<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
CENTRAL AND SOUTH WEST CORPORATION
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
__________________________________________________________________________
2) Aggregate number of securities to which transaction applies:
__________________________________________________________________________
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:*
__________________________________________________________________________
4) Proposed maximum aggregate value of transaction:
__________________________________________________________________________
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form of schedule and the date of its filing.
1) Amount previously paid: _________________________________________________
2) Form, Schedule or Registration Statement No.: ___________________________
3) Filing party: ___________________________________________________________
4) Date filed: _____________________________________________________________
________________
* Set forth the amount on which the filing fee is calculated and state how
it was determined.
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==============================================================================
Central and South West Corporation
_____________________________________
NOTICE OF
ANNUAL MEETING
OF STOCKHOLDERS
and
PROXY STATEMENT
Annual Meeting April 20, 1995
______________________________________
March 13, 1995
==============================================================================
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TABLE OF CONTENTS
PAGE
Letter from the Chairman of the Board. . . . . . . . . . . . . . . . . . . . i
Notice of Annual Meeting of Stockholders . . . . . . . . . . . . . . . . . .ii
Proxy Statement
General Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Proposal 1 - Election of Directors. . . . . . . . . . . . . . . . . . . . 2
Proposal 2 - Approval of Appointment of Independent
Public Accountants. . . . . . . . . . . . . . . . . . . .11
Proposal 3 - Transaction of Other Business. . . . . . . . . . . . . . . .12
Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . .12
Appendix A - 1994 Financial Report
<PAGE> 4
Central and South West Corporation
1616 Woodall Rodgers Freeway
P.O. Box 660164
Dallas, Texas 75266-0164
March 13, 1995
Dear Fellow Stockholder:
You are cordially invited to attend the annual meeting of
stockholders of Central and South West Corporation on April
20, 1995, at the Marriott Hotel, 900 N. Shoreline Blvd.,
Corpus Christi, Texas, at 10:45 a.m., Central Time.
At this important meeting, you will be asked to elect
directors and approve the appointment of independent public
accountants. I urge you to read this proxy statement
carefully.
It is important that your shares are represented whether
or not you plan to attend the meeting. Please sign, date and
promptly return your proxy card in the enclosed postage-paid
envelope. Your cooperation will be appreciated.
This year, the Corporation's audited financial statements
and certain other information have been included as an
appendix to this proxy statement. Including this financial
information with the proxy statement results in substantial
cost savings and allows for the use of a summary annual
report. This summary annual report contains my letter to
stockholders, a review of operations, the independent public
accountants report and summary financial information. Your
comments on this new format are welcome.
The Board of Directors and employees of Central and South
West Corporation appreciate your continued interest in the
Corporation. I want to express our gratitude for your
confidence and continued support.
Sincerely,
/s/ E. R. BROOKS
E. R. Brooks
Chairman, President and
Chief Executive Officer
<PAGE> 5
Central and South West Corporation
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
The annual meeting (Meeting) of stockholders of CENTRAL AND SOUTH
WEST CORPORATION (Corporation) will be held on April 20, 1995, at 10:45
a.m., Central Time, at the Marriott Hotel, 900 N. Shoreline Blvd., Corpus
Christi, Texas, for the purpose of considering and voting upon proposals
to:
1. a) Elect four directors to Class II of the Corporation's Board
of Directors (Board) to serve three-year terms;
b) Elect one director to Class I of the Board to serve the
remaining two years of the current Class I term;
2. Approve the Board's selection of Arthur Andersen LLP as the
Corporation's independent public accountants for the calendar
year 1995; and
3. Transact such other business as may properly come before the
Meeting or any adjournment(s) thereof. The Board at this time
knows of no such other business.
For further information with respect to the matters to be acted upon
at the Meeting, reference is made to the Proxy Statement accompanying this
Notice. The Meeting may be adjourned from time to time without any notice
other than the announcement at the Meeting or any adjournment(s) thereof,
and any and all business for which notice is hereby given may be
transacted at any such adjourned Meeting.
Only holders of Common Stock of the Corporation of record at the
close of business on March 2, 1995 (Record Date), will be entitled to
notice of and to vote at the Meeting or any adjournment(s) thereof.
Beginning April 6, 1995, a list of stockholders entitled to vote at the
Meeting will be available for examination during ordinary business hours
by any stockholder for any purpose germane to the Meeting at the offices
of Central Power and Light Company, 539 N. Carancahua, Corpus Christi,
Texas.
A copy of the Corporation's 1994 Summary Annual Report to
Stockholders has been provided to each record stockholder of the
Corporation and does not form any part of the material for the
solicitation of proxies.
All stockholders are requested to be represented at the Meeting,
either in person or by proxy. To ensure your representation, whether or
not you plan to attend the Meeting, please promptly complete, date and
sign the enclosed proxy card and return it in the postage-paid envelope
provided. Stockholders of record as of the Record Date will be entitled
to vote in person at the Meeting whether or not they have completed and
returned proxy cards. Your proxy covers all shares of Common Stock of
which you are a registered holder as of the Record Date including all
shares held for you as of that date in the PowerShare SM Plan, the
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Corporation's Dividend Reinvestment and Stock Purchase Plan. If you are an
employee participating in the Corporation's Thrift Plus, you will receive
separate instructions from the Plan Trustee covering shares held for your
account in the plan.
You will also receive separate instructions from your broker or other
nominee if your shares are held in "street name" by your broker or another
financial institution as nominee.
By Order of the Board of Directors,
/s/ FREDERIC L. FRAWLEY
Frederic L. Frawley
Secretary
March 13, 1995
__________________________________________________________________________
YOUR VOTE IS IMPORTANT!
PLEASE COMPLETE AND RETURN THE ENCLOSED PROXY CARD,
REGARDLESS OF THE SIZE OF YOUR HOLDINGS, AS SOON AS POSSIBLE.
<PAGE> 7
Central and South West Corporation
Proxy Statement
_________________________
GENERAL INFORMATION
Purpose of the Meeting and Solicitation
This Proxy Statement is furnished to stockholders of Central and
South West Corporation (CSW or Corporation) in connection with the
solicitation of proxies by and on behalf of the Board of Directors of the
Corporation (Board) for use at the Annual Meeting of Stockholders to be
held on April 20, 1995 at 10:45 a.m., Central Time, at the Marriott Hotel,
900 N. Shoreline, Blvd., Corpus Christi, Texas, and at any adjournment
thereof (Meeting). The purposes of the Meeting are set forth in the
attached Notice of Annual Meeting.
The initial solicitation of proxies is being made pursuant to this
Proxy Statement, which is being mailed to stockholders on or about March
13, 1995. The cost of such solicitation will be borne by the Corporation,
including the costs of assembling and mailing this Proxy Statement and the
enclosed proxy. The Corporation has employed D.F. King & Co., Inc. to
assist in the solicitation of proxies. The Corporation has agreed to pay
D.F. King & Co., Inc. a fee for such services of $7,500 plus out-of-
pocket expenses. After March 13, 1995, officers, employees and directors
of the Corporation may solicit proxies without extra compensation. Such
solicitation may be made by mail, telephone, facsimile, telegraph or in
person.
To ensure representation at the Meeting, each holder of outstanding
shares of Common Stock entitled to be voted at the Meeting is requested to
complete, date and sign the enclosed proxy card and return it to the
Corporation in the postage-paid envelope provided. Such stockholders will
be entitled to vote in person at the Meeting whether or not they have
completed and returned proxy cards. Banking institutions, brokerage
firms, custodians, trustees and other nominees and fiduciaries who are
record holders of the Common Stock entitled to be voted at the Meeting are
requested to forward this Proxy Statement, a proxy card and all of the
accompanying materials to each of the beneficial owners of such shares,
and to seek authority to execute proxies with respect to such shares.
Upon request, the Corporation will reimburse such record holders for their
reasonable out-of-pocket forwarding expenses.
Voting of Proxies
The Corporation's only voting security is its Common Stock, par value
$3.50 per share, of which 190,627,949 shares were outstanding on January
31, 1995.
Only holders of Common Stock of the Corporation of record on its
books at the close of business on March 2, 1995 (Record Date), are
entitled to notice of and to vote at the Meeting. Each stockholder is
entitled to one vote for each share of Common Stock of the Corporation
held of record on the Record Date, on each matter submitted to a vote at
<PAGE> 8
the Meeting. Any stockholder may vote shares owned either in person or by
duly authorized proxy, designating not more than three persons as proxies
to vote the shares owned. Cumulative voting is not permitted with respect
to any proposal to be acted upon at the Meeting.
Each stockholder returning a proxy to the Corporation has the right
to revoke it, at any time before it is voted, by submitting a later-dated
proxy in proper form, by notifying the Secretary of the Corporation in
writing of such revocation, or by appearing at the Meeting, requesting a
return of the proxy and voting the shares in person.
If properly executed and received by the Corporation before the
Meeting, any proxy representing shares of Common Stock entitled to be
voted at the Meeting and specifying how it is to be voted will be voted
accordingly. Any such proxy, however, which fails to specify how it is to
be voted on a proposal for which a specification may be made will be voted
on such proposal in accordance with the recommendation of the Board.
Abstentions are counted in tabulations of the votes cast on proposals
presented to stockholders, but broker non-votes are not counted for
purposes of determining whether a proposal has been approved.
The presence, in person or by proxy, of the holders of a majority of
the outstanding shares of Common Stock entitled to vote at the Meeting,
excluding any shares owned by the Corporation, is necessary to constitute
a quorum. Abstentions and broker non-votes are counted for purposes of
determining the presence or absence of a quorum for the transaction of
business.
The Board currently is unaware of any proposal to be presented at the
Meeting other than the matters specified in the attached Notice of Annual
Meeting of Stockholders. Should any other proposal properly come before
the Meeting, the persons named in the enclosed proxy will vote on each
such proposal in accordance with their discretion. Anyone desiring to
address the stockholders at the Meeting, whether or not making a formal
proposal, must so indicate this intention to the Secretary prior to the
Meeting and will be required to comply with the Rules of Conduct
established prior to the Meeting.
Stockholder Proposals for 1996 Annual Meeting
Pursuant to the rules of the Securities and Exchange Commission
(SEC), in order to be considered for inclusion in the Proxy Statement and
form of proxy relating to the 1996 annual meeting of stockholders, a
proposal by a record holder of Common Stock of the Corporation must be
received by the Secretary of the Corporation at the Corporation's
principal executive offices in Dallas, Texas, on or before November 19,
1995.
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Proposal 1: ELECTION OF DIRECTORS
Nominees for Directors
At the Meeting, four directors will be elected to Class II of the
Board for three-year terms expiring at the 1998 annual meeting or until
their respective successors are duly elected and qualified. One director
will be elected to Class I of the Board to fill the remaining two years of
the Class I term expiring at the 1997 annual meeting or until his
successor is duly elected and qualified. Directors will be elected by a
plurality of the votes cast at the Meeting.
In accordance with the Corporation's Certificate of Incorporation,
the Board is divided into three classes as nearly equal in size as is
practicable with staggered terms of office so that one class of the
directors must be elected at each annual meeting. The Board currently
consists of thirteen directors. The Board elected Donald M. Carlton to
fill a directorship in November, 1994. The number of directors will be
eleven upon the retirement of T.J. Barlow, a director since 1969, and
Arthur Rasmussen, a director since 1971, prior to the commencement of the
Meeting.
The Board of Directors of the Corporation has nominated and
unanimously recommends that stockholders vote FOR the election of Glenn
Biggs, E.R. Brooks, Robert W. Lawless, and James L. Powell, as Class II
directors and Donald M. Carlton as a Class I director.
Each nominee is presently a director of the Corporation and has
served continuously since the year indicated opposite his/her name in the
following table. Each of the nominees has consented to being named as a
nominee and to serve as a director of the Corporation if elected. If,
because of events not presently known or anticipated, any nominee is
unable to serve or for good cause will not serve, the proxies voted for
the election of directors may be voted (at the discretion of the holders
of the proxies) for a substitute nominee not named herein.
<PAGE> 10
The following information is given with respect to the nominees for
election as directors:
Year First
Became
Nominee, Age, Principal Occupation, Director and
Business Experience and Other Directorships (1) Class (2)
________________________________________________________ ____________
GLENN BIGGS ..................................... AGE 61 1987 II
President of Biggs & Co., investments, San Antonio,
Texas since before 1990. Chairman and Chief
Executive Officer of Texas TGV Corporation from
December 1991 to December 1994. Director of
Diamond Shamrock R & M, Inc.
E. R. BROOKS .................................... AGE 57 1988 II
Chairman, President and Chief Executive Officer of
the Corporation since February 1991. President of
the Corporation from September 1990 to February
1991. President and Chief Operating Officer of
the Corporation from January 1990 to September
1990. Director of each of the Corporation's sub-
sidiaries. Director of Hubbell, Inc., Orange,
Connecticut. Trustee of Baylor University Medical
Center, Dallas, Texas, and Hardin Simmons
University, Abilene, Texas.
ROBERT W. LAWLESS ............................... AGE 58 1991 II
President and Chief Executive Officer of Texas Tech
University and Texas Tech University Health Sciences
Center in Lubbock, Texas since June 1989. Professor
of Industrial Engineering, Information Systems and
Quantitative Sciences at Texas Tech University.
Director of Salomon Brothers Fund, Salomon Brothers
Capital Fund, and Salomon Brothers Investors Fund.
JAMES L. POWELL ................................. AGE 65 1987 II
Ranching and investments Ft. McKavett, Texas since
prior to 1990. Director of Southwest Bancorp of
Sanderson, Texas, First National Bank, Eldorado,
Texas and Advisory Director of First National Bank,
Mertzon, Texas.
DONALD M. CARLTON ............................... AGE 57 1994 I
President and Chairman of Radian Corporation, an
engineering and technology firm, since prior to
1990. Executive vice president and Director of
the Hartford Steam Boiler Inspection and Insurance
Company, Radian's parent company. since prior to
1990. Director of American Capital Bond Fund,
Inc., American Convertible Securities, Inc., Joy
Technologies, Medical Polymers Technologies and
National Instruments. (3)
<PAGE> 11
The following information is given for continuing directors:
Year First
Became
Nominee, Age, Principal Occupation, Director and
Business Experience and Other Directorships (1) Class (2)
________________________________________________________ ____________
MOLLY SHI BOREN ................................. AGE 51 1991 I
Attorney-at-law Norman, Oklahoma since prior to
1990. Director of Pet Incorporated.
JOE H. FOY ...................................... AGE 68 1974 III
Retired in June 1993 as a Partner of the firm of
Bracewell & Patterson, Attorneys, Houston, Texas,
where he served as a partner from before 1990
until 1993. Director of Enron Corporation.
HARRY D. MATTISON ............................... AGE 58 1991 III
Executive Vice President of the Corporation since
September 1990 and Chief Executive Officer of
Central and South West Services, Inc., a subsidiary
of the Corporation, since December 1993. Chief
Operating Officer of the Corporation from September
1990 to December 1993. President and Chief
Executive Officer of Southwestern Electric Power
Company, a subsidiary of the Corporation, from
September 1988 to September 1990. Director of
each of the Corporation's wholly-owned subsidiaries.
THOMAS V. SHOCKLEY, III ......................... AGE 50 1991 I
Executive Vice President of the Corporation since
September 1990. Chief Executive Officer of Central
and South West Services, Inc., a subsidiary of the
Corporation, from October 1992 to December 1993.
Senior Vice President of the Corporation from June
1990 to September 1990. President and Chief
Executive Officer of Central Power and Light
Company, a subsidiary of the Corporation, prior
to June 1990. Director of each of the Corporation's
non-electric subsidiaries.
J. C. TEMPLETON ................................. AGE 70 1983 III
Investments, Houston, Texas, since 1991. Retired
in 1991 as President and Chairman of the Board of
Directors of TGX Corporation, positions in which
he served prior to 1990.
<PAGE> 12
Year First
Became
Nominee, Age, Principal Occupation, Director and
Business Experience and Other Directorships (1) Class (2)
________________________________________________________ ____________
LLOYD D. WARD ................................... AGE 46 1993 III
Division President-Central of Frito-Lay, Inc., Dallas,
Texas since January 1993. Division President-West
of Frito-Lay, Inc., Pleasanton, California from
October 1991 to December 1992. General Manager of
Frito-Lay, Inc., Pleasanton, California from June
1991 to October 1991. Vice President-Operations of
Pepsi-Cola East, a unit of PepsiCo, Inc., Somers,
N.Y., from 1988 to 1991.
______________________________
1) T.J. Barlow and Arthur E. Rasmussen will retire from the Board
immediately prior to the Meeting.
2) Class III and Class I directors' terms expire at the 1996 and 1997
annual meetings of stockholders, respectively, or when their
respective successors are duly elected and qualified.
3) Due to the acquisition of Joy Technologies by Harnischfeger, Donald
Carlton is no longer a member of the board of directors of Joy
Technologies, effective December 31, 1994. Additionally, the boards
of directors for American Capital Bond Fund, Inc. and American
Convertible Securities, Inc. were consolidated into American Capital
Closed End Fund and Common Sense Trust effective December 31, 1994.
<PAGE> 13
Security Ownership of Management
The following table shows securities beneficially owned as of
December 31, 1994 by each director and nominee, the chief executive
officer and the four other most highly compensated executive officers and,
as a group, all directors and executive officers of the Corporation.
Share amounts shown in this table include options exercisable within 60
days after year-end, restricted stock, shares of Common Stock credited to
Thrift Plus accounts, and all other shares of Common Stock beneficially
owned by the listed persons. Each person has sole voting and sole
investment power with respect to all shares listed in the table below,
excluding the shares underlying the unexercised options.
Common Stock
Percent of
Name Shares(1) Class (2)
T.J. Barlow............................. 16,249 -
Glenn Biggs............................. 13,249 -
Molly Shi Boren......................... 1,626 -
E.R. Brooks............................. 81,940 -
Donald M. Carlton........................ 1,056 -
Joe H. Foy.............................. 11,677 -
Robert W. Lawless....................... 1,846 -
Harry D. Mattison....................... 33,111 -
Ferd. C. Meyer, Jr...................... 17,203 -
James L. Powell......................... 3,249 -
Arthur E. Rasmussen..................... 14,661 -
Glenn D. Rosilier....................... 34,496 -
Thomas V. Shockley, III................. 26,873 -
J.C. Templeton.......................... 2,449 -
Lloyd D. Ward........................... 1,195 -
All of the above and other executive
officers as a group (CSW Directors
and Executives)....................... 300,611 -
______________________________
1) Shares for Messrs. Brooks, Mattison, Meyer, Rosilier and Shockley, and
CSW Directors and Executives include 4,760, 3,236, 2,843, 2,507,
3,226, and 20,008 shares of restricted stock, respectively. These
individuals currently have voting power, but not investment power,
with respect to these shares. The above shares also include 19,062,
12,352, 9,620, 9,620, 12,532, and 80,208 shares underlying immediately
exercisable options held by Messrs. Brooks, Mattison, Meyer, Rosilier
and Shockley, and CSW Directors and Executives, respectively.
2) Percentages are all less than one percent and therefore are omitted.
<PAGE> 14
Security Ownership of Certain Beneficial Owners
Set forth below are the only persons or groups known to the
Corporation as of March 13, 1995, with beneficial ownership of 5% or more
of the Corporation's Common Stock.
Common Stock
Amount of
Name, Address of Beneficial Percent of
Beneficial Owners Ownership Class
The Capital Group Companies, Inc. 10,270,000 (1) 5.41
and subsidiaries
333 South Hope Street
Los Angeles, CA 90071
Mellon Bank Corporation 13,183,297 (2) 6.94
and subsidiaries
One Mellon Bank Center
Pittsburgh, PA 15258
______________________
1) The Capital Group Companies, Inc. has reported that it or its
investment advisory subsidiaries have sole dispositive power, but no
power to direct the vote, with respect to 10,270,000 shares which were
owned by various institutional investors.
2) Mellon Bank Corporation and its subsidiaries, including Mellon Bank,
N.A. which acts as trustee of an employee benefit plan of the
Corporation, reported that they exercise sole voting power as to
2,029,000 shares, shared voting power as to 10,887,297 shares, sole
dispositive power as to 2,108,000 shares, and shared dispositive power
as to 215,000 shares.
OTHER INFORMATION REGARDING THE BOARD OF DIRECTORS
General Information
Nominees for directorships are recommended by the Corporation's
Nominating Committee and nominated by the Board on the basis of their
qualifications, including training, experience, integrity and independence
of mind, to render service to the Corporation. The Corporation's By-Laws
generally provide that the Corporation shall not elect or propose for
election as a director any non-employee who will have attained the age of
70 (72 for persons who served as directors and were at least 60 years of
age on October 12, 1987) at the date of such election or proposed
election. Federal law restricts the extent to which the Corporation may
have interlocking directorates with other companies.
The number of directors constituting the entire Board may not be less
than nine nor more than fifteen, as may be fixed from time to time by
resolution adopted by a majority of the entire Board. No decrease in the
number of directors on the Board may shorten the term of any incumbent
<PAGE> 15
director. The majority of the Board may adopt a resolution to increase
the number of directors to not more than fifteen and may elect a new
director or directors to fill any such newly created directorship.
Similarly, vacancies occurring on the Board for any reason may be filled
by majority vote of the remaining directors. Any such Board-elected
director will hold office until the Corporation's next annual meeting of
stockholders and the election and qualification of a successor.
Under the Corporation's Certificate of Incorporation, any director
may be removed from office by the stockholders of the Corporation only for
cause and only by the affirmative vote of the holders of at least 80
percent of the voting power of the outstanding shares of Common Stock.
Meetings and Compensation
The Board held six regular meetings and two special meetings during
1994. Directors who are not also officers and employees of the
Corporation receive annual cash directors' fees of $12,000 for serving on
the Board and a fee of $1,250 per day plus expenses for each meeting of
the Board or committee attended. In addition, the Corporation has a
Directors Restricted Stock Plan pursuant to which directors receive
$12,000 annually in restricted stock of the Corporation. The Board has
standing Policy, Audit, Executive Compensation and Nominating Committees.
Chairmen of the Audit, Executive Compensation and Nominating Committees
receive annual fees of $6,000, $3,500 and $3,500, respectively, to be paid
in cash in addition to regular directors' and meeting fees. Committee
chairmen and committee members who are also officers and employees of the
Corporation receive no annual directors', chairman's or meeting fees.
The Corporation maintains a memorial gift program for all of its
current directors, directors who retired since 1992, and certain executive
officers. Retired directors eligible for the memorial gift program are:
M.L. Borchelt, Glen Churchill, Martin E. Fate, Jr., Drayton McLane, Jr.,
James M. Moroney, Jr., Thomas B. Walker, Jr., and Samuel W. White, Jr.
Nineteen current directors and executive officers are eligible for this
program. Under this program, the Corporation will make donations in a
director's or executive officer's name to up to three charitable
organizations in an aggregate of $500,000, payable by the Corporation upon
such person's death. The Corporation maintains corporate-owned life
insurance policies to fund the program. The annual premiums paid by the
Corporation are based on pooled risks and average $17,013 per participant
for 1994 and 1993, and $17,200 per participant for 1992.
The Corporation has retained Glenn Biggs under a Memorandum of
Agreement to pursue special business development activities in Mexico on
behalf of the Corporation. This agreement, which provides for a monthly
fee of $10,000, lasts through December 31, 1995 and may be extended by
mutual agreement between Mr. Biggs and the Corporation.
All current directors attended more than 75 percent of the total
number of meetings held by the Board and each committee on which such
directors served in 1994.
<PAGE> 16
Policy Committee
The Policy Committee, currently consisting of Messrs. Brooks
(Chairman), Barlow, Foy and Rasmussen, held 7 meetings in 1994. The
Policy Committee reviews and makes recommendations to the Board concerning
major policy issues, considers the composition, structure and functions of
the Board and its committees and reviews existing corporate policies and
recommends changes when appropriate. The Policy Committee has authority
to act as and on behalf of the Board when the full Board is not in
session.
Audit Committee
The Audit Committee, currently consisting of Ms. Boren and Messrs.
Rasmussen (Chairman), Biggs, Carlton, Lawless, Templeton, and Ward, held 6
meetings in 1994. The Audit Committee recommends to the Board the
independent public accountants to be selected; discusses with the internal
auditors and independent public accountants the overall scope, plans and
results of their audits, and their evaluations of internal controls and
the overall quality of the Corporation's accounting and financial
reporting practices; facilitates any private communication with the
Committee desired by the internal auditors or independent public
accountants; discusses with management, internal auditors and the
independent public accountants the Corporation's accounting and financial
reporting principles and policies; monitors the program to ensure
compliance with the Corporation's business ethics policy; and may direct
and supervise an investigation into any significant matter brought to its
attention within the scope of its duties.
Executive Compensation Committee
The Executive Compensation Committee, currently consisting of Ms.
Boren and Messrs. Foy (Chairman), Lawless, Powell and Templeton, held 4
meetings in 1994. The Executive Compensation Committee determines the
executive compensation philosophy of the Corporation, reviews benefit
programs and management succession programs, sets the salaries for the
executive officers of the Corporation and reviews and recommends salaries
for the chief executive officers of the Corporation's principal
subsidiaries.
Nominating Committee
The Nominating Committee, currently consisting of Messrs. Barlow
(Chairman), Biggs, Carlton, Powell, and Ward, held 3 meetings in 1994.
The Nominating Committee reviews candidates for election to the Board and
recommends qualified candidates to fill existing vacancies or newly
created directorships. The Nominating Committee welcomes stockholder
suggestions for Board nominations. Such suggestions should be directed to
Mr. Brooks, Chairman, President and Chief Executive Officer, who will
forward them to the Nominating Committee.
<PAGE> 17
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 and Section
17(a) of the Public Utility Holding Company Act of 1935 require the
Corporation's officers and directors, and persons who beneficially own
more than ten percent of a registered class of the Corporation's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (SEC) and the New York Stock Exchange.
Officers, directors and greater-than-ten-percent stockholders are required
by SEC regulation to furnish the Corporation with copies of all Section
16(a) reports they file.
Based solely on the Corporation's review of the copies of such forms
received and written representations from certain reporting persons, the
Corporation believes that during the 1994 calendar year all such filing
requirements applicable to its officers, directors and greater-than-ten-
percent stockholders were complied with except that Mr. Foy did not file a
report with respect to a purchase of 860 shares of common stock in March
and 1,000 shares of common stock in May. Additionally, Mr. Ward did not
file a report with respect to a purchase of 300 shares of common stock in
June. These omissions were corrected upon discovery, and Messrs. Foy and
Ward reported their transactions on Forms 4 filed in June and July,
respectively.
Compensation Committee Interlocks and Insider Participation
No person serving during 1994 as a member of the Executive
Compensation Committee of the Board served as an officer or employee of
the Corporation or any of its subsidiaries during or prior to 1994.
No person serving during 1994 as an executive officer of the
Corporation serves or has served on the compensation committee or as a
director of another company, one of whose executive officers serves as a
member of the Executive Compensation Committee or as a director of the
Corporation.
Proposal 2: APPROVAL OF APPOINTMENT OF
INDEPENDENT PUBLIC ACCOUNTANTS
Subject to the approval of the stockholders, the Board of the
Corporation has reappointed Arthur Andersen LLP, independent public
accountants, as auditors to examine the financial statements of the
Corporation and its subsidiaries for 1995. The affirmative vote of a
majority of shares of Common Stock represented at the Meeting is required
to approve such reappointment. The Corporation is advised that neither
Arthur Andersen LLP nor any of its partners has any material direct or
indirect relationship with the Corporation or any of its subsidiaries, and
that Arthur Andersen LLP qualifies as an independent public accountant as
to the Corporation and its subsidiaries under the applicable rules of the
SEC.
A representative of Arthur Andersen LLP will be present at the
Meeting with the opportunity to make a statement, if he or she desires to
do so, and will be available to respond to appropriate questions.
<PAGE> 18
The Board of Directors of the Corporation unanimously recommends that
stockholders vote FOR the appointment of Arthur Andersen LLP.
Proposal 3: TRANSACTION OF OTHER BUSINESS
At the date hereof, the management of the Corporation knows of no
other business to come before the Meeting. If any other business is
properly presented at the Meeting, the proxies will be voted in respect
thereof in the discretion of the person or persons voting them.
EXECUTIVE COMPENSATION
Executive Compensation Committee Report
The Corporation's executive compensation program has as its
foundation the following objectives:
* Maintaining a compensation program designed to support the
corporate goal of providing superior value to our stockholders
and customers,
* Providing comprehensive programs which serve to facilitate the
recruitment, retention and motivation of qualified executives,
and
* Rewarding key executives for achieving financial, operating and
personal objectives that produce a corresponding and direct
return to the Corporation's stockholders in both the long-term
and the short-term.
The Executive Compensation Committee of the Board (Committee), which
consists of five independent, outside directors, has designed the
Corporation's compensation programs around a strong pay-for-performance
philosophy. The Committee strives to maintain competitive levels of total
compensation as compared to peers in the utility industry.
Each year, the Committee conducts a comprehensive review of the
Corporation's executive compensation programs. The Committee is assisted
in these efforts by an independent consultant and by the Corporation's
internal staff, who provide the Committee with relevant information and
recommendations regarding the compensation policies and specific
compensation matters. This review is designed to ensure that the proper
programs are in place to enable the Corporation to achieve its strategic
and operating objectives and provide superior value to its stockholders,
the Corporation's customers, and to document our relative competitive
position.
To maintain competitive, comprehensive compensation, the Committee
reviews a comparison of the Corporation's compensation programs with those
offered by comparable companies within the utility industry. For each
component of compensation as well as total compensation, the Committee
seeks to ensure that the Corporation's level of compensation for expected
level of performance approximates the average or mean for executive
<PAGE> 19
officers in similar positions at comparable companies. Performance above
or below expected levels is reflected in a corresponding increase or
reduction in the incentive portion of our compensation program.
The amounts of each of the primary components of executive
compensation--salary, annual incentive plan awards, and long-term
incentive plan awards--will fluctuate according to individual and/or
corporate performance, as described in detail in this report. Corporate
performance for these purposes is measured against a peer group of
selected companies in the utility industry (Utility Peer Group). The
Utility Peer Group consists of twenty-five large, high-credit quality
utility companies, large regional competitors and large electric utility
holding companies. The Committee believes that the composition of the
Utility Peer Group establishes rigorous performance benchmarks appropriate
for compensation purposes.
The Corporation's executive compensation program includes several
components, serving long- and short-term objectives and taking advantage
of several federal income tax incentives, which are not directly
performance-based. The Corporation provides its senior executive officers
with benefits under the Supplemental Executive Retirement Plan and all
executive officers with certain executive perquisites (as noted elsewhere
in this Proxy Statement.) In addition, the Corporation maintains for each
of its executive officers a package of benefits under its pension and
welfare benefit plans that are generally provided to all employees,
including group health and life, disability and accident insurance plans,
tax-advantaged reimbursement accounts, a defined benefit pension plan and
the ThriftPlus 401(k) thrift plan.
The following describes the relationship of compensation to
performance for the principal components of executive officer
compensation:
Base Salary. Each executive officer's corporate position is assigned
a salary grade reflecting the Corporation's evaluation of the position's
overall contribution to corporate goals and the value the labor market
places on the associated job skills. A range of appropriate salaries is
then assigned to that salary grade. Each January, the salary ranges may
be adjusted for market conditions, including practices in the Utility Peer
Group, inflation, and supply and demand in the labor markets. The
midpoint of the salary range (Salary Midpoint) corresponds to a 'market
rate' salary which the Committee believes is appropriate for an
experienced executive who is performing satisfactorily, with salaries in
excess of Salary Midpoint appropriate for executives whose performance is
excellent or exemplary.
Any progression or regression within the salary range for an
executive officer depends upon a formal annual review of job performance,
accomplishments and progress toward individual goals and objectives. The
results of executive officers' performance evaluations form a part of the
basis of the Committee's decision to approve base salaries of executive
officers. Corporate performance factors affect progress within salary
ranges in several ways. First, corporate or departmental financial and
other results are one of the best methods for evaluating various elements
<PAGE> 20
of an individual executive officer's performance. Second, corporate or
departmental results or budgets may limit the extent to which an executive
officer may progress in salary for a given year.
Incentive Programs-General. The executive incentive programs are
designed to strike an appropriate balance between short-term
accomplishments and the Corporation's need to effectively plan for and
perform over the long-term.
Incentive Programs-Annual Incentive Plan. The Annual Incentive Plan
(AIP) is a short-term bonus plan rewarding annual performance. AIP awards
are determined under a formula that directly ties the amount of the award
with levels of achievement for specific individual and corporate goals.
The amount of an executive officer's AIP award equals the arithmetic
product of (i) that officer's target award and (ii) a composite
performance index that can vary from 0 to a maximum of 1.5, as explained
below.
The composite performance index for executive officers generally is
the arithmetic product of two equally weighted indices, a corporate
performance index and an individual performance index. For those
executive officers whose principal responsibility is to a subsidiary of
the Corporation, a third equally weighted index consisting of a
performance index for that subsidiary may, in the discretion of the
Committee, be factored into the composite index.
The corporate performance index is determined solely by the
Corporation's earnings per share. Threshold, target and exceptional
levels of earnings per share are set by the Committee in January of each
year. The Committee considers both historic performance and the current
year plan level of earnings per share. If the Corporation fails to
achieve the threshold level of earnings per share, the corporate
performance index will equal zero and, thus, no AIP awards will be paid by
the Corporation for that year (regardless of the levels of the individual
or subsidiary performance indices.)
The individual performance index represents the average of results
achieved on several individual goals and a subjective evaluation of
overall job performance. Although individual performance goals do not
necessarily directly correlate to identifiable corporate performance,
these goals are constructed to support departmental corporate initiatives
and performance. If a given individual fails to achieve a minimum
threshold performance level on the individual performance index, that
individual does not earn an AIP award for that year regardless of the
levels of the corporate or subsidiary performance indices.
The performance index for a given subsidiary represents the weighted
average of performance indices that measure the achievement of specific
objective and/or subjective goals that are set and weighted at the
beginning of the year for that subsidiary. The specific goals generally
will include achieving specified earnings levels and one or more non-
financial goals such as achievement of specified customer satisfaction
ratings, productivity measures or strategic goals. If a given subsidiary
of the Corporation fails to achieve a minimum threshold level of
<PAGE> 21
performance on each of its performance goals, the subsidiary performance
index will equal zero and, thus, executive officers of that subsidiary
will not earn an AIP award for that year (regardless of the levels of the
corporate or individual performance indices.)
Target awards for executive officers have been fixed at 40 percent of
Salary Midpoint for senior executives, 30 percent of Salary Midpoint for
subsidiary presidents, and 20 percent of Salary Midpoint for other
executive officers; thus, the corresponding maximum AIP awards that can be
earned by executive officers of the Corporation range from 60 percent (40
percent X 1.5) to 30 percent (20 percent X 1.5) of Salary Midpoint based
on the position of the executive officer in the Corporation. These
targets are established by a review of competitive practice among the
Utility Peer Group.
Performance under the AIP is measured or reviewed by each executive
officer's superior officer, or in the case of the chief executive officer,
the Committee, with the assistance of internal staff. The results are
reviewed and are subject to approval by the Committee. Under the terms of
the AIP, the Committee in the exercise of its discretion may vary
corporate or company performance measures and the form of payment for AIP
awards from year-to-year prior to establishing the awards, including
payment in cash or restricted stock, as determined by the Committee.
In 1994, AIP awards were determined based on the corporate
performance index and the individual performance index. The subsidiary
performance index was not used, as each company was transitioning to new
organizational structures during the year and the Committee desired to
emphasize overall corporate performance. For 1994, the Corporation
achieved 71% of the corporate performance index, based on the earnings per
share measure. Accordingly, executive officers had the opportunity, based
on individual performance results, to earn AIP awards for 1994 up to a
maximum for senior executive officers of 42.6 percent of Salary Midpoint
and for other executive officers of 21.3 percent of Salary Midpoint.
These awards were paid in the form of cash to all participants in January
1995.
Incentive Programs-Long-Term Incentive Plan. Amounts realized by the
Corporation's executive officers under awards made to date pursuant to the
Central and South West Corporation 1992 Long-Term Incentive Plan (LTIP)
depend entirely upon corporate performance. The Committee selects the form
and amount of LTIP awards, based upon its evaluation of which vehicles
then are best positioned to serve as effective incentives for long-term
performance.
Since 1992, the Committee has established LTIP awards primarily in
the form of performance shares. These awards provide incentives both for
exceptional corporate performance and retention. Each year, the Committee
has set a target award of a specified dollar amount for each awardee. The
dollar amount corresponding to the target award is divided by the per
share market price of the Corporation's common stock on the date the award
is established to derive the number of shares of such stock that will be
issued if target performance is achieved by the Corporation.
<PAGE> 22
The payout of such an LTIP award is based upon a comparison of the
Corporation's total stockholder return over a three-year period, or
"cycle," against total stockholder returns of utilities in the Utility
Peer Group over the same three-year period. Total stockholder return is
calculated by dividing (i) the sum of (A) the cumulative amount of
dividends per share for the three-year period, assuming full dividend
reinvestment, and (B) the change in share price over the three-year
period, by (ii) the share price at the beginning of the three-year period.
If the Corporation's total stockholder return for a cycle falls in one of
the top three quartiles of total stockholder returns achieved at companies
in the Utility Peer Group and exceeds a certain defined minimum threshold,
the Corporation will make a payout to participants for the three-year
cycle then ending. First, second and third quartile performance will
result in payouts of 150 percent, 100 percent and 50 percent of target,
respectively.
Each year since inception of the LTIP, a new three-year performance
cycle has been established. The first performance-based restricted stock
awards under the LTIP were established in 1992 for a three-year cycle
through 1994. The Committee is scheduled to evaluate the 1992-94 cycle I
performance under the LTIP in late March 1995.
The Corporation from time to time has also granted stock options
under the LTIP. Stock options are granted at the discretion of the
Committee. The stock options, once vested, allow grantees to buy
specified numbers of shares of the Corporation's common stock at a
specified strike price, which to date has been the market price on the
date of grant. In determining grants to date, the Committee has
considered both the number and value of options granted by companies in
the Utility Peer Group with respect to both the number and value of
options awarded by the Corporation, and the relative amounts of other
long-term incentive awards at the Corporation and such peers. The
executive officers' realization of any value on the options depends upon
stock appreciation.
The Committee does not consider the current number or value of
options or restricted stock held by the Corporation's executive officers
in determining the value and size of restricted stock and option awards
under the LTIP. No executive officer owns in excess of one percent of the
Corporation's Common Stock. Further, the amounts of LTIP awards are
measured against similar practices at other companies in the Utility Peer
Group.
Tax Considerations. Section 162(m) of the Internal Revenue Code, as
amended (Code), generally limits the Corporation's federal income tax
deduction for compensation paid to any one executive officer named in the
Corporation's proxy statement to $1 million. The limit does not apply to
specified types of payments, including, most significantly, payments that
are not includible in the employee's gross income, payments made to or
from a tax-qualified plan, and compensation that meets the Code definition
of performance-based compensation. Under the tax law, the amount of an
incentive award must be based entirely on an objective formula, without
any subjective consideration of individual performance, to be considered
<PAGE> 23
performance-based. To date, Code section 162(m) has not limited the
deductibility of the Corporation's compensation of its executive officers
under its current compensation policies.
The Committee has carefully considered the impact of this tax law.
At this time, the Committee believes it is in the Corporation's and
stockholders' best interests to retain the subjective determination of
individual performance under the AIP. Consequently, the payments under
the AIP, if any, to the named executive officers may be subject to the
limitation imposed by the Code section 162(m). The Corporation believes
that amounts awarded to date under the LTIP are or will be deductible
under the Code. The Committee believes that it is appropriate to continue
with the existing design and maximize tax deductibility when consistent
with the Committee's overall compensation philosophy. Should federal
income tax deductibility of one or more elements of the Corporation's
executive compensation become an issue for the Corporation under Code
section 162(m), the Committee will consider deductibility in its annual
analysis of the Corporation's executive compensation programs.
Rationale for CEO Compensation
In 1994, Mr. Brooks' compensation was determined as described above
for all of the Corporation's executive officers.
* Mr. Brooks' annual salary increased to $625,000 in November 1994.
The Committee based its subjective decision to increase Mr.
Brooks' annual salary on Mr. Brooks' role in advancing important
corporate initiatives designed to enhance the Corporation's
performance and position as a strong utility. These significant
initiatives were equally important to the Committee and are as
follows: Mr. Brooks' role in overseeing the Corporation's
restructuring and resultant operations and maintenance expense
reductions, his role in pursuing the proposed El Paso merger, and
his management of the Corporation's position in CPL's rate and
related regulatory proceedings, Mr. Brooks' role in addressing
the performance of the Corporation's South Texas Project, his
oversight of and formulation of strategies for non-utility
businesses, and a subjective review of the level of corporate
earnings achieved for 1994. In addition, as part of its overall
annual review of executive compensation, the Committee reviewed
Mr. Brooks' salary range and Salary Midpoint and adjusted each
based on changes in the salaries of chief executive officers at
comparable regional utilities (not limited to the Utility Peer
Group.)
* Like those of other senior executive officers, Mr. Brooks' target
AIP award for 1994 was 40 percent of his Salary Midpoint. In
1994, the Corporation achieved earnings per share in excess of
the AIP threshold which, together with the Committee's subjective
evaluation of Mr. Brooks' individual performance, resulted in a
$162,739 AIP award, which was paid in cash in January 1995. Mr.
Brooks' individual goals corresponded to the Corporation's
strategic goals adopted in pursuit of its overall goal to
maximize stockholder value. The Corporation achieved significant
milestones for each of such strategic goals.
<PAGE> 24
* In 1994, the Committee established Mr. Brooks' target award for
the LTIP cycle 1994-1996 of $357,008 to be paid in shares of
restricted stock in 1997 if performance measures are met. This
target amount was derived by reference to the number and value of
grants to chief executive officers at comparable companies (not
limited to the Utility Peer Group.) In 1994, Mr. Brooks also
received a grant of stock options. This grant was made pursuant
to stock option grants given to every management employee of the
Corporation to motivate these employees and further focus their
attention on enhancing stockholder value following the 1994
reorganization. The options provide Mr. Brooks with the right,
upon vesting, to acquire 38,579 shares at an exercise price of
$24.813. These options have a ten-year term and vest one-third
in each of the next three years.
EXECUTIVE COMPENSATION COMMITTEE
Joe H. Foy, Chairman
Molly Shi Boren
Robert W. Lawless
James L. Powell
J. C. Templeton
<PAGE>
<PAGE> 25
<TABLE>
Cash and Other Forms of Compensation
The following table sets forth the aggregate cash and other compensation for
services rendered for the fiscal years of 1994, 1993, and 1992 paid or awarded by
each registrant to the Chief Executive Officer and each of the four most highly
compensated executive officers, other than the Chief Executive Officer, whose
salary and bonus exceeds $100,000 and up to two additional individuals (if any) not
holding an executive officer position as of year-end but who held such a position
at any time during the year, and whose compensation for the year would have placed
them among the four most highly compensated executive officers.
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Awards Payouts
Other
Annual Restricted Securities All Other
Compen- Stock Underlying LTIP Compen-
Name and Salary Bonus sation Award(s) Options/ Payouts sation
Principal Position Year ($) ($)(1) ($)(1) ($)(1)(2) SARs(#) ($) ($)(3)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
E.R. Brooks 1994 599,765 - 20,577 - 38,579 - 24,485
Chairman, President 1993 549,167 57,265 20,579 57,236 - - 28,334
and Chief Executive 1992 490,000 89,076 13,981 89,063 28,596 - 27,498
Officer
T.V. Shockley, III 1994 392,389 - 12,693 - 23,702 - 22,235
Executive Vice 1993 373,333 35,462 12,606 35,402 - - 24,796
President 1992 332,500 54,900 11,022 54,858 18,529 - 24,065
Harry D. Mattison 1994 382,388 - 8,765 - 23,702 - 24,485
Executive Vice 1993 363,333 38,773 9,538 38,750 - - 28,333
President 1992 322,500 54,900 9,361 54,858 18,529 - 27,498
Ferd. C. Meyer, Jr. 1994 320,637 - 8,236 - 18,459 - 22,235
Senior Vice 1993 307,167 30,688 12,346 30,632 - - 24,796
President and 1992 285,000 48,898 7,846 48,914 14,430 - 24,065
General Counsel
</TABLE>
<PAGE> 26
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
(continued)
Annual Compensation Long Term Compensation
Awards Payouts
Other
Annual Restricted Securities All Other
Compen- Stock Underlying LTIP Compen-
Name and Salary Bonus sation Award(s) Options/ Payouts sation
Principal Position Year ($) ($)(1) ($)(1) ($)(1)(2) SARs(#) ($) ($)(3)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Glenn D. Rosilier 1994 311,541 - 6,714 - 18,459 - 22,235
Senior Vice 1993 294,450 32,117 11,872 32,084 - - 24,796
President and Chief 1992 263,590 48,898 6,299 48,914 14,430 - 24,065
Financial Officer
______________________
1) Amounts in this column are paid or awarded in a calendar year for performance
in a preceding year.
2) Grants of restricted stock are administered by the Executive Compensation
Committee of the Board, which has the authority to determine the individuals to
whom and the terms upon which restricted stock grants shall be made. The
awards reflected in this column all have four-year vesting periods with 20% of
the stock vesting on the first, second and third anniversary dates of the award
and 40% vesting on the fourth such anniversary. Upon vesting, shares of Common
Stock are re-issued without restrictions. The individual receives dividends
and may vote shares of restricted stock, even before they are vested. The
amount reported in the table represents the market value of the shares at the
date of grant. As of the end of 1994, the aggregate restricted stock holdings
of each of the Named Executive Officers were:
(continued)...
</TABLE>
<PAGE> 27
______________________
2)...(continued)
Restricted Stock Held Market Value at
at December 31, 1994 December 31, 1994
E.R. Brooks .............. 4,760 107,695
T.V. Shockley, III ....... 3,226 72,988
Harry D. Mattison ........ 3,236 73,215
Ferd C. Meyer, Jr. ....... 2,843 64,323
Glenn D. Rosilier ........ 2,507 56,721
3) Amounts shown in this column consist of (i) the annual employer
matching payments to CSW's Thrift Plus Plan, (ii) premiums paid per
participant for personal liability insurance, and (iii) average
amounts of premiums paid per participant in those years under CSW's
memorial gift program. See "OTHER INFORMATION REGARDING THE BOARD OF
DIRECTORS--Meetings and Compensation" for a description of the
Corporation's memorial gift program.
<PAGE> 28
<TABLE>
Option/SAR Grants
Shown below is information on grants of stock options made in 1994 pursuant to
the 1992 LTIP to the Named Executive Officers. No stock appreciation rights were
granted in 1994.
<CAPTION>
Option/SAR Grants in 1994 (1)
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term (3)
Number of
Securities % of Total
Underlying/ Options/SARs
Options/ Granted to Exercise or
SARs Employees Base Price Expiration
Name Granted (2) in Fiscal YR ($/Share) Date 5% ($) 10% ($)
<S> <C> <C> <C> <C> <C> <C>
E.R. Brook 38,579 3.4% $24.813 4/1/2004 $603,074 $1,522,045
T.V. Shockley, III 23,702 2.1% 24.813 4/1/2004 370,514 935,107
Harry D. Mattison 23,702 2.1% 24.813 4/1/2004 370,514 935,107
Ferd. C. Meyer, Jr. 18,459 1.6% 24.813 4/1/2004 288,555 728,257
Glenn D. Rosilier 18,459 1.6% 24.813 4/1/2004 288,555 728,257
______________________
1) The stock option plans are administered by the Executive Compensation Committee
of the Board of Directors, which has the authority to determine the individuals
to whom and the terms at which option and SAR grants shall be made.
2) All options were granted on April 20, 1994 and are first exercisable 12 months
after the grant date, with one-third of the shares becoming exercisable at that
time and with an additional one-third of the aggregate becoming exercisable on
each of the next two anniversary dates.
3) The annual rates of appreciation of 5% and 10% are specifically required by SEC
disclosure rules and in no way guarantee that such annual rates of appreciation
will be achieved by the Corporation, nor should this be construed in any way to
constitute any representation by the Corporation that such growth will be
achieved.
</TABLE>
<PAGE> 29
<TABLE>
Option/SAR Exercises and Year-End Value Table
Shown below is information regarding option/SAR exercises during 1994 and
unexercised options/SARs at December 31, 1994 for the Named Executive Officers.
<CAPTION>
Aggregated Option/SAR Exercises in 1994
and Fiscal Year-End Option/SAR Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Value at Year-End at Year-End ($)
Shares Acquired Realized Exercisable/ Exercisable/
Name on Exercise (#) ($) Unexercisable Unexercisable (1)
<S> <C> <C> <C> <C>
E. R. Brooks - - 19,062/48,113 -/-
T. V. Shockley, III - - 12,352/29,879 -/-
Harry D. Mattison - - 12,352/29,879 -/-
Ferd. C. Meyer, Jr. - - 9,620/23,269 -/-
Glenn D. Rosilier - - 9,620/23,269 -/-
_______________
1) Based on the New York Stock Exchange December 31, 1994 closing price of the
Corporation's Common Stock of $22.625 per share and the exercise prices of
$29.625 and $24.813 per share.
</TABLE>
<PAGE> 30
<TABLE>
Long-Term Incentive Plan Awards - Awards in 1994
The following table shows information concerning awards made to the Named
Executive Officers during 1994 under cycle III of the LTIP:
<CAPTION>
Performance or Estimated Future Payouts under
Number of Other Period Non-Stock Price Based Plans
Shares, Units or Until Maturation Threshold Target Maximum
Name Other Rights or Payout (1) ($) ($) ($)
<S> <C> <C> <C> <C> <C>
E. R. Brooks -- 2 years -- 357,008 535,512
T. V. Shockley, III -- 2 years -- 211,723 317,585
Harry D. Mattison -- 2 years -- 211,723 317,585
Ferd. D. Meyer, Jr. -- 2 years -- 166,244 249,366
Glenn D. Rosilier -- 2 years -- 166,244 249,366
_______________
1) As these grants were established in March, 1994 with a three-year performance
measurement period, two years now remain until maturation.
</TABLE>
<PAGE>
<PAGE> 31
Payouts of the awards are contingent upon the Corporation's
achieving a specified level of total stockholder return, relative to a
peer group of utility companies, for a three-year period, or cycle, and
exceeding a certain defined minimum threshold. Total stockholder return is
calculated by dividing (i) the sum of (A) the cumulative amount of
dividends per share for the three-year period, assuming full dividend
reinvestment, and (B) the change in share price over the three-year
period, by (ii) the share price at the beginning of the three-year period.
If the Named Executive Officer's employment is terminated during the
performance period for any reason other than death, total and permanent
disability or retirement, then the award is canceled. The first awards
under the LTIP were established in 1992 for a three-year cycle through
1994. The Executive Compensation Committee is scheduled to evaluate cycle
I performance under the LTIP in March, 1995.
The LTIP contains a provision accelerating awards upon a change in
control of the Corporation. If a change in control of the Corporation
occurs, (a) all options and SARs become fully exercisable, (b) all
restrictions, terms and conditions applicable to all restricted stock are
deemed lapsed and satisfied and all performance units are deemed to have
been fully earned, as of the date of the change in control. Awards which
have been granted and outstanding for less than six months as of the date
of change in control are not then exercisable, vested or earned on an
accelerated basis. The LTIP also contains provisions designed to prevent
circumvention of the above acceleration provisions generally through
coerced termination of an employee prior to the change in control of the
Corporation.
Retirement Plan
Pension Plan Table
Annual Benefits After
Average compensation Specified Years of Credited Service
15 20 25 30 or more
$250,000 ............ $ 62,625 $ 83,333 $104,167 $125,000
350,000 ............ 87,675 116,667 145,833 175,000
450,000 ............ 112,725 150,000 187,500 225,000
550,000 ............ 137,775 183,333 229,167 275,000
650,000 ............ 162,825 216,667 270,833 325,000
750,000 ............ 187,875 250,000 312,500 375,000
Executive officers are eligible to participate in the tax-qualified,
Central and South West System Pension Plan like other employees of the
Corporation. Certain executive officers, including the Named Executive
Officers, are also eligible to participate in the Special Executive
Retirement Plan (SERP), a non-qualified ERISA excess benefit plan. Such
pension benefits depend upon years of credited service, age at retirement
and the amount of covered compensation earned by a participant. The
annual normal retirement benefits payable under the pension and the SERP
are based on 1.67% of "Average Compensation" times the number of years of
credited service (reduced by (i) no more than 50% of a participant's age
62 or later Social Security benefit and (ii) certain other offset
benefits).
<PAGE> 32
"Average Compensation" is the covered compensation for the plans and
equals the average annual compensation, reported as salary in the Summary
Compensation Table, during the 36 consecutive months of highest pay during
the 120 months prior to retirement. The combined benefit levels in the
table above, which include both pension and SERP benefits, are based on
retirement at age 65, the years of credited service shown, continued
existence of the plans without substantial change and payment in the form
of a single life annuity.
Respective years of credited service and ages, as of December 31,
1994, for the Named Executive Officers are as follows: Mr. Brooks, 30 and
57; Mr. Shockley, 11 and 50; Mr. Mattison, 30 and 58; Mr. Meyer, 12 and
55; and Mr. Rosilier, 19 and 47. In addition, Mr. Shockley and Mr. Meyer
have arrangements with the Corporation under which they will receive a
total of 30 years of credited service under the SERP if they remain
employed by the Corporation through ages 60 and 65, respectively. In
1992, Mr. Meyer completed five consecutive years of employment which
entitled him to receive five additional years of credited service under
the SERP as included in his years of credited service set forth above in
this paragraph.
Performance Graph
Set forth below is a line graph comparing the cumulative total
stockholder return on the Corporation's Common Stock with the cumulative
total return of companies comprising the Standard & Poor's 500 Stock Index
(S&P 500) and the Standard & Poor's Electric Companies Index (S&P Electric
Cos.).
Comparison of Five Year Cumulative Total Return (1)
Among Central and South West Corporation , the S&P 500 Index
and the S&P Electric Cos. Index (2)
[Presented in tabular format, with graph submitted as a paper exhibit
pursuant to Regulation S-T, [Section] 232.304]
S&P S&P
YEAR 500 Electric Cos. CSW
---- ---- ------------- ----
1989 $100 $100 $100
1990 97 103 117
1991 126 134 153
1992 136 141 175
1993 150 159 191
1994 138 152 153
___________________
1) This illustration assumes $100 invested on December 31, 1989 in
Central and South West Corporation Common Stock, the S&P 500 Index and
the S&P Electric Companies Index. Each mark on the axis displaying
the years 1989 through 1994 represents December 31 of that year.
Total Return includes investment of all dividends. The historical
stockholder return shown above may not be indicative of future
performance.
(continued)...
<PAGE> 33
___________________
2)...(continued)
The peer group used for executive compensation purposes is not used
for the Corporation's performance graph above, which reflects the S&P
Electric Companies Index, a broader index. The Corporation believes
its stockholders, who as a group have a wide range of other
investments including utility investments, find a broader measure of
performance in the electric utility industry more useful. See
"EXECUTIVE COMPENSATION-Executive Compensation Committee Report" for
information about the peer group used for executive compensation
purposes.
CENTRAL AND SOUTH WEST CORPORATION
/s/ E. R. BROOKS
E. R. Brooks
Chairman, President and
Chief Executive Officer
March 13, 1995
CSW
CENTRAL AND SOUTH WEST CORPORATION
1994 FINANCIAL REPORT
APPENDIX A
Table of Contents
Management's Discussion and Analysis
of Financial Condition and Results of Operations........... 1
Consolidated Statements of Income............................. 20
Consolidated Statements of Retained Earnings.................. 21
Consolidated Balance Sheets................................... 22
Consolidated Statements of Cash Flows......................... 24
Notes to Consolidated Financial Statements.................... 25
Report of Independent Public Accountants...................... 62
Report of Management.......................................... 63
Glossary of Terms............................................. 64
NOTE: The graphs presented in this APPENDIX A are described at the
bottom of page 65.
<PAGE> 1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CENTRAL AND SOUTH WEST CORPORATION
Reference is made to CSW's Consolidated Financial Statements and
related Notes and Selected Financial Data. The information contained
therein should be read in conjunction with, and is essential in
understanding, the following discussion and analysis.
Overview
The electric utility industry is changing rapidly and becoming
more competitive. Several years ago, in anticipation of increasing
competition and fundamental changes in the industry, CSW's management
developed a four-part strategic plan. This plan is designed to help
position CSW to be competitive in the rapidly changing environment
that the CSW System currently faces. The four-part strategy is:
Enhance CSW's core electric utility business.
Expand CSW's core electric utility business.
Expand CSW's non-utility business.
Pursue financial initiatives.
Since the introduction of CSW's strategic plan in 1990, CSW has
undertaken initiatives in each of these areas that are important steps
in the implementation of the overall strategy. These initiatives were
marked by the efforts in the proposed acquisition of El Paso and the
continued restructuring of CSW's core business. In addition, CSW has
faced some operational challenges during the past two years with the
outage and 1994 restart of STP. These events are discussed below and
elsewhere in this report.
CSW and the Electric Operating Companies believe that, compared
to other electric utilities, the CSW System is well positioned to meet
future competition. The CSW System benefits from economies of scale
and scope by virtue of its size and is a relatively low-cost producer
of electric power. Moreover, CSW is taking steps to enhance its
marketing and customer service, reduce costs, improve and standardize
business practices, and grow through strategic acquisitions, in order
to position itself for increased competition in the future.
Proposed Acquisition of El Paso
El Paso filed a voluntary petition for reorganization under
Chapter 11 of the Bankruptcy Code on January 8, 1992. In May 1993,
CSW entered into a Merger Agreement pursuant to which El Paso would
emerge from bankruptcy as a wholly-owned subsidiary of CSW. El Paso
is an electric utility company headquartered in El Paso, Texas,
engaged principally in the generation and distribution of electricity
to approximately 262,000 retail customers in west Texas and southern
New Mexico. El Paso also sells electricity under contract to
wholesale customers in a number of locations including southern
California and Mexico.
On July 30, 1993, El Paso filed the Modified Plan and a related
proposed form of disclosure statement providing for the acquisition
of El Paso by CSW. On November 15, 1993, all voting classes of
creditors and shareholders of El Paso voted to approve the Modified
Plan. On December 8, 1993, the Bankruptcy Court confirmed the
Modified Plan.
Under the Modified Plan, the total value of CSW's offer to
acquire El Paso is approximately $2.2 billion. The Modified Plan
generally provides for El Paso creditors and shareholders to receive
shares of CSW Common, cash and/or securities of El Paso, or to have
their claims cured and reinstated. The Modified Plan also provides
<PAGE> 2
for claims of secured creditors generally to be paid in full with
debt securities of reorganized El Paso, and for unsecured creditors
to receive a combination of debt securities of reorganized El Paso
and CSW Common equal to 95.5 percent of their claims, and for small
trade creditors to be paid in full with cash. The Modified Plan
provides for El Paso's preferred shareholders to receive preferred
shares of reorganized El Paso, or cash, and for options to purchase
El Paso Common to be converted into options to purchase a
proportionate number of shares of CSW Common.
Based on information provided by El Paso, 35,544,330 shares of
El Paso Common were outstanding as of the Confirmation Date. The
Modified Plan provides for El Paso's common shareholders to receive
between $3.00 and $4.50, plus dividends, per share of El Paso Common
to be paid in CSW Common as described below. The Merger Agreement
provides for each share of El Paso Common to be converted on the
Effective Date into the number of shares of CSW Common with a value
(based on a value of $29.4583 per share of CSW Common) equal to the
sum of (i) $3.00 per share of El Paso Common outstanding on the
Confirmation Date, (ii) any proceeds received by El Paso prior to the
Effective Date from certain contingent claims based on a value of CSW
Common equal to the closing price on the New York Stock Exchange on
the day such proceeds are received by El Paso, and (iii) the
dividends that would be deemed to have been paid on the amounts
described in items (i) and (ii) above from the Confirmation Date, or
the date upon which such contingent claims are converted into cash,
as the case may be, through and including the Effective Date, as well
as dividends that would have been paid on such dividends under (iii)
above; provided, however, that the sum of (i) and (ii) above will not
exceed $4.50 multiplied by the number of shares of El Paso Common
outstanding on the Confirmation Date. If $4.50 per share of El Paso
Common has not been realized under items (i) and (ii) above and any
of the contingent claims are remaining on the Effective Date, the
Modified Plan and Merger Agreement provide for a liquidation trust to
be established pursuant to the Modified Plan and for El Paso's rights
in those contingent claims to be assigned to the trust. The Modified
Plan provides for proceeds resulting from disposition of the assets
in the liquidation trust, if any, to be distributed pro rata to the
holders of El Paso Common up to $4.50 per share under items (i) and
(ii) above, with any net proceeds thereafter to be returned to El
Paso. El Paso has stated publicly that it has realized sufficient
proceeds from the contingent claims referred to in item (ii) above so
that no liquidation trust would be required.
The aggregate number of shares of CSW Common that would be
issued in connection with the Merger 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 occurrence and
timing of the Effective Date of the Merger. CSW has estimated the
value of the shares to be issued to El Paso stakeholders at
approximately $569 million based on an assumed Effective Date in the
first half of 1995. In addition, CSW expects to make payments in
cash of approximately $335 million in connection with the
consummation of the Merger, a portion of which would be funded by
cash in the El Paso estate and an estimated $200 million of which
would be funded from other internal or external sources which may
include a new issuance of CSW Common or debt securities. Depending
on the number of shares issued and the outcome of other matters
discussed below, existing holders of CSW Common could experience
short-term dilution in earnings if the Merger is consummated. As of
December 31, 1994, the price per share of CSW Common had declined by
approximately 31% since May 3, 1993, the date of the Merger
Agreement. Because the number of shares of CSW Common and the
interest rates of the debt securities that would be issued to the
creditor groups 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 would affect the economic impact of the
proposed acquisition to CSW.
The Merger is subject to numerous conditions set forth in the
Merger Agreement, including but not limited to (i) the receipt of
final orders with respect to all required regulatory approvals on
terms that would not cause a regulatory material adverse effect as
defined in the Merger Agreement, (ii) the receipt of all third party
consents, (iii) the absence of a material adverse effect or facts or
circumstances that could reasonably be expected to result in a
material adverse effect on El Paso or the business prospects of El
Paso, (iv) transfer to El Paso of good and marketable title to the
leased portion of El Paso's share of Palo Verde, (v) performance by
El Paso, CSW and CSW's acquisition subsidiary, CSW Sub, Inc., in all
material respects of all covenants contained in the Merger Agreement
<PAGE> 3
and (vi) the occurrence of the Effective Date under the Modified
Plan. Required regulatory approvals and filings in connection with
the Merger include approvals of the FERC, the SEC, the Texas
Commission, the New Mexico Commission, the NRC, and filings with the
Department of Justice and the Federal Trade Commission under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976.
The Merger Agreement also provides that CSW and El Paso have the
right to terminate the Merger Agreement under specified circumstances
including without limitation, (i) the filing of a stand-alone rate
plan by El Paso, (ii) the failure of the Effective Date to occur
within 18 months after the Confirmation Date (i.e., by June 8, 1995),
or , if extended by mutual consent of CSW and El Paso, within 24
months of the Confirmation Date (i.e., by December 8, 1995), or (iii)
the entering of any order denying any of the required regulatory
approvals. In the event the Merger Agreement is terminated, a
termination fee is payable in limited circumstances. El Paso is
required to pay a termination fee of $50 million to CSW if El Paso
terminates the Merger Agreement under certain circumstances and
subsequently consummates a merger with another party. CSW and El
Paso would be required to pay a $25 million termination fee to the
other party in the case of termination based upon a material breach
of the Merger Agreement or failure to approve an extension of time
permitted to consummate the Merger under specified circumstances. If
the Merger Agreement is terminated, whether or not any termination
fee is payable, CSW could be required, in most cases, to recognize as
an expense deferred costs associated with the Merger, which amounted
to approximately $36 million at December 31, 1994. Additionally,
under certain circumstances, if the Merger is not consumated, the
Merger Agreement provides for CSW to pay El Paso a portion of certain
interest costs and certain fees and expenses. CSW's potential
exposure as of December 31, 1994 is estimated to be approximately
$17.5 million; however, the actual amount, if any, that CSW may be
required to pay pursuant to these provisions depends on a number of
contingencies and cannot presently be predicted.
CSW continues to use its best efforts to consummate the Merger.
At the same time, however, CSW continues to monitor contingencies
which may preclude the consummation of the Merger, including without
limitation the potential loss of significant portions of El Paso's
service area and significant El Paso customers, including Las Cruces
and two military installations, Holloman Air Force Base and White
Sands Missile Range, 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 the 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 Palo Verde.
Based upon El Paso's written response to the concerns identified
in a September 12 letter from CSW to El Paso and the failure of El
Paso to resolve the contingencies set forth above, CSW cannot predict
whether, or if so when, the Merger will be consummated. In the event
that the proposed Merger is not consummated, there may be ensuing
litigation between El Paso and CSW or among other parties to El
Paso's bankruptcy proceedings and either or both of El Paso and CSW.
Management is unable to predict the ultimate outcome of the
proposed Merger. In the event that recognition of any or all of
these expenses is required, it could have a material adverse impact
on CSW's consolidated results of operations in the period they are
recognized, but would not be expected to have a material adverse
impact on CSW's continuing consolidated results of operations or
financial condition.
See NOTE 11, Commitments and Contingent Liabilities - Proposed
Acquisition of El Paso, for additional information related to the
proposed El Paso merger.
Restructuring
As previously reported, the CSW System has taken steps to
implement 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 the customer. The restructuring
costs were initially estimated to be $97 million and were expensed in
1993. The final costs of the restructuring were approximately $88
<PAGE> 4
million. Approximately $84 million of the restructuring expenditures
were incurred during 1994, with the remaining $4 million expected to
be incurred during 1995. Approximately $12 million of the
restructuring expenses relate to employee termination benefits, $45
million relate to enhanced benefit costs and $31 million relate to
employees that will not be terminated. Approximately $60 million of
the restructuring costs were paid from or 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. The cost of these enhanced benefit amounts will
be paid from general corporate funds to the benefit plan trusts over
future years. The restructuring is substantially completed, with the
remaining activity to take place during 1995. Certain aspects of the
restructuring are pending SEC approval under the Holding Company Act.
CSW 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 by early 1996 with reductions in
the rate of growth of O&M costs continuing thereafter.
STP
Introduction
CPL owns 25.2% of STP, a two-unit nuclear power plant which is
located near Bay City, Texas. In addition to CPL, HLP, the Project
Manager, owns 30.8%, San Antonio owns 28.0%, and Austin owns 16.0%.
STP Unit 1 was placed in service in August 1988 and STP Unit 2 was
placed in service in June 1989.
From February 1993 until May 1994, STP experienced an
unscheduled outage which has resulted in significant rate and
regulatory proceedings involving CPL. These matters, including a
base rate case and fuel reconciliation proceedings, are discussed
immediately below.
STP Outage
In February 1993, Units 1 and 2 of STP were shut down by HLP in
an unscheduled outage resulting from mechanical problems. 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 that it
supplemented to identify additional issues to be resolved and
verified by the NRC before STP could be restarted.
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 agreed with HLP's recommendation that Unit 1 was
ready to restart. Unit 1 restarted on February 25, 1994 and reached
100% power on April 8, 1994. Subsequently, the issues with respect
to Unit 2 were resolved and the NRC on May 17, 1994 agreed with HLP's
recommendation to restart Unit 2. Unit 2 resumed operation on May
30, 1994 and reached 100% power on June 16, 1994. During 1994, Unit
1 and Unit 2 achieved annual net capacity factors of 75.3% and 54.7%,
respectively. During the last six months of 1994, the STP units
operated at capacity factors of 98.6% for Unit 1 and 99.2% for Unit
2.
In June 1993, the NRC placed STP on its "watch list" of plants
with "weaknesses that warrant increased NRC attention." The decision
to place STP on the watch list followed the June 1993 issuance of a
report by an NRC Diagnostic Evaluation Team which conducted a review
of STP operations.
On February 3, 1995, the NRC removed STP from the "watch list".
The NRC noted that the four key areas for their decision were
sustained improvement throughout 1994, high standards of performance
exhibited by the plant, effective maintenance and engineering support
resulting in reduced equipment repair backlogs and improved plant
<PAGE> 5
reliability, and the open and positive employee climate at the plant.
With the NRC reviewing the "watch list" status every 6 months and
with Unit 2 achieving 100% power in June of 1994, the February review
was the first realistic opportunity for STP to be considered for a
change in status. On average, plants previously placed on the "watch
list" have stayed on the list for 29 months.
Rates and Regulatory Matters
CPL Rate Inquiry
Several Cities, the Texas Commission General Counsel and others
initiated actions in late 1993 and early 1994 which, if approved by
the Texas Commission, would lower CPL's base rates. The requests for
a review of CPL's rates arose out of the unscheduled outage at STP
which began in February 1993. The STP outage did not affect CPL's
ability to meet customer demand because of existing capacity and
CPL's purchase of additional energy.
CPL submitted a filing package on July 1, 1994, to the Texas
Commission justifying its current base rate structure. Parties to
CPL's base rate case have filed testimony with the Texas Commission
recommending reductions in CPL's retail base rates of up to $147
million annually, resulting from a combination of proposed rate base
and cost of service reductions, as well as a rate base disallowance
of up to $400 million.
The Texas Commission held hearings in November and December
1994, and all parties have filed briefs in the case. The ALJ is
expected to issue a recommended order for consideration by the Texas
Commission in April 1995 with a final order from the Texas Commission
expected in May 1995. Testimony filed by parties to the rate case,
including the Staff, is not binding on either the ALJ or the Texas
Commission.
CPL continues to maintain that its rates are reasonable and that
its earnings are within established regulatory guidelines. In
addition, CPL strongly believes that 100 percent of its investment in
both units of STP belongs in rate base. This belief is based on,
among other factors, Units 1 and 2 providing output at high capacity
factors since April and June 1994, respectively. In addition, the
long-term benefits nuclear generation provides to customers further
support their inclusion in rate base. Furthermore, there are no
Texas Commission precedents addressing the removal of a nuclear plant
from rate base as a performance disallowance. Assuming both units of
STP are included in rate base, CPL believes it is not collecting
excessive revenues, notwithstanding that market rates of return on
common equity are generally lower today than they were in 1990 and
1991, when CPL's base rates were last set.
CPL Fuel
Pursuant to the substantive rules of the Texas Commission, CPL
generally is allowed to recover its fuel costs through a fixed fuel
factor. These fuel factors are in the nature of temporary rates, and
CPL's collection of revenues by such fuel factors is subject to
adjustment at the time of a fuel reconciliation proceeding before the
Texas Commission. The difference between fuel revenues billed and
fuel expense incurred is recorded as an addition to or a reduction
from revenues, with a corresponding entry to unrecovered fuel costs
or other current liabilities, as appropriate. Any fuel costs, not
limited to under- or over-recoveries, which the Texas Commission
determines as unreasonable in a reconciliation proceeding are not
recoverable from customers.
CPL is currently involved in two proceedings before the Texas
Commission relating to the recovery of fuel and purchased power
costs. CPL originally filed Docket No. 12154 seeking approval of a
customer surcharge to recover fuel and purchased power costs,
including those resulting from the STP outage. In Docket No. 13126,
the Texas Commission General Counsel and others are reviewing the
prudence of management activities at STP. In November 1994, CPL
filed a fuel reconciliation case in Docket No. 13650 with the Texas
Commission seeking to reconcile fuel costs since March 1, 1990,
including the period during which CPL's fuel and purchased power
costs were increased due to the STP outage. At December 31, 1994,
CPL's under-recovered fuel balance was $54.1 million, exclusive of
interest, which was due primarily to the STP outage. If a
significant portion of the fuel costs were disallowed by the Texas
Commission, CSW could experience a material adverse effect on its
<PAGE> 6
consolidated results of operations in the year of disallowance but
not on its financial condition. Finally, in Docket No. 13126, the
Texas Commission General Counsel is reviewing the prudence of
management activities at STP. On January 4, 1995, Docket No. 12154
was consolidated into Docket No. 13650. The results of the prudence
inquiry in Docket No. 13126 are expected to be incorporated into the
fuel reconciliation proceedings in Docket No. 13650.
CPL continues to negotiate with the intervening parties to
resolve these matters through settlement. However, no settlement has
been reached to date.
Management cannot predict the ultimate outcome of these
regulatory proceedings. However, management believes that the
ultimate resolution of the various issues will not have a material
adverse effect on CSW's consolidated results of operations or
financial condition.
See NOTE 10, Litigation and Regulatory Proceedings - CPL, STP,
for a discussion of regulatory proceedings arising out of the STP
outage and background on STP rate orders and deferred accounting.
Nuclear Decommissioning
CPL's decommissioning costs are accrued and funded to an
external trust over the expected service life of the STP units. The
existing NRC operating licenses will allow the operation of STP Unit
1 until 2027, and Unit 2 until 2028. The accrual is an annual level
cost based on the estimated future cost to decommission STP,
including escalations for expected inflation to the expected time of
decommissioning and is net of expected earnings on the trust fund.
The staff of the SEC has questioned certain of the current
accounting practices of the electric utility industry regarding the
recognition, measurement and classification of decommissioning costs
for nuclear generating stations. In response to these questions, FASB
has agreed to review the accounting for removal costs, including
decommissioning. If current electric utility industry accounting
practices for such decommissioning are changed, (i) annual provisions
for decommissioning could increase, (ii) the estimated cost for
decommissioning could be recorded as a liability rather than as
accumulated depreciation, and (iii) trust fund income from the
external decommissioning trusts could be reported as investment income
rather than as a reduction to decommissioning expense.
See NOTE 1, Summary of Significant Accounting Policies - Nuclear
Decommissioning, for further information regarding CPL's
decommissioning of STP.
See NOTE 10, Litigation and Regulatory Proceedings, for
information regarding other rate and regulatory matters, including the
PSO rate case, the SWEPCO fuel reconciliation, and WTU's fuel and rate
proceedings.
New Accounting Standards
SFAS No. 115, was effective for fiscal years beginning after
December 15, 1993. CSW adopted SFAS No. 115 in 1994. The adoption of
SFAS No. 115 did not have a material effect on CSW's consolidated
results of operations or financial condition.
In June 1993 the FASB issued SFAS No. 116. The statement,
effective for fiscal years beginning after December 15, 1994, will be
adopted by CSW for 1995. The statement establishes accounting
standards for contributions and applies to all entities that receive
or make contributions. Management does not believe the adoption of
SFAS No. 116 will have a material impact on CSW's consolidated results
of operations or financial condition.
SFAS No. 119, was effective for fiscal years ending after
December 15, 1994. Transok, which is the only subsidiary of CSW
currently using derivative financial instruments, uses derivatives to
manage price and market risks for gas purchases and sales. The
<PAGE> 7
Electric Operating Companies may use these instruments in the future
to manage the increased market risks associated with greater
competition in the electric utility industry. The adoption of this
new statement had no material effect on CSW's consolidated results of
operations or financial condition.
Liquidity and Capital Resources
Overview
The historical capital requirements of the CSW System have been
primarily for the construction of electric utility plant. Large
capital expenditures for the construction of new generating capacity
are not planned through the end of this decade. Accordingly,
internally generated funds should meet most of the capital
requirements of the Electric Operating Companies. However, CSW's
strategic initiatives, including expanding CSW's core electric utility
and non-utility businesses, may require additional capital. Primary
sources of capital are long-term debt and preferred stock issued by
the Electric Operating Companies, common stock issued by CSW and
internally generated funds. In addition, CSWE uses various forms of
non-recourse project financing. CSW, in order to strengthen its
capital structure and support growth from time to time, may issue
additional shares of its common stock.
Productive investment of net funds from operations in excess of
capital expenditures and dividend payments are necessary to enhance
the long-term value of CSW for its investors. CSW is continually
evaluating the best use of these funds. CSW is required to obtain
authorization from various regulators in order to invest in any
additional business activities.
Capital Expenditures
Construction expenditures for the CSW System totaled $578 million
in 1994. Based on projections of growth in peak demand, the CSW
System will not require significant additional generating capability
through the end of this decade. Planned construction expenditures for
the Electric Operating Companies for the next three years are
primarily to improve and expand and distribution facilities. These
improvements will be required to meet the needs of new customers and
the growth in the requirements of existing customers. Construction
expenditures, excluding capital required for acquisitions by CSW or
its subsidiaries, if any, are expected to be approximately $385
million, $382 million and $358 million during 1995, 1996, and 1997,
respectively. Not included in the 1995 amount is approximately $61
million of equity investments by CSWE.
The construction program continues to be monitored, reviewed and
adjusted to reflect changes in estimated load growth in the Electric
Operating Companies' service areas, variations in prices of
alternative fuel sources, the cost of labor, materials, equipment and
capital, and other external factors.
The CSW System facilities plan presently includes projected coal
and lignite-fired generating plants for which the CSW System has
invested approximately $140 million in prior years for plant sites,
engineering studies and lignite reserves. Should future plans exclude
these plants for environmental or other reasons, CSW would evaluate
the probability of recovery of these investments and may record
appropriate reserves.
Long-Term Financing
As of December 31, 1994, the capitalization ratios of CSW were:
common stock equity 48%, preferred stock 5% and long-term debt 47%.
The CSW System's embedded cost of long-term debt was 7.7% at the end
of 1994. The CSW System continually monitors the capital markets for
opportunities to lower its cost of capital through refinancing. The
CSW System continues to be committed to maintaining financial
flexibility by maintaining a strong capital structure and favorable
securities ratings which should allow funds to be obtained from the
capital markets when required.
<PAGE> 8
The CSW System's significant long-term financing activity for
1994 and 1995 to date is summarized as follows:
Security Issued Security Reacquired
Security Amount Rate Maturity Security Amount Rate Maturity
(millions) (millions)
CPL FMB(1) $100.0 7-1/2% 1999 PFDs $22.4 10.05% --
FMB 0.6 9-3/8% 2019
SWEPCO Term Term
Loan 50.0 Floating 2000 Loan 50.0 Floating 1997
FMB 5.8 9-1/8% 2019
WTU FMB(2) 40.0 6-1/8% 2004 FMB 12.0 7-1/4% 1999
FMB(3) 40.0 7-1/2% 2000 FMB 7.8 9-1/4% 2019
PFDs 4.7 7-1/4% --
CSWS Term(4)
Loan 60.0 Floating 2001
(1) Net proceeds were used to repay a portion of CPL's short-term
borrowings.
(2) Net proceeds were used to reimburse WTU's treasury for (i) $12
million aggregate principal amount of 7-1/4% FMBs, Series G, due
January 1, 1999, redeemed on January 1, 1994, and (ii) $23 million
aggregate principal amount of 7-7/8% FMBs, Series H, due July 1,
2003, redeemed on December 30, 1993. The balance of the proceeds
were used to repay outstanding short-term borrowings.
(3) Issuance occurred in 1995 and is not reflected in the 1994
financial statements. Net proceeds were used to repay a portion of
WTU's short-term debt, to provide working capital and for other
general corporate purposes.
(4) Proceeds were used to repay short-term debt, which had been
previously used to finance certain assets, including the CSW
headquarters building in Dallas, Texas.
Shelf Registration Statements
The Electric Operating Companies expect to obtain a majority of
their 1995 capital requirements from internal sources, but may issue
additional securities subject to market conditions and other factors.
CPL and WTU have filed shelf registration statements with the SEC for
the sale of securities. The amount available for issuance by company
and the date filed with the SEC follow:
First Mortgage Bonds Preferred Stock
Amount Date Filed Amount Date Filed
Available Available
(millions) (millions)
CPL $260 1993 $75 1994
WTU $20 1993
The Operating Companies may issue additional debt securities
subject to market conditions and other factors. The proceeds of any
such offerings will be used principally to redeem higher cost FMBs, to
lower the embedded cost of debt, to repay short-term debt, to provide
working capital and for other general corporate purposes.
<PAGE> 9
The Electric Operating Companies may issue additional preferred
stock subject to market conditions and other factors. The proceeds of
any such offerings will be used principally to redeem higher cost
preferred stock and to repay short-term debt.
Short-Term Financing
The Electric Operating Companies utilize short-term debt to meet
fluctuations in working capital requirements due to the seasonal
nature of electric sales. The CSW System has established a money pool
to coordinate short-term borrowings and to make borrowings outside the
money pool through CSW's issuance of commercial paper. At December
31, 1994, the CSW System had bank lines of credit aggregating $930
million to back up the CSW commercial paper program.
The maximum amount of consolidated short-term debt outstanding in
1994 was $1,618 million in September 1994, which represented 26% of
the total capitalization at December 31, 1994. The average amount of
short-term debt during 1994 was $1,455 million, of which $694 million
was attributable to CSW Credit. The weighted average cost of short-
term debt was 4.5% in 1994. Short-term debt outstanding increased due
to continued expenditures for corporate initiatives, including
investments in CSWE.
Acquisitions
To meet its strategic goals, CSW will continue to search for
electric utility companies or other electric utility properties to
acquire and will continue evaluating opportunities to pursue energy
related non-utility businesses. For any major acquisition, additional
funds from the capital markets, including the issuance of CSW Common
in underwritten public offerings, in the acquisition transaction
itself, or otherwise, may be required.
For a discussion of circumstances under which CSW may issue
additional shares of common stock in connection with the proposed
acquisition of El Paso, see Proposed Acquisition of El Paso, above.
Dividend Reinvestment Plan
The PowerShare dividend reinvestment plan is available to all CSW
stockholders, employees, eligible retirees, utility customers and
other residents of the four states where the Electric Operating
Companies operate. Plan participants are able to make optional cash
payments and reinvest all or any portion of their dividends in CSW
Common. During 1994 CSW raised approximately $50 million in new
equity through the PowerShare plan.
Internally Generated Funds
Internally generated funds consist of cash flows from operating
activities less common and preferred stock dividends. The Electric
Operating Companies utilize short-term debt to meet fluctuations in
working capital requirements due to the seasonal nature of energy
sales. Information concerning internally generated funds follows:
1994 1993 1992
(millions)
Internally Generated Funds $424 $369 $374
Capital expenditures, Acquisitions,
CSWE Equity Investments Provided by
Internally Generated Funds 63% 58% 82%
CSWE and CSWI
At December 31, 1994, CSW had loaned $221 million to CSWE on an
interim basis for the purpose of developing and constructing
independent power and cogeneration facilities. Repayment of these
amounts to CSW is expected to be made through funds obtained from
third party non-recourse project financing. In late February 1994,
CSWE closed permanent project financing for its 50% owned Mulberry
facility, which is described below, and repaid $94 million of the
interim financing provided by CSW. In March 1995, CSWE closed
permanent project financing for its Ft. Lupton facility, which is
described below, and repaid $102 million of the interim financing
<PAGE> 10
provided by CSW. In addition to the amounts already expended in 1994
for the development of projects, CSWE and CSWI have general authority
from the SEC to expend up to $242 million and $399 million,
respectively, on future projects.
CSW Credit
CSW Credit purchases, without recourse, the accounts receivable
of the Operating Companies and certain non-affiliated electric
companies. CSW Credit's capital structure contains greater leverage
than that of the Operating Companies, consequently lowering CSW's cost
of capital.
CSW Credit issues commercial paper, secured by the assignment of
its receivables, to meet its financing needs. CSW Credit maintains a
secured revolving credit agreement which aggregated $900 million at
December 31, 1994 to back up its commercial paper program.
The sale of these accounts receivables provides the Operating
Companies with cash immediately, thereby reducing working capital
needs and revenue requirements.
Recent Developments and Trends
Competition and Industry Challenges
Competitive forces at work in the electric utility industry are
impacting the CSW System and electric utilities generally. Increased
competition facing electric utilities is driven by complex economic,
political and technological factors. These factors have resulted in
legislative and regulatory initiatives that are likely to result in
even greater competition at both the wholesale and retail level in the
future. As competition in the industry increases, the Electric
Operating Companies will have the opportunity to seek new customers
and at the same time be at risk of losing customers to other
competitors. The Electric Operating Companies believe that their
prices for electricity and the quality and reliability of their
service currently place them in a position to compete effectively in
the marketplace.
The Energy Policy Act, which was enacted in 1992, significantly
alters the way in which electric utilities compete. The Energy Policy
Act creates exemptions from regulation under the Holding Company Act
and permits utilities, including registered utility holding companies
and non-utility companies, to form EWGs. EWGs are a new category of
non-utility wholesale power producer that are free from most federal
and state regulation, including the principal restrictions of the
Holding Company Act. These provisions enable broader participation in
wholesale power markets by reducing regulatory hurdles to such
participation. The Energy Policy Act also allows the FERC, on a case-
by-case basis and with certain restrictions, to order wholesale
transmission access and to order electric utilities to enlarge their
transmission systems. A FERC order requiring a transmitting utility
to provide wholesale transmission service must include provisions
generally that permit (i) the utility to recover from the FERC
applicant all of the costs incurred in connection with the
transmission services and (ii) any enlargement of the transmission
system and associated services. While CSW believes that the Energy
Policy Act will continue to make the wholesale markets more
competitive, CSW is unable to predict the extent to which the Energy
Policy Act will impact CSW System operations.
Increasing competition in the utility industry brings an
increased need to stabilize or reduce rates. The retail regulatory
environment is beginning to shift from traditional rate base
regulation to incentive regulation. Incentive rate and performance-
based plans encourage efficiencies and increased productivity while
permitting utilities to share in the results. Retail wheeling, a
major industry issue which may require utilities to "wheel" or move
power from third parties to their own retail customer, is evolving
gradually.
The Electric Operating Companies also compete with suppliers of
alternative forms of energy, such as natural gas, fuel oil and coal,
some of which may be cheaper than electricity. The Electric Operating
Companies believe that their prices and the quality and reliability of
<PAGE> 11
their service currently places them in a position to compete
effectively in the marketplace.
Wholesale energy markets, including the market for wholesale
electric power, have been extremely competitive since the enactment of
the Energy Policy Act. The Electric Operating Companies compete in
the wholesale energy markets with other public utilities,
cogenerators, qualified facilities, exempt wholesale generators and
others for sales of electric power.
Under the Energy Policy Act, the FERC has approved several
proposals by utility companies to sell wholesale power at market-based
rates and provide to electric utilities "open access" to transmission
systems, subject to certain requirements. The adoption of these
proposals increases marketing opportunities for electric utilities,
but also exposes them to the risk of loss of load or reduced revenues
due to competition with alternative suppliers. In 1993, PSO and
SWEPCO filed with the FERC tariffs under which they make available
firm and non-firm transmission services for other electric utilities
on the combined PSO and SWEPCO transmission systems in the Southwest
Power Pool. The FERC accepted the tariffs for filing on November 9,
1993. In the event the FERC approves the Merger between CSW and El
Paso and denies CSW's request for rehearing wherein CSW asked FERC to
reconsider the imposition of a comparable service requirement, these
tariffs could be superseded by a set of compliance tariffs which offer
point-to-point and network transmission service on terms and
conditions comparable to CSW's and El Paso's use of their own
transmission systems. As discussed, compliance tariffs could expose
the merged CSW System to additional risks of loss of load from current
requirements wholesale customers purchasing power from alternative
suppliers or reduced revenue resulting from competition with
alternative suppliers of electric power.
CSW and the Electric Operating Companies believe that, compared
to other electric utilities, the CSW System is well positioned to meet
future competition. The CSW System benefits from economies of scale
and scope by virtue of its size and is a relatively low-cost producer
of electric power. Moreover, CSW is taking steps to enhance its
marketing and customer service, reduce costs, improve and standardize
business practices, and grow through strategic acquisitions, in order
to position itself for increased competition in the future.
CSW is unable to predict the ultimate outcome or impact of
competitive forces on the electric utility industry or the CSW System.
As the wholesale and retail electricity markets become more
competitive, however, the principal factor determining success is
likely to be price, and to a lesser extent, reliability, availability
of capacity, and customer service.
Public Utility Regulatory Act
PURA is the legal foundation for electric utility regulation in
Texas. PURA will expire on September 1, 1995, in accordance with the
sunset policy of the Texas Legislature, which applies to all state
agencies, unless the Texas Legislature reenacts PURA in its current
form or in modified form. Several proposals have been made to amend
PURA which, among other things, provide for a market-driven integrated
resource planning process, pricing flexibility for utilities faced
with competitive challenges, incentive regulation and deregulation of
the wholesale bulk power market in ERCOT. CSW is unable to predict
the ultimate outcome of the 1995 session of the Texas Legislature and
in particular whether amendments to PURA will be adopted. If,
however, the Texas Legislature passes legislation permitting any form
of retail wheeling, such legislation could have an adverse impact on
CPL and CPL's sales to its retail customers.
Regulatory Accounting
Consistent with industry practice and the provisions of SFAS No.
71, which allows for the recognition and recovery of regulatory
assets, the Electric Operating Companies have recognized significant
regulatory assets and liabilities. Management believes that the
Electric Operating Companies will continue to meet the criteria for
following SFAS No. 71. However, in the event the Electric Operating
Companies no longer meet the criteria for following SFAS No. 71, a
write-off of regulatory assets and liabilities would be required. For
<PAGE> 12
additional information regarding SFAS No. 71 reference is made to NOTE
1, Summary of Significant Accounting Policies - Regulatory Assets and
Liabilities.
Holding Company Act
The Holding Company Act generally has been construed to limit the
operations of a registered holding company to a single integrated
public utility system, plus such additional businesses as are
functionally related to such system. Among other things, the Holding
Company Act requires CSW and its subsidiaries to seek prior SEC
approval before effecting mergers and acquisitions or pursuing other
types of non-utility initiatives. Pervasive regulation under the
Holding Company Act may impede or delay CSW's efforts to achieve its
strategic and operating objectives, including its pursuit of non-
utility initiatives. CSW is continuing its efforts to repeal or
modify the Holding Company Act in order to provide the flexibility to
compete within the changing environment.
Consolidated Taxes
The Texas Commission before 1992 allowed income taxes to be
recovered in rates based on the federal income tax incurred by a
utility as if it were a stand-alone company. This stand-alone
approach treated the regulated activities of a utility as a separate
entity and considered only those revenues and expenses that are
included in the utility's cost of service to calculate the federal
income tax liability for ratemaking purposes.
Beginning in 1992, the Texas Commission changed its method of
calculating the federal income tax component of rates to the "actual
tax approach." The actual tax approach is an evolving concept but
generally seeks to reflect in rates the actual tax liability of the
utility irrespective of its relationship to the utility's cost of
service. The approach reduces rates by the tax benefits of deductions
which are not considered for or included in setting rates for the
utility.
The Texas Commission is expected to use the actual tax approach
for calculating the recovery of federal income tax in the pending rate
cases for CPL and WTU. The impact of the actual tax approach on the
prospective rates for CPL and WTU cannot be determined since the
application of the concept is unsettled.
CSW believes that the recovery of federal income taxes in rates
should be determined on the stand-alone approach for ratemaking
purposes, but there is no assurance this approach will be adopted in
the pending CPL or WTU rate cases or the pending El Paso rate and
Merger cases.
Environmental Matters
CERCLA and Related Matters
The operations of the CSW System, like those of other utility
systems, generally involve the use and disposal of substances subject
to environmental laws. The CERCLA, the federal "Superfund" law,
addresses the cleanup of sites contaminated by hazardous substances.
Superfund requires that PRPs fund remedial actions regardless of fault
or the legality of past disposal activities. PRPs include owners and
operators of contaminated sites and transporters and/or generators of
hazardous substances. Many states have similar laws. Theoretically,
any one PRP can be held responsible for the entire cost of a cleanup.
Typically, however, cleanup costs are allocated among PRPs.
The Electric Operating Companies are subject to various pending
claims alleging that they are PRPs under federal or state remedial
laws for investigating and cleaning up contaminated property. CSW
anticipates that resolution of these claims, individually or in the
aggregate, will not have a material adverse effect on CSW's
consolidated results of operations or financial condition. Although
the reasons for this expectation differ from site to site, factors
that are the basis for the expectation for specific sites include the
volume and/or type of waste allegedly contributed by the Electric
Operating Company, the estimated amount of costs allocated to the
Electric Operating Company and the participation of other parties.
<PAGE> 13
MGPs
Contaminated former MGPs are a type of site which utilities, and
others, may have to remediate in the future under Superfund or other
federal or state remedial programs. Gas was manufactured at MGPs from
the mid-1800s to the mid-1900s. In some cases, utilities and others
have faced potential liability for MGPs because they, or their alleged
predecessors, owned or operated the plants. In other cases, utilities
or others may have been subjected to such liability for MGPs because
they acquired MGP sites after gas production ceased.
Suspected MGP Site in Marshall, Texas
SWEPCO owns a suspected former MGP site in Marshall, Texas.
SWEPCO has notified the TNRCC that evidence of contamination has been
found at the site. As a result of sampling conducted at the end of
1993 and early 1994, SWEPCO is evaluating the extent, if any, to which
contamination has impacted soil, groundwater and other conditions in
the area. A final range of clean-up costs has not yet been
determined, but, based on a preliminary estimate, SWEPCO has accrued
approximately $2 million as a liability for this site on SWEPCO's
books as of December 31, 1993. As more information is obtained about
the site, and SWEPCO discusses the site with the TNRCC, the
preliminary estimate may change.
Suspected MGP Site in Texarkana, Texas and Arkansas and Shreveport, Louisiana
SWEPCO also owns a suspected former MGP site in Texarkana, Texas
and Arkansas. The EPA ordered an initial investigation of this site,
as well as one in Shreveport, Louisiana, which is no longer owned by
SWEPCO. The contractor who performed the investigations of these two
sites recommended to the EPA that no further action be taken at this
time.
Biloxi, Mississippi MGP Site
SWEPCO has been notified by Mississippi Power Company that it may
be a PRP at the former Biloxi MGP site formerly owned and operated by
a predecessor of SWEPCO. SWEPCO is working with Mississippi Power
Company to investigate the extent of contamination at this site. The
MDEQ approved a site investigation work plan and, in January 1995,
SWEPCO and Mississippi Power Company initiated sampling pursuant to
that work plan. On an interim basis, SWEPCO and Mississippi Power
Company are each paying fifty percent of the cost of implementing the
site investigation work plan. That interim allocation is subject to a
final allocation in the future. SWEPCO and Mississippi Power Company
are investigating whether there are other PRPs at the Biloxi site.
Until the extent of the contamination at the Biloxi site is
identified, it is unknown what, if any, additional investigation or
cleanup may be required.
Management does not expect these matters to have a material
effect on CSW's consolidated results of operations or financial
position.
Clean Air Act Amendments
In November 1990, the United States Congress passed the Clean
Air Act which places restrictions on the emission of sulfur dioxide
from gas-, coal- and lignite-fired generating plants. Beginning in
the year 2000, the Electric Operating Companies will be required to
hold allowances in order to emit sulfur dioxide. EPA issues
allowances to owners of existing generating units based on historical
operating conditions. Based on the CSW System facilities plan, CSW
believes that the Electric Operating Companies' allowances will be
adequate to meet their needs at least through 2008. Public and
private markets are developing for trading of excess allowances. CSW
presently has no intention of engaging in trading of allowances, but
may seek to do so in the future if market conditions warrant and
appropriate regulatory approvals are obtained.
The Clean Air Act also establishes a federal operating source
permit program to be administered by the states. CSW estimates that
it and the Electric Operating Companies will incur approximately
$500,000 to prepare permit applications for the program.
<PAGE> 14
The Clean Air Act also directs the EPA to issue regulations
governing nitrogen oxide emissions and requires government studies to
determine what controls, if any, should be imposed on utilities to
control air toxics emissions. The impact that the nitrogen oxide
emission regulations and the air toxics study will have on CSW cannot
be determined at this time.
As a result of requirements imposed by the Clean Air Act, CSW
expects to spend an additional $4 million for annual testing of,
software modifications to, and maintenance of continuous emission
monitoring equipment from 1995 through 1997.
EMFs
Research is ongoing whether exposure to EMFs may result in
adverse health effects or damage to the environment. Although a few
of the studies to date have suggested certain associations between
EMFs and some types of adverse health effects, the research to date
has not established a cause-and-effect relationship between EMFs and
adverse health effects. CSW cannot predict the impact on the CSW
System or the electric utility industry if further investigations or
proceedings were to establish that the present electricity delivery
system is contributing to increased risk or incidence of health
problems.
See NOTE 10, Litigation and Regulatory Proceedings, for
additional discussion of environmental issues.
Non-Utility Initiatives
As indicated above, one component of CSW's four-part strategy to
meet the increasing competition and fundamental changes in the
electric utility industry is to expand CSW's non-utility business.
CSW continues to consider new business opportunities to expand its
energy related business. CSW's principal non-utility businesses are
Transok and CSWE. As discussed below, CSW recently formed CSWI to
seek opportunities internationally for investment in non-utility
generation. CSW Communications was formed to provide a communications
network for the CSW System as well as third parties. While CSW
believes that non-utility initiatives are necessary to maintain its
competitiveness and to grow in the future, there can be no assurance
as to the level of success that will be attained in these initiatives.
Transok
Transok is an intrastate natural gas gathering, transmission,
marketing and processing company that provides natural gas services to
CSW System companies, predominately PSO, and to non-affiliated gas
customers throughout the United States. Transok's natural gas
facilities are located in Oklahoma, Louisiana and Texas. It operates
gas processing plants and markets natural gas liquids produced from
those plants to various markets.
CSWE
CSWE, a wholly-owned subsidiary of CSW, is authorized to develop
various independent power and cogeneration facilities and to own and
operate such non-utility projects, subject to further regulatory
approvals. CSWE has an approximate 50% interest in the Brush, Ft.
Lupton and Mulberry facilities which achieved commercial operation in
1994.
Brush
The 68 MW Brush project, located in Brush, Colorado, achieved
commercial operation in January 1994, and provides steam and hot water
to a 15-acre greenhouse and sells electricity to Public Service
Company of Colorado.
Ft. Lupton
The Ft. Lupton project located in Colorado provides steam and hot
water to a 20-acre greenhouse and also sells electricity to Public
Service Company of Colorado. Phase I of the Ft. Lupton project,
representing 122 MWs, achieved commercial operation in June 1994.
Phase II of the project commenced operations in July 1994 bringing
total on-line capacity of the project to 272 MWs.
<PAGE> 15
Mulberry
The Mulberry facility, a 117 MW gas-fired cogeneration plant in
Polk County, Florida achieved commercial operation in August 1994 and
provides steam to a combined distilled water and ethanol facility and
sells electricity to Florida Power Corporation and Tampa Electric
Company.
Orange Cogen
The Orange Cogen facility, in which CSWE holds a 50% interest, is
expected to commence operation in June 1995. The 103 MW, gas-fired
plant in Florida will provide thermal energy to an orange juice
processor and will sell electricity to Florida Power Corporation and
Tampa Electric Company. CSWE's O&M division plans to operate the
plant.
Other Projects
In addition to these projects, CSWE has 19 other projects
totaling more than 5,000 MW in various stages of development, mostly
in affiliation with other developers. CSWE can provide no assurances
that these projects, which are subject to further negotiations and
regulatory approvals, will be commenced or completed and, if they are
completed, that they will provide the anticipated return on
investment.
CSWI
In November 1994, CSWI, a wholly-owned subsidiary of CSW, was
formed to engage in international activities including developing,
acquiring, financing and owning the securities of exempt wholesale
generators and foreign utility companies.
In 1994, CSWI continued with the Mexico initiative that began in
1992. CSWI's goal is to participate in providing Mexico's future
electricity needs. The geographical location of the CSW System offers
opportunities to provide bulk power sales to Mexico. The Mexico City
office of CSW, opened in 1993, allows CSWI greater access to key
Mexican markets, permitting CSWI to more readily evaluate
opportunities as they become available. However, the recent
devaluation of the Mexican peso will slow previously projected power
demand for the near-term.
CSW Communications
In July 1994, CSW Communications, a wholly-owned subsidiary, of
CSW, was formed to provide communication services to the CSW System
and non-affiliates. One important goal of CSW Communications is to
enhance services to CSW System customers through fiber optics and
other telecommunications technologies. CSW Communications will
consolidate the future design, construction, maintenance and ownership
of the CSW System's telecommunications networks. In 1994, CSW
announced a $9 million project in Laredo, Texas, to install fiber
optic lines and coaxial cable to CPL residential customers who have
volunteered to take part in this pilot program. This project
involving CSW Communications and CPL will demonstrate the energy
efficiency and cost savings that result from giving customers greater
choice and control over their electric service. These energy-
efficiency services will use only a portion of the capacity of the
telecommunications lines CSW Communications is installing. In the
future, CSW Communications may, subject to any required regulatory
approvals, seek to lease the remaining capacity for other services
including possibly telephone service, cable television and home
security systems.
Results of Operations
Overview Of Results
CSW's earnings increased to $394 million or $2.08 per share in
1994 as compared to $308 million or $1.63 per share in 1993 and $382
million or $2.03 per share in 1992. The return on average common
stock equity was 13.4% in 1994 compared to 10.6% in 1993 and 13.5% in
1992. Electric operations contributed approximately 100% of total
earnings in 1994 and 1993, and 95% in 1992. In 1994, earnings at
Transok, CSWE, and CSW Credit totaling $34 million, were offset by
corporate expenditures including merger and acquisition activities and
the formation of two new subsidiaries.
<PAGE> 16
Earnings increased in 1994 compared to 1993 due primarily to
higher KWH sales and natural gas operations and decreased costs
associated with the end of the outage at STP. In addition, CSWE,
which had three projects become operational during 1994, contributed
$2 million to earnings. These items were partially offset by
increased interest and depreciation and amortization expense.
Earnings in 1993 were significantly affected by several items
described below:
(millions, after-tax)
Restructuring charges $(63)
Recognition of unbilled revenues 49
Early adoption of SFAS No. 112 (9)
Adoption of SFAS No. 109 6
Establishment of reserves for
fuel and other properties (11)
Prior year tax adjustments (18)
In addition to the aforementioned items, earnings in 1993 were
below 1992 levels due to additional costs primarily associated with
the outage at STP, higher benefit costs as a result of the adoption of
SFAS No. 106, higher taxes other than income as a result of school
funding tax increases in Texas, and the increase in the federal income
tax rate from 34% to 35%. These items were partially offset by higher
KWH sales in 1993 due primarily to more normal weather than was
experienced in 1992.
Operating Revenues
Revenues decreased 2% in 1994, after increasing 12% in 1993 and
8% in 1992 from the previous years due to the following items:
Revenue Increase (Decrease)
From Prior Year
1994 1993 1992
(millions)
Base rate changes $ 7 $ 8 $ --
Fuel costs (49) 168 --
KWH sales 61 93 (25)
Natural gas (85) 107 255
Other electric and
diversified 2 22 12
$(64) $398 $242
Electric Revenues
Electric revenues increased $10 million in 1994 compared to 1993.
Total KWH sales increased approximately 6%, with increases in sales
among all customer classes. During 1994, the average number of
customers increased approximately 2%. In addition to customer growth,
there was slightly more favorable weather during 1994 as compared to
1993. However, offsetting much of the increases in revenue due to KWH
sales, fuel revenues were down substantially during 1994 compared to
1993. Fuel costs incurred in the generation of electricity are
typically passed through to the customers, so decreases in fuel costs
will cause a corresponding decrease in fuel revenues. Fuel costs,
which decreased during 1994, are more fully discussed below under Fuel
and Purchased Power. Fuel revenues increased in 1993 compared to 1992
due to higher per unit costs of fuel and purchased power.
Base rates increased slightly at PSO because of changes in retail
customers' rates, and decreased due to a 3.2% interim rate reduction
at WTU implemented during the fourth quarter of 1994. Because PSO's
increased base rates, finalized in December 1993, were not
significantly higher than the interim rates that had been in effect
throughout the year, base rates had little overall change from 1993.
As part of a stipulated agreement reflecting its rate increase, PSO
<PAGE> 17
agreed that it will not file for an increase in base rates until after
June 30, 1995. During late 1993 and early 1994, several parties
initiated actions, which, if approved, would lower CPL's base rates.
The review of CPL's rates arose out of the unscheduled outage at STP
as discussed above under the heading Rates and Regulatory Matters, CPL
Rate Inquiry
For additional information on these proceedings and others, see
NOTE 10, Litigation and Regulatory Proceedings.
The percentage changes in KWH sales for the three years were as
follows:
KWH Sales Increase (Decrease)
From Prior Year
1994 1993 1992
Residential 2.9% 9.0% (4.2)%
Commercial 3.8 4.8 (1.1)
Industrial 3.6 5.5 3.1
Sales for resale 21.9 (6.6) 5.4
Total sales 5.5 4.9 0.1
KWH sales to retail customers increased in 1994 and 1993 as a
result of more favorable weather and increased residential customers.
In addition, KWH sales grew in all of the other customer classes.
SWEPCO acquired BREMCO in July 1993, and accordingly, there were
twelve months of KWH sales to these customers in 1994 compared to only
six months in 1993. Weather was more favorable in 1994 than in 1993,
while extremely mild weather was experienced in 1992. The continued
increases in industrial sales over the last three years reflect the
increased marketing efforts by the Electric Operating Companies and
the continued improvement in the economy throughout their service
areas. Sales for resale increased in 1994 because STP was operational
for most of the year, whereas in 1993, plants in the CSW System were
producing power to replace the power normally produced at STP.
The Electric Operating Companies have maintained competitive
rates in an increasingly competitive marketplace. Efforts have
increased at each of the Electric Operating Companies to attract new
customers while efficiently serving all customers. Economic
conditions in the service areas of the Electric Operating Companies
are expected to continue to improve in 1995.
Natural Gas Revenues
Revenues from natural gas decreased 14% in 1994 due primarily to
a decrease in the price of gas, even though total natural gas volumes
increased 4% from 1994 to 1993. However, lower gas sales prices were
mitigated by lower gas purchase prices, which are described below
under Gas Purchased for Resale. The lower gas sales revenues were
partially offset by both increased gathering and transportation
revenues and increased natural gas liquids processing revenues.
Gathering and transportation sales volumes increased 12% primarily as
a result of a pipeline extension completed during 1994, and gas
liquids processing volumes increased 12% during 1994. Revenues from
natural gas increased 22% in 1993 from 1992 due primarily to an
increase in sales volumes and to a lesser extent an increase in sales
prices. A portion of this increase is attributable to the acquisition
of the NGC Anadarko Gathering System in 1993. Revenue increases in
1993 from natural gas liquids are due to increased sales volumes
combined with slightly higher prices.
Other Diversified Revenues
Other diversified revenues increased 38% from 1994 as compared to
1993 due to the reclassification of CSWE's operating revenues more
fully discussed below under Other Income and Deductions. Other
<PAGE> 18
diversified revenues increased substantially in 1993 as compared to
1992 because CSW Credit began factoring the receivables of a
significant non-affiliated utility in January 1993.
Fuel and Purchased Power Expense
During 1994, the Electric Operating Companies generated
approximately 95% of their electric energy requirements. During 1993
and 1992, they generated 92% and 94%, respectively. Total fuel and
purchased power expenses decreased 4% during 1994 due to a decrease in
fossil fuel costs and increased usage of lower cost nuclear fuel. The
average unit cost of fuel was $1.82 during 1994, compared to $2.11 and
$1.92 for 1993 and 1992, respectively. Several contracts with major
fuel suppliers and carriers have been recently renegotiated. These
settlements have contributed to the lower cost of fuel. In addition,
because STP restarted and Units 1 and 2 reached 100% capacity in April
and June of 1994, respectively, lower cost nuclear fuel was utilized,
whereas the 1993 outage required higher cost energy purchases to
replace STP's nuclear power. The increase in fuel and purchased power
expense in 1993 compared to 1992 is attributable to higher natural gas
costs as well as the cost of STP replacement power.
Gas Purchased for Resale/Gas Extraction and Marketing
Gas purchased for resale decreased 30% in 1994 from 1993, while
it increased 29% in 1993 from 1992. Lower gas prices caused the
decrease in 1994, including a significant portion attributable to
sales made on natural gas drawn from storage. Increased natural gas
prices and increased pipeline capacity from Transok's recent
acquisitions caused the 1993 increase. Gas extraction and marketing
expenses increased 14% in 1994 from 1993 and 19% in 1993 from 1992 due
to higher input costs associated with higher natural gas liquids
processing volumes.
Other Operating and Maintenance Expenses and Taxes
Other operating and maintenance expenses decreased 8% in 1994
compared to 1993, due primarily to the absence of expenses that were
incurred during the 1993 STP outages. In 1993, in addition to $29
million in maintenance costs associated with the STP outage, operating
expenses increased compared to 1992 due to expenses associated with
the adoption of SFAS 106, reserves taken on lignite and other
property, corporate expenditures, and other administrative and general
expenses. Federal income taxes were higher in 1994 than 1993 due to
higher pre-tax income. Federal income taxes were lower in 1993 than
1992 due to lower pre-tax income offset in part by tax adjustments and
the increase in the corporate tax rate from 34% to 35%, which was
effective retroactive to January 1, 1993. Taxes other than federal
income remained comparable in 1994 from 1993, while they increased in
1993 compared to 1992 due to school funding tax increases in Texas.
Restructuring Charges
In 1994, the original restructuring accrual of $97 million that
had been recorded in 1993 was reduced by $9 million. Accordingly, the
final costs associated with the CSW System's restructuring totaled $88
million over the two year period. For additional information on CSW's
restructuring, see Restructuring, above.
Depreciation and Amortization
Depreciation and amortization expense increased in 1994 compared
to 1993 and also 1993 compared to 1992 as a result of increases in
depreciable plant.
Inflation
Annual inflation rates, as measured by the national Consumer
Price Index, have averaged about 2.7% during the three years ended
December 31, 1994. Management believes that inflation, at these
levels, does not materially affect CSW's consolidated results of
operations or financial position. However, under existing regulatory
<PAGE> 19
practice, only the historical cost of plant is recoverable from
customers. As a result, cash flows designed to provide recovery of
historical plant costs may not be adequate to replace plant in future
years.
Other Income and Deductions
Other income and deductions increased $18 million or 19% in 1994
compared to 1993, as a result of the reclassification of CSWE's
operating activities offset partially by decreased Mirror CWIP
liability amortization and the absence of adjustments recorded in 1993
associated with Transok's 1991 acquisition of TEX/CON. Prior to 1994,
CSWE was in the developmental stage of its business, so its operating
activities were classified in CSW's Other Income and Deductions.
However, in conjunction with the completion of three projects in 1994,
CSWE's revenues and expenses were classified as operating activities
in CSW's Other Diversified Revenues and Other Operating Expenses.
Both of these components had negative earnings impacts classified in
Other Income and Deductions in 1993. Other Income and Deductions
increased $11 million or 13% in 1993 from 1992 due in part to
Transok's aforementioned TEX/CON acquisition adjustments and slightly
higher Allowance for Equity Funds Used During Construction partially
offset by decreased Mirror CWIP liability amortization.
Interest Expense
Interest expense on long-term debt in 1994 was comparable to
1993, whereas 1993 interest expense was substantially lower than 1992
due to long-term debt refinancings, which lowered CSW's embedded cost
of long-term debt from 8.3% in 1992 to 7.8% in 1993. CSW's embedded
cost of long-term debt decreased slightly to 7.7% in 1994. Short-term
interest expense increased in 1994 due primarily to higher short-term
interest rates combined with higher general corporate borrowings, and
in 1993 because of increased borrowings attributable to the expansion
of CSW Credit's business, interim financing of CSWE's projects, and
various corporate initiatives.
Cumulative Effect of Changes in Accounting Principles
In 1993, CSW implemented SFAS No. 112, SFAS No. 109, and changed
the method of accounting for unbilled revenues. These changes had a
cumulative effect of increasing net income approximately $46 million.
<PAGE> 20
Consolidated Statements of Income
Central and South West Corporation
For the Years Ended December 31,
1994 1993 1992
(millions, except per share amounts)
Operating Revenues
Electric
Residential $1,156 $1,160 $1,046
Commercial 836 832 773
Industrial 733 736 659
Sales for resale 204 179 177
Other 136 148 135
Total Electric 3,065 3,055 2,790
Gas 518 603 496
Other diversified 40 29 3
3,623 3,687 3,289
Operating Expenses and Taxes
Fuel and purchased power 1,161 1,209 1,035
Gas purchased for resale 276 396 306
Gas extraction and marketing 98 86 72
Other operating 596 593 490
Restructuring charges (9) 97 --
Maintenance 176 197 170
Depreciation and amortization 356 330 311
Taxes, other than federal income 196 197 175
Federal income taxes 179 125 142
3,029 3,230 2,701
Operating Income 594 457 588
Other Income and Deductions
Mirror CWIP liability amortization 68 76 83
Other 43 17 (1)
111 93 82
Income Before Interest Charges 705 550 670
Interest Charges
Interest on long-term debt 218 219 230
Interest on short-term debt
and other 75 50 36
293 269 266
Income Before Cumulative Effect of
Changes in Accounting Principles 412 281 404
Cumulative Effect of Changes in
Accounting Principles -- 46 --
Net Income 412 327 404
Preferred stock dividends 18 19 22
Net Income for Common Stock $394 $308 $382
Average Common Shares Outstanding 189.3 188.4 188.3
Earnings per Share of Common Stock
before Cumulative Effect of
Changes in Accounting Principles $ 2.08 $ 1.39 $ 2.03
Cumulative Effect of Changes in
Accounting Principles -- .24 --
Earnings per Share of Common Stock $ 2.08 $ 1.63 $ 2.03
Dividends Paid per Share of Common
Stock $ 1.70 $ 1.62 $ 1.54
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE> 21
Consolidated Statements of Retained Earnings
Central and South West Corporation
For the Years Ended December 31,
1994 1993 1992
(millions)
Retained Earnings at Beginning of Year $1,753 $1,751 $1,659
Net income for common stock 394 308 382
Deduct: Common stock dividends 323 306 290
Retained Earnings at End of Year $1,824 $1,753 $1,751
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE> 22
Consolidated Balance Sheets
Central and South West Corporation
As of December 31,
1994 1993
(millions)
ASSETS
Plant
Electric utility
Production $ 5,802 $ 5,775
Transmission 1,377 1,228
Distribution 2,539 2,362
General 764 709
Construction work in progress 412 361
Nuclear fuel 161 160
Total Electric 11,055 10,595
Gas 798 738
Other diversified 15 10
11,868 11,343
Less - Accumulated depreciation 3,870 3,550
7,998 7,793
Current Assets
Cash and temporary cash investments 27 62
Special deposits -- 2
Accounts receivable 761 801
Materials and supplies, at average cost 162 149
Electric utility fuel inventory,
substantially at average cost 118 102
Gas inventory/products for resale 23 24
Unrecovered fuel costs 54 70
Prepayments and other 44 44
1,189 1,254
Deferred Charges and Other Assets
Deferred plant costs 516 518
Mirror CWIP asset 322 332
Other non-utility investments 394 266
Income tax related regulatory assets, net 216 182
Other 274 259
1,722 1,557
$10,909 $10,604
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE> 23
Consolidated Balance Sheets
Central and South West Corporation
As of December 31,
1994 1993
(millions)
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock: $3.50 par value
Authorized: 350 million shares
Issued and outstanding: 190.6
million shares in 1994 and 188.4
million shares in 1993 $ 667 $ 659
Paid-in capital 561 518
Retained earnings 1,824 1,753
Total Common Stock Equity 3,052 2,930
Preferred stock
Not subject to mandatory redemption 292 292
Subject to mandatory redemption 35 58
Long-term debt 2,940 2,749
Total Capitalization 6,319 6,029
Current Liabilities
Long-term debt and preferred stock due
within twelve months 7 26
Short-term debt 910 769
Short-term debt - CSW Credit 573 641
Accounts payable 286 313
Accrued taxes 111 90
Accrued interest 61 55
Accrued restructuring charges 4 97
Other 155 152
2,107 2,143
Deferred Credits
Income taxes 2,048 1,935
Investment tax credits 320 335
Mirror CWIP liability and other 115 162
2,483 2,432
$10,909 $10,604
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE> 24
Consolidated Statements of Cash Flows
Central and South West Corporation
For the Years Ended December 31,
1994 1993 1992
(millions)
OPERATING ACTIVITIES
Net Income $ 412 $ 327 $ 404
Non-cash Items Included in Net Income
Depreciation and amortization 402 366 351
Deferred income taxes and
investment tax credits 87 94 71
Mirror CWIP liability amortization (68) (76) (83)
Restructuring charges (9) 97 --
Cumulative effect of changes in
accounting principles -- (46) --
Changes in Assets and Liabilities
Accounts receivable 29 (52) (52)
Unrecovered fuel costs 16 (63) (4)
Accounts payable (27) 34 53
Accrued taxes 21 37 (41)
Accrued restructuring charges (57) -- --
Other (42) (24) (13)
764 694 686
INVESTING ACTIVITIES
Capital expenditures (578) (508) (422)
Acquisitions (21) (106) (27)
Non-affiliated accounts receivable
collections (purchases), net 11 (314) 11
CSW Energy projects (includes $73, $19
and $8 of equity investments for
1994, 1993 and 1992, respectively) (115) (127) (37)
Other (14) (14) (8)
(717) (1,069) (483)
FINANCING ACTIVITIES
Common stock sold 50 1 2
Proceeds from issuance of
long-term debt 199 904 1,009
Retirement of long-term debt (4) (50) (4)
Reacquisition of long-term debt (27) (987) (652)
Special deposits for reacquisition
of long-term debt -- 199 (199)
Redemption of preferred stock (33) (17) (13)
Change in short-term debt 73 602 17
Payment of dividends (340) (325) (312)
(82) 327 (152)
Net Change in Cash and Cash Equivalents (35) (48) 51
Cash and Cash Equivalents at
Beginning of Year 62 110 59
Cash and Cash Equivalents at End of
Year $ 27 $ 62 $ 110
SUPPLEMENTARY INFORMATION
Interest paid less amounts
capitalized $ 280 $ 260 $ 268
Income taxes paid $ 93 $ 53 $ 108
The accompanying notes to consolidated financial statements integral part
of these statements.
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.Summary of Significant Accounting Policies
Public Utility Regulation
CSW is subject to regulation by the SEC as a registered holding
company under the Holding Company Act. CSW's Operating Companies
are also regulated by the SEC under the Holding Company Act.
CSW's four Electric Operating Companies, Central Power and Light
Company, Public Service Company of Oklahoma, Southwestern Electric
Power Company, and West Texas Utilities Company, are subject to
regulation by the FERC under the Federal Power Act and follow the
Uniform System of Accounts prescribed by the FERC. The Operating
Companies are subject to further regulation for rates and other
matters by state regulatory commissions.
CSW Credit
CSW Credit, as a wholly-owned subsidiary of CSW, purchases,
without recourse, the billed and unbilled accounts receivable of
the Operating Companies and certain non-affiliated companies.
The more significant accounting policies of CSW and its
subsidiaries are summarized below:
Principles of Consolidation
The consolidated financial statements include the accounts of CSW
and its subsidiary companies. All significant intercompany items
and transactions have been eliminated.
Plant
Electric utility plant is stated at the original cost of
construction, which includes the cost of contracted services,
direct labor, materials, overhead items and allowances for
borrowed and equity funds used during construction. Transok's gas
plant acquisitions are stated at fair market value based on the
purchase price while other gas plant is stated at original cost of
construction, which includes the cost of contracted services,
direct labor, materials, overhead items and capitalized interest.
Depreciation
Provisions for depreciation of plant are computed using the
straight-line method, generally at individual rates applied to the
various classes of depreciable property. The annual average
consolidated composite rate was 3.2% for 1994, 1993 and 1992.
Nuclear Decommissioning
At the end of STP's service life, decommissioning is expected to
be accomplished using the decontamination method, which is one of
the techniques acceptable to the NRC. Using this method, the
decontamination activities occur as soon as possible after the end
of plant operations. Contaminated equipment is cleaned or removed
to a permanent disposal location and the site is generally
returned to its pre-plant state.
CPL's decommissioning costs are accrued and funded to an external
trust over the expected service life of the STP units. The
existing NRC operating licenses will allow the operation of STP
Unit 1 until 2027, and Unit 2 until 2028. The accrual is an
annual level cost based on the estimated future cost to
decommission STP, including escalations for expected inflation to
the expected time of decommissioning, and is net of expected
earnings on the trust fund.
CPL's portion of the costs of decommissioning STP were estimated
to be $85 million in 1986 dollars based on a site specific study
completed in 1986. CPL is recovering these decommissioning costs
through rates based on the service life of STP at a rate of $4.2
million per year. The $4.2 million annual cost of decommissioning
is reflected on the income statement in other operating expense.
Decommissioning costs are paid to an irrevocable external trust
<PAGE> 26
and as such are not reflected on CPL's balance sheet. At December
31, 1994, the trust balance was $19.3 million.
In May 1994, CPL received a new decommissioning study updating the
cost estimates to decommission STP that indicated that CPL's share
of such costs would increase from $85 million, as stated in 1986
dollars, to $251 million, as stated in 1994 dollars. The increase
in costs occurred primarily as a result of extended on-site
storage of high level waste, much higher estimates of low-level
waste disposal costs and increased labor costs since the prior
study. These costs are expected to be incurred during the years
2027 through 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.
Based on this projected cost to decommission STP, CPL estimates
that its annual funding level should increase to $10.0 million.
CPL has requested this amount as part of its cost of service in
its current rate filing. Other parties to the rate proceeding have
filed their projections of the annual amount, which have ranged
from $4.5 million to $8.1 million. CPL expects to fund at the
level ultimately ordered by the Texas Commission although CPL
cannot predict what that level will be. Historically, the Texas
Commission has allowed full recovery of nuclear decommissioning
costs. For further information on CPL's current rate filing, see
NOTE 10, Litigation and Regulatory Proceedings - Texas Commission
Proceedings, below.
Electric Revenues and Fuel
Prior to January 1, 1993, electric revenues were recorded at the
time billings were made to customers on a cycle-billing basis.
Electric service provided subsequent to billing dates through the
end of each calendar month became part of operating revenues of
the next month. To conform to general industry standards, the
Electric Operating Companies changed their method of accounting to
accrue for estimated unbilled revenues. The effect of this change
on 1993 net income was pre-tax increase of $75 million, and an
after-tax increase of $49 million, included in cumulative effect
of changes in accounting principles.
CPL, SWEPCO and WTU recover fuel costs in Texas as a fixed
component of base rates whereby over-recoveries of fuel are
payable to customers and under-recoveries may be billed to
customers after Texas Commission approval. The cost of fuel is
charged to expense as consumed. See NOTE 10, Litigation and
Regulatory Proceedings, for further information about fuel
recovery.
PSO recovers fuel costs in Oklahoma and SWEPCO recovers fuel costs
in Arkansas and Louisiana through automatic fuel recovery
mechanisms. The application of these mechanisms varies by
jurisdiction.
Each of the Electric Operating Companies recovers fuel costs
applicable to wholesale customers, which are regulated by the
FERC, through an automatic fuel adjustment clause.
CPL amortizes the costs of nuclear fuel to fuel expense based on a
ratio of the estimated Btu's used and available to generate
electric energy, and includes a provision for the disposal of
spent nuclear fuel.
Accounts Receivable
Each of the Operating Companies sells its billed and unbilled
accounts receivable, without recourse, to CSW Credit.
Regulatory Assets and Liabilities
For their regulated activities, each of the Electric Operating
Companies follows SFAS No. 71 which defines the criteria for
establishing regulatory assets and regulatory liabilities.
Regulatory assets represent probable future revenue to the company
associated with certain costs which will be recovered from
customers through the ratemaking process. Regulatory liabilities
<PAGE> 27
represent probable future refunds to customers. At December 31,
1994 and 1993, the CSW System had recorded the following
significant regulatory assets and liabilities:
1994 1993
(millions)
Regulatory Assets
Deferred plant costs $516 $518
Mirror CWIP asset 322 332
Income tax related
regulatory assets, net 216 182
Unrecovered fuel costs 54 70
Other 33 34
Regulatory Liabilities
Mirror CWIP liability 41 109
Deferred Plant Costs
In accordance with orders of the Texas Commission, WTU and CPL
deferred operating, depreciation and tax costs incurred for
Oklaunion Power Station Unit 1 and STP, respectively. These
deferrals were for the period beginning on the date when the
plants began commercial operation until the date the plants were
included in rate base. The deferred costs are being amortized and
recovered through rates over the lives of the respective plants.
See NOTE 10, Litigation and Regulatory Proceedings, for further
discussion of WTU's and CPL's deferred accounting proceedings.
Mirror CWIP
In accordance with Texas Commission orders, CPL previously
recorded a Mirror CWIP asset, which is being amortized over the
life of STP. For more information regarding Mirror CWIP, reference
is made to NOTE 10, Litigation and Regulatory Proceedings.
Statements of Cash Flows
Cash equivalents are considered to be highly liquid debt
instruments purchased with a maturity of three months or less.
Accordingly, temporary cash investments are considered cash
equivalents.
Reclassification
Certain financial statement items for prior years have been
reclassified to conform to the 1994 presentation.
Accounting Changes
Effective January 1, 1993, the CSW System adopted SFAS No. 106,
SFAS No. 112 and SFAS No. 109. See NOTE 2, Federal Income Taxes,
for further information regarding SFAS No. 109. In addition, the
Electric Operating Companies also changed their method of
accounting for unbilled revenues. See Electric Revenues and Fuel
above for further information.
The adoption of SFAS No. 106 resulted in an increase in 1993
operating expenses of $16 million. The adoption of SFAS No. 109,
SFAS No. 112 and the change in accounting for unbilled revenues
are presented as a cumulative effect of changes in accounting
principles as shown below:
Pre-Tax Tax Net Income EPS
CSW Effect Effect Effect Effect
(millions, except EPS)
SFAS No. 109 $ -- $ 6 $ 6 $0.03
SFAS No. 112 (13) 4 (9) (0.05)
Unbilled revenues 75 (26) 49 0.26
Total $62 $(16) $46 $0.24
<PAGE> 28
Pro forma amounts, assuming that the change in accounting for
unbilled revenues had been adopted retroactively, are not
materially different from amounts previously reported for prior
years.
2.Federal Income Taxes
The CSW System adopted the provisions of SFAS No. 109 effective
January 1, 1993. The net effect on CSW's earnings was a one-time
adjustment to increase net income by $6 million or $0.03 per
share. This adjustment was recorded as a cumulative effect of
change in accounting principle. The benefit was attributable to
the reduction in deferred taxes associated with CSW's non-utility
operations previously recorded at rates higher than current rates.
For utility operations, there were no material effects of SFAS No.
109 on CSW's earnings. As a result of this change, CSW recognized
additional accumulated deferred income taxes from its utility
operations and corresponding regulatory assets and liabilities to
ratepayers in amounts equal to future revenues or the reduction in
future revenues required when the income tax temporary differences
reverse and are recovered or settled in rates. As a result of a
favorable earnings history, the CSW System did not record any
valuation allowance against deferred tax assets at December 31,
1994 and 1993.
CSW files a consolidated federal income tax return and
participates in a tax sharing agreement with its subsidiaries.
The components of income taxes follow:
1994 1993 1992
Included in Operating Expenses and Taxes (millions)
Current $ 88 $ 28 $ 64
Deferred 105 112 95
Deferred ITC (14) (15) (17)
179 125 142
Included in Other Income and Deductions
Current (14) (3) (7)
Deferred (4) (5) 7
(18) (8) --
Tax effects of cumulative effect of changes
in Accounting Principles -- 14 --
-- 14 --
$161 $131 $142
Investment tax credits deferred in prior years are included in
income over the lives of the related properties.
Total income taxes differ from the amounts computed by applying
the statutory income tax rates to income before taxes. The
reasons for the differences follow:
1994 % 1993 % 1992 %
(dollars in millions)
Tax at statutory rates $201 35 $160 35 $186 34
Differences
Amortization of ITC (14) (2) (15) (3) (15) (3)
Mirror CWIP (20) (4) (23) (5) (25) (4)
Prior period adjustments -- -- 18 4 (10) (2)
Cumulative effect of
change in method of
accounting for
income taxes -- -- (8) (2) -- --
Other (6) (1) (1) -- 6 1
$161 28 $131 29 $142 26
<PAGE> 29
The significant components of the net deferred income tax
liability follow:
December 31, December 31,
1994 1993
(millions)
Deferred Income Taxes
Depreciable utility plant $ 1,683 $ 1,589
Deferred plant costs 181 181
Mirror CWIP asset 113 116
Income tax related regulatory assets 229 239
Other 262 234
Total Deferred Income Taxes Liabilities 2,468 2,359
Deferred Income Tax Assets
Income tax related regulatory liability (155) (177)
Unamortized ITC (115) (120)
Alternative minimum tax carryforward (96) (68)
Other (56) (65)
Total Deferred Income Tax Assets (422) (430)
Net accumulated deferred income taxes-total $ 2,046 $ 1,929
Net accumulated deferred income taxes-noncurrent $ 2,048 $ 1,935
Net accumulated deferred income taxes-current (2) (6)
Net accumulated deferred income taxes-total $ 2,046 $ 1,929
3.Long-Term Debt
The long-term debt of the Operating Companies outstanding as of
the end of the last two years follow:
Maturities Interest Rates December 31,
From To From To 1994 1993
(millions)
First mortgage
bonds
1995 1999 5.25% 7.50% $443 $343
2000 2004 5.25% 7.75% 836 796
2005 2009 6.20% 7.75% 247 248
2010 2014 7.50% 7.50% 112 112
2015 2019 9.125% 9.75% 226 240
2020 2024 7.25% 7.50% 295 295
2025 2029 6.875% 6.875% 80 80
Pollution
control bonds
2000 2004 6.90% 7.125% 21 21
2005 2009 5.90% 6.00% 83 83
2010 2014 7.875% 10.125% 231 231
2015 2019 7.60% 7.875% 114 114
2025 2029 6.00% 6.00% 120 120
Notes and lease obligations
1996 2023 6.25% 9.75% 328 273
Unamortized discount (21) (22)
Unamortized cost of reacquired debt (175) (185)
$2,940 $2,749
<PAGE> 30
The mortgage indentures, as amended and supplemented, securing
first mortgage bonds issued by the Electric Operating Companies,
constitute a direct first mortgage lien on substantially all
electric utility plant.
The Operating Companies may offer additional first mortgage bonds
and medium-term notes subject to market conditions and other
factors.
Annual Requirements
Certain series of outstanding first mortgage bonds have annual
sinking fund requirements, which are generally 1% of the amount of
each such series issued. These requirements may be, and generally
have been, satisfied by the application of net expenditures for
bondable property in an amount equal to 166-2/3% of the annual
requirements. Certain series of pollution control bonds also have
sinking fund requirements. At December 31, 1994, the annual
sinking fund requirements and annual maturities for first mortgage
bonds and pollution control bonds for the next five years follow:
Sinking Fund
Requirements Maturities
(millions)
1995 $ 4 $ 9
1996 4 33
1997 4 207
1998 4 34
1999 4 98
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 stock. These
restrictions do not limit the ability of CSW to pay dividends to
its stockholders. At December 31, 1994, $1,375 million of the
subsidiary companies' retained earnings were available for payment
of cash dividends to CSW.
Reacquired Long-term Debt
During 1994, 1993 and 1992, the Electric Operating Companies
reacquired $27 million, $987 million and $652 million of long-term
debt, respectively, including reacquisition premiums, prior to
maturity. The premiums and related reacquisition costs and
discounts are included in long-term debt on the consolidated
balance sheets and are being amortized over 5 to 35 years,
consistent with its expected ratemaking treatment.
The weighted average cost of long-term debt was 7.7% for 1994,
7.8% for 1993 and 8.3% for 1992.
Reference is made to MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Liquidity and
Capital Resources, for further information related to long-term
debt, including new issues and reacquisition.
<PAGE> 31
4.Preferred Stock
The outstanding preferred stock of the Electric Operating
Companies as of the end of the last two years follow:
Current
1994 Dividend Rate December 31, Redemption Prices
Shares Outstanding From To 1994 1993 From To
(millions)
Not subject to mandatory redemption
592,900 4.00% 5.00% 59 59 102.75 107.00
760,000 7.12% 8.72% 76 76 100.00 101.00
1,600,000 auction 160 160 100.00 100.00
Issuance expenses and unamortized
redemption costs (3) (3)
$292 $292
Subject to mandatory redemption
352,000 6.95% 6.95% $ 35 $ 37 104.64 104.64
-- 10.05% 10.05% -- 22 -- --
Issuance expenses and unamortized
redemption costs -- (1)
$ 35 $ 58
The outstanding preferred stock not subject to mandatory
redemption is redeemable at the option of the Electric Operating
Companies upon 30 days notice at the current redemption price per
share. CPL's auction preferred stock totaling $160 million also
may be redeemed at par on any dividend payment date. The CSW
System's authorized number of shares of preferred stock totaled
6.4 million at December 31, 1994 and 1993.
Redemption prices of certain preferred stock decline at specified
intervals in future periods. The preferred stock issues subject
to mandatory redemption are refundable at various times during the
period 1995 through 1999. The minimum annual sinking fund
requirements of the preferred stock are $1.2 million for the years
1995 through 1999. During 1994 and 1993, the Electric Operating
Companies redeemed $33 million and $17 million, respectively, of
preferred stock, including redemption premiums.
CPL
The dividends on CPL's $160 million auction and money market
preferred stocks are adjusted every 49 days, based on current
market rates. The dividend rates averaged 3.5%, 2.7%, and 3.6%
during 1994, 1993 and 1992.
CPL retired its remaining 10.05% preferred stock during August
1994.
WTU
In July 1993, WTU redeemed 100,000 shares of its 7.25% Series,
$100 par value, Preferred Stock, for $10 million, in accordance
with mandatory and optional sinking fund provisions. The capital
required for this transaction was provided by short-term
borrowings from the CSW System money pool and internal sources.
In July 1994, WTU redeemed the remaining 47,000 shares of its
7.25% Series, $100 par value, Preferred Stock.
5.Common Stock
On March 6, 1992, CSW effected a two-for-one split of CSW's common
stock by means of a 100% stock dividend paid to stockholders of
record on February 10, 1992. All references to number of shares
outstanding, to per share information in the Consolidated
Financial Statements, and to the notes thereto have been adjusted
to reflect the stock split on a retroactive basis.
<PAGE> 32
CSW has a restricted stock plan and a stock option plan. Under
the stock option plan, 3,833,000 shares of common stock are
available for grant and 491,000 shares are reserved for exercise
of options which were outstanding at December 31, 1994.
The PowerShare dividend reinvestment plan is available to all CSW
stockholders, employees, eligible retirees, utility customers and
other residents of the four states where the Electric Operating
Companies operate. Plan participants are able to make optional
cash payments and reinvest all or any portion of their dividends
in CSW common shares. During 1994, CSW raised approximately $50
million in common stock equity through PowerShare.
6.Financial Instruments
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate fair value.
Cash and temporary cash investments
The carrying amount approximates fair value because of the short
maturity of those instruments.
Short-term investments
The carrying amount approximates fair value because of the short
maturity of those instruments. Short-term investments are
classified in accounts receivable on the consolidated balance
sheets.
Long-term debt
The fair value of the CSW System's long-term debt is estimated
based on the quoted market prices for the same or similar issues
or on the current rates offered to CSW for debt of the same
remaining maturities.
Preferred stock subject to mandatory redemption
The fair value of the Electric Operating Companies' preferred
stock subject to mandatory redemption is estimated based on
quoted market prices for the same or similar issues or on the
current rates offered to CSW for preferred stock with the same or
similar remaining redemption provision.
Long-term debt and preferred stock due within 12 months
The fair value of current maturities of long-term debt and
preferred stock due within 12 months are estimated based on quoted
market prices for the same or similar issues or on the current
rates offered for long-term debt or preferred stock with the same
or similar remaining redemption provisions.
Short-term debt
The carrying amount approximates fair value because of the short
maturity of those instruments.
The fair value does not affect CSW's liabilities unless the issues
are redeemed prior to their maturity dates.
<PAGE> 33
The estimated fair values of CSW's financial instruments follow:
1994 1993
Carrying Fair Carrying Fair
Amount Value Amount Value
(millions)
Cash and temporary cash
investments $27 $27 $62 $62
Short-term investments -- -- 13 13
Long-term debt 2,940 2,795 2,749 2,947
Preferred stock subject to
mandatory redemption 35 32 58 61
Long-term debt and preferred
stock due within 12 months 7 7 26 26
Short-term debt 1,483 1,483 1,410 1,410
7.Short-Term Financing
The CSW System has established a money pool to coordinate short-
term borrowings and to make borrowings outside the money pool
through CSW's issuance of commercial paper. At December 31, 1994,
the CSW System had bank lines of credit aggregating $930 million
to back up its commercial paper program.
CSW Credit, which does not participate in the money pool, issues
commercial paper that is secured by the assignment of its
receivables. CSW Credit maintains a secured revolving credit
agreement which aggregated $900 million at December 31, 1994, to
back up its commercial paper program.
8.Benefit Plans
Defined Benefit Pension Plan
The CSW System maintains a tax qualified, non-contributory defined
benefit pension plan covering substantially all employees.
Benefits are based on employees' years of credited service, age at
retirement, and final average annual earnings with an offset for
the participant's primary Social Security benefit. The CSW
System's funding policy is based on actuarially determined
contributions, taking into account amounts which are deductible
for income tax purposes and minimum contributions required by the
ERISA. Pension plan assets consist primarily of common stocks and
short-term and intermediate-term fixed income investments.
Contributions to the plan for the years ended December 31, 1994,
1993 and 1992 were $28 million, $32 million and $29 million,
respectively.
The approximate maximum number of participants in the plan during
1994 were 8,500 active participants, 3,600 retirees and
beneficiaries and 1,000 terminated employees.
<PAGE> 34
The components of net periodic pension cost and the assumptions
used in accounting for pensions follow:
1994 1993 1992
(dollars in millions)
Net Periodic Pension Cost
Service cost $22 $20 $18
Interest cost on projected
benefit obligation 62 56 50
Actual return on plan assets (4) (68) (43)
Net amortization and deferral (70) -- (20)
$10 $ 8 $ 5
Discount rate 8.25% 7.75% 8.50%
Long-term compensation increase 5.46% 5.46% 5.96%
Return on plan assets 9.50% 9.50% 9.50%
A reconciliation of the funded status of the plan to the amounts
recognized on the balance sheets is shown below:
December 31,
1994 1993
(millions)
Plan assets, at fair value $794 $790
Actuarial present value of
Accumulated benefit obligation
for service rendered to date 685 649
Additional benefit for future
salary levels 112 133
Projected benefit obligation 797 782
Plan assets in excess/(below) the
projected benefit obligation (3) 8
Unrecognized net gain 60 62
Unrecognized prior service cost (8) (8)
Unrecognized net obligation 15 17
Prepaid pension cost $ 64 $ 79
The vested portion of the accumulated benefit obligations at
December 31, 1994 and 1993 was $626 million and $586 million,
respectively. The unrecognized net obligation is being amortized
over the average remaining service life of employees or 16 years.
Prepaid pension cost is included in other deferred charges on the
consolidated balance sheets.
In addition to the amounts shown in the above table, the CSW
System has a non-qualified excess benefit plan. This plan is
available to all pension plan participants who are entitled to
receive a pension benefit from CSW which is in excess of the
limitations imposed on benefits by the Internal Revenue Code
through the qualified plan. CSW's net periodic cost for this non-
qualified plan for the years ended December 31, 1994, 1993 and
1992 was $1.8 million, $1.8 million and $0.5 million,
respectively.
Health and Welfare Plans
The CSW System had medical, dental, group life insurance,
dependent life insurance, and accidental death and dismemberment
plans for substantially all active CSW System employees during
1994. The contributions, recorded on a pay-as-you-go basis, for
the years ended December 31, 1994 and 1993 were approximately $17
million and $23 million, respectively. Effective January 1993,
the CSW System's method of providing health benefits was modified
<PAGE> 35
to include such benefits as a health maintenance organization,
preferred provider options, managed prescription drug and mail-
order program and a mental health and substance abuse program in
addition to the self-insured indemnity plans.
Postretirement Benefits Other Than Pensions
The CSW System adopted SFAS No. 106 effective January 1, 1993. The
effect on operating expense in 1993 was an increase of $16
million. The transition obligation is being amortized over twenty
years, with eighteen years remaining. In prior years, these
benefits were accounted for on a pay-as-you-go basis.
The components of net periodic postretirement benefit cost follow:
1994 1993
(millions)
Net Periodic Postretirement Benefit Cost
Service cost $ 9 $ 8
Interest cost on APBO 19 17
Actual return on plan assets (1) (1)
Amortization of transition obligation 9 9
Net amortization and deferral (4) (2)
$32 $31
A reconciliation of the funded status of the plan to the amounts
recognized on the consolidated balance sheets follow:
December 31,
1994 1993
APBO (millions)
Retirees $ 141 $ 146
Other fully eligible participants 31 30
Other active participants 55 64
Total APBO 227 240
Plan assets at fair value (69) (51)
APBO in excess of plant assets 158 189
Unrecognized transition obligation (162) (171)
Unrecognized gain or (loss) 4 (18)
(Accrued)/Prepaid Cost $ -- $ --
The following assumptions were used in accounting for SFAS No.
106.
1994 1993
Discount rate 8.25% 7.75%
Return on plan assets 9.50% 9.00%
Tax rate for taxable trusts 39.60% 39.60%
Health Care Cost Trend Rate Assumptions
Pre-65 Participants: 1994 rate of 11.75% grading down .75% per
year to an ultimate rate of 6.5% in 2001.
Post-65 Participants: 1994 rate of 11.25% grading down .75% per
year to an ultimate rate of 6.0% in 2001.
Increasing the assumed health care cost trend rates by one
percentage point in each year would increase the APBO by $26
million and increase the aggregate of the service and interest
costs components by $4 million as of December 31, 1994.
<PAGE> 36
9.Jointly Owned Electric Utility Plant
The Electric Operating Companies are parties to various joint
ownership agreements with other non-affiliated entities. Such
agreements provide for the joint ownership and operation of
generating stations and related facilities, whereby each
participant bears its share of the project costs. At December 31,
1994, the companies have undivided interests in five such
generating stations and related facilities as shown below:
CPL SWEPCO SWEPCO SWEPCO CSW
South Flint Dolet System
Texas Creek Pirkey Hills Oklaunion
Nuclear Coal Lignite Lignite Coal
Plant Plant Plant Plant Plant
(dollars in millions)
Plant in service $2,343 $ 79 $ 431 $ 226 $ 397
Accumulated
depreciation $ 380 $ 39 $ 135 $ 62 $ 91
Plant capacity-MW 2,500 480 650 650 676
Participation 25.2% 50.0% 85.9% 40.2% 78.1%
Share of capacity-MW 630 240 559 262 528
10. Litigation and Regulatory Proceedings
CPL
STP
From February 1993 until May 1994, STP experienced an unscheduled
outage which has resulted in significant rate and regulatory
proceedings involving CPL. These matters, including a base rate
case and fuel reconciliation proceedings, are discussed
immediately below.
Texas Commission Proceedings
Base Rates
Rate Inquiry - Docket No. 12820
Several Cities, the Texas Commission General Counsel and others
initiated actions in late 1993 and early 1994 which, if approved
by the Texas Commission, would lower CPL's base rates. The
requests for a review of CPL's rates arose out of the unscheduled
outage at STP which began in February 1993. The STP outage did
not affect CPL's ability to meet customer demand because of
existing capacity and CPL's purchase of additional energy.
Pursuant to a scheduling and procedural settlement agreement among
the parties challenging CPL's rates, which was approved by a Texas
Commission ALJ on April 1, 1994, CPL submitted a rate filing
package on July 1, 1994 to the Texas Commission justifying its
current base rate structure. In that filing, CPL stated that it
had a $111 million retail revenue deficiency and would be
justified in seeking a base rate increase. However, consistent
with the procedural settlement agreement, CPL has not sought to
increase base rates as a part of this docket but seeks to maintain
its rates at the same levels agreed to in the settlement of its
last two rate cases in 1990 and 1991. As part of the 1990 and
1991 settlements, CPL agreed to freeze base rates from January 1,
1991 through 1994, subject to certain force majeure events
including double digit inflation, major tax increases,
extraordinary increases in operating expenses or serious declines
in operating revenues. On October 31, 1994, CPL filed rebuttal
testimony that revised its retail revenue deficiency to
approximately $103 million. CPL continues to maintain that its
rates are reasonable and that its earnings are within established
regulatory guidelines.
Parties to CPL's base rate case have filed testimony with the
Texas Commission recommending reductions in CPL's base rates.
Among the parties that filed testimony were OPUC which initially
recommended an annual $100 million retail rate reduction. After
hearings on the rate case, OPUC claimed that CPL did not meet its
burden of proof concerning deferred accounting and as a result
OPUC changed its proposed reduction to $147 million. The Cities,
<PAGE> 37
which are parties to the rate case, have recommended an annual $75
million retail rate reduction and the write-off of $219 million of
CPL's Mirror CWIP asset. See Deferred Accounting below.
The Staff filed testimony recommending an annual reduction in
retail rates of $99.6 million resulting from a combination of
proposed rate base and cost of service reductions, which it
subsequently revised during the hearings to $83.9 million. In its
final brief to the ALJ, the Texas Commission's Staff withdrew its
recommendation that short-term debt be included in the calculation
of CPL's weighted cost of capital. CPL estimates that this change
in the Staff's position will lower its revised proposed retail
rate reduction by approximately $6 million. The Staff recommended
a rate base disallowance of $407 million, or approximately 17% of
CPL's investment in STP, based upon the Staff's calculation of
historical performance for STP compared to a peer group of other
nuclear facilities. The Staff also recommended that accumulated
depreciation and accumulated deferred federal income taxes related
to the disallowed portion of STP be adjusted to reflect a net
reduction to rate base of $325 million. Additionally, the Staff
proposed to disallow depreciation expense related to the
recommended STP disallowed plant.
In its testimony, the Staff argued that its proposed STP rate base
reduction was a historical performance-based disallowance that
could be temporary in nature and would not have to result in a
permanent disallowance. The Staff indicated that, in the future,
CPL could seek recovery in rates of the proposed STP rate base
disallowance, subject to the performance of STP.
The Texas Commission held hearings in November and December 1994,
and all parties have filed briefs in the case. The ALJ is
expected to issue a recommended order for consideration by the
Texas Commission in April 1995, with a final order from the Texas
Commission expected in May 1995. Testimony filed by parties to
the rate case, including the Staff, is not binding on either the
ALJ or the Texas Commission.
CPL strongly believes that 100 percent of its investment in both
units of STP belong in rate base. This belief is based on, among
other factors, Units 1 and 2 providing output at high capacity
factors since April and June 1994, respectively. In addition, the
long-term benefits nuclear generation provides to customers
supports their inclusion in rate base. Furthermore, there are no
Texas Commission precedents addressing the removal of a nuclear
plant from rate base as a performance-based disallowance.
Assuming both units of STP are included in rate base, CPL believes
it is not collecting excessive revenues, notwithstanding that
market rates of return on common equity are generally lower today
than they were in 1990 and 1991, when CPL's base rates were last
set.
Fuel
Introduction
Pursuant to the substantive rules of the Texas Commission, CPL
generally is allowed to recover its fuel costs through a fixed
fuel factor. These fuel factors are in the nature of temporary
rates, and CPL's collection of revenues by such fuel factors is
subject to adjustment at the time of a fuel reconciliation
proceeding before the Texas Commission. The difference between
fuel revenues billed and fuel expense incurred is recorded as an
addition to or a reduction of revenues, with a corresponding entry
to unrecovered fuel cost or other current liabilities, as
appropriate. Any fuel costs, not limited to under- or over-
recoveries, which the Texas Commission determines as unreasonable
in a reconciliation proceeding are not recoverable from customers.
Fuel Surcharge - Docket No. 12154
In July 1993, CPL filed a fuel surcharge petition, which is
separate from a fuel reconciliation proceeding, with the Texas
Commission to comply with the mandatory provisions of the Texas
Commission's fuel rules. The petition requested approval of a
customer surcharge to recover under-recovered fuel and purchased
power costs resulting from the STP outage, increased natural gas
costs and other factors. The petition also requested that the
Texas Commission postpone consideration of the surcharge until the
STP outage concluded or at the time fuel costs are next reconciled
as discussed above. In August 1993, a Texas Commission ALJ
<PAGE> 38
granted CPL's request to postpone consideration of the surcharge.
In January and July of 1994, CPL updated its fuel surcharge
petition to reflect amounts of under-recovery through November
1993 and May 1994, respectively. Also, CPL further updated its
petition in January 1995 to reflect amounts of under-recovery
through November 1994. Likewise, CPL requested and was granted
postponement of the updated petitions until the STP outage
concluded or at the time fuel costs are next reconciled. On
January 4, 1995, Docket No. 12154 was consolidated into Docket No.
13650.
Prudence Inquiry - Docket No. 13126
In April 1994, the Texas Commission's General Counsel and Staff
issued a Request for Proposal for an audit of the STP outage, and
in July 1994 a consultant was selected to perform the audit. The
purpose of the audit is to evaluate the prudence of 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 to service from the outage. The
findings of this audit are expected to be incorporated into this
proceeding. 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 Texas Commission's General Counsel initiated an
inquiry into the operation and management of STP which resulted in
the establishment of this proceeding. As part of the inquiry, CPL
presented certain information concerning the prudence of
management activities at STP relating to the STP outage.
Testimony filed by CPL stated that the cause of the STP outage was
the result of an accidental equipment failure rather than
imprudent management activities at STP. Based on this
information, CPL will seek full recovery in its fuel
reconciliation case of incremental energy costs related to the STP
outage.
As a part of this proceeding, CPL was required to reconstruct its
production costs assuming STP was available 100% of the time
during the actual outage. Testimony filed by CPL stated that it
is unrealistic to expect any generating unit to operate all the
time. The testimony provided calculations of STP replacement
power cost estimates for availability factor scenarios at (i)
100%, (ii) 75% and (iii) 65% average availability. Based on these
average availability factors, STP net replacement power costs for
the entire outage period were estimated to be (i) $104.5 million
at 100%, (ii) $79.0 million at 75% and (iii) $68.2 million at 65%
average availability.
The results of this prudence inquiry are expected to be used in
CPL's pending fuel reconciliation proceeding in Docket No. 13650,
as discussed below, and possibly CPL's next base rate proceeding
should a return on equity penalty be ordered by the Texas
Commission. Such penalty could lower CPL's allowed return on
equity in its next base rate case from what it otherwise would be
permitted to earn.
Fuel Reconciliation - Docket No. 13650
On November 15, 1994, CPL filed a fuel reconciliation case with
the Texas Commission seeking to reconcile approximately $1.2
billion of fuel costs from March 1, 1990 through June 30, 1994.
This period includes the STP outage where CPL's fuel and purchased
power costs were increased as the power normally generated by STP
was replaced through sources with higher costs. At December 31,
1994, CPL's under-recovered fuel balance was $54.1 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 nature of the above factors. CPL cannot predict how the Texas
Commission will ultimately resolve the reasonableness of higher
replacement energy costs associated with the STP outage. Although
the Texas Commission could disallow all or a portion of the STP
replacement energy costs, such determination cannot be made until
a final order is issued by the Texas Commission in this docket.
If a significant portion of the fuel costs were disallowed by the
Texas Commission, CSW could experience a material adverse effect
on its consolidated results of operations in the year of
disallowance but not on its financial condition.
<PAGE> 39
CPL continues to negotiate with the intervening parties to resolve
Docket Nos. 12820, 13126 and the STP portions of Docket No. 13650
through settlement. However, no settlement has been reached.
Management cannot predict the ultimate outcome of these regulatory
proceedings. However, management believes that the ultimate
resolution of the various issues will not have a material adverse
effect on CSW's consolidated results of operations or financial
condition.
STP Background
Final Orders
In October 1990, the Texas Commission issued the STP Unit 1 Order
which fully implemented a stipulated agreement filed in February
1990 to resolve dockets then pending before the Texas Commission.
In December 1990, the Texas Commission issued the STP Unit 2 Order
which fully implemented a stipulated agreement to resolve all
issues regarding CPL's investment in STP Unit 2.
The STP Unit 1 Order allowed CPL to increase retail base rates by
$144 million. This base rate increase made permanent a $105
million interim base rate increase placed into effect in March
1990 and a $39 million interim base rate increase placed into
effect in September 1989. The STP Unit 2 Order provided for a
retail base rate increase of $120 million effective January 1,
1991. The STP Unit 1 Order also provided for the deferral of
operating expenses and carrying costs on STP Unit 2. A prior
Texas Commission order had authorized deferral of STP Unit 1
costs. See Deferred Accounting below. Such costs are being
recovered through rates over the remaining life of STP. Also, the
STP Unit 1 Order authorized use of Mirror CWIP, pursuant to which
CPL recognized $360 million of carrying costs as deferred costs,
and established a corresponding liability to customers recorded in
Mirror CWIP Liability and Other Deferred Credits on the balance
sheets. In compliance with the order, carrying costs collected
through rates during periods when CWIP was included in rate base
were recognized as a loan from customers. The loan is being
repaid through lower rates from 1991 through 1995. The Mirror
CWIP liability is being reduced by the recognition of non-cash
income during the period 1991 through 1995. The Mirror CWIP asset
is being amortized to expense over the life of the plant.
The STP Unit 1 and 2 Orders resolved all issues pertaining to the
reasonable original costs of STP and the appropriate amount to be
included in rate base. Pursuant to the Texas Commission orders,
the original costs of CPL's total investment in STP is included in
rate base. As indicated under the heading Texas Commission
Proceedings above, however, CPL is currently involved in base rate
and fuel proceedings which challenge CPL's right to recover
certain costs associated with the STP outage.
As part of the stipulated agreement, CPL agreed to freeze base
rates from January 1, 1991 through 1994, subject to certain force
majeure events including double-digit inflation, major tax
increases, extraordinary increases in operating expenses or
serious declines in operating revenues. CPL may file for
increases in base rates, which would be effective after 1994 and
subject to certain limitations. The fuel portion of customers'
bills is subject to adjustment following the normal review and
approval by the Texas Commission.
The stipulated agreements, as discussed above, were entered into
by CPL, the Staff and a majority of intervenors including major
cities in CPL's service territory and major industrial customers.
These intervenors represent a significant majority of CPL's
customers. CPL and the TSA reached agreements, which were
subsequently approved by the Staff and other signatories, whereby
TSA agreed not to oppose the stipulated agreements in any respect,
except with regard to deferred accounting and rate design issues
in the STP Unit 1 Order. OPUC and a coalition of low-income
customers declined to enter into the stipulated agreements.
In January 1991, the TSA, OPUC and the coalition of low-income
customers filed appeals of the STP Unit 1 Order in District Court
requesting reversal of the deferred accounting for STP Unit 2 and
other aspects of that order. In March 1991, the TSA, OPUC and the
<PAGE> 40
coalition of low-income customers filed appeals of the STP Unit 2
Order in the District Court requesting reversal of that order.
These appeals are pending before the District Court. If these
orders are ultimately reversed on appeal, the stipulated
agreements would be nullified and CSW could experience a
significant adverse effect on its consolidated results of
operations and financial condition. However, the parties to the
stipulated agreement, should it be nullified, are bound to
renegotiate and try to reach a revised agreement that would
achieve the same economic results. Management believes that the
STP Unit 1 and 2 Orders will be upheld.
Deferred Accounting
CPL was granted deferred accounting for STP Unit 1 and 2 costs by
Texas Commission orders. These orders allowed CPL to defer post-
in-service operating and maintenance costs, including taxes and
depreciation, and carrying costs until these costs were reflected
in retail rates. Deferred accounting had an immediate positive
effect on net income in the years allowed, but cash earnings were
not increased until rates went into effect reflecting STP in
service. See Final Orders above. The total deferrals for the
periods affected were approximately $492 million with an after-tax
net income effect of approximately $325 million. This total
deferral included approximately $270 million of pre-tax debt
carrying costs. Pursuant to the STP Unit 1 and 2 Orders, CPL's
retail rates include recovery of STP Unit 1 and 2 deferrals over
the remaining life of the plant.
In July 1989, OPUC and the TSA filed appeals of the Texas
Commission's final order in District Court requesting reversal of
deferred accounting for STP Unit 1. In September 1990, the
District Court issued a judgment affirming the Texas Commission's
order for STP Unit 1, which was subsequently appealed to the Court
of Appeals by OPUC and the TSA. The hearing of CPL's STP Unit 1
deferred accounting order was combined by the Court of Appeals
with similar appeals of HLP deferred accounting orders.
In September 1992, the Court of Appeals issued a decision that
allows CPL to include STP Unit 1 deferred post-in-service
operating and maintenance costs in rate base. However, the Court
of Appeals held that deferred post-in-service carrying costs could
not be included in rate base, thereby prohibiting CPL from earning
a return on such costs.
After the Court of Appeals' denial of each party's motion for
rehearing of the decision, CPL and the Texas Commission in
December 1992 filed Applications for Writ of Error petitioning the
Supreme Court of Texas to review the September 1992 decision
denying rate base treatment of deferred post-in-service carrying
costs by the Court of Appeals. Additionally, the TSA and OPUC
filed Applications for Writ of Error petitioning the Supreme Court
of Texas to reverse the Court of Appeals' decision, challenging
generally the legality of deferred accounting for rate base
treatment of any deferred costs. In May 1993, the Supreme Court
of Texas granted CPL's Application for Writ of Error. CPL's case
was consolidated with the deferred accounting cases of El Paso and
HLP. In June 1994, 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 those costs that are incurred between
the in-service date of a plant and the effectiveness of new rates,
which include such costs. On October 6, 1994, the Supreme Court
of Texas denied a motion for rehearing CPL's deferred accounting
matter filed by the State of Texas. The language of the Supreme
Court of Texas opinion suggests that the appropriateness of
allowing deferred accounting may need to again be reviewed under a
financial integrity standard at the time the costs begin being
recovered through rates. For CPL, that would be the STP Unit 1
and Unit 2 Orders discussed above. To the extent that additional
review is required, it should occur in those dockets.
If these deferred accounting matters are not favorably resolved,
CSW could experience a material adverse effect on its consolidated
results of operations and financial condition. While CPL's
management cannot predict the ultimate outcome of these matters,
management believes CPL will receive approval of its deferred
<PAGE> 41
accounting orders or will be successful in renegotiation of its
rate orders, so that there will be no material adverse effect on
CSW's consolidated results of operations or financial condition.
Westinghouse Litigation
CPL and other owners of STP are plaintiffs in a lawsuit filed in
October 1990 in the District Court in Matagorda County, Texas
against Westinghouse, seeking damages and other relief. The suit
alleges that Westinghouse supplied STP with defective steam
generator tubes that are susceptible to stress corrosion cracking.
Westinghouse filed an answer to the suit in March 1992, denying
the plaintiff's allegations. The suit is set for trial in July
1995.
Inspections during the STP outage have detected early signs of
stress corrosion cracking in tubes at STP Unit 1. Management
believes additional problems would develop gradually and will be
monitored by the Project Manager of STP. An accurate estimate of
the costs of remedying any further problems currently is
unavailable due to many uncertainties, including among other
things, the timing of repairs, which may coincide with scheduled
outages, and the recoverability of amounts from Westinghouse.
Management believes that the ultimate resolution of this matter
will not have a material adverse effect on CSW's consolidated
results of operations or financial condition.
Civil Penalties
In October 1994, the NRC staff advised HLP that it proposes to
fine HLP $100,000 for what the NRC believes was discrimination
against a contractor employee at STP who brought complaints of
possible safety problems to the NRC's attention. These actions
resulted from the findings of a NRC investigation of alleged
violations of STP security and work process procedures in 1992.
The incident cited by the NRC is the subject of a contested
hearing that is scheduled to be held in the spring of 1995 before
a United States Department of Labor judge. Until the Department
of Labor issues a final decision in this matter, the NRC is not
requiring HLP to respond to its notice of violation.
PSO
Rate Review
In December 1993, the Oklahoma Commission issued an order
unanimously approving a joint stipulation between PSO, the
Oklahoma Commission Staff, and the Office of the Attorney General
of the State of Oklahoma, as recommended by the ALJ. The order
allowed PSO an increase in retail prices of $14.4 million on an
annual basis which represents a $4.3 million increase above those
authorized by the March 1993 interim order. In January 1994, the
Oklahoma Commission issued an order unanimously approving PSO's
price schedules reflecting the $14.4 million price increase. The
new prices became effective beginning with the billing month of
February 1994.
The December 1993 order addresses, among other things, the
following issues. PSO will recover $4.5 million annually in
expenses associated with OPEBs, which, for PSO, are primarily
health care related benefits. Such expenses will be recovered
along with amortization of the deferred 1993 OPEBs at a rate of
$0.5 million per year for 10 years. PSO will amortize deferred
storm expenses associated with both a 1987 ice storm and a 1992
wind storm, amounting to $1.2 million per year for five years. In
addition, the order recognizes the increase in federal income tax
expenses resulting from the recent increase in the federal
corporate income tax rate from 34 percent to 35 percent. PSO will
continue to use the depreciation rates previously approved by the
Oklahoma Commission. PSO agreed that it will not file another
retail price increase application until after June 30, 1995.
Gas Transportation and Fuel Management Fees
An order issued by the Oklahoma Commission in 1991 required that
the level of gas transportation and fuel management fees, paid to
Transok by PSO, permitted for recovery through the fuel adjustment
clause be reviewed in the aforementioned price proceeding. This
<PAGE> 42
portion of the price review was bifurcated. In February 1995, an
agreement was reached which allows PSO to recover approximately
$28.4 million of transportation and fuel management fees in base
rates using 1991 determinants and approximately $1 million through
the fuel adjustment clause. The agreement also requires the phase-
in of competitive bidding of natural gas transportation
requirements in excess of 165 Mmcf per day. An ALJ has
recommended approval of the agreement to the Oklahoma Commission.
A final order is expected in the first quarter of 1995.
Gas Purchase Contracts
PSO has been named defendant in complaints filed in federal and
state courts of Oklahoma and Texas in 1984 through February 1995
by gas suppliers alleging claims arising out of certain gas
purchase contracts. Cases currently pending seek approximately
$29 million in actual damages, together with claims for punitive
damages 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 CSW'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 CSW's consolidated
results of operations or financial condition.
PCB Cases
PSO has been named defendant in complaints filed in state court in
Oklahoma alleging, among other things, that some of the plaintiffs
were contaminated with PCBs and other toxic by-products following
transformer malfunctions. The complaints currently total
approximately $383 million of which appproximately one-third
respresents punitive damages. Some claims have been dismissed,
certain of which resulted from settlements among the parties. The
settlements did not have a significant effect on CSW's
consolidated results of operations. Although management cannot
predict the outcome of these proceedings, management believes that
PSO has defenses to these claims 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 these cases will not have a
material adverse effect on CSW's consolidated results of
operations or financial condition.
Burlington Northern Transportation Contract
In June 1992, PSO filed suit in Federal District Court in Tulsa,
Oklahoma, against Burlington Northern seeking declaratory relief
under a long-term contract for the transportation of coal. In
July 1992, Burlington Northern 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 Burlington Northern seeking damages and
declaratory relief under federal and state anti-trust laws. PSO
and Burlington Northern 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 Burlington Northern'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,
Burlington Northern appealed this judgment to the United States
Court of Appeals for the Tenth Circuit. This appeal is now
pending.
Burlington Northern Arbitration
In May 1994, in a related arbitration, an arbitration panel made
an award favorable to PSO concerning basic transportation rates
under the coal transportation contract described above, and
concerning the contract mechanism for adjustment of future
transportation rates. These arbitrated issues were not involved
in the related lawsuit described above. Burlington Northern filed
an action to vacate the arbitrated 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
<PAGE> 43
filed a motion to either dismiss this action or have it
transferred to the United States District Court for the Northern
District of Oklahoma. Burlington Northern moved to remand the
action to state court. In September 1994, the United States
District Court for the Northern District of Texas denied the rail
carrier's motion to remand, and granted PSO's motion to transfer
the action to the United States District Court for the Northern
District of Oklahoma. Separately, PSO filed an action to confirm
the arbitration award in the United States District Court for the
Northern District of Oklahoma, and Burlington Northern filed a
motion to dismiss this confirmation action. On December 6, 1994,
the District Court entered an order denying the Burlington
Northern's motion to vacate the arbitration award, and granting
PSO's motion to confirm the arbitration award. On December 29,
1994, the District Court entered judgment confirming the
arbitration award, including a money judgment in PSO's favor for
$16.4 million, with interest at 7.2% per annum compounded annually
from December 21, 1994 until paid. On January 6, 1995, Burlington
Northern appealed the District Court's judgment to the United
States Court of Appeals for the Tenth Circuit. This appeal is now
pending.
SWEPCO
Fuel Reconciliation
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 50-month period were
approximately $559 million. SWEPCO's net under-recovery for the
reconciliation period was approximately $0.9 million. SWEPCO and
the intervening parties in this proceeding were able to negotiate
a stipulated agreement providing a $3.2 million fuel cost
disallowance and settling all issues except one. That issue
involved the recovery of certain fuel related litigation and
settlement negotiation expenses. The Texas Commission, at its
Final Order hearing on January 18, 1995, approved the stipulated
disallowance and granted SWEPCO recovery of the fuel related
litigation expense. The $3.2 million disallowance is included in
SWEPCO's 1994 results of operations. SWEPCO recognized the
litigation costs as expenses in prior periods.
Burlington Northern Transportation Contract
On January 20, 1995, a state district court in Bowie County,
Texas, entered judgment in favor of SWEPCO against Burlington
Northern in a lawsuit between the parties regarding rates charged
under two rail transportation contracts for delivery of coal to
SWEPCO's Welsh and Flint Creek power plants. The court awarded
SWEPCO approximately $72 million covering damages for the period
from April 27, 1989 through September 26, 1994 and prejudgment
interest fees and grant certain declaratory relief requested by
SWEPCO.
Kansas City Southern Railway Company Transportation Contracts
In March 1994, SWEPCO entered into a settlement with the Kansas
City Southern Railway Company of litigation between parties
regarding two coal transportation contracts. Pursuant to the
settlement, SWEPCO and the Kansas City Southern Railway Company
executed a new coal transportation agreement. The settlement is
expected to result in a reduction of SWEPCO's coal transportation
costs now and in the future. Burlington Northern, another party
to the prior contracts and to the litigation, did not participate
in the settlement and the litigation is still pending between
SWEPCO and Burlington Northern.
WTU
Rate Proceeding - Docket No. 13369
On August 25, 1994, WTU filed a petition with the Texas Commission
and with cities with original jurisdiction to review WTU's rates,
proposed an interim across-the-board base rate reduction of 3.25%
or, approximately $5.7 million, effective October 1, 1994, and
sought until February 28, 1995, the time to develop and file a
RFP. WTU also requested the ability to "true-up", back to October
1, 1994, any difference in revenue requirements upon final order
of the Texas Commission, and proposed that any increases over the
<PAGE> 44
pre-October 1, 1994, base rates be implemented prospectively on
the effective date of the final order.
As discussed below, WTU's fuel reconciliation was consolidated
with this proceeding in September 1994. Reconcilable fuel costs
during the reconciliation period were approximately $300 million.
At June 30, 1994, the fuel cost under-recovery totaled
approximately $5.1 million, including interest. At December 31,
1994, this amount had become an over-recovery of approximately
$0.2 million. WTU is not seeking a change in fuel factors.
On February 28, 1995, WTU filed with the Texas Commission and
cities with original jurisdiction the rate filing package which
indicates a revenue deficiency of approximately $14.5 million.
However, WTU simultaneously filed with the parties a settlement
proposal to reduce overall base rate revenue by 3.25%, effective
October 1, 1994, an annual impact in the rate year beginning
January 1, 1996 of approximately $5.9 million. The settlement
proposal reflects WTU's desire to maintain competitive rates,
recognizes the importance of competitive rates in the changing
electric service marketplace, and demonstrates WTU's strong
commitment to the long-term success of WTU and its customers.
Unless a settlement accelerates the schedule, WTU anticipates
hearings in mid-1995 with a final order in the fourth quarter of
1995. Management cannot predict the outcome of the rate
proceeding, the fuel reconciliation, or the settlement proposal,
but believes that the ultimate resolution of these matters will
not have a material adverse effect on CSW's consolidated results
of operations or financial condition.
Fuel Reconciliation - Docket No. 13172
On June 30, 1994, WTU filed a petition with the Texas Commission
to reconcile fuel costs for the period January 1991 through
February 1994. Subsequently, in September 1994, this fuel
reconciliation proceeding was consolidated into Docket No. 13369
described above, and the reconciliation period was extended
through June 1994.
Rate Case Proceeding - Docket No. 7510
In November 1987, the Texas Commission issued a final order in
WTU's retail rate case providing for WTU to receive an annual
increase in base retail revenues of $34.9 million. Rates
reflecting the final order were implemented in December 1987.
WTU, along with certain intervenors in the retail rate proceeding,
appealed the Texas Commission's final order to the District Court
seeking reversal of various provisions of the final order,
including the inclusion of deferred accounting in rate base.
The appeals were consolidated and in September 1988, the District
Court affirmed the final order of the Texas Commission. In
November 1988, certain intervenors filed appeals of the District
Court's judgment with the Court of Appeals. In February 1990, the
Court of Appeals ruled that an intervenor had improperly been
excluded from presenting its appeal to the District Court,
reversed the District Court's judgment and remanded the case to
the District Court for further proceedings.
In October 1992, the District Court heard the remanded appeals of
the final order of the Texas Commission and in March 1993 issued
an order affirming the Texas Commission's order in all material
respects with the single exception of the inclusion of deferred
Oklaunion carrying costs in rate base. In its treatment of
deferred costs, the District Court followed a then-current opinion
of the Court of Appeals which precluded recovery of deferred post-
in-service carrying costs. In April 1993, WTU and other parties
filed appeals, and oral argument was held on the appeals in
December 1993 on the non-deferred accounting issues. With respect
to the deferred accounting issues, the parties recognized certain
Supreme Court of Texas decisions regarding other deferred
accounting cases would be influential in WTU's case.
<PAGE> 45
In June 1994, the Supreme Court of Texas issued its opinion in the
three other cases involving deferred accounting holding that the
Texas Commission has the authority to allow deferred accounting
treatment during the deferral period, including deferred post-in-
service carrying costs. The Supreme Court of Texas upheld the
Court of Appeals in all respects except it reversed the Court of
Appeals to the extent it disallowed carrying costs deferrals and
remanded to the Court of Appeals for consideration of the
unresolved arguments of the improperly excluded intervenor.
Motions for rehearing were filed by certain parties which were
denied by the Supreme Court of Texas. These rulings influenced
the Court of Appeals' decision in WTU's rate case appeals, as
described below.
On February 15, 1995, the Court of Appeals affirmed all aspects of
the District Court judgment relating to the Texas Commission's
allowance of non-Oklaunion depreciation rates and the surcharge of
rate case expenses, reversed the District Court's judgment
relating to the exclusion of deferred Oklaunion carrying costs in
rate base, and remanded the cause to the Texas Commission to
reexamine the issue of deferred costs in light of the remand of
Docket No. 7289, as described above. However, on March 3, 1995,
WTU filed a motion for rehearing at the Court of Appeals seeking
clarification of certain aspects of its order and arguing that the
Court of Appeals erred in remanding the case to the Texas
Commission for it to determine to what extent deferred costs are
necessary to preserve WTU's financial integrity because the issue
has been waived since it was not briefed or argued to the Court of
Appeals. WTU expects other parties may also file motions for
rehearing.
WTU's motion for rehearing may, if granted, prevent further review
of financial integrity issues with respect to deferred accounting
in any remand of Docket No. 7510. If a broader remand is
permitted and if the Texas Commission concludes in Docket No. 7289
that deferred accounting was necessary to preserve WTU's financial
integrity during the deferral period, the Texas Commission must
decide to what extent the deferred Oklaunion costs, including
carrying costs, were necessary to preserve WTU's financial
integrity. If WTU's deferred accounting treatment is ultimately
reversed or is substantially reduced, WTU could experience a
material adverse impact on its results of operations. While
management can give no assurances as to the outcome of the
remanded proceeding or the motion for rehearing, management
believes that 100 percent of the Oklaunion deferred costs will be
determined by the Texas Commission to have been necessary to
preserve WTU's financial integrity during the deferral period so
that there will be no material adverse effect on CSW's
consolidated results of operations or financial condition.
Deferred Accounting - Docket No. 7289
WTU received approval from the Texas Commission in September 1987
to defer operating expenses and carrying costs associated with
Oklaunion incurred subsequent to its December 1986 commercial
operation date until December 1987 (the deferral period) when
retail rates including Oklaunion in WTU's rate base became
effective. WTU has recorded approximately $32 million of
Oklaunion deferred costs, of which $25 million are carrying costs.
The deferred costs are being recovered and amortized over the
remaining life of the plant. In November 1987, OPUC filed an
appeal in the District Court challenging the Texas Commission's
final order authorizing WTU to defer the costs associated with
Oklaunion. In October 1988, the District Court affirmed the final
order of the Texas Commission. In December 1988, OPUC filed an
appeal of the District Court judgment in the Court of Appeals. In
September 1990, the Court of Appeals upheld the District Court's
affirmance of the Texas Commission's final order and in October
1990, OPUC filed a motion for rehearing of the Court of Appeals'
decision, which was denied in November 1990. On further appeal,
the Supreme Court heard oral argument in September 1993, in WTU's
case as well as three other cases involving deferred accounting
and in June 1994 issued its opinions in these cases affirming the
Texas Commission's authority to allow deferred accounting
treatment, but establishing a financial integrity standard rather
than the measurable harm standard used by the Texas Commission.
In October 1994, the Supreme Court of Texas issued a mandate
remanding WTU's deferred accounting case to the Texas Commission.
While no schedule has yet been established for the proceedings on
<PAGE> 46
remand at the Texas Commission, this remand may be considered in
tandem with WTU's pending rate case, Docket No. 13369. In the
remanded proceeding, the Texas Commission must make a formal
finding that the deferral of Oklaunion costs was necessary to
prevent WTU's financial integrity during the deferral period from
being jeopardized.
If WTU's deferred accounting treatment is ultimately reversed and
not favorably resolved, WTU could experience a material adverse
impact on its results of operations. While management cannot
predict the ultimate outcome of these proceedings, management
believes that WTU's deferred accounting will be ultimately
sustained by the Texas Commission on the basis of the financial
integrity standard set forth by the Supreme Court of Texas, so
that there will be no material adverse effect on CSW's
consolidated results of operations or financial condition.
WTU FERC Order
On April 4, 1994, the FERC issued an order pursuant to section 211
of the Federal Power Act forcing a regional utility to transmit
power to Tex-La on behalf of WTU. The order was one of the first
issued by FERC under that provision, which was added by the Energy
Policy Act to increase competition in wholesale power markets.
WTU began serving Tex-La, which has requirements of approximately
120 MW of electric power. WTU will serve Tex-La until facilities
are completed to connect Tex-La to SWEPCO, an affiliated system,
at which time SWEPCO will provide 85 MW and WTU will retain 35 MW
of the Tex-La electric load.
Other
Cimmaron
On January 12, 1994, Cimmaron brought suit against CSW and its
wholly-owned subsidiary, CSWE, in the 125th District Court of
Houston, Harris County, Texas. Cimmaron alleges that CSW and CSWE
breached commitments to participant 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, punitive damages of an
unspecified amount, as well as attorney's fees.
CSWE filed a counterclaim against Cimmaron and third-party claims
against the principals of Cimmaron on December 22, 1994, alleging
that they misrepresented and omitted material facts about their
experience and background and about the proposed cogeneration
project. CSWE seeks damages of $500,000, the earnest money paid
when the letter of intent was executed, the costs associated with
due diligence and punitive damages. On January 10, 1995, Cimmaron
filed a first amended original petition suing CSWE board members
at the time, personally.
Pre-trial discovery on the case is presently underway with
depositions of the parties being taken during March, 1995. Trial
was originally set for the week of April 10, 1995, but the parties
have filed a joint motion for continuance which is set for hearing
on March 20, 1995. Management of CSW cannot predict the outcome
of this litigation, but believes that CSW and CSWE have defenses
to these complaints and are pursuing them vigorously and that the
ultimate resolution will not have a material adverse effect on
CSW's consolidated results of operations or financial condition.
General Matters
CSW and the Operating Companies are party to various other legal
claims, actions and complaints arising in the normal course of
business. Management does not expect disposition of these matters
to have a material adverse effect on CSW's consolidated results of
operations or financial condition.
<PAGE> 47
11.Commitments and Contingent Liabilities
Proposed Acquisition of El Paso
Background
In May 1993, CSW entered into a Merger Agreement pursuant to which
El Paso would emerge from bankruptcy as a wholly-owned subsidiary
of CSW. El Paso is an electric utility company headquartered in
El Paso, Texas, engaged principally in the generation and
distribution of electricity to approximately 262,000 retail
customers in west Texas and southern New Mexico. El Paso also
sells electricity under contract to wholesale customers in a
number of locations including southern California and Mexico. El
Paso had filed a voluntary petition for reorganization under
Chapter 11 of the Bankruptcy Code on January 8, 1992.
On July 30, 1993, El Paso filed the Modified Plan and a related
proposed form of Disclosure Statement providing for the
acquisition of El Paso by CSW. On November 15, 1993, all voting
classes of creditors and shareholders of El Paso voted to approve
the Modified Plan. On December 8, 1993, the Bankruptcy Court
confirmed the Modified Plan.
Under the Modified Plan, the total value of CSW's offer to acquire
El Paso is approximately $2.2 billion. The Modified Plan
generally provides for El Paso creditors and shareholders to
receive shares of CSW Common, cash and/or securities of El Paso,
or to have their claims cured and reinstated. The Modified Plan
also provides for claims of secured creditors generally to be paid
in full with debt securities of reorganized El Paso, and for
unsecured creditors to receive a combination of debt securities of
reorganized El Paso and CSW Common equal to 95.5 percent of their
claims, and for small trade creditors to be paid in full with
cash. The Modified Plan provides for El Paso's preferred
shareholders to receive preferred shares of reorganized El Paso,
or cash, and for options to purchase El Paso Common to be
converted into options to purchase a proportionate number of
shares of CSW Common. In addition, the Modified Plan provides for
certain creditor classes of El Paso to accrue interest on their
claims and to receive periodic interim distributions of such
interest through the Effective Date or the withdrawal or
revocation of the Modified Plan, subject to certain conditions and
limitations set forth in the Modified Plan. To date, all such
accrued interest payments to creditors have been made by El Paso
on a timely basis. If, under certain circumstances, the Merger is
not consummated, the Merger Agreement provides for CSW to pay El
Paso for a portion of such interim interest payments paid or
accrued prior to the termination of the Merger Agreement. The
Merger Agreement also provides for CSW to pay for a portion of
fees and expenses, including legal expenses of certain El Paso
creditors under such circumstances. CSW's potential exposure as
of December 31, 1994 is estimated to be approximately $17.5
million; however, the actual amount, if any, that CSW may be
required to pay pursuant to these provisions depends on a number
of contingencies and cannot presently be predicted.
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 the expiration of its franchise agreement
with Las Cruces 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.
On June 29 and July 1, 1994, El Paso and CSW filed responses in
the Bankruptcy Court opposing the Las Cruces motion. On August 1,
1994, CSW filed an amended response to the Las Cruces 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, as defined in the Merger Agreement,
the absence of which is a condition of CSW's obligation to
consummate the Merger. The existence of an El Paso material
adverse effect would preclude consummation of the Merger and the
Modified Plan, unless CSW waives this condition in writing. CSW's
amended response concludes that Las Cruces' intention to file a
condemnation proceeding creates a situation that must be favorably
resolved before the closing of the Merger.
<PAGE> 48
By letter dated August 5, 1994, El Paso protested CSW's filing of
the amended response and asserted its disagreement with CSW's
position regarding Las Cruces as summarized above. In addition,
El Paso asserted that CSW's filing of the amended response over El
Paso's objection was contrary to the terms of the Merger
Agreement.
On August 22, 1994, Las Cruces entered into a wholesale full
requirements power contract with SPS to supply power to a
municipal utility proposed to be established by Las Cruces. On
August 30, 1994, voters in Las Cruces approved by nearly a two-to-
one margin a referendum authorizing Las Cruces to proceed with
efforts to acquire from El Paso, through negotiated purchase or
condemnation proceedings, the electric utility system of El Paso
within Las Cruces, including certain distribution, substation and
associated transmission facilities.
On September 12, 1994, CSW delivered a response to El Paso's
August 5 letter. In its September 12 letter, CSW reiterated its
position that Las Cruces is a material element of CSW's bargain
with El Paso and advised El Paso that the municipalization efforts
in Las Cruces and other matters, including (i) the potential loss
of other customers in El Paso's service area, including the
Holloman Air Force Base and the White Sands Missile Range in New
Mexico, (ii) cracking in steam generator tubes at Palo Verde,
(iii) intense political and regulatory opposition to the Merger,
and (iv) a new "comparable transmission service" standard being
imposed on the Merger by the FERC, place the completion of the
Merger in jeopardy. CSW's September 12 letter further advised El
Paso that the foregoing matters, individually and cumulatively,
constitute a material adverse effect or failure of other closing
conditions under the Merger Agreement which, unless timely
resolved in accordance with the Merger Agreement, will preclude
closing of the proposed Merger.
Since CSW's September 12 letter, CSW has exchanged letters with El
Paso and others regarding the interpretation of the Merger
Agreement and the legal significance of the matters cited by CSW
in its September 12 letter. Most of these letters are summarized
below.
On September 14, 1994, CSW filed a second amended response to Las
Cruces' motion to lift the stay in bankruptcy. In its second
amended response, CSW stated that the intent and plan of Las
Cruces to file a condemnation proceeding creates a situation that
must be timely and favorably resolved by El Paso before the
consummation of the Merger, whether or not the stay is modified or
maintained. Further, CSW supported the maintenance of the stay as
a means of avoiding disruption pending resolution of the Las
Cruces dispute and because El Paso had taken the position that
maintenance of the stay was in the best interests of the Merger
and the El Paso estate and put El Paso in a better position to
resolve the Las Cruces dispute.
By letter dated September 16, 1994, El Paso disagreed with the
positions set forth by CSW in its September 12 letter and asserted
that CSW's September 12 letter "had inflicted irreparable harm on
El Paso and the Merger process."
On September 20, 1994, following a hearing on the June 14, 1994
motion of Las Cruces discussed above, the Bankruptcy Court judge
indicated orally that, effective January 1, 1995, he would lift
the bankruptcy stay on certain actions against El Paso and allow
Las Cruces to pursue condemnation proceedings against El Paso with
respect to the electric distribution system within Las Cruces
under applicable New Mexico law. El Paso filed a motion seeking
clarification of this oral ruling as to whether Las Cruces may
take immediate possession of the El Paso distribution system under
the New Mexico condemnation statutes. On November 22, 1994, the
Bankruptcy Court judge orally ruled that Las Cruces can commence
condemnation proceedings but can not take possession of the
distribution system when the stay is lifted until returning to the
Bankruptcy Court and obtaining an order which permits that action.
<PAGE> 49
By letter dated September 23, 1994, El Paso requested CSW's
consent to meet with the City of Las Cruces to discuss the
possibility of a resolution of El Paso's dispute with Las Cruces.
By letter dated October 3, 1994, CSW responded to El Paso's
September 16 letter and reaffirmed the positions set forth in
CSW's September 12 letter. In addition, CSW consented to El
Paso's meeting with Las Cruces, but advised El Paso that CSW would
not participate directly in negotiations between Las Cruces and El
Paso.
By letter dated October 5, 1994, counsel to the El Paso Unsecured
Creditors Committee, with the concurrence of certain other
creditor groups, advised CSW that the committee disagreed with
certain positions set forth in CSW's September 12 letter to El
Paso. By letter dated October 27, 1994, CSW responded to and
stated its disagreement with various statements set forth in the
Unsecured Creditors Committee's letter.
By letter dated October 5, 1994, El Paso's New Mexico regulatory
counsel asserted that CSW's September 12 letter had "adversely
affected proceedings before the New Mexico Commission" relating to
the Merger and that the letter "is being widely interpreted as a
statement from CSW that the Merger will not close." By letter
dated October 7, 1994, CSW's New Mexico regulatory counsel set
forth CSW's disagreement with statements made in El Paso's New
Mexico regulatory counsel's October 5 letter. The New Mexico
Commission had delayed the New Mexico proceedings prior to
September 12, 1994. On October 12, 1994, a New Mexico Commission
hearing examiner held a prehearing conference covering scheduling
and other matters. On October 14, 1994, CSW filed a Statement of
Position and Request for Procedural Schedule in the New Mexico
proceeding. El Paso filed a separate position statement in the New
Mexico proceeding and advised CSW, by letter dated October 14,
1994, that CSW's statement of position did not "state a
sufficiently clear and strong commitment by CSW to closing the
Merger." By letter dated October 25, 1994, CSW's New Mexico
regulatory counsel stated that the filing by El Paso of a separate
position statement "impairs our ability to obtain necessary
regulatory approvals from the New Mexico Commission on a timely
basis by implying that there are severe problems in the
relationship between El Paso and CSW." CSW's October 25 letter
also stated that "the lack of a favorable resolution of Las Cruces
municipalization efforts continues to not only prevent the closing
of the Merger, but is also hindering our ability to obtain New
Mexico regulatory approvals."
By letter dated October 18, 1994, El Paso reasserted its position
that the Merger Agreement does not condition CSW's obligation to
consummate the Merger on a favorable resolution of the Las Cruces
situation. El Paso asserted it was not clear from CSW's October 3
letter whether CSW consented to El Paso's proposed discussion with
Las Cruces and again requested CSW's consent to a meeting between
El Paso and Las Cruces.
By letter dated October 27, 1994, CSW reaffirmed the positions
taken in its September 12 and October 3 letters, and again
consented to El Paso's meeting with Las Cruces and reiterated
CSW's willingness to discuss with El Paso possible resolutions of
the Las Cruces situation.
On October 11, 1994, the Bankruptcy Court granted an application
by El Paso to employ special litigation counsel to advise El Paso
as to ongoing activities with CSW and to assist El Paso as to the
best means of preserving its rights. El Paso's application stated
that special litigation counsel was needed to evaluate El Paso's
rights, remedies and obligations with respect to CSW, the Plan and
the Merger Agreement and to advise key officers of El Paso on a
course of action to preserve and enforce El Paso's rights and
remedies. The application also stated that special litigation
counsel "should also be in a position to conduct any litigation
which may be necessary," and noted that another law firm then
representing El Paso "would not be in a position to represent the
Debtor in litigation against CSW." On October 28, 1994, CSW filed
a response to El Paso's application, in which CSW stated that
while it did not oppose El Paso's motion to employ special
litigation counsel, the hiring and future use of litigation
counsel may be incongruous with the goal of consummating the
<PAGE> 50
Merger. The response also stated that El Paso's Disclosure
Statement, pursuant to which it obtained confirmation of its Plan
of Reorganization, contained projections that explicitly assume
the continuation of service to Las Cruces and two military
installations in New Mexico.
By letter dated December 21, 1994, El Paso objected to CSW's
motion filed with the New Mexico Commission to extend the
procedural schedule by two-weeks. CSW responded to El Paso in a
letter dated January 11, 1995, that CSW considered the short two
week extension to be in the best interest of obtaining favorable
and timely regulatory approval in New Mexico. The two weeks were
to be used to facilitate efforts to narrow and resolve outstanding
issues in the proceedings and thereby expedite the progress of
those proceedings. El Paso restated its disagreement to CSW's
motion for extension in a letter dated January 16, 1995.
By letter dated January 13, 1995, CSW recommended that El Paso
object to a request by the Equity Committee to renew its
engagement of Salomon Brothers as financial advisor to said
committee. CSW stated that the Merger Agreement requires the
parties to cooperate in limiting professional fees and that the
cost and timing of the reengagement is inappropriate. By letter
dated January 20, 1995, El Paso responded to CSW that the Equity
Committee's request to reemploy Salomon is a direct consequence of
CSW's September 12 letter to El Paso and that it supports the
Equity Committee's application. El Paso subsequently filed a
statement of support of the Equity Committee's request in the
Bankruptcy Court. On February 6, 1995, the Equity Committee of El
Paso filed a response in the Bankruptcy Court to objections made
by other parties to its rehiring of financial advisors in which
the committee accused CSW of taking moves to back out of the
Merger Agreement, thereby causing harm to the equity holders.
On January 3, 1995, a PFD was issued by the presiding officers in
the proceedings pending before the Texas Commission relating to
the Merger. On January 17, 1995, CSW and El Paso filed joint
exceptions to the proposed decision, stating, among other things,
that, "in CSW's view, the rate relief recommended . . . falls far
short of what is necessary for the consummation of the merger."
That same day, CSW issued a press release describing the filing of
the exceptions and repeating CSW's view that the terms of the
proposed interim decision failed to provide sufficient revenue and
adequate rate-making treatment for CSW to consummate the proposed
Merger.
In a letter dated January 19, 1995, El Paso objected to the tenor
of CSW's January 17 press release and claimed that CSW's press
release harmed El Paso, its creditors, and shareholders and
poisoned the regulatory approval process. CSW responded in a
letter dated January 31 that it is El Paso's actions that have
hindered obtaining the regulatory approvals necessary to
consummate the Merger and that these actions were contrary to El
Paso's obligations under the Merger Agreement. Further, CSW
called on El Paso again to detail the steps it proposes to take to
solve the problems identified by CSW in its September 12 letter
cited in the PFD by the hearing examiners of the Texas Commission,
and to desist from further actions which undercut CSW's efforts to
obtain the rate relief, asset treatment and required regulatory
approvals necessary to consummate the Merger.
On February 17, 1995, El Paso responded to CSW's January 31, 1995
letter stating that CSW's assertion that El Paso has breached the
Merger Agreement are unfounded. El Paso further accused CSW of
searching for a "viable contractual excuse" not to close the
Merger.
On February 20, 1995, El Paso sent a letter to CSW inquiring
whether CSW would consent to the sale of the Las Cruces service
territory by El Paso and, if so, on what terms and at what price.
In addition, the letter inquired whether CSW would consent to a
rate reduction in New Mexico and, if so, at what percentage
reduction over what period of time. CSW responded in a February
27, 1995 letter that CSW is unwilling to give up any more of the
value it bargained for in the Merger Agreement, or to accept the
risk of a litigated outcome with Las Cruces. However, CSW
encouraged dialogue between El Paso and Las Cruces and stated it
<PAGE> 51
continues to support El Paso's efforts to resolve its dispute with
Las Cruces. CSW stated it is amenable to considering any
alternatives negotiated between Las Cruces and El Paso that would
not deprive the Merger of further value and that would enable El
Paso to continue to serve the Las Cruces service area or provide
El Paso with full compensation for the loss of Las Cruces. CSW
looks to El Paso to resolve this situation prior to consummation
of the proposed Merger.
Texas Commission Applications
On January 10, 1994, CSW and El Paso filed a joint application
with the Texas Commission requesting a determination that the
Merger is consistent with the public interest. As a part of the
application, CSW proposed a three-step rate settlement plan,
contingent upon the Texas Commission's approval of the Merger,
that seeks to limit El Paso's proposed $41.4 million initial base
rate increase for Texas customers, discussed below, to $25
million. In addition, the settlement rate plan proposed to reduce
El Paso's fixed fuel factors by $12.8 million and refund $16.4
million from a one-time fuel reconciliation. As a result of the
proposed annual reductions in fuel cost, El Paso's rates would not
increase during the first year of the settlement plan. The
settlement plan also provided for a three-year freeze on
additional base rate increases, a limitation on the frequency of
base rate increases following the rate freeze period through 2001
to not more than once every other year (i.e., 1997, 1999, and
2001), and a limitation on the amount of the 1997, 1999 and 2001
base rate increases to an amount not to exceed eight percent of
total revenues. No party to the proceedings accepted CSW's rate
settlement plan.
On January 10, 1994, El Paso separately filed with the Texas
Commission for a base rate increase, exclusive of fuel, of
approximately $41.4 million. The proposed rate increase
represents what El Paso has stated it believes is supported under
Texas law and prior Texas Commission orders, adjusted to reflect
El Paso's proposed Merger with CSW. If the Texas Commission were
to approve El Paso's request, the net effect would be to raise
rates significantly higher than those proposed in the settlement
plan.
On June 23, 1994, the El Paso City Council voted to reduce El
Paso's rates $15.7 million following a recommendation from the
City of El Paso's Public Utility Regulation Board. The City of El
Paso's decision was appealed to the Texas Commission and
consolidated with the rate case pending before that commission.
On June 24, 1994, the Staff filed testimony in the case before the
Texas Commission recommending an increase in base rates of $17.1
million and taking the position that the proposed Merger is not in
the public interest because of the possible cost increases to
CSW's subsidiaries, which the Staff attributed to increased
financial risk associated with the proposed acquisition of El
Paso. The Staff's recommendation was revised and increased to a
$21.5 million increase in base rates for El Paso in October 1994.
In addition, the Staff determined that the proposed purchase price
for El Paso is too high by $300 to $500 million and disagreed with
the estimates of the Merger-related savings presented by CSW and
El Paso in the case. Hearings at the Texas Commission began on
July 20, 1994 and were completed in early November 1994.
Effective July 16, 1994, El Paso implemented under bond, a base
rate increase of approximately $25 million annually for its Texas
jurisdiction, which is subject to refund depending on the outcome
of the rate case. The bonded increase in rates is authorized
under PURA. Because of the current uncertainty as to the final
outcome of the rate proceeding, El Paso has stated that it is
deferring on its books the recognition of the revenues resulting
from the increased rates.
On January 3, 1995, the Texas Commission presiding officers who
heard El Paso's pending rate case and the CSW and El Paso Merger
case filed their proposed interim decision with the Texas
Commission. The presiding officers proposed an initial base-rate
increase for El Paso of $21.2 million. The PFD recommends a
determination by the Texas Commission that the Merger and the
reacquisition of the leased Paso Verde assets are in the public
interest and that the purchase price to be paid to El Paso's
creditors and equity holders is fair, subject to satisfactory
resolution of the Las Cruces and Palo Verde problems. The
presiding officers found Merger related benefits ranging from $309
<PAGE> 52
million to $379.4 million over the first ten years of the Merger
which the presiding officers allocated to El Paso's customers
under the PFD.
In addition to recommending the imposition of conditions in the
determination that the Merger is in the public interest, the PFD
failed to provide sufficient revenue and adequate rate-making
treatment for CSW to consummate the proposed Merger.
Specifically, the presiding officers propose to reduce El Paso's
rates by allocating to customers certain potential tax benefits
related to the payment of lease rejection damages on the leased
Palo Verde assets. Reallocation of these tax benefits to
customers effectively increases the acquisition cost to CSW by
$133 million. The presiding officers attempted to mitigate the
economic effect of their allocation of these tax benefits by
allowing recovery through rates of an acquisition adjustment over
the remaining 33 year life of Palo Verde. However, CSW believes
that the proposed recovery through rates of an acquisition
adjustment has considerably less economic value than the tax
deductions. The presiding officers also recommended a reduction
in El Paso's rate moderation plan and disallowance of El Paso's
Palo Verde Unit 3 deferred accounting assets. CSW believes that,
in recommending these rate treatments, the PFD fails to recognize
rate relief to which El Paso is entitled under previous Texas
Commission decisions in El Paso rate cases. Additionally, the PFD
proposed an 11.5% return on equity rather than a 12.5% return
which CSW believes is necessary for El Paso to have the
opportunity to earn a reasonable return on its equity. Finally,
the presiding officers proposed that the Texas Commission's
interim order be conditioned on the successful resolution of the
loss of Las Cruces as a customer of El Paso and on the successful
resolution of the Palo Verde steam generator problems.
On March 3, 1995, the Texas Commission issued an interim order in
the El Paso rate case and proposed Merger with CSW. The interim
order found the proposed Merger to be in the public interest and
provides for a $24.9 million base rate increase for El Paso. The
interim order adopted most of the recommendations of the presiding
officers. The most significant revision to the presiding officers
recommendations was an increase in the allowed return on equity
from 11.5% to 12%. The presiding officers' recommendations were
adopted in the interim decision for several significant issues
even though agreement was not reached by the Texas Commission.
The interim decision allows for motions for reconsideration to be
filed on these issues. The Texas Commission has indicated that
the motions for reconsideration will be granted to allow for a
consensus of the Texas Commission to be reached on these issues
prior to the effective date of the merger. These issues included
conditioning approval of the merger on resolution of the Las
Cruces and Palo Verde issues, the rate treatment of the tax
effects of lease rejection damages, recovery of any acquisition
adjustment and deferred costs associated with the regulatory lag
period prior to the rate treatment of Palo Verde Unit 3. Pending
resolution of these issues, the Texas Commission allowed El Paso's
bonded rates to remain in effect until a subsequent interim
decision is issued.
The Texas Commission severed fuel related issues from the El Paso
rate case and issued a final order which allows for El Paso to
lower fixed fuel factors by $14.3 million annually and to refund
$13.7 million in fuel costs over a twelve month period.
New Mexico Commission Application
On March 14, 1994, CSW and El Paso filed an application with the
New Mexico Commission seeking approval of the pending Merger, the
reacquisition of the leased Palo Verde assets and certain
accounting treatments. On February 10, 1995, the New Mexico
Commission Staff filed testimony recommending approval of each of
these requests. El Paso plans to seek approval for the issuance
of securities in connection with the Merger.
On October 27, 1994, the hearing examiner assigned to hear CSW and
El Paso's Merger application before the New Mexico Commission
issued an order amending the procedural schedule to provide for
hearings beginning February 13, 1995. On December 21, 1994, the
hearing examiner issued an order granting a two week extension to
the procedural schedule, resulting in hearings beginning February
27, 1995. Hearings in New Mexico were completed on March 2, 1995.
<PAGE> 53
This revised schedule allows for the issuance of a final order by
the New Mexico Commission by June 1995. However, CSW cannot
predict when a final order may be issued by the New Mexico
Commission.
FERC Applications
On November 4, 1993, CSWS, as agent for the Electric Operating
Companies and El Paso, filed an application with the FERC under
Section 211 of the Federal Power Act seeking an order of the FERC
and requiring SPS to provide firm and non-firm transmission
services in connection with the transfers of power between PSO and
El Paso in connection with the post-Merger coordinated operations
of the Electric Operating Companies and El Paso. The intent of
the transmission services is to obtain the benefits of integrated
operations and thereby meet the requirement of the Holding Company
Act that the Electric Operating Companies and El Paso be
physically interconnected or capable of physical interconnection
and economically operated as a single interconnected and
coordinated electric system. SPS subsequently requested that the
application be dismissed or, in the alternative, be set for
hearing.
On January 10, 1994, as supplemented on January 13, 1994, CSWS, on
behalf of the Electric Operating Companies and El Paso, filed a
joint application with the FERC under Sections 203 and 205 of the
Federal Power Act requesting approval by the FERC of the Merger.
CSWS and El Paso have requested expedited consideration of the
joint application. However, CSW cannot predict at this time when
the FERC will issue a final decision on the joint application.
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
Federal Power Act, the FERC preliminarily found that "a final
order requiring SPS 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 directed SPS to perform studies so that the FERC can
determine whether provision of the requested transmission service
will unreasonably impair reliability. Such studies and
supplemental pleadings analyzing the studies were filed with the
FERC in early October and November 1994. 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 systems. 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." On August 31, 1994, CSW
and El Paso filed with the FERC a request for rehearing that,
among other things, asks the FERC to reconsider the imposition of
the comparable service requirement. On August 31, 1994, CSW and
El Paso also filed the form of transmission tariffs they would
propose to file with the FERC in order to meet the comparable
service requirement if the requirement is upheld and the Merger is
consummated. In agreeing to accept, as a condition to the Merger,
the requirement that comparable service be provided over CSW's 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. In addition, both CSW and El Paso do not intend to
waive or otherwise prejudice 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.
<PAGE> 54
The FERC has not yet determined what "comparable service" is.
However, the FERC said it will establish what uses PSO, SWEPCO and
El Paso make of their own systems. The FERC will also examine
likely costs and benefits of the Merger and determine whether the
Merger is consistent with the public interest. The FERC has
instructed one of its administrative law judges to issue an
initial decision by April 14, 1995. A FERC administrative law
judge established a procedural schedule whereby hearings began
January 3, 1995. Hearings ended January 25, 1995, and the judge's
initial decision is expected to be issued on or before April 5,
1995.
On November 15, 1994, the FERC trial staff filed its testimony in
the Merger proceeding. The FERC staff determined that the
proposed Merger will result in total savings of $414 million, $265
million in net present value for the period 1995 through 2004 of
post-Merger operations. This compares to Merger savings projected
by CSW for the same period of $420 million, or $280 million in net
present value. The staff found $140.7 million in non-fuel O&M
expense savings, $109.0 million in financial savings, and $15.3
million in production cost savings.
The FERC staff has recommended that approval of the Merger be made
subject to two conditions. As required in the FERC's August 1,
1994 order, the merged companies must offer the use of their non-
ERCOT transmission system to others under rates, terms and
conditions comparable to the rates, terms and conditions under
which CSW will use their non-ERCOT transmission system. The FERC
staff has also recommended that the Merger be approved,
conditioned on the existing CSW Operating Companies not being
allocated any transmission costs associated with firm transmission
service across SPS's system in excess of $24.6 million, which is
the amount CSW projects through 2004.
The FERC staff also determined that "hold harmless conditions"
proposed by various state utility commissions and other
intervenors to protect CSW Operating Companies from certain
potential effects of the Merger are unnecessary to assure that the
Merger is in the public interest. The FERC staff concluded that:
As proposed, the Merger is beneficial to El Paso and is
roughly neutral with respect to the four present CSW
Operating Companies. If enacted as proposed, with the
Applicants' voluntary offer to exclude Merger-related
transmission expenses of non-affiliates from the
transmission customers of CSW's four current Operating
Companies, the Merger should not substantially harm any
class of wholesale customers.
SEC Application
On January 10, 1994, CSW filed with the SEC an application under
the Holding Company Act seeking authorization of (i) the Merger
and reacquisition of the Palo Verde leased assets, (ii) the
issuance of securities by CSW and El Paso in connection with the
Modified Plan and Merger and certain related transactions, and
(iii) to engage in certain hedging transactions in connection with
the Merger. CSW subsequently amended the application to eliminate
the request for authorization to engage in certain hedging
transactions, at the request of the SEC staff. CSW has
subsequently amended and supplemented the application and has
filed a brief in response to intervention petitions. CSW cannot
predict what action the SEC will take with respect to the
application, or when such action will be taken.
NRC Application
On January 13, 1994, APS, as operating agent for Palo Verde,
joined by El Paso, filed a request with the NRC for (i) consent to
the indirect transfer of El Paso's interest in the operating
licenses for Palo Verde Units 1, 2, and 3 that will occur as a
result of the Merger, and (ii) to amend the operating licenses for
Units 2 and 3 to delete provisions of those licenses related to El
Paso's sale and leaseback transactions involving those units. The
request to the NRC specifies that the proposed amendments to the
operating licenses and consent become effective on the Effective
Date, but CSW cannot predict at this time whether and, if so, when
the approvals and consent will be granted.
<PAGE> 55
Palo Verde
The operating agent of Palo Verde, APS, discovered axial cracking
in steam generator tubes in Unit 2 following a tube rupture 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, has identified axial cracking in Unit 3
and another more common type of cracking in the steam generator
tubes of all three units. 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 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 all three
units, with each unit operating at 100% of capability. All
remedial actions have been completed on each of the three units,
except for chemically cleaning Unit 1 which is scheduled for April
1995. 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/or purchased power during periods in which one or more
units are removed from service every 6 months for inspections. In
its September 12, 1994 letter to El Paso, CSW stated that the
significance of the tube cracking problems will have to be
determined before CSW will close the Merger.
Other
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. See
El Paso's Quarterly Reports on Form 10-Q, its Current Reports on
Form 8-K and its Annual Report on Form 10-K and the documents
referenced therein.
CSW continues to use its best efforts to consummate the Merger.
At the same time, however, CSW continues to monitor contingencies
which may preclude the consummation of the Merger, including
without limitation the potential loss of significant portions of
El Paso's service area and significant El Paso customers,
including Las Cruces and two military installations, Holloman Air
Force Base and White Sands Missile Range, 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 the
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 Palo Verde.
Based upon El Paso's written response to the concerns identified
in CSW's September 12 letter and the failure of El Paso to resolve
items set forth in the preceding paragraph, CSW cannot predict
whether, and if so when, the Merger will be consummated. In the
event that the proposed Merger is not consummated, there may be
ensuing litigation between El Paso and CSW or among other parties
to El Paso's bankruptcy proceedings and either or both of El Paso
and CSW.
See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Proposed Acquisition of El Paso, for
further information.
Other Commitments and Contingencies
Construction
It is estimated that the CSW System will spend approximately $385
million in construction expenditures during 1995. Substantial
commitments have been made in connection with this construction
expenditure program.
<PAGE> 56
Fuel
To supply a portion of the fuel requirements of the CSW System,
the subsidiary companies have entered into various commitments for
the procurement of fuel.
SWEPCO
Henry W. Pirkey Power Plant
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
December 31, 1994, the maximum amount SWEPCO would have to assume
was $73.7 million. The maximum amount may vary as the mining
contractor's need for funds fluctuates. The contractor's actual
obligation outstanding at December 31, 1994 was $60.9 million.
South Hallsville Lignite Mine
As part of the process to receive a renewal of a Texas Railroad
Commission permit for lignite mining at the South Hallsville
lignite mine, SWEPCO has agreed to provide bond guarantees on mine
reclamation in the amount of $70 million. Since SWEPCO uses self-
bonding, the guarantee provides for SWEPCO to commit to use its
resources to complete the reclamation in the event the work is not
completed by the third party miner. The current estimate of cost
to reclaim the mine is estimated to be approximately $25 million.
Coal Transportation
SWEPCO has entered into various financing arrangements primarily
with respect to coal transportation and related equipment, which
are treated as operating leases for rate-making purposes. At
December 31, 1994, leased assets of $46 million, net of
accumulated amortization of $30.1 million, were included in
electric plant on the balance sheet and at December 31, 1993,
leased assets were $46 million, net of accumulated amortization of
$26.8 million. Total charges to operating expenses for leases
were $6.8 million, $7.1 million, and $6.9 million for the years
1994, 1993, and 1992.
Suspected MGP Site in Marshall, Texas
SWEPCO owns a suspected former MGP site in Marshall, Texas.
SWEPCO has notified the TNRCC that evidence of contamination has
been found at the site. As a result of sampling conducted at the
end of 1993 and early 1994, SWEPCO is evaluating the extent, if
any, to which contamination has impacted soil, groundwater and
other conditions in the area. A final range of clean-up costs has
not yet been determined, but, based on a preliminary estimate,
SWEPCO has accrued approximately $2 million as a liability for
this site on SWEPCO's books as of December 31, 1993. As more
information is obtained about the site, and SWEPCO discusses the
site with the TNRCC, the preliminary estimate may change.
Suspected MGP Site in Texarkana, Texas and Arkansas and Shreveport, Louisiana
SWEPCO also owns a suspected former MGP site in Texarkana, Texas
and Arkansas. The EPA ordered an initial investigation of this
site, as well as one in Shreveport, Louisiana, which is no longer
owned by SWEPCO. The contractor who performed the investigations
of these two sites recommended to the EPA that no further action
be taken at this time.
Biloxi, Mississippi MGP Site
SWEPCO has been notified by Mississippi Power Company that it may
be a PRP at the former Biloxi MGP site formerly owned and operated
by a predecessor of SWEPCO. SWEPCO is working with Mississippi
Power Company to investigate the extent of contamination at this
site. The MDEQ approved a site investigation work plan and, in
January 1995, SWEPCO and Mississippi Power Company initiated
sampling pursuant to that work plan. On an interim basis, SWEPCO
and Mississippi Power Company are each paying fifty percent of the
cost of implementing the site investigation work plan. That
interim allocation is subject to a final allocation in the future.
SWEPCO and Mississippi Power Company are investigating whether
<PAGE> 57
there are other PRPs at the Biloxi site. Until the extent of the
contamination at the Biloxi site is identified, it is unknown
what, if any, additional investigation or cleanup may be required.
Management does not expect these matters to have a material effect
on CSW's consolidated results of operations or financial position.
WTU
WTU has a sale/leaseback agreement with Transok for full capacity
use of a natural gas pipeline to WTU's Ft. Phantom generating
plant. The lease agreement also provides for full capacity use of
Transok's natural gas pipelines serving WTU's San Angelo and Oak
Creek generating plants. The initial terms of the agreement are
for twelve years with renewable options thereafter.
CPL
Nuclear Insurance
In connection with the licensing and operation of STP, the owners
have purchased the maximum limits of nuclear liability insurance,
as required by law, and have executed indemnification agreements
with the NRC in accordance with the financial protection
requirements of the Price-Anderson Act.
The Price-Anderson Act, a comprehensive statutory arrangement
providing limitations on nuclear liability and governmental
indemnities, is in effect until August 1, 2002. The limit of
liability under the Price-Anderson Act for licensees of nuclear
power plants is $8.92 billion per incident, effective as of
January 1995. The owners of STP are insured for their share of
this liability through a combination of private insurance
amounting to $200 million and a mandatory industry-wide program
for self-insurance totaling $8.72 billion. The maximum amount
that each licensee may be assessed under the industry-wide program
of self-insurance following a nuclear incident at an insured
facility is $75.5 million per reactor, which may be adjusted for
inflation plus a five percent charge for legal expenses, but not
more than $10 million per reactor for each nuclear incident in any
one year. CPL and each of the other STP owners are subject to
such assessments, which CPL and other owners have agreed will be
allocated on the basis of their respective ownership interests in
STP. For purposes of these assessments, STP has two licensed
reactors.
The owners of STP currently maintain on-site decontamination
liability and property damage insurance in the amount of $2.75
billion provided by ANI and NEIL. Policies of insurance issued by
ANI and NEIL stipulate that policy proceeds must be used first to
pay decontamination and clean-up costs before being used to cover
direct losses to property. Under project agreements, CPL and the
other owners of STP will share the total cost of decontamination
liability and property insurance for STP, including premiums and
assessments, on a pro rata basis, according to each owner's
respective ownership interests in STP.
CPL purchases, for its own account, a NEIL I Business Interruption
and/or Extra Expense policy. This insurance will reimburse CPL
for extra expenses incurred, up to $1.65 million per week, for
replacement generation or purchased power as the result of a
covered accident that shuts down production at STP for more than
21 weeks. The maximum amount recoverable for Unit 1 is $111.3
million and for Unit 2 is $111.8 million. CPL is subject to an
additional assessment up to $2.1 million for the current policy
year in the event that losses as a result of a covered accident at
a nuclear facility insured under the NEIL I policy exceeds the
accumulated funds available under the policy.
On August 28, 1994, CPL filed a claim under the NEIL I policy
related to the outage at STP Units 1 and 2. NEIL is currently
reviewing the claim. CPL management is unable to predict the
ultimate outcome of this matter.
<PAGE> 58
CSWE
CSWE has provided construction services to the Mulberry
cogeneration facility through a wholly-owned subsidiary, CSW
Development-I, Inc. The project achieved commercial operation in
August 1994 and added 117 MWs of on-line capacity of which CSWE
owns 50%. CSWE's maximum potential liability under the fixed
price contract is $83 million and will decrease to zero over the
next two years as contractual standards are met. Additionally,
CSW Development-I, Inc. has entered into a fixed price contract to
construct the Mulberry thermal host facility. The maximum
potential liability under this fixed price contract is $14
million. The thermal host facility is expected to be completed by
the first quarter of 1995. CSW has provided additional guarantees
to the project totaling approximately $57 million.
CSWE has entered into a purchase agreement on the Ft. Lupton
project to provide $79.5 million of equity upon the occurrence of
certain events. As of January 9, 1995, $43 million has been paid.
CSWE has provided three letters of credit to the project totaling
$14.3 million. During March 1995, CSWE closed permanent project
financing on the Ft. Lupton facility in the amount of $208
million.
CSWE has committed to provide up to $125 million of construction
financing to the Orange cogeneration project in which CSWE owns a
50% interest. Of this total, CSWE has provided $62 million at
December 31, 1994. CSWE expects to obtain third party permanent
financing for this project in 1995.
In November 1994, CSWE transferred its 50% interest in the 40 MW
Oildale cogeneration facility to two non-affiliated third parties,
Oildale Holdings, Inc. and Oildale Holdings II, Inc. The Oildale
project, which was financed with third party non-recourse project
financing, had been in default of certain provisions of its loan
agreement since December 1993. Under the terms of the project
transfer, CSWE contributed $3 million in equity in exchange for
the return of a letter of credit in the same amount in favor of a
third party lender.
In addition, CSWE has posted security deposits and other security
instruments of approximately $14 million on six additional
projects in various stages of development, construction, and
operation.
<PAGE> 59
12. Business Segments
CSW's business segments include electric utility operations (CPL,
PSO, SWEPCO, WTU), and gas operations (Transok). Seven non-
utility companies are included in corporate items (CSWE, CSWI, CSW
Communications, CSW Credit, CSW Leasing, CSWS and CSW).
CSW's business segment information follows:
1994 1993 1992
(millions)
Operating Revenues
Electric $ 3,065 $ 3,055 $ 2,790
Gas 518 603 496
Corporate items and other 40 29 3
$ 3,623 $ 3,687 $ 3,289
Operating Income
Electric $ 728 $ 559 $ 694
Gas 49 25 42
Corporate items and other 6 5 1
Total operating income before taxes 783 589 737
Income taxes 189 132 149
$ 594 $ 457 $ 588
Depreciation and Amortization
Electric $ 316 $ 296 $ 284
Gas 32 29 22
Corporate items and other 8 5 5
$ 356 $ 330 $ 311
Identifiable Assets
Electric $ 9,066 $ 8,927 $ 8,575
Gas 724 684 674
Corporate items and other 1,119 993 580
$ 10,909 $ 10,604 $ 9,829
Capital expenditures and acquisitions
Electric $ 493 $ 481 $ 325
Gas 65 88 101
Corporate items and other(1) 114 64 31
$ 672 $ 633 $ 457
(1) Includes CSWE Equity Investments.
<PAGE> 60
13. Quarterly Information (Unaudited)
The following unaudited quarterly information includes, in the
opinion of management, all adjustments necessary for a fair
presentation of such amounts.
Earnings
per Share
Operating Operating Net of Common
Quarter Ended Revenues Income Income Stock
(millions)
1994
March 31 $ 850 $ 93 $ 48 $0.23
June 30 908 157 107 0.55
September 30 1,070 239 189 0.97
December 31 795 105 68 0.33
$3,623 $594 $412 $2.08
1993
March 31 $ 810 $ 97 $ 92 $0.47
June 30 894 144 96 0.48
September 30 1,140 219 181 0.93
December 31 843 (3) (42) (0.25)
$3,687 $457 $327 $1.63
Information for quarterly periods is affected by seasonal
variations in sales, rate changes, timing of fuel expense recovery
and other factors.
<PAGE> 61
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<PAGE> 62
Report of Independent Public Accountants
To the Stockholders and Board of Directors of Central and South West
Corporation:
We have audited the accompanying consolidated balance sheets of
Central and South West Corporation (a Delaware corporation) and
subsidiary companies, as of December 31, 1994 and 1993, and the
related consolidated statements of income, retained earnings and
cash flows, for each of the three years in the period ended December
31, 1994. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Central and South West Corporation and subsidiary companies as of
December 31, 1994 and 1993, and the results of their operations and
their cash flows for each of the three years in the period ended
December 31, 1994, in conformity with generally accepted accounting
principles.
In 1993, as discussed in NOTE 1, Central and South West
Corporation and subsidiary companies changed their methods of
accounting for unbilled revenues, postretirement benefits other than
pensions, income taxes and postemployment benefits.
Our audits were made for the purpose of forming an opinion on
the financial statements taken as a whole. The supplemental
schedule II is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the
basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial
statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Dallas, Texas
February 13, 1995
<PAGE> 63
Report of Management
Management is responsible for the preparation, integrity and
objectivity of the consolidated financial statements of Central and
South West Corporation and subsidiary companies as well as other
information contained in this Annual Report. The consolidated
financial statements have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis and, in
some cases, reflect amounts based on the best estimates and judgments
of management, giving due consideration to materiality. Financial
information contained elsewhere in this Annual Report is consistent
with that in the consolidated financial statements.
The consolidated financial statements have been audited by the
independent accounting firm, Arthur Andersen LLP, which was given
unrestricted access to all financial records and related data,
including minutes of all meetings of stockholders, the board of
directors and committees of the board. CSW and its subsidiaries
believe that representations made to the independent auditors during
their audit were valid and appropriate. Arthur Andersen LLP's audit
report is presented elsewhere in this report.
CSW, together with its subsidiary companies, maintains a system
of internal controls to provide reasonable assurance that
transactions are executed in accordance with management's
authorization, that the consolidated financial statements are
prepared in accordance with generally accepted accounting principles
and that the assets of CSW and its subsidiaries are properly
safeguarded against unauthorized acquisition, use or disposition. The
system includes a documented organizational structure and division of
responsibility, established policies and procedures including a
policy on ethical standards which provides that the companies will
maintain the highest legal and ethical standards, and the careful
selection, training and development of our employees.
Internal auditors continuously monitor the effectiveness of the
internal control system following standards established by the
Institute of Internal Auditors. Actions are taken by management to
respond to deficiencies as they are identified. The board, operating
through its audit committee, which is comprised entirely of directors
who are not officers or employees of CSW or its subsidiaries,
provides oversight to the financial reporting process.
Due to the inherent limitations in the effectiveness of internal
controls, no internal control system can provide absolute assurance
that errors will not occur. However, management strives to maintain
a balance, recognizing that the cost of such a system should not
exceed the benefits derived.
CSW and its subsidiaries believe that, in all material respects,
its system of internal controls over financial reporting and over
safeguarding of assets against unauthorized acquisition, use or
disposition functioned effectively during 1994.
E. R. Brooks Glenn D. Rosilier Wendy G. Hargus
Chairman, President and Senior Vice President and Controller
Chief Executive Officer Chief Financial Officer
<PAGE> 64
GLOSSARY OF TERMS
The following abbreviations or acronyms used in this Financial Report
are defined below:
Abbreviation or Acronym Definition
ALJ.......................... Administrative Law Judge
ANI.......................... American Nuclear Insurance
APBO......................... Accumulated Postretirement Benefit Obligation
APS.......................... Arizona Public Service Company
Austin....................... City of Austin, Texas
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
BREMCO....................... Bossier Rural Electric Membership Corporation
Btu.......................... British thermal unit
Burlington Northern.......... Burlington Northern Railroad Company
CERCLA....................... Comprehensive Environmental Response,
Compensation and Liability Act of 1980
Cimmaron..................... Cimmaron Chemical Company
Cities....................... Several cities in CPL's service territory
Clean Air Act................ Clean Air Act Amendments of 1990
Confirmation Date............ December 8, 1993, the confirmation date for the
Modified Plan
Court of Appeals............. Court of Appeals, Third District of Texas,
Austin, Texas
CPL.......................... Central Power and Light Company, Corpus Christi,
Texas
CSW.......................... Central and South West Corporation, Dallas,
Texas
CSW Common................... CSW common stock, $3.50 par value per share
CSW Communications........... CSW Communications, Inc., Dallas, Texas
CSW Credit................... CSW Credit, Inc., Dallas, Texas
CSWE......................... CSW Energy, Inc., Dallas, Texas
CSWI......................... CSW International, Inc., Dallas, Texas
CSW Leasing.................. CSW Leasing, Inc., Dallas, Texas
CSW System................... CSW and its subsidiaries
CSWS......................... Central and South West Services, Inc., Dallas,
Texas and Tulsa, Oklahoma
CWIP......................... Construction work in progress
District Court............... State District Court 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
Electric Operating Companies. CPL, PSO, SWEPCO and WTU
EMF.......................... Electric and magnetic fields
Energy Policy Act............ National Energy Policy Act of 1992
EPA.......................... United States Environmental Protection Agency
EPS.......................... Earnings per share
ERCOT........................ Electric Reliability Council of Texas
ERISA........................ Employee Retirement Income Security Act of 1974,
as amended
EWG.......................... Exempt Wholesale Generator
FASB......................... Financial Accounting Standards Board
FERC......................... Federal Energy Regulatory Commission
FMB.......................... First Mortgage Bond
HLP.......................... Houston Lighting & Power Company, the Project
Manager of STP
Holding Company Act.......... Public Utility Holding Company Act of 1935, as
amended
ITC.......................... Investment tax credit
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 CSW
Merger Agreement............. Agreement and Plan of Merger between El Paso and
CSW, dated as of May 3, 1993, as amended
MGP.......................... Manufactured gas plant or coal gasification
plant
Mirror CWIP.................. Mirror Construction Work in Progress
Modified Plan................ Modified Third Amended Plan of Reorganization
for the proposed merger with El Paso
MW........................... Megawatt
NEIL......................... Nuclear Electric Insurance Limited
New Mexico Commission........ New Mexico Public Utility Commission
<PAGE> 65
GLOSSARY OF TERMS (continued)
Abbreviation or Acronym Definition
Acronym
Notes........................ Notes to Financial Statements
NRC.......................... Nuclear Regulatory Commission
O&M.......................... Operations and maintenance
Oklahoma Commission.......... Corporation Commission of the State of Oklahoma
Oklaunion.................... Oklaunion Power Station Unit No. 1
OPEBs........................ Other Postemployment Benefits
Operating Companies.......... CPL, PSO, SWEPCO, WTU, and Transok
OPUC......................... Office of Public Utility Counsel
Palo Verde................... Palo Verde Nuclear Generating Station
PCB.......................... Polychlorinated biphenyl
PFD.......................... Proposal for Decision
PFDs......................... Preferred Stock
Project Manager.............. HLP, the Project Manager for STP
PRP.......................... Potentially responsible party
PSO.......................... Public Service Company of Oklahoma, Tulsa,
Oklahoma
PURA......................... Public Utility Regulatory Act of the State of
Texas
RFP.......................... Rate Filing Package
San Antonio.................. City of San Antonio, Texas
SEC.......................... Securities and Exchange Commission
SFAS......................... Statement of Financial Accounting Standards
SFAS 71...................... Accounting for the effects of certain types of
regulation
SFAS 106..................... Employers' accounting for postretirement
benefits other than pensions
SFAS 109..................... Accounting for income taxes
SFAS 112..................... Employers' accounting for postemployement
benefits
SFAS 115..................... Accounting for certain investments in debt and
equity securities
SFAS 116..................... Accounting for contributions received and
contributions made
SFAS 119..................... Disclosure about derivative financial
instruments and fair value of financial
instruments
SPS.......................... Southwestern Public Service Company
Staff........................ The Staff of the Texas Commission
STP.......................... South Texas Project nuclear electric generating
station
STP Unit 1 Order............. October 1990 Texas Commission STP Unit 1 Final
Order
STP Unit 2 Order............. December 1990 Texas Commission STP Unit 2 Final
Order
Supreme Court................ Supreme Court of Texas
SWEPCO....................... Southwestern Electric Power Company, Shreveport,
Louisiana
Texas Commission............. Public Utility Commission of Texas
TEX/CON...................... TEX/CON Oil and Gas Company
TEX-LA....................... TEX-LA Electric Cooperative
TNRCC........................ Texas Natural Resource Conservation Commission,
formerly the Texas Water Commission
TSA.......................... Texas State Agencies
Transok...................... Transok, Inc. and subsidiaries, Tulsa, Oklahoma
Westinghouse................. Westinghouse Electric Corporation
WTU.......................... West Texas Utilities Company, Abilene, Texas
GRAPH DESCRIPTION AND DATA POINTS
Title and Location Description Data Points
90 91 92 93 94
Page 1
Earnings and Dividends per Share
Dollars Two Column Bar Chart
Bars (side by side):
Earnings 2.03 1.63 2.08
Dividends 1.54 1.62 1.70
Page 7
Capital Expenditures Stacked Bar Chart with Line Superimposed
Dollars in Millions Bars (stacked):
Capital Expenditures 422 508 578
Acquisitions 27 106 21
CSW Energy Projects 8 19 73
Line
Internal Generation 374 369 424
Page 8
Embedded Cost of Bar Chart
Long-Term Debt 9.1 9.0 8.3 7.8 7.7%
Page 17
Kilowatt-Hour Sales Stacked Bar Chart
Billions of Kilowatt-Hours Residential 14.6 15.9 16.4
Commercial 12.4 13.0 13.5
Industrial 17.3 18.2 18.9
Sales for Resale 6.3 5.9 7.1
Other 1.4 1.4 1.5
Page 18
1994 Fuel Mix Pie Chart
Gas 44%
Coal 36%
Lignite 9%
Nuclear 6%
Purchases 5%
<PAGE> 1
INDEX OF EXHIBITS
EXHIBIT TRANSMISSION
NUMBER EXHIBIT METHOD
- ------- ------- ------------
1 Performance Graph SE
