
clause. Until a new level is established, PSO is permitted to include all gas
transportation and agency fees in the fuel adjustment clause up to $30.6 million
on an annual basis.
Southwestern Electric Power Company (SWEPCO)
On March 17, 1994, SWEPCO filed a petition, designated as Docket No.
12855, with the Texas Commission to reconcile fuel costs for the period November
1989 through December 1993. Total Texas jurisdictional fuel expenses subject to
reconciliation for this 50-month period were approximately $559 million.
SWEPCO's net under-recovery for the reconciliation period was approximately $0.9
million. Discovery has begun and a hearing on the case has been scheduled to
begin July 26, 1994.
3. DIVIDENDS
The subsidiary companies' mortgage indentures, as amended and
supplemented, contain certain restrictions on the use of their retained earnings
for cash dividends on their common stocks. These restrictions do not limit the
ability of the Corporation to pay dividends to its shareholders. At March 31,
1994, $1,162 million of the subsidiary companies' retained earnings were
available for payment of cash dividends to the Corporation.
4. EARNINGS AND DIVIDENDS PER SHARE OF COMMON STOCK
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. Dividends per common share reflect per share amounts paid
during the periods.
5. COMMITMENTS AND CONTINGENT LIABILITIES
SWEPCO
In connection with the lignite mining contract for its Henry W. Pirkey
Power Plant, SWEPCO has agreed, under certain conditions, to assume the
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obligations of the mining contractor. As of March 31, 1994, the maximum SWEPCO
would have to assume is $75 million. The maximum amount may vary as the mining
contractor's need for funds fluctuates. The contractor's actual obligation
outstanding as of March 31, 1994 is $66 million.
CSW Energy (CSWE)
Through a wholly owned subsidiary, CSWE is providing construction services
to a qualifying cogeneration project. The contract provides, among other
things, that the maximum potential liability for performance and completion
guarantees is limited to the fixed price of the contract, which is approximately
$83 million. CSWE has provided additional guarantees related to the project
totaling approximately $30 million. CSWE has also entered into a purchase
agreement on a separate project to provide approximately $60 million to the
project upon the occurrence of certain events.
CSWE, with credit support from the Corporation has committed to make
equity investments in two projects in the amount of $11 million. In addition,
CSWE has committed to provide up to $245 million in construction and term
financing for two of the projects currently under construction. Of this amount
the company has provided approximately $96 million in term financing at March
31, 1994. The Corporation has direct or indirect responsibility for these
amounts.
6. FINANCING
CPL
In February 1994, CPL retired $3.5 million of 10.05% series preferred
stock at par, pursuant to its sinking fund provisions. On March 21, 1994, CPL
filed a registration statement with the SEC for the sale of preferred stock in
an aggregate amount up to $75 million. CPL may offer preferred stock subject to
market conditions and other factors. The proceeds of any such offerings will be
used principally to redeem certain of CPL's outstanding preferred stock. On May
10, 1994, CPL agreed to issue $100 million of 7.50% first mortgage bonds due May
1, 1999. The funds from these bonds will be used to repay portions of CPL's
short-term debt.
SWEPCO
In January 1994, SWEPCO redeemed $0.5 million of Series U, 9-1/8% First
Mortgage Bonds due November 1, 2019. The redemption was made under the terms of
SWEPCO's bond indenture. Also during January, an additional $1.1 million of
Series U bonds was acquired at a premium. The premium and related redemption
costs associated with this transaction will be recorded as a reduction to long-
term debt on the balance sheet and will be amortized over the life of the
original bonds (Series U).
West Texas Utilities Company (WTU)
In February 1994, WTU sold $40 million principal amount of First Mortgage
Bonds, Series S, 6-1/8%, due February 1, 2004. The proceeds were used to
reimburse WTU's treasury for the redemption of (i) WTU's $12 million aggregate
principal amount of 7-1/4% First Mortgage Bonds, Series G, due January 1, 1999,
which were redeemed on January 1, 1994, and, (ii) WTU's $23 million aggregate
principal amount of 7-7/8%, First Mortgage Bonds, Series H, due July 1, 2003,
which were redeemed on December 31, 1993.
<PAGE> 12
7. ACCOUNTING CHANGES
Effective January 1, 1993 the Corporation adopted SFAS No. 106,
Employers' Accounting for Postretirement Other Than Pensions, SFAS No. 112,
Employers' Accounting for Postemployment Benefits and SFAS No. 109,
Accounting for Income Taxes. In addition, the electric operating companies
also changed their method of accounting for unbilled revenues.
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Corporation's 1993 Annual
Report on Form 10-K. Reference is also made to the unaudited Consolidated
Financial Statements and related Notes to Consolidated Financial Statements
included herein. The information included therein should be read in conjunction
with, and is essential in understanding, the following discussion and analysis.
CAPITAL REQUIREMENTS
Construction expenditures of the Corporation and its subsidiaries (CSW
System) for the first three months of 1994 were $121 million. These
construction expenditures were primarily for improvements to existing
production, transmission and distribution facilities as well as an extension by
Transok of existing gas transportation lines. The improvements are required to
meet the needs of new customers and to satisfy the changing requirements of
existing customers. The extension by Transok of its gas transportation system
will form an interconnection between the eastern and western portions of its
transmission system.
FINANCING AND CAPITAL RESOURCES
The CSW System anticipates that the majority of all funds required for
construction for the remainder of the year will be provided from internal
sources. As additional funds are needed, the financial condition of the CSW
System companies should allow any required funds to be obtained from the capital
markets at reasonable rates. The CSW System utilizes short-term debt to meet
fluctuations in working capital requirements due to the seasonal nature of
electric sales. The primary source of short-term debt is the issuance of the
Corporation's commercial paper. The Corporation, in order to strengthen its
capital structure and support growth from time to time, may decide to issue
additional shares of its common stock. At March 31, 1994, consolidated
capitalization ratios were 48% common equity, 6% preferred stock and 46%
long-term debt.
PROPOSED EL PASO ELECTRIC COMPANY (EL PASO) MERGER
The Corporation and El Paso have entered into an Agreement and Plan of
Merger between El Paso and the Corporation, dated as of May 8, 1993 as amended
(Merger Agreement), under which El Paso would emerge from bankruptcy
protection as a wholly owned subsidiary of the Corporation. All classes
of El Paso's creditors and shareholders have approved the Modified
Third Amended Plan of Reorganization (Modified Plan), which sets forth the
consideration to be paid in connection with the merger. The total value of the
Corporation's offer to acquire El Paso is approximately $2.2 billion. The
aggregate number of shares of the Corporation's common stock, $3.50 per share
(CSW Common), to be issued pursuant to the Modified Plan cannot be determined
at this time due to certain contingencies, including the future price of CSW
Common, future dividend rates on CSW Common and the timing of the effective
date of the Modified Plan (Effective Date). While the total number of shares
of CSW Common ultimately to be issued cannot be determined, the value of the
shares issued is expected to be approximately $770 million based on the
anticipated effective date of early 1995. Depending on the number of shares
issued and the outcome of other matters discussed below, existing holders of
CSW Common may experience short-term dilution in earnings. Because the number
of shares of CSW Common to be issued pursuant to the Modified Plan and the
interest rates at which debt securities are to be issued in connection with the
Merger are to be set on or about the Effective Date, changes in the price of
CSW Common and the level of interest rates will effect the cost of the proposed
acquisition to the Corporation. The request to hedge the price of CSW Common
and interest rates has been removed from the Corporation's application to the
SEC for approval of the merger. The Corporation continues to monitor the
advisability of seeking authority to enter into hedging transactions.
<PAGE> 14
Completion of the merger is subject to various conditions, including
receipt of necessary regulatory approvals. The Corporation and El Paso have
initiated the process of seeking regulatory approvals, but there can be no
assurances as to when, on what terms or whether the required approvals will be
received. The success of the merger is also dependent upon certain assumptions.
The financial assumptions underlying the Modified Plan assume, among other
things, that El Paso will secure regulatory approvals necessary to implement
acceptable rate treatment. Other contingencies which could impact the success
of the merger include the risk of competition in serving key portions of
El Paso's service area, financial risk arising out of changes in interest rates
and the price of CSW Common, regulatory risk principally related to approval of
the merger and El Paso's request for a rate increase, and operating risk
associated with the ownership of an interest in the Palo Verde nuclear facility.
For additional information concerning the Corporation's proposed
acquisition of El Paso, see "ITEM 1. BUSINESS - Proposed Acquisition of El
Paso Electric Company" and "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Proposed El Paso Merger"
in the Corporation's Annual Report on Form 10-K for the year ended December 31,
1993.
RESTRUCTURING
As previously reported, the Corporation has announced a restructuring and
early retirement program designed to consolidate and restructure its operations
in order to meet the challenges of the changing electric utility industry
and to compete effectively in the years ahead. The underlying goal of the
restructuring is to enable the electric operating companies to focus on and
be accountable for serving customers. Estimated costs for the restructuring
are $97 million before taxes and were expensed in December 1993. The
restructuring continues and is expected to be completed in 1994. Certain
aspects of the restructuring may be subject to SEC approval.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1994 COMPARED TO QUARTER ENDED MARCH 31, 1993
Net Income for Common Stock. Net income for common stock decreased 51%
during the first quarter of 1994 to $43 million from $87 million in the same
quarter of 1993. The primary reason for the decrease was the impact of the
cumulative effect of changes in accounting principles realized in the first
quarter of 1993. Earnings per share decreased to $0.23 in the first quarter of
1994 as compared to $0.47 in the same quarter of 1993. Net income before the
cumulative effect of changes in accounting principles increased 4% during the
first quarter of 1994 to $48 million from $46 million in the same quarter of
1993. This increase is due primarily to increases in KWH sales in the first
quarter of 1994 when compared to the first quarter of 1993. Earnings per share
before cumulative effect of changes in accounting principles was the same in the
first quarter of 1994 and 1993, at $0.23 per share.
Operating Revenues. Operating revenues increased $40 million or 5% in
the first quarter of 1994 compared to the same period of 1993. The increase is
due primarily to increased fuel revenue and KWH sales at the electric operating
companies. Increased KWH sales are attributable to the more favorable weather
experienced in the first quarter of 1994 when compared to the first quarter of
1993, when the weather was milder than normal. Total KWH sales increased 5.1%
in total with residential KWH sales increasing 3.1%.
Fuel and Purchased Power. Fuel and purchased power increased $38 million
or 15% for the first quarter of 1994 compared to the same period of 1993. This
is due primarily to use of greater quantities of higher cost fuel.
<PAGE> 15
Gas Purchased for Resale. Gas purchased for resale declined $12 million
or 10% for the first quarter of 1994 compared to the same period of 1993. This
decline is due to a decrease in sales volumes and an increase in sales from
inventory by Transok. This decline is partially offset by lower gas prices.
Cumulative Effect of Changes in Accounting Principles. The Corporation
implemented a number of accounting changes in the first quarter of 1993. These
included SFAS No. 109, Accounting for Income Taxes and SFAS No. 112, Employers'
Accounting for Postemployment Benefits. The electric operating companies also
changed their method of accounting for unbilled revenues. These accounting
changes had a cumulative effect of increasing net income by $46 million, net of
tax.
<PAGE> 16
PART II - OTHER INFORMATION
For background and earlier developments relating to Part II information
reference is made to the Corporation's 1993 Annual Report on Form 10-K.
Item 1. Legal Proceedings.
CSW and CSWE
Cimmaron Chemical, Inc. (Cimmaron)
The Corporation and its wholly owned subsidiary, CSWE, have been named
co-defendants in a lawsuit filed by Cimmaron Chemical, Inc. (Cimmaron) in the
125th District Court of Houston, Harris County, Texas. Cimmaron alleges that
the Corporation and CSWE breached commitments to participate with Cimmaron in
the failed BioTech Cogeneration Project located in Colorado. Cimmaron claims
breach of contract, fraud and negligent misrepresentation with alleged
damages totaling $250 million. The Corporation and CSWE have answered the
suit and are in the beginning stages of pre-trial discovery. Management
cannot predict the outcome of this litigation, but believes that the
Corporation and CSWE have defenses to these complaints and are pursuing them
vigorously.
CPL
In March 1994, CPL received an administrative information request
from the Environmental Protection Agency seeking additional information about
polychlorinated biphenyl (PCB) compliance matters related to the September 1992
PCB inspection of various CPL facilities. This matter has not resulted in
any proceeding against CPL. Management does not believe that the
resolution of this matter will have a material adverse effect on Corporation's
financial condition or consolidated results of operations.
For background on this and other environmental matters, see ITEM 1.
BUSINESS - Environmental Matters and ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Environmental in the
Corporation's Annual Report on Form 10-K for the year ended December 31, 1993.
PSO
Gas Supplier Claims
PSO has been named defendant in complaints filed in Federal and state
courts of Oklahoma and Texas in 1984 through March 1994 by gas suppliers
alleging claims arising out of certain gas purchase contracts. Cases currently
pending seek approximately $37 million in actual damages, together with claims
for punitive damage which, in compliance with pleading code requirements, are
alleged to be in excess of $10,000. The plaintiffs seek relief through the
filing dates as well as attorney fees. As a result of settlements among the
parties, certain plaintiffs dismissed their claims with prejudice to further
action. The settlements did not have a significant effect on PSO's consolidated
results of operations. The remaining suits are in the preliminary stages.
Management cannot predict the outcome of these proceedings. However, management
believes that PSO has defenses to these complaints and intends to pursue them
vigorously. Management also believes that the ultimate resolution of the
remaining complaints will not have a material adverse effect on the
Corporation's consolidated results of operations.
Coal Transportation Contract
In June 1992, PSO filed suit in Federal District Court in Tulsa, Oklahoma
against a rail carrier seeking declaratory relief under a long-term contract for
<PAGE> 17
the transportation of coal. In July 1992, the defendant carrier asserted
counterclaims against PSO alleging that PSO breached the contract. The
counterclaims sought damages in an unspecified amount. In December 1993, PSO
amended its suit against the defendant carrier seeking damages and declaratory
relief under Federal and state anti-trust laws. PSO and the defendant carrier
filed motions for summary judgment on certain dispositive issues in the
litigation. In March 1994, the court issued an order granting PSO's motions for
summary judgment and denying the defendant's motion. It was not necessary for
the court to reach or decide the Federal and state anti-trust claims raised by
PSO. The court is currently considering PSO's Motion for Entry of Final
Judgment. PSO anticipates final judgment will be entered in its favor in the
near future, following which the defendant will have an opportunity to appeal.
Although management cannot predict the outcome, management believes that PSO's
interpretation and performance of the contract have been proper and intends to
vigorously pursue this case. Management also believes that the ultimate
resolution of the case will not have a material adverse effect on the
Corporation's consolidated results of operations.
Toxic Contamination Claims
PSO has been named defendant in complaints filed in Federal and state
courts of Oklahoma in 1984, 1985, 1986 and 1993. The complaints allege, among
other things, that some of the plaintiffs and the property of other plaintiffs
were contaminated with PCB's and other toxic by-products following certain
incidents, including transformer malfunctions in April 1982, December 1983 and
May 1984. To date, complaints representing approximately $735
million (including compensatory and punitive damages) of claims have been
dismissed, certain of which resulted from settlements among the parties. The
settlements did not have a significant effect on PSO's consolidated results of
operations. Remaining complaints currently total approximately $395 million, of
which approximately one-third is for punitive damages. Complaints of
approximately $1 million have been dismissed without prejudice to refile.
Discovery with regard to the remaining complaints continues. Management cannot
predict the outcome of these proceedings. However, management believes that PSO
has defenses to these complaints and intends to pursue them vigorously.
Moreover, management has reason to believe that PSO's insurance may cover some
of the claims. Management also believes that the ultimate resolution of the
remaining complaints will not have a material adverse effect on the
Corporation's consolidated results of operations.
The Corporation is party to various other legal claims and proceedings
arising in the normal course of business. Management does not expect
disposition of these matters to have a material adverse effect on the
Corporation's consolidated results of operations.
<PAGE> 18
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The annual meeting of shareholders of Central and South West Corporation
was held April 21, 1994.
(b) The shareholders elected five directors at the annual meeting.
The name of each nominee and the number of shares voted for or against
were as follows:
Nominee Votes for Votes against
T. J. Barlow 164,921,720 1,118,007
Molly Shi Boren 164,950,585 1,089,142
Arthur E. Rasmussen 164,925,222 1,114,505
Thomas V. Shockley, III 165,042,403 997,324
Lloyd D. Ward 164,864,237 1,175,490
In addition, shareholders voted to approve the appointment of Arthur Andersen &
Co., independent public accountants, as the Corporation's auditors for 1994,
with 164,729,931 votes cast for approval, 713,642 votes cast against approval
and 596,154 votes abstaining.
(c) Other matters voted upon at the annual meeting of shareholders.
No other matters (other than procedural matters) were voted upon at the
annual meeting.
Item 5. Other Information.
Proposed El Paso Merger
As previously announced the Corporation has entered into a Merger
Agreement pursuant to which El Paso would emerge from bankruptcy as a wholly
owned subsidiary of the Corporation. Background information on the proposed El
Paso merger is contained in the Corporation's Annual Report filed on Form 10-K
dated December 31, 1993. Subsequent developments are set forth below:
Texas Commission Application
Numerous parties have intervened in these proceedings. The Texas
Commission has consolidated the two cases and a hearing schedule has been
established which contemplates the issuance of a final order in February 1995.
FERC Application filed November 4, 1993
FERC Application filed January 10, 1994 as supplemented January 13, 1994
Several parties have subsequently sought to intervene or raise protests
in these proceedings.
SEC Application
The application has subsequently been amended, including the withdrawal
of the Corporation's original request to engage in hedging transactions, and the
SEC in April 1994 issued a notice of the proceeding inviting public comment. To
date several parties have intervened or sought to intervene in the proceeding.
NRC Request for Approvals
The NRC is expected to issue an order for this request in late 1994.
<PAGE> 19
New Mexico Commission Application
Subsequent to the filing of the application with the New Mexico
Commission, the Corporation has agreed not to request a rate increase in New
Mexico for at least six months after the completion of the merger with El Paso.
A schedule has been established which calls for hearings to begin in October
1994.
Other
The Corporation continues to vigorously pursue the receipt of all
regulatory approvals required in order to consummate the merger. The
Corporation can give no assurances, however, as to whether the required
regulatory approvals will be received, and if they are received, the timing of
the receipt.
El Paso has recently announced developments with respect to the
expiration of its franchise agreement with Las Cruces, New Mexico. El Paso has
also recently announced developments relating to steam generator problems and
outages at the Palo Verde Nuclear Generating Station.
El Paso is subject to the informational 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 concurring El
Paso, see El Paso's Quarterly Report on Form 10-Q dated March 31, 1994 and
the documents referenced therein and its Annual Report on Form 10-K dated
December 31, 1993 and the documents referenced therein.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
None.
(b) Reports on Form 8-K:
The Corporation filed a Current Report on Form 8-K dated March 10, 1994
updating the STP outage and the related Cities rate case filings.
The Corporation filed a Current Report on Form 8-K dated April 7, 1994
updating the Cities rate case filings.
<PAGE> 20
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTRAL AND SOUTH WEST CORPORATION
Date: May 13, 1994 /s/ WENDY G. HARGUS
Wendy G. Hargus
Controller and Chief Accounting Officer
