<PAGE>
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:*
__________________________________________________________________________
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__________________________________________________________________________
[ ] 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.
==============================================================================
Central and South West Corporation
NOTICE OF
ANNUAL MEETING
OF STOCKHOLDERS
and
PROXY STATEMENT
Annual Meeting April 18, 1996
March 7, 1996
==============================================================================
TABLE OF CONTENTS
PAGE
Notice of Annual Meeting of Stockholders.................................. i
Proxy Statement .......................................................... ii
General Information....................................................... 1
Proposal 1 - Election of Directors..................................... 2
Proposal 2 - Approval of Appointment of
Independent Public Accountants............................ 8
Proposal 3 - Transaction of Other Business............................. 9
Executive Compensation................................................. 10
Performance Graph...................................................... 20
Appendix A - 1995 Financial Reports
<PAGE> i
CENTRAL AND SOUTH WEST CORPORATION
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
The annual meeting of stockholders of Central and South West Corporation, a
Delaware corporation, will be held on April 18, 1996, at 10:45 a.m., local
time, at the San Angelo Convention Center, 500 Rio Concho Drive, San Angelo,
Texas, for the purpose of considering and voting upon proposals:
1. a) To elect four directors to Class III of the Corporation's Board of
Directors (Board) to serve three-year terms;
b) To elect one director to Class I of the Board to serve the remaining one
year of the current Class I term;
2. To approve the Board's selection of Arthur Andersen LLP as the
Corporation's independent public accountants for the calendar year 1996; and
3. To 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.
Stockholders of record at the close of business on March 1, 1996 (Record Date)
will be entitled to notice of and to vote at the meeting and any adjournment
thereof. Beginning April 4, 1996, a list of stockholders entitled to vote may
be examined during ordinary business hours at the offices of West Texas
Utilities at 106 South Chadbourne Street, San Angelo, Texas.
By Order of the Board of Directors,
/s/FREDERIC L. FRAWLEY
Frederic L. Frawley
Secretary
March 7, 1996
______________________________________________________________________________
YOUR VOTE IS IMPORTANT!
PLEASE COMPLETE AND RETURN THE ENCLOSED PROXY CARD,
REGARDLESS OF THE SIZE OF YOUR HOLDINGS, AS SOON AS POSSIBLE.
<PAGE> 1
CENTRAL AND SOUTH WEST CORPORATION
Proxy Statement
_________________________
GENERAL INFORMATION
Purpose of the Meeting and Solicitation
The accompanying proxy is solicited by the Board of Directors of Central and
South West Corporation (CSW or Corporation) for use at the Annual Meeting of
Stockholders to be held on April 18, 1996, at 10:45 a.m., local time, at the
San Angelo Convention Center, 500 Rio Concho Drive, San Angelo, Texas, and at
any adjournment thereof (Meeting). The purposes of the Meeting are set forth
in the attached Notice of Annual Meeting.
This Proxy Statement and the form of proxy are being mailed to stockholders
on or about March 7, 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 card. The Corporation has employed D.F. King
& Co., Inc. to assist in the solicitation of proxies and has agreed to pay
D.F. King & Co., Inc. a fee for such services of $7,500 plus out-of-pocket
expenses. After March 7, 1996, 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 209,065,917 shares were outstanding on March 1, 1996 (the
Record Date). Only stockholders of record at the close of business on the
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 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
<PAGE> 2
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 Procedure established prior to the
Meeting.
Stockholder Proposals for 1997 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 1997 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 7, 1996.
PROPOSALS FOR THE MEETING
Proposal 1: ELECTION OF DIRECTORS
Nominees for Directors
At the Meeting, four directors will be elected to Class III of the Board for
three-year terms expiring at the 1999 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 year 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.
<PAGE> 3
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. Class I, Class II and Class III directors' terms
expire at the 1997, 1998 and 1999 annual meetings of stockholders,
respectively, or when their respective successors are duly elected and
qualified. The Board currently consists of 13 directors, but will be reduced
to twelve members upon the retirement of Harry D. Mattison as a Director prior
to the commencement of the Annual Meeting on April 18, 1996. The Board
elected Thomas H. Cruikshank and T. J. Ellis to fill vacant directorships in
October 1995 and January 1996, respectively.
THE BOARD OF DIRECTORS OF THE CORPORATION HAS NOMINATED AND UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE ELECTION OF T.J. ELLIS AS A CLASS I
DIRECTOR AND THOMAS CRUIKSHANK, JOE H. FOY, J.C. TEMPLETON AND LLOYD D. WARD,
AS CLASS III DIRECTORS.
Each nominee is presently a director of the Corporation and has served
continuously since the year indicated opposite his/her name below. 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.
The following information is given with respect to the nominees for election
as directors:
T. J. ELLIS, 53 Class I Director since 1996
Mr. Ellis served as the Commercial Director of SEEBOARD plc in 1985 and
became the Chief Executive of SEEBOARD plc after privatization of the United
Kingdom's national electric distribution system in 1992. He currently serves
as Chairman of SEEBOARD (Generation) Limited and director of The National Grid
Group plc, Sussex Chamber of Commerce Training and Enterprise and Eurorail
CTRL Limited.
THOMAS H. CRUIKSHANK, 65 Class III Director since 1995
Mr. Cruikshank served as the Chairman and Chief Executive Officer of
Halliburton Company from 1989 until his retirement in December 1995. He served
also as a director of Halliburton from 1977 until his retirement last year.
JOE H. FOY, 69 Class III Director since 1974
Mr. Foy served as a partner of the law firm of Bracewell & Patterson, Houston,
Texas from before 1991 until his retirement in 1993. He is currently a member
of the Board of Directors of Enron Corporation.
J. C. TEMPLETON, 71 Class III Director since 1983
Mr. Templeton retired in 1991 from his position as President and Chairman of
the Board of Directors of TGX Corporation, an oil and gas pipeline company.
Since 1991 he has operated an investment company based in Houston.
<PAGE> 4
LLOYD D. WARD, 47 Class III Director since 1993
Mr. Ward joined Frito-Lay, Inc., Pleasanton, California as General Manager in
June 1991 and was promoted to President of that Division in October 1991. Mr.
Ward has served as Division President of the Central Division of Frito-Lay,
Inc. in Dallas, Texas since January 1993.
The following information is given for continuing directors:
GLENN BIGGS, 62 Class II Director since 1987
Mr. Biggs has served as the President of Biggs & Co., an investment firm
located in San Antonio, Texas, since 1989. From 1991 to 1995 Mr. Biggs served
as the Chairman and Chief Executive Officer of Texas TGV Corporation, a
development company proposing to build a high speed railway. He is also a
member of the Board of Directors of Diamond Shamrock R & M, Inc.
MOLLY SHI BOREN, 52 Class I Director since 1991
Ms. Boren, of Norman, Oklahoma, has been an attorney since prior to 1991 and
is a former Special District Judge in Pontotoc County, Oklahoma. She formerly
served as a Director of Liberty Bank Corporation and of Pet Incorporated.
E. R. BROOKS, 58 Class II Director since 1988
Mr. Brooks has served as Chairman, President and Chief Executive Officer of
the Corporation since February 1991. He served as the Corporation's President
from September 1990 to February 1991. He is also a member of the Board of
Directors of each of the Corporation's subsidiaries, as well as a Director of
Hubbell, Inc., based in Orange, Connecticut. Mr. Brooks is a Trustee of
Baylor University Medical Center, Dallas, Texas, and Hardin Simmons
University, Abilene, Texas.
DONALD M. CARLTON, 58 Class I Director since 1994
Mr. Carlton served as the President and Chairman of Radian Corporation, an
engineering and technology firm, from 1969 through December 1995. In January
1996 he was named President and Chief Executive Officer of Radian
International LLC, a new company formed in partnership with The Dow Chemical
Company and Hartford Steam Boiler Inspection and Insurance Company. He is a
member of the Board of Directors of Hartford Steam Boiler Inspection and
Insurance Company, Van Kampen American Capital Closed End Fund and Common
Sense Trust, and National Instruments.
ROBERT W. LAWLESS, 59 Class II Director since 1991
Dr. Lawless served as the President and Chief Executive Officer of Texas Tech
University and Texas Tech University Health Sciences Center in Lubbock, Texas
from July 1, 1989, and will continue to serve in that capacity until April 30,
1996. On May 1, 1996 he will assume the presidency of the University of
Tulsa. He is a member of the Board of Directors of Salomon Brothers Fund,
Salomon Brothers Capital Fund and Salomon Brothers Investors Fund.
JAMES L. POWELL, 66 Class II Director since 1987
Mr. Powell has been involved in ranching and investments in Ft. McKavett,
Texas since prior to 1991. He is a Director of Southwest Bancorp of Sanderson,
Texas, a Director and member of the Executive Committee of National Finance
Credit Corporation and an Advisory Director of First National Bank, Mertzon,
Texas.
<PAGE> 5
THOMAS V. SHOCKLEY, III, 50 Class I Director since 1991
Mr. Shockley joined the Corporation as Senior Vice President in January 1990,
and became an Executive Vice President in September of that same year. In
addition, he served as Chief Executive Officer of the Corporation's subsidiary
Central and South West Services, Inc. from October 1992 to December 1993.
Mr. Shockley continues to serve as a Director of each of the Corporation's
non-electric subsidiaries.
Security Ownership of Management
The following table shows securities beneficially owned as of December 31,
1995 by each director and nominee, certain executive officers and all
directors and executive officers as a group. Share amounts shown in this
table include options exercisable within 60 days after 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.
Common Stock
Percent of
Name Shares(1) Class (2)
Glenn Biggs........................................ 16,125 -
Molly Shi Boren.................................... 2,288 -
E.R. Brooks........................................ 86,887 -
Donald M. Carlton.................................. 3,776 -
Thomas H. Cruikshank (3)........................... 0 -
T. J. Ellis (4)..................................... 0 -
Joe H. Foy......................................... 12,208 -
Robert W. Lawless.................................. 2,524 -
Harry D. Mattison.................................. 49,580 -
Ferd. C. Meyer, Jr................................. 27,114 -
James L. Powell.................................... 3,780 -
Glenn D. Rosilier.................................. 46,432 -
Thomas V. Shockley, III............................ 41,742 -
J.C. Templeton..................................... 2,980 -
Lloyd D. Ward...................................... 1,726 -
All of the above and other officers as a group
(CSW Directors and Officers).......................385,437
______________________
1) Shares for Messrs. Brooks, Mattison, Meyer, Rosilier ,Shockley, and CSW
Directors and Officers include 2,572, 1,654, 1,398, 1,429, 1,587, and 10,100
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 41,455, 26,429, 20,583, 20,583, 26,421, and 167,168
shares of Common Stock underlying immediately exercisable options held by
Messrs. Brooks, Mattison, Meyer, Rosilier , Shockley, and CSW Directors and
Officers, respectively.
2) Percentages are all less than one percent and therefore are omitted.
3) Mr. Cruikshank was appointed to the Board effective October 18, 1995. At
the time of his appointment, Mr. Cruikshank did not own any of the
Corporation's Common Stock. However, he purchased 2,000 shares of Common
Stock on February 20, 1996.
4) Mr. Ellis was appointed to the Board effective January 18, 1996, and was
awarded 16,200 stock options at a grant price of $27.750 per share. One-third
of the options vest each year for a period of three years.
<PAGE> 6
Security Ownership of Certain Beneficial Owners
Set forth below are the only persons or groups known to the Corporation as
of December 31, 1995, with beneficial ownership of 5 percent or more of the
Corporation's Common Stock.
Common Stock
Amount of
Name, Address of Beneficial Percent of
Beneficial Owners Ownership Class
Mellon Bank Corporation 11,207,892(1) 5.3
and subsidiaries
One Mellon Bank Center
Pittsburgh, PA 15258
______________________
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 928,433 shares and shared voting
power as to 34,255 shares.
OTHER INFORMATION REGARDING THE BOARD OF DIRECTORS
General Information
Nominees for directorships are recommended by the Nominating Committee of
the Board and are 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 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.
<PAGE> 7
Meetings and Compensation
The Board held 6 regular meetings and 8 special meetings during 1995.
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 director's, chairman's or
meeting fees.
The Corporation maintains a memorial gift program for all of its current
directors, directors who have retired since 1992 and certain executive
officers. There are seventeen current directors and executive officers and
eight retired directors and officers eligible for the memorial gift 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 averaged $16,367 per participant for 1995 and $17,013 per
participant for 1994 and 1993.
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, 1996 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 1995, except for Lloyd D. Ward who attended 70 percent of the total
meetings.
Board Committees
Policy Committee. The Policy Committee, currently consisting of Messrs.
Brooks (Chairman), Foy, Lawless and Powell, held 15 meetings in 1995. 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.
<PAGE> 8
Audit Committee. The Audit Committee, currently consisting of Ms. Boren and
Messrs. Biggs, Carlton, Lawless (Chairman), Powell and Templeton, held 4
meetings in 1995. 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. Cruikshank, Foy (Chairman),
Lawless, Templeton and Ward, held 6 meetings in 1995. 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. Biggs, Carlton, Cruikshank, Foy, Powell (Chairman) and Ward, held 3
meetings in 1995. 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.
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 the Corporation's Common Stock to file reports of ownership and changes in
ownership with the SEC and the New York Stock Exchange. Officers, directors
and greater-than-ten-percent stockholders are required by SEC regulation to
furnish 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 1995 calendar year all such filing requirements
applicable to its officers, directors and greater-than-ten-percent
stockholders were complied with.
Compensation Committee Interlocks and Insider Participation
No 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 1995. No executive officer of the Corporation serves or has served
on the Compensation Committee during or prior to 1995. No executive officer
of the Corporation serves or has served 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, during or prior to 1995.
<PAGE> 9
Proposal 2: APPROVAL OF APPOINTMENT
OF INDEPENDENT PUBLIC ACCOUNTANTS
The Audit Committee of the Board of Directors, which is composed entirely of
non-employee directors, has selected Arthur Andersen LLP ("Arthur Andersen")
as the independent public accountants to audit the consolidated financial
statements of the Corporation and its consolidated subsidiaries for the year
ending December 31, 1996. The Board of Directors has endorsed this
appointment and it is being presented to the stockholders for approval.
Arthur Andersen has audited the consolidated financial statements of the
Corporation and its consolidated subsidiaries for many years. The Corporation
has been advised by Arthur Andersen that neither it nor any member or employee
thereof has any direct financial interest or any material indirect financial
interest in the Corporation or any of its subsidiaries in any capacity.
During the year ended December 31, l995, Arthur Andersen provided both audit
and non-audit services to the Corporation and its subsidiaries. These audit
services included: (1) regular examination of the consolidated financial
statements of the Corporation, including work relating to quarterly reviews,
SEC filings and consultation on accounting and financial reporting matters;
(2) audit of the financial statements of certain subsidiary companies to meet
statutory or regulatory requirements; and (3) examination of the financial
statements of various employee benefit plans of the Corporation and its
subsidiaries. Nonaudit services provided by Arthur Andersen included income
tax consulting, employee benefit advisory services, economic consulting and
other financial consulting services.
The financial statements of SEEBOARD plc (SEEBOARD), a regional electricity
company located in the U.K., for calendar year 1995 and prior years have been
audited by KPMG Peat Marwick, which firm is expected to be engaged to audit
the financial statements for the year ending December 31, l996. Andersen
Consulting, which is part of the Andersen World Wide Organization, provides
information technology services to SEEBOARD, which became a subsidiary of the
Corporation in November 1995.
All significant audit and nonaudit services provided by Arthur Andersen and
Andersen Consulting are approved by the Audit Committee which gives due
consideration to the potential effect of nonaudit services on auditor
independence.
One or more representatives of Arthur Andersen will be present at this
year's Annual Meeting of Stockholders, will have an opportunity to make a
statement if he or she desires to do so and will be available to respond to
appropriate questions.
Ratification of the appointment of Arthur Andersen to audit the consolidated
financial statements of the Corporation for the year ending December 31, l996
requires the affirmative vote of a majority of the votes cast by the holders
of the shares of Common Stock of the Corporation voting in person or by proxy
at the Annual Meeting of Stockholders. For purposes of determining the number
of votes cast on the matter, only those cast "for" or "against" are included.
Abstentions and broker nonvotes are not included. If the resolution does not
pass, the selection of independent public accountants will be reconsidered by
the Audit Committee and the Board of Directors.
<PAGE> 10
THE BOARD OF DIRECTORS OF THE CORPORATION RECOMMENDS A VOTE FOR THE PROPOSAL
TO RATIFY THE APPOINTMENT OF ARTHUR ANDERSEN AS INDEPENDENT PUBLIC ACCOUNTANTS
OF THE CORPORATION FOR FISCAL YEAR 1996. PROXIES RECEIVED BY THE BOARD OF
DIRECTORS WILL BE SO VOTED UNLESS STOCKHOLDERS SPECIFY IN THEIR PROXIES A
CONTRARY CHOICE.
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 total compensation program consisting of base salary,
performance incentives and benefits designed to support the corporate goal of
providing superior value to our stockholders and customers;
Providing comprehensive programs which serve to facilitate the recruitment,
retention and motivation of qualified executives; and
Rewarding key executives for achieving financial, operating and individual
objectives that produce a 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 (Compensation Committee),
which consists of six independent outside directors, has designed the
Corporation's executive compensation programs around a strong
pay-for-performance philosophy. The Compensation Committee strives to
maintain competitive levels of total compensation as compared to peers in the
utility industry.
Each year, the Compensation Committee conducts a comprehensive review of the
Corporation's executive compensation programs. The Compensation Committee is
assisted in these efforts by an independent consultant and by the
Corporation's internal staff, who provide the Compensation 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 the Corporation's
relative competitive position.
<PAGE> 11
To maintain competitive, comprehensive compensation, the Compensation
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 Compensation
Committee seeks to ensure that the Corporation's level of compensation for
expected level of performance approximates the average or mean for executive
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 the
companies listed in the S&P Electric Utility Index as well as large regional
competitors. The Compensation Committee believes that using the S&P Electric
Utility Index provides an objective measure to compare 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
Special 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, 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 at the
discretion of the Compensation Committee 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.
<PAGE> 12
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 Compensation Committee's decision to approve, at its discretion,
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 of an individual executive officer's performance.
Second, corporate or departmental operating 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, subsidiary 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.
The award can vary from 0 to a maximum of 150 percent of target.
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, at the discretion of the Committee, be factored into the composite index.
The corporate performance index currently is determined solely by the
Corporation's earnings per share. Threshold, target and exceptional levels of
earnings per share are set by the Compensation Committee in January of each
year. The Compensation Committee considers both historic performance and the
current year plan expected level of earnings per share.
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 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 customer satisfaction ratings, productivity measures or
strategic goals. If a subsidiary performance index is factored into the
composite index and a given subsidiary of the Corporation fails to achieve a
minimum threshold level of performance on each of its performance goals, the
subsidiary performance will equal zero and, thus, executive officers of that
subsidiary will not earn an AIP award for that year.
<PAGE> 13
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.
The corresponding maximum AIP award that can be earned by the executive based
on the position of the executive in the Corporation is 1.5 times the target
award. 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
Compensation Committee, with the assistance of internal staff. The results
are reviewed and are subject to approval by the Compensation Committee. Under
the terms of the AIP, the Compensation Committee in the exercise of its
discretion, may vary corporate or company performance measures and the form of
payment for AIP awards from year-to-year prior to establishing the awards,
including payment in cash or restricted stock, as determined by the
Compensation Committee.
In 1995, the AIP awards were determined based on the corporate performance
index, the subsidiary company performance indices and the individual
performance index. For 1995, the Corporation achieved 125 percent of the
corporate performance index based on the earnings per share measure.
Accordingly, executive officers had the opportunity, based on individual and
subsidiary performance results, to earn AIP awards for 1995 up to a maximum
for senior executive officers of 60 percent of Salary Midpoint and for other
executive officers 30 percent of Salary Midpoint. These awards were paid in
the form of cash to all participants in January 1996.
Incentive Programs - Long-Term Incentive Plan: Amounts realized by the
Corporation's executive officers under awards made pursuant to the Central and
South West Corporation 1992 Long-Term Incentive Plan (LTIP) depend entirely
upon corporate performance. The Compensation Committee selects the form and
amount of LTIP awards based upon its evaluation of which vehicles then are
best positioned to serve as effective incentives for long-term performance.
Since 1992, the Compensation Committee has established LTIP awards in the
form of performance shares. These awards provide incentives both for
exceptional corporate performance and retention. Each year, the Compensation
Committee has set a target award of a specified dollar amount for each awardee
based on a percent of Salary Midpoint. 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> 14
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
similarly-calculated total stockholder returns achieved at companies in the
Utility Peer Group, 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. Performance in the fourth quartile yields no payout under the
LTIP.
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.
In March 1995, the Committee reviewed total stockholder return results and
because they were below the threshold for a payout, no awards were granted.
The Committee is scheduled to evaluate the 1993-1995 cycle performance under
the LTIP in late March 1996.
The Corporation from time to time has also granted stock options under the
LTIP. Stock options are granted at the discretion of the Compensation
Committee. The stock options, once vested, allow grantees to buy specified
numbers of shares of 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 Compensation Committee has considered both the number and value of
options granted by companies in the Utility Peer Group with respect to both
the number and value of options awarded by 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. There were no stock option grants issued in 1995.
Restricted Stock Award: In January 1996, the Compensation Committee
authorized a restricted stock grant for the executive officers of the
Corporation. This special discretionary award was made to reward sustained,
long-term corporate performance, encourage executive retention and focus on
the long-term perspective. This grant vests in 25 percent increments in 1997,
1998, 1999 and 2000.
The Compensation 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.
<PAGE> 15
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 in any taxable year to any one of the five highest paid
executive officers 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 a performance-based incentive award must be based entirely
on an objective formula, without any subjective consideration of individual
performance, to be considered performance-based. To preserve current tax
deductibility to the Corporation, the Compensation Committee deferred a
nominal portion of Mr. Brooks' 1995 AIP award.
The Compensation Committee has carefully considered the impact of this law.
At this time, the Compensation Committee believes it is in the Corporation's
and stockholder's best interests to retain the subjective determination of
individual performance under the AIP. Consequently, payments under the AIP,
if any, to the named executive officers may be subject to the limitation
imposed by the Code section 162(m). The LTIP is a shareholder approved plan
which meets the definition of performance-based compensation.
Rationale for CEO Compensation
In 1995, Mr. Brooks' compensation was determined as described above for all
of the Corporation's executive officers.
Mr. Brooks' annual salary increased to $650,000 in November 1995. The
Compensation 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
Compensation Committee and are as follows: Mr. Brooks' role in overseeing the
Corporation's operations and resultant operations and maintenance expense
reductions, his role in pursuing international investments and the proposed
SEEBOARD acquisition, his management of the Corporation's position in the CPL
and WTU rate and related regulatory proceedings, his oversight of and
formulation of strategies for the non-utility businesses and a subjective
review of the level of corporate earnings achieved for 1995. In addition, as
a part of its overall annual review of executive compensation, the
Compensation Committee reviewed Mr. Brooks' salary range and Salary Midpoint
and adjusted his salary based on that information as well as 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 1995 was 40 percent of his Salary Midpoint. In 1995, the Corporation
achieved 125 percent of its corporate objective, based solely on earnings per
share, which together with the Compensation Committee's subjective evaluation
of Mr. Brooks' individual performance, resulted in a $374,354 AIP award, which
was paid in cash in January 1996. 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> 16
To recognize sustained long-term performance, in January 1996 the
Compensation Committee granted Mr. Brooks a special restricted stock award of
16,300 restricted shares. These shares were granted at a share price of
$27.25 and will vest in 25 percent increments over the next four years.
In 1995, the Compensation Committee established Mr. Brooks' target award for
LTIP for the 1995-1997 cycle of $368,114 to be paid in shares of restricted
stock in 1998 if performance measures are met. This target amount was derived
by reference to the number and value of grants to chief executive officers at
comparable companies (not limited to the Utility Peer Group.)
EXECUTIVE COMPENSATION COMMITTEE
Joe H. Foy, Chairman
Molly Shi Boren
Thomas H. Cruikshank
Robert W. Lawless
J.C. Templeton
Lloyd D. Ward
<TABLE>
<PAGE> 17
Cash and Other Forms of Compensation
The following table sets forth the aggregate cash and other compensation for
services rendered for the fiscal years of 1995, 1994 and 1993 paid or awarded
by the Corporation to the Chief Executive Officer and each of the four most
highly compensated executive officers (Named Executive Officers).
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Awards Payouts
Other
Annual Restricted Securities All Other LTIPCompen-
Compen Stock Underlying LTIP Compen-
Name and Salary Bonus sation Award(s) Options/ Payouts sation
Principal Position Year ($) ($)(1) ($)(1) ($)(1)(2) SARs(#) ($) ($)(3)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
E.R. Brooks 1995 628,847 162,739 25,149 -- -- -- 23,956
Chairman, 1994 599,765 -- 20,577 -- 38,579 -- 24,485
President 1993 549,167 57,265 20,579 57,236 -- -- 28,334
and Chief Executive
Officer
T.V. Shockley,III 1995 406,870 105,448 8,441 -- -- -- 21,706
Executive Vice 1994 392,389 -- 12,693 -- 23,702 -- 22,235
President 1993 373,333 35,462 12,606 35,402 -- -- 24,796
Harry D. Mattison 1995 396,823 99,898 5,886 -- -- -- 23,956
Executive Vice 1994 382,388 -- 8,765 -- 23,702 -- 24,485
President 1993 363,333 38,773 9,538 38,750 -- -- 28,333
Ferd. C. Meyer, Jr. 1995 336,547 86,444 12,354 -- -- -- 21,706
Senior Vice 1994 320,637 -- 8,236 -- 18,459 -- 22,235
President and 1993 307,167 30,688 12,346 30,632 -- -- 24,796
General Counsel
Glenn D. Rosilier 1995 326,500 86,444 6,706 -- -- -- 23,019
Senior Vice 1994 311,541 -- 6,714 -- 18,459 -- 22,235
President and 1993 294,450 32,117 11,872 32,084 -- -- 24,796
Chief Financial
Officer
______________________
</TABLE>
1) Amounts in these columns 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,
including the number of underlying shares, shall be made. The awards
reflected in this column all have four-year vesting periods with 20 percent
of the stock vesting on the first, second and third anniversary dates of the
award and 40 percent 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 1995, the
aggregate restricted stock holdings of each of the Named Executive Officers
were:
Restricted Stock Held Market Value at
at December 31, 1995 December 31, 1995
E.R. Brooks 2,572 $71,695
T.V. Shockley, III 1,587 44,238
Harry D. Mattison 1,654 46,105
Ferd. C. Meyer, Jr. 1,398 38,969
Glenn D. Rosilier 1,429 39,833
<PAGE> 18
3) Amounts shown in this column consist of (i) the annual employer matching
payments to CSW's Thrift Plus Plan, (ii) premiums paid per participant for
personal liability insurance and (iii) average amounts of premiums paid per
participant in those years under CSW's memorial gift program. See "OTHER
INFORMATION REGARDING THE BOARD OF DIRECTORS - MEETINGS AND" for a description
of the Corporation's memorial gift program.
Option/SAR Grants
No stock options or stock appreciation rights were granted in 1995. The
stock option plans are administered by the Executive Compensation Committee of
the Board, which has the authority to determine the individuals to whom and
the terms upon which option and SAR grants shall be made.
Option/SAR Exercises and Year-End Value Table
Shown below is information regarding option/SAR exercises during 1995 and
unexercised options/SARs at December 31, 1995 for the Named Executive
Officers.
<TABLE>
Aggregated Option/SAR Exercises in 1995
and Fiscal Year-End Option/SAR Values
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Value at Year-End($) at Year-End ($)
Shares Acquired Realized Exercisable/ Exercisable/
Name on Exercise(#) ($) Unexercisable Unexercisable(1)
<S> <C> <C> <C> <C>
E. R. Brooks - - 41,455/25,720 -/78,755
T. V. Shockley, III - - 26,421/15,810 -/48,410
Harry D. Mattison - - 26,429/15,802 -/48,386
Ferd. C. Meyer, Jr. - - 20,583/12,306 -/37,681
Glenn D. Rosilier - - 20,583/12,306 -/37,681
_______________
Calculated based upon the difference between the closing price of the
Corporation's Common Stock on the New York Stock Exchange on December 31, 1995
($27.875 per share) and the exercise price per share of the outstanding
unexercisable and exercisable options ($24.813 and $29.625, as applicable).
</TABLE>
<PAGE> 19
Long-Term Incentive Plan Awards in 1995
<TABLE>
<CAPTION>
The following table shows information concerning awards made to the Named
Executive Officers during 1995 under the LTIP:
Performance or Estimated Future Payouts under
Number of Other Period Non-Stock Price Based Plans
Shares, Units Until Maturation Threshold Target Maximum
Name Other Rights or Payout ($) ($) ($)
<S> <C> <C> <C> <C> <C>
E.R. Brooks -- 2 years -- 368,114 552,171
T.V. Shockley,III -- 2 years -- 218,308 327,462
Harry D. Mattison -- 2 years -- 218,308 327,462
Ferd. C. Meyer,Jr.-- 2 years -- 171,417 257,126
Glenn D. Rosilier -- 2 years -- 171,417 257,126
</TABLE>
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. If the Named Executive Officer's employment is
terminated during the performance period for any reason other than death,
total and permanent disability or retirement, then the award is canceled. The
LTIP contains a provision accelerating awards upon a change in control of the
Corporation. Except as provided in the next sentence, if a change in control
of the Corporation occurs, all options and SARs become fully exercisable and
all restrictions, terms and conditions applicable to all restricted stock are
deemed lapsed and satisfied and all performance units are deemed to have been
fully earned, as of the date of the change in control. Awards which have been
outstanding for less than six months prior to the date the change in control
occurs are not subject to acceleration upon the occurrence of a change of
control. The LTIP also contains provisions designed to prevent circumvention
of the above acceleration provisions through coerced termination of an
employee prior to a change in control. See "EXECUTIVE COMPENSATION COMMITTEE
REPORT - INCENTIVE PROGRAMS - LONG-TERM INCENTIVE" for a more thorough
discussion of the terms of the LTIP.
Retirement Plan
<TABLE>
<CAPTION>
PENSION PLAN TABLE
Annual Benefits After
Average Compensation Specified Years of Credited Service
15 20 25 30 or more
<S> <C> <C> <C> <C>
$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
</TABLE>
<PAGE> 20
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 percent of "Average
Compensation" times the number of years of credited service (reduced by (i) no
more than 50 percent of a participant's age 62 or later Social Security
benefit and (ii) certain other offset benefits).
"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, 1995, for
the Named Executive Officers are as follows: Mr. Brooks, 30 and 58; Mr.
Shockley, 12 and 50; Mr. Mattison, 30 and 59; Mr. Meyer, 13 and 56; and Mr.
Rosilier, 20 and 48. 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.). This
illustration assumes $100 invested on December 31, 1990 in Central and South
West Corporation Common Stock, the S&P 500 Index and the S&P Electric Cos.
Index. Each mark on the axis displaying the years 1990 through 1995
represents December 31 of that year. Total Return includes reinvestment of
all dividends. The historical stockholder return below above may not be
indicative of future performance.
<PAGE> 21
Comparison of Five Year Cumulative Total Return
Among Central and South West Corporation, the S&P 500 Index
and the S&P Electric Cos. Index
[Presented in tabular format, with graph submitted as a paper exhibit
pursuant to Regulation S-T.]
S&P S&P
YEAR 500 Electric Cos. CSW
1990 $100 $100 $100
1991 130 130 131
1992 140 138 149
1993 154 158 163
1994 156 137 131
1995 215 180 172
CENTRAL AND SOUTH WEST CORPORATION
/s/E.R. BROOKS
E. R. Brooks
Chairman, President and Chief Executive Officer
March 7, 1996
CSW
----------------------------------
CENTRAL AND SOUTH WEST CORPORATION
----------------------------------
1995 FINANCIAL REPORT
APPENDIX A
TABLE OF CONTENTS
Page
Management's Discussion and Analysis of Financial
Condition and Results of Operations 1
Consolidated Statements of Income 21
Consolidated Statements of Retained Earnings 22
Consolidated Balance Sheets 23
Consolidated Statements of Cash Flows 25
Notes to Consolidated Financial Statements 26
Report of Independent Public Accountants 53
Report of Management 54
Glossary of Terms 55
<PAGE> 1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Reference is made to CSW's Consolidated Financial Statements
and related Notes to Consolidated Financial Statements and Selected
Financial Data contained herein. 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 as it is
becoming more competitive. Several years ago, in anticipation of
increasing competition and fundamental changes in the industry,
CSW's management developed the following four-part strategic plan
designed to help position CSW to be competitive in this rapidly
changing environment:
* 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 key initiatives in each of these areas that are important
steps in the implementation of the overall strategy. These
initiatives were marked by the restructuring of CSW's core business
in 1993 and 1994, the recent SEEBOARD acquisition and, although it
was not consummated, the proposed acquisition of El Paso. These
events are discussed below and elsewhere in this report.
CSW believes that, compared to other electric utilities, the
CSW System is well positioned to capitalize on the opportunities and
challenges of an increasingly deregulated and competitive market for
the generation, transmission and distribution of electricity. The
CSW System benefits from economies of scale by virtue of its size
and is a reliable and relatively low-cost provider of electric
power. More specifically, CSW seeks competitive advantages through
its diverse and stable customer base, competitive prices for
electricity, diversified fuel mix, extensive transmission
interconnections, diversity of regulation and financial flexibility.
See RECENT DEVELOPMENTS AND TRENDS.
SEEBOARD ACQUISITION
On November 6, 1995, CSW, indirectly through CSW (UK),
announced its intention to commence the Tender Offer in the United
Kingdom to acquire all of the outstanding share capital of SEEBOARD,
a regional electricity company in the United Kingdom, for an
aggregate adjusted purchase price of approximately $2.12 billion.
SEEBOARD is one of the 12 regional electricity companies which came
into existence as a result of the restructuring and subsequent
privatization of the United Kingdom electric industry in 1990. Its
principal businesses are the distribution and supply of electricity
in southeast England. SEEBOARD is also involved in other
activities, including gas supply, electricity generation, electrical
contracting and retailing.
SEEBOARD serves an affluent suburban and rural area in the
United Kingdom. SEEBOARD is also one of the lowest cost suppliers
among the United Kingdom's regional electricity companies.
Approximately 91% of SEEBOARD's customers are residential. For the
year ended December 31, 1995, SEEBOARD had electricity sales of
approximately 18 billion KWH and, excluding exceptional items, net
earnings of approximately $118 million on revenues of approximately
$1.9 billion (1.00 pound=$1.58). SEEBOARD's results for the year ended
<PAGE> 2
December 31, 1995 are not indicative of the results that will be
experienced by SEEBOARD as a subsidiary of CSW due, in part, to the
debt incurred in connection with the financing of the acquisition,
the purchase accounting adjustments and the accounting adjustments
made to adjust SEEBOARD's results for U.S. Generally Accepted
Accounting Principles. See LIQUIDITY AND CAPITAL RESOURCES and NOTE
13. UNAUDITED PRO FORMA INFORMATION.
On January 10, 1996, CSW's Tender Offer was declared wholly
unconditional. Through February 29, 1996, CSW (UK) had acquired
shares representing, or had received valid acceptances in respect
of, approximately 92.3% of the outstanding share capital of
SEEBOARD. CSW (UK) expects to acquire the remaining 7.7% of the
outstanding share capital of SEEBOARD by the end of the second
quarter of 1996.
TERMINATION OF EL PASO MERGER
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, which filed a voluntary petition
for reorganization under Chapter 11 of the Bankruptcy Code on
January 8, 1992. On June 9, 1995, CSW notified El Paso that CSW
would not extend the termination date under the Merger Agreement as
had been requested by El Paso and, accordingly, that it was
terminating the Merger Agreement. CSW also informed El Paso on June
9, 1995 that it was withdrawing the Modified Plan for the proposed
Merger with El Paso by a contemporaneous filing with the Bankruptcy
Court. On June 9, 1995, following CSW's notification that it was
terminating the Merger and withdrawing the Modified Plan, El Paso
filed suit against CSW. On June 15, 1995, CSW filed suit against El
Paso. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for a
discussion of the legal proceedings surrounding this termination.
RESTRUCTURING
During 1993, CSW announced a restructuring under which the CSW
System restructured the Electric Operating Companies under a new
business unit called CSW Electric and centralized many common
service functions into CSW Services in order to reduce costs and
improve efficiency and productivity. The restructuring included
restaffing positions throughout the CSW System and a reduction in
the workforce by more than 7% system-wide. The restructuring costs
were initially estimated to be $97 million and were expensed in
1993. The actual costs of the restructuring, approximately $86
million, were incurred primarily during 1994. CSW has realized a
number of benefits from the restructuring, including increased
efficiencies and synergies through the elimination of previously
duplicated functions.
RATES AND REGULATORY MATTERS
CPL RATE REVIEW
On November 6, 1995, CPL filed with the Texas Commission a
request to increase its retail base rates by $71 million and reduce
its annual retail fuel factors by $17 million. The net effect of
these proposals would be an increase of $54 million, or 4.6%, in
total annual retail revenues based on a test year ended June 30,
1995. CPL is not seeking interim rate relief, but will implement
bonded rates in May 1996, the earliest date permitted by law. CPL
also is seeking to reconcile $229 million of fuel costs incurred
during the period July 1, 1994 through June 30, 1995. CPL's previous
request to reconcile fuel costs from March 1, 1990 to June 30, 1994
in Docket No. 13650 was consolidated with the current rate review.
If the requested increase and other adjustments in rate structure are
approved, CPL will commit not to increase its base rates prior to
January 1, 2001, subject to certain force majeure events.
<PAGE> 3
CPL is requesting this rate review in large part as a result of
the expiration of the amortization of its Mirror CWIP liability. The
Mirror CWIP liability was amortized to income in declining amounts
over a five-year period from 1991 through 1995 pursuant to rate
settlements reached by CPL in 1990 and 1991. In 1995, Mirror CWIP
provided $41 million in non-cash earnings at CPL. Also included in
the request are proposals by CPL to accelerate recovery of nuclear
and regulatory assets as a way to proactively address certain assets
that could possibly be unrecoverable or stranded in a more
competitive electric utility industry. In a preliminary order issued
December 21, 1995, the Texas Commission expanded the scope of the
rate review to address certain competitive issues facing the electric
utility industry. The competitive issues to be addressed by CPL in a
supplemental filing due April 1, 1996, are: (i) the calculation of
rates on an unbundled or functional basis (i.e., generation,
transmission and distribution); (ii) the current value of CPL's
generating assets as compared to estimates of the market value of
such assets under alternate future industry structures; (iii) the
application of performance based ratemaking; (iv) potential revisions
in the methodology of reconciling and recovering fuel costs; and (v)
the Texas Commission's authority to introduce competition in the
electric utility industry under existing law.
On February 13, 1996, intervening parties filed testimony in the
revenue requirements phase of CPL's base rate case. Among the
parties that filed testimony were the OPUC which recommended a base
rate decrease of approximately $75 million on a total company basis
and the Cities which recommended a base rate reduction of
approximately $52 million on a total company basis.
On February 20, 1996, the Staff filed testimony recommending an
increase in total company base rates of approximately $30 million.
Certain elements of the Staff's proposal are described below.
The Staff recommended a return on common stock equity of 11.35%
compared to the 12.25% return on common equity requested by CPL. The
Staff recommended a disallowance of $16 million in costs billed for
administrative services by CSW Services to CPL on the basis that the
specific benefits to CPL were not clearly identified. Additionally,
the Staff recommended a $7 million reduction in CPL's current annual
depreciation accrual and a $3 million reduction in CPL's requested
accrual for decommissioning STP. A comparison of the Staff's
recommendation for a base rate increase, compared to CPL's claimed
revenue deficiency is provided in the CPL RATE REVIEW COMPARISON
table.
CPL RATE REVIEW COMPARISON
(millions)
CPL revenue deficiency (1) $103
Return on common equity (21)
CSW Services expenses (16)
Depreciation expense (7)
Decommissioning expense (3)
Miscellaneous items (26)
Staff recommended
revenue increase (2) $30
(1) The total company rate increase requested
by CPL was reduced from $103 million to
$78 million ($71 million allocated to the
Texas retail jurisdiction) in accordance
with rate settlements entered into by CPL
in 1990 and 1991.
(2) The Staff recommended that CPL be granted
a $23 million base rate increase and an
annual increase of $7 million in customer
service charges.
The Staff and other parties' recommendations on the fuel portion
of the case are expected to be filed in early March 1996.
After completion of hearings in all phases of the rate case,
which began in late February 1996 and are expected to conclude during
the third quarter of 1996, the ALJs assigned to hear the case will
issue a proposal for decision for consideration by the Texas
Commission. Testimony filed by parties to the rate case, including
the Staff, is not binding on either the ALJs or the Texas Commission.
A final decision on the rate request is not anticipated from the
Texas Commission prior to December 1996.
<PAGE> 4
Management of CSW and CPL cannot predict the ultimate outcome of
CPL's rate case, although management believes that the ultimate
resolution will not have a material adverse effect on CPL's or CSW's
consolidated results of operations or financial condition. However,
if CPL ultimately is unsuccessful in obtaining adequate rate relief,
CPL and CSW could experience a material adverse effect on their
results of operations and financial condition.
CPL 1995 AGREEMENT
On April 5, 1995, CPL reached an agreement in principle with
other parties to pending regulatory proceedings involving base rate,
fuel and prudence issues relating to an outage experienced at STP
during 1993 and 1994. On May 16, 1995, CPL filed the CPL 1995
Agreement with the Texas Commission. Pursuant to the CPL 1995
Agreement, base rate refunds, fuel refunds and the reduction of CPL's
fuel factors were implemented on an interim basis during the summer
of 1995. Under the CPL 1995 Agreement, CPL provided customers a one-
time base rate refund of $50 million. In addition, CPL refunded
approximately $30 million in over-recovered fuel costs through April
1995. Furthermore, CPL did not charge customers for $62.25 million
in replacement power costs and related interest primarily associated
with the 1993-1994 STP outage. The CPL 1995 Agreement did not result
in any ongoing change in base rate levels and provided that there
would be no new rate review requests filed prior to September 28,
1995. CPL also reduced its fuel factors, effective in July 1995, by
approximately $55 million on an annual basis due to projections of
lower fuel costs. Hearings on the CPL 1995 Agreement were held on
July 19, 1995, and the final written Texas Commission order approving
the CPL 1995 Agreement was received on October 4, 1995. See NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS.
WTU STIPULATION AND AGREEMENT
WTU has been the subject of several pending regulatory matters,
including the following: (i) a retail rate proceeding and fuel
reconciliation before the Texas Commission in Docket No. 13369; (ii)
Writ of Error to the Supreme Court of Texas - review of WTU's 1987
Texas rate case in Docket No. 7510; and (iii) the Texas Commission's
proceeding on remand in Docket No. 13949 regarding deferred
accounting treatment for Oklaunion Power Station Unit No. 1
originally authorized in the Texas Commission's order in Docket No.
7289.
On September 22, 1995, WTU, along with other major parties to
the above described matters, filed with the Texas Commission a joint
stipulation and agreement to resolve all of these matters. The WTU
Stipulation and Agreement is a unified package that included: (i) a
retail base rate reduction of approximately $13.5 million annually
starting with WTU's October 1995 revenue month billing cycle; (ii) a
$21 million retail refund which was not attributed to any specific
cause but was inclusive of all claims related to the three above
described litigation and regulatory matters and included the effect
of the rate reduction retroactive to October 1, 1994; (iii) a
reduction of fixed fuel factors by approximately 2%; (iv) various
rate and accounting treatments including a reasonable return on
equity for retail operations of 11.375%; and (v) a retail base rate
freeze until October 1, 1998, subject to certain force majeure
provisions.
On November 9, 1995, the Texas Commission rendered a final order
that implemented the joint stipulation and agreement. The WTU
Stipulation and Agreement is expected to impact WTU's results of
operations for the next several years, reducing annual earnings by
approximately $8 million beginning in 1996. The WTU Stipulation and
Agreement also eliminated several significant risks that have been
the subject of regulatory proceedings relating to deferred plant
costs and rates and will enable WTU's rates to remain at competitive
levels for the foreseeable future. See NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS.
See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for
information regarding other regulatory matters.
<PAGE> 5
TRANSOK
In January 1996, CSW announced it was exploring strategic
alternatives for Transok, CSW's wholly owned intrastate natural gas
gathering, transmission, marketing and processing subsidiary. The
alternatives for Transok, which include a possible sale, are a part
of CSW's continuous strategic review of its business. See NON-
UTILITY INITIATIVES.
SOUTH TEXAS PROJECT
CPL owns 25.2% of STP, a two-unit nuclear power plant which is
located near Bay City, Texas. In addition, HLP, the Project Manager
of STP, owns 30.8%, San Antonio owns 28.0% and Austin owns 16.0% of
STP. STP Unit 1 was placed in service in August 1988 and STP Unit 2
was placed in service in June 1989.
From February 1993 until May 1994, STP experienced an
unscheduled outage resulting from mechanical problems. The outage
resulted in significant rate and regulatory proceedings involving
CPL, including a base rate case and fuel reconciliation proceedings
as previously discussed. Unit 1 restarted on February 25, 1994 and
reached 100% power on April 8, 1994 and Unit 2 resumed operation on
May 30, 1994 and reached 100% power on June 16, 1994. 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. For a discussion of
regulatory matters surrounding the STP outage, see RATES AND
REGULATORY MATTERS above and NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS.
Both STP units were removed from service during 1995 for
scheduled refueling outages. The fueling outages lasted 41 days for
Unit 1 and 26 days for Unit 2. For the year 1995, Unit 1 and Unit 2
operated at net capacity factors of 84.9% and 90.6%, respectively.
For additional information regarding STP and the accounting for
the decommissioning of STP, see NOTE 1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES and NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
The historical capital requirements of the CSW System have been
primarily for the construction of electric utility plant. Based on
projections of growth in peak demand, CSW does not anticipate that
large capital expenditures for the construction of new generating
capacity will be required through the end of this decade.
Accordingly, future capital expenditures for the Electric Operating
Companies, as well as SEEBOARD, are anticipated to be primarily for
existing distribution systems. Primary sources of capital are long-
term debt and preferred stock issued by the Electric Operating
Companies, long-term and short-term debt and common stock issued by
CSW and internally generated funds. CSW Energy and CSW
International typically use various forms of non-recourse project
financing to provide a portion of the capital required for their
respective projects. In addition, CSW, in order to strengthen its
capital structure and support growth from time to time, may issue
additional shares of CSW Common.
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 through acquisitions or
otherwise, may require additional capital from external sources. As
of February 29, 1996, CSW Investments had borrowed approximately
$1.0 billion to fund a portion of the SEEBOARD acquisition purchase
<PAGE> 6
price pursuant to a credit facility for which neither CSW nor CSW
International is subject to recourse. On February 27, 1996, CSW
sold 15,525,000 shares of CSW Common pursuant to the 1996 Stock
Offering and received approximately $398 million in net proceeds,
which it used to repay a portion of the indebtedness incurred by CSW
to finance the acquisition of SEEBOARD.
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. Subject to certain
exceptions, CSW is required to obtain authorization from various
regulators in order to invest in any additional business activities.
See RECENT DEVELOPMENTS AND TRENDS - HOLDING COMPANY ACT.
SEEBOARD ACQUISITION FINANCING
The aggregate adjusted purchase price to be paid for SEEBOARD in
the Tender Offer is approximately $2.12 billion. As of February 29,
1996, CSW had contributed approximately $829 million of the purchase
price to complete the acquisition of SEEBOARD shares in connection
with the Tender Offer. CSW obtained such funds through borrowings
under the $850 million CSW Credit Agreement. Borrowings under the
CSW Credit Agreement are unsecured and mature on November 6, 2000,
subject to prepayment by CSW at any time. On February 28, 1996, CSW
used the $398 million net proceeds from the 1996 Stock Offering to
repay a portion of these borrowings. CSW anticipates that the
remaining amounts owed under the CSW Credit Agreement will be repaid
through a combination of internally generated funds, additional sales
of CSW Common (including sales through CSW's Thrift Plan and
PowerShare) or strategic sales of assets, including possibly Transok.
See TRANSOK, and 1996 STOCK OFFERING, THRIFTPLUS PLAN and
POWERSHARESM.
CSW (UK) has obtained or will obtain the remaining funds
necessary to consummate the Tender Offer, approximately $1.29
billion, from capital contributions or loans to be made to CSW (UK)
by its sole shareholder, CSW Investments, which has arranged the CSW
Investment Credit Facility for that purpose. Neither CSW nor CSW
International, the indirect parent of CSW Investments and CSW (UK),
has guaranteed or is otherwise subject to recourse for amounts
borrowed under the CSW Investments Credit Facility. As of February
29, 1996, CSW Investments had borrowed approximately $1.0 billion
under the CSW Investments Credit Facility. CSW Investments
anticipates that amounts borrowed under the CSW Investments Credit
Facility will be repaid through dividends and other amounts
received, indirectly through CSW (UK), from SEEBOARD.
CAPITAL EXPENDITURES
Total capital expenditures for CSW, including the Electric
Operating Companies, SEEBOARD, Transok and other diversified
operations (but excluding capital that may be required for
acquisitions), are estimated to be approximately $636 million, $671
million and $563 million for the years 1996 through 1998. The
foregoing consists of forward looking information and, accordingly,
actual results may differ materially from such projected information
due to changes in the underlying assumptions. Such assumptions are
based on numerous factors, including factors such as the rate of
load growth, escalation of construction costs, changes in lead times
in manufacturing, inflation, the availability and pricing of
alternatives to construction, nuclear, environmental and other
regulation, delays from regulatory hearings, adequacy of rate relief
and the availability of necessary external capital. In addition,
actual results may differ materially from the projected information
due to changes in the nature and scope of CSW's diversified
<PAGE> 7
operations and the capital requirements that may be required to fund
such operations.
CSW periodically revaluates its capital spending policies and
generally seeks to fund only those construction projects and
investments that management believes will offer satisfactory returns
in the current environment. Consistent with this strategy, the CSW
System is likely to continue to make additional investments in
energy-related and non-utility businesses and will continue to
search for electric utility companies or other electric utility
properties to acquire. CSW expects to fund the majority of its
construction expenditures through internally generated funds.
However, for any significant investment or acquisition, additional
funds from the capital markets, including from the issuance and sale
of additional CSW Common and short-term and long-term borrowings,
may be required.
CONSTRUCTION EXPENDITURES
The Electric Operating Companies maintain a continuing
construction program, the nature and extent of which is based upon
current and estimated future demands upon the system. Planned
construction expenditures for the Electric Operating Companies for
the next three years are primarily to improve and expand distribution
facilities and will be funded primarily through internally generated
funds. These improvements will be required to meet the anticipated
needs of new customers and the growth in the requirements of existing
customers. Construction expenditures for the Electric Operating
Companies were approximately $398 million in 1995, $492 million in
1994 and $445 million in 1993. The estimated total construction
expenditures for the Electric Operating Companies for the years 1996
through 1998 are presented in the CONSTRUCTION EXPENDITURES table.
CONSTRUCTION EXPENDITURES
1996 1997 1998 Total
(millions)
Generation $40 $68 $42 $150
Transmission 38 46 55 139
Distribution 168 172 174 514
Fuel 18 11 15 44
Other 68 59 57 184
$332 $356 $343 $1,031
Information in the foregoing table is a forward looking
statement and, accordingly, actual results may differ materially
from such projected information due to changes in the underlying
assumptions based on numerous factors, including those factors
enumerated above under Capital Expenditures. Changes in those and
other factors could cause each of the electric operating companies
to defer or accelerate construction or to sell or buy more power,
which would affect its cash position, revenues and income to an
extent that cannot now be reliably predicted.
Although CSW does not believe that the Electric Operating
Companies will require substantial additions of generating capacity
through the end of the decade, the CSW System's internal resource
plan presently anticipates that any additional capacity needs will
come from a variety of sources including projected coal- and lignite-
fired generating plants for which the CSW System has invested
approximately $135 million in prior years for plant sites,
engineering studies and lignite reserves. Should future plans
exclude these plants for environmental, economical 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, 1995, the capitalization ratios of CSW were
43% common stock equity, 4% preferred stock and 53% long-term debt.
CSW continues to be committed to maintaining financial flexibility
through maintaining a strong capital structure and favorable
securities ratings in order to access capital markets
opportunistically or when required. The 1995 capitalization ratios
were significantly impacted when compared to 1994 due to the amount
of indebtedness utilized to finance the SEEBOARD acquisition, a
portion of which was repaid on February 28, 1996, with the $398
million net proceeds from the 1996 Stock Offering.
<PAGE> 8
CSW continually monitors the capital markets for opportunities
to lower its cost of capital through refinancing. Since 1991, CSW
has refinanced nearly $2.0 billion of outstanding securities and has
lowered its embedded cost of debt from approximately 9.0% to 7.2% at
the end of 1995. CSW's significant long-term financing activity for
1995 and 1996 through February 29, 1996 is summarized in the
following table.
ISSUED/UTILIZED REACQUIRED
Financing Amount Financial Amount
Instrument (millions) Rate Maturity Instrument (millions) Rate Maturity
CPL FMB(1) $200.0 6 5/8% 2005 FMB $139.2 9 3/8% 2019
PCRB 100.6 6.1% 2028 PCRB 68.9 10 1/8% 2014
PCRB (2) 31.8 9 3/4% 2015
PCRB 40.9 floating 2015 PCRB (3) 8.4 7 1/8% 2004
PCRB (3) 34.2 6.0% 2007
PSO Medium Term 2000 -
Notes (4) 30.0 various 2001
WTU FMB (5) 40.0 7 1/2% 2000
FMB (6) 80.0 6 3/8% 2005 FMB 53.3 9 1/4% 2019
CSW Credit
Facility 431.0 floating 2000
(7)
CSW
Invest- Credit
ments Facility 1,024.7 floating 2001
(8)
(1) The balance of proceeds not used to redeem higher cost FMBs
were used to repay a portion of CPL's short-term borrowings, to
provide working capital and for other general corporate purposes.
(2) Collateralized PCRB (secured by a FMB).
(3) The additional funds required to redeem these issues were
provided through internal funds and short-term borrowings.
(4) Proceeds were used to repay a portion of PSO's short-term
borrowings and to reimburse PSO's treasury for the scheduled
maturity of $25 million FMBs on March 1, 1996. The Medium Term
Notes are a series of PSO's Senior Notes. The rates on the Medium
Term Notes range from 5.89% to 6.03%.
(5) Proceeds were used to repay a portion of WTU's short-term
borrowings and to reimburse WTU's treasury for the reacquisition
of FMBs.
(6) The balance of proceeds not used to redeem higher cost FMBs
were used to repay a portion of WTU's short-term borrowings.
(7) Represents the amount outstanding of the CSW Credit Agreement
on February 29, 1996. Proceeds were used to purchase capital
shares of SEEBOARD. Approximately $731 million was outstanding
under the CSW Credit Agreement and is included in Long-Term Debt
on the balance sheet at December 31, 1995. See SEEBOARD
Acquisition Financing above. On February 28, 1996, CSW repaid
$398 million of borrowings under the CSW Credit Agreement from the
net proceeds of the 1996 Stock Offering. See 1996 Stock Offering,
below.
(8) Represents the amount outstanding of the CSW Investments
Credit Facility on February 29, 1996. Proceeds were used to
purchase additional capital shares of SEEBOARD in 1996. See
SEEBOARD Acquisition Financing above.
1996 STOCK OFFERING
On February 27, 1996, CSW sold 15,525,000 shares of CSW Common
in the 1996 Stock Offering and received net proceeds of
approximately $398 million. These proceeds were used to repay a
portion of the indebtedness incurred by CSW under the CSW Credit
Agreement to fund the acquisition of SEEBOARD.
SHELF REGISTRATION STATEMENTS
CSW and the Electric Operating Companies may issue additional
securities subject to market conditions and other factors. CPL and
PSO have filed shelf registration statements with the SEC for the
issuance of securities from time to time based upon market
conditions. CPL has shelf registration statements on file for up to
$60 million of FMBs and up to $75 million of preferred stock. PSO
has a shelf registration statement on file for the sale of up to $75
million of Senior Notes, $45 million of which was remaining as of
February 29, 1996.
<PAGE> 9
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 and other interim capital needs.
The CSW System has established a money pool to coordinate short-term
borrowings by the Electric Operating Companies, Transok and CSW
Services, which is funded through CSW's issuance of commercial
paper. At December 31, 1995, the CSW System had two credit
facilities in place aggregating $1.2 billion to back up the CSW
commercial paper program.
During 1995, the maximum amount of consolidated short-term debt
outstanding for the CSW System was $1.65 billion in March 1995,
which represented 22% of the total capitalization at December 31,
1995. The average amount of short-term debt during 1995 was $1.47
billion, of which $667 million was attributable to CSW Credit. The
weighted average cost of short-term debt was 6.64% in 1995.
POWERSHARE
CSW's PowerShare plan is available to all CSW shareholders,
employees, eligible retirees, utility customers and other residents
of the four states where the Electric Operating Companies operate.
Under this dividend reinvestment and stock purchase plan,
participants are able to make optional cash payments and reinvest all
or any portion of their dividends in additional CSW Common.
In February 1996, CSW filed a registration statement with the
SEC relating (i) to the issue and sale of an additional five million
shares of CSW Common through the PowerShare plan and (ii) proposed
amendments to the plan that would, among other things, make the plan
available to the residents of all fifty states and the District of
Columbia. During 1995 and 1994, CSW raised approximately $57 million
and $50 million, respectively, in new equity through PowerShare. CSW
expects to use the proceeds from sales of CSW Common made pursuant to
PowerShare to reduce short-term and long-term debt and for other
general corporate purposes.
THRIFTPLUS PLAN
CSW's ThriftPlus plan permits eligible employees to contribute
up to 12% of their annual compensation to the plan, subject to
certain exceptions. Funds contributed to the plan are invested by
the plan trustee, at the employee's direction, in any of five
investment options, including an option consisting of CSW Common.
Historically, funds allocated to the CSW Common option under the plan
have been used by the trustee to purchase shares of CSW Common in the
open market. In order to provide the plan with the flexibility to
acquire shares of CSW Common directly from CSW rather than on the
open market, CSW filed a registration statement with the SEC during
1995 with respect to the issue and sale of up to an additional five
million shares of CSW Common. In the event the ThriftPlus plan
trustee elects, on behalf of the plan, to purchase CSW Common
directly from CSW, CSW expects to use the proceeds from such sales to
reduce short-term and long-term debt and for other general corporate
purposes.
INTERNALLY GENERATED FUNDS
Internally generated funds consist of cash flows from operating
activities less common and preferred stock dividends. The Electric
Operating Companies utilize short-term debt to meet fluctuations in
working capital requirements due to the seasonal nature of energy
sales. Information concerning internally generated funds is in the
following table.
1995 1994 1993
($ in millions)
Internally generated funds $451 $424 $369
Capital expenditures provided
by internally generated funds (1) 37% 63% 58%
(1) Capital expenditures include construction and
acquisition expenditures, equity investments in
CSW Energy projects and amounts invested by CSW to
finance the SEEBOARD acquisition.
<PAGE> 10
CSW ENERGY
At December 31, 1995, CSW had loaned $66 million to CSW Energy
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. During 1995, CSW
Energy secured such financing for its Ft. Lupton and Mulberry
projects and reimbursed CSW for the interim loans. In addition to
the amounts already expended for the development of projects, CSW
Energy has, subject to certain limitations in the case of EWG and
foreign utility investments, authority from the SEC to expend up to
$250 million on future projects. The following table summarizes
CSW's investments and commitments in CSW Energy projects at December
31, 1995.
Letters of Credit
Equity and Guarantees Loans
(millions)
Brush $15.3 $-- $--
Orange Cogeneration 53.2 2.3 --
Ft. Lupton 44.0 58.9 36.5
Mulberry 23.6 32.3 --
Phillips Sweeny -- 3.0 4.2
Newgulf 10.5 -- --
Various developmental projects 8.1 7.1 9.5
CSW Energy through CSW Development-I, Inc., a wholly owned
subsidiary of CSW Energy, entered into a fixed price contract of $14
million to construct the Mulberry thermal host. At November 2, 1995,
the thermal host was substantially completed for an aggregate cost of
approximately $43 million and CSW Energy reached an agreement and
settlement with its business partner regarding the $29 million cost
overruns for the host facility. These negotiations also resulted in
a change in the business partner for the Mulberry and Orange
Cogeneration projects. Under the terms of the settlement, the newly
admitted partner paid to CSW Energy 50%, or $53.2 million, of the
outstanding obligations of Orange Cogeneration and assumed 50%, or
$2.3 million, of the letters of credit and guarantees of the project.
Concurrently, CSW Energy contributed as partners capital the
remaining debt of $53.2 million to Orange Cogeneration. On the same
date, CSW Energy obtained its term financing for the Mulberry
project.
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, 1995 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. Additionally, the Electric
Operating Companies will continue to compete with suppliers of
alternative forms of energy, such as natural gas, fuel oil and coal,
some of which may be cheaper than electricity. The Electric
Operating Companies believe that their prices for electricity and
<PAGE> 11
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 producers 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
the utility to recover from the FERC applicant all of the costs
incurred in connection with the transmission services and any
enlargement of the transmission system and associated services.
Wholesale energy markets, including the market for wholesale
electric power, have been extremely competitive since the enactment
of the Energy Policy Act. The Electric Operating Companies must
compete in the wholesale energy markets with other public utilities,
cogenerators, qualifying facilities, EWGs and others for sales of
electric power. While CSW believes that the Energy 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.
On March 29, 1995, consistent with the direction of the Energy
Policy Act, the FERC announced in a NOPR a requirement that each
public utility that owns and controls transmission facilities in
interstate commerce must unbundle its services and file open access
transmission tariffs under which such utility will offer comparable
open access transmission services to its transmission customers. In
addition, the FERC revised its proposed mechanisms by which utilities
will be permitted to recover stranded investment costs expected to be
brought about by the proposed changes. On August 7, 1995, CSW filed
comments on the proposed approach in the NOPR with the FERC.
Although CSW supports the concept of comparable open access for the
nation's transmission service, CSW believes that certain changes must
be made in the FERC's proposed approach of implementing the open
transmission system. First, with respect to the issue of stranded
investments, the FERC proposed that customers who left the utility
company pay for a portion, but not all, of the costs incurred by the
owner of existing facilities that are not utilized as a result of the
loss of such customers. CSW raised concerns about the FERC's proposed
methodology for addressing stranded investment because it did not, in
CSW's view, provide for the fair recovery of the full amount
previously invested. Second, CSW proposed that the FERC adopt a
"power flow pricing" approach whereby all electric systems that incur
costs because of a transmission transaction are compensated, as
opposed to the traditional "postage stamp" method whereby only the
companies that are directly involved in the actual purchase and sale
of the electricity are compensated or charged.
On February 9, 1996, the Electric Operating Companies filed at
the FERC complete sets of open access transmission tariffs for both
the companies that are members of the Southwest Power Pool as well as
the companies that are members of ERCOT. These tariffs substantially
reflect the pro forma tariffs attached to the FERC's March 29, 1995
NOPR. Open access and market pricing should increase marketing
opportunities for the Electric Operating Companies, but may also
expose them to the risk of loss of load or reduced revenues due to
competition with alternate suppliers.
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 customers, is evolving
gradually. Many states throughout the country currently have
preliminary legislation introduced to investigate the issue. For
example, in Oklahoma (portions of which are served by PSO), a
<PAGE> 12
legislative task force is examining state laws affecting retail
electric companies. Issues being addressed include retail wheeling,
territorial boundaries, taxes and condemnations.
CSW believes that retail competition would harm the best
interests of CSW's and the Electric Operating Companies' customers
and security holders unless CSW receives fair recovery of the full
amounts previously invested to finance power plants. These
investments, which were reasonably incurred, were made by the CSW
System to meet their obligation to serve the public interest,
necessity and convenience. This obligation has existed for nearly a
century and remains in force under current law. CSW intends to
strongly oppose attempts to impose retail competition without just
compensation for the risks and investments CSW undertook to serve
the public's demand for electricity.
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.
PURA
Amendments to PURA, the legal foundation of electric regulation
in Texas, became effective on September 1, 1995. Among other things,
the amendments deregulate the wholesale bulk power market in ERCOT,
permit pricing flexibility for utilities facing competitive
challenges, provide for a market-driven integrated resource planning
process and mandate comparable open access transmission service.
PURA also requires that the Texas Commission adopt a rule on
comparable open transmission access by March 1, 1996. In
conjunction with this rulemaking proceeding (Project No. 14045),
Texas Commission Chairman Pat Wood issued a proposal on September 6,
1995, for the purpose of maximizing competition in the ERCOT
wholesale bulk power market. The proposal calls for the functional
unbundling of integrated utilities where distribution entities could
purchase their power requirements from any generator or set of
generators in ERCOT. Those generators which are currently regulated
would be deregulated after provisions are in place to recover
stranded costs. The proposal has been assigned to a separate
proceeding (Project No. 15000). CSW expects this project to provide
the vehicle for the Texas Commission and other interested parties to
develop positions on industry restructuring before the Texas
Legislature convenes in January 1997. A schedule has been developed
for Project No. 15000 that includes a series of workshops and
technical conferences during the first half of 1996. The schedule
contemplates that the Texas Commission will develop legislative
recommendations on restructuring and stranded costs during the
second half of 1996.
On February 7, 1996, the Texas Commission adopted a rule
governing transmission access and pricing (Project No. 14045). The
pricing method tentatively adopted by the Texas Commission is a
hybrid combination of an ERCOT-wide postage stamp rate covering 70%
of total ERCOT transmission costs and a distance-sensitive component
referred to as a vector-absolute megawatt mile which recovers the
remaining 30% of ERCOT transmission costs. Although the open access
tariffs filed with the FERC on February 9, 1996 do not reflect
Project No. 14045 pricing, CSW anticipates filing tariffs with the
FERC that do conform to the Texas Commission's rule in the second
quarter of 1996.
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 additional information regarding SFAS No. 71 reference is made
to NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
<PAGE> 13
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. During 1995, a bill was introduced in the
United States Senate which, if adopted, would repeal the Holding
Company Act and replace it with a new, less restrictive, holding
company law administered by the FERC. CSW cannot predict if or when
Holding Company Act repeal legislation will be enacted or what form
such legislation will take if adopted. However, CSW intends to
continue its efforts to repeal or modify the Holding Company Act in
order to provide the flexibility to compete within the changing
environment.
CONSOLIDATED TAXES
Prior to 1992, the Texas Commission 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. However, in 1992 the
Texas Commission changed its method of calculating the federal income
tax component of rates to the "actual tax approach." This approach
reduces rates by the tax benefits of deductions which are not
considered for or included in setting rates for the utility.
On April 13, 1995, the Supreme Court issued a decision which
holds that the Texas Commission is not required to use the tax
benefits associated with the losses of unregulated affiliates to
reduce tax expense in cost of service. The Supreme Court also ruled
that the Texas Commission cannot include the income tax deductions
taken by the utility for disallowed expenses when determining the
utility's federal income tax liability. This decision will allow
CSW, and indirectly its shareholders, to retain the tax benefits
associated with disallowed expenditures.
ENVIRONMENTAL MATTERS
The operations of the CSW System, like those of other utility
systems, generally involve the use and disposal of substances
subject to environmental laws. CERCLA, the federal "Superfund" law,
addresses the cleanup of sites contaminated by hazardous substances.
Superfund requires that PRPs fund remedial actions regardless of
fault or the legality of past disposal activities. PRPs include
owners and operators of contaminated sites and transporters and/or
generators of hazardous substances. Many states have similar laws.
Legally, any one PRP can be held responsible for the entire cost of
a cleanup. Usually, however, cleanup costs are allocated among
PRPs.
The 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 or any
Electric Operating Company's results of operations or financial
condition. Although the reasons for this expectation differ from
site to site, factors that are the basis for the expectation for
specific sites include the volume and/or type of waste allegedly
contributed by the Electric Operating Company, the estimated amount
of costs allocated to the Electric Operating Company and the
participation of other parties. See NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS, for additional discussion of environmental
matters.
<PAGE> 14
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 and energy-
related business. While CSW believes that such initiatives are
necessary to maintain its competitiveness and to supplement its
growth in the future, the Holding Company Act may impede or delay
its ability to successfully pursue such initiatives. See RECENT
DEVELOPMENTS AND TRENDS.
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. During 1995, a new
processing plant was completed that increased Transok's processing
capacity by approximately 27%. In addition, during the second
quarter of 1996, two new natural gas compression units are scheduled
to be completed. These units will increase Transok's west to east
transport capacity by approximately 22%.
In January 1996, CSW announced it was exploring strategic
alternatives for its investment in Transok. The alternatives, which
include a possible sale, are a part of CSW's ongoing strategic
review of its business.
CSW ENERGY
CSW Energy is authorized to develop various independent power
and cogeneration facilities and to own and operate such non-utility
projects, subject to regulatory approval. The table below summarizes
CSW Energy's participation in projects as of the end of 1995.
Capacity Commercial
(in MW) Operation Ownership Thermal
Project Location Total Sold Date Interest Host Host Utility
Brush II Brush, CO 68 68 January 1994 47% Greenhouse Public Service
Company of
Colorado
Ft. Lupton Ft. Lupton, 272 272 June 1994 50% Greenhouse Public Service
CO Company of
Colorado
Mulberry Polk County, 120 110 August 1994 50% Distilled Florida Power
FL water/ethanol Corporation
plant
Orange Polk County, 103 97 June 1995 50% Orange juice Florida Power
FL processor Corporation
Tampa
Electric
Company
Phillips Sweeny, TX 300 90* Mid 1998 50% Refinery Undetermined*
Sweeny
Newgulf Wharton, TX 85 -- Mid 1996 100% IPP Undetermined
*The Phillips Sweeny project has the unexercised option to sell 90 MW
of capacity to Phillips Petroleum Company.
In addition to these projects, CSW Energy has another six
projects totaling approximately 2,000 MW in various stages of
development, mostly in affiliation with other developers.
CSW INTERNATIONAL
CSW International was formed in 1994 to engage in international
activities, including developing, acquiring, financing and owning
EWGs and foreign utility companies. CSW International's most
significant activity to date is the acquisition, indirectly through
CSW (UK), of the outstanding share capital of SEEBOARD pursuant to
the Tender Offer. See SEEBOARD ACQUISITION above. CSW International
also intends to continue its efforts in Mexico, with a stated goal
of participating in providing Mexico's future electricity needs.
<PAGE> 15
Although the recent devaluation of the Mexican peso has slowed
previously projected power demand, CSW International continues to
believe that the geographic location of the CSW System offers
opportunities to provide bulk power to Mexico. CSW International
continues to seek to expand into other countries in Latin America,
Europe and Asia that meet its investment criteria.
CSW COMMUNICATIONS
CSW Communications was formed in 1994 to provide communication
services to the Electric Operating Companies and non-affiliates.
One important goal of CSW Communications is to enhance services to
CSW System customers through fiber optics and other
telecommunications technologies. In Laredo, Texas, a project has
been undertaken to install fiber optic lines and coaxial cable to
CPL customers. The project, a network of over 3,000 homes with
approximately 700 customers currently participating, will
demonstrate the energy efficiency and cost savings that result from
giving customers greater choice and control over their electric
service. CSW Communications offers similar utility management
services to other parties, including affiliates as well as non-
affiliates. In the future, CSW Communications may, subject to any
required regulatory approvals, seek to lease or otherwise use the
reserve capacity for other services including telephone service,
cable television and home security systems. CSW Communications
presently owns and manages a 185 mile fiber-optic line connecting
the south Texas cities of Corpus Christi, Harlingen and McAllen, and
anticipates the construction of another fiber-optic line, connecting
Shreveport, Louisiana and Longview, Texas, to begin in mid-1996.
CSW Communications filed for "exempt telecommunications
company" status with the FCC on February 8, 1996, subsequent to
legislation that introduced competition to telephone and other
communications industries that operated within regulated
environments. The filing with the FCC automatically qualifies CSW
Communications as an exempt telecommunications company, pending the
FCC's review of the application (which is required to be completed
within 60 days). CSW believes that CSW Communications' exempt
telecommunications company status will enable it to compete more
effectively with other telecommunications companies.
ENERSHOPSM
In September 1995, EnerShop was formed to provide energy
services to customers throughout the Southwest. EnerShop offers
services that help reduce customers' operating costs through
increased energy efficiencies and improved equipment operations.
EnerShop utilizes the skills of local trade allies in offering
services that include energy and facility analysis, project
management, engineering design and equipment procurement and
construction, third party financing and equipment leasing, savings
and performance guarantees and performance monitoring. EnerShop
recently secured its first major contract and has bids outstanding
for several additional projects in 1996.
NEW ACCOUNTING STANDARDS
SFAS NO. 121
In March 1995, the FASB issued SFAS No. 121 to be effective for
financial statements for fiscal years beginning after December 15,
1995. The statement establishes a two-fold test for identification
and quantification of an impaired asset. The first test in
determining an impairment is to compare the sum of expected future
cash flows (undiscounted and without interest charges) related to an
asset to the carrying amount of the asset. If the sum of expected
cash flows is not sufficient to recover the carrying value of the
asset, then an impairment is recognized. Once an impairment is
identified, the second part of the test is applied to quantify the
amount of the impairment. The statement lists several alternative
methods of establishing fair market value and quantifying the
impairment. Cash flows used to measure possible impairment of an
asset are grouped at the lowest level for which there are
identifiable cash flows that are largely independent of the cash
flows of other groups of assets. For the Electric Operating
Companies, the lowest independently identifiable cash flow level
used for this analysis is jurisdictional rates charged to customers.
<PAGE> 16
CSW will adopt SFAS No. 121 in the first quarter of 1996.
Under the current regulatory environment, CSW does not expect the
adoption of SFAS No. 121 to have a significant impact on CSW's
consolidated results of operations or financial condition. However,
future developments in the electric industry and utility regulation
could jeopardize the full recovery of the carrying cost of certain
investments. Consequently, CSW is monitoring the changing
conditions facing the electric utility industry.
SFAS NO. 123
SFAS No. 123 was issued in October 1995 with an effective date
for transactions entered into after December 15, 1995. This
statement requires the use of an option pricing model to calculate
the value of stock-based compensation transactions where such value
cannot otherwise be determined, but then allows for two alternative
methods of reporting the transactions. One method recognizes this
value as a cost of compensation and as an expense for the current
period. The alternative method permits footnote disclosure of the
compensation cost, without charging the amount against current
earnings.
As provided by the provisions of SFAS No. 123, CSW will
continue to apply the recognition and measurement provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" and adopt the disclosure requirements of SFAS
No. 123 in 1996. Accordingly, the adoption of SFAS No. 123 will not
impact CSW's consolidated results of operations or financial
condition.
RESULTS OF OPERATIONS
OVERVIEW OF RESULTS
CSW's earnings increased to $402 million or $2.10 per share in
1995 as compared to $394 million or $2.08 per share in 1994 and $308
million or $1.63 per share in 1993. The return on average common
stock equity was 13.1% in 1995 compared to 13.4% in 1994 and 10.6%
in 1993. Electric operations contributed approximately 105% of
total earnings in 1995 and approximately 100% of total earnings in
1994 and 1993. In 1995, corporate expenses, including $42 million
of expenses related to the termination of the El Paso Merger, were
offset in part by earnings at Transok, CSW Energy, SEEBOARD and CSW
Credit, totaling $51 million in the aggregate.
Earnings increased in 1995 compared to 1994 due primarily to
higher electric revenues from customer growth and increased usage
and lower operation and maintenance expenses. In addition, earnings
from SEEBOARD contributed to the increase. Partially offsetting
these factors were higher depreciation and interest and lower
earnings from Mirror CWIP. Significant one time items impacting
1995 earnings are set forth in the SIGNIFICANT ITEMS table.
SIGNIFICANT ITEMS
(millions, after-tax)
1995
CPL 1995 Agreement $(16)
Merger termination (27)
Tax adjustments 30
1993
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)
Tax adjustments (18)
<PAGE> 17
Earnings increased in 1994 compared to 1993 due primarily to
higher KWH sales and natural gas margins and decreased costs
associated with the end of the outage at STP. In addition, CSW
Energy, which had three projects become operational during 1994,
contributed $2 million to earnings in 1994. These items were
partially offset by increased interest and depreciation and
amortization expense. In addition, earnings in 1993 were
significantly affected by several items set forth in the SIGNIFICANT
ITEMS table.
OPERATING REVENUES
Revenues increased $112 million or 3% in 1995, after a decrease
of $64 million or 2% in 1994. The variances in the different
revenue categories are shown in the REVENUE VARIANCE table.
REVENUE VARIANCE
Increase (decrease) from prior year
1995 1994
(millions)
U.S. Electric
CPL 1995 Agreement $(112) $--
WTU Stipulation and Agreement (22) --
Base rates (8) 7
Fuel costs (106) (49)
KWH sales 62 61
Other electric and diversified 16 2
Natural gas 74 (85)
SEEBOARD 208 --
$112 $(64)
ELECTRIC REVENUES
Electric revenues decreased $182 million or 6% in 1995 compared
to 1994. The acquisition of SEEBOARD contributed $208 million in
revenues for the month of December 1995 and total U.S. Electric KWH
sales increased approximately 5%, with increases in sales among all
customer classes. During 1995, the average number of customers
increased approximately 2%. In addition to customer growth, there
was increased usage during 1995 as compared to 1994. However,
offsetting the increases in revenue due to SEEBOARD and increased
KWH sales were customer refunds made by CPL and WTU resulting from
the resolution of rate proceedings during 1995 and lower fuel costs.
Electric revenues increased $10 million in 1994 as compared to
1993 due primarily to increased KWH sales offset in part by
decreased fuel revenues. Base rates increased in 1994 from 1993 due
to a rate increase implemented by PSO in February 1994, offset in
part by a 3.2% interim rate reduction implemented by WTU during the
fourth quarter of 1994.
The percentage changes in U.S. Utility KWH sales from the
previous year for 1995 and 1994 are presented in the KWH SALES
VARIANCE table. KWH sales to retail customers increased in 1995 as
a result of increased customer usage and customer growth. KWH sales
to retail customers in 1994 increased as a result of more favorable
weather and increased residential customers. 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.
<PAGE> 18
The continued increases in industrial sales over the last two
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 1995
because STP was operational for the full year as compared to most of
1994, thereby eliminating the need for plants in the CSW System to
produce power to replace the power normally produced at STP. In
addition, during 1995, WTU began supplying a major new wholesale
customer. The Electric Operating Companies have maintained
relatively low 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.
U.S. ELECTRIC KWH SALES VARIANCE
(Increase from prior year)
1995 1994
Residential 3.1% 2.9%
Commercial 2.2 3.8
Industrial 2.4 3.6
Sales for resale 18.7 21.9
Total sales 4.5 5.5
NATURAL GAS REVENUES
Revenues from natural gas increased 14% to $592 million in 1995
from $518 million in 1994 due primarily to an increase in natural
gas sales volumes which was partially offset by a reduction in sales
prices. Also contributing to the increase in 1995 natural gas
revenues were increased natural gas liquids sales volumes and
prices. The 14% decrease in revenues in 1994 from $603 million in
1993 was due to a decrease in natural gas prices which was partially
offset by an increase in volumes.
OTHER DIVERSIFIED REVENUES
Other diversified revenues increased 30% to $52 million in 1995
as compared to $40 million in 1994 due primarily to two CSW Energy
projects that went into operation during the second and third
quarter of 1994 and increased factoring revenues at CSW Credit.
Other diversified revenues increased 38% in 1994 from $29 million in
1993 due to the reclassification of CSW Energy's operating revenues
as discussed below under Other Income and Deductions.
REVENUES FROM SEEBOARD
CSW's operating revenues includes $208 million of revenues from
SEEBOARD for the month of December 1995. During the month of
December 1995, pursuant to its effective control of SEEBOARD through
its 76.45% ownership interest, CSW began full consolidation
accounting for SEEBOARD in its consolidated financial statements.
OPERATING EXPENSES
FUEL AND PURCHASED POWER EXPENSE
During 1995, the Electric Operating Companies generated
approximately 98% of their electric energy requirements. During
1994 and 1993, they generated 95% and 92%, respectively. Total fuel
and purchased power expenses increased $58 million or 5% from 1994,
due primarily to SEEBOARD's December 1995 power purchases. Without
including such purchases, total fuel and purchased power decreased
$116 million during 1995 due mainly to a decrease in natural gas
prices and an increased usage of lower cost nuclear fuel. The
average unit cost of fuel was $1.58 per MMbtu during 1995, compared
to $1.82 in 1994 and $2.11 in 1993. Purchased power decreased $8
million during 1995 due primarily to increased generation from STP
which replaced power that had been purchased during the first six
<PAGE> 19
months of 1994 when STP was out of service. During 1995 STP was
operational for the entire year allowing the use of lower cost
nuclear fuel. The decrease in fuel and purchased power expense in
1994 compared to 1993 was attributable to a decrease in fossil fuel
costs and increased usage of lower cost nuclear fuel.
GAS PURCHASED FOR RESALE/GAS EXTRACTION AND MARKETING
Gas purchased for resale increased 20% in 1995 from 1994, while
it decreased 27% in 1994 from 1993. The increase in 1995 was caused
by higher sales volumes, which more than offset the relatively low
average cost of gas which prevailed during 1995 compared to 1994.
Lower gas prices caused the decrease in 1994, including a
significant reduction in prices attributable to sales made on
natural gas drawn from storage. Gas extraction and marketing
expenses increased 11% in 1995 from 1994 and 14% in 1994 from 1993.
The 1995 and 1994 increases were both due to increases in natural
gas liquids purchased for resale.
OTHER OPERATING AND MAINTENANCE EXPENSES AND TAXES
Other operating and maintenance expenses in 1995 increased $18
million or 2% from 1994 due primarily to the establishment of a $42
million reserve for expenses incurred in association with the
terminated El Paso Merger and the inclusion of SEEBOARD's December
1995 operating and maintenance expenses, offset in part by the
benefits that were realized from a cost-reduction initiative whereby
CSW System employees received a portion of the operating and
maintenance expense savings. In 1994, the 2% decrease in other
operating and maintenance expenses from 1993 was due primarily to
the absence of $29 million in maintenance expenses that were
incurred during the 1993 STP outages, expenses associated with the
1993 adoption of SFAS No. 106 and reserves taken in 1993 on fuel and
other properties, offset in part by the reclassification of CSW
Energy's operating costs as discussed below under OTHER INCOME AND
DEDUCTIONS.
Income taxes were lower in 1995 than 1994 due to prior year
adjustments, the reserve established in connection with the
termination of the El Paso Merger as well as both the tax
adjustments and the tax effects of the CPL 1995 Agreement and the
WTU Stipulation and Agreement. In 1994, income taxes were higher
than 1993 due to higher pre-tax income. Taxes other than income
decreased in 1995 due to prior year adjustments but remained
approximately the same in 1994 as in 1993.
RESTRUCTURING CHARGES
Restructuring charges reflect the original accrual of $97
million in 1993, which was subsequently reduced by $9 million in
1994 and $2 million in 1995. In addition, during 1995, $34 million
in regulatory assets were capitalized in accordance with the CPL
1995 Agreement and the WTU Stipulation and Agreement for costs
associated with the restructuring that had previously been charged
to expense.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased in 1995 and
1994 when compared to the prior year due primarily to increases in
depreciable plant.
OTHER ITEMS
OTHER INCOME AND DEDUCTIONS
Other income and deductions decreased $12 million or 11% in
1995 compared to 1994, as a result of decreased Mirror CWIP
liability amortization offset in part by approximately $11 million
in previously deferred factoring income recognized as income by CPL
beginning in 1995 pursuant to the CPL 1995 Agreement, increased
interest income of $4 million and a $3 million gain on PSO's sale of
non-utility fiber optic telecommunication property.
Other income and deductions increased $18 million or 19% in
1994 compared to 1993 as a result of the reclassification of CSW
Energy'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.
<PAGE> 20
Prior to 1994, CSW Energy was in the developmental stage of its
business and, as a result, its operating activities were classified
in CSW's Other Income and Deductions. However, in conjunction with
the completion of three projects in 1994, CSW Energy's revenues and
expenses were classified as operating activities in CSW's Operating
Revenues and Other Operating Expenses. The net amount of these
components had negative earnings impacts classified in Other Income
and Deductions in 1993.
INTEREST CHARGES
Interest expense on long-term debt increased 5% in 1995 from
1994 due to higher levels of debt outstanding, whereas interest
expense on long-term debt in 1994 was comparable to 1993. CSW's
embedded cost of long-term debt decreased to 7.2% in 1995 from 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.
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 $46 million.
INFLATION
Annual inflation rates, as measured by the national Consumer
Price Index, have averaged approximately 2.8% during the three years
ended December 31, 1995. Management believes that inflation, at
this level, does not materially affect CSW's consolidated results of
operations or financial position. However, under existing
regulatory practice, only the historical cost of plant is
recoverable from customers. As a result, cash flows designed to
provide recovery of historical plant costs may not be adequate to
replace plant in future years.
<PAGE> 21
CSW
Consolidated Statements of Income
Central and South West Corporation
For the Years Ended December 31,
1995 1994 1993
($ in millions, except share amounts)
Operating Revenues $ 3,735 $ 3,623 $ 3,687
Operating Expenses and Taxes
Fuel and purchased power 1,184 1,126 1,181
Gas purchased for resale 372 311 424
Gas extraction and marketing 109 98 86
Other operating 629 596 593
Restructuring charges (36) (9) 97
Maintenance 161 176 197
Depreciation and amortization 384 356 330
Taxes, other than income 171 186 191
Income taxes 105 189 131
3,079 3,029 3,230
Operating Income 656 594 457
Other Income and Deductions
Mirror CWIP liability amortization 41 68 76
Other 58 43 17
99 111 93
Income Before Interest Charges 755 705 550
Interest Charges
Interest on long-term debt 284 218 219
Interest on short-term debt and other 50 75 50
334 293 269
Income Before Cumulative Effect of
Changes in Accounting Principles 421 412 281
Cumulative Effect of Changes in Accounting
Principles -- -- 46
Net Income 421 412 327
Preferred stock dividends 19 18 19
Net Income for Common Stock $ 402 $ 394 $ 308
Average Common Shares Outstanding 191.7 189.3 188.4
Earnings per Share of Common Stock before
Cumulative Effect of Changes in
Accounting Principles $ 2.10 $ 2.08 $ 1.39
Cumulative Effect of Changes in Accounting
Principles -- -- 0.24
Earnings per Share of Common Stock $ 2.10 $ 2.08 $ 1.63
Dividends Paid per Share of Common Stock $ 1.72 $ 1.70 $ 1.62
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE> 22
CSW
Consolidated Statements of Retained Earnings
Central and South West Corporation
For the Years Ended December 31,
1995 1994 1993
(millions)
Retained Earnings at Beginning of Year $ 1,824 $ 1,753 $ 1,751
Net income for common stock 402 394 308
Deduct: Common stock dividends 329 322 306
Deduct: Reacquired preferred stock 4 1 --
Retained Earnings at End of Year $ 1,893 $ 1,824 $ 1,753
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE> 23
CSW
Consolidated Balance Sheets
Central and South West Corporation
As of December 31,
1995 1994
(millions)
ASSETS
Electric
Production $ 5,888 $ 5,802
Transmission 1,484 1,377
Distribution 3,799 2,539
General 1,209 764
Construction work in progress 346 412
Nuclear fuel 165 161
Total Electric 12,891 11,055
Gas 869 798
Other diversified 18 15
13,778 11,868
Less - Accumulated depreciation 4,761 3,870
9,017 7,998
Current Assets
Cash and temporary cash investments 401 108
National Grid assets held for sale 100 --
Accounts receivable 1,093 837
Materials and supplies, at average cost 188 162
Electric utility fuel inventory, substantially
at average cost 129 118
Gas inventory/products for resale 13 23
Under-recovered fuel costs -- 54
Prepayments and other 115 44
2,039 1,346
Deferred Charges and Other Assets
Deferred plant costs 514 516
Mirror CWIP asset 312 322
Other non-utility investments 296 394
Income tax related regulatory assets, net 253 216
Goodwill 1,074 --
Other 364 274
2,813 1,722
$ 13,869 $ 11,066
The accompanying notes to consolidated financial statements are an integral
part of the statements.
<PAGE> 24
CSW
Consolidated Balance Sheets
Central and South West Corporation
As of December 31,
1995 1994
CAPITALIZATION AND LIABILITIES (millions)
Capitalization
Common stock: $3.50 par value
Authorized shares: 350.0 million shares
Issued and outstanding: 192.9 million shares
in 1995 and 190.6 million shares in 1994 $ 675 $ 667
Paid-in capital 610 561
Retained earnings 1,893 1,824
Total Common Stock Equity 3,178 3,052
Preferred stock
Not subject to mandatory redemption 292 292
Subject to mandatory redemption 34 35
Long-term debt 3,914 2,940
Total Capitalization 7,418 6,319
Minority Interest 202 --
Current Liabilities
Long-term debt and preferred stock due
within twelve month 30 7
Short-term debt 692 910
Short-term debt - CSW Credit, Inc. 646 654
Accounts payable 595 286
Accrued taxes 228 111
Accrued interest 77 61
Provision for SEEBOARD acceptances 1,001 --
Other 156 159
3,425 2,188
Deferred Credits
Income taxes 2,306 2,048
Investment tax credits 306 320
Mirror CWIP liability -- 41
Other 212 150
2,824 2,559
$ 13,869 $ 11,066
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE> 25
CSW
Consolidated Statements of Cash Flows
Central and South West Corporation
For the Years Ended December 31,
1995 1994 1993
(millions)
OPERATING ACTIVITIES
Net Income $ 421 $ 412 $ 327
Non-cash Items Included in Net Income
Depreciation and amortization 425 402 366
Deferred income taxes and investment tax
credits (11) 87 94
Mirror CWIP liability amortization (41) (68) (76)
Restructuring charges (2) (9) 97
Cumulative effect of changes in
accounting principles -- -- (46)
Charges for terminated Merger 42 -- --
Regulatory assets established for
previously incurred restructuring charges (34) -- --
Changes in Assets and Liabilities
Accounts receivable (36) 29 (52)
Unrecovered fuel costs 76 16 (63)
Accounts payable (32) (27) 34
Accrued taxes 25 21 37
Accrued restructuring charges (2) (57) --
Other (32) (42) (24)
799 764 694
INVESTING ACTIVITIES
Capital expenditures (474) (578) (508)
Acquisitions excluding SEEBOARD (6) (21) (106)
Net cash paid on SEEBOARD acquisition (415) -- --
Non-affiliated accounts receivable
collections/(purchases), net 2 11 (314)
CSW Energy projects (includes $2, $73 and
$19 of equity investments for 1995,
1994 and 1993, respectively) 109 (115) (127)
Other (28) (13) (14)
(812) (716) (1,069)
FINANCING ACTIVITIES
Common stock sold 57 50 1
Proceeds from issuance of long-term debt 1,187 199 904
Retirement of long-term debt (8) (4) (50)
Reacquisition of long-term debt (355) (27) (987)
Special deposits for reacquisition of
long-term debt -- -- 199
Redemption of preferred stock (1) (33) (17)
Change in short-term debt (226) 153 602
Payment of dividends (348) (340) (325)
306 (2) 327
Net Change in Cash and Cash Equivalents 293 46 (48)
Cash and Cash Equivalents at Beginning of Year 108 62 110
Cash and Cash Equivalents at End of Year $ 401 $ 108 $ 62
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $ 301 $ 280 $ 260
Income taxes paid $ 77 $ 93 $ 53
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
CSW is a registered holding company under the Holding
Company Act subject to regulation by the SEC. CSW's four Electric
Operating Companies are also regulated by the SEC under the
Holding Company Act.
The principal business of CSW's four Electric Operating
Companies, CPL, PSO, SWEPCO and WTU, is the generation,
transmission, and distribution of electric power and energy.
These four companies are subject to regulation by the FERC under
the Federal Power Act and follow the Uniform System of Accounts
prescribed by the FERC. They are subject to further regulation
with regard to rates and other matters by state regulatory
commissions as follows: CPL and WTU are subject to the Texas
Commission; PSO is subject to the Oklahoma Commission; and SWEPCO
is subject to the Arkansas Commission, Louisiana Commission,
Oklahoma Commission and the Texas Commission.
The principal business of CSW's United Kingdom electric
operating subsidiary, SEEBOARD, is the distribution and supply of
electric power and energy in southeast England. SEEBOARD's
distribution business is subject to regulation of rates by the
United Kingdom Office of Electricity Regulation.
In addition to the electric utility operations, CSW has
subsidiaries involved in a variety of other business activities.
Transok is an Oklahoma natural gas company, CSW Energy and CSW
International pursue cogeneration and other energy-related
ventures, CSW Credit purchases the accounts receivable of
affiliates and non-affiliates, CSW Communications pursues
telecommunications projects, CSW Leasing invests in leveraged
leases and EnerShop offers energy-management services.
The more significant accounting policies of the CSW System
are summarized below:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts
of CSW and its subsidiary companies. The consolidated financial
statements for PSO include the accounts of its wholly owned
subsidiary, Ash Creek. All significant intercompany items and
transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of financial statements and the reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FIXED ASSETS
Electric fixed assets are stated at the original cost of
construction, which includes the cost of contracted services,
direct labor, materials, overhead items and allowances for
borrowed and equity funds used during construction. SEEBOARD's
fixed assets are stated at fair market value based on the
preliminary allocation of the purchase price CSW paid for
SEEBOARD. 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. See SEEBOARD ACQUISITION below for
additional information, including the allocation of purchase price
to the SEEBOARD Group's fixed asset accounts.
<PAGE> 27
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 rates were 3.4% for 1995 and 3.2% for both
1994 and 1993.
CPL NUCLEAR DECOMMISSIONING OF THE STP PLANT
At the end of STP's service life, decommissioning is
expected to be accomplished using the decontamination method,
which is one of the techniques acceptable to the NRC. Using this
method, the decontamination activities occur as soon as possible
after the end of plant operations. Contaminated equipment is
cleaned and removed to a permanent disposal location, and the site
is generally returned to its 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 for
decommissioning costs 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 and as such are not reflected on CPL's
balance sheet. At December 31, 1995, the trust balance was $28.0
million.
In August 1995, CPL received a new decommissioning study
updating the cost estimates to decommission STP that indicated
that CPL's share of such costs would increase from $85 million, as
stated in 1986 dollars, to $258 million, as stated in 1995
dollars. The increase in costs occurred primarily as a result of
extended on-site storage of high level waste, much higher
estimates 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 $10.5
million. CPL has requested this amount as part of its cost of
service in its current rate filing. Other parties to the
proceeding have filed annual projections ranging from $1.4 million
to $8.2 million. CPL expects to fund at the level ultimately
ordered by the Texas Commission although CPL cannot predict that
level. Historically, the Texas Commission has allowed full
recovery of nuclear decommissioning costs. For further
information on CPL's current rate filing, see NOTE 2. LITIGATION
AND REGULATORY PROCEEDINGS.
ELECTRIC REVENUES AND FUEL
Prior to 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. See the effects of this
change under ACCOUNTING CHANGES below.
<PAGE> 28
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. 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. See NOTE 2. LITIGATION
AND REGULATORY PROCEEDINGS, for further information about fuel
recovery.
CPL, PSO and WTU recover fuel costs applicable to wholesale
customers, which are regulated by the FERC, through an automatic
fuel adjustment clause. SWEPCO recovers fuel costs applicable to
wholesale customers through formula rates.
CPL amortizes direct nuclear fuel costs to fuel expense on
the basis of a ratio of the estimated energy used in the core to
the energy expected to be derived from such fuel assembly over its
life in the core. In addition to fuel amortization, CPL also
records nuclear fuel expense as a result of other items, including
spent fuel disposal fees assessed on the basis of net KWHs sold
from STP and DOE special assessment fees for decontamination and
decommissioning of the enrichment facilities on the basis of prior
usage of enrichment services.
ACCOUNTS RECEIVABLE
CSW Credit, as a wholly owned subsidiary of CSW, purchases,
without recourse, the billed and unbilled accounts receivable of
the Electric Operating Companies, Transok and certain non-
affiliated companies.
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 represent
probable future refunds to customers. The significant regulatory
assets and liabilities that have been recorded by the CSW System are
presented in the following table.
1995 1994
(millions)
Regulatory Assets
Deferred plant costs $514 $516
Mirror CWIP asset 312 322
Income tax related regulatory
assets, net 253 216
Deferred restructuring and
rate case costs 46 --
Other 35 33
Regulatory Liability
Mirror CWIP liability -- 41
DEFERRED PLANT COSTS AT CPL AND WTU
In accordance with orders of the Texas Commission, CPL and
WTU deferred carrying costs, as well as operating, depreciation
and tax costs incurred for STP and Oklaunion, 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. CPL is amortizing and recovering these
deferred costs through rates over the life of the plant. WTU is
amortizing and recovering such costs over seven years. See NOTE
2. LITIGATION AND REGULATORY PROCEEDINGS, for further discussion
of the deferred accounting proceedings.
<PAGE> 29
CPL 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 further information regarding Mirror CWIP,
reference is made to NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS.
SEEBOARD ACQUISITION
The acquisition of SEEBOARD was accounted for as a purchase
combination. A preliminary allocation of the purchase price has
been performed and is reflected in the consolidated financial
statements. This includes an allocation of approximately $1.0
billion to goodwill at December 31, 1995, which will increase to
approximately $1.4 billion when CSW reaches its eventual 100%
ownership interest in SEEBOARD. While the allocation of the
purchase price may be revised at a later date, the goodwill is
expected to be amortized on a straight-line basis over 40 years.
SEEBOARD's results of operations are included in the consolidated
CSW results in the following manner. Equity earnings representing
the 27.6% CSW ownership interest in SEEBOARD during November 1995
were recorded in Other Income and Deductions. During December
1995, pursuant to its effective control of SEEBOARD through its
76.45% ownership interest, CSW began full consolidation accounting
for SEEBOARD in its consolidated financial statements. At that
time, CSW recorded a current liability of approximately $1.0
billion representing the obligation to purchase the controlled
shares for which CSW had received acceptances but had not actually
purchased.
NATIONAL GRID ASSETS HELD FOR SALE
Pursuant to a December 11, 1995 distribution by SEEBOARD,
CSW (UK), as a shareholder of SEEBOARD, received 32,492,966 shares
of National Grid common stock. At December 31, 1995, the carrying
value of the National Grid assets held for sale, when converted to
U.S. dollars, was approximately $100 million. On February 2,
1996, all of the shares of National Grid that CSW (UK) held were
sold. On February 29, 1996, the proceeds from the sale of the
National Grid shares were used to repay a portion of the CSW
Investments Credit Facility.
PRICE RISK MANAGEMENT ACTIVITIES
Transok periodically uses natural gas futures, options and
basis swap contracts to manage the impact of price fluctuations on
its inventory of natural gas, fuel and shrinkage requirements for
its processing plants and certain fixed price purchase and sales
contracts. Such contracts are designated at inception as a hedge
when there is a direct relationship to the price risk associated
with Transok's operations. Gains and losses on hedge contracts
are deferred until the effect of the corresponding hedged
transaction is recognized. For those contracts that are not
designated as hedges, changes in the fair value of those contracts
are recognized as gains or losses in income currently and are
recorded in the balance sheet at fair value at the reporting date.
Transok determines the fair value of its contracts based upon
settlement prices for exchange-traded contracts, market-related
indexes or by obtaining quotes from brokers. Transok's trading
gains and losses, either from its hedging or its speculative
trading, did not have a material impact upon CSW's consolidated
results of operations. Transok's open trade positions at December
31, 1995, were not material to CSW's financial position.
ACCOUNTING CHANGES
Effective January 1, 1993, the CSW System adopted SFAS No.
106, SFAS No. 112 and 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 regarding the change in method of accounting
for unbilled revenue. See NOTE 4. INCOME TAXES for further
information regarding the adoption of SFAS No. 109 and See NOTE 5.
BENEFIT PLANS for further information regarding the adoption of
SFAS No. 106.
<PAGE> 30
In 1993, the change in accounting for unbilled revenues and
the adoption of both SFAS No. 109 and SFAS No. 112 were presented
as a cumulative effect of changes in accounting principles for CSW
as shown in the table below.
Unbilled SFAS SFAS
Revenues No. 109 No. 112 Total
(millions, except EPS)
Pre-tax effect $75 $-- $(13) $62
Tax effect (26) 6 4 (16)
Net income effect $49 $6 $(9) $46
EPS effect $0.26 $0.03 $(0.05) $0.24
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 1995 presentation.
2. LITIGATION AND REGULATORY PROCEEDINGS
TERMINATION OF EL PASO MERGER
In May 1993, CSW entered into a Merger Agreement pursuant to
which El Paso would emerge from bankruptcy as a wholly owned
subsidiary of CSW. El Paso is an electric utility company
headquartered in El Paso, Texas, which filed a voluntary petition
for reorganization under Chapter 11 of the Bankruptcy Code on
January 8, 1992.
On June 9, 1995, CSW notified El Paso that CSW would not
extend the termination date under the Merger Agreement as had been
requested by El Paso and, accordingly, that it was terminating the
Merger Agreement. CSW also informed El Paso on June 9, 1995, that
it was withdrawing the Modified Plan for the proposed Merger with
El Paso by a contemporaneous filing with the United States
Bankruptcy Court for the Western District of Texas, Austin
Division, before which the El Paso bankruptcy reorganization
proceeding was pending.
On June 9, 1995, following CSW's notification that it was
terminating the Merger and withdrawing the Modified Plan, El Paso
filed the El Paso Suit against CSW in state district court in El
Paso, Texas, claiming breach of contract, breach of duty of good
faith and fair dealing, breach of fiduciary duty, business
disparagement, tortious interference with contract and fraud in
the inducement. The El Paso Suit seeks a $25 million termination
fee from CSW, certain costs related to the Modified Plan,
additional unspecified damages, punitive damages, interest as
permitted by law, reasonable attorneys' fees and court costs. On
June 15, 1995, CSW filed the CSW Suit against El Paso in the
United States Bankruptcy Court for the Western District of Texas,
Austin Division, seeking a $25 million termination fee from El
Paso due to El Paso's breach of the Merger Agreement, at least
$3.6 million in rate case expenses incurred by CSW on behalf of El
Paso related to state regulatory merger proceedings and a
declaratory judgment that CSW properly terminated the Merger
Agreement. CSW also removed the El Paso Suit from state district
court to the United States Bankruptcy Court for the Western
District of Texas, El Paso Division. The El Paso Suit was then
transferred to the United States Bankruptcy Court in Austin,
Texas.
On August 4, 1995, El Paso filed motions with the Austin
bankruptcy court to remand the El Paso Suit back to the state
district court in El Paso and abstain from hearing the CSW Suit.
<PAGE> 31
The bankruptcy court denied El Paso's motions, and in connection
therewith the judge presiding over El Paso's bankruptcy proceeding
recused himself from hearing the El Paso Suit and the CSW Suit.
Both lawsuits have since been assigned to another judge of the
United States Bankruptcy Court for the Western District of Texas,
Austin Division. On October 19, 1995, El Paso filed motions (i)
to withdraw the reference of both lawsuits from the United States
Bankruptcy Court for the Western District of Texas to the United
States District Court for the Western District of Texas and (ii)
to change venue in both lawsuits to the El Paso Division. El
Paso's motion to withdraw the reference was denied on November 15,
1995, by the United States District Court for the Western District
of Texas, Austin Division, and El Paso's motion for
reconsideration of this ruling was denied on December 11, 1995.
On January 26, 1996, El Paso filed a petition for writ of mandamus
in the United States Court of Appeals for the Fifth Circuit
seeking an order directing the withdrawal of the reference of both
lawsuits from the Bankruptcy Court. On February 26, 1996, El
Paso's motion to transfer venue was denied by the United States
Bankruptcy Court for the Western District of Texas, Austin
Division, and the court consolidated the El Paso Suit and the CSW
Suit into one adversary proceeding. CSW is the named plaintiff in
the consolidated adversary proceeding. No trial date has been set
for the lawsuits.
Although CSW believes that it has substantial defenses to El
Paso's claims and intends to defend El Paso's claims and pursue
CSW's claims vigorously, CSW cannot presently predict the outcome
of the lawsuit. However, if the lawsuit is decided adversely to
CSW, it could have a material adverse effect on CSW's consolidated
results of operations and financial condition.
CPL RATE REVIEW
On November 6, 1995, CPL filed with the Texas Commission a
request to increase its retail base rates by $71 million and
reduce its annual retail fuel factors by $17 million. The net
effect of these proposals would be an increase of $54 million, or
4.6%, in total annual retail revenues based on a test year ended
June 30, 1995. CPL is not seeking interim rate relief, but will
implement bonded rates in May 1996, the earliest date permitted by
law. CPL also is seeking to reconcile $229 million of fuel costs
incurred during the period July 1, 1994 through June 30, 1995.
CPL's previous request to reconcile fuel costs from March 1, 1990
to June 30, 1994 in Docket No. 13650 was consolidated with the
current rate review. If the requested increase and other
adjustments in rate structure are approved, CPL will commit not to
increase its base rates prior to January 1, 2001, subject to
certain force majeure events.
CPL is requesting this rate review in large part as a result
of the expiration of the amortization of its Mirror CWIP
liability. The Mirror CWIP liability was amortized to income in
declining amounts over a five-year period from 1991 through 1995
pursuant to rate settlements reached by CPL in 1990 and 1991. In
1995, Mirror CWIP provided $41 million in non-cash earnings at
CPL. Also included in the request are proposals by CPL to
accelerate recovery of nuclear and regulatory assets as a way to
proactively address certain assets that could possibly be
unrecoverable or stranded in a more competitive electric utility
industry. In a preliminary order issued December 21, 1995, the
Texas Commission expanded the scope of the rate review to address
certain competitive issues facing the electric utility industry.
The competitive issues to be addressed by CPL in a supplemental
filing due April 1, 1996, are: (i) the calculation of rates on an
unbundled or functional basis (i.e., generation, transmission and
distribution); (ii) the current value of CPL's generating assets
as compared to estimates of the market value of such assets under
alternate future industry structures; (iii) the application of
performance based ratemaking; (iv) potential revisions in the
methodology of reconciling and recovering fuel costs; and (v) the
Texas Commission's authority to introduce competition in the
electric utility industry under existing law.
On February 13, 1996, intervening parties filed testimony in
the revenue requirements phase of CPL's base rate case. Among the
parties that filed testimony were the OPUC which recommended a
base rate decrease of approximately $75 million on a total company
basis and the Cities which recommended a base rate reduction of
approximately $52 million on a total company basis.
<PAGE> 32
On February 20, 1996, the Staff filed testimony recommending
an increase in total company base rates of approximately $30
million. Certain elements of the Staff's proposal are described
below.
The Staff recommended a return on common stock equity of
11.35% compared to the 12.25% return on common equity requested by
CPL. The Staff recommended a disallowance of $16 million in costs
billed for administrative services by CSW Services to CPL on the
basis that the specific benefits to CPL were not clearly
identified. Additionally, the Staff recommended a $7 million
reduction in CPL's current annual depreciation accrual and a $3
million reduction in CPL's requested accrual for decommissioning
STP. A comparison of the Staff's recommendation for a base rate
increase, compared to CPL's claimed revenue deficiency is provided
in the CPL RATE REVIEW COMPARISON table.
CPL RATE REVIEW COMPARISON (unaudited)
(millions)
CPL revenue deficiency (1) $103
Return on common equity (21)
CSW Services expenses (16)
Depreciation expense (7)
Decommissioning expense (3)
Miscellaneous items (26)
Staff recommended revenue
increase (2) $30
(1) The total company rate increase requested
by CPL was reduced from $103 million to $78
million ($71 million allocated to the Texas
retail jurisdiction) in accordance with rate
settlements entered into by CPL in 1990 and
1991.
(2) The Staff recommended that CPL be granted a $23
million base rate increase and an annual increase
of $7 million in customer service charges.
The Staff and other parties' recommendations on the fuel
portion of the case are expected to be filed in early March 1996.
After completion of hearings in all phases of the rate case,
which began in late February 1996 and are expected to conclude
during the third quarter of 1996, the ALJs assigned to hear the
case will issue a proposal for decision for consideration by the
Texas Commission. Testimony filed by parties to the rate case,
including the Staff, is not binding on either the ALJs or the
Texas Commission. A final decision on the rate request is not
anticipated from the Texas Commission prior to December 1996.
Management of CSW and CPL cannot predict the ultimate outcome
of CPL's rate case, although management believes that the ultimate
resolution will not have a material adverse effect on CPL's or
CSW's consolidated results of operations or financial condition.
However, if CPL ultimately is unsuccessful in obtaining adequate
rate relief, CPL and CSW could experience a material adverse
effect on their results of operations and financial condition.
CPL 1995 AGREEMENT
On April 5, 1995, CPL reached an agreement in principle with
other parties to pending regulatory proceedings involving base
rate, fuel and prudence issues relating to an outage experienced
at STP during 1993 and 1994. On May 16, 1995, CPL filed the CPL
1995 Agreement with the Texas Commission. Pursuant to the CPL
1995 Agreement, base rate refunds, fuel refunds and the reduction
of CPL's fuel factors were implemented during the summer of 1995.
Under the CPL 1995 Agreement, CPL provided customers a one-time
base rate refund of $50 million. In addition, CPL refunded
approximately $30 million in over-recovered fuel costs through
April 1995. Furthermore, CPL did not charge customers for $62.25
million in replacement power costs and related interest primarily
associated with the 1993-1994 STP outage. The CPL 1995 Agreement
did not result in any ongoing change in base rate levels and
provided that there would be no new rate review requests filed
prior to September 28, 1995. CPL also reduced its fuel factors,
effective in July 1995, by approximately $55 million on an annual
basis due to projections of lower fuel costs. Hearings on the CPL
1995 Agreement were held on July 19, 1995, and the final written
Texas Commission order approving the CPL 1995 Agreement was
received on October 4, 1995. Details of the items in the CPL 1995
<PAGE> 33
Agreement and the total 1995 earnings impact for CPL, including
certain accounting provisions, are set forth in the following
table.
Pre-tax After-tax
(millions)
Base rate refund $(50.0) $(32.5)
Fuel disallowance (62.3) (40.5)
Wholesale fuel refund (3.2) (2.1)
Current flowback of excess
deferred federal income
taxes 34.3 34.3
Capitalization of previously
expensed restructuring and
rate case costs 27.6 17.9
Recognition of factoring
income 16.1 10.5
Amortization, interest and
other (6.6) (4.4)
CPL DEFERRED ACCOUNTING
CPL was granted deferred accounting treatment for certain
STP Unit 1 and 2 costs by Texas Commission orders issued in
October 1990 and December 1990, respectively. In 1994, the
Supreme Court sustained deferred accounting as an appropriate
mechanism for the Texas Commission to use in preserving the
financial integrity of CPL, but remanded CPL's case to the Court
of Appeals to consider certain substantial evidence points of
error not previously decided by the Court of Appeals given its
prior determinations. On August 16, 1995, the Court of Appeals
rendered its opinion in the remand proceeding and affirmed the
Texas Commission's order in all respects.
CPL believes that the language of the Supreme Court's
opinion suggests that the appropriateness of allowing deferred
accounting may be reviewed under a financial integrity standard in
the first case in which the deferred STP costs are recovered
through rates. If the courts decide that subsequent review under
the financial integrity standard is required, that review would be
conducted in a remand of the STP Unit 1 and 2 orders. Pending the
ultimate resolution of CPL's deferred accounting issues, CPL is
unable to predict how its deferred accounting orders will
ultimately be resolved by the Texas Commission.
If CPL's deferred accounting matters are not favorably
resolved, CSW and CPL could experience a material adverse effect
on their respective results of operations and financial condition.
While CPL's management is unable to predict the ultimate outcome
of these matters, management believes CPL will receive approval of
its deferred accounting orders or will be successful in
renegotiation of its rate orders, so that there will be no
material adverse effect on CSW's or CPL's results of operation or
financial condition.
CPL WESTINGHOUSE LITIGATION
CPL and other owners of STP were 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 alleged that Westinghouse supplied STP with defective steam
generator tubes that are susceptible to stress corrosion cracking.
On December 8, 1995, CPL and the other owners of STP settled the
lawsuit. While the court order prohibits disclosure of the terms
of the settlement, CPL believes the litigation was settled on
terms that provided satisfactory consideration to CPL and STP and
will not have a material adverse effect on the results of
operations or financial condition of CSW or CPL.
CPL CIVIL PENALTIES
In October 1995, the NRC notified HLP of a Notice of
Violation and proposed penalties totaling $160,000 related to
events that occurred at STP in May 1992. The Notice of Violation
and penalties reflect the NRC's belief that certain STP employees
were terminated as a result of raising safety concerns with the
NRC. The Notice of Violation was the result of a Department of
Labor decision and order in April 1995 and is awaiting final
action by the Secretary of Labor. HLP is not required to reply to
the NRC's Notice of Violation or pay the penalties pending the
Secretary of Labor's final decision. The NRC indicated that the
<PAGE> 34
proposed civil penalties reflect minimum penalties allowed because
of improvements made to the STP Employee Concerns Program since
1992. CPL's share of any penalty that is ultimately paid would be
approximately 25%, reflecting its ownership interest in STP.
CPL INDUSTRIAL ROAD AND INDUSTRIAL METALS SITE
Three suits naming CPL and others as defendants relating to
a third-party owned and operated site in Corpus Christi, Texas
formerly used for commercial reclamation of used electrical
transformers, lead acid batteries and other scrap metals, are
currently pending in federal and state court in Corpus Christi,
Texas. Plaintiffs' complaints seek damages for alleged property
damage and health impairment as a result of operations on the site
and cleanup activities. Management cannot predict the outcome of
these suits. However, management believes that CPL has defenses
to the plaintiffs' complaints and intends to defend the suits
vigorously. Management also believes that the ultimate resolution
of these matters will not have a material adverse effect on CSW's
or CPL's results of operations or financial condition.
PSO 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 PSO's 1993 rate proceeding. This
portion of the 1993 rate review was subsequently bifurcated. In
March 1995, an order was issued by the Oklahoma Commission
approving an agreement which allows PSO to recover 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/d.
PSO GAS PURCHASE CONTRACTS
PSO has been named defendant in complaints filed in federal
and state courts of Oklahoma and Texas in 1984 through 1995 by gas
suppliers alleging claims arising out of certain gas purchase
contracts. The plaintiffs seek relief through the filing dates as
well as attorneys' fees. In January 1996, complaints representing
approximately $10 million in claims were settled. Remaining
complaints currently total approximately $1 million in claimed
actual damages. The settlements did not have a material effect on
CSW's and PSO's consolidated results of operations or financial
condition. The remaining suits are in the preliminary stages.
Management cannot predict the outcome of these proceedings.
However, management believes that PSO has defenses to the
remaining complaints and intends to defend the suits vigorously.
Management also believes that the ultimate resolution of the
remaining complaints will not have a material adverse effect on
CSW's or PSO's consolidated results of operations or financial
condition.
PSO PCB CASES
PSO has been named a defendant in complaints filed in
federal and state courts of Oklahoma in 1984, 1985, 1986, 1993 and
1996. The complaints allege, among other things, that some of the
plaintiffs and the property of other plaintiffs were contaminated
with PCBs and other toxic by-products following certain incidents,
including transformer malfunctions, in April 1982, December 1983
and May 1984. To date, all complaints, except for claims
representing approximately $13 million in alleged damages and
claims filed in February 1996 for additional unspecified actual
and punitive damages, have been dismissed, certain of which
resulted from settlements among the parties. Management believes
that PSO has defenses to the remaining complaints and intends to
defend the suits vigorously. Moreover, management believes that
the remaining claims are covered under insurance. Management also
believes that the ultimate resolution of the remaining complaints
will not have a material adverse effect on CSW's or PSO's
consolidated results of operations or financial condition.
<PAGE> 35
PSO BURLINGTON NORTHERN TRANSPORTATION CONTRACT
In June 1992, PSO filed suit in the United States District
Court for the Northern District of Oklahoma against Burlington
Northern seeking declaratory relief under a long-term contract for
the transportation of coal. In July 1992, Burlington Northern
asserted counterclaims for unspecified damages against PSO
alleging that PSO breached the contract. In December 1993, PSO
amended its suit against Burlington Northern seeking damages and
declaratory relief under federal and state antitrust laws. In
December 1995, PSO and Burlington Northern reached a compromise
settlement of all outstanding claims and counterclaims, and the
action was dismissed with prejudice. The settlement did not have
a material adverse effect on CSW's or PSO's consolidated results
of operations or financial condition.
PSO BURLINGTON NORTHERN ARBITRATION
In May 1994, in an arbitration related to the Burlington
Northern coal transportation contract described above, an
arbitration panel made an award in favor of PSO concerning basic
transportation rates under the coal transportation contract and
concerning the contract mechanism for adjustment for future
transportation rates. This arbitration award was then the subject
of litigation in the United States District Courts for the
Northern Districts of Oklahoma and Texas and the United States
Court of Appeals for the Tenth Circuit. In December 1995, this
litigation was settled as part of the compromise settlement of the
related lawsuit described above. Under the settlement, a $16.4
million judgment by the U.S. District Court for the Northern
District of Oklahoma confirming the arbitration award became final
and was then released and satisfied of record.
PSO ASH CREEK COAL MINE RECLAMATION
In August 1994, PSO received approval from the Wyoming
Department of Environmental Quality to begin reclamation of a coal
mine in Sheridan, Wyoming, owned by Ash Creek, a wholly owned
subsidiary of PSO. Ash Creek recorded a $3 million liability in
1993 for the estimated reclamation costs and subsequently accrued
an additional $500,000 in 1995. Actual reclamation work commenced
in September 1995, with completion expected in late 1996.
Surveillance monitoring will continue for ten years after final
reclamation. Management believes that ultimate resolution of this
matter will not have a material adverse effect on CSW's or PSO's
consolidated results of operations or financial condition.
PSO MCPC
In 1989, PSO entered into certain long-term contracts with
MCPC, a cogeneration development company located in northeastern
Oklahoma. These contracts include: (i) an Interconnection and
Interchange Agreement providing terms and conditions under which
MCPC could connect its electric generating facilities to PSO's
transmission system and providing for future transmission by PSO
of specified amounts of MCPC's power to an unaffiliated utility;
(ii) a Stock/Asset Purchase Agreement which allows PSO under
certain conditions to acquire the stock or assets of MCPC; and
(iii) an Energy Conversion Agreement which required PSO to deliver
natural gas to MCPC for conversion to electrical energy to be
delivered by MCPC to PSO. Under the Energy Conversion Agreement,
MCPC was required to deliver at least 394,200 MWH per year of firm
energy to PSO. PSO also had the right to dispatch up to 60 MWH
per hour of quick-start capability.
In 1993, MCPC filed an application with the Oklahoma
Commission requesting relief through the modification of the
existing Energy Conversion Agreement. An emergency order was
issued under MCPC's application which increased the payment made
by PSO to MCPC for energy purchases and decreased the amount of
firm energy MCPC was required to deliver to PSO. The emergency
order was subject to a permanent ruling.
In July 1993, PSO commenced a lawsuit in the District Court
of Tulsa County, Oklahoma, seeking a declaratory judgment that PSO
was entitled to terminate the Energy Conversion Agreement as of
August 1, 1993, because of a default committed by MCPC. On March
<PAGE> 36
31, 1995, PSO, MCPC and the Oklahoma Commission Staff signed a
joint settlement resolving all issues pursuant to the various
proceedings before the Oklahoma Commission and the District Court
of Tulsa County, Oklahoma. The settlement, among other things,
eliminated a requirement that MCPC deliver an annual minimum of
394,200 MWH of Assured Delivery Energy and related provisions
associated with underdelivery charges. Most other provisions of
the agreement between PSO and MCPC were kept intact. The Oklahoma
Commission issued an order in May 1995 approving the settlement.
The settlement is on terms satisfactory to PSO and will not have a
material adverse effect on CSW's or PSO's consolidated results of
operations or financial condition.
SWEPCO FUEL FACTOR PROCEEDINGS
On October 6, 1995, SWEPCO filed a petition, designated as
Docket No. 14819, with the Texas Commission to revise its fixed
fuel factors for the recovery of fuel and purchased power costs.
SWEPCO was experiencing an over-recovery of fuel costs based on
application of its then current factors which became effective in
July 1994. The original filing with the Texas Commission proposed
decreasing SWEPCO's fixed fuel factors and refunding to customers
$7.1 million of cumulative over-recoveries for the period January
1994 to June 1995. SWEPCO subsequently revised its petition to
the Texas Commission, updating the cumulative fuel over-recovery
to $10.4 million through September 1995. On December 20, 1995,
the Texas Commission issued an order approving SWEPCO's revised
fixed fuel factors and authorizing the refund of $10.8 million,
including interest, to customers primarily as billing credits on
January 1996 monthly bills.
SWEPCO 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 regarding rates charged under two rail
transportation contracts for delivery of coal to SWEPCO's Welsh
and Flint Creek power plants. The court awarded SWEPCO
approximately $72 million covering damages for the period from
April 27, 1989 through September 26, 1994, post-judgment interest
and attorneys' fees and granted certain declaratory relief
requested by SWEPCO. Burlington Northern appealed the state
district court's judgment to the Texarkana, Texas Court of
Appeals. The appeal is now pending.
WTU STIPULATION AND AGREEMENT
WTU has been the subject of several pending regulatory
matters, including the following: (i) a retail rate proceeding and
fuel reconciliation before the Texas Commission in Docket No.
13369; (ii) Writ of Error to the Supreme Court - review of WTU's
1987 Texas rate case in Docket No. 7510; and (iii) the Texas
Commission's proceeding on remand in Docket No. 13949 regarding
deferred accounting treatment for Oklaunion Power Station Unit No.
1 originally authorized in the Texas Commission's Docket No. 7289.
On September 22, 1995, WTU, along with other major parties
to the above described matters, filed with the Texas Commission a
joint stipulation and agreement to resolve all of these matters.
The WTU Stipulation and Agreement is a unified package that
included: (i) a retail base rate reduction of approximately $13.5
million annually starting with WTU's October 1995 revenue month
billing cycle; (ii) a $21 million retail refund which was not
attributed to any specific cause but was inclusive of all claims
related to the three above described litigation and regulatory
matters and included the effect of the rate reduction to October
1, 1994; (iii) a reduction of fixed fuel factors by approximately
2%; (iv) various rate and accounting treatments including a
reasonable return on equity for retail operations of 11.375%; and
(v) a retail base rate freeze until October 1, 1998, subject to
certain force majeure provisions.
On November 9, 1995, the Texas Commission rendered a final
order that implemented the joint stipulation and agreement, ending
the rate proceeding and fuel reconciliation in Docket No. 13369
and the remand, designated Docket No. 13949, to the Texas
Commission by the Supreme Court for the deferred accounting
treatment of Oklaunion Power Station Unit No. 1 originally
authorized by the Texas Commission in Docket No. 7289. The final
order also set into motion the actions required to seek a remand
<PAGE> 37
of the appeal of Docket No. 7510 to the Texas Commission to
implement a final order consistent with the WTU Stipulation and
Agreement.
On December 8, 1995, all parties to the appeals filed a
joint motion with the Supreme Court and, on December 22, 1995, the
Supreme Court approved the joint motion to withdraw and dismissed
the case. The case will now go back to the Court of Appeals so
that it can be remanded back to the Texas Commission. The date of
this remand and final action by the Texas Commission is not known.
The WTU Stipulation and Agreement is expected to impact
WTU's results of operations for the next several years, reducing
annual earnings by approximately $8 million beginning in 1996.
Details of the items with significant earnings impact for 1995 and
1996, including certain accounting treatments, are set forth in
the following table.
1995 1996
(unaudited)
Pre-Tax After-Tax Pre-tax After-tax
(millions)
Refund to retail customers $(21.0) $(13.7) $-- $--
Effect of retail rate reduction (2.4) (1.6) (7.6) (4.9)
Current flowback of property
related excess deferred federal
income taxes 6.9 6.9 -- --
Five year flowback of non-
property related excess deferred
federal income taxes 0.1 0.1 0.5 0.5
Capitalization and amortization
of previously expensed
restructuring costs 12.7 8.2 (1.9) (1.2)
Accelerated amortization of
deferred Oklaunion plant
costs (accelerated from the
remaining 31 years to 7 years) -- -- (2.9) (1.9)
Other amortization (0.2) (0.1) (0.8) (0.5)
Other one-time items 1.0 0.7 -- --
The WTU Stipulation and Agreement also eliminated several
significant risks that have been the subject of regulatory
proceedings relating to deferred accounting and rates and will
enable WTU's rates to remain at competitive levels for the
foreseeable future.
CSW ENERGY CIMMARON LITIGATION
On January 12, 1994, Cimmaron brought suit against CSW and
its wholly owned subsidiary, CSW Energy, in the 125th District
Court of Houston, Harris County, Texas. Cimmaron alleged that CSW
and CSW Energy breached commitments to participate with Cimmaron
in the failed BioTech Cogeneration project located in Colorado.
CSW Energy filed a counterclaim against Cimmaron and third-
party claims against the principals of Cimmaron on December 22,
1994. On January 10, 1995, Cimmaron added claims of negligence
and gross negligence against the members of CSW Energy's board of
directors at the time of the failed project. Effective July 27,
1995, the parties agreed upon a settlement whereby they would
dismiss their respective claims. The terms of the settlement were
on terms satisfactory to CSW and CSW Energy and had no material
adverse impact on CSW's consolidated results of operations or
financial condition.
OTHER
CSW is 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> 38
3. COMMITMENTS AND CONTINGENT LIABILITIES
CONSTRUCTION AND CAPITAL EXPENDITURES
It is estimated that CSW, including the Electric Operating
Companies, SEEBOARD, Transok and other diversified operations,
will spend approximately $636 million in capital expenditures
during 1996. Substantial commitments have been made in connection
with these programs.
FUEL COMMITMENTS
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 South Hallsville lignite mining
contract for its Henry W. Pirkey Power Plant, SWEPCO has agreed,
under certain conditions, to assume the obligations of the mining
contractor. As of December 31, 1995, the maximum amount SWEPCO
would have to assume was $71.9 million. The maximum amount may
vary as the mining contractor's need for funds fluctuates. The
contractor's actual obligation outstanding at December 31, 1995
was $58.7 million.
SWEPCO SOUTH HALLSVILLE LIGNITE MINE
As part of the process to receive a renewal of a Texas
Railroad Commission permit for lignite mining at the South
Hallsville lignite mine, SWEPCO has agreed to provide bond
guarantees on mine reclamation in the amount of $70 million.
Since SWEPCO uses self-bonding, the guarantee provides for SWEPCO
to commit to use its resources to complete the reclamation in the
event the work is not completed by the third party miner. The
current cost to reclaim the mine is estimated to be approximately
$25 million.
WTU PIPELINE LEASES
WTU has entered into various commitments for the procurement
of fuel. WTU has a sale/leaseback agreement with Transok, an
affiliated company, 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, Oak Creek and Rio Pecos
generating plants. The initial terms of the agreement entered
into in 1992 are for twelve years with renewable options
thereafter.
OTHER COMMITMENTS AND CONTINGENCIES
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
<PAGE> 39
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 cleanup costs before being used to cover
direct losses to property. Under project agreements, CPL and the
other owners of STP will share the total cost of decontamination
liability and property insurance for STP, including premiums and
assessments, on a pro rata basis, according to each owner's
respective ownership interest in STP.
CPL purchases, for its own account, a NEIL I Business
Interruption and/or Extra Expense policy. This insurance will
reimburse CPL for extra expenses incurred for replacement
generation or purchased power as the result of a covered accident
that shuts down production at one or both of the STP Units for
more than 21 consecutive weeks. In the event of an outage of STP
Units 1 and 2 and the outage is the result of the same accident,
insurance will reimburse CPL up to 80% of the single unit
recovery. The maximum amount recoverable for a single unit outage
is $86.02 million for Unit 1 and $85.96 million for Unit 2. CPL
is subject to an additional assessment up to $1.6 million for the
current policy year in the event that insured losses at a nuclear
facility covered under the NEIL I policy exceeds the accumulated
funds available under the policy.
On August 28, 1994, CPL filed a claim under the NEIL I
policy relating to the 1993 - 1994 outage at STP Units 1 and 2.
NEIL has denied the claim. CPL management is currently evaluating
its options regarding this claim, but cannot predict the ultimate
outcome of this matter.
SWEPCO RENTAL AND LEASE COMMITMENTS
SWEPCO has entered into various financing arrangements
primarily with respect to coal transportation and related
equipment, which are treated as operating leases for rate-making
purposes. At December 31, 1995, leased assets of $46 million, net
of accumulated amortization of $33.7 million, were included in
Electric fixed assets on the balance sheet and at December 31,
1994, leased assets were $46 million, net of accumulated
amortization of $30.1 million. Total charges to SWEPCO's
operating expenses for expenses associated with these financing
arrangements were $6.3 million, $6.8 million and $7.1 million for
the years 1995, 1994 and 1993, respectively.
SWEPCO BILOXI, MISSISSIPPI MGP SITE
In 1994, SWEPCO was notified by Mississippi Power that it may
be a PRP at a MGP site in Biloxi, Mississippi, formerly owned and
operated by a predecessor of SWEPCO. SWEPCO worked with
Mississippi Power 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 initiated sampling
pursuant to that work plan. Contamination at the site was
identified as a result of the investigation of property and
adjacent properties. Soil and grounds water test results were
sent to the MDEQ for review and comment. The test results
confirmed the contamination on the property and indicated the
possibility of contamination of an adjacent property. A risk
assessment has been performed to assist SWEPCO and Mississippi
Power in determining remediation alternatives. A final range of
cleanup costs has not been determined, but based on preliminary
estimates, SWEPCO has accrued approximately $2 million for its
portion of the cleanup of this site.
CSW ENERGY INVESTMENTS AND COMMITMENTS
CSW Energy 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 120 MW of on-line capacity of which CSW
Energy owns 50%. CSW Energy's maximum potential liability under
the fixed price contract is $29 million which will decrease to
zero in August 1996. As of December 31, 1995, CSW had provided
<PAGE> 40
additional guarantees to the project totaling approximately $3.3
million.
CSW Energy has entered into a purchase agreement on the Ft.
Lupton project to provide $80.6 million of equity upon the
occurrence of certain events. As of December 31, 1995, $44
million has been paid and CSW has provided a guarantee for $40
million. Additionally, CSW Energy has provided four letters of
credit to the project totaling $18.9 million. In March 1995, CSW
Energy closed permanent project financing on the Ft. Lupton
facility in the amount of $208 million which allowed the project
to repay its $102 million construction borrowing to CSW. The
following table summarizes the investments and commitments in CSW
Energy's projects at December 31, 1995.
Letters of Credit
Equity and Guarantees Loans
(millions)
Brush $15.3 $-- $--
Orange Cogeneration 53.2 2.3 --
Ft. Lupton 44.0 58.9 36.5
Mulberry 23.6 32.3 --
Phillips Sweeny -- 3.0 4.2
Newgulf 8.1 -- --
Various developmental
projects 10.5 7.1 9.5
SEEBOARD MEDWAY COMMITMENT
In April 1992, SEEBOARD entered into an agreement to provide
37.5% of the equity to Medway Power Ltd., a company formed to
construct, own and operate a 660 MW gas-fired power plant on the
Isle of Grain, Kent, in the United Kingdom. Through December 31,
1995, SEEBOARD has invested 11.6 million pounds or approximately
$18.0 million in the project and remains committed for an additional
maximum amount of 11.3 million pounds or approximately $17.5 million
(1.00 pound=$1.55). In addition, SEEBOARD has entered into a
commitment to purchase 50% of the Medway power plant's output for
15 years commencing in 1996.
4. INCOME TAXES
CSW files a consolidated federal income tax return and
participates in a tax sharing agreement with its subsidiaries.
Income tax includes federal income taxes, applicable state income
taxes and SEEBOARD's United Kingdom Corporation income taxes.
The CSW System adopted the provisions of SFAS No. 109
effective January 1, 1993. The net effect on CSW's earnings for
the year ended December 31, 1993, 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 the Electric Operating Companies, 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
book versus tax 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, 1995, 1994 and 1993.
Total income taxes (income taxes included in Operating
Expenses and Taxes as well as Other Income and Deductions) differ
<PAGE> 41
from the amounts computed by applying the federal statutory income
tax rates to income before taxes for a number of reasons. The tax
implications of the CPL 1995 Agreement and the WTU Stipulation and
Agreement, whereby the flowback of unprotected excess deferred
income taxes was accelerated, contributed to the difference as did
adjustments that were made to eliminate tax obligations that no
longer exist. These differences are presented in the INCOME TAX
RATE RECONCILIATION table below.
Information concerning income taxes, including total income
tax expense, a reconciliation between the federal statutory tax
rate and the effective tax rate and significant components of
deferred income taxes follow.
INCOME TAX EXPENSE 1995 1994 1993
(millions)
Included in Operating
Expenses and Taxes
Current $107 $94 $35
Deferred 12 109 111
Deferred ITC (1) (14) (14) (15)
105 189 131
Included in Other Income and Deductions
Current 2 (13) (3)
Deferred (4) (5) (3)
(2) (18) (6)
Tax Effects of Cumulative Effect of
Changes in Accounting Principles -- -- 14
$103 $171 $139
(1) ITC deferred in prior years are included in income over the
lives of the related properties.
INCOME TAX RATE RECONCILIATION 1995 1994 1993
($ in millions)
Tax at statutory rate $182 35% $204 35% $163 35%
Differences
Amortization of ITC (14) (3) (14) (2) (15) (3)
Mirror CWIP (11) (2) (20) (4) (23) (5)
CPL 1995 Agreement (34) (7) -- --
WTU Stipulation and
Agreement (7) (1) -- --
Prior period adjustments (22) (4) (2) -- 19 4
Cumulative effect of change
in method of accounting
for income taxes -- -- (8) (2)
Other 9 2 3 -- 3 1
$103 20% $171 29% $139 30%
<PAGE> 42
DEFERRED INCOME TAXES 1995 1994
(millions)
Deferred Income Tax Liabilities
Depreciable utility plant $1,679 $1,683
Deferred plant costs 180 181
Mirror CWIP asset 109 113
Income tax related regulatory
assets 220 229
Other 474 262
2,662 2,468
Deferred Income Tax Assets
Income tax related regulatory
liability (133) (155)
Unamortized ITC (98) (115)
Alternative minimum tax
carryforward (96) (96)
Other (71) (56)
(398) (422)
Net Accumulated Deferred Income
Taxes $2,264 $2,046
Net Accumulated Deferred Income
Taxes
Noncurrent $2,306 $2,048
Current (42) (2)
$2,264 $2,046
5. 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
ERISA. Pension plan assets consist primarily of common stocks and
short-term and intermediate-term fixed income investments.
Information about the pension plan, including: (1) pension plan
net periodic cost, contributions and participation; (2) a
reconciliation of the funded status of the pension plan to the
amounts recognized on the consolidated balance sheets; and (3)
assumptions used in accounting for the pension plan follow.
NET PERIODIC PENSION PLAN COSTS,
CONTRIBUTIONS AND PARTICIPATION 1995 1994 1993
(millions)
Service cost $20 $22 $20
Interest cost on projected benefit
obilgation 64 62 56
Actual return on plan assets (117) (4) (68)
Net amortization and deferral 44 (70) --
$11 $10 $8
Pension Plan Contributions $29 $28 $32
During 1995, approximately 7,700 active employees, 4,200
retirees and 1,300 terminated employees participated in
the plan.
<PAGE> 43
RECONCILIATION OF FUNDED STATUS OF
PLAN TO AMOUNTS RECOGNIZED ON THE
CONSOLIDATED BALANCE SHEETS 1995 1994
(millions)
Plan assets, at fair value $897 $794
Actuarial present value of Accumulated
benefit obligation for service rendered
to date 745 685
Additional benefit for future salary levels 140 112
Projected benefit obligation 885 797
Plan assets in excess/(below) the projected
benefit obligation 12 (3)
Unrecognized net gain 64 60
Unrecognized prior service cost (8) (8)
Unrecognized net obligation 14 15
Prepaid pension cost $82 $64
The vested portion of the accumulated benefit obligations at
December 31, 1995 and 1994 was $678 million and $626 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 Deferred Charges and Other
Assets on the consolidated balance sheet.
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, 1995, 1994 and
1993 was $2.4 million, $1.8 million and $0.5 million,
respectively.
ASSUMPTIONS USED IN Long-Term
ACCOUNTING FOR THE Compensation Return on Plan
PENSION PLAN Discount Rate Increase Assets
1995 8.00% 5.46% 9.50%
1994 8.25% 5.46% 9.50%
1993 7.75% 5.46% 9.50%
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The CSW System, including each of the Electric Operating
Companies, adopted SFAS No. 106 effective January 1, 1993. The
effect on the CSW System's operating expense in 1993 was an
increase of $16 million. The transition obligation is being
amortized over twenty years, with seventeen years remaining.
Prior to 1993, these benefits were accounted for on a pay-as-you-
go basis. Information about the non-pension postretirement
benefit plan, including: (1) net periodic postretirement benefit
cost; (2) a reconciliation of the funded status of the
postretirement benefit plan to the amounts recognized on the
consolidated balance sheets; and (3) assumptions used in
accounting for the postretirement benefit plan follow.
NET PERIODIC POSTRETIREMENT
BENEFIT COST 1995 1994 1993
(millions)
Service cost $8 $9 $8
Interest cost on APBO 18 19 17
Actual return on plan assets (8) (1) (1)
Amortization of transition
obilgation 9 9 9
Net amortization and deferral 2 (4) (2)
$29 $32 $31
<PAGE> 44
RECONCILIATION OF FUNDED STATUS OF
PLAN TO AMOUNTS RECOGNIZED ON THE
CONSOLIDATED BALANCE SHEETS 1995 1994
(millions)
APBO
Retirees $175 $149
Other fully eligible participants 13 31
Other active participants 57 55
Total 245 235
Plan assets at fair value (100) (76)
APBO in excess of plan assets 145 159
Unrecognized transition obligation (153) (162)
Unrecognized gain 8 4
Prepaid Cost $-- $1
ASSUMPTIONS USED IN
ACCOUNTING FOR SFAS Return on Plan Tax Rate for
NO. 106 Discount Rate Assets Taxable Trusts
1995 8.00% 9.50% 39.6%
1994 8.25% 9.50% 39.6%
1993 7.75% 9.00% 39.6%
HEALTH CARE COST TREND RATES
Pre-65 Participants: 1995 Rate of 10.50% grading down .75% per
year to an ultimate rate of 6.0% in 2001.
1994 Rate of 11.75% grading down .75% per
year to an ultimate rate of 6.5% in 2001.
Post-65 Participants: 1995 Rate of 10.00% grading down .75% per
year to an ultimate rate of 5.5% in 2001.
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
approximately $26 million and the aggregate of the service and
interest costs components by approximately $4 million.
HEALTH AND WELFARE PLANS
The CSW System has medical, dental, group life insurance,
dependent life insurance, and accidental death and dismemberment
plans for substantially all active CSW System employees. The
contributions for the CSW System, recorded on a pay-as-you-go
basis, for the years ended December 31, 1995, 1994 and 1993 were
$27 million, $17 million and $23 million, respectively.
Effective January 1993, the CSW System's method of providing
health benefits was modified 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.
SEEBOARD'S EMPLOYEE BENEFITS
The majority of SEEBOARD's employees joined, and received
pension benefits from a pension plan that is administered for the
United Kingdom's electricity industry. The assets of this plan
are held in a separate trustee administered fund that is
actuarially valued every three years. SEEBOARD and its
participating employees both contribute to the plan for the
employee's benefit. Subsequent to July 1, 1995, new employees
were no longer able to participate in that plan. Instead, two new
pension plans were made available to new employees, both of which
are also separate trustee-administered plans. At December 31,
1995, SEEBOARD's pension plan projected benefit obligation,
reflecting CSW's 76.45% ownership interest in SEEBOARD, is
approximately $676 million while the fair value of the pension
plan's assets is approximately $719 million. The excess of the
fair value represents a $43 million prepaid pension cost and is
<PAGE> 45
included in Deferred Charges and Other Assets on the consolidated
balance sheet at December 31, 1995. Employer provided health care
benefits are not common in the United Kingdom due to the country's
national health care system. Accordingly, SEEBOARD does not
provide health care benefits to the majority of its employees.
6. JOINTLY OWNED ELECTRIC UTILITY PLANT
The Electric Operating Companies are parties to various
joint ownership agreements with other non-affiliated entities. Such
agreements provide for the joint ownership and operation of
generating stations and related facilities, whereby each participant
bears its share of the project costs. At December 31, 1995, the
Electric Operating Companies had undivided interests in five such
generating stations and related facilities as shown in the following
table.
STP
Nuclear Flint Creek Pirkey Dolet Hills Oklaunion
Plant Coal Plant Lignite Plant Lignite Plant Coal Plant
($ in millions)
Plant in service $2,325 $79 $432 $226 $396
Accumulated
depreciation $443 $42 $148 $69 $103
Plant capacity-MW 2,501 480 650 650 676
Participation 25.2% 50.0% 85.9% 40.2% 78.1%
Share of
capacity-MW 630 240 559 262 528
7. FINANCIAL INSTRUMENTS
The following methods and assumptions were used to
estimate the following fair values of each class of financial
instruments for which it is practicable to estimate fair value.
The fair value does not affect CSW's liabilities unless the issues
are redeemed prior to their maturity dates.
CASH, TEMPORARY CASH INVESTMENTS, ACCOUNTS RECEIVABLE AND
SHORT-TERM DEBT
The fair value equals the carrying amount as stated on the
consolidated balance sheets because of the short maturity of those
instruments.
NATIONAL GRID ASSETS HELD FOR SALE
The fair value and the carrying value of the 32,492,966
shares of common stock of the National Grid held for sale are both
approximately $100 million. The fair value is based on the
closing market price for National Grid common stock on the London
Stock Exchange on December 31, 1995 (1.995 pound per share) and an
exchange rate of 1.00 pound=$1.55 (the prevailing exchange rate on
December 31, 1995).
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. For 1995, the carrying amount of
long-term debt totaled approximately $3.9 billion while the fair
value was approximately $4.1 billion. In 1994, the carrying
amount was approximately $2.9 billion while the fair value was
approximately $2.8 billion.
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. For 1995, preferred stock
<PAGE> 46
subject to mandatory redemption totaled $34 million while the fair
value was $35 million. In 1994, the carrying amount was $35
million while the fair value was $32 million.
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. For both long-term
debt and preferred stock, the fair value equals the carrying
amount as stated on the consolidated balance sheets.
8. LONG-TERM DEBT
The long-term debt of CSW and the Operating Companies
outstanding as of the end of the last two years is presented in
the following table.
Maturities Interest Rates December 31,
From To From To 1995 1994
(millions)
First mortgage bonds
1996 1999 5.25% 7.50% $418 $443
2000 2004 5.25% 7.75% 876 836
2005 2009 6.20% 7.75% 527 247
2010 2014 7.50% 7.50% 112 112
2015 2019 9.15% 9.75% -- 226
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% 12 21
2005 2009 5.90% 6.00% 49 83
2010 2014 7.875% 10.125% 162 231
2015 2019 4.135% 7.875% 154 114
2025 2029 6.00% 6.10% 221 120
Notes and Lease Obligations
1996 2023 6.287% 9.75% 477 328
CSW Credit Agreement
2000 floating 731 --
Unamortized discount (13) (21)
Unamortized cost of
reacquired debt (187) (175)
$3,914 $2,940
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, medium-term notes and
other securities subject to market conditions and other factors.
CSW's year-end weighted average cost of long-term debt was
7.2% for 1995, 7.7% for 1994 and 7.8% for 1993.
<PAGE> 47
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, 1995,
the annual sinking fund requirements and annual maturities for
first mortgage bonds, pollution control bonds and SWEPCO's rail
car capital lease obligations for the next five years are
presented in the table.
Sinking Fund Annual
Requirements Maturities
(millions)
1996 $1 $31
1997 1 204
1998 1 31
1999 1 194
2000 1 188
DIVIDENDS
The Electric Operating 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 shareholders. At December 31, 1995,
approximately $1.5 billion of the CSW subsidiaries' retained
earnings were available for payment of cash dividends to CSW.
REACQUIRED LONG-TERM DEBT
During 1995, 1994 and 1993, the Electric Operating Companies
reacquired $355 million, $27 million and $987 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.
Reference is made to MD&A - LIQUIDITY AND CAPITAL RESOURCES
for further information related to long-term debt, including new
issues and reacquisitions.
9. PREFERRED STOCK
The outstanding preferred stock of the Electric Operating
Companies as of the end of the last two years is presented in the
following table.
Current
Dividend Rate December 31, Redemption Price
From - To 1995 1994 From - To
(millions)
Not subject to mandatory redemption
592,900 shares 4.00% - 5.00% $59 $59 $102.75 - $109.00
760,000 shares 7.12% - 8.72% 76 76 100.00 - 101.00
1,600,000 shares auction 160 160 100.00
Issuance expenses and unamortized
redemption costs (3) (3)
$292 $292
Subject to mandatory redemption
352,000 shares 6.95% $35 $36 104.64
To be redeemed within one year
within one year (1) (1)
$34 $35
Total authorized shares
6,405,000
<PAGE> 48
All of the outstanding preferred stock is redeemable at the
option of the Electric Operating Companies upon 30 days notice at
the current redemption price per share.
The dividends on CPL's $160 million auction and money market
preferred stocks are adjusted every 49 days, based on current
market rates. The dividend rates averaged 4.5%, 3.5% and 2.7%
during 1995, 1994 and 1993, respectively. CPL retired its
remaining 10.05% preferred stock during August 1994.
During 1994 and 1993, the Electric Operating Companies
redeemed $33 million and $17 million, respectively, of preferred
stock, including redemption premiums, while in 1995, the only
preferred stock redemption was to meet SWEPCO's $1.2 million
annual sinking fund requirement. The minimum annual sinking fund
requirement for SWEPCO's preferred stock subject to mandatory
redemption is $1.2 million for the years 1996 through 2000. This
sinking fund retires 12,000 shares annually.
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.
10. SHORT-TERM FINANCING
The CSW System has established a money pool to coordinate
short-term borrowings by the Electric Operating Companies, Transok
and CSW Services, which is funded through CSW's issuance of
commercial paper. At December 31, 1995, the CSW System had two
credit facilities in place aggregating $1.2 billion to back up its
commercial paper program, which had $692 million outstanding at a
weighted average rate of 5.85%.
CSW Credit, which does not participate in the money pool,
issues commercial paper on a stand-alone basis that is secured by
the assignment of its receivables. CSW Credit maintains a secured
revolving credit agreement which aggregated $900 million to back
up its commercial paper program which, at December 31, 1995, had
$646 million outstanding at a weighted average rate of 5.83%.
11. COMMON STOCK
CSW has reserved 100,000 shares of CSW Common for issuance
to outside directors pursuant to the directors restricted stock
plan. In addition, CSW maintains a long-term incentive plan
pursuant to which CSW is authorized to issue shares of restricted
common stock, stock options and/or stock appreciation rights to
certain eligible employees. Under the long-term incentive plan,
approximately 3.8 million shares of CSW Common were available for
grant as of December 31, 1995 and approximately 1.6 million shares
were reserved for issuance upon exercise of options which were
outstanding at December 31, 1995. In January 1996, the
compensation committee of the board of directors of CSW authorized
a restricted stock grant for the executive officers of CSW. This
special award was made to reward sustained, long-term corporate
performance, encourage executive retention and focus on the long-
term perspective. This grant vests in 25 percent increments in
1997, 1998, 1999 and 2000.
The PowerShare plan is available to all CSW shareholders,
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 additional CSW Common. In February 1996, CSW filed a
registration statement with the SEC relating (i) to the issue and
<PAGE> 49
sale of an additional five million shares of CSW Common through
the PowerShare plan and (ii) proposed amendments to the plan that
would, among other things, make the plan available to the
residents of all fifty states and the District of Columbia.
During 1995 and 1994, CSW raised approximately $57 million and $50
million, respectively, in new equity through the PowerShare plan.
CSW expects to use the proceeds from sales of CSW Common made
pursuant to the PowerShare plan to reduce short-term and long-term
debt and for other general corporate purposes. Information
concerning new CSW Common equity, primarily through PowerShare,
issued during 1995 and 1994 is presented in the following table.
1995 1994
Number of new shares issued (millions) 2.3 2.2
Range of stock price for new shares $22 5/8 - $28 3/8 $20 3/8 - $29 5/8
New common stock equity (millions) $57 $50
On February 27, 1996, CSW sold 15,525,000 shares of its CSW
Common in the 1996 Stock Offering and received net proceeds of
approximately $398 million. These proceeds were used to repay a
portion of the indebtedness incurred by CSW under the CSW Credit
Agreement to fund the acquisition of SEEBOARD.
12. BUSINESS SEGMENTS
CSW's business segments include United States Electric
Operations (CPL, PSO, SWEPCO, WTU), United Kingdom Electric
Operations (SEEBOARD Group) and Gas Operations (Transok). Seven
additional non-utility companies are included with CSW in
Corporate items and Other (CSW Energy, CSW International, CSW
Communications, CSW Credit, CSW Leasing, CSW Services and
EnerShop). The United Kingdom Electric Operations includes the
activities of SEEBOARD, as well as the purchase accounting
adjustments and financing activities included in the SEEBOARD
Group. See NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES for
a discussion of the accounting for the SEEBOARD acquisition.
CSW's business segment information is presented in the following
tables.
1995 1994 1993
(millions)
Operating Revenues
Electric Operations
United States $2,883 $3,065 $3,055
United Kingdom (1) 208 -- --
Gas Operations 592 518 603
Corporate items and Other 52 40 29
$3,735 $3,623 $3,687
Operating Income
Electric Operations
United States $719 $728 $559
United Kingdom (1) 21 -- --
Gas Operations 52 49 25
Corporate items and Other (31) 6 4
Operating income before taxes 761 783 588
Income taxes 105 189 131
$656 $594 $457
<PAGE> 50
1995 1994 1993
(millions)
Depreciation and Amortization
Electric Operations
United States $335 $316 $296
United Kingdom (1) 7 -- --
Gas Operations 31 32 29
Corporate items and Other 11 8 5
$384 $356 $330
Identifiable Assets
Electric Operations
United States $9,201 $9,066 $8,927
United Kingdom (1) 2,821 -- --
Gas Operations 766 724 684
Corporate items and Other 1,081 1,276 993
$13,869 $11,066 $10,604
Capital expenditures and
acquisitions
Electric Operations
United States $398 $493 $481
United Kingdom (1), (2) 731 -- --
Gas Operations 66 65 88
Corporate items and Other (3) 19 114 64
$1,214 $672 $633
(1) Represents equity method of accounting for November 1995
(27.6%) and full consolidation accounting for December
1995 (76.45%).
(2) Represents cash that had been used as of December 31,
1995, to purchase SEEBOARD capital shares in the open market.
(3) Includes CSW Energy equity investments.
13. UNAUDITED PRO FORMA INFORMATION
On November 6, 1995, CSW, indirectly through CSW (UK),
announced its intention to commence the Tender Offer in the United
Kingdom to acquire all of the outstanding share capital of
SEEBOARD, a regional electric company based in the United Kingdom,
for an aggregate adjusted purchase price of approximately $2.12
billion.
SEEBOARD's principal business is the distribution and supply
of electricity in southeast England. SEEBOARD has its
headquarters in Crawley, West Sussex. It has a distribution
territory that covers approximately 3,000 square miles which
extends from the outlying areas of London to the English Channel.
SEEBOARD serves approximately 2 million customers. Approximately
80% of SEEBOARD's sales are to residential and commercial
customers, while the remaining 20% are primarily to industrial
customers. For the year ended December 31, 1995, SEEBOARD had
electricity sales of approximately 18 billion KWHs and, excluding
exceptional items, net earnings of $118 million on revenues of
approximately $1.9 billion. SEEBOARD's results for the calendar
year ended December 31, 1995 are not indicative of the results
that will be experienced by SEEBOARD as a subsidiary of CSW due,
in part, to the debt incurred in connection with the financing of
the acquisition, the purchase accounting adjustments and the
accounting adjustments made to adjust SEEBOARD's results for U.S.
Generally Accepted Accounting Principles. SEEBOARD is also
involved in certain activities other than electricity distribution
and supply, including electrical contracting and retailing, gas
supply and electricity generation. The earnings of SEEBOARD
presented above have been converted into U. S. dollar amounts for
illustrative purposes only at an exchange rate of 1.00 pound=$1.58,
which was the prevailing rate of exchange at the close of business
on November 3, 1995, the business day prior to the announcement of
the Tender Offer. See MD&A - LIQUIDITY AND CAPITAL RESOURCES for
a discussion of the financing of the SEEBOARD acquisition.
<PAGE> 51
The unaudited pro forma information is presented in response
to applicable accounting rules relating to acquisition
transactions. The pro forma information gives effect to the
acquisition of SEEBOARD accounted for under the purchase method of
accounting for the twelve months ended December 31, 1995 and the
twelve months ended December 31, 1994 as if the transaction had
been consummated at the beginning of the periods presented.
The unaudited pro forma information is based upon preliminary
fair value allocations related to the purchase of SEEBOARD. The
allocations are subject to revision after more detailed analyses,
appraisals and evaluations are completed. The unaudited pro forma
information has been prepared in accordance with United States
generally accepted accounting principles. The pro forma
information in the following table is presented for illustrative
purposes only and is not necessarily indicative of the operating
results that would have occurred if the SEEBOARD acquisition had
taken place at the beginning of the period specified, nor is it
necessarily indicative of future operating results. The following
pro forma information has been prepared reflecting the February
1996 issuance of CSW Common, and has been converted at an exchange
rate of 1.00 pound=$1.58 and 1.00 pound=$1.54 for the twelve months
ended December 31, 1995 and 1994, respectively.
1995 1994
(millions, except EPS)
Operating Revenues $5,404 $5,465
Operating Income 750 745
Net Income for Common Stock 445 431
Earnings Per Share of Common Stock $2.15 $2.13
<PAGE> 52
14. QUARTERLY INFORMATION (UNAUDITED)
The following unaudited quarterly information includes, in
the opinion of management, all adjustments necessary for a fair
presentation of such amounts. Information for quarterly periods
is affected by seasonal variations in sales, rate changes, timing
of fuel expense recovery and other factors.
QUARTERS ENDED 1995 1994
(millions, except EPS)
March 31,
Operating Revenues $659 $850
Operating Income 90 93
Net Income 44 48
EPS $0.20 $0.23
June 30,
Operating Revenues $920 $908
Operating Income 170 157
Net Income 108 107
EPS $0.54 $0.55
September 30,
Operating Revenues $1,087 $1,070
Operating Income 267 239
Net Income 203 189
EPS $1.04 $0.97
December 31,
Operating Revenues $1,069 $795
Operating Income 129 105
Net Income 66 68
EPS $0.32 $0.33
Total
Operating Revenues $3,735 $3,623
Operating Income 656 594
Net Income 421 412
EPS $2.10 $2.08
<PAGE> 53
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, 1995 and 1994, and the
related consolidated statements of income, retained earnings and
cash flows, for each of the three years ended December 31, 1995.
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, 1995 and 1994, and the related consolidated statements
of income, retained earnings and cash flows for each of the three
years ended December 31, 1995, 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.
Arthur Andersen LLP
Dallas, Texas
February 28, 1996
<PAGE> 54
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 as of December 31, 1995.
E. R. Brooks Glenn D. Rosilier Wendy G. Hargus
Chairman, President and Senior Vice President and Controller
Chief Executive Officer Chief Financial Officer
<PAGE> 55
GLOSSARY OF TERMS
The following abbreviations or acronyms used in this Financial Report
are defined below:
Abbreviation or Acronym Definition
1996 Stock Offering............ Registered public stock offering of
15,525,000 shares of CSW Common
AFUDC.......................... Allowance for funds used during construction
ALJ............................ Administrative Law Judge
ANI............................ American Nuclear Insurance
APBO........................... Accumulated Postretirement Benefit Obligation
Arkansas Commission............ Arkansas Public Service Commission
Ash Creek...................... Ash Creek Mining Company, Tulsa, Oklahoma
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, was pending
BREMCO......................... Bossier Rural Electric Membership Corporation
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
Court of Appeals............... Court of Appeals, Third District of Texas,
Austin, Texas
CPL............................ Central Power and Light Company, Corpus
Christi, Texas
CPL 1995 Agreement............. Settlement Agreement filed by CPL with the
Texas Commission to settle certain CPL
regulatory matters
CSW............................ Central and South West Corporation, Dallas,
Texas
CSW Common..................... CSW common stock, $3.50 par value per share
CSW Communications............. CSW Communications, Inc., Austin, Texas
CSW Credit..................... CSW Credit, Inc., Dallas, Texas
CSW Credit Agreement........... $850 million senior credit agreement entered
into by CSW with a consortium of banks to
partially fund the SEEBOARD acquisition
CSW Energy..................... CSW Energy, Inc., Dallas, Texas
CSW International.............. CSW International, Inc., Dallas, Texas
CSW Investments................ CSW Investments, an unlimited company
organized in the United Kingdom which is
wholly owned, indirectly through
subsidiaries, by CSW International
CSW Investments Credit Facility 1.0 billion pounds senior credit facility
arranged by CSW Investments with a
consortium of banks to partially fund the
SEEBOARD acquisition
CSW Leasing.................... CSW Leasing, Inc., Dallas, Texas
CSW System..................... CSW and its subsidiaries (excluding SEEBOARD
Group)
CSW Services................... Central and South West Services, Inc., Dallas,
Texas and Tulsa, Oklahoma
CSW Suit....................... Suit filed by CSW against El Paso in the
Bankruptcy Court
CSW (UK)....................... CSW (UK) plc., a public limited company
organized in the United Kingdom which is
wholly owned by CSW Investments
CWIP........................... Construction work in progress
DOE............................ United States Department of Energy
El Paso........................ El Paso Electric Company
El Paso Suit................... Suit filed by CSW against El Paso in the
United States Bankruptcy Court in Austin,
Texas
Electric Operating Companies... CPL, PSO, SWEPCO and WTU
Energy Policy Act.............. National Energy Policy Act of 1992
EnerShopSM..................... EnerShop Inc., Dallas, Texas
EPS............................ Earnings per share
ERCOT.......................... Electric Reliability Council of Texas
ERISA.......................... Employee Retirement Income Security Act of
1974, as amended
EWG............................ Exempt Wholesale Generators
FASB........................... Financial Accounting Standards Board
FCC............................ Federal Communications Commission
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
IPP............................ Independent Power Producer
ITC............................ Investment tax credit
KWH............................ Kilowatt-hour
<PAGE> 56
GLOSSARY OF TERMS (continued)
Louisiana Commission........... Louisiana Public Service Commission
MCPC........................... Mid-Continent Power Company, Inc.
MD&A........................... Management's Discussion and Analysis of
Financial Condition and Results of
Operations
MDEQ........................... Mississippi Department of Environmental
Quality
Merger......................... The proposed merger whereby El Paso would
have 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
Mississippi Power.............. Mississippi Power Company
MMbtu.......................... Million Btu
MMcf/d......................... Million cubic feet of gas per day
Modified Plan.................. Modified Third Amended Plan of Reorganization
for the Merger
MW............................. Megawatt
MWH............................ Megawatt-hour
National Grid.................. National Grid Group plc
NEIL........................... Nuclear Electric Insurance Limited
NOPR........................... Notice of Proposed Rule Making
NRC............................ Nuclear Regulatory Commission
Oklahoma Commission............ Corporation Commission of the State of
Oklahoma
Oklaunion...................... Oklaunion Power Station Unit No. 1
Operating Companies............ CPL, PSO, SWEPCO, WTU, and Transok
OPUC........................... Office of Public Utility Counsel of Texas
PCB............................ Polychlorinated biphenyl
PCRB........................... Pollution Control Revenue Bond
PowerShareSM................... CSW's PowerShare Dividend Reinvestment and
Stock Purchase Plan
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
San Antonio.................... City of San Antonio, Texas
SEEBOARD....................... SEEBOARD, plc., Crawley, West Sussex, United
Kingdom
SEEBOARD Group................. Consolidated SEEBOARD, CSW (UK) and CSW
Investments converted to U.S. Generally
Accepted Accounting Principles
SEC............................ Securities and Exchange Commission
SFAS........................... Statement of Financial Accounting Standards
SFAS No. 71.................... Accounting for the Effects of Certain Types of
Regulation
SFAS No. 106................... Employers' Accounting for Postretirement
Benefits Other than Pensions
SFAS No. 109................... Accounting for Income Taxes
SFAS No. 112................... Employers' Accounting for Postemployment
Benefits
SFAS No. 121................... Accounting for the Impairment of Long-Lived
Assets for Long-Lived Assets to be Disposed
of
SFAS No. 123................... Accounting for Stock-Based Compensation
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
Tender Offer................... CSW (UK)'s $2.12 billion tender offer in the
United Kingdom for all the outstanding share
capital of SEEBOARD
Texas Commission............... Public Utility Commission of Texas
TEX/CON........................ TEX/CON Oil and Gas Company
Transok........................ Transok, Inc. and subsidiaries, Tulsa,
Oklahoma
Westinghouse................... Westinghouse Electric Corporation
WTU............................ West Texas Utilities Company, Abilene, Texas
WTU Stipulation and Agreement.. Stipulation and Agreement to settle certain
WTU regulatory matters
<PAGE> 57
GRAPH DESCRIPTION AND DATA POINTS
Title and Location Description Data Points
Page 6
Estimated Future Capital Expenditures
Dollars in Millions Three Column Bar Chart with Line Superimposed
96 97 98
--- --- ---
Total 636 671 563
Line:
Electric Operating Companies 332 356 343
Page 8 91 92 93 94 95
Embeded Cost of Debt ---- ---- ---- ---- ----
Percent Five Column Bar Chart
Embeded Cost of Debt 9.0% 8.3% 7.8% 7.7% 7.2%
Page 17 93 94 95
U.S. Electric Revenues ----- ----- -----
Dollars in Millions 3 Column Stacked Bar Chart
Residential 1,160 1,156 1,138
Commercial 832 836 810
Industrial 736 733 702
Sales for Resale 179 204 224
Other 148 136 9
93 94 95
Page 18 ---- ---- ----
Average Unit Cost of Fuel
Per MMbtu 3 Column Bar Chart 2.11 1.82 1.58
95
Page 49 --
1995 Operating Revenues by Segment
Percent Pie Chart
U.S. Electric 78
U.K. Electric 6
Gas 16
Other (not in chart) approximately 1%
Page 50 95
1995 Identifiable Assets by Segment --
Percent Pie Chart
U.S. Electric 67
U.K. Electric 20
Gas 6
Corp/Other 7
Page 51 94 95
CSW Revenues ----- -----
Dollars in Millions 2 Column Stacked Bar Chart
Actual 3,623 3,735
Pro-forma 1,842 1,669
Page 52
CSW Quarterly EPS Comparisons
Dollars 4 Column Bar Chart 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
1994 .23 .55 .97 .33
1995 .20 .54 1.04 .32
