<PAGE> 1
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 June 30, 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 July 31, 1994: 189,476,484
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CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
INDEX
Page
Number
GLOSSARY OF TERMS 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. (Unaudited)
Consolidated Statements of Income for the Three Months
Ended and Six Months Ended June 30, 1994 and 1993 4
Consolidated Balance Sheets as of June 30, 1994
and December 31, 1993 5 - 6
Consolidated Statements of Cash Flows for the
Three Months Ended June 30, 1994 and 1993 7
Notes to Consolidated Financial Statements 8 - 16
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 17 - 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 21 - 22
Item 2. Changes in Securities. Inapplicable
Item 3. Defaults Upon Senior Securities. Inapplicable
Item 4. Submission of Matters to a Vote of Security Holders. 23
Item 5. Other Information. 23 - 26
Item 6. Exhibits and Reports on Form 8-K. 27
Signature. 28
<PAGE> 3
GLOSSARY OF TERMS
The following abbreviations or acronyms used in this text are
defined below:
Abbreviation or Definition
Acronym
APS............... Arizona Public Service Company
Bankruptcy Court.. United States Bankruptcy Court for the Western
District of Texas, Austin Division,
before which the El Paso bankruptcy
reorganization proceeding, Case No.
92-10148-FM, is pending
Cimmaron.......... Cimmaron Chemical Company
Cities............ Several cities in CPL's service territory
Corporation or CSW Central and South West Corporation, Dallas, Texas
Court of Appeals Court of Appeals, Third District of Texas,
Austin, Texas
CPL............... Central Power and Light Company, Corpus Christi, Texas
CSW Common........ CSW common stock, $3.50 par value per share
CSWE.............. CSW Energy, Inc., Dallas, Texas
CSWS.............. CSW Services, Inc., Tulsa, Oklahoma
CSW System........ CSW and its subsidiaries
Customer Cases.... Certain challenges of CPL's rates brought by
OPUC, the Texas Commission General
Counsel, and certain CPL customers
District Court.... State District Courts of Travis County, Texas
Effective Date.... The effective date of the Modified Plan
El Paso........... El Paso Electric Company
El Paso Common.... El Paso common stock, no par value
ERCOT............. Electric Reliability Council of Texas
FPA............... Federal Power Act
FERC.............. Federal Energy Regulatory Commission
HLP............... Houston Lighting & Power Company
KWH............... Kilowatt-hour
Las Cruces........ City of Las Cruces, New Mexico
MDEQ.............. Mississippi Department of Environmental Quality
Merger............ The proposed merger whereby El Paso would become
a wholly owned subsidiary of the Corporation
Merger Agreement.. Agreement and Plan of Merger between El Paso and
CSW, dated as of May 8, 1993, as amended
Modified Plan..... Modified Third Amended Plan of Reorganization
New Mexico
Commission........ New Mexico Public Utility Commission
NRC............... Nuclear Regulatory Commission
O&M............... Operations and Maintenance
Oklahoma
Commission........ Corporation Commission of the State of Oklahoma
OPUC.............. Office of Public Utility Counsel
Palo Verde........ Palo Verde Nuclear Generating Station
PCB............... Polychlorinated biphenyl
Project Manager... HLP, the Project Manager for STP
PSO............... Public Service Company of Oklahoma, Tulsa, Oklahoma
PURA.............. Public Utility Regulatory Act
Rate Order........ 1987 Texas Commission Final Order
SEC............... Securities and Exchange Commission
SFAS.............. Statement of Financial Accounting Standards
SPS............... Southwestern Public Service Company
Staff............. Staff of the Texas Commission
STP............... South Texas Project nuclear electric generating station
SWEPCO............ Southwestern Electric Power Company, Shreveport,
Louisiana
Texas Commission.. Public Utility Commission of Texas
TIEC.............. Texas Industrial Energy Consumers
Transok........... Transok, Inc., Tulsa, Oklahoma
WTU............... West Texas Utilities Company, Abilene, Texas
<PAGE> 4
PART I. FINANCIAL INFORMATION.
Item 1. Financial Statements.
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Six Months Ended
Ended
June 30, June 30,
1994 1993 1994 1993
(as restated) (as restated)
(Millions, except per share amounts)
OPERATING REVENUES $ 908 $ 894 $ 1,758 $ 1,704
OPERATING EXPENSES AND
TAXES
Fuel and purchased power 291 284 580 535
Gas purchased for resale 60 88 170 210
Other operating 169 172 335 334
Maintenance 45 51 86 89
Depreciation and
amortization 89 77 176 157
Taxes, other than
Federal income 51 43 100 89
Federal income taxes 46 35 61 49
751 750 1,508 1,463
OPERATING INCOME 157 144 250 241
OTHER INCOME AND
DEDUCTIONS
Mirror CWIP liability
amortization 17 19 34 38
Other 4 1 10 (1)
21 20 44 37
INCOME BEFORE INTEREST CHARGES 178 164 294 278
INTEREST CHARGES
Interest on long-term debt 55 54 108 112
Interest on short-term debt 16 14 31 24
and other 16 14 31 24
71 68 139 136
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGES IN ACCOUNTING
PRINCIPLES 107 96 155 142
Cumulative effect of changes
in accounting principles - - - 46
NET INCOME 107 96 155 188
Preferred stock dividends 4 5 9 10
NET INCOME FOR COMMON STOCK $ 103 $ 91 $ 146 $ 178
AVERAGE COMMON SHARES
OUTSTANDING 189.0 188.4 188.8 188.4
EARNINGS PER SHARE OF
COMMON STOCK BEFORE
CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING
PRINCIPLES $ 0.55 $ 0.48 $ 0.78 $ 0.71
CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING
PRINCIPLES - - - 0.24
EARNINGS PER SHARE OF
COMMON STOCK $ 0.55 $ 0.48 $ 0.78 $ 0.95
DIVIDENDS PAID PER SHARE
OF COMMON STOCK $ 0.425 $ 0.405 $ 0.85 $ 0.81
The accompanying notes to consolidated financial statements are
an integral part of these statements.
<PAGE> 5
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, December 31,
1994 1993
(Millions)
ASSETS
PLANT
Electric Utility
Production $ 5,787 $ 5,775
Transmission 1,274 1,228
Distribution 2,433 2,362
General 733 709
Construction work in progress 406 371
Nuclear fuel 160 160
Gas 784 752
11,577 11,357
Less - Accumulated depreciation 3,704 3,550
7,873 7,807
CURRENT ASSETS
Cash and temporary cash investments 22 62
Special deposits 1 2
Accounts receivable 900 813
Materials and supplies, at average cost 150 149
Fuel inventory, substantially at average cost 91 102
Gas inventory/products for resale,
substantially at LIFO 14 28
Unrecovered fuel cost 88 70
Prepayments and other 66 53
1,332 1,279
DEFERRED CHARGES AND OTHER ASSETS
Deferred plant costs 517 518
Mirror CWIP asset 327 332
Other non-utility investments 277 253
Income tax related regulatory assets 198 182
Other 295 252
1,614 1,537
$ 10,819 $ 10,623
The accompanying notes to consolidated financial statements are
an integral part of these statements.
<PAGE> 6
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 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 189,359,000
shares in 1994 and 188,394,000 shares
in 1993 $ 663 $ 659
Paid-in capital 539 518
Retained earnings 1,738 1,753
Total Common Stock Equity 2,940 2,930
Preferred stock
Not subject to mandatory redemption 292 292
Subject to mandatory redemption 36 58
Long-term debt 2,889 2,749
Total Capitalization 6,157 6,029
CURRENT LIABILITIES
Long-term debt/preferred stock due within
twelve months 33 26
Short-term debt 759 769
Short-term debt - CSW Credit, Inc. 776 641
Accounts payable 265 306
Accrued taxes 102 98
Accrued interest 55 55
Accrued restructuring charges 80 97
Other 151 168
2,221 2,160
DEFERRED CREDITS
Income taxes 1,991 1,935
Investment tax credits 328 335
Mirror CWIP liability and other 122 164
2,441 2,434
$ 10,819 $ 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)
Six Months
Ended
June 30,
1994 1993
(as restated)
(Millions)
OPERATING ACTIVITIES
Net income $ 155 $ 188
Non-cash items included in net income
Depreciation and amortization 195 171
Deferred income taxes and investment
tax credits 38 53
Cumulative effect of changes in
accounting principles - (46)
Mirror CWIP liability amortization (34) (38)
Changes in assets and liabilities
Accounts receivable (32) (26)
Unrecovered fuel costs/fuel refunds
due customers (16) (27)
Accrued restructuring charges (17) -
Accounts payable (50) (64)
Accrued taxes 4 6
Other (29) 35
214 252
INVESTING ACTIVITIES
Capital expenditures and acquisitions (268) (239)
Non-affiliated accounts receivable
purchases (114) (395)
CSW Energy projects 37 (69)
Other (7) (5)
(352) (708)
FINANCING ACTIVITIES
Common stock sold 25 -
Proceeds from issuance of long-term debt 138 616
Redemption of preferred stock (4) (7)
Retirement of long-term debt (2) (49)
Reacquisition of long-term debt (14) (679)
Change in short-term debt 125 451
Special deposits for reacquisition of
long-term debt - 199
Payment of dividends (170) (162)
98 369
NET CHANGE IN CASH AND CASH EQUIVALENTS (40) (87)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 62 110
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22 $ 23
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $ 131 $ 133
Income taxes paid (refunded) $ 14 $ (6)
The accompanying notes to consolidated financial statements are
an integral part of these statements.
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPLES OF PREPARATION
The condensed consolidated financial statements included
herein have been prepared by the Corporation, pursuant to the
rules and regulations of the 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 and the Quarterly Report on Form 10-Q for the
quarter ended March 31, 1994.
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 second
quarter and year-to-date information to reflect the change in its
method of accounting for unbilled revenues and restated 1993 year-
to-date information for the adoption of SFAS No. 112, Employers'
Accounting for Postemployment Benefits. The effect of restating
net income for the quarter ended and six months ended June 30,
1993 is as follows:
Earnings
Operating Operating Net per Share
Revenues Income Income of Common
(millioms) Stock
Period Ending June 30
Quarter-Reported $859 $121 $ 73 $0.36
Adjustment 35 23 23 0.12
Quarter- Restated $894 $144 $ 96 $0.48
Six Months - Reported $1,676 $223 $130 $0.64
Adjustment 28 18 58 0.31
Six Months - Restated $1,704 $241 $188 $0.95
Nuclear Decommissioning.
In May 1994, CPL received a new study updating the cost
estimates to decommission STP that indicated that CPL's share of
such costs would increase from $85 million, as stated in 1986
dollars, to $251 million, as stated in 1994 dollars. The
increase in costs occurred primarily as a result of extended on-
site storage of high level nuclear waste and increased labor
costs since the prior study. These costs are expected to be
incurred during the period 2027 to 2062. While this is the best
estimate available at this time, these costs may change between
now and when the funds are actually expended because of changes
in the assumptions used to derive the estimates, including the
prices of the goods and services required to accomplish the
decommissioning. Additional studies will be completed
periodically to update this information.
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CPL currently is recovering annually through rates $4.2
million of decommissioning costs. With the cost increases
discussed above the annual cost necessary to fund the external
trusts to provide for the future expenditures would increase to
$10.0 million. The annual cost estimates are based on an assumed
escalation rate of 5.5%, and earnings on trust assets of 6.7%.
CPL has filed a rate case as discussed in Note (2) of the Notes
to Financial Statements, and the increases in costs are a part of
the filing in that case. CPL is seeking to have the higher level
of costs determined as reasonable and necessary expenses by the
Texas Commission, and that recovery from customers and funding to
the external trust be deferred until a subsequent proceeding when
rates can be adjusted to recover the higher costs. CPL also is
seeking that the deferred amounts be determined as recoverable
over a reasonable future period.
2. LITIGATION AND REGULATORY PROCEEDINGS
See the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1993 and the Quarterly Report on Form 10-
Q for the quarter ended March 31, 1994, for additional discussion
of litigation and regulatory proceedings.
CPL
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 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 NRC was briefed on
the causes of these failures and the corrective actions that were
taken. The NRC formalized that commitment in a confirmatory
action letter.
During the outage, the necessary improvements were 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 and has
been operating substantially at or near that level since that
time.
Following the NRC's support of HLP's plans to restart Unit 2,
the unit was restarted in late May, 1994. After Unit 2 reached
the 100 percent output level in mid-June 1994, the unit was taken
out of service June 25 when a faulty signal from a monitoring
system indicated a problem with the unit's main transformer,
which resulted in shutting the unit down from operation. After
completion of necessary repairs, Unit 2 was returned to service
June 29, 1994, and it has been operating substantially at the 100
percent output level since that time.
The units' 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.
The NRC placed STP on its "watch list" of plants with
"weaknesses that warrant increased NRC attention" in June 1993.
Plants on the watch list are subject to closer NRC oversight. On
June 24, 1994, the NRC voted to keep STP on its watch list while
observing that conditions at STP are slowly improving. The NRC
noted that management has established better communications with
workers, including faster correction of problems found by
workers. A dual unit plant will remain on the watch list until
both units have returned to service and have demonstrated a
period of good performance. CPL's management believes that the
first reasonable opportunity for STP to be removed from the watch
list will be the NRC's plant review meeting in January 1995. The
NRC has commenced an inspection at STP to provide input for a
Systematic Assessment of Licensee Performance evaluation to be
completed after September 1994. The inspection is expected to
continue until mid-August 1994.
See "Rate Cases" below for a discussion of increased fuel
costs arising out of the STP outage and proceedings relating to
the recovery of such costs.
<PAGE> 10
Management believes that the operating outage at STP will not
have a material adverse effect on the Corporation's consolidated
results of operations or its financial condition.
Rate Cases
During December 1993 and January 1994, several Cities in
CPL's service territory 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.
In February and March 1994, and thereafter, most of the
cities served by CPL 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 the
cities' limits. CPL has appealed all of these actions to the
Texas Commission, which has stayed their effectiveness.
Similar challenges to CPL's rates were filed with the Texas
Commission by the OPUC, the Texas Commission General Counsel, and
affected customers. In its complaint, OPUC has alleged that CPL
is over- earning 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. The Customer Cases have been
consolidated with the appealed cities' cases.
On March 31, 1994, a scheduling and procedural settlement
agreement relating to the above matters, was filed with the Texas
Commission. The agreement was executed by CPL and each of the
parties to the proceedings at that time. On April 1, 1994, a
Texas Commission administrative law judge approved the agreement.
Under the agreement CPL filed its rate case on July 1, 1994.
Hearings are scheduled to start on 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 submitted a rate filing package on July 1, 1994 to the
Texas Commission justifying its current base rate structure. In
that filing, CPL indicated a need to increase its base rates but
asked that CPL's rates remain at the same levels approved in 1990
and 1991. CPL maintained that its rates are reasonable and its
earnings are within established regulatory guidelines. The rate
filing package showed that CPL currently has a $111 million
retail revenue deficiency and would be justified in seeking a
base rate increase. However, CPL is seeking to maintain its
current base rate structure as agreed in the settlement of its
two last rate cases. The filing also noted that the litigation
expenses associated with the rate hearings are expected to total
$7 million and requested such costs to be deferred for recovery
some time in the future.
Three residential customers represented by the same counsel
have recently requested the administrative law judge to order an
interim rate reduction. One of the residential customers was a
signatory to the March 31, 1994 agreement and motion which called
for the cancellation of interim rate proceedings and a June 15,
1994 effective date for implementation of any ordered rate
reduction. As noted above, CPL's July 1 filing supports a $111
million retail revenue deficiency and the administrative law
judge approved the prior agreement which canceled interim rate
proceedings. The administrative law judge has not ruled on this
new motion.
CPL contends that both units of STP belong in rate base.
This contention is based on Units 1 and 2 providing electrical
output at a 100 percent level beginning in April and June 1994,
<PAGE> 11
respectively. Additionally, the long-term benefits nuclear
generation provides to customers further supports 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 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.
In April 1994, the General Counsel and Staff of the Texas
Commission issued a Request for Proposal for an audit of the STP
outage, and in July a consultant was selected to perform the
audit. The purpose of the audit is to evaluate the prudence of
the management activities at 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 were returned 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.
In June 1994, the General Counsel of the Texas Commission
initiated an inquiry into the operation and management of STP.
The purpose of the proceeding is to develop a record and make
findings on STP operation and management issues to be used in
base rate and fuel reconciliation proceedings for HLP and CPL.
Under a schedule agreed to by CPL, CPL will provide its STP-
related prudence testimony on October 1, 1994. Staff testimony,
including the report of the Texas Commission's consultant, is
scheduled for early February 1995, with hearings tentatively set
to begin on March 15, 1995.
All of the parties to CPL's base rate proceedings, except for
the three residential customers previously mentioned, have filed
a motion with the administrative law judge requesting the STP
prudence issues to be addressed in the inquiry docket initiated
by general counsel and to be applied in subsequent proceedings
and not in CPL's current base rate proceeding. If the motion is
granted, the current base rate case could proceed to a final
Texas Commission determination near the end of the first quarter
of 1995. If the motion is denied and prudence issues are tried
in the existing base rate case instead of the next base rate
proceeding, a Texas Commission decision in the pending base rate
case is not likely until late in 1995. The primary issue
affected by this decision is whether the present or a future base
rate proceeding will determine if there should be any adjustment
to CPL's allowed rate of return for the circumstances associated
with the STP outage.
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 consolidated results of operations or financial
condition. However, if the CPL ultimately is unsuccessful in
maintaining rates at their current level, the Corporation could
experience a material adverse effect on its consolidated results
of operations and financial condition.
Fuel Costs and Reconciliation
During the STP outage, CPL's fuel and purchased power costs
were increased as the power normally generated by STP was
replaced through sources with higher costs. It is unclear how
the 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 June 30,
1994, CPL's under-recovered fuel balance was $77.9 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. However, any
disallowance would not be expected to materially affect the
Corporation's financial condition. CPL is required to file a
reconciliation of its fuel costs by November 15, 1994, in
accordance with a Texas Commission order.
Deferred Accounting
On June 22, 1994, the Supreme Court of Texas issued a
decision in CPL's deferred accounting case. In a 5-4 vote, the
Supreme Court of Texas sustained deferred accounting as an
<PAGE> 12
appropriate mechanism for the Texas Commission to use in
preserving the financial integrity of utilities. The Supreme
Court of Texas held that the Texas Commission can authorize
utilities to defer those costs that are incurred between the in-
service date of a plant and the effectiveness of new rates, which
includes such costs.
The Supreme Court of Texas upheld the portion of the 1992
Court of Appeals decision that permitted CPL to include in rate
base deferred post-in-service operations and maintenance costs
from Unit 1 of STP. The Supreme Court of Texas also reversed the
portion of the Court of Appeals decision providing that deferred
post-in-service carrying costs could not be included in rate
base. In addition, the Supreme Court of Texas remanded the case
to the Court of Appeals for consideration of specific unresolved
arguments. In July 1994, the State of Texas filed a motion for
rehearing of CPL's deferred accounting matter and CPL filed its
response to that motion, both of which are pending. CPL's total
pre-tax STP deferrals for the periods affected were approximately
$492 million, of which $270 million are carrying costs.
While management cannot predict the ultimate outcome of
CPL's deferred accounting proceedings, management believes that
CPL will successfully sustain approval of its deferred accounting
orders or will be successful in renegotiation of its rate
settlement, so there will be no material adverse effect on the
Corporation's consolidated results of operations or financial
condition.
PSO
In March 1993, the 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 a permanent
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 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 mid-1995.
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.
SWEPCO
On March 17, 1994, SWEPCO filed a petition 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 period is approximately $559
million. SWEPCO's net under-recovery for the reconciliation
period is approximately $0.9 million.
This under-recovered balance includes $0.5 million of
reconciled, but unrecovered fuel and interest carried forward
from SWEPCO's last fuel reconciliation, $4.1 million of currently
over-recovered fuel, $1.2 million of interest due SWEPCO on prior
under-recovered fuel balances, and a $3.3 million recovery of
litigation and settlement negotiation costs associated with
SWEPCO's renegotiation of a coal supply agreement.
Intervenor status has been granted to TIEC and to the OPUC.
TIEC's consultant filed testimony on August 3, 1994 seeking
reclassification of $22.2 million of Texas jurisdictional
expense, premised on the argument that these costs are more
appropriately recovered as components of base rates, rather than
as fuel expense. OPUC did not file testimony.
Testimony was filed by the Staff on August 10, 1994. The
Staff identified four issues in testimony and recommended a Texas
jurisdictional disallowance of approximately $1.2 million.
Discovery is continuing and a hearing on the case is
scheduled to begin August 22, 1994. SWEPCO believes that the
positions taken by TIEC and the Staff are without merit. While
management cannot predict the outcome of these proceedings,
management believes that the resolution of these proceedings will
not have a material adverse effect on the Corporation's financial
position or consolidated results of operations.
<PAGE> 13
WTU
Deferred Accounting
WTU received authorization from the Texas Commission in
September 1987 to defer O&M costs and carrying costs associated
with the Oklaunion power plant that were incurred between the
plant's December 1986 commercial operation date and December
1987, when retail rates including Oklaunion in WTU's rate base
became effective. WTU recorded approximately $32 million of
Oklaunion deferred post-in-service costs, including $25 million
of carrying costs. These deferred costs are being recovered and
amortized over the life of the Oklaunion plant.
In November 1987, the OPUC filed an appeal in the District
Court, in which the District Court upheld the Texas Commission's
final order authorizing WTU to defer the post-in-service costs
associated with Oklaunion. Upon appeal of the decision, the
Court of Appeals in September 1990 upheld the District Court's
affirmance of the Texas Commission's final order. On further
appeal, the Supreme Court of Texas in September 1993 heard WTU's
case and three other cases involving deferred accounting.
On June 22, 1994, the Supreme Court of Texas issued a
decision in each of the deferred accounting cases pending before
it, including WTU's case. In a case involving deferred
accounting for CPL and HLP, the Supreme Court of Texas sustained
deferred accounting as an appropriate mechanism for the Texas
Commission to use in preserving the financial integrity of
utilities. The Supreme Court of Texas held that the Texas
Commission can authorize utilities to defer post-in-service costs
and include those costs in rate base, and also invalidated any
distinction for this purpose between deferred O&M costs and
carrying costs.
The court, however, reversed the 1990 decision of the Court
of Appeals upholding the Texas Commission's order permitting WTU
to defer post-in-service costs associated with the Oklaunion
power plant. The Supreme Court of Texas based its reversal on
the lack of a formal Texas Commission finding under the
appropriate legal standard. It remanded the matter to the Texas
Commission for further proceedings consistent with its judgment
and instructed the Texas Commission on remand to review WTU's
deferral under a financial integrity standard rather than the
measurable harm to financial condition standard the Texas
Commission initially used. On July 22, 1994, the court's
decision in WTU's case became final when the period for filing
motions for rehearing expired without any motions having been
filed.
Concurrently with the deferred accounting case, WTU has been
litigating a related rate proceeding. In November 1987, the
Texas Commission issued a final order in WTU's retail rate case
providing for an annual increase in WTU's nonfuel related retail
revenues of $34.9 million. Rates reflecting the Rate Order were
implemented in December 1987. The Rate Order was appealed, in
turn, to the District Court and Third Court of Appeals.
In March 1993, upon remand of the initial appeals of the
Rate Order, the District Court affirmed the Rate Order in all
material respects with the single exception of the inclusion of
deferred Oklaunion carrying costs in rate base. The District
Court's ruling relied on a 1992 decision of the Court of Appeals
in the deferred accounting case of El Paso, in which the Court of
Appeals held that deferred post-in-service carrying costs could
not be included in rate base. In April 1993, WTU and other
parties filed appeals of the District Court's decision in WTU's
rate proceeding. The Court of Appeals heard oral argument in the
appeals in December 1993, and its decision is pending.
Management believes that upon remand, WTU's deferred
accounting will be ultimately sustained by the Texas Commission
on the basis that the evidentiary record in the deferred
accounting proceeding supports the authorization of deferred
accounting under the financial integrity standard set forth by
the Supreme Court of Texas. However, no assurance can be given
as to the outcome of the remanded proceeding before the Texas
Commission.
Management also believes that in the pending appeal of WTU's
rate case, the Court of Appeals will be bound by the Supreme
Court of Texas' ruling on the legal question of the Texas
Commission's authority to authorize deferred accounting and to
<PAGE> 14
include deferred costs (including carrying costs) in rate base.
Appellants in that appeal have, however, asserted other
challenges to the Rate Order, and, while the Corporation believes
these challenges are without merit, no assurance can be given as
to the outcome of the appeal with respect to those matters.
While management cannot predict the final outcome of WTU's
deferred accounting and related rate proceedings, management
believes that the resolution of these proceedings will not have a
material adverse effect on the Corporation's financial condition
or continuing consolidated results of operations. If WTU
ultimately is unable to defer post-in-service costs from
Oklaunion, or to recover such deferred costs through rates, the
Corporation could experience a material adverse impact on its
consolidated results of operations, but not on its financial
condition.
Fuel Reconciliation
On June 30, 1994, WTU filed a petition with the Texas
Commission requesting fuel reconciliation and an accounting
deferral order. WTU is seeking to reconcile historic fuel and
purchased power costs of $271.4 million incurred since WTU's last
fuel reconciliation, including certain other named associated
fuel expenses. WTU is also seeking an accounting deferral order
pursuant to the PURA in order to recover, at a future date,
certain expenses associated with litigation and negotiation
efforts to reduce fuel costs to its customers.
In its petition, WTU has indicated that for the
reconciliation period of January 1, 1991 through February 28,
1994, it has under-recovered its fuel and purchased power costs
by $3.9 million including interest thereon. WTU is not
requesting a surcharge of this under-recovery balance at this
time nor a change to its current fuel factors now in effect.
This filing addresses only the historic fuel portion of the
retail rates charged by WTU for electricity and has no impact on
non-fuel base rates presently in effect. The outcome of this
petition is not expected to have a material adverse effect on the
Corporation's financial condition or consolidated results of
operations.
Rate Proceedings
Over the past several months WTU and others have been in
discussion about WTU's current rate levels. In addition to the
right of the Texas Commission to review utility rates, cities in
WTU's service territory may also review and analyze WTU's
electric utility rates and seek adjustments under a formal
proceeding. After reviewing current and projected financial
results and after discussions with the Texas Commission and
others, on August 10, 1994, WTU announced it will file a petition
with the Texas Commission to start a process to review its
revenues, rule on proposed rate changes and implement lower
interim charges to customers. The petition, to be filed in late
August, will request that a review of WTU's revenues be conducted
by the Texas Commission to determine if WTU's revenues should be
adjusted. WTU will propose the effective date of any revenue
adjustment and new rates to be October 1, 1994. WTU will request
that until a final Texas Commission order is implemented, charges
to customers be reduced 3.25%, or approximately $5.7 million in
base revenue, also effective October 1, 1994.
Management cannot predict the ultimate outcome of these rate
proceedings. However, management believes that the ultimate
resolution of this matter will not have a material adverse effect
on the Corporation's consolidated results of operations or
financial condition.
<PAGE> 15
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 June 30,
1994, $1,249 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 obligations of the mining contractor.
As of June 30, 1994, the maximum SWEPCO would have to assume is
$76.8 million. The maximum amount may vary as the mining
contractor's need for funds fluctuates. The contractor's actual
obligation outstanding as of June 30, 1994 is approximately $65.7
million.
CSWE
Through a wholly owned subsidiary, CSWE is providing
construction services to the Mulberry cogeneration facility. 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's liability under these guarantees will gradually
decrease to zero over the next two years with performance or
completion under applicable contractual standards. CSWE has
provided additional guarantees related to the Mulberry project
totaling approximately $30 million. The project is expected to
achieve commercial operation in the third quarter of 1994, which
will add 120 megawatts of on-line capacity of which CSWE owns a
50% interest.
CSWE has entered into a purchase agreement on the Fort
Lupton project to provide $41 million to the project upon the
occurrence of certain events. In addition, CSWE has committed to
provide up to $127 million in construction and term financing to
the project. Of this amount, CSWE has provided approximately
$101 million at June 30, 1994. Phase I of the Fort Lupton
project, representing 122 megawatts, achieved commercial
operation in June 1994. Phase II of the project commenced
operations in early July 1994 bringing total on-line capacity of
the project to 272 megawatts of which CSWE owns a 50% interest.
CSWE expects to syndicate the entire construction loan to third
party lenders in late 1994.
CSWE has committed to provide up to $75 million of
construction financing to the Orange cogeneration project in
which CSWE owns a 50% interest. Of this total, CSWE has provided
$33 million at June 30, 1994. CSWE expects to obtain third party
permanent financing for this project in early 1995.
In addition, CSWE has posted security deposits and other
security instruments of approximately $19 million on ten
additional projects in various stages of development,
construction and operations.
<PAGE> 16
6. FINANCING
CPL
On May 18, 1994, CPL issued $100 million of 7-1/2% First
Mortgage Bonds, Series JJ, due May 1, 1999 and used the net
proceeds to repay a portion of CPL's short-term borrowings, to
provide working capital and for other general corporate purposes.
Additionally, CPL has $260 million remaining for the issuance of
first mortgage bonds under a shelf registration statement field
with the SEC in 1993. CPL may offer additional first mortgage
bonds subject to market condition and other factors. The
proceeds of any such offerings will be used principally to redeem
all or a portion of one or more series of CPL's outstanding first
mortgage bonds in order to lower CPL's embedded cost of long-term
debt. In July and August, 1994, CPL reacquired $0.6 million of 9-
3/8% First Mortgage Bonds, Series Z, due December 1, 2019, with
internal funds.
On August 1, 1994, CPL redeemed the remaining outstanding
$22.4 million of its 10.05% series preferred stock at the price
of $104.76 a share. The related premiums and redemption costs
are treated as a reduction of retained earnings.
WTU
In July 1994, WTU redeemed the remaining 47,000 shares of
its 7.25% Series, $100 par value, preferred stock, for $4.7
million, in accordance with mandatory and optional sinking fund
provisions. The capital required for this transaction was
provided by internally generated funds and short-term borrowings.
7. ACCOUNTING CHANGES
Effective January 1, 1993 the Corporation adopted SFAS No.
106, Employers' Accounting for Postretirement Benefits 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> 17
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 and the
Corporation's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1994. 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 CSW System for the first
six months of 1994 were $268 million. These construction
expenditures were primarily for improvements to existing
production, transmission and distribution facilities, including
CPL's 345 kilovolt transmission line between its Lon C. Hill and
Coleto Creek power stations, 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 forms 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 June 30, 1994, consolidated
capitalization ratios were 47% common equity, 6% preferred stock
and 47% long-term debt.
PROPOSED EL PASO MERGER
The Corporation and El Paso have entered into a Merger
Agreement pursuant to which El Paso would merge with a subsidiary
of the Corporation and 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
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 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. 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 an anticipated Effective Date in the first half of 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 affect the economics of the proposed
acquisition to the Corporation. The price per share of CSW
Common has declined by approximately 30% since May 8, 1993. The
Corporation continues to monitor the advisability of seeking
authority to enter into hedging transactions, which would require
SEC approval.
Completion of the Merger is subject to various conditions,
including receipt of necessary regulatory approvals. The
Corporation and El Paso have made application for such regulatory
approvals, but no assurance can be given as to when, on what
terms or whether the required approvals will be granted. 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 be allowed to increase its
rates to Texas retail customers and be permitted to account for
certain costs and tax matters in a manner that will be favorable
to the Corporation. The Corporation continues to monitor other
<PAGE> 18
contingencies which could impact the success of the Merger
including the potential loss of significant portions of El Paso's
service area (including Las Cruces, New Mexico, which has
threatened to terminate El Paso's electric service within the
city, and two military installations, Holloman Air Force Base and
White Sands Missile Range), financial risk arising out of changes
in interest rates and the price of CSW Common, regulatory risks
principally related to approval of the Merger and El Paso's
request for a rate increase in Texas as well as the effects of
any conditions imposed by Federal or state regulatory agencies on
the approval of the Merger, and operating risks 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, and "ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Proposed El Paso Electric Company (El Paso) Merger" and "ITEM 5.
OTHER INFORMATION - Proposed El Paso Merger" in the Corporation's
Quarterly Report on Form 10-Q for the quarterly period ended
March 31, 1994.
RESTRUCTURING
As previously reported, the Corporation has undertaken 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
restructuring is to enable the electric operating companies to
focus on and be accountable for serving the customer. Initial
costs for restructuring are expected to be approximately $97
million and were expensed in 1993. The Corporation does not
expect any material additional restructuring costs in 1994.
Approximately $69 million of the restructuring costs will be paid
from general corporate funds. The remaining $28 million
represents the present value of enhanced benefit amounts to be
paid from the benefit plan trusts to participants over future
years in accordance with the early retirement program. These
costs will be funded from general corporate funds to the benefit
plan trusts over future years. The restructuring is expected to
be substantially completed in 1994. Certain aspects of the
restructuring may be subject to SEC approval.
The Corporation expects to realize a number of benefits from
the restructuring. Beginning in 1994 and continuing into the
future, increased efficiencies and synergies are expected to be
realized with the elimination of previously duplicated functions.
This leads to enhanced communication and efficiency, which should
translate into a reduction in the rate of growth in O&M costs.
All restructuring costs are expected to be recovered within 18-24
months after implementation of the restructuring changes.
A number of assumptions and judgments are built into these
expected benefits. These assumptions may become inaccurate as a
result of other costs and circumstances which are beyond the
Corporation's control. If projections of future O&M costs are
too low, the restructuring should mitigate any future increases
in cost of service but may not result in any net O&M reduction
overall. It is also assumed that staffing will be adequate at
the new levels. The reductions in staff will increase the need
for automation, with resulting increases in capital and
maintenance costs. The Corporation is continuing to re-engineer
its business practices.
<PAGE> 19
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1994 COMPARED TO QUARTER ENDED JUNE 30,
1993
Net Income for Common Stock. Net income for common stock
increased 13% during the second quarter of 1994 to $103 million
from $91 million in the same quarter of 1993. This increase is
due primarily to increases in KWH sales in the second quarter of
1994 when compared to the second quarter of 1993.
Operating Revenues. Operating revenues increased $14
million or 2% in the second quarter of 1994 compared to the same
period of 1993. The increase is due primarily to increased KWH
sales at the electric operating companies. Increased KWH sales
are primarily attributable to the more favorable weather
experienced in the second quarter of 1994 when compared to the
second quarter of 1993 and also customer growth experienced in
the service territories. Total KWH sales increased 9.3% in total
with residential KWH sales increasing 10.6%.
Fuel and Purchased Power. Fuel and purchased power
increased $7 million or 2% for the second quarter of 1994
compared to the same period of 1993. This is due primarily to
increased KWH sales requiring increased generation.
Gas Purchased for Resale. Gas purchased for resale declined
$28 million or 32% for the second quarter of 1994 compared to the
same period of 1993. This decline is due to a decrease in sales
volumes to non-affiliates and lower gas prices.
Maintenance. Maintenance decreased $6 million or 12% for
the second quarter of 1994 compared to the same period of 1993
due to lower maintenance activities, including power plant
maintenance and tree trimming.
Depreciation and amortization. Depreciation and
amortization increased $12 million or 16% due to increased
depreciable property and amortization of an investment by a
subsidiary.
Taxes other than Federal Income. Taxes other than Federal
Income increase $8 million or 19% due to increased ad valorem
taxes.
SIX MONTHS ENDED JUNE 30, 1994 COMPARED TO SIX MONTHS ENDED JUNE
30, 1993
Net Income for Common Stock. Net income for common stock
decreased 18% during the first six months of 1994 to $146 million
from $178 million for the same period in 1993. Earnings per
share decreased to $0.78 in 1994 as compared to $0.95 for 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 which had a $46 million, $0.24 per
share, impact on earnings.
Net income before cumulative effect of changes in accounting
principles increased 9% for the first six months of 1994 to $155
million from $142 million for the same period in 1993. This
increase is primarily due to increases in KWH sales over 1993
levels. KWH sales increased 7.3% in 1994 over 1993 levels, with
residential increasing, 6.7%.
Operating Revenues. Operating revenues increased $54
million or 3% for the first six months of 1994 compared to the
same period of 1993. This increase in due to increased fuel
revenues and KWH sales at the electric operating companies.
Increased KWH sales are attributable to more favorable weather
and customer growth in the service territories.
Fuel and Purchased Power. Fuel and purchased power
increased $45 million or 8% for the first six months of 1994
compared to the same period of 1993. This is due to use of
greater quantities of fuel to meet higher generation.
Gas Purchased for Resale. Gas purchased for resale
decreased $40 million or 19% for the first six months of 1994
compared to the same period of 1993. This is due to a decrease
in sales volumes to non-affiliates and lower gas prices.
<PAGE> 20
Depreciation and Amortization. Depreciation and
amortization increased $19 million or 12% for the first six
months of 1994 compared to the same period of 1993. This is due
to increased fixed assets and amortization of a subsidiary's
investments.
Taxes other than Federal Income. Taxes other than Federal
Income increased $11 million or 12% for the first six months of
1994 compared to the same period of 1993. This is due primarily
to higher ad valorem taxes at the electric operating companies
related to public school funding in Texas.
Other Income. Other income increased $11 million. This
increase is primarily due to a reclassification of amortization
of a subsidiary's investment from other income to amortization.
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, $0.24 per share.
<PAGE> 21
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.
The Corporation and its wholly owned subsidiary, CSWE, have
been named co-defendants in a lawsuit filed by 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.
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
$41 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 the Corporation'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 or financial
condition.
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 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 decide the Federal and state anti-
trust claims raised by PSO. Judgment was rendered in favor of
PSO by the United States District Court in May 1994. In June
1994, the defendant rail carrier appealed this judgment to the
United States Court of Appeals for the Tenth Circuit. This
appeal is now pending.
In a related arbitration, in May 1994 an arbitration panel
made an award favorable to PSO concerning basic transportation
rates under the involved coal transportation contract, and
concerning the contract mechanism for adjustment of future
transportation rates. These arbitrated issues were not involved
in the related lawsuit. The defendant rail carrier has filed an
action to vacate the arbitration award in the District Court for
Dallas County, Texas. PSO removed this action to the United
States District Court for the Northern District of Texas, and has
<PAGE> 22
filed a motion to either dismiss this action or have it
transferred to the United States District Court for the Northern
District of Oklahoma. The defendant rail carrier has moved to
remand the action to state court. Separately, PSO has filed an
action to confirm the arbitration award in the United States
District Court for the Northern District of Oklahoma, and the
defendant rail carrier has filed a motion to dismiss this
confirmation action.
SWEPCO
SWEPCO has received notification from the MDEQ that it may be
responsible along with at least two or three other large
companies, for a suspected manufactured gas plant site in Biloxi.
SWEPCO has insufficient information at this time to determine the
extent, if any, to which contamination is present or has impacted
soil, groundwater or other conditions at the site. SWEPCO
intends to cooperate with the MDEQ and other identified parties
in investigating the Biloxi site.
The CSW System 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 or financial condition.
<PAGE> 23
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.
Various regulatory approvals and other conditions must be
obtained or met on terms satisfactory to the Corporation before
it will consummate the Merger. 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
As previously reported, on January 10, 1994, El Paso filed
for a cash base rate increase of approximately $41.4 million with
the Texas Commission, and the Corporation proposed a settlement
of the rate proceeding thus commenced that would limit such base
rate increase to $25 million. On June 23, 1994, the El Paso City
Council voted to deny El Paso's requested rate increase following
a recommendation from the City's Public Utility Regulatory Board
that electric rates for residents in the city of El Paso be
reduced by $15.7 million.
On June 24, 1994, the Staff of the Texas Commission
announced that it had filed testimony in the case before the
Texas Commission recommending an increase in base rates of $17.1
million. On June 24, the Staff also announced it was taking the
position that the proposed Merger is not in the public interest
because of the possible cost increases to the Corporation's
subsidiaries, which the Staff attributed to increased financial
risk associated with the proposed acquisition of El Paso. The
Staff also took the position that the proposed purchase price is
too high by $300-$500 million and that it disagreed with the
estimates of the Merger-related savings presented by the
Corporation and El Paso in the case. El Paso's rate case was
appealed to and is proceeding before the Texas Commission, with
hearings before a hearing examiner having begun July 20, 1994.
The hearing is expected to last from 3 to 5 months, with a final
decision from the Texas Commission expected during the first half
of 1995. At this time it is not possible to predict either the
level of rates the Texas Commission will order or whether the
Texas Commission will find the proposed Merger to be in the
public interest.
<PAGE> 24
Effective July 16, 1994, El Paso implemented under bond, a
cash base rate increase of approximately $25 million annually,
subject to refund depending on the outcome of the rate case, for
its Texas jurisdictional customers. The increase in rates is
authorized by applicable statute and regulation and was approved
by the Texas Commission. Because of the current uncertainty as
to the final outcome of the proceeding, El Paso has stated that
it anticipates it will defer the recognition of the revenues
resulting from the increased rates.
In late June 1994, intervenors and the Staff of the Texas
Commission filed testimony in the Texas regulatory proceedings
relating to the Merger. The Corporation and El Paso later filed
motions to strike the portions of such testimony relating to
certain important issues they believe have already been
conclusively decided by the Bankruptcy Court as part of its
confirmation order, including issues of fairness of certain
aspects of the Merger and the appropriateness of El Paso's
reaquisition of the Palo Verde leased assets. The Corporation
and El Paso have filed a joint motion with the Bankruptcy Court
seeking its determination as to what effect the confirmation
order has on the issues raised in their motion to strike in the
Texas proceedings.
The administrative law judge hearing the Texas proceedings
has denied intervenor and Staff procedural motions designed to
gain accelerated determinations of these issues and, subject to a
binding determination to the contrary by the Bankruptcy Court,
will decide the issues as part of the overall proceeding. The
joint motion is pending before the Bankruptcy Court.
New Mexico Regulatory
On July 13, 1994, the Hearing Examiner assigned to hear the
Corporation and El Paso's Merger Application before the New
Mexico Commission issued an Order amending the procedural
schedule. The revised schedule has hearings beginning November
14, 1994. This revised schedule should result in a Final Order's
issuance from the New Mexico Commission concurrent with the other
regulatory orders to be required in connection with the Merger.
On May 23, 1994, the Corporation announced its proposal to
extend a rate freeze in base rates for the New Mexico
jurisdiction following the effective date of the Merger through
1997. The rates would remain at the level established by the New
Mexico Commission in May 1990. Under the Corporation's proposal,
a one-time increase capped at six percent could be sought no
earlier than 1998 and no further increases could be sought until
2002. In addition, pursuant to the proposal, qualifying low-
income customers in New Mexico would receive a $6 monthly bill
reduction. The proposal replaces the application portion of the
condition to the Merger that a $6 million base rate increase for
New Mexico jurisdiction be approved by the New Mexico Commission.
FERC Applications
On August 1, 1994, the FERC issued orders in two proceedings
that relate to the Merger. In an order issued under section 211
of the FPA, the FERC preliminarily found that "a final order
requiring Southwestern Public Service Company to provide the
transmission service requested by the Applicants would comply
with the statutory standards, once reliability concerns have been
met." The FERC's order rejects assertions made by SPS that the
FERC has no authority under section 211 to order transmission
service where the purpose of the service is to allow coordination
of merging utilities' operations. The order directs SPS to
perform reliability studies so that the FERC can determine
whether provision of the requested transmission service will
unreasonably impair reliability. If, after reviewing the studies
and comments filed by SPS, CSWS and El Paso the FERC concludes
that reliability will not be unreasonably impaired, the FERC will
issue a further "proposed order" requiring El Paso, CSWS and SPS
to negotiate the rates, terms and conditions on which the
requested transmission service will be provided.
The FERC also issued an order under section 203 of the FPA
in which the FERC ruled that it will require merging utilities to
offer transmission service to others on a basis that is
comparable to their own uses of their transmission system. On
August 10, 1994, CSW and El Paso notified the FERC that they will
accept, as a condition to the FERC's approval of CSW's
acquisition of El Paso, the requirement to amend their non-ERCOT
transmission tariffs to offer "comparable service." By August
31, 1994, CSW and El Paso expect to file proposed revisions of
<PAGE> 25
the previously announced El Paso Electric System transmission
tariffs and the transmission tariffs that have been previously
filed by PSO and SWEPCO.
The FERC has not yet determined what "comparable service"
is. However, the FERC said it will hold hearings to establish
what uses PSO, SWEPCO and El Paso make of their own systems. The
hearings also will examine likely costs and benefits of the
merger and determine whether the Merger consistent with the
public interest. The FERC has instructed one of its
administrative law judges to issue an initial decision by March
3, 1995.
In agreeing to accept, as a condition to the Merger, the
requirement that comparable service be provided over CSW and El
Paso's non-ERCOT transmission facilities, both CSW and El Paso do
not intend to waive or otherwise prejudice any of their rights,
including but not limited to the right to seek rehearing of the
order or any other order the FERC later enters in these
proceedings or their right under the FPA to seek judicial review
of the order or any subsequent order or orders, if and to the
extent CSW and El Paso deem such action necessary or advisable.
Other
As previously reported, El Paso's franchise with Las Cruces,
expired March 18, 1994 and has not been replaced or extended. El
Paso has continued to provide electric service to customers
within Las Cruces and states that it expects and intends to
continue to do so. On June 6, 1994, the Las Cruces City Council
approved resolutions (i) selecting the proposals of SPS for the
provision of (a) firm wholesale electric power and (b) operation
and maintenance services for the proposed Las Cruces electric
distribution system, substations and associated transmission
facilities; and (ii) authorizing the staff of Las Cruces to
negotiate contracts with SPS related to such services. Las
Cruces continues to examine the alternatives for acquiring a
distribution system and has obtained authority to issue up to $90
million in revenue bonds to finance the acquisition.
On July 5, 1994, the City Council of Las Cruces approved a
resolution to hold a special election on August 30, 1994 for the
qualified resident voters to vote on whether Las Cruces should
acquire, through negotiated purchase or eminent domain, an
electric utility system, including distribution, subtransmission
and transmission facilities, to provide electricity to the
citizens of Las Cruces. Las Cruces has announced that it does
not intend currently to place before the voters the question of
whether the City should construct a duplicate system.
On June 14, 1994, Las Cruces filed a motion with the
Bankruptcy Court to lift the automatic stay imposed by the
bankruptcy filing to allow it to (i) commence action against El
Paso for failure to pay franchise fees after expiration of the
franchise in March 1994; (ii) enter El Paso's property to conduct
an appraisal of the electric distribution system and any
suitability studies; (iii) give notice of intent to file a
condemnation action; and (iv) commence state court condemnation
proceedings against El Paso to condemn El Paso's distribution
system within Las Cruces' city limits. The Bankruptcy Court will
hear the motion in September 1994.
On August 1, 1994, the Corporation filed its amended
response to the City's motion which states that the threat or
actual commencement of condemnation proceedings by Las Cruces or
the elimination of El Paso's service to Las Cruces by
condemnation or otherwise may constitute an El Paso Material
Adverse Effect, the absence of which is a condition of the
Corporation's obligation to consummate the Merger. The existence
of an El Paso Material Adverse Effect would preclude consummation
of the Merger and the Plan, unless the Corporation waives this
condition in writing. The Corporation's amended response
concludes that the City's intention to file a condemnation
proceeding creates a situation that must be resolved to CSW's
satisfaction before the closing of the Merger.
The operating agent of Palo Verde, APS discovered axial
cracking in steam generator tubes in Unit 2 following a tube
rupture in Unit 2 in March 1993. APS began an ongoing
examination and analysis of the tubes in each of the two steam
generators in each unit of Palo Verde and, as a result of
inspections, has identified axial cracking in Unit 3 and another
more common type of cracking in the steam generator tubes of all
three units. Although the analysis is not complete, APS has
indicated that it believes the axial cracking in Units 2 and 3 is
due to the susceptibility of tube materials to a combination of
<PAGE> 26
deposits on the tubes and the relatively high temperatures at
which all three units at Palo Verde are designed to operate.
According to statements by APS and El Paso, the form of the
degradation experienced in the steam generators is uncommon in
the nuclear industry. APS has stated that it believes it can
retard further tube degradation to acceptable levels by remedial
actions, which include chemically cleaning the steam generators
and performing analyses and adjustments that will allow the units
to be operated at lower temperatures without appreciably reducing
their power output. These analyses and adjustments have been
performed on Units 1 and 3 and currently operating at or near 98%
and 100% of capability, respectively. It is anticipated that
Unit 2, currently operating at 98% capability, will be operated
at 100% capability following its September 1994 mid-cycle outage.
El Paso has stated that it is incurring increased maintenance
costs related to the mid-cycle inspections of the steam generator
tubes and the remedial actions being undertaken to retard tube
degradation. El Paso also incurs additional costs for fuel and
purchased power during periods in which one or more units are
operated at reduced power or are removed from service for mid-
cycle inspections.
The Corporation continues to monitor these and other
developments regarding El Paso and its operations and to evaluate
the possible operational and financial effects those developments
may have on El Paso both now and in the future.
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 on
satisfactory terms, and if they are received, the timing of the
receipt.
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 Reports on Form 10-Q dated March 31, 1994 and June 30,
1994 and the documents referenced therein and its Annual Report
on Form 10-K dated December 31, 1993 and the documents referenced
therein.
<PAGE> 27
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
April 7, 1994 updating the Cities rate case filings.
The Corporation filed a Current Report on Form 8-K dated
July 5, 1994 reporting the rulings by the Supreme
Court of Texas in the deferred accounting cases of CPL and
WTU.
<PAGE> 28
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: August 15, 1994 WENDY G. HARGUS
Wendy G. Hargus
Controller and Chief Accounting Officer
