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Central and South West Corporation
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NOTICE OF
ANNUAL MEETING
OF STOCKHOLDERS
and
PROXY STATEMENT
Annual Meeting April 17, 1997
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March 7, 1997
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TABLE OF CONTENTS
PAGE
Notice of Annual Meeting of Stockholders.................................i
Proxy Statement
General Information.................................................1
Proposal 1 -- Election of Directors.................................2
Proposal 2 -- Reapproval of 1992 Long-Term Incentive Plan,
As Amended to Date............................9
Proposal 3 -- Approval of Appointment of
Independent Public Accountants.................14
Proposal 4 -- Transaction of Other Business...................... .15
Executive Compensation.............................................16
Performance Graph..................................................26
Appendix A - 1996 Financial Report
Appendix B - Amended and Restated 1992 Long-Term Incentive Plan
<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 17, 1997, at 10:30 a.m., local time,
at the Galleria Ballroom of the Westin Hotel, 13340 Dallas Parkway, Dallas,
Texas, for the purpose of considering and voting upon proposals:
1. a) To elect four directors to Class I of the Corporation's Board of
Directors (Board) to serve three-year terms; b) To elect one director
to Class III of the Board to serve the remaining two years of the
current Class III term;
2. To reapprove the Corporation's 1992 Long-Term Incentive Plan, as
amended to date, to qualify performance-based grants thereunder for
exemption from the deductible compensation limits imposed by federal
tax law;
3. To approve the Board's selection of Arthur Andersen LLP as the
Corporation's independent public accountants for the calendar year
1997; and
4. 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 4, 1997 (Record
Date) will be entitled to notice of and to vote at the meeting and any
adjournment thereof. Beginning April 3, 1997, a list of stockholders entitled to
vote may be examined during ordinary business hours at the Corporation's offices
at 1616 Woodall Rodgers Freeway, Dallas, Texas; please see Ellen Whalen, Manager
of Investor Services.
By Order of the Board of Directors,
Kenneth C. Raney, Jr.
Secretary
March 7, 1997
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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 17, 1997, at 10:30 a.m., local time, at the
Galleria Ballroom of the Westin Hotel, 13340 Dallas Parkway, Dallas, 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, 1997. 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, 1997, 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 212,140,504 shares were outstanding on March 4, 1997 (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 proxy and
voting the shares in person.
<PAGE>2
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 1998 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 1998 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, 1997.
PROPOSALS FOR THE MEETING
Proposal 1: ELECTION OF DIRECTORS
Nominees for Directors
At the Meeting, four directors will be elected to Class I of the Board for
three-year terms expiring at the 2000 annual meeting or until their respective
successors are duly elected and qualified. One director will be elected to Class
III of the Board to fill the remaining two years of the Class III term expiring
at the 1999 annual meeting or until his successor is duly elected and qualified.
Directors will be elected by a plurality of the votes cast at the Meeting.
In accordance with the Corporation's Second Restated 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 2000, 1998 and 1999 annual meetings of
stockholders, respectively, or when their respective successors are duly elected
and qualified. The Board currently consists of 12 directors. The Board elected
Glenn Files to a directorship in October, 1996. Effective February 27, 1997, Mr.
Cruikshank resigned from the Board for personal reasons. The Corporation may
retain Mr. Cruikshank from time to time to perform consulting services.
<PAGE>3
The Board of Directors of the Corporation has nominated and unanimously
recommends that stockholders vote FOR the election of Molly Shi Boren, Donald M.
Carlton, T.J. Ellis, and Thomas V. Shockley, III, as Class I directors, and
Glenn Files, as a Class III director.
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:
MOLLY SHI BOREN, 53 Class I Director since 1991
Ms. Boren, of Norman, Oklahoma, has been an attorney since prior to 1992
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.
DONALD M. CARLTON, 59 Class I Director since 1994
Dr. Carlton served as the President and Chairman of Radian Corporation, an
engineering and technology firm, from 1969 through 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 Van Kampen American Capital Closed End Funds and Common Sense Trust
and National Instruments.
T. J. ELLIS, 54 Class I Director since 1996
Mr. Ellis served as the Commercial Director of SEEBOARD plc in 1985 and in
1992 became the Chief Executive of SEEBOARD plc after privatization of the
United Kingdom's national electric distribution system. 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 V. SHOCKLEY, III, 51 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 and of SEEBOARD Group plc, an electric subsidiary
located in the United Kingdom.
GLENN FILES, 49 Class III Director since 1996
Mr. Files joined the CSW System in 1971, working in the accounting,
customer service and operations areas for Public Service Company of Oklahoma. In
1990, he was named the Vice President of Marketing and Business Development at
Central Power and Light Company, and elected President and Chief Executive
Officer at West Texas Utilities Company in 1992. He was promoted to his current
position, Executive Vice President of Central and South West Corporation, in
April, 1996. Mr. Files serves as a Director of each of the Corporation's four
U.S. electric subsidiaries.
<PAGE>4
The following information is given for continuing directors:
GLENN BIGGS, 63 Class II Director since 1987
Since 1989 Mr. Biggs has served as the President of Biggs & Co., an
investment firm located in San Antonio, Texas. From 1991 to 1994 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.
E. R. BROOKS, 59 Class II Director since 1988
Mr. Brooks has served as Chairman, President and Chief Executive Officer of
the Corporation since 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 and Baylor Health Care System Foundation, Dallas,
Texas, and Hardin-Simmons University, Abilene, Texas.
JOE H. FOY, 70 Class III Director since 1974
Mr. Foy served as a partner of the law firm of Bracewell & Patterson,
Houston, Texas prior to 1992 until his retirement in 1993. He is currently a
member of the Board of Directors of Enron Corporation.
ROBERT W. LAWLESS, 60 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, 1989 through April, 1996. He has served as the President of the
University of Tulsa since May, 1996. He is a member of the Board of Directors of
Salomon Brothers Fund, Salomon Brothers Capital Fund and Salomon Brothers
Investors Fund.
JAMES L. POWELL, 67 Class II Director since 1987
Mr. Powell has been involved in ranching and investments in Ft. McKavett,
Texas since prior to 1992. 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.
J. C. TEMPLETON, 72 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, Texas. After
fourteen years of service to the Corporation, Mr. Templeton will retire from the
Board of Directors at the conclusion of the Annual Stockholders Meeting on April
17, 1997.
LLOYD D. WARD, 48 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 served as Division President of the Central Division of Frito-Lay, Inc. in
Dallas, Texas from January 1993 until March, 1996. In April, 1996 he joined the
Maytag Corporation as an Executive Vice President and as President of Maytag
Appliances.
<PAGE>5
Security Ownership of Management
The following table shows securities beneficially owned as of December 31,
1996 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.........................................14,211 -
Molly Shi Boren......................................2,886 -
E.R. Brooks........................................113,690 -
Donald M. Carlton....................................5,230 -
T. J. Ellis..........................................2,000 -
Glenn Files.........................................33,723 -
Joe H. Foy...........................................8,717 -
T.M. Hagan..........................................11,740 -
Robert W. Lawless....................................3,137 -
Venita McCellon-Allen................................4,535 -
Ferd. C. Meyer, Jr..................................41,246 -
James L. Powell......................................4,211 -
Glenn D. Rosilier...................................60,676 -
Thomas V. Shockley, III.............................60,657 -
J.C. Templeton.......................................3,411 -
Lloyd D. Ward........................................2,157 -
All of the above and other officers as a group
(CSW Directors and Officers).......................413,799
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(1) Shares for Ms. McCellon-Allen and Messrs. Brooks, Files, Hagan,
Meyer, Rosilier, Shockley, and all CSW Directors and Officers include
1,500, 17,074, 6,333, 1,610, 8,013, 8,035, 10,178 and 58,552 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 1,289, 54,315, 19,067, 6,701, 26,736,
26,736, 34,331 and 189,917 shares of Common Stock underlying
immediately exercisable options held by Ms. McCellon-Allen, Messrs.
Brooks, Files, Hagan, Meyer, Rosilier, Shockley, and CSW Directors and
Officers, respectively.
(2) Percentages are all less than one percent and therefore are omitted.
Security Ownership of Certain Beneficial Owners
Set forth below are the only persons or groups known to the Corporation as
of December 31, 1996, with beneficial ownership of 5 percent or more of the
Corporation's Common Stock.
<PAGE>6
Common Stock
--------------------------------
Amount of
Name, Address of Beneficial Percent of
Beneficial Owners Ownership Class
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Mellon Bank Corporation 15,097,191 (1) 7.1%
and subsidiaries
One Mellon Bank Center
Pittsburgh, PA 15258
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(1) 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
998,086 shares and shared voting power as to 23,755 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 4 special meetings during 1996.
Directors who are not also officers and employees of the Corporation receive
annual cash director's 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. Beginning in 1997, the 1997 Director's Compensation Plan will award
non-employee directors an annual award of 600 phantom stock shares which vest
upon termination from the Board and are then converted into one-for-one shares
of Common Stock. 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. Directors who are also officers and employees of the Corporation receive
no annual retainer 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 16 current directors and executive officers and 11 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 for
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 $16,402 per participant for
1996; $16,367 per participant for 1995; and $17,013 per participant for 1994.
Non-employee directors are provided the opportunity to enroll in a medical
and dental program offered by the company. This program is identical to the
employee plan and directors who elect coverage pay the same premium as active
employee participants in the plan. If a non-employee director terminates his
service on the board with ten or more years of service, that director is
eligible to receive retiree medical and dental benefits coverage from the
corporation.
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, 1997 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
1996, except for Lloyd D. Ward who attended 72% of the total meetings.
Board Committees
Policy Committee. The Policy Committee, currently consisting of Messrs.
Brooks (Chairman), Foy, Lawless and Powell, held 9 meetings in 1996. 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 1996. The Audit Committee recommends to the Board the independent
public accountants to be selected; discusses with the internal auditors and
independent public accountants the overall scope, plans and results of their
audits, and their evaluations of internal controls and the overall quality of
the Corporation's accounting and financial reporting practices; facilitates any
private communication with the Committee desired by the internal auditors or
independent public accountants; discusses with management, internal auditors and
the independent public accountants the Corporation's accounting and financial
reporting principles and policies; monitors the program to ensure compliance
with the Corporation's business ethics policy; and may direct and supervise an
investigation into any significant matter brought to its attention within the
scope of its duties.
Executive Compensation Committee. The Executive Compensation Committee,
currently consisting of Ms. Boren and Messrs. Foy (Chairman), Lawless, Templeton
and Ward, held 6 meetings in 1996. 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 presidents and chief executive officers of the Corporation's principal
subsidiaries.
Nominating Committee. The Nominating Committee, currently consisting of
Messrs. Biggs, Carlton, Foy, Powell (Chairman) and Ward, held 2 meetings in
1996. 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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 and Section 17(a) of
the Public Utility Holding Company Act of 1935 require the Corporation's
officers and directors, and persons who beneficially own more than ten percent
of any class of the Corporation's equity securities 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 such reports received and
written representations from certain reporting persons, the Corporation believes
that during the 1996 calendar year all such filing requirements applicable to
its officers, directors and greater-than-ten-percent stockholders were complied
with as regards holdings of the Corporation's equity securities
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 1996. No executive officer of the Corporation serves or has served on
the Compensation Committee during or prior to 1996. 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 1996.
<PAGE>9
Proposal 2: REAPPROVAL OF THE 1992 LONG-TERM INCENTIVE PLAN,
AS AMENDED TO DATE
The success of the Company depends, in large measure, on its ability to
recruit and retain key employees with outstanding ability and experience. The
Board of Directors also believes there is a need to align shareholder and
employee interests by encouraging employee stock ownership and to motivate
employees with compensation conditioned upon achievement of the Company's
financial goals.
In order to accomplish these objectives, the Board of Directors has
adopted, subject to approval by the shareholders, the Central and South West
Corporation Amended and Restated 1992 Long-Term Incentive Plan (the "LTIP" or
"Incentive Plan").
The Incentive Plan is intended to amend and restate the 1992 Long-Term
Incentive Plan (the "Original Plan") to address recent regulatory changes,
enhance flexibility under the Incentive Plan, and to make the Incentive Plan
more consistent with the Company's overall compensation program. The revisions
do not increase the number of shares of Common Stock authorized for issuance
under the Original Plan nor authorize the issuance of any additional shares.
Specifically, the Original Plan has been amended to (i) impose maximum
grant and award payment amounts in respect of stock option, stock appreciation
rights, restricted stock and performance unit awards; (ii) enable the Executive
Compensation Committee (the "Committee") to determine, in its own discretion,
how share availability under the LTIP is computed; (iii) preclude the use of
shares owned less than six months in payment for the exercise price of stock
options; (iv) permit the Committee to determine, on an individual award basis,
the shareholder rights, if any, available to a restricted stock grantee; (v) add
"cash value added" and "economic value added" concepts as possible performance
unit performance goals; (vi) provide that upon death, disability or retirement a
grantee's LTIP awards will become 100% vested and any stock options held by any
such terminee will be exercisable for three years after retirement and one year
after death or disability; (vii) eliminate the requirement that an award under
the LTIP be forfeited if the grantee terminates employment for any reason within
one year after the date of grant of such award; (viii) permit the transfer of
non-qualified stock options by grantees (if so provided by the Committee); (ix)
conform the definition of "change in control" in the LTIP to the definition of
that term contained in the several change-in-control agreements recently entered
into with senior management; and (x) delete the provision limiting payments
under the LTIP to amounts not treated as non-deductible "excess parachute
payments" under Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code"). These amendments are more fully described below in the Summary
Description of the LTIP.
The affirmative vote of a majority of the shares of Common Stock present in
person or by proxy and entitled to vote at the Annual Meeting is required for
adoption of the Incentive Plan.
The Board of Directors recommends that shareholders vote FOR this proposal.
Summary Description of the LTIP
The following summary of the terms of the LTIP is qualified in its
entirety by reference to the text of the plan, which is attached as Appendix B
to this Proxy Statement. If adopted by the shareholders, the LTIP will be
effective as of April 17, 1997.
<PAGE>10
Administration. The LTIP will be administered by the Executive
Compensation Committee of the Board of Directors (the "Committee"). As a result
of recent changes to Section 16 of the Exchange Act and the implementation of
Section 162(m) of the Code, the definition of the Committee has been revised to
allow the Committee to meet the requirements of Sections 16 and 162(m) where
appropriate.
Eligibility. Key employees of the Company and its subsidiaries are
eligible to participate in the LTIP. Nonemployee Directors of the Company are
not eligible.
More than 700 employees of the Company and its subsidiaries are
presently eligible to participate; however, because the LTIP provides for broad
discretion in selecting participants and in making awards, the total number of
persons who will participate and the respective benefits to be accorded to them
cannot be determined at this time.
Stock Available for Issuance Through the LTIP. The LTIP provides for a
number of forms of stock-based compensation, as further described below. Up to
4,000,000 shares of the Company's Common Stock, par value $3.50 per share, are
authorized for issuance through the LTIP. The revisions to the Original Plan do
not authorize any additional shares for issuance under the LTIP. Provisions in
the LTIP permit the reuse or reissuance of shares of Common Stock underlying
canceled, expired, or forfeited awards of stock-based compensation, as well as
shares tendered in payment of a stock option exercise price or withheld by the
Company to pay taxes on an award, subject to restrictions imposed under the
Securities and Exchange Commission's ("SEC") short-swing trading rules. As a
result of recent revisions to Section 16, the Original Plan has been revised to
enhance the ability of the Committee to determine the number of shares available
for issuance under the LTIP. On February 3, 1997, the closing price for a share
of the Company's Common Stock, as reported on the New York Stock Exchange
composite tape, was $25.125.
Stock-based compensation will typically be issued in consideration for
the performance of services to the Company. At the time of exercise, the full
exercise price for a stock option must be paid in cash or, if the Committee so
provides, in shares of Common Stock.
Description of Awards Under the Plan. The Committee may award to
eligible employees incentive and nonqualified stock options, reload stock
options, stock appreciation rights, restricted awards, and performance units. As
separately described under "Performance Measures", the Committee may also grant
awards subject to satisfaction of specific performance goals. The forms of
awards are described in greater detail below.
Stock Options. The Committee will have discretion to award incentive
stock options ("ISOs"), which are intended to comply with Section 422 of the
Internal Revenue Code, or nonqualified stock options ("NQSOs"), which are not
intended to comply with Section 422 of the Internal Revenue Code. The Incentive
Plan also permits the Committee to award reload stock options in connection with
grants of NQSOs. A reload stock option provides a Participant with a new stock
option for each share used to satisfy the exercise price of an NQSO. As part of
the revisions to the Original Plan, an annual, individual stock option award
limit of two hundred and fifty thousand (250,000) shares was incorporated into
the LTIP.
Each ISO issued under the LTIP must be exercised within a period of ten
years from the date of grant, and the exercise price of any ISO or reload stock
option may not be less than the fair market value of the underlying shares of
Common Stock on the date of grant. Subject to the specific terms of the LTIP,
the Committee will have discretion to set such additional limitations on option
grants as it deems appropriate.
<PAGE>11
Options granted to employees under the LTIP will expire at such times
as the Committee determines at the time of the grant; provided, however, that no
ISO will be exercisable later than ten years from the date of grant. Each option
award agreement will set forth the extent to which the participant will have the
right to exercise the option following termination of the participant's
employment with the Company. The termination provisions will be determined
within the discretion of the Committee, may not be uniform among all
participants, and may reflect distinctions based on the reasons for termination
of employment.
Upon the exercise of an option granted under the LTIP, the option price
is payable in full to the Company, either in cash or its equivalent, by a
fully-secured, recourse promissory note, or by tendering shares having a fair
market value at the time of exercise equal to the total option price (provided
such shares have been held for at least six months prior to their tender). The
minimum six-month period has been added to the Original Plan to limit the
possibility of the Company incurring accounting charges related to the use of
shares to satisfy the exercise price. In its discretion, the Committee may
permit the simultaneous exercise of stock options and the sale of shares
acquired thereby in a brokerage "cashless" exercise.
Stock Appreciation Rights. The Committee may also award stock
appreciation rights ("SARs") upon such terms and conditions as it will
establish. The grant price of a freestanding SAR (a SAR not granted in
connection with a stock option) will equal the fair market value of a share of
Class A Common Stock while the grant price of a tandem SAR issued in connection
with a stock option will equal the exercise price of the related option. As part
of the revisions to the Original Plan, an annual, individual SAR award limit of
two hundred and fifty thousand (250,000) shares was incorporated into the LTIP.
Restricted Awards. The Committee will also be authorized to make
Restricted Awards of restricted stock or phantom stock under the LTIP upon such
terms and conditions as it shall establish. The award agreement will specify the
period(s) of restriction, the number of shares of restricted Common Stock or
phantom stock granted, restrictions based upon achievement of specific
performance objectives, and/or restrictions under applicable federal or state
securities laws. As part of the revisions to the Original Plan, an individual
annual restricted award limit of one hundred thousand (100,000) shares was
incorporated into the LTIP. In the Committee's discretion, participants may
receive dividends on and/or the right to vote their shares of restricted stock
and the Committee, in its discretion, will determine how dividends on restricted
shares are to be paid.
Each award agreement for restricted stock will set forth the extent to
which the participant will have the right to retain unvested restricted stock
following termination of the participant's employment with the Company. These
provisions will be determined in the sole discretion of the Committee, need not
be uniform among all shares of restricted stock issued pursuant to the LTIP, and
may reflect distinctions based on reasons for termination of employment. Except
in the case of terminations connected with a change in control and terminations
by reason of death or disability, the vesting of restricted stock which
qualifies for performance-based compensation under Section 162(m) and which are
held by "covered employees" under Section 162(m) shall occur at the time it
otherwise would have, but for the employment termination.
Performance Units. The Committee will have the discretion to award
performance units upon such terms and conditions as it will establish.
Performance units will have an initial value equal to the Fair Market Value of a
share of Common Stock or as determined by the Committee. The revisions to the
Original Plan clarify that performance units may be based on the value of a
share of Common Stock. Performance units will be paid upon the satisfaction of
performance goals specified by the Committee at the time of grant. The
performance measures upon which the performance units may be based shall
include, but shall not be limited to, such measures as cash value added,
earnings per share, economic value added, net earnings growth, net income,
operating income, return on assets, return on equity, sales or revenue growth,
and total shareholder return. Performance measures may be made on the basis of
comparisons to peer companies, individual or aggregate participant performance,
where such measure or measures of performance as the Committee in its sole
discretion, may deem appropriate. The number of performance units granted to a
key employee in any year shall be determined by the Committee in its sole
discretion subject to the limits set forth in the LTIP. As part of the revisions
to the Original Plan, an annual individual performance unit limit equal to the
value of one hundred thousand (100,000) shares at the end of the Performance
Period was incorporated into the LTIP.
The value of each performance unit shall be determined solely upon the
achievement of certain preestablished objective performance goals during each
performance period (the "Performance Period"). The duration of a Performance
Period is set by the Committee but may be no less than three years. A new
Performance Period may begin every year, or at more frequent or less frequent
intervals, as determined by the Committee.
The Committee shall establish, in writing, the objective performance
goals applicable to the evaluation of the performance units granted in each
Performance Period, the performance measures which shall be used to determine
the achievement of those performance goals, and any formulas or methods to be
used to determine the value of the performance units.
Following the end of a Performance Period, the Committee shall
determine the value of the performance-based awards granted for the period based
on the attainment of the preestablished objective performance goals. The
Committee shall also have discretion to reduce (but not to increase) the value
of a performance-based award.
The Committee will certify, in writing, that the award is based on the
degree of attainment of the preestablished objective performance goals. As soon
as practicable thereafter, payment of the awards to employees, if any, shall be
made in the form of shares of Common Stock.
Termination of Employment. The termination provisions contained in the
Original Plan have been revised to make the default provisions more closely
reflect the Company's current practice for treating awards upon an individual's
termination of employment. In addition, the special one-year rule which required
termination and cancellation of any award if the participant terminated
employment within one (1) year of the grant has been eliminated. This revision
permits the Committee to provide for different termination provisions based upon
a participant's reason for termination of employment.
Adjustments. The LTIP provides for appropriate adjustments in the
number of shares of Common Stock subject to awards and available for future
awards in the event of changes in outstanding Common Stock by reason of a
merger, recapitalization, stock split, or certain other events. The Original
Plan has been amended to limit the Committee's ability to adjust
performance-based awards subject to the requirements of Code Section 162(m).
<PAGE>13
Nontransferability. Unless otherwise provided for in an award
agreement, no award under the LTIP may be assigned, transferred, sold,
exchanged, pledged, disposed of, or otherwise hypothecated or encumbered by a
participant or any beneficiary thereof, except by testamentary disposition or
the laws of descent in distribution. As a result of recent changes to Section
16, this section has been revised to permit the Committee, in its sole
discretion, to permit transferability of awards in individual award agreements.
Change in Control. In case of a change in control of the Company,
outstanding options and SARs granted under the LTIP will become immediately
exercisable and will remain exercisable throughout their entire term, and
restriction periods and restrictions imposed on shares of Restricted Stock and
Phantom Stock immediately lapse. All performance units shall be deemed to have
been fully earned as of a change in control.
The definition of "change in control" in the Original Plan has been
revised to utilize the definition which is more consistent with that currently
being used by the Company's change-in-control agreements. The definition of
"potential change in control" has also been revised to narrow and limit the
circumstances constituting a potential change in control. The revision is
intended to preserve the Company's ability to use pooling of interests
accounting. Finally, the Original Plan has also been revised to eliminate the
provision regarding the treatment of incentive awards in response to the excise
tax imposed by Section 280G of the code. The revision is intended to provide a
consistent treatment for compensation in excise tax situations as provided in
the Company's change-in-control agreements. A discussion of the company's
change-in-control agreements is set forth later in this Proxy Statement.
Duration of the Plan and Amendments. The Board of Directors may suspend
or terminate the LTIP at any time and may amend the LTIP at any time, and from
time to time, in such respects as the Board may deem to be in the best interest
of the Company or its Subsidiaries. Notwithstanding the foregoing, however, no
amendment shall, without the requisite shareholder approval, (a) materially
increase the number of shares of Common Stock which may be issued under the
Plan, except as provided in Section 14 of the LTIP; (b) materially modify the
requirements as to eligibility for participation in the LTIP; (c) materially
increase the benefits accruing the participants under the LTIP; or (d) extend
the termination date of the LTIP. However, in no event will an ISO be granted
under the LTIP on or after April 17, 2007.
Federal Income Tax Consequences
Options. With respect to options which qualify as ISOs, an LTIP
participant will not recognize income for federal income tax purposes at the
time options are granted or exercised. If the participant disposes of shares
acquired by exercise of an ISO either before the expiration of two years from
the date the options are granted or within one year after the issuance of shares
upon exercise of the ISO (the "holding periods"), the participant will recognize
in the year of disposition: (a) ordinary income, to the extent that lesser of
either (1) the fair market value of the shares on the date of option exercise,
or (2) the amount realized on disposition, exceeds the option price; and (b)
capital gain, to the extent the amount realized on disposition exceeds the fair
market value of the shares on the date of option exercise. If the shares are
sold after expiration of the holding periods, the participant generally will
recognize capital gain or loss equal to the difference between the amount
realized on disposition and the option price.
<PAGE>14
With respect to NQSOs, the participant will recognize no income upon
grant of the option, and, upon exercise, will recognize ordinary income to the
extent of the excess of the fair market value of the shares on the date of
option exercise over the amount paid by the participant for the shares. Upon a
subsequent disposition of the shares received under the option, the participant
generally will recognize capital gain or loss to the extent of the difference
between the fair market value of the shares at the time of exercise and the
amount realized on the disposition.
Restricted Stock. A participant holding restricted stock will, at the
time the shares vest, realize ordinary income in an amount equal to the fair
market value of the shares and any cash received at the time of vesting, and the
Company will be entitled to a corresponding deduction for federal income tax
purposes. Dividends paid to the participant on the restricted stock during the
restriction period will generally be ordinary income to the participant and
deductible as such by the Company.
In general, the Company will receive an income tax deduction at the
same time and in the same amount which is taxable to the employee as
compensation, except as provided below under "Section 162(m)." To the extent a
participant realizes capital gains, as described above, the Company will not be
entitled to any deduction for federal income tax purposes.
Section 162(m)
Under Section 162(m) of the Internal Revenue Code, compensation paid by the
Company in excess of $1 million for any taxable year to "Covered Employees"
generally is deductible by the Company or its affiliates for federal income tax
purposes if it is based on the performance of the Company, is paid pursuant to a
plan approved by shareholders of the Company, and meets certain other
requirements. Generally, "Covered Employee" under Section 162(m) means the chief
executive officer and the four other highest paid executive officers of the
Company as of the last day of the taxable year.
It is presently anticipated that the Committee will at all times
consist of "outside directors" as required for purposes of Section 162(m), and
that the Committee will take the effect of Section 162(m) into consideration in
structuring Incentive Plan awards.
New Plan Benefits
The benefits that will be received under the LTIP by particular
individuals or groups are not determinable at this time. The benefits that were
received for the 1996 fiscal year by the Named Executive Officers pursuant to
the Original Plan (which the LTIP is intended to replace) are summarized in
tables on pages 22-24.
Proposal 3: 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, 1997. The Board of Directors has endorsed this
appointment and it is being presented to the stockholders for approval.
<PAGE>15
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, l996, 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 United Kingdom, 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
wholly-owned subsidiary of the Corporation in January, 1996.
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, l997 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.
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 1997. Proxies received by the
Board of Directors will be so voted unless stockholders specify in their proxies
a contrary choice.
Proposal 4: 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.
<PAGE>16
EXECUTIVE COMPENSATION 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,
programs and specific compensation practices. This review is designed to ensure
proper programs are in place to enable the Corporation to achieve its strategic
and operating objectives, provide superior value to its stockholders and
customers, and to document the Corporation's relative competitive position.
To maintain competitive, comprehensive compensation, the Compensation
Committee reviews a comparison of the Corporation's compensation program with
those offered by comparable companies within the utility and general industry.
For each component of compensation as well as total compensation, the
Compensation Committee seeks to ensure the Corporation's level of compensation
for expected levels of performance approximates the average for executive
officers in similar positions at comparable companies. In most years, this means
that the level of total compensation for expected performance will be near the
average for comparable companies. Performance above or below the expected levels
is reflected in a corresponding increase or reduction in the incentive portion
of the Corporation's compensation program.
To further this pay for performance philosophy, the Compensation
Committee has increased the percentage of pay that varies in relation to
performance and has slowed the growth in base pay.
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 corporate, business unit and/or individual
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 Utility Peer
Group provides an objective measure to compare performance benchmarks
appropriate for compensation purposes.
<PAGE>17
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 it 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 is generally provided
to all employees, including group health, life, disability and accident
insurance plans, tax-advantage reimbursement accounts, a defined 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 matched to
a comparable position within the utility industry and is valued at both the 50th
percentile market level as well as the 75th percentile of the market. In some
cases, these positions are common in both the utility industry and general
industry. In these cases, comparison are made to both markets. The position is
then evaluated based on the position's overall contribution to corporate goals.
This internal weighting is combined with the value the market places on the
associated job responsibilities, and a salary is assigned to that position.
Each year the assigned salary values are reviewed against market
conditions, including compensation practices in the Utility Peer Group,
inflation, and supply and demand in the labor markets. If these conditions
change significantly there may be an adjustment to base salary. Finally, the
results of the executive officer's performance over the past year becomes part
of the basis of the Compensation Committee's decision to approve, at its
discretion, base salaries of executive officers.
Incentive Programs - General. The executive incentive programs are
designed to strike an appropriate balance between short-term accomplishments and
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, business unit 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 zero 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 business unit of the Corporation, a
third equally weighted index consisting of a performance index for that business
unit may, at the discretion of the Committee, be factored into the composite
index.
The corporate performance index is determined by two equally weighted
measures--earnings per share and cash flow. Threshold, target and exceptional
levels for these objective measures are set by the Compensation Committee in the
first quarter of each year. The Compensation Committee considers both historic
performance and budgeted or expected levels of performance in setting these
targets.
<PAGE>18
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 work team, departmental or business unit performance which links to
corporate goals or initiatives. If an individual fails to achieve a minimum
threshold performance level on the individual performance index, that individual
does not earn an AIP award for the year.
The performance index for a given subsidiary business unit 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 business unit. The specific goals generally will
include achieving specific earnings levels and one or more non-financial goals
such as achievement of customer satisfaction ratings or productivity measures of
strategic goals. If a business unit 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.
Target awards for executive officers have been fixed at 50 percent of
salary for the chief executive officer, 45 percent of salary for executive and
senior vice presidents, 40 percent of salary for business unit presidents and 30
percent of salary for other executive officers. The corresponding maximum AIP
award that can be earned by the executive 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 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 1996, AIP awards were determined based on the corporate performance
index, the subsidiary business unit performance indices and the individual
performance index. For 1996, the Corporation achieved 102.27 percent of the
corporate performance index based on the earnings per share and cash flow
measures. Awards based on these results were paid in the form of cash to all
participants in January, 1997.
Incentive Programs - Long Term Incentive Plan. The Compensation
Committee rewards long-term performance with awards made pursuant to the Central
and South West Corporation 1992 Long-Term Incentive Plan (LTIP). The
Compensation Committee selects the form and amount of long-term awards based
upon its evaluation of which vehicles are best positioned to serve as effective
incentives for long-term performance.
Since 1992, the Compensation Committee has established long-term 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 specific dollar amount for each awardee
based on a percentage of Salary Midpoint. For 1997, the target award will be set
as a percentage of salary. 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>19
The payout of such long-term award is based upon a comparison of the
Corporation's total stockholder return over a three-year period, cycle, against
total stockholder returns of utilities in the S&P Electric Utility Index 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 S&P Electric Utility Index, 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 this program.
Each year a new three-year performance cycle has been established. In
March 1996, the Committee reviewed total stockholder return results for the
period covering 1993-1995, and, because they were below the threshold for a
payout, no awards were granted. In January 1997, the Committee reviewed total
stockholder return results for the period covering 1994-1996. Results for this
period were below the threshold for a payout, therefore, no awards were granted.
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 the grantee to buy specific
numbers of shares of Common Stock at a specific 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 officer's realization of any value on the options depends upon stock
appreciation.
In January, 1996 the Compensation Committee authorized a stock option
grant to the top management of SEEBOARD. This award was intended to align
management's interests with stockholders interests in order to enhance the value
to the Corporation of this newly-acquired subsidiary. The grant vests equally
over the three years, 1997, 1998 and 1999.
As previously disclosed, 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>20
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 exempt compensation, including payments that are not
included 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 award must be based entirely on an objective formula, without
any subjective consideration of individual performance.
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).
Rationale for CEO Compensation
In 1996, Mr. Brooks' compensation was determined as described above
and is consistent with all of the Corporation's executive officers.
Mr. Brooks' annual salary increased to $700,000 in November, 1996. 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' leadership in guiding the
Corporation through a strategic restructuring to align its structure and
management to effectively compete in a deregulated environment, his role in
effectively transitioning SEEBOARD into the Corporation, his management of the
Corporation's position in the CPL rate case and related regulatory proceedings,
and a subjective review of the level of corporate earnings achieved in 1996. In
addition, as a part of its overall annual review of executive compensation, the
Compensation Committee reviewed Mr. Brooks' salary based on market information
for similar positions as well as changes in the salaries of chief executive
officers at comparable regional utilities (not limited to the Utility Peer
Group).
Mr. Brooks' target AIP award for 1996 was 50 percent of his salary. In
1996, the Corporation achieved 102.27 percent of its corporate objective based
on earnings per share and cash flows results, which together with the
Compensation Committee's subjective evaluation of Mr. Brooks' individual
performance, resulted in a $375,000 AIP award which was paid in cash in January,
1997. 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.
To recognize sustained long-term performance, in January, 1996 the
Compensation Committee granted Mr. Brooks a restricted stock award of 16,300
shares as disclosed in the 1996 Proxy Statement. These shares were granted at a
share price of $27.75 and will vest in 25 percent increments over four years.
<PAGE>21
In 1996, the Compensation Committee established Mr. Brooks' performance
share target award for the 1996-1998 long-term incentive cycle of $436,745 to be
paid in shares of restricted stock in 1999 if performance measures are met. In
January, 1997, the Compensation Committee established Mr. Brooks' target award
for the 1997-1999 long-term incentive cycle of $490,000 to be paid in shares of
restricted stock in 2000 if performance measures are met. In both cases, the
target amount was derived by reference to the number and value of grants to
chief executive officers at comparable companies (not limited to the Utility
Peer Group).
EXECUTIVE COMPENSATION COMMITTEE
Joe H. Foy, Chairman
Molly Shi Boren
Robert W. Lawless
J.C. Templeton
Lloyd D. Ward
<PAGE>22
Cash and Other Forms of Compensation
The following table sets forth the aggregate cash and other
compensation for services rendered for the fiscal years of 1996, 1995, and 1994
paid or awarded by the Corporation to the Chief Executive Officer and each of
the four most highly compensated executive officers (Named Executive Officers).
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation
Awards Payouts
Other
Annual Restricted Securities All Other
Compen- Stock Underlying LTIP Compen-
Name and Salary Bonus sation Award(s) Options/ Payouts sation
Principal Position Year ($) ($) (1) ($) ($)(1)(2) SARs(#) ($) ($)(3)
- ------------------ ---- -------------------- ------------ ---------- ---------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
E.R. Brooks 1996 657,692 374,354 22,267 417,688 -- -- 23,992
Chairman, President 1995 628,847 162,739 25,149 -- -- -- 23,956
and Chief Executive 1994 599,765 -- 20,577 -- 38,579 -- 24,485
Officer
T.V. Shockley, III 1996 435,212 242,565 10,746 248,563 -- -- 21,742
Executive Vice 1995 406,870 105,448 8,441 -- -- -- 21,706
President 1994 392,389 -- 12,693 -- 23,702 -- 22,235
Ferd. C. Meyer, Jr. 1996 345,051 209,898 8,910 194,750 -- -- 21,742
Senior Vice 1995 336,547 86,444 12,354 -- -- -- 21,706
President and 1994 320,637 -- 8,236 -- 18,459 -- 22,235
General Counsel
Glenn D. Rosilier 1996 334,751 209,898 10,331 194,750 -- -- 23,992
Senior Vice 1995 326,500 86,444 6,706 -- -- -- 23,019
President and Chief 1994 311,541 -- 6,714 -- 18,459 -- 22,235
Financial Officer
Glenn Files(4) 1996 331,135 44,860 66,415 153,750 -- -- 23,992
Executive Vice 1995 266,223 85,048 19,144 -- -- -- 23,117
President 1994 246,699 50,000 10,032 -- 13,758 -- 6,750
Harry D. Mattison(5) 1996 183,083 242,565 8,871 248,563 -- -- 2,333,434
Former Executive Vice 1995 396,823 99,898 5,886 -- -- -- 23,956
President 1994 382,388 -- 8,765 -- 23,702 -- 24,485
- ----------------------
(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 25 percent of the stock vesting on the first, second,
third and fourth anniversary dates. Upon vesting, shares of Common
Stock are re-issued without restrictions. The individual receives
dividends and may vote shares of restricted stock. The amount reported
in the table represents the market value of the shares at the date of
grant. As of the end of 1996, the aggregate restricted stock holdings
of each of the Named Executive Officers were:
</TABLE>
<PAGE>23
Restricted Stock Held Market Value at
at December 31, 1996 December 31, 1996
-------------------- -----------------
E.R. Brooks 17,074 $437,521
T.V. Shockley, III 10,178 260,811
Glenn Files 6,333 162,283
Ferd. C. Meyer, Jr. 8,013 205,337
Glenn D. Rosilier 8,035 205,897
Harry D. Mattison -- --
- ---------------
(3) Amounts shown in this column consist of (i) the annual employer matching
payments to CSW's Thrift Plus Plan, (ii) premiums paid per participant for
personal liability insurance and (iii) average amounts of premiums paid per
participant in those years under CSW's memorial gift program. See "Other
Information Regarding the Board of Directors - Meetings and Compensation"
for a description of the Corporation's memorial gift program.
(4) Mr. Files was promoted to his position as Executive Vice President of the
Corporation in April, 1996. Therefore, $97,350 in salary and bonus was paid
to him by West Texas Utilities Company ("WTU") where he served as president
from 1992. Both 1994 and 1995 salary amounts were paid by WTU.
Additionally, in 1996 Mr. Files was reimbursed $25,662 for relocation
expenses incurred in connection with his transfer from WTU to the
Corporation.
(5) Upon his retirement in 1996, Mr. Mattison was paid an early retirement
package valued at $2,309,442.
Option/SAR Grants
No stock options or stock appreciation rights were granted in 1996. The
stock option plans are administered by the Executive Compensation Committee of
the Board, which has the authority to determine the individuals to whom and the
terms upon which option and SAR grants shall be made. Shown below is information
regarding option/SAR exercises during 1996 and unexercised options/SARs at
December 31, 1996 for the Named Executive Officers.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in 1996
and Fiscal Year-End Option/SAR Values
Number of Securities Value of
Underlying Unexercised In-the-Money
Value Options/SARs at Year-End Options/SARs at Year-End($)
Shares Acquired Realized Exercisable/ Exercisable/
Name on Exercise(#) ($) Unexercisable Unexercisable(1)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
E. R. Brooks - - 54,315/12,860 -/10,442
T. V. Shockley, III - - 34,314/ 7,917 -/ 6,429
Glenn Files - - 19,067/ 4,586 -/ 3,724
Ferd. C. Meyer, Jr. - - 26,736/ 6,153 -/ 4,996
Glenn D. Rosilier - - 26,736/ 6,153 -/ 4,996
Harry D. Mattison 15,801 50,359 18,529/ 7,901 -/ 6,416
- ---------------
(1) Calculated based upon the difference between the closing price of the
Corporation's Common Stock on the New York Stock Exchange on December 31,
1996 ($25.625 per share) and the exercise price per share of the
outstanding unexercisable and exercisable options ($16.250, $24.813 and
$29.625, as applicable).
</TABLE>
<PAGE>24
Long-Term Incentive Plan Awards in 1996
The following table shows information concerning certain
performance-based awards made to the Named Executive Officers during 1996 under
the LTIP:
<TABLE>
<CAPTION>
Performance or Estimated Future Payouts under
Number of Other Period Non-Stock Price Based Plans
Shares, Units or Until Maturation Threshold Target Maximum
Name Other Rights or Payout ($) ($) ($)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
E. R. Brooks -- 2 years -- 436,745 655,118
T. V. Shockley, III -- 2 years -- 242,564 363,846
Glenn Files -- 2 years -- 126,723 190,085
Ferd. C. Meyer, Jr. -- 2 years -- 192,407 288,611
Glenn D. Rosilier -- 2 years -- 192,407 288,611
Harry D. Mattison(1) -- -- -- -- --
- ---------------
(1) Mr. Mattison retired from the Corporation effective April 17, 1996 and
therefore is not entitled to future stock awards under the LTIP.
Payouts of these awards are contingent upon the Corporation 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 otherwise 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-based awards 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 such earn-out or 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 Plan"
for a more thorough discussion of the terms of the LTIP.
</TABLE>
Retirement Plan
Pension Plan Table
Annual Benefits After
Average Compensation Specified Years of Credited Service
- -------------------- -------------------------------------------------
15 20 25 30 or more
---------- ----------- ------------ ----------
$250,000 $ 62,625 $83,333 $104,167 $125,000
350,000 87,675 116,667 145,833 175,000
450,000 112,725 150,000 187,500 225,000
550,000 137,775 183,333 229,167 275,000
650,000 162,825 216,667 270,833 325,000
750,000 187,875 250,000 312,500 375,000
<PAGE>25
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, 1996,
for the Named Executive Officers are as follows: Mr. Brooks, 30 and 59; Mr.
Shockley, 13 and 51; Mr. Files, 25 and 49, Mr. Meyer, 15 and 57; and Mr.
Rosilier, 21 and 49. 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 age 60. 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.
The Corporation has entered into change in control agreements with the
individuals named in the Summary Compensation Table. The purpose of the
agreements is to assure the objective judgment, and to retain the loyalties of
these key individuals in the event the Corporation is faced with a potential
change in control. The change in control agreements entitle such individuals, in
the event any such individual is terminated by the Corporation within three
years after the change in control (and prior to the expiration of the
agreements), to receive a lump sum payment equal to four times base salary plus
target bonus, enhanced non-qualified retirement benefits, continued health and
other welfare benefits for up to three years, and various other non-qualified
benefits. The individuals will also be eligible for an additional payment, if
necessary, to make them whole for an excise tax on excess payments imposed.
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 1991 through 1996 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>26
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
[Graph submitted in hard copy as a separate exhibit.]
CENTRAL AND SOUTH WEST CORPORATION
E. R. Brooks
Chairman, President and Chief Executive Officer
March 7, 1997
<PAGE>
[GRAPHIC OMITTED]
- ------------------------------------------------------------------------------
Central and South West Corporation
-------------------------------------
APPENDIX A
1996 FINANCIAL REPORT
--------------------------------------
March 7, 1997
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
Management's Discussion and Analysis of Financial Condition
and Results of Operations 1
Consolidated Statements of Income 30
Consolidated Statements of Stockholders' Equity 31
Consolidated Balance Sheets 32
Consolidated Statements of Cash Flows 34
Notes to Consolidated Financial Statements 35
Report of Independent Public Accountants 63
Report of Management 65
Glossary of Terms 66
FORWARD LOOKING INFORMATION
This report and other presentations made by CSW and its subsidiaries
contain forward looking statements within the meaning of Section 21E of the
Exchange Act. Although CSW and each of its subsidiaries believe that, in making
any such statements, its expectations are based on reasonable assumptions, any
such statements may be influenced by factors that could cause actual outcomes
and results to be materially different from those projected. Important factors
that could cause actual results to differ materially from those in the forward
looking statements include, but are not limited to: the impact of general
economic changes in the U.S. and in countries in which CSW either currently has
made or in the future may make investments; the impact of deregulation on the
U.S. electric utility business; increased competition and electric utility
industry restructuring in the U.S.; federal and state regulatory developments
and changes in law which may have a substantial adverse impact on the value of
CSW System assets; timing and adequacy of rate relief; adverse changes in
electric load and customer growth; climatic changes or unexpected changes in
weather patterns; changing fuel prices, generating plant and distribution
facility performance; decommissioning costs associated with nuclear generating
facilities; uncertainties in foreign operations and foreign laws affecting CSW's
investments in those countries; the effects of retail competition in the natural
gas and electricity distribution and supply businesses in the United Kingdom;
and the timing and success of efforts to develop domestic and international
power projects. In the non-utility area, the aforementioned factors would also
apply, and, in addition, would include: the ability to compete effectively in
new areas, including telecommunications, power marketing and brokering, and
other energy related services, as well as evolving federal and state regulatory
legislation and policies that may adversely affect those industries generally or
the CSW System's business in areas in which it operates.
<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. 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. In anticipation of increasing competition and fundamental
changes in the industry, CSW's management is implementing a strategic plan
designed to help position CSW to be competitive in this rapidly changing
environment and to develop an emerging global energy business.
CSW has undertaken key initiatives in the implementation of this
overall strategy. In 1996, these initiatives were marked by the restructuring of
CSW's core U.S. electric business, completion of the acquisition of SEEBOARD, an
investment in a Brazilian electric distribution utility and implementation of an
executive exchange agreement with a Philippine utility. In addition, CSW has
proposed to acquire the non-nuclear generating assets of Cajun, a Louisiana
member electric cooperative. In January 1997, CSW announced that its CSW
Communications subsidiary had entered into a joint venture limited partnership
to market telecommunications services. 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 foregoing statement constitutes a forward
looking statement within the meaning of Section 21E of the Exchange Act. Actual
results may differ materially from such projected information due to changes in
the underlying assumptions. See FORWARD LOOKING INFORMATION). 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 for additional information.
RESULTS OF OPERATIONS
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1996 AND 1995
OVERVIEW OF RESULTS
CSW's earnings increased to $429 million in 1996 compared to $402
million in 1995. Although earnings increased, earnings per share decreased from
$2.10 in 1995 to $2.07 in 1996 due to the issuance of additional shares of
common stock during 1996. The return on average common stock equity was 12.1% in
1996 compared to 13.1% in 1995. U.S. Electric operations contributed
approximately 57% of total earnings in 1996 and approximately 105% of total
earnings in 1995. The lower percent for U.S. Electric operations is mostly
attributed to the gain on the sale of Transok, higher earnings from CSW's
investment in SEEBOARD and the recording of reserves at each of the U.S.
Electric Operating Companies for certain investments and contingencies. CSW's
investment in SEEBOARD contributed 24% of total earnings in 1996 as compared to
2% in 1995, reflecting a full year of earnings in 1996 compared to only a
partial quarter in 1995.
<PAGE> 2
Earnings increased in 1996 compared to 1995 due primarily to the gain
from the sale of Transok, the additional earnings from CSW's investment in
SEEBOARD, the absence of charges in 1996 related to the termination of the
proposed El Paso Merger in June 1995 and the effect of the CPL 1995 Agreement.
Also contributing to the increase were higher non-fuel electric revenues
resulting from increased usage, customer growth and weather-related demand.
Partially offsetting these increases in earnings were the recording of reserves
by the U.S. Electric Operating Companies in June 1996 associated with certain
investments and contingencies, write-offs of certain equity investments and
other project development costs for CSW Energy, restructuring charges, the
effect of the CPL 1996 Fuel Agreement, the asset reserves for the pending CPL
rate case and the absence in 1996 of favorable tax adjustments made in 1995. For
additional information relating to the reserves recorded in June 1996, see OTHER
INCOME AND DEDUCTIONS. For further discussion of CPL's regulatory activities,
see NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS. Increased depreciation and
amortization, increased other operating expense, increased interest expense and
the loss of Mirror CWIP earnings also reduced the increase in earnings.
Significant items impacting 1996 earnings are listed below (in millions, net of
tax).
* Gain on the Sale of Transok, $120
* Reserves for Certain Investments and Contingencies, $(104)
* CPL Pending Rate Case Write-offs, $(8)
* CPL 1996 Fuel Agreement, $(7)
OPERATING REVENUES
Revenues increased approximately $2.0 billion or 64% in 1996 when
compared to 1995. The revenue variances are shown in the following table.
1996 REVENUE VARIANCES
INCREASE (DECREASE) FROM PRIOR YEAR, MILLIONS
U.S. Electric
Fuel Revenues $181
CPL 1995 Agreement 112
KWH Sales, Growth and Usage 83
KWH Sales, Weather-Related 21
WTU 1995 Stipulation and Agreement 21
Other Electric (35)
CPL 1996 Fuel Agreement (18)
------
365
United Kingdom 1,640
Other Diversified 7
------
$2,012
------
U.S. ELECTRIC REVENUES
U.S. Electric revenues increased $365 million or 13% in 1996 compared
to 1995. Total U.S. Electric KWH sales increased 4.2%, with increases in sales
among all retail customer classes. Customer growth, increased usage and
weather-related demand contributed to the increased revenues along with higher
fuel revenues as discussed below. Also contributing to the increase was the
absence in 1996 of reserves for refunds recorded in 1995 in accordance with the
CPL 1995 Agreement and the WTU 1995 Stipulation and Agreement.
<PAGE> 3
KWH sales to retail customers increased in 1996 as a result of customer
growth, increased customer usage and weather-related demand. The percentage
increases/(decreases) in U.S. Electric KWH sales in 1996 from 1995 are listed
below.
* Residential, 6.0% * Commercial, 3.6% * Industrial, 4.9% * Sales for
Resale, (0.5)% * Total Sales, 4.2%
UNITED KINGDOM REVENUES
CSW's operating revenues include $1.8 billion from a full year of
revenues from CSW's investment in SEEBOARD for 1996 compared to $208 million of
revenues for a partial quarter of operations in 1995.
OTHER DIVERSIFIED REVENUES
Other diversified revenues increased 13% to $59 million in 1996 as
compared to $52 million in 1995 due primarily to increased revenues from CSW
Energy projects, increased factoring revenues at CSW Credit and new revenues
from CSW Communications and EnerShop.
OPERATING EXPENSES AND TAXES
U.S. ELECTRIC FUEL
During 1996 and 1995 the U.S. Electric Operating Companies generated
most of their electric energy requirements. U.S. Electric fuel expense increased
15% to approximately $1.1 billion in 1996 at the U.S. Electric Operating
Companies due primarily to an increase in the average unit cost of fuel to $1.81
per MMbtu in 1996 from $1.58 per MMbtu in 1995, reflecting higher natural gas
prices. Partially offsetting this increase was a reduction in the delivered cost
of coal at the U.S. Electric Operating Companies resulting from lower coal
transportation costs and lower spot market coal prices.
U.S. ELECTRIC PURCHASED POWER
U.S. Electric purchased power increased $36 million to $77 million in
1996 due primarily to increased economy energy purchases at a higher cost per
MWH.
UNITED KINGDOM COST OF SALES
CSW's operating expenses include $1.3 billion for cost of sales from a
full year of United Kingdom operations in 1996 compared to $158 million recorded
in United Kingdom cost of sales for a partial quarter of operations in 1995.
OTHER OPERATING
Other operating expenses in 1996 increased $228 million, or 41%, from
1995 due primarily to the addition in 1996 of a full year of operating expenses
from CSW's investment in SEEBOARD as well as the impact in 1995 of $28 million
of regulatory assets established for previously expensed restructuring charges
and the reversal of rate case costs pursuant to the CPL 1995 Agreement. Also
contributing to the increase was the recognition in 1995 of a $13 million
regulatory asset for previously recorded restructuring charges in accordance
with the WTU 1995 Stipulation and Agreement. Another factor contributing to
increased other operating expense was a CSW restructuring charge recorded in
1996. For additional information on this restructuring, see CSW RESTRUCTURING. A
$42 million reserve for deferred merger and acquisition costs was recorded in
1995 from the terminated El Paso Merger.
<PAGE> 4
MAINTENANCE
Maintenance expense decreased $5 million to $150 million in 1996 from
$155 million in 1995 due primarily to a $10 million decrease in maintenance
expense at CPL resulting from lower production and distribution maintenance.
Partially offsetting this decrease was a $7 million increase in maintenance due
to a write-down of production inventory at the U.S. Electric Operating Companies
in 1996.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 31% to $464 million in 1996
from $353 million in 1995 due primarily to the addition of depreciable fixed
assets and the goodwill amortization related to the purchase of SEEBOARD, as
well as increases in depreciable fixed assets at the U.S. Electric Operating
Companies. Also contributing to the increase were the amortization of the
regulatory assets established in 1995 associated with the CPL 1995 Agreement and
the WTU 1995 Stipulation and Agreement along with accelerated amortization of
deferred Oklaunion plant costs in accordance with the WTU 1995 Stipulation and
Agreement.
TAXES, OTHER THAN INCOME
Taxes, other than income increased 10% to $178 million in 1996 from
$162 million in 1995. The increase was due primarily to lower 1995 ad valorem
taxes resulting from revisions of prior year estimates recorded in 1995. Also
contributing to the increase were higher ad valorem and state franchise taxes at
SWEPCO in 1996. The higher ad valorem taxes resulted primarily from a higher
state assessed value in Louisiana and the addition of the HVdc tie in Texas. The
state franchise taxes increased due mainly to higher federal taxable income
associated with Texas franchise tax.
INCOME TAXES
Income taxes increased $132 million to $224 million during 1996
compared to 1995. During 1995, income taxes were lower primarily due to
adjustments relating to prior year taxes, as well as the tax effect from both
the CPL 1995 Agreement and the WTU 1995 Stipulation and Agreement. Income taxes
of $46 million were recorded for CSW's investment in SEEBOARD from a full year
of operations in 1996 compared to $6 million for a partial quarter of operations
in 1995.
OTHER ITEMS
OTHER INCOME AND DEDUCTIONS
Other income and deductions decreased $160 million in 1996 when
compared to 1995 due primarily to charges recorded in June 1996 associated with
certain investments for plant sites, engineering studies and lignite reserves
for the U.S. Electric Operating Companies. See the U.S. ELECTRIC OPERATING
COMPANY RESERVES table below for additional detail on these reserves. Other
income and deductions was also lower as a result of certain write-offs recorded
by CSW Energy. In addition, CPL's Mirror CWIP liability, which has now been
fully amortized, contributed $41 million to income in 1995.
U.S. ELECTRIC OPERATING COMPANY RESERVES
Pre-tax effect Income tax Net income
on income benefit benefit effect
-------------- ---------- --------------
(thousands)
CPL $(21,509) $5,940 $(15,569)
PSO (51,109) 15,401 (35,708)
SWEPCO (29,700) 7,885 (21,815)
WTU (14,949) 4,003 (10,946)
------- ------ -------
$(117,267) $33,229 $(84,038)
------- ------ -------
<PAGE> 5
INTEREST CHARGES
Interest on long-term debt increased $102 million or 46% during 1996
compared to 1995 due to higher levels of long-term debt outstanding related to
the SEEBOARD acquisition. CSW's 1996 embedded cost of long-term debt was
unchanged from 1995 at 7.2%. Interest on short-term debt decreased $7 million or
7% in 1996 compared to 1995 due to both lower interest rates and lower levels of
short-term debt outstanding. CSW used a portion of the proceeds from the sale of
Transok to reduce short-term debt.
DISCONTINUED OPERATIONS
The $120 million gain on the sale of Transok as well as Transok's 1996
operations are shown separately in discontinued operations. Transok's earnings
for the first five months of 1996 were $12 million compared to $25 million from
a full year of operations for 1995. Since Transok was sold on June 6, 1996,
CSW's results for 1996 do not reflect a full year of earnings from Transok. See
NOTE 14. TRANSOK DISCONTINUED OPERATIONS for information, including comparative
statements of income, related to the sale of Transok.
COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND 1994
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. The return on average
common stock equity was 13.1% in 1995 compared to 13.4% in 1994. U.S. Electric
operations contributed approximately 105% of total earnings in 1995 and
approximately 100% in 1994. In 1995, increased corporate expenses, including $42
million of pre-tax expense related to the terminated El Paso Merger, were offset
in part by earnings from Transok, CSW Energy, CSW's investment in SEEBOARD and
CSW Credit, totaling $51 million in the aggregate.
Earnings increased in 1995 compared to 1994 due primarily to higher
U.S. Electric revenues resulting from customer growth and increased usage along
with lower operation and maintenance expenses. Also contributing to the increase
were the 1995 earnings from CSW's investment in SEEBOARD. Partially offsetting
these factors were higher depreciation and amortization, higher interest and
lower earnings from Mirror CWIP. Significant items impacting 1995 earnings are
listed below (in millions, net of tax):
* Tax Adjustments, $30
* Merger Termination, $(27)
* CPL 1995 Agreement, $(16)
<PAGE> 6
OPERATING REVENUES
Operating revenues increased $38 million or 1% in 1995 as shown in the
table below.
1995 REVENUE VARIANCES
INCREASE (DECREASE) FROM PRIOR YEAR
U.S. Electric
KWH Sales, Growth and Usage $62
Other Electric 3
CPL 1995 Agreement (112)
Fuel Revenues (106)
WTU 1995 Stipulation and Agreement (21)
KWH Sales, Weather-Related (8)
----
(182)
United Kingdom 208
Other Diversified 12
----
$38
----
U.S. ELECTRIC REVENUES
U.S. Electric revenues decreased $182 million or 6% in 1995 compared to
1994. Total U.S. Electric KWH sales increased 4.5% with increases in sales among
all customer classes. During 1995, the average number of customers increased
approximately 2%. In addition to customer growth, customer usage increased
during 1995 as compared to 1994. Partially offsetting these revenue increases
were customer refunds made by CPL and WTU resulting from the resolution of rate
proceedings during 1995 along with lower fuel revenues and weather-related
demand.
KWH sales to retail customers increased in 1995 as a result of
increased customer usage and customer growth. The percentage changes in U.S.
Electric KWH sales from 1994 to 1995 are listed below.
* Residential, 3.1% * Commercial, 2.2% * Industrial, 2.4% * Sales for
Resale, 18.7% * Total Sales, 4.5%
Sales for resale increased in 1995 because STP was operational for the
full year in 1995 compared to a partial year in 1994, making more energy
available for sale. In addition, during 1995, WTU began supplying a major new
wholesale customer. The U.S. Electric Operating Companies have maintained
relatively low rates in an increasingly competitive marketplace.
UNITED KINGDOM REVENUES
CSW's operating revenues include $208 million of revenues from CSW's
investment in SEEBOARD for a partial quarter in 1995. Pursuant to its effective
control of SEEBOARD in December 1995 through its 76.45% ownership interest, CSW
began full consolidation accounting for SEEBOARD in its consolidated financial
statements.
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 quarters of 1994 along with
increased factoring revenues at CSW Credit.
<PAGE> 7
OPERATING EXPENSES AND TAXES
U.S. ELECTRIC FUEL
During 1995 and 1994, the U.S. Electric Operating Companies generated
most of their electric energy requirements. U.S. Electric fuel expense decreased
$109 million during 1995 due mainly to a decrease in natural gas prices and
increased usage of lower cost nuclear fuel at STP. The average unit cost of fuel
was $1.58 per MMbtu during 1995 compared to $1.82 per MMbtu in 1994. This
decrease was due primarily to lower cost spot market natural gas prices,
favorable fuel contract negotiations and a greater use of lower unit cost
nuclear fuel at STP.
U.S. ELECTRIC PURCHASED POWER
U.S. Electric purchased power decreased $7 million during 1995 due
primarily to increased generation from STP which replaced power that had been
purchased during the first six months of 1994 when STP was out of service.
UNITED KINGDOM COST OF SALES
CSW recorded $158 million of cost of sales from CSW's investment in
SEEBOARD for a partial quarter in 1995 after taking effective control of that
company.
OTHER OPERATING
Other operating expense in 1995 increased $18 million compared to 1994
due primarily to the establishment of a $42 million reserve for expenses
incurred for the terminated El Paso Merger, the recording of a partial quarter
of operating expenses of $22 million from CSW's investment in SEEBOARD and
increased transmission expenses associated with the completion of an HVdc tie in
1995. These increases were offset in part by the recording in 1995 of $41
million in regulatory assets in accordance with the CPL 1995 Agreement and the
WTU 1995 Stipulation and Agreement. Also partially offsetting the increase were
benefits realized from a cost reduction initiative that paid CSW System
employees a portion of the operating expense savings.
MAINTENANCE
Maintenance expense decreased $16 million or 9% in 1995 compared to
1994 due primarily to the write-off in 1994 of certain deferred expenses related
to PSO's Tulsa Power Station, the postponement of previously scheduled
maintenance at CPL and savings from cost containment efforts at the U.S.
Electric Operating Companies.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased $29 million in 1995
when compared to 1994 due primarily to increases in depreciable plant at the
U.S. Electric Operating Companies.
TAXES, OTHER THAN INCOME
Taxes other than income decreased $14 million or 8% in 1995 compared to
1994 due primarily to lower 1995 ad valorem taxes resulting from revisions of
prior year estimates recorded in 1995.
INCOME TAXES
Income taxes decreased $87 million in 1995 compared to 1994 due to
prior year adjustments recorded in 1995, the reserve established in connection
with the termination of the El Paso Merger and the tax effects of both the CPL
1995 Agreement and the WTU 1995 Stipulation and Agreement.
<PAGE> 8
OTHER ITEMS
OTHER INCOME AND DEDUCTIONS
Other income and deductions decreased $10 million or 9% in 1995
compared to 1994 as a result of decreased Mirror CWIP liability amortization of
$27 million offset in part by the recognition of approximately $16 million in
factoring income by CPL in 1995 pursuant to the CPL 1995 Agreement, increased
interest income and a $3 million gain on PSO's sale of a non-utility,
fiber-optic telecommunication property.
INTEREST CHARGES
Interest expense on long-term debt increased 10% in 1995 from 1994 due
to higher levels of debt outstanding. CSW's embedded cost of long-term debt
decreased to 7.2% in 1995 from 7.7% in 1994. Short-term interest expense
increased 36% in 1995 as compared to 1994 due primarily to higher short-term
interest rates combined with higher general corporate borrowings.
DISCONTINUED OPERATIONS
The results of Transok are shown separately in discontinued operations
as a result of the sale of Transok in June 1996. Transok's earnings were
relatively unchanged in 1995 compared to 1994. CSW began reporting Transok's
operations as discontinued operations in the first quarter of 1996. Accordingly,
the prior comparative periods have been restated for consistency. See NOTE 14.
TRANSOK DISCONTINUED OPERATIONS for comparative statements of income and
information related to the sale of Transok.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW OF OPERATING, INVESTING AND FINANCING ACTIVITIES
Net cash provided by operating activities increased $76 million during
1996 compared to 1995. The increase was primarily attributable to the inclusion
of a full year of operations for CSW's investment in SEEBOARD compared to only
one partial quarter of operations for 1995 as well as higher rates, collected
under bond, at CPL. The increase was offset in part by higher natural gas prices
not yet recovered from customers in Texas and the loss of approximately seven
months of operations in 1996 for Transok as compared to 1995. See NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS for information related to the recovery of
fuel costs.
Net cash used in investing activities was $1.3 billion in 1996 compared
to $812 million used in 1995. The change is primarily the result of the
culmination of CSW's acquisition of the share capital of SEEBOARD. The investing
activities of SEEBOARD also caused CSW's construction expenditures to increase
compared to 1995. In addition, a combined total of approximately $100 million
was invested in several projects by CSW Energy and CSW International. These uses
of cash were partially offset by the cash received on the sale of both Transok
and the National Grid shares.
Net cash flows provided from financing activities totaled $320 million
for 1996 compared to $306 million in 1995. Cash proceeds from the primary
offering of CSW Common in February 1996 contributed $398 million in cash. These
proceeds were subsequently used to pay down a portion of the interim SEEBOARD
acquisition debt. In addition, the financing and subsequent refinancing related
to CSW's acquisition of SEEBOARD, including the use of a portion of the proceeds
from the sale of Transok, had a significant impact on financing activities
during 1996. CSW also used a portion of the proceeds from the sale of Transok to
reduce its short-term borrowings. For additional information see CAPITAL
STRUCTURE and SEEBOARD ACQUISITION FINANCING.
<PAGE> 9
Finally, non-cash impacts of exchange rate differences on the
translation of British pound denominated assets and liabilities were recorded on
a separate line on the cash flow statement in accordance with accounting
guidelines.
INTERNALLY GENERATED FUNDS
Internally generated funds, which consist of cash flows from operating
activities less common and preferred stock dividends, totaled $499 million, $451
million and $424 million for 1996, 1995 and 1994, respectively, should meet most
of the capital requirements of the CSW System. However, CSW's strategic
initiatives, including expanding CSW's core electric utility and non-utility
businesses through acquisitions or otherwise, may require additional capital
from external sources. 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 certain new
business activities. See HOLDING COMPANY ACT.
CSW CAPITAL EXPENDITURES
Total capital expenditures for CSW, including the U.S. Electric
Operating Companies, SEEBOARD and other diversified operations, but excluding
capital that may be required for acquisitions, are estimated to be approximately
$539 million, $546 million and $512 million for the years 1997 through 1999,
respectively (The foregoing statement constitutes a forward looking statement
within the meaning of Section 21E of the Exchange Act. Actual results may differ
materially from such projected information due to changes in the underlying
assumptions. See FORWARD LOOKING INFORMATION).
Although the historical capital requirements of the CSW System have
been primarily for the construction of electric utility plant, current projected
capital expenditures are expected to be primarily for existing distribution
systems and non-utility investments. Primary sources of capital for these
expenditures are long-term debt and preferred stock issued by the U.S. 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 as well as utilizing long-term
debt for other investments.
CSW periodically reevaluates its capital spending policies and
generally seeks to fund only those projects and investments that management
believes will offer satisfactory returns in the current environment. Consistent
with this strategy, the CSW System is likely to continue to make additional
investments in energy-related and non-utility businesses and will continue to
search for electric utility companies or other electric utility properties to
acquire. CSW expects to fund the majority of its capital 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.
U.S. ELECTRIC OPERATING COMPANIES' CONSTRUCTION EXPENDITURES
The U.S. Electric Operating Companies maintain a continuing
construction program, the nature and extent of which is based upon current and
estimated future demands upon the system. Planned construction expenditures for
the U.S. Electric Operating Companies for the next three years are primarily to
improve and expand 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, including AFUDC, for the U.S.
Electric Operating Companies were approximately $363 million in 1996, $417
million in 1995 and $505 million in 1994. The estimated total construction
expenditures, including AFUDC, for the U.S. Electric Operating Companies for the
years 1997 through 1999 are presented in the following table (The foregoing
statement constitutes a forward looking statement within the meaning of Section
21E of the Exchange Act. Actual results may differ materially from such
<PAGE> 10
projected information due to changes in the underlying assumptions. See FORWARD
LOOKING INFORMATION).
CONSTRUCTION EXPENDITURES
1997 1998 1999 Total
-------------------------------------
(millions)
Production $73 $47 $47 $167
Transmission 43 60 67 170
Distribution 182 186 191 559
Fuel 13 19 25 57
Other 44 45 40 129
-----------------------------------
$355 $357 $370 $1,082
-----------------------------------
The U.S. Electric Operating Companies plan to dismantle certain power
plant properties during late 1997 and 1998. Dismantling includes the removal,
disposal and/or salvage of retired equipment and ancillary buildings. Of the
units anticipated to be dismantled, only one unit currently in storage (85 MW),
is considered part of CSW's aggregate capability. The depreciation rates of the
U.S. Electric Operating Companies include a component for net removal cost and
therefore are being recovered from customers currently through rates. As a
result, actual dismantling of these units will not have a material impact on net
income. Current estimates of capital resources that will be required to
dismantle these units range from $10 million to $15 million and are not
reflected in the above construction numbers. It is anticipated that a request
for dismantling bids will be issued by mid-1997 (The foregoing statement
constitutes a forward looking statement within the meaning of Section 21E of the
Exchange Act. Actual results may differ materially from such projected
information due to changes in the underlying assumptions. See FORWARD LOOKING
INFORMATION).
Although CSW does not believe that the U.S. Electric Operating
Companies will require substantial additions of generating capacity over the
next several years, the U.S. Electric system's internal resource plan presently
anticipates that any additional capacity needs will come from a variety of
sources including power purchases. Therefore, during 1996, the U.S. Electric
Operating Companies recorded reserves and write-offs in the amount of $84
million, net of tax, for certain investments in plant sites, engineering studies
and lignite reserves. Refer to INTEGRATED RESOURCE PLAN for additional
information regarding the U.S. Electric System's capacity needs.
INFLATION
Annual inflation rates, as measured by the Consumer Price Index, have
averaged approximately 2.8% during the three years ended December 31, 1996.
Management believes that inflation, at this level, does not materially effect
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.
FINANCIAL STRUCTURE
As of December 31, 1996, the capitalization ratios of CSW were 47%
common stock equity, 4% preferred stock and 49% long-term debt. CSW is committed
to maintaining financial flexibility through a strong capital structure and
favorable securities ratings in order to access capital markets
opportunistically or when required. CSW continually monitors the capital markets
for opportunities to lower its cost of capital through refinancing activities.
During the period from 1992 to 1996, CSW has refinanced approximately $2.2
billion. At December 31, 1996, CSW's embedded cost of debt was 7.2%. CSW's
<PAGE> 11
significant financing activities for 1996 are summarized in the following table.
<TABLE>
<CAPTION>
ISSUED/UTILIZED REACQUIRED (IF APPLICABLE)
Financing Amount Financial Amount
Instrument (millions) Rate Maturity Instrument (millions) Rate % Maturity
----------------------------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CSW Common Stock (1) $397.8
CPL PCRB (2) 6.3 6.0 2020 PCRB $6.3 7 7/8 2014
PCRB 60.0 6 1/8 2030 PCRB 60.0 7 7/8 2016
PSO MTN (3) 40.0 various various none
PCRB (2) 12.7 6.0 2020 PCRB 12.7 7 7/8 2014
SWEPCO PCRB 81.7 6.1 2018 PCRB 81.7 8.2 2014
WTU PCRB (2) 44.3 6.0 2020 PCRB 44.3 7 7/8 2014
CSW ENERGY Senior Notes 200.0 6.875 2001
SEEBOARD
ACQUISITION
REFINANCING (4)
$ denominated
Yankee Notes (5) $200.0 6.95 2001
200.0 7.45 2006
(pound)
denominated Eurobonds (pound)100.0 8.875 2006
Fixed Rate
Loan 173.8 8.25 2003
Accounts
Receivable
Securitization 155.0
(1) In February 1996, CSW sold 15,525,000 shares of CSW Common and received net
proceeds of approximately $397.8 million, which were used to repay a portion
of the indebtedness incurred by CSW to fund the acquisition of SEEBOARD.
(2) Reflects the individual company's proportionate share of Red River Series
PCRBs.
(3) PSO issued $30 million in March 1996 and an additional $10 million in April
1996. The 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 MTNs are a series of PSO's Senior Notes.
The rates on the MTNs range from 5.89% to 6.43% with various maturity dates
in 2000 and 2001.
(4) During 1996, several financing transactions were undertaken to refinance
borrowings incurred to complete the acquisition of SEEBOARD. Both the CSW
Credit Agreement and the CSW Investments Credit Facility, which were
utilized during the acquisition period, were repaid by the end of 1996. See
SEEBOARD ACQUISITION FINANCING for details of these transactions as well as
the activities related to obtaining permanent financing for the acquisition.
(5) Yankee Notes were swapped into British pounds using cross-currency swaps
with notional amounts of(pound)129 million each and Sterling rates of 7.98%
for the 2001 Notes and 8.75% for the 2006 Notes.
</TABLE>
CSW and the U.S. Electric Operating Companies may issue additional
securities subject to market conditions and other factors. CPL has shelf
registration statements on file for the issuance of up to $60 million of FMBs
and up to $75 million of preferred stock, and PSO has a shelf registration
statement on file for the issuance of up to $35 million of Senior Notes.
Additionally, CPL, PSO and SWEPCO, along with certain affiliated capital trusts
established by each company, have filed shelf registration statements with the
SEC for the issuance from time to time of up to $150 million, $75 million and
$110 million, respectively, of preferred securities and/or junior subordinated
deferrable interest debentures.
<PAGE> 12
The current securities ratings for CSW and each of the U.S. Electric
Operating Companies is presented in the following table.
Duff & Standard
Moody's Phelps & Poors
------- ------ --------
CPL (1)
FMB A2 A A
Senior unsecured A3 A- A-
Preferred stock a3 BBB+ A-
PSO (1)
FMB Aa3 AA A+
Senior unsecured A1 AA- A
Preferred stock aa3 AA- A
SWEPCO (1)
FMB Aa2 AA+ AA-
Senior unsecured Aa3 AA A+
Preferred stock aa2 AA A+
WTU (1)
FMB A1 AA- A+
Senior unsecured A2 A+ A
Preferred stock a2 A+ A
CSW
Commercial Paper P-2 D-1 A-2
(1) Securities ratings are on Negative Outlook by both
Moody's and Standard & Poors
These securities ratings may be revised or withdrawn at any time, and
each rating should be evaluated independently of any other rating.
COMMON STOCK
In order to strengthen its capital structure and support growth from
time to time, CSW may issue additional shares of CSW Common. During 1996, CSW
issued new common equity via: (i) a primary public offering; (ii) the PowerShare
dividend reinvestment and stock purchase plan; and (iii) the CSW Common option
in CSW's ThriftPlus plan.
On February 27, 1996, CSW sold 15,525,000 shares of CSW Common and
received net proceeds of approximately $397.8 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.
During 1996, CSW's PowerShare dividend reinvestment and stock purchase
plan was expanded to make it available to the residents of all fifty states and
the District of Columbia whereas it was previously available only to existing
CSW shareholders, employees, eligible retirees, utility customers and other
residents of the four states where the U.S. Electric Operating Companies
operate. For the expanded PowerShare plan, CSW registered five million shares of
new CSW Common with the SEC. CSW raised approximately $62 million, $57 million
and $50 million in new equity through the PowerShare plan in 1996, 1995 and
1994, respectively. CSW expects to use the proceeds from such sales to reduce
short-term and long-term debt and for other general corporate purposes.
CSW's ThriftPlus currently permits eligible employees to contribute a
portion 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. During 1996, the trustee for CSW's ThriftPlus plan
began to purchase CSW Common directly from CSW rather than from the open market
<PAGE> 13
as historically had been done. Previously, CSW registered five million new
shares of CSW Common with the SEC for such use. During 1996, CSW raised
approximately $14 million in new equity as a result of such direct purchases by
the ThriftPlus plan trustee. CSW expects to use the proceeds from such sales to
reduce short-term and long-term debt and for other general corporate purposes.
SHORT-TERM FINANCING
The CSW System uses short-term debt to meet fluctuations in working
capital requirements and other interim capital needs. The U.S. Electric
Operating Companies, together with several other subsidiaries of CSW have: (i)
established a money pool to coordinate short-term borrowings and (ii) incurred
borrowings outside the money pool through CSW's issuance of commercial paper. As
of December 31, 1996, CSW had a revolving credit facility totaling $1.2 billion
to back up its commercial paper program.
SEEBOARD ACQUISITION FINANCING
CSW, indirectly through intermediate subsidiaries, acquired 100%
control of SEEBOARD during 1996 for an aggregate adjusted purchase price of
approximately $2.1 billion assuming average exchange rates during the purchase
period. As of December 31, 1996, CSW had contributed approximately $829 million
of the purchase price for the acquisition of SEEBOARD shares. Those funds, which
were initially obtained through borrowings under the CSW Credit Agreement, have
since been repaid by using the $398 million net proceeds from CSW's February
1996 common stock offering and $431 million of the proceeds from the sale of
Transok.
Additional acquisition funds were obtained from capital contributions
and loans made to CSW (UK) plc (which has been replaced by SEEBOARD Group plc)
by its sole shareholder, CSW Investments, which arranged the CSW Investments
Credit Facility for that purpose. During the second half of 1996, borrowings
under the CSW Investments Credit Facility were refinanced through several
different transactions. CSW Investments issued $200 million of unsecured notes
due 2001 and $200 million of unsecured notes due 2006, the proceeds of which
were swapped into British pounds through a cross-currency swap and used to repay
borrowings outstanding under the CSW Investments Credit Facility. CSW
Investments also issued (pound)100 million of unsecured Eurobonds due 2006 to
repay a portion of the CSW Investments Credit Facility. The remaining borrowing
outstanding under the CSW Investments Credit Facility were repaid with proceeds
from a SEEBOARD accounts receivable securitization, utilization of SEEBOARD
balance sheet cash and proceeds from a fixed rate loan due in 2003.
CSW ENERGY
In October 1996, CSW Energy issued $200 million, 6.875% Senior Notes
due 2001. CSW Energy intends to use the proceeds from the notes for the
acquisition, development and construction of electric generation assets in the
United States and to make affiliate loans to CSW International.
In addition to the amounts already expended for the development of
projects, CSW Energy has, subject to certain limitations in the case of EWGs and
foreign utility company investments, authority from the SEC to expend up to $250
million for general development activities related to qualifying facilities and
independent power facilities. CSW Energy may seek specific authority to spend
additional amounts on certain projects. See NOTE 3. COMMITMENTS AND CONTINGENT
LIABILITIES, for a discussion of CSW's investments and commitments in CSW Energy
projects at December 31, 1996.
CSW INTERNATIONAL
As discussed in CSW ENERGY, CSW Energy issued $200 million in Senior
Notes in October 1996. CSW Energy loaned to CSW International a portion of these
proceeds to acquire an interest in a Brazilian utility. It is anticipated that
CSW Energy will loan additional amounts to CSW International, the guarantor of
the Senior Notes, to develop, acquire or construct EWGs or foreign utility
company investments.
<PAGE> 14
In January 1997, CSW received authority from the SEC under the Holding
Company Act to spend an amount up to 100% of consolidated retained earnings on
EWGs or foreign utility company investments. This represents a step-up in
previous authority under the Holding Company Act.
CSW CREDIT
CSW Credit purchases, without recourse, the accounts receivable of the
U.S. Electric Operating Companies and certain non-affiliated electric companies.
CSW Credit's capital structure contains greater leverage than that of the U.S.
Electric 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 $830 million at December 31, 1996 to back up its
commercial paper program. The sale of accounts receivable provides the U.S.
Electric 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 U.S. Electric 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 U.S. Electric Operating Companies will have the
opportunity to seek new customers and at the same time be at risk of losing
customers to other competitors. Additionally, the U.S. Electric Operating
Companies will continue to compete with suppliers of alternative forms of
energy, such as natural gas, fuel oil and coal, some of which may be cheaper
than electricity. As a whole, the U.S. Electric Operating Companies believe
that, overall, their prices for electricity and the quality and reliability of
their service currently place them in a position to compete effectively in the
energy marketplace (The foregoing statement constitutes a forward looking
statement within the meaning of Section 21E of the Exchange Act. Actual results
may differ materially from such projected information due to changes in the
underlying assumptions. See FORWARD LOOKING INFORMATION).
Electric industry restructuring and the development of competition in
the generation and sale of electric power requires resolution of several
important issues, including, but not limited to: (i) who will bear the costs of
prudent utility investments or past commitments incurred under traditional
cost-of-service regulation that will be uneconomic in a competitive environment,
sometimes referred to as stranded costs; (ii) whether all customers have access
to the benefits of competition; (iii) how, and by whom, the rules of competition
will be established; (iv) what the impact of deregulation will be on
conservation, environmental protection and other regulator-imposed programs; and
(v) how transmission system reliability will be ensured. The degree of risk to
CSW and the U.S. Electric Operating Companies associated with various federal
and state restructuring proposals aimed at resolving any or all of these issues
will vary depending on many factors, including their competitive position and
the treatment of stranded costs. Although the U.S. Electric Operating Companies
believe they are in a position to compete effectively in a deregulated, more
competitive marketplace, if stranded costs are not recovered from customers,
then the U.S. Electric Operating Companies may be required by existing
accounting standards to recognize potentially significant losses from
unrecovered stranded costs, especially with respect to STP (The foregoing
statement constitutes a forward looking statement within the meaning of Section
21E of the Exchange Act. Actual results may differ materially from such
projected information due to changes in the underlying assumptions. See FORWARD
LOOKING INFORMATION). See REGULATORY Accounting for additional information.
At the federal level, several bills have been introduced in Congress in
the early part of the 1997 legislative session, and recent reports indicate that
<PAGE> 15
other bills are likely to be introduced in the near future, which provide for
restructuring and/or deregulating the U.S. electric utility industry. These
bills will likely cover many different issues including repeal of the Holding
Company Act and PURPA, establishment of full retail customer choice,
disaggregation of electric utilities and the restructuring of the electric
utility industry. See HOLDING COMPANY ACT. States that have considered
deregulation have been moving increasingly toward requiring some form of retail
competition or retail wheeling. CSW and the U.S. Electric Operating Companies
cannot predict when and if they will be subject to one or more of these
legislative initiatives, nor can they predict the scope or effect of such
legislation on their results of operations or financial condition. For
additional information related to such initiatives, see INDUSTRY RESTRUCTURING
(OKLAHOMA, LOUISIANA AND TEXAS).
WHOLESALE ELECTRIC COMPETITION IN THE UNITED STATES
The Energy Policy Act, which was enacted in 1992, significantly alters
the way in which electric utilities compete. The Energy Policy Act created
exemptions from regulation under the Holding Company Act and permits utilities,
including registered utility holding companies and non-utility companies, to own
EWGs. EWGs are a new category of non-utility wholesale power producers that are
free from most federal and state regulation, including restrictions under the
Holding Company Act. These provisions enable broader participation in wholesale
power markets by reducing regulatory hurdles to such participation. The Energy
Policy Act also allows the FERC, on a case-by-case basis and with certain
restrictions, to order wholesale transmission access and to order electric
utilities to enlarge their transmission systems. A FERC order requiring a
transmitting utility to provide wholesale transmission service must include
provisions generally that permit the utility to recover from the FERC applicant
all of the costs incurred in connection with the transmission services and any
enlargement of the transmission system and associated services. Wholesale energy
markets, including the market for wholesale electric power, have been
increasingly competitive since enactment of the Energy Policy Act. The U.S.
Electric Operating Companies must compete in the wholesale energy markets with
other public utilities, cogenerators, 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 whether the Energy Policy Act will adversely impact the U.S. Electric
Operating Companies.
FERC ORDER 888
On April 24, 1996, the FERC issued Order 888 which is the final
comparable open access transmission rule. The provisions of FERC Order 888
provide for comparable transmission service between utilities and their
transmission customers by requiring utilities to take transmission service under
their open access tariffs for all of their new wholesale sales and purchases and
by requiring utilities to rely on the same information that their transmission
customers rely on to make wholesale purchases and sales. FERC Order 888
reaffirms the FERC's position that utilities are entitled to recover all
legitimate, prudent and verifiable stranded costs determined by a formula based
upon the revenues lost method through direct assignments charges to departing
customers.
FERC Order 888 requires holding companies to offer single system
transmission rates. However, the rule granted the U.S. Electric Operating
Companies an exemption permitting an opportunity to propose a solution that
provides comparability to all wholesale users. The final rule does suggest that
the terms and conditions for the CSW ERCOT companies (CPL and WTU) would be
permitted to differ from those offered by the CSW SPP companies (PSO and
SWEPCO). Transmitting utilities in the SPP are under the exclusive jurisdiction
of the FERC while most transmitting utilities in ERCOT are under the exclusive
jurisdiction of the Texas Commission. These two commissions have different
approaches to defining and implementing comparable open access transmission
service. CSW is the only holding company that owns operating companies in both
ERCOT and the SPP.
On November 1, 1996, the U.S. Electric Operating Companies filed a
system-wide tariff to comply with FERC Order 888. On December 31, 1996, the FERC
accepted for filing the system-wide tariff to become effective on January 1,
1997, subject to refund and to the issuance of further orders. CSW and the U.S.
Electric Operating Companies believe that their system-wide tariff complies with
the requirements of the FERC and the Texas Commission, but the tariff does not
offer a single system rate for transactions due to the different transmission
<PAGE> 16
pricing approaches of the FERC and the Texas Commission. Reference is made to
INDUSTRY RESTRUCTURING IN TEXAS for information related to the transmission
pricing approach rules that the Texas Commission adopted during 1996 (Project
No. 14045).
RETAIL ELECTRIC COMPETITION IN THE UNITED STATES
Increasing competition in the utility industry has resulted in
increasing pressure 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 legislative initiative which would require
utilities to "wheel" or move power from third parties to their own retail
customers, is evolving gradually. Many states currently have introduced
legislation or are investigating the issue, and several states have already
passed legislation which mandates retail choice by a certain date.
CSW believes that retail competition would not be in the best interests
of CSW's and the U.S. Electric Operating Companies' customers and security
holders unless CSW and the U.S. Electric Operating Companies receive fair
recovery of the full amounts previously invested to finance power plants. These
investments, which were reasonably incurred, were made by the U.S. Electric
Operating Companies 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. For
additional information related to retail wheeling in the United States, see
HOLDING COMPANY ACT and INDUSTRY RESTRUCTURING (OKLAHOMA, LOUISIANA AND TEXAS).
COMPETITION IN THE SUPPLY BUSINESS IN THE UNITED KINGDOM SEEBOARD
currently has the sole right to supply substantially all of
the consumers in its authorized area, except where demand is above 100 KW. As a
part of the restructuring of the electricity industry in the United Kingdom,
competition is being introduced into the market for electricity supply on a
phased basis. The threshold for competitive supply was reduced from 1 MW to 100
KW effective April 1, 1994. SEEBOARD, as well as other licensed suppliers
(second-tier license), are permitted to supply electricity to customers whose
peak demand exceeds 100 KW in the areas of other regional electricity companies.
All holders of a second-tier license, including SEEBOARD, who supply electricity
to non-franchise customers (i.e., demand of 100 KW or above) must pay charges to
the host regional electricity company for the use of its distribution network.
It is currently intended that, effective April 1, 1998, the regional electricity
companies' supply businesses, including SEEBOARD's, will no longer be protected
by a franchise. SEEBOARD has always been a strong supporter of extending
competition in electricity whenever feasible and practicable. To date, SEEBOARD
has established a profitable business in supplying customers outside of its
franchise area. While SEEBOARD is currently unable to predict the impact that
the transition in 1998 to full competition will have on its electricity supply
business, its primary objective is one of profit and not market share.
CSW RESTRUCTURING
In April 1996, CSW announced organizational and executive changes to
help prepare CSW for increased competition and unbundling of the electric
utility industry into generation, transmission, distribution and service
segments. As a result of these changes, in 1996 CSW functionally reorganized its
domestic utility operations into three organizational units which are centrally
managed from CSW Services.
CSW created a power generation business unit to provide energy
generation and production services. All phases of management of the U.S.
Electric Operating Companies' energy production activities have been
consolidated into the power generation business unit. These activities include
management of all generating facilities, including nuclear facilities, and fuel
procurement.
<PAGE> 17
CSW created an energy delivery business unit to provide services for
the long-distance transmission and local distribution of electricity to retail
customers, including attendant customer services such as meter reading, billing
and accounting. All phases of management of the U.S. Electric Operating
Companies' energy delivery activities have been consolidated into the energy
delivery business unit.
CSW created an energy services business unit to provide marketing
services, along with new energy efficiency products and services as they become
available, to existing and future customers of the U.S. Electric Operating
Companies. The energy services unit also manages CSW Communications and
EnerShop.
Functional unbundling of CSW's vertically integrated structure is
expected to provide a more competitive organizational structure for CSW. Some
employees have been reassigned from the U.S. Electric Operating Companies to CSW
Services to provide these centrally managed services.
Through December 31, 1996, CSW has incurred approximately $9.6 million
in connection with the implementation of the 1996 restructuring. CSW also has
reserved approximately $6.7 million for additional expenses associated with the
1996 restructuring, which is expected to be completed by early 1997.
INDUSTRY RESTRUCTURING IN OKLAHOMA
In June 1996, the Oklahoma Commission initiated a proceeding in which
it solicited public comment on various issues associated with the potential
restructuring of the Oklahoma electric utility industry. The Oklahoma Commission
requested comment on certain issues including the extent and timing of
restructuring, the unbundling of utility services, and the legislative and
regulatory requirement for restructuring. The Oklahoma Commission staff
conducted a series of informal public technical conferences and workshops over
the last half of 1996 to discuss these issues. After receiving a report from its
staff summarizing the comments provided in the restructuring proceeding, the
Oklahoma Commission took no immediate action but left the proceeding open at
this time to allow for the monitoring of other states' activities.
In February, 1997, a bill was introduced in the Oklahoma Senate which
would permit some form of retail competition by January 1, 1999, with retail
competition for all customers soon thereafter. The bill directs the Oklahoma
Commission to review the issue of and devise a mechanism for recovery of
prudently incurred, unmitigable and verified stranded costs and investments. The
bill leaves many details to be decided by the Oklahoma Commission and the
Oklahoma Tax Commission, but neither can issue any regulations without the prior
express authority of the legislature or the Joint Electric Utility Task Force, a
14-member panel with an equal number of members from each house of the Oklahoma
Legislature. CSW is unable to predict whether any retail competition legislation
will be enacted by the Oklahoma Legislature and, if enacted, what form such
legislation would take.
INDUSTRY RESTRUCTURING IN LOUISIANA
In October 1996, the Louisiana Commission requested comments on various
electric industry restructuring issues in a docket opened in 1995 to consider
aspects of competition in the provision of retail electric service.
Specifically, the Louisiana Commission requested input from interested parties
on its policy statement on the "principles to guide the investigation into
whether electric industry restructuring and retail competition are in the public
interest." SWEPCO filed comments on this matter in November 1996. The Louisiana
Commission has not taken further action in this matter at this time. CSW expects
that legislation regarding the restructuring of the Louisiana electric utility
industry will be introduced in the upcoming session of the Louisiana
legislature. CSW cannot predict whether any such legislation will be enacted
and, if enacted, what form such legislation would take.
INDUSTRY RESTRUCTURING IN ARKANSAAS
To date, no legislation regarding the restructuring of the Arkansas
electric utility industry has been introduced in the Arkansas legislature.
<PAGE> 18
INDUSTRY RESTRUCTURING IN TEXAS
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 required 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), the chairman of the Texas Commission 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 was assigned a separate
proceeding (Project No. 15000) and after a series of workshops and technical
conferences conducted during 1996, the Texas Commission submitted a final Scope
of Competition report to the Texas Legislature in January 1997. The final report
contains numerous recommendations to the Texas Legislature including requests
for additional regulatory authority or clarification of existing authority
including, INTER ALIA, authority to certificate electric service resellers, the
authority to adopt consumer protection and universal service standards, the
authority to determine and allocate stranded costs to all customers, the
authority to promote unbundling, the authority to allow alternative forms of
regulation, increased authority to address mergers, authority to correct market
power abuses, authority over the ERCOT ISO and authority to permit alternative
methods for fuel cost recovery. In addition, the final report offers the Texas
Legislature four restructuring options. Option 1 maintains the regulatory status
quo; Option 2 would permit utilities to voluntarily offer retail access; Option
3 provides for full wholesale competition; and Option 4 provides for full retail
competition. The report's final recommendation is for the Texas Legislature to
direct the Texas Commission to prepare for full retail competition using a
careful and deliberate approach on a timetable to be established by the Texas
Legislature, but with no retail access before the year 2000. CSW cannot predict
the outcome of these proposals.
On February 7, 1996, the Texas Commission adopted a rule governing
transmission access and pricing (Project No. 14045). The pricing method 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. The open access tariffs filed with
the FERC on February 9, 1996 did not reflect Project No. 14045 pricing. However,
on November 1, 1996, CSW filed tariffs with the FERC in accordance with FERC
Order 888 that do conform to the Texas Commission's rule. See FERC ORDER 888 for
additional information regarding the transmission pricing rules prescribed by
FERC.
By statute the Texas Commission must submit a report to the 1997 Texas
Legislature on "methods or procedures for quantifying the magnitude of stranded
investment, procedures for allocating costs, and the acceptable methods of
recovering stranded costs." The Texas Commission initiated Project No. 15001 to
collect information to prepare the required report. In response to the Texas
Commission's order in this Project, CPL, SWEPCO, and WTU each filed information
on estimates of potential stranded costs. While the filings for CPL included
estimates of significant potential stranded costs, no significant potential
stranded costs were identified in the filings for SWEPCO or WTU. See NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS for a discussion of the potential impact
of potential stranded costs relating to CPL.
The Texas Commission's Project 15002, "Scope of Competition Report," is
a report that the Texas Commission is required to present to the Texas
Legislature in each odd-numbered year detailing the scope of competition in the
electric markets and the impact of competition and industry restructuring on
customers. In addition, the report is required to include the Texas Commission's
<PAGE> 19
recommendations to the Texas Legislature for further legislation. In June 1996,
CPL, SWEPCO and WTU each filed information for the Texas Commission's report.
In February 1997, a retail competition bill was introduced into the
Texas Legislature. As proposed, the bill would: (i) require utilities to file a
restructuring plan by January 1, 1998; (ii) require a 15 percent rate reduction
for all customers of investor-owned utilities effective September 1, 1997; (iii)
allow public schools and universities to seek alternative electric energy
suppliers by August 1, 1998; (iv) allow residential and other small customers to
seek alternative electric energy suppliers by January 1, 1999; and (v) allow
other retail customers to seek alternative electric energy suppliers by January
1, 2000. The proposed bill would also allow utilities to recover stranded costs,
but would require a utility to reduce uneconomic investments before recovering
any stranded assets. Investor owned utilities would be required to allocate the
burden of stranded cost recovery between shareholders and customers, requiring
such utilities to write-off some portion of their assets. CSW is unable to
predict whether any retail competition legislation will be enacted by the Texas
Legislature , and if enacted, the ultimate form such legislation would take.
EFFECT OF FEDERAL AND STATE RESTRUCTURING INITIATIVES ON CSW
CSW and the U.S. Electric Operating Companies cannot predict the form
or effect of any federal or state electric utility restructuring initiatives at
this time. Federal and/or state electric utility restructuring may cause
impairment of significant recorded assets, material reductions of profit
margins, and/or increased costs of capital (The foregoing statement constitutes
a forward looking statement within the meaning of Section 21E of the Exchange
Act. Actual results may differ materially from such projected information due to
changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). No
assurance can be made that such events would not have a material adverse effect
on CSW's or any U.S. Electric Operating Company's results of operations,
financial condition or competitive position.
INDEPENDENT SYSTEM OPERATOR PLAN
In June 1996, CSW, including CPL and WTU, and more than 20 other
parties, including other investor-owned utilities, municipal power companies,
electric cooperatives, independent power producers and power marketers, filed
plans to create an ISO to manage the ERCOT power grid. The filing marks a major
step towards implementing the Texas Commission's overall strategy to create the
competitive wholesale electric market that was mandated by the Texas Legislature
in 1995. The Texas Commission approved the ISO in August 1996. Such approval
made Texas the first state in the nation to implement a regional ISO and a
regional competitive wholesale bulk power market.
INTEGRATED RESOURCE PLAN
On January 31, 1997, CPL, WTU, and SWEPCO filed with the Texas
Commission a joint integrated resource plan outlining the companies' future
electric needs over a 10-year forecast horizon and the manner in which the
companies propose to meet those needs.
The filing indicates additional resources will be needed within the
next 10 years. It is anticipated that the initial needs will be met through a
mix of energy resource options including purchased power, generation, energy
efficiency programs and renewable energy resources. This integrated resource
plan is significant because this is the first time an electric utility has filed
such a plan under the provisions of PURA. In adopting this law, the Texas
Legislature required that some type of public participation be incorporated in
the planning process. Traditionally, these public participation activities would
involve surveys, focus groups or public meetings. CPL, WTU and SWEPCO chose
instead to use a public approach known as Deliberative Polling. Deliberative
Polling is designed for the company's customers to develop a truly informed,
deliberated opinion, as a way of bringing the customer into the electric utility
planning process.
Customers at all three polls overwhelmingly determined that a mix of
energy resource options was preferable as a means to accomplish several
objectives including low cost, reliability, maintenance of the environment and
<PAGE> 20
further development of renewable sources. Because of the strong customer
interest evidenced in the Deliberative Polls, CPL, WTU, and SWEPCO have each
instituted targeted purchase goals for renewable energy resources and energy
efficiency programs, which, along with the wind resources already on the CSW
U.S. Electric system, would constitute the largest renewable installation in
Texas and would be a significant contribution toward further development and
commercialization of the renewable energy industries. The willingness to pay
more per month for renewable resources varied considerably, with 80% of
customers willing to pay at least $1 more per month to those willing to pay up
to $10 more per month. As a result, the CSW companies are proposing a program of
"green power" choices. CPL, WTU and SWEPCO plan to file a green pricing tariff
in 1997 following additional customer consultation and research which will
provide a means for those customers who are interested in acquiring a greater
portion of their personal consumption from environmentally beneficial generation
to exercise that choice. The CSW companies have proposed a pilot program for the
installation of rooftop photovoltaic solar systems at schools. These
installations would provide a community focus and would contain educational
components to teach about renewable resources.
Action by the Texas Commission on this integrated resource plan filing
is expected by mid-1997.
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. Such pervasive
regulation may impede or delay CSW's efforts to achieve its strategic and
operating objectives. Consequently, CSW continues to support efforts to repeal
or modify this legislation.
In 1995, the SEC issued a report to the United States Congress
advocating repeal of the Holding Company Act, either on a conditional and
transitional basis or immediate and outright repeal. The basis for the SEC's
recommendation for repeal is that the Holding Company Act is anachronistic and
duplicative of other federal and state regulatory regimes that have developed
over the past sixty years. Following the SEC's report, there were several bills
introduced in both the United States Senate and House of Representatives in 1996
which would have repealed the Holding Company Act on a conditional and
transitional basis and transferred its oversight functions to the FERC and the
states. Another bill was introduced into the United States House of
Representatives that, in addition to repealing the Holding Company Act, would
have repealed PURPA, which among other things, requires investor owned utilities
to purchase power at their avoided cost from qualifying facilities. Although
none of these bills was enacted into law, they may suggest the form of future
legislation.
Published reports name electric utility restructuring as one of the
foremost issues before the United States Congress in 1997. Statements made by
proponents of various proposed bills indicate that many of these bills will
address repeal of the Holding Company Act. In January 1997, a bill was
introduced in the United States Senate providing for comprehensive electric
utility industry restructuring and for retail choice by December 2003, repeal of
the Holding Company Act one year after the bill is enacted, as well as repeal of
the requirement that electric utilities purchase power at their avoided cost
from qualifying facilities under PURPA. Under this bill, many of the oversight
functions performed by the SEC under the Holding Company Act would be shifted to
the FERC and the states. In addition, a bill has been reintroduced in the United
States House of Representatives providing for choice of electricity suppliers at
the retail level by the year 2000. Under this bill, which is substantially
similar to the Senate bill, the application of the Holding Company Act to a
particular holding company system would be eliminated after each state served by
the electric utility companies in that system made a determination that retail
competition existed in that state. There have also been reports of other bills
that are likely to be introduced in 1997, many of which deal with retail choice
issues and/or repeal of the Holding Company Act and/or PURPA. Given this level
of activity, there is some probability that Congress will enact legislation in
1997 that amends or repeals various portions of the Holding Company Act and/or
PURPA. CSW is unable to predict the form or effects of any such potential
legislation at this time.
<PAGE> 21
In February 1997, the SEC adopted Rule 58 allowing a holding company
registered under the Holding Company Act or any of its subsidiaries, to acquire,
without prior SEC approval, the securities of any energy-related company subject
to certain limits. Under the new rule, investment in energy-related company
securities without prior SEC approval is limited to the greater of (i) $50
million and (ii) 15% of the consolidated capitalization of the registered
holding company as reported on its most recent Form 10-Q or Form 10-K as filed
with the SEC. Rule 58 does not exempt the acquisition by a registered holding
company of the securities of an electric utility company or a gas utility
company, which remains subject to the SEC's prior approval as does the issuance
of securities for the purpose of making such exempt investments.
REGULATORY ACCOUNTING
Consistent with industry practice and the provisions of SFAS No. 71,
which allows for the recognition and recovery of regulatory assets, the U.S.
Electric Operating Companies have recognized significant regulatory assets and
liabilities. Management believes that the U.S. Electric Operating Companies will
continue to meet the criteria for following SFAS No. 71. However, in the event
the U.S. 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 regulatory accounting, reference is made to
NEW ACCOUNTING STANDARDS and NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
PSO UNION NEGOTIATIONS
Since July 1, 1996, PSO and its Local Union 1002 of the IBEW have been
engaged in contract renewal negotiations. The underlying agreement expired
September 30, 1996 and, to date, the parties have been unable to reach an
agreement. As a result, PSO implemented portions of its final proposal on
December 29, 1996 after declaring an impasse. The principal issue of
disagreement involves PSO's anticipated need for flexibility in a deregulated
environment. At this time, PSO cannot predict the outcome of this matter.
However, PSO is confident that, even in the event of a strike, its operations
would continue without a significant disruption.
CSW STRATEGIC RESPONSES
CSW and the U.S. Electric Operating Companies have from time to time
considered, and expect to consider in the future, various strategies designed to
enhance CSW's competitive position and to increase its ability to anticipate and
adapt to changes in the electric utility industry. These strategies may include
business combinations with other companies, internal restructurings involving
the complete or partial separation of CSW's generation, transmission and
distribution businesses, acquisitions or dispositions of assets or lines of
business, and additions to or reductions of franchised service territories. See
CSW RESTRUCTURING. CSW and the U.S. Electric Operating Companies may from time
to time engage in discussions, either internally or with third parties,
regarding one or more of these potential strategies. Those discussions may be
subject to confidentiality agreements and CSW's policy is generally not to
comment on such activities. No assurances can be given that any potential
transaction of the type described above may actually occur, or, if one does
occur, the ultimate effect thereof on CSW's or any U.S. Electric Operating
Company's results or operations, financial condition or competitive position
(The foregoing statement constitutes a forward looking statement within the
meaning of Section 21E of the Exchange Act. Actual results may differ materially
from such projected information due to changes in the underlying assumptions.
See FORWARD LOOKING INFORMATION).
IMPACT OF COMPETITION
CSW is unable to predict the ultimate outcome or impact of competitive
forces on the electric utility industry in the United States, and in the United
Kingdom or on the CSW System. As the 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 (The foregoing statement constitutes a forward looking
statement within the meaning of Section 21E of the Exchange Act. Actual results
may differ materially from such projected information due to changes in the
underlying assumptions. See FORWARD LOOKING INFORMATION).
<PAGE> 22
RATES AND REGULATORY MATTERS
CPL RATE REVIEW DOCKET NO. 14965
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 result in an
increase of $54 million, or 4.6%, in total annual retail revenues based on a
test year ended June 30, 1995. CPL's filing also sought 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.
On April 30, 1996, CPL implemented new fuel factors that will lower
fuel costs to its retail customers by $25 million annually. The lower fuel
factors result primarily from the projected decline in CPL's fuel costs during
the twelve-month period following the implementation of the new factors. On May
9, 1996, CPL placed a $70 million base rate increase into effect under bond. The
bonded rates are subject to refund based on the final order of the Texas
Commission. When combined with the fuel factor reduction, the net result is an
increase in annual retail revenues of $45 million, or 3.8%.
On May 10, 1996, CPL and other parties to the fuel reconciliation phase
of the current rate review filed the CPL 1996 Fuel Agreement with the Texas
Commission that reconciles CPL's fuel costs through June 1995. A final order
implementing the settlement was issued on June 28, 1996, approving a one-time
fuel refund of $23 million that was refunded to customers in July 1996. As a
condition of the settlement, CPL agreed not to seek recovery of $6 million of
fuel and fuel-related costs incurred during the reconciliation period. The
additional amount of the refund resulted from an over-recovery of fuel costs
during the reconciliation period and did not have a material impact on CPL's
results of operations or financial condition.
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. CPL made a supplemental filing on April 1,
1996, addressing a recommended model for restructuring the electric industry
within ERCOT. In addition, the supplemental filing included: (i) estimates of
CPL's potential stranded costs based upon various possible structures of the
electric industry and under several energy price scenarios; and (ii) a
recommendation that the potential stranded costs not be quantified in rates
until any changes in the electricity market and structure of utilities in Texas
are known. In this supplemental filing, CPL estimated its potential stranded
costs could range from approximately zero to approximately $3.7 billion in a
worst-case scenario. The range is dependent upon a number of presently unknown
factors, including the extent to which CPL is compensated for its reasonable
costs and the extent and timing of any implementation of retail competition.
CPL has filed rebuttal testimony that challenges positions taken by the
Texas Commission staff and other parties intervening in this case. CPL's
testimony challenges the Texas Commission staff's proposals as unreasonable and
contrary to current law and regulatory policy. While the Texas Commission staff
reported the use of a "point estimate" of $850 million for potentially stranded
costs, their testimony actually describes their range of potential stranded
costs as very uncertain and having a range from $200 million to $2 billion. The
Texas Commission staff subsequently revised their "point estimate" to $1.069
billion and their range from $223 million to $2.9 billion. In addition, the
Texas Commission staff recommended (i) a nuclear performance standard that would
penalize CPL unless it operates its nuclear units better than 75 percent of the
U.S. nuclear industry; (ii) a fuel-recovery mechanism that is based on prices in
an undeveloped energy market; and (iii) a one-sided cap on CPL's earnings that
effectively prevents CPL from realizing its authorized level of earnings.
A proposal for decision was issued on January 21, 1997 by the ALJs
hearing the case. The proposal for decision recommends an increase in annual
revenues of $7.2 million, the net result of a recommended base rate reduction of
<PAGE> 23
$5.2 million plus increased revenues collected through two surcharges. The $7.2
million revenue rate change is made up of the following components: (i) a $10.3
million reduction in KWH-related revenues; (ii) an increase of $5.1 million in
miscellaneous revenues (customer connect charges, insufficient check charges and
other fees); (iii) a $4.3 million annual surcharge applied over three years to
recover rate case expenses; and (iv) annual recovery of $8.1 million for
demand-side management expenditures through a separate surcharge.
A factor contributing significantly to the difference between the $71
million retail base rate increase originally requested by CPL and the ALJs'
proposal is the recommended reduction in CPL's return on equity from 12.25% to
10.9% resulting in a reduction of $31 million in CPL's requested base rate
increase.
The ALJs' decision also recommends no change in the method used by CPL
to recover the capitalized costs associated with CPL's 25.2% ownership interest
in STP. The ALJs have recommended that the Texas Commission reject CPL's request
to change the method of recovering STP deferred accounting costs from a mortgage
amortization methodology to a straight-line amortization methodology. Rejection
of this request would reduce CPL's request for rate relief by $14 million. The
ALJs also recommended that CPL's current depreciation rates be decreased by $8.8
million a year and that the Texas Commission deny CPL's request for a $3.6
million increase for its catastrophe reserve.
The proposal for decision also addressed the competitive issues raised
in the Texas Commission's preliminary order. The ALJs determined that, under
current law, the Texas Commission does not have authority to implement the
nuclear performance standard, fuel-recovery mechanism, or earnings cap proposed
by the Texas Commission staff. However, the ALJs determined that with
legislative authorization, it could be appropriate to implement a nuclear
performance standard and alternative fuel-recovery mechanism for CPL. The ALJs
also determined that under various structures of a future competitive electric
utility industry, CPL could have potentially stranded costs from $30 million to
$1.718 billion. The ALJs stated that CPL's potentially stranded costs will
depend on the structure of the industry in the future and that recovery of these
costs might not be required by law under certain industry structures.
A final order from the Texas Commission is expected in March 1997.
CPL's management cannot predict the ultimate outcome of CPL's rate case. 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.
PSO RATE REVIEW
On July 19, 1996, the Oklahoma Commission staff filed an application
seeking a review of PSO's earnings and rate structure. The review is being
initiated to investigate the potential impact on PSO's rates from both the sale
of Transok and PSO's restructuring efforts as well as PSO's improved financial
results. Although rate reviews do not have specific time limitations, a schedule
has been established for PSO's response. In accordance with the established
schedule, PSO filed a package of financial information with the Oklahoma
Commission staff on November 1, 1996, and cost of service and rate design
testimony on January 10, 1997. A final order from the Oklahoma Commission is
expected in the fall of 1997. PSO's management cannot predict the ultimate
outcome of PSO's rate case, although management believes that the ultimate
resolution will not have a material adverse effect on PSO and CSW's consolidated
results of operations or financial condition. However, if PSO ultimately is
unsuccessful in reaffirming adequate rates, PSO and CSW could experience a
material adverse effect on their consolidated results of operations and
financial condition.
On January 14, 1997, the Oklahoma Commission approved a joint
settlement which provides that all bills rendered beginning with PSO's June 1997
billing cycle shall be considered interim rates subject to refund in the event
that the permanent final order grants less than the current revenue produced by
the existing rates.
<PAGE> 24
OTHER
See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for information
regarding these and other regulatory matters.
MERGER AND ACQUISITION ACTIVITIES
SEEBOARD ACQUISITION
In November 1995, CSW announced its intention to commence the Tender
Offer in the United Kingdom to acquire all of the outstanding share capital of
SEEBOARD. 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 electricity industry in 1990. By April 1996, CSW, through
intermediate subsidiaries, had acquired control of 100% of SEEBOARD for an
aggregate adjusted purchase price of approximately $2.1 billion assuming average
exchange rates during the purchase period. See SEEBOARD ACQUISITION FINANCING
for additional information.
SEEBOARD'S RECENT OPERATING RESULTS
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. SEEBOARD is also involved
in other business activities, including electrical contracting and retailing,
gas supply and electricity generation.
For the year ended December 31, 1996, SEEBOARD had electricity sales of
approximately 19.4 billion KWHs and net earnings of $208 million on revenues of
approximately $1.8 billion. For the year ended December 31, 1995 (unaudited),
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 1996 gross profit, (revenue less cost of sales), was higher
than the comparable period last year due primarily to an increase in sales
volume in the distribution business and a 3.3% increase in supply tariffs
charged to customers beginning in February 1996 to recover supply costs. The
increase in 1996 gross profit was offset in part by a 13% decrease in regulatory
allowed distribution revenue, effective April 1, 1996, following the completion
of a regulatory price review of SEEBOARD's distribution business and some loss
of volume to competition in SEEBOARD's supply business.
Other factors contributing to SEEBOARD's increase in 1996 earnings were
continued cost reduction programs, the first year of earnings contribution from
SEEBOARD's 37.5% interest in the 675 MW Medway Power Station, the recognition of
a benefit in 1996 of funds required to settle a liability for redundancy costs
and the absence in 1996 of restructuring costs incurred in 1995. Partially
offsetting the increase in 1996 earnings was the receipt in 1995 of dividends
from SEEBOARD's interest in the National Grid which did not repeat in 1996.
SEEBOARD's results for the calendar years ended December 31, 1996 and
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, and the purchase accounting adjustments and the
accounting adjustments made to adjust SEEBOARD's results for U.S. Generally
Accepted Accounting Principles.
SEEBOARD's 1996 earnings have been converted into U.S. dollar amounts
for illustrative purposes only at an exchange rate of (pound)1.00=$1.56, which
was the average rate of exchange for 1996. SEEBOARD's 1995 earnings have been
<PAGE> 25
converted into U.S. dollar amounts for illustrative purposes only at an exchange
rate of (pound)1.00=$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 CSW's Tender Offer to acquire SEEBOARD.
See NOTE 15. PRO FORMA INFORMATION for information required by the SEC
related to the pro forma impact on CSW of the SEEBOARD acquisition.
TERMINATION OF EL PASO MERGER
In May 1993, CSW entered into a Merger Agreement pursuant to which El
Paso would have emerged from bankruptcy as a wholly owned subsidiary of CSW. On
June 9, 1995, following CSW's notification that it was terminating the Merger
Agreement, El Paso filed a suit against CSW seeking a $25 million termination
fee from CSW, additional unspecified damages, punitive damages, interest as
permitted by law and certain other costs. On June 15, 1995, CSW filed suit
against El Paso 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. On June 14, 1996, CSW filed an amended complaint seeking a first
priority administrative expense claim of $50 million from El Paso based upon El
Paso's breach of the Merger Agreement.
The United States Bankruptcy Court for the Western District of Texas,
Austin Division, consolidated the El Paso suit and the CSW suit into one
adversary proceeding. CSW is the named plaintiff in the consolidated adversary
proceeding. The trial was completed on January 30, 1997 and a decision is
expected in the case in the first quarter of 1997.
Although CSW believes that it has substantial defenses to El Paso's
claims and intends to defend against 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.
SALE OF TRANSOK
Transok is an intrastate natural gas gathering, transmission, marketing
and processing company. In January 1996, CSW announced it was exploring
strategic alternatives for its investment in Transok, including a possible sale.
On June 6, 1996, CSW sold Transok to Tejas for approximately $890 million,
consisting of $690 million in cash and $200 million in existing long-term debt
that remained with Transok after the sale. A portion of the cash proceeds was
used to repay the CSW Credit Agreement related to the SEEBOARD acquisition with
the remaining proceeds used to repay commercial paper borrowings.
CSW and PSO do not expect the sale of Transok to have an adverse impact
in its ability to secure natural gas in the future. Negotiations are currently
in progress with third party pipelines to provide additional pipeline
interconnections to other natural gas suppliers besides Transok.
SWEPCO CAJUN ASSET PURCHASE PROPOSAL
Cajun filed a petition for reorganization under Chapter 11 of the
United States Bankruptcy Code on December 21, 1994 and is currently operating
under the supervision of the United States Bankruptcy Court for the Middle
District of Louisiana.
On October 26, 1996, SWEPCO, together with Entergy Gulf States and the
Members Committee, which currently represents 8 of the 12 Louisiana member
distribution cooperatives that are served by Cajun, filed the Second Amended
SWEPCO Plan in the bankruptcy court. Under the Second Amended SWEPCO Plan, a
SWEPCO subsidiary or affiliate would acquire all of the non-nuclear assets of
Cajun, comprised of the Big Cajun I gas-fired plant, the Big Cajun II coal-fired
plant, and related non-nuclear assets, for approximately $780 million in cash,
up to an additional $20 million to pay certain other bankruptcy claims and
expenses and an additional $7 million to acquire claims of unsecured creditors.
<PAGE> 26
In addition, the Second Amended SWEPCO Plan provides for SWEPCO and the Cajun
member cooperatives to enter into new 25-year power supply agreements which will
provide the Cajun member cooperatives with two wholesale rate options while
permitting the Cajun member cooperatives the flexibility to acquire power on the
open market when their requirements exceed mutually agreed upon levels of
generating capacity available from SWEPCO. In addition, the cooperatives could
elect, once every five years, to move from one option to the other. The Second
Amended SWEPCO Plan would settle all claims and litigation in the bankruptcy
case, including potentially protracted litigation over power supply contract
rights.
The Second Amended SWEPCO Plan amends the Original SWEPCO Plan filed on
April 19, 1996 (as amended by the First Amended SWEPCO Plan filed on September
30, 1996) by the Members Committee, SWEPCO and Entergy Gulf States in the
bankruptcy court. Under the Original SWEPCO Plan, SWEPCO had proposed to acquire
all of the non-nuclear assets of Cajun for approximately $405 million in cash.
In addition, under the Original SWEPCO Plan, the Cajun member cooperatives would
have made future payments with a net present value ranging from $497 million to
$567 million to the RUS of the federal government, Cajun's largest creditor, by
using a portion of the cooperatives' future income from their retail customers.
Two competing plans of reorganization for the non-nuclear assets of
Cajun have been filed with the bankruptcy court at about the same time as the
filing of the First Amended SWEPCO Plan, one of which offers a higher cash bid
price. Under one competing plan, Cajun's non-nuclear assets would be acquired by
Louisiana Generating LLC, which would be owned by affiliates of SEI Holding,
Inc., NRG Energy, Inc. and Zeigler Coal Holdings Company. Cajun's court
appointed trustee in bankruptcy is supporting this plan as well as RUS, Cajun's
largest creditor. In addition, Enron Capital & Trade Resources Corp. and the
Official Committee of Unsecured Creditors have jointly filed a competing plan of
reorganization.
Confirmation hearings in Cajun's bankruptcy case have been postponed
until March 10, 1997 because a bankruptcy court ruling on January 7, 1997
disqualified the law firm representing the Members Committee due to an
irreconcilable conflict between the firm's representation of both the Members
Committee and Southwest Louisiana Electric Membership Corporation. The
bankruptcy court postponed the confirmation hearings to allow the Members
Committee time to obtain new counsel. At a February 24, 1997 status conference,
the bankruptcy court extended the resumption of full confirmation hearings until
April 21, 1997.
Consummation of the Second Amended SWEPCO Plan is conditioned upon
confirmation by the bankruptcy court, and the receipt by SWEPCO and CSW of all
requisite state and federal regulatory approvals in addition to the receipt of
their corresponding board approvals. If the Second Amended SWEPCO Plan is
confirmed, CSW and SWEPCO expect initially to finance the $807 million required
to consummate the acquisition of Cajun's non-nuclear assets through a
combination of external borrowings and internally generated funds.
NEW INITIATIVES
As described in OVERVIEW, a vital part of CSW's future strategy
involves initiatives that are outside of the traditional United States electric
utility industry due to increasing competition and fundamental changes in this
industry. In addition, lower anticipated growth rates in CSW's core United
States electric utility business combine with the aforementioned industry
factors to cause CSW to pursue new initiatives. These new initiatives have taken
a variety of forms; however, they are all consistent with the overall plan for
CSW to develop a global energy 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 (The foregoing statement constitutes a
forward looking statement within the meaning of Section 21E of the Exchange Act.
Actual results may differ materially from such projected information due to
changes in the underlying assumptions. See FORWARD LOOKING INFORMATION). See
RECENT DEVELOPMENTS AND TRENDS.
<PAGE> 27
CSW ENERGY
CSW Energy presently owns interests in five operating power projects
totaling 648 MW which are located in Colorado, Florida and Texas. Also, CSW
Energy has one 330 MW power plant under construction in Texas. In addition to
these projects, CSW Energy has another six projects totaling approximately 1,700
MW in various stages of development, mostly in affiliation with other
developers.
CSW INTERNATIONAL
CSW International was organized to pursue investment opportunities in
EWGs and foreign utility companies. CSW International currently holds
investments in the United Kingdom, Mexico and Brazil.
In July 1996, CSW International announced a joint venture with Alpek,
through a subsidiary, to build, own and operate a 109 MW, gas-fired cogeneration
project at Alpek's Petrocel industrial complex in Altamira, Tamaulipas, Mexico.
CSW International and Alpek each will have a 50% ownership in the project,
Enertek, which is expected to commence commercial operation in the first quarter
of 1998.
In December 1996, CSW International acquired a minority interest in a
Brazilian electric utility company which serves approximately 600,000 customers
in an area of approximately 118,000 square miles. CSW International continues to
seek to expand into other countries in Latin America, Europe, Australia and Asia
that meet its investment criteria.
CSW COMMUNICATIONS
CSW Communications was formed to provide communication services to the
U.S. Electric Operating Companies, non-affiliates and directly to retail
customers. CSW Communications will continue to market energy management and
utility management systems to other electric companies. The company will also
seek regulatory approval to provide similar services to CPL, PSO, SWEPCO and
WTU.
In January 1997, CSW and ICG Communications, Inc. announced a joint
venture limited partnership to market telecommunications services. The new
partnership, ChoiceCom, will be based in Austin, Texas and will develop and
market telecommunications services in the four-state region of Texas, Oklahoma,
Louisiana, and Arkansas. ChoiceCom initially plans to serve Austin and Corpus
Christi, Texas with local telephone, long distance and data services.
At the same time, ChoiceCom will seek to develop business opportunities
in other cities in the four-state region. In addition to offering local
exchange, long distance and data transmission services, ChoiceCom may expand CSW
Communications' existing city-to-city fiber network business depending on market
conditions. CSW Communications currently has franchises in Austin and Corpus
Christi, Texas to build fiber networks and provide telecommunications services.
ChoiceCom must obtain regulatory approvals and negotiate business
agreements with existing telecommunications providers before it can begin
offering telecommunications services in competition with established
telecommunications providers. ChoiceCom currently plans to begin offering
telecommunications services as soon as appropriate agreements and approvals have
been obtained.
ENERSHOP
EnerShop currently provides energy services to customers in Texas.
These are 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. In 1996, EnerShop
secured several contracts and has bids outstanding for several additional
projects in 1997.
<PAGE> 28
OTHER VENTURES
The CSW Services Business Ventures group pursues energy projects
related to the business activities of the U.S. Electric Operating Companies. One
project, Numanco, provides staffing services for electric utility power plants.
Projects related to energy management systems and electric substation automation
software are also being pursued.
SOUTH TEXAS PROJECT
CPL owns 25.2% of STP, a two-unit nuclear power plant which is located
near Bay City, Texas. 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. The owners of STP
are in negotiations to form the South Texas Project Nuclear Operating Company
which would replace HLP as the operator and project manager of STP.
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 NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS.
STP Unit 1 was removed from service during 1996 for a scheduled
refueling outage which lasted 22 days. For the year 1996, Unit 1 and Unit 2
operated at net capacity factors of 93.1% and 95.2%, 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.
ENVIRONMENTAL MATTERS
The operations of the CSW System, like those of other utility systems,
generally involve the use and disposal of substances subject to environmental
laws. CERCLA, the federal "Superfund" law, addresses the cleanup of sites
contaminated by hazardous substances. Superfund requires that PRPs fund remedial
actions regardless of fault or the legality of past disposal activities. PRPs
include owners and operators of contaminated sites and transporters and/or
generators of hazardous substances. Many states have similar laws. Legally, any
one PRP can be held responsible for the entire cost of a cleanup. Usually,
however, cleanup costs are allocated among PRPs.
The U.S. Electric Operating Companies are subject to various pending
claims alleging that they are PRPs under federal or state remedial laws for
investigating and cleaning up contaminated property. CSW anticipates that
resolution of these claims, individually or in the aggregate, will not have a
material adverse effect on CSW's or any U.S. Electric Operating Company's
results of operations or financial condition. Although the reasons for this
expectation differ from site to site, factors that are the basis for the
expectation for specific sites include the volume and/or type of waste allegedly
contributed by the U.S. Electric Operating Company, the estimated amount of
costs allocated to the U.S. Electric Operating Company and the participation of
other parties. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS and NOTE 3.
COMMITMENTS AND CONTINGENT LIABILITIES for additional discussion regarding
environmental matters.
<PAGE> 29
NEW ACCOUNTING STANDARDS
SFAS NO. 121
CSW adopted SFAS No. 121 effective January 1, 1996. The statement
establishes a two-fold test for identification and quantification of an impaired
asset. The adoption of SFAS No. 121 did not have a significant impact on CSW's
consolidated results of operations or financial condition. Under the current
regulatory environment, CSW does not expect SFAS No. 121 to have a significant
impact on its consolidated results of operation 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 provides that if stock is granted to an employee or a
non-employee in return for services provided to the company, that this stock
represents compensation to the recipient. It requires the calculation of a
compensation cost, but then allows the company to choose between making the
charge to net income or disclosing this information in its notes to its
financial statements. CSW has chosen to disclose the information in the Notes to
the Consolidated Financial Statements rather than making the charge to Net
Income. See NOTE 12. STOCK-BASED COMPENSATION PLANS for CSW's valuation of stock
options for 1996 and 1995. Under prior accounting rules, recognition of
compensation for the grant of stock options was not required if the stock price
at the time of the grant and the price at which the employee could purchase the
stock were the same.
SFAS NO. 125
SFAS No. 125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishment of liabilities using a
financial-components approach that focuses on control. An entity recognizes
assets it controls and derecognizes assets when control has been surrendered and
liabilities when they have been extinguished. A transfer of assets in which
control of the asset is surrendered is recorded as a sale. Control of an asset
is surrendered only when and if certain distinct conditions are met. Likewise, a
liability is only extinguished under certain distinct conditions. SFAS No. 125
is effective for transfers and servicing of financial assets occurring after
December 31, 1996, and cannot be applied prior to that date. Adoption of this
standard will not have a material adverse effect on CSW's consolidated results
of operations or financial condition.
SFAS NO. 128
On March 3, 1997, the FASB issued SFAS No. 128, effective for financial
statements for periods ending after December 15, 1997. SFAS No. 128 will
simplify the computation of earnings per share for many companies by eliminating
calculation provisions which were required by the prior earnings per share
standard, Accounting Principles Board Opinion No. 15. CSW believes that adoption
of SFAS No. 128 will not have a material effect on its calculation of earnings
per share.
<PAGE> 30
CSW
Consolidated Statements of Income
Central and South West Corporation
- -----------------------------------------------------------------------------
For the Years Ended December 31,
--------------------------------
1996 1995 1994
------- ------ ------
($ in millions, except share amounts)
Operating Revenues
U.S. Electric $3,248 $2,883 $3,065
United Kingdom 1,848 208 --
Other diversified 59 52 40
------- ------ ------
5,155 3,143 3,105
------- ------ ------
Operating Expenses and Taxes
U.S. Electric fuel 1,151 1,004 1,113
U.S. Electric purchased power 77 41 48
United Kingdom cost of sales 1,331 158 --
Other operating 785 557 539
Maintenance 150 155 171
Depreciation and amortization 464 353 324
Taxes, other than income 178 162 176
Income taxes 224 92 179
------- ------ ------
4,360 2,522 2,550
------- ------ ------
Operating Income 795 621 555
------- ------ ------
Other Income and Deductions
Mirror CWIP liability amortization -- 41 68
U.S. Electric reserves for utility plant
development costs, net of tax benefit
of $33 (84) -- --
Other 23 58 41
------- ------ ------
(61) 99 109
------- ------ ------
Income Before Interest Charges 734 720 664
------- ------ ------
Interest Charges
Interest on long-term debt 325 223 203
Interest on short-term debt and other 94 101 74
------- ------ ------
419 324 277
------- ------ ------
Income from Continuing Operations 315 396 387
------- ------ ------
Discontinued Operations
Income from discontinued operations, net
of tax of $6 for 1996, $13 for 1995
and $10 for 1994 12 25 25
Gain on the sale of discontinued
operations, net of tax of $72 120 -- --
------- ------ ------
132 25 25
------- ------ ------
Net Income 447 421 412
Preferred stock dividends 18 19 18
======= ====== ======
Net Income for Common Stock $429 $402 $394
======= ====== ======
Average Common Shares Outstanding 207.5 191.7 189.3
Earnings per Share of Common Stock
from Continuing Operations $1.43 $1.97 $1.95
Earnings per Share of Common Stock
from Discontinued Operations 0.64 0.13 0.13
------- ------ ------
Earnings per Share of Common Stock $2.07 $2.10 $2.08
======= ====== ======
Dividends Paid per Share of Common Stock $1.74 $1.72 $1.70
======= ====== ======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE> 31
CSW
Consolidated Statements of Stockholders' Equity
Central and South West Corporation
- ------------------------------------------------------------------------------
For the Years Ended December 31,
--------------------------------
1996 1995 1994
------ ------ ------
(millions)
Common Stock at Beginning of Year $675 $667 $659
Sale of Common Stock 65 8 8
------ ------ ------
Common Stock at End of Year 740 675 667
------ ------ ------
Paid-in Capital at Beginning of Year 610 561 518
Sale of Common Stock 412 49 43
------ ------ ------
Paid-in Capital at End of Year 1,022 610 561
------ ------ ------
Retained Earnings at Beginning of Year 1,893 1,824 1,753
Net income for common stock 429 402 394
Deduct: Common stock dividends 358 329 322
Deduct: Preferred stock and other
adjustments 1 4 1
------ ------ ------
Retained Earnings at End of Year 1,963 1,893 1,824
------ ------ ------
Foreign Currency Translation and Other at
Beginning of Year -- -- --
Net Change 77 -- --
------ ------ ------
Foreign Currency Translation and Other at
End of Year 77 -- --
------ ------ ------
------ ------ ------
Total Stockholders' Equity $3,802 $3,178 $3,052
====== ====== ======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE> 32
CSW
Consolidated Balance Sheets
Central and South West Corporation
- ---------------------------------------------------------------------------
As of December 31,
-----------------
1996 1995
------- -------
(millions)
ASSETS
Fixed Assets
Electric
Production $5,830 $5,888
Transmission 1,538 1,484
Distribution 4,237 3,799
General 1,318 1,209
Construction work in progress 230 346
Nuclear fuel 184 165
------- -------
Total Electric 13,337 12,891
Gas -- 869
Other diversified 84 18
------- -------
13,421 13,778
Less - Accumulated depreciation
and amortization 4,940 4,761
------- -------
8,481 9,017
------- -------
Current Assets
Cash and temporary cash investments 254 401
National Grid assets held for sale -- 100
Accounts receivable 861 1,035
Materials and supplies, at average cost 185 188
Electric utility fuel inventory,
substantially at average cost 102 129
Under-recovered fuel costs 46 --
Prepayments and other 85 186
------- -------
1,533 2,039
------- -------
Deferred Charges and Other Assets
Deferred plant costs 509 514
Mirror CWIP asset 299 312
Other non-utility investments 347 296
Income tax related regulatory assets, net 236 253
Goodwill 1,525 1,074
Other 402 364
------- -------
3,318 2,813
------- -------
$13,332 $13,869
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE> 33
CSW
Consolidated Balance Sheets
Central and South West Corporation
- ---------------------------------------------------------------------------
As of December 31,
-----------------
1996 1995
------- -------
CAPITALIZATION AND LIABILITIES (millions)
Capitalization
Common stock: $3.50 par value
Authorized shares: 350.0 million shares
Issued and outstanding: 211.5 million shares
in 1996 and 192.9 million shares in 1995 $740 $675
Paid-in capital 1,022 610
Retained earnings 1,963 1,893
Foreign currency translation and other 77 --
------- -------
3,802 3,178
------- -------
Preferred stock
Not subject to mandatory redemption 292 292
Subject to mandatory redemption 33 34
Long-term debt 4,024 3,914
------- -------
Total Capitalization 8,151 7,418
------- -------
Minority Interest -- 202
------- -------
Current Liabilities
Long-term debt and preferred stock due
within twelve months 204 30
Short-term debt 364 692
Short-term debt - CSW Credit, Inc. 579 646
Loan notes 76 --
Accounts payable 630 595
Accrued taxes 324 228
Accrued interest 82 77
Provision for SEEBOARD acceptances -- 1,001
Over-recovered fuel costs -- 43
Other 166 113
------- -------
2,425 3,425
------- -------
Deferred Credits
Accumulated deferred income taxes 2,272 2,306
Investment tax credits 291 306
Other 193 212
------- -------
2,756 2,824
------- -------
$13,332 $13,869
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE> 34
CSW
Consolidated Statements of Cash Flows
Central and South West Corporation
- -----------------------------------------------------------------------------
For the Years Ended December 31,
-------------------------------
1996 1995 1994
------- ------ ------
(millions)
OPERATING ACTIVITIES
Net Income $447 $421 $412
Non-cash Items Included in Net Income
Depreciation and amortization 521 425 402
Deferred income taxes and investment
tax credits 62 (11) 87
Mirror CWIP liability amortization -- (41) (68)
Reserves for utility plant and other
project development costs 147 -- --
Gain on sale of subsidiary (192) -- --
Changes in Assets and Liabilities
Accounts receivable (86) (36) 29
Accounts payable 23 (32) (27)
Accrued taxes (14) 25 21
Fuel recovery (89) 76 16
Accrued restructuring charges -- (2) (57)
Other 56 (26) (51)
------- ------ ------
875 799 764
------- ------ ------
INVESTING ACTIVITIES
Construction expenditures (521) (474) (578)
Acquisitions expenditures (1,394) (421) (21)
CSW Energy/CSW International projects (124) 109 (115)
Sale of National Grid assets 99 -- --
Cash proceeds from sale of subsidiary 690 -- --
Other (36) (26) (2)
------- ------ ------
(1,286) (812) (716)
------- ------ ------
FINANCING ACTIVITIES
Common stock sold 477 57 50
Proceeds from issuance of long-term debt 437 456 199
SEEBOARD acquisition financing 350 731 --
Reacquisition/Maturity of long-term debt (239) (363) (31)
Redemption of preferred stock (1) (1) (33)
Other financing activities 67 -- --
Change in short-term debt (395) (226) 153
Payment of dividends (376) (348) (340)
------- ------ ------
320 306 (2)
------- ------ ------
Effect of exchange rate changes on cash
and cash equivalents (56) -- --
------- ------ ------
Net Change in Cash and Cash Equivalents (147) 293 46
Cash and Cash Equivalents at Beginning of Year 401 108 62
------- ------ ------
Cash and Cash Equivalents at End of Year $254 $401 $108
======= ====== ======
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $356 $301 $280
======= ====== ======
Income taxes paid $196 $77 $93
======= ====== ======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE> 35
CENTRAL AND SOUTH WEST CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
CSW is a registered holding company under the Holding Company Act
subject to regulation by the SEC. CSW's four U.S. Electric Operating Companies
are also regulated by the SEC under the Holding Company Act.
The principal business of CSW's four U.S. Electric Operating Companies
is the generation, transmission, and distribution of electric power and energy.
These companies are subject to regulation by the FERC under the Federal Power
Act and follow the Uniform System of Accounts prescribed by the FERC. They are
subject to further regulation with regard to rates and other matters by state
regulatory commissions as follows: CPL and WTU are subject to the Texas
Commission; PSO is subject to the Oklahoma Commission; and SWEPCO is subject to
the Arkansas Commission, Louisiana Commission, Oklahoma Commission and 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 is subject to rate regulation by the DGES.
In addition to electric utility operations, CSW has subsidiaries
involved in a variety of business activities. CSW Energy and CSW International
pursue cogeneration and other energy-related ventures; CSW Credit factors the
accounts receivable of affiliated and non-affiliated companies; CSW
Communications pursues telecommunications projects; CSW Leasing has investments
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities along
with disclosure of contingent liabilities at the date of financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FIXED ASSETS
Electric fixed assets are stated at the original cost of construction,
which includes the cost of contracted services, direct labor, materials,
overhead items and allowances for borrowed and equity funds used during
construction. SEEBOARD's fixed assets are stated at their original fair market
value which existed on the date of acquisition plus the original cost of
construction since the acquisition.
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 both 1996 and 1995 and 3.2% for 1994.
<PAGE> 36
CPL NUCLEAR DECOMMISSIONING OF STP
At the end of STP's service life, decommissioning is expected to be
accomplished using the decontamination method, which is one of the techniques
acceptable to the NRC. Using this method, the decontamination activities occur
as soon as possible after the end of plant operations. Contaminated equipment is
cleaned and removed to a permanent disposal location, and the site is generally
returned to its 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, 1996, the trust balance
was $34.7 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 $8.2 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. The presiding ALJs in CPL's rate case filed a proposal for
decision with the Texas Commission recommending a decommission annual funding of
$6 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.
The FASB is currently reviewing the utility industry's accounting
treatment of nuclear and certain other plant decommissioning costs. The FASB has
preliminarily concluded that decommissioning costs should be accounted for at
the present value as a liability, with a corresponding asset in utility plant,
rather than as a component of depreciation. An exposure draft regarding this
matter was issued in February 1996.
ELECTRIC REVENUES AND FUEL
The U.S. Electric Operating Companies record revenues based upon
cycle-billings. Electric service provided subsequent to billing dates through
the end of each calendar month are accrued for estimated unbilled revenues in
accordance with industry standards.
CPL, SWEPCO and WTU recover retail 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
<PAGE> 37
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 U.S. Electric
Operating Companies, certain non-affiliated companies and, prior to its sale in
June 1996, Transok.
REGULATORY ASSETS AND LIABILITIES
For their regulated activities, the U.S. Electric Operating Companies
follow SFAS No. 71, which defines the criteria for establishing regulatory
assets and regulatory liabilities. Regulatory assets represent probable future
revenue to the company associated with certain costs which will be recovered
from customers through the ratemaking process. Regulatory liabilities represent
probable future refunds to customers. The regulatory assets are currently being
recovered in rates and the unrecovered asset balances are included in the table
below.
1996 1995
------------------------
(millions)
Deferred plant costs $509 $514
Mirror CWIP asset 299 312
Income tax related regulatory assets, net 236 253
Deferred restructuring and rate case costs 46 46
Deferred storm costs 2 4
Demand side management costs 15 14
OPEBs 3 7
Other 11 10
------------------------
$1,121 $1,160
In accordance with orders of the Texas Commission, CPL and WTU deferred
carrying costs, as well as operating costs, 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. 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 the deferred plant costs
at CPL and WTU, reference is made to NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS.
SEEBOARD ACQUISITION
The acquisition of SEEBOARD was accounted for as a purchase
combination. An allocation of the purchase price has been performed and is
reflected in the consolidated financial statements. This included an allocation
of approximately $1.0 billion to goodwill at December 31, 1995. The goodwill is
<PAGE> 38
being amortized on a straight-line basis over 40 years. The unamortized balance
of the SEEBOARD goodwill at December 31, 1996 was $1.5 billion including
goodwill not recorded at December 31, 1995 prior to completion of the SEEBOARD
purchase in April 1996. CSW evaluates whether circumstances have occurred that
indicate the remaining useful life of goodwill may warrant revision or that the
remaining balance of goodwill may not be recoverable.
NATIONAL GRID ASSETS
Pursuant to a December 11, 1995 distribution by SEEBOARD, CSW (UK), as
a shareholder of SEEBOARD, received approximately 32.5 million shares of
National Grid common stock. On February 2, 1996, all of the shares of National
Grid that CSW (UK) plc held were sold for approximately $99 million.
FOREIGN CURRENCY TRANSLATION
The financial statements of the CSW Investments Group, which are
included in CSW's consolidated financial statements, have been translated from
British pounds to U.S. dollars in accordance with SFAS No. 52. All balance sheet
accounts are translated at the exchange rate at the end of the period and all
income statement items are translated at the average exchange rate for the
applicable period. At December 31, 1996 the current exchange rate was
approximately (pound)1.00=$1.71, and the average exchange rate for the twelve
month period ended December 31, 1996 was approximately (pound)1.00=$1.56. All
resulting translation adjustments are recorded directly to Foreign currency
translation and other on CSW's consolidated balance sheets. Cash flow statement
items are translated at a combination of average, historical and current
exchange rates. The non-cash impact of the changes in exchange rates on cash and
cash equivalents, resulting from the translation of items at the different
exchange rates, is shown on CSW's Consolidated Statements of Cash Flows in
Effect of exchange rate changes on cash and cash equivalents.
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 1996 presentation. See NOTE 14. TRANSOK
DISCONTINUED OPERATIONS for information related to the classification of Transok
activities.
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 have emerged from bankruptcy as a wholly owned subsidiary of CSW. On
June 9, 1995, following CSW's notification that it was terminating the Merger
Agreement, El Paso filed a suit against CSW seeking a $25 million termination
fee from CSW, additional unspecified damages, punitive damages, interest as
permitted by law and certain other costs. On June 15, 1995, CSW filed suit
against El Paso 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. On June 14, 1996, CSW filed an amended complaint seeking a first
priority administrative expense claim of $50 million from El Paso based upon El
Paso's breach of the Merger Agreement.
The United States Bankruptcy Court for the Western District of Texas,
Austin Division, consolidated the El Paso suit and the CSW suit into one
adversary proceeding. CSW is the named plaintiff in the consolidated adversary
proceeding. A two week non-jury trial of the case was completed on January 30,
1997, and a decision is expected in the case in the first quarter of 1997.
<PAGE> 39
Although CSW believes that it has substantial defenses to El Paso's
claims and intends to defend against 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 result in an
increase of $54 million, or 4.6%, in total annual retail revenues based on a
test year ended June 30, 1995. CPL's filing also sought 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.
On April 30, 1996, CPL implemented new fuel factors that will lower
fuel costs to its retail customers by $25 million annually. The lower fuel
factors result primarily from the projected decline in CPL's fuel costs during
the twelve-month period following the implementation of the new factors. On May
9, 1996, CPL placed a $70 million base rate increase into effect under bond. The
bonded rates are subject to refund based on the final order of the Texas
Commission. When combined with the fuel factor reduction, the net result is an
increase in annual retail revenues of $45 million, or 3.8%.
On May 10, 1996, CPL and other parties to the fuel reconciliation phase
of the current rate review filed the CPL 1996 Fuel Agreement with the Texas
Commission that reconciles CPL's fuel costs through June 1995. A final order
implementing the settlement was issued on June 28, 1996, approving a one-time
fuel refund of $23 million that was refunded to customers in July 1996. As a
condition of the settlement, CPL agreed not to seek recovery of $6 million of
fuel and fuel-related costs incurred during the reconciliation period. The
additional amount of the refund resulted from an over-recovery of fuel costs
during the reconciliation period and did not have a material impact on CPL's
results of operations or financial condition.
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. CPL made a supplemental filing on April 1,
1996, addressing a recommended model for restructuring the electric industry
within ERCOT. In addition, the supplemental filing included: (i) estimates of
CPL's potential stranded costs based upon various possible structures of the
electric industry and under several energy price scenarios; and (ii) a
recommendation that the potential stranded costs not be quantified in rates
until any changes in the electricity market and structure of utilities in Texas
are known. In this supplemental filing, CPL estimated its potential stranded
costs could range from approximately zero to approximately $3.7 billion in a
worst-case scenario. The range is dependent upon a number of presently unknown
factors, including the extent to which CPL is compensated for its reasonable
costs and the extent and timing of any implementation of retail competition.
CPL has filed rebuttal testimony that challenges positions taken by the
Texas Commission staff and other parties intervening in this case. CPL's
testimony challenges the Texas Commission staff's proposals as unreasonable and
contrary to current law and regulatory policy. While the Texas Commission staff
reported the use of a "point estimate" of $850 million for potentially stranded
costs, their testimony actually describes their range of potential stranded
costs as very uncertain and having a range from $200 million to $2 billion. The
Texas Commission staff subsequently revised its "point estimate" to $1.069
billion and its range from $223 million to $2.9 billion. In addition, the Texas
Commission staff recommended: (i) a nuclear performance standard that would
penalize CPL unless it operates its nuclear units better than 75 percent of the
U.S. nuclear industry; (ii) a fuel-recovery mechanism that is based on prices in
<PAGE> 40
an undeveloped energy market; and (iii) a one-sided cap on CPL's earnings that
effectively prevents CPL from realizing its authorized level of earnings.
A proposal for decision was issued on January 21, 1997 by the ALJs
hearing the case. The proposal for decision recommends an increase in annual
revenues of $7.2 million, the net result of a recommended base rate reduction of
$5.2 million plus increased revenues collected through two surcharges. The $7.2
million revenue rate change is made up of the following components: (i) a $10.3
million reduction in KWH-related revenues; (ii) an increase of $5.1 million in
miscellaneous revenues (customer connect charges, insufficient check charges and
other fees); (iii) a $4.3 million annual surcharge applied over three years to
recover rate case expenses; and (iv) annual recovery of $8.1 million for
demand-side management expenditures through a separate surcharge.
A factor contributing significantly to the difference between the $71
million retail base rate increase originally requested by CPL and the ALJs'
proposal is the recommended reduction in CPL's return on equity from 12.25% to
10.9% resulting in a reduction of $31 million in CPL's requested base rate
increase.
The ALJs' decision also recommends no change in the method used by CPL
to recover the capitalized costs associated with CPL's 25.2% ownership interest
in STP. The ALJs have recommended that the Texas Commission reject CPL's request
to change the method of recovering STP deferred accounting costs from a mortgage
amortization methodology to a straight-line amortization methodology. Rejection
of this request would reduce CPL's request for rate relief by $14 million. The
ALJs also recommended that CPL's current depreciation rates be decreased by $8.8
million a year and that the Texas Commission deny CPL's request for a $3.6
million increase for its catastrophe reserve.
The proposal for decision also addressed the competitive issues raised
in the Texas Commission's preliminary order. The ALJs determined that, under
current law, the Texas Commission does not have authority to implement the
nuclear performance standard, fuel-recovery mechanism, or earnings cap proposed
by the Texas Commission staff. However, the ALJs determined that with
legislative authorization, it could be appropriate to implement a nuclear
performance standard and alternative fuel-recovery mechanism for CPL. The ALJs
also determined that under various structures of a future competitive electric
utility industry, CPL could have potentially stranded costs from $30 million to
$1.718 billion. The ALJs stated that CPL's potentially stranded costs will
depend on the structure of the industry in the future and that recovery of these
costs might not be required by law under certain industry structures.
A final order from the Texas Commission is expected in March 1997.
CPL's management cannot predict the ultimate outcome of CPL's rate case. 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
<PAGE> 41
items in the CPL 1995 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
By orders issued in 1989 and 1990, the Texas Commission authorized CPL
to defer certain STP Unit 1 and Unit 2 costs incurred between the commercial
operation dates of those units and the effective date of rates reflecting the
operation of those units. Upon appeal of the 1989 CPL order, and a related order
involving another utility, the Supreme Court in 1994 sustained deferred
accounting as an appropriate mechanism for the Texas Commission to use in
preserving the financial integrity of CPL, but remanded CPL's case to the Court
of Appeals to consider certain substantial evidence points of error not
previously decided by the Court of Appeals. 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.
By orders issued in October 1990 and December 1990, the Texas
Commission quantified the STP Unit 1 and Unit 2 deferred accounting costs and
authorized the inclusion of the amortization of the costs and associated return
in CPL's retail rates. These Texas Commission orders were appealed to the Travis
County District Court where the appeals are still pending. Language in the
Supreme Court's opinion in the appeal of the deferred accounting authorization
case suggests that the appropriateness of including deferred accounting costs in
rates charged to customers is dependent on a finding in the first case in which
the deferred STP costs are recovered through rates that the deferral was
actually necessary to preserve the utility's financial integrity. If in the
appeals of the October 1990 and December 1990 rate orders, the courts decide
that subsequent review under the financial integrity standard is required and
was not made in those orders, such rate orders would be remanded to the Texas
Commission for the purpose of entering findings applying the financial integrity
standard. Pending the ultimate resolution of CPL's deferred accounting issues,
CPL is unable to predict how its deferred accounting orders will ultimately be
resolved by the Texas Commission.
If CPL's deferred accounting matters are not favorably resolved, CSW
and CPL could experience a material adverse effect on their respective results
of operations and financial condition. While CPL's management is unable to
predict the ultimate outcome of these matters, management believes either that
CPL will receive approval of its deferred accounting amounts or that CPL will be
successful in renegotiation of its rate orders, so that there will be no
material adverse effect on CSW's or CPL's results of operation or financial
condition.
CPL FUEL SURCHARGE
On January 3, 1997, CPL filed with the Texas Commission an Application
for Authority to Implement an increase in fuel factors of $34.4 million, or
15.4% on an annual basis. Additionally, CPL proposed to implement a surcharge of
$24.3 million, including accumulated interest, over a 12 month period. CPL
requested to implement the revised fuel factors by February 28, 1997, and to
commence the surcharge by April 30, 1997. On January 24, 1997, CPL filed revised
schedules reflecting a revised surcharge of $23.4 million, including accumulated
interest. On February 10, 1997, CPL filed a Stipulation with the Texas
<PAGE> 42
Commission which would surcharge customers $23.4 million, including interest
over a period not to exceed twelve months and coordinate the surcharge with any
refund obligation in Docket No. 14965. Additionally, the proposed fuel factors
would be implemented in March 1997 resulting in an increase in fuel revenue of
approximately $29.4 million , or 13.2% on an annual basis. An order granting
interim approval of the stipulated fuel factors was issued February 20, 1997,
allowing a March 1997 implementation of the fuel factors.
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. HLP paid the penalties in 1996.
In September 1996, the NRC notified HLP of a Notice of Violation and
proposed penalties totaling $200,000 related to events that occurred at STP in
1991 and 1994. The Notice of Violation and penalties reflect the NRC's belief
that certain contractor employees working at STP were discriminated against by
their employers as a result of raising safety concerns with the NRC. HLP paid
the penalties in 1996.
CPL's share of these penalty payments is 25.2% reflecting its ownership
interest in STP.
CPL NUCLEAR INSURANCE CLAIMS
In 1994, CPL filed a claim under its NEIL I policy relating to the
1993-1994 outage at STP Units 1 and 2. NEIL formally denied CPL's claim on
November 21, 1995. On April 9, 1996, CPL filed an action in state district court
in Corpus Christi, Texas, against NEIL and Johnson & Higgins of Texas, Inc., the
former insurance broker for STP, seeking recovery under the policy and other
relief. NEIL responded by filing a suit against CPL on April 16, 1996, in the
United States District Court for the Southern District of New York seeking a
declaratory judgment to enforce an arbitration provision contained in the
policy. On May 24, 1996, the New York court ordered the dispute, including the
issue of whether the arbitration provision is enforceable, to arbitration and
stayed the Texas proceeding. NEIL also canceled CPL's current NEIL I policy
effective July 31, 1996. NEIL also filed a claim in arbitration seeking a
determination that NEIL properly terminated CPL's coverage and that CPL has
caused NEIL damages by opposing NEIL's attempt to compel arbitration and seeking
recovery of NEIL's attorneys' fees. On June 21, 1996, CPL filed a notice of
appeal of the New York court's order in the United States Court of Appeals for
the Second Circuit. Subsequently, CPL and NEIL agreed to dismiss all litigation
between them concerning CPL's claim for NEIL coverage. CPL and NEIL also agreed
to submit their disputes over coverage to a non-binding, neutral evaluation
process, although both CPL and NEIL have reserved the right to take their
dispute to binding arbitration. CPL and NEIL also agreed that CPL's NEIL I
policy would be reinstated. Evidentiary hearings were held by the neutral
evaluator in February 1997. A final oral argument is scheduled to be held before
the neutral evaluator on April 4, 1997. CPL intends to assert its rights to
recovery under the NEIL I policy vigorously, but cannot predict the ultimate
outcome of this matter. CPL's management believes that the resolution of this
matter will not have a material adverse effect on CSW's or CPL's results of
operations or financial condition.
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.
<PAGE> 43
PSO RATE REVIEW
On July 19, 1996, the Oklahoma Commission staff filed an application
seeking a review of PSO's earnings and rate structure. The review is being
initiated to investigate the potential impact on PSO's rates from both the sale
of Transok and PSO's restructuring efforts as well as PSO's improved financial
results. Although rate reviews do not have specific time limitations, a schedule
has been established for PSO's response. In accordance with the established
schedule, PSO filed a package of financial information with the Oklahoma
Commission staff on November 1, 1996, and cost of service and rate design
testimony on January 10, 1997. A final order from the Oklahoma Commission is
expected in the fall of 1997. PSO's management cannot predict the ultimate
outcome of PSO's rate case, although management believes that the ultimate
resolution will not have a material adverse effect on PSO's or CSW's
consolidated results of operations or financial condition. However, if PSO
ultimately is unsuccessful in reaffirming adequate rates, PSO and CSW could
experience a material adverse effect on their consolidated results of operations
and financial condition.
On January 14, 1997, the Oklahoma Commission approved a joint
settlement which provides that all bills rendered beginning with PSO's June 1997
billing cycle shall be considered interim rates subject to refund in the event
that the permanent final order grants less than the current revenue produced by
the existing rates.
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 beginning in 1998.
PSO GAS PURCHASE CONTRACTS
PSO has been named defendant in complaints filed in federal and state
courts of Oklahoma and Texas in 1984 through 1996 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. To date, complaints
representing approximately $11 million in claims were settled. Remaining
complaints currently total approximately $100,000 in claimed actual damages. The
settlements did not have a material effect on PSO's consolidated results of
operations or financial condition.
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 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
<PAGE> 44
1994, the United States District Court for the Northern District of Oklahoma
entered judgment for PSO confirming the arbitration award and granting PSO a
$16.4 million money judgment. In December 1995, this litigation was settled as
part of the compromise settlement of the related transportation contract
litigation described above. Under the settlement, that portion of the district
court's judgment granting PSO a $16.4 million money judgment was released and
satisfied of record, and that portion of the judgment confirming the arbitration
award as to basic transportation rates for the balance of the contract term and
the mechanism for adjustment of future transportation rates became final and is
in full force and effect.
PSO PCB CASES
PSO has been named a defendant in petitions filed in state court in
Oklahoma in February and August, 1996. The petitions allege that the plaintiffs
suffered personal injury and fear future injury as a result of contamination by
PCBs from a transformer malfunction that occurred in April, 1982 at the Page
Belcher Federal Building in Tulsa. Each of the plaintiffs seeks actual and
punitive damages in excess of $10,000. As previously reported, other claims
arising from this incident have been settled and the suits dismissed. 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 by insurance. Management also believes that the ultimate resolution
of the remaining lawsuits will not have a material adverse effect on CSW's or
PSO's consolidated results of operations or financial condition.
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 was completed in
August, 1996, at a total cost of $3.6 million. 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 SAND SPRINGS/GRANDFIELD, OKLAHOMA SITES
In 1989, PSO investigated a Sand Springs, Oklahoma PCB storage facility
and found potential PCB contamination. A clean-up plan of the facility was
approved by the EPA and clean-up of the facility began in November 1994. In
October 1996, EPA filed a complaint against PSO alleging PSO failed to comply
with provisions of the Toxic Substances Control Act. The complaint has three
counts, two of which pertain to the Sand Springs facility and the third dealing
with a substation in Grandfield, Oklahoma. The EPA alleges improper disposal of
PCBs at the Sand Springs site due to the length of time between discovery of the
contamination and the actual clean-up at the site. The complaint at the
Grandfield site alleges failure to date PCB articles at the site. The total
proposed penalty for the three counts is $479,500 which has been accrued by PSO.
PSO has filed a response to the complaint and is currently awaiting an answer
from the EPA. Management cannot predict the outcome of this matter. However,
management believes that PSO has defenses to the EPA's claims and intends to
defend the matter vigorously. Management also believes that the 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.
SWEPCO FUEL FACTOR PROCEEDING
On October 31, 1996, SWEPCO filed with the Texas Commission an
Application for Authority to Implement an Interim Surcharge of Fuel Cost
Under-Recoveries. SWEPCO proposed to surcharge its customers approximately $10.2
million which included additional interest through the end of the surcharge
period.
On December 20, 1996, SWEPCO filed a motion for authorization to
withdraw its above referenced application and to carry over the under-recovered
balance to the fuel reconciliation proceeding SWEPCO is required to initiate by
June 30, 1997. On December 30, 1996, the Texas Commission issued an order
<PAGE> 45
approving SWEPCO's motion for withdrawal. On December 31, 1996, SWEPCO had a
Texas jurisdictional under-recovered fuel balance of approximately $10.5
million, including accumulated interest.
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, and on April 30, 1996, that court reversed the judgment of the state
district court. On October 14, 1996, SWEPCO filed an application with the
Supreme Court to grant a writ of error to review and reverse the judgment of the
Texarkana, Texas Court of Appeals. This application is now pending.
WTU FUEL SURCHARGE
On February 24, 1997, WTU filed with the Texas Commission an
Application for Authority to Implement an increase in fuel factors of $4.2
million, or 4.2% on an annual basis. Additionally, WTU proposed to implement a
surcharge of $13.3 million, including accumulated interest, over a twelve month
period. WTU requested to implement the revised fuel factors in conjunction with
the May 1997 billings, and to commence the surcharge in conjunction with the
June 1997 billings. An order in this proceeding is anticipated in early May
1997.
WTU 1995 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 1995 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 of the appeal of Docket No. 7510 to the Texas
Commission to implement a final order consistent with the WTU 1995 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 Court of
Appeals issued a mandate on April 15, 1996, directed to the Travis County
District Court, that permitted the case to be remanded back to the Texas
Commission. On May 23, 1996, the Texas Commission assigned it a new proceeding
for docketing purposes, Docket No. 15988. A prehearing on Docket No. 15988 was
held on June 24, 1996 where parties to Docket No. 15988 discussed with the ALJ a
<PAGE> 46
joint motion filed with the ALJ by the parties on June 21, 1996 that proposed to
adopt a finding to implement the last outstanding element related to the WTU
1995 Stipulation and Agreement in Docket No. 13369, WTU's settled rate case. On
October 4, 1996, the ALJ issued a proposed order that is fully consistent with
the terms of the WTU 1995 Stipulation and Agreement. The Texas Commission
entered a final order in Docket No. 15988 approving this agreement on October
28, 1996.
The WTU 1995 Stipulation and Agreement is expected to impact WTU's
results of operations for the next several years. Details of the items with
significant earnings impact for 1995, including certain accounting treatments,
are set forth in the following table.
Pre-tax After-tax
------- ---------
(millions)
Refund to retail customers $(21.0) $(13.7)
Effect of retail rate reduction (2.4) (1.6)
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
Capitalization and amortization of previously
expensed restructuring costs 12.7 8.2
Other amortization (0.2) (0.1)
Other one-time items 1.0 0.7
The WTU 1995 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.
OTHER
The registrants are party to various other legal claims, actions and
complaints arising in the normal course of business. Management does not expect
disposition of these matters to have a material adverse effect on the
registrants' results of operations or financial condition.
3. COMMITMENTS AND CONTINGENT LIABILITIES
CONSTRUCTION AND CAPITAL EXPENDITURES
It is estimated that CSW, including the U.S. Electric Operating
Companies, SEEBOARD and other diversified operations, will spend approximately
$539 million in capital expenditures (but excluding capital that may be required
for acquisitions) during 1997. Substantial commitments have been made in
connection with these programs.
FUEL COMMITMENTS
To supply a portion of their fuel requirements, the U.S. Electric
Operating Companies have entered into various commitments for the procurement of
fuel.
SWEPCO HENRY W. PIRKEY POWER PLANT
In connection with the South Hallsville lignite mining contract for its
Henry W. Pirkey Power Plant, SWEPCO has agreed, under certain conditions, to
assume the obligations of the mining contractor. As of December 31, 1996, the
maximum amount SWEPCO would have to assume was $63.9 million. The maximum amount
may vary as the mining contractor's need for funds fluctuates. The contractor's
actual obligation outstanding at December 31, 1996 was $57.7 million.
<PAGE> 47
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 $36 million.
OTHER COMMITMENTS AND CONTINGENCIES
CPL NUCLEAR INSURANCE
In connection with the licensing and operation of STP, the owners have
purchased nuclear property and liability insurance coverage as required by law,
and have executed indemnification agreements with the NRC in accordance with the
financial protection requirements of the Price-Anderson Act.
The Price-Anderson Act, a comprehensive statutory arrangement providing
limitations on nuclear liability and governmental indemnities, is in effect
until August 1, 2002. The limit of liability under the Price-Anderson Act for
licensees of nuclear power plants is $8.92 billion per incident, effective as of
December 1996. The owners of STP are insured for their share of this liability
through a combination of private insurance amounting to $200 million and a
mandatory industry-wide program for self-insurance totaling $8.72 billion. The
maximum amount that each licensee may be assessed under the industry-wide
program of self-insurance following a nuclear incident at an insured facility is
$75.5 million per reactor, which may be adjusted for inflation, plus a five
percent charge for legal expenses, but not more than $10 million per reactor for
each nuclear incident in any one year. CPL and each of the other STP owners are
subject to such assessments, which CPL and other owners have agreed will be
allocated on the basis of their respective ownership interests in STP. For
purposes of these assessments, STP has two licensed reactors.
The owners of STP currently maintain on-site decontamination liability
and property damage insurance in the amount of $2.75 billion provided by ANI and
NEIL. Policies of insurance issued by ANI and NEIL stipulate that policy
proceeds must be used first to pay decontamination and 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 purchased, 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, such insurance will
reimburse CPL up to 80% of the single unit recovery. The maximum amount
recoverable for a single unit outage is $118.6 million for both Unit 1 and 2.
CPL is subject to an additional assessment up to $1.9 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. CPL
renewed its current NEIL I Business Interruption and/or Extra Expense policy
September 15, 1996.
For further information relating to litigation associated with CPL
nuclear insurance claims, reference is made to NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS.
SWEPCO CAJUN ASSET PURCHASE PROPOSAL
Cajun filed a petition for reorganization under Chapter 11 of the
United States Bankruptcy Code on December 21, 1994 and is currently operating
under the supervision of the United States Bankruptcy Court for the Middle
District of Louisiana.
<PAGE> 48
On October 26, 1996, SWEPCO, together with Entergy Gulf States and the
Members Committee, which currently represents 8 of the 12 Louisiana member
distribution cooperatives that are served by Cajun, filed the Second Amended
SWEPCO Plan in the bankruptcy court. Under the Second Amended SWEPCO Plan, a
SWEPCO subsidiary or affiliate would acquire all of the non-nuclear assets of
Cajun, comprised of the Big Cajun I gas-fired plant, the Big Cajun II coal-fired
plant, and related non-nuclear assets, for approximately $780 million in cash,
up to an additional $20 million to pay certain other bankruptcy claims and
expenses and an additional $7 million to acquire claims of unsecured creditors.
In addition, the Second Amended SWEPCO Plan provides for SWEPCO and the Cajun
member cooperatives to enter into new 25-year power supply agreements which will
provide the Cajun member cooperatives with two wholesale rate options while
permitting the Cajun member cooperatives the flexibility to acquire power on the
open market when their requirements exceed mutually agreed upon levels of
generating capacity available from SWEPCO. In addition, the cooperatives could
elect, once every five years, to move from one option to the other. The Second
Amended SWEPCO Plan would settle all claims and litigation in the bankruptcy
case, including potentially protracted litigation over power supply contract
rights.
The Second Amended SWEPCO Plan amends the Original SWEPCO Plan filed on
April 19, 1996 (as amended by the First Amended SWEPCO Plan filed on September
30, 1996) by the Members Committee, SWEPCO and Entergy Gulf States in the
bankruptcy court. Under the Original SWEPCO Plan, SWEPCO had proposed to acquire
all of the non-nuclear assets of Cajun for approximately $405 million in cash.
In addition, under the Original SWEPCO Plan, the Cajun member cooperatives would
have made future payments with a net present value ranging from $497 million to
$567 million to the RUS of the federal government, Cajun's largest creditor, by
using a portion of the cooperatives' future income from their retail customers.
Two competing plans of reorganization for the non-nuclear assets of
Cajun have been filed with the bankruptcy court at about the same time as the
filing of the First Amended SWEPCO Plan, one of which offers a higher cash bid
price. Under one competing plan, Cajun's non-nuclear assets would be acquired by
Louisiana Generating LLC, which would be owned by affiliates of SEI Holding,
Inc., NRG Energy, Inc. and Zeigler Coal Holdings Company. Cajun's court
appointed trustee in bankruptcy is supporting this plan as well as RUS, Cajun's
largest creditor. In addition, Enron Capital & Trade Resources Corp. and the
Official Committee of Unsecured Creditors have jointly filed a competing plan of
reorganization.
Confirmation hearings in Cajun's bankruptcy case have been postponed
until March 10, 1997 because a bankruptcy court ruling on January 7, 1997
disqualified the law firm representing the Members Committee due to an
irreconcilable conflict between the firm's representation of both the Members
Committee and Southwest Louisiana Electric Membership Corporation. The
bankruptcy court postponed the confirmation hearings to allow the Members
Committee time to obtain new counsel. At a February 24, 1997 status conference,
the bankruptcy court extended the resumption of full confirmation hearings until
April 21, 1997.
Consummation of the Second Amended SWEPCO Plan is conditioned upon
confirmation by the bankruptcy court, and the receipt by SWEPCO and CSW of all
requisite state and federal regulatory approvals in addition to the receipt of
their corresponding board approvals. If the Second Amended SWEPCO Plan is
confirmed, CSW and SWEPCO expect initially to finance the $807 million required
to consummate the acquisition of Cajun's non-nuclear assets through a
combination of external borrowings and internally generated funds.
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, 1996, leased assets
of $46 million, less accumulated amortization of $36.9 million, were included in
utility plant on the balance sheet and at December 31, 1995, leased assets were
$46 million, less accumulated amortization of $33.7 million.
<PAGE> 49
SWEPCO BILOXI, MISSISSIPPI MGP SITE
SWEPCO was notified by Mississippi Power in 1994 that it may be a PRP
at a MGP site in Biloxi, Mississippi, formerly owned and operated by a
predecessor of SWEPCO. Since then, SWEPCO has worked with Mississippi Power on
both the investigation of the extent of contamination on the site as well as on
the subsequent sampling of the site. The sampling results indicated
contamination at the property as well as the possibility of contamination of an
adjacent property. A risk assessment was submitted to the MDEQ, whose ensuing
comments requested that a future residential exposure scenario be evaluated for
comparison with commercial and industrial exposure scenarios. However,
Mississippi Power and SWEPCO do not feel that cleanup to a residential scenario
is appropriate since this site has been industrial/commercial for more that 100
years, and Mississippi Power plans to continue this type of usage. Mississippi
Power and SWEPCO also presented a report to the MDEQ demonstrating that the
ground water on the site was not potable, further demonstrating that cleanup to
residential standards is not necessary.
The MDEQ has not agreed to a non-residential future land use scenario
as of this date and has requested further testing. Following the additional
testing and resolution of whether cleanup is necessary to meet a residential
usage scenario or if cleanup to a commercial/industrial scenario is appropriate,
a feasibility study will be conducted to more definitively evaluate remedial
strategies for the property. This will require public input prior to a final
decision being made.
A final range of cleanup costs has not been determined, but based on
preliminary estimates, SWEPCO has incurred to date approximately $200,000 for
its portion of the cleanup of this site and anticipates that an additional $2
million may be required. Accordingly, SWEPCO has accrued $2 million for the
cleanup.
CSW ENERGY LOANS AND COMMITMENTS
The following table summarizes loans made by CSW Energy and commitments
provided by CSW at December 31, 1996.
Letters of
Credit and
PROJECT Guarantees Loans
-----------------------------------------------------------
(millions)
Ft. Lupton $56.4 $--
Mulberry 15.7 --
Orange Cogen 1.7 --
Phillips Sweeny (1) 234.7 51.8
Various developmental projects 7.6 5.5
(1) CSW Energy has agreed to provide construction financing
for the project which began in September 1996. The
project costs (development, construction and financing
costs) are estimated at $190 million.
CSW INTERNATIONAL ENERTEK PROJECT
In July 1996, CSW International announced a joint venture with Alpek,
through a subsidiary, to build, own and operate a 109 MW, gas-fired cogeneration
project at Alpek's Petrocel industrial complex in Altamira, Tamaulipas, Mexico.
CSW International and Alpek each will have 50% ownership in the project,
Enertek, which will cost approximately $75 million. CSW International has agreed
to provide construction financing for the project of which $24 million had been
funded at December 31, 1996. CSW International has entered into a limited
guarantee agreement with the project's engineering, procurement and construction
contractor that provides the contractor a guarantee of up to $5 million. The
Enertek project is expected to commence commercial operations in the first
quarter of 1998.
<PAGE> 50
4. INCOME TAXES
CSW files a consolidated United States federal income tax return and
participates in a tax sharing agreement with its subsidiaries. Income tax
includes United States federal income taxes, applicable state income taxes and
SEEBOARD's United Kingdom corporation taxes. Total income taxes differ from the
amounts computed by applying the United States federal statutory income tax rate
to income before taxes for a number of reasons which are presented in the INCOME
TAX RATE RECONCILIATION table below. Information concerning income taxes,
including total income tax expense, the reconciliation between the United States
federal statutory tax rate and the effective tax rate and significant components
of deferred income taxes follow.
INCOME TAX EXPENSE 1996 1995 1994
-------------------------
(millions)
INCLUDED IN OPERATING EXPENSES AND TAXES
Current (1) $118 $105 $103
Deferred (1) 120 1 90
Deferred ITC (2) (14) (14) (14)
---- --- ---
224 92 179
INCLUDED IN OTHER INCOME AND
DEDUCTIONS
Current (1) 2 (13)
Deferred (39) (4) (5)
---- --- ---
(40) (2) (18)
INCOME TAXES FOR DISCONTINUED
OPERATIONS
(includes $72 resulting from the gain 78 13 10
on the sale in 1996)
---- --- ---
$262 $103 $171
---- --- ---
(1) Approximately $49 million and $7 million of CSW's Current Income Tax
Expense was attributable to CSW Investments Group's operations and was
recognized as United Kingdom corporation tax expense for 1996 and
1995, respectively. In addition, approximately $19 million of CSW's
1996 Deferred Income Tax Expense was the result of CSW's foreign
investment in SEEBOARD.
(2) ITC deferred in prior years are included in income over the lives of
the related properties.
INCOME TAX RATE
RECONCILIATION 1996 1995 1994
-------------------------------------
($ in millions)
Income before taxes attributable to:
Domestic operations $562 $506 $583
Foreign operations 146 13 --
---- ---- ---
Income before taxes $708 $519 $583
Tax at U.S. statutory rate $248 35% $182 35% $204 35%
Differences
Amortization of ITC (14) (2) (14) (3) (14) (2)
Mirror CWIP 5 1 (11) (2) (20) (4)
Non-deductible goodwill amortization 13 2 -- -- -- --
Tax credit on foreign operations
dividend (18) (3) -- -- -- --
CPL 1995 Agreement -- -- (34) (7) -- --
WTU 1995 Stipulations and Agreement -- -- (7) (1) -- --
Prior period adjustments 10 1 (22) (4) (2) --
Other 18 3 9 2 3 --
-------------------------------------
$262 37% $103 20% $171 29%
-------------------------------------
<PAGE> 51
DEFERRED INCOME TAXES (1) 1996 1995
-------------- ---------------
(millions)
Deferred Income Tax Liabilities
Depreciable utility plant $1,867 $1,863
Deferred plant costs 178 180
Mirror CWIP asset 105 109
Income tax related regulatory assets 207 220
Other 307 290
----- -----
2,664 2,662
Deferred Income Tax Assets
Income tax related regulatory liability (126) (133)
Unamortized ITC (105) (98)
Alternative minimum tax carryforward (83) (96)
Other (99) (129)
----- -----
(413) (456)
----- -----
Net Accumulated Deferred Income Taxes $2,251 $2,206
----- -----
Net Accumulated Deferred Income
Taxes
Noncurrent $2,272 $2,306
Current (21) (100)
----- -----
$2,251 $2,206
----- -----
(1) In 1996, CSW generated $33 million of excess foreign tax credits
against which a full valuation allowance was established as of
December 31, 1996. Otherwise, as a result of a favorable earnings
history, CSW did not have any valuation allowances recorded
against any deferred tax assets at December 31, 1996 and 1995
other than excess foreign tax credits.
5. BENEFIT PLANS
PENSION PLANS
CSW maintains a tax qualified, non-contributory defined benefit pension
plan covering substantially all CSW employees in the United States. 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 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.
The majority of SEEBOARD's employees joined a pension plan that is
administered for the United Kingdom's electricity industry. The assets of this
plan are held in a separate trustee-administered fund that is actuarially valued
every three years. SEEBOARD and its participating employees both contribute to
the plan. Subsequent to July 1, 1995, new employees were no longer able to
participate in that plan. Instead, two new pension plans were made available to
new employees, both of which are also separate trustee-administered plans.
Information about the two separate pension plans (the U.S. plan and the
Non-U.S. plan), including: (i) pension plan net periodic costs and
contributions; (ii) pension plan participation; (iii) a reconciliation of the
funded status of the pension plan to the amounts recognized on the balance
sheets; and (iv) assumptions used in accounting for the pension plan follow.
<PAGE> 52
NET PERIODIC PENSION 1996 1996 1996
PLAN COSTS AND Combined U.S. Non-U.S. 1995 U.S. 1994 U.S.
CONTRIBUTIONS Plans Plan Plan Plan Only Plan Only
-----------------------------------------------
(millions)
Net Periodic Pension Costs
Service cost $37 $23 $14 $20 $22
Interest cost on projected
benefit obligation 136 69 67 64 62
Actual return on plan assets (184) (110) (74) (117) (4)
Net amortization and deferral 27 27 -- 44 (70)
-------------------- ---- ---
$16 $9 $7 $11 $10
-------------------- ---- ---
Pension Plan Contributions $35 $28 $7 $29 $28
APPROXIMATE NUMBER OF Combined U.S. Non-U.S.
PARTICIPANTS IN PLANS Plans Plan Plan
DURING 1996 ---------------------------------------
Active employees 10,900 7,900 3,000
Retirees 10,100 4,200 5,900
Terminated employees 6,200 1,400 4,800
RECONCILIATION OF FUNDED
STATUS OF PLAN TO AMOUNTS 1996 1996 1995
RECOGNIZED ON THE Combined 1996 Non-U.S. U.S.
CONSOLIDATED BALANCE SHEETS Plans U.S. Plan Plan Plan Only
---------------------------------------
(millions)
Actuarial present value of
Accumulated benefit obligation
for service rendered to date $1,748 $781 $967 $745
Additional benefit for future
salary levels 200 141 59 140
------------------------- ----
Projected benefit obligation 1,948 922 1,026 885
Plan assets, at fair value 2,077 991 1,086 897
------------------------- ----
Plan assets in excess of the projected
benefit obligation 129 69 60 12
Unrecognized net loss 30 27 3 64
Unrecognized prior service cost (12) (7) (5) (8)
Unrecognized net obligation 16 12 4 14
------------------------- ----
Prepaid pension cost $163 $101 $62 $82
------------------------- ----
The vested portion of the accumulated benefit obligations for the
combined plans was $1,678 million at December 31, 1996 and $678 million for the
U.S. plan at December 31, 1995. The unrecognized net obligation of the U.S. plan
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
CSW's consolidated balance sheet.
In addition to the amounts shown in the above table, CSW 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, 1996, 1995 and 1994 was $4.8 million, $2.4
million and $1.8 million, respectively.
<PAGE> 53
ASSUMPTIONS USED IN Long-Term
ACCOUNTING FOR THE Discount Compensation Return on Plan
PENSION PLAN Rate Increase Assets
----------------------------------------------
1996 U.S. Plan 8.00% 5.46% 9.50%
Non-U.S. Plan 7.75% 5.75% 8.25%
1995 U.S. Plan 8.00% 5.46% 9.50%
1994 U.S. Plan 8.25% 5.46% 9.50%
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (U.S. COMPANIES ONLY)
CSW including each of the U.S. Electric Operating Companies, adopted
SFAS No. 106 effective January 1, 1993. The transition obligation established at
adoption is being amortized over twenty years, with sixteen 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: (i)
net periodic postretirement benefit costs; (ii) a reconciliation of the funded
status of the postretirement benefit plan to the amounts recognized on the
balance sheets; and (iii) assumptions used in accounting for the postretirement
benefit plan follow.
NET PERIODIC
POSTRETIREMENT 1996 1995 1994
BENEFIT COSTS -----------------------------
(millions)
Service cost $8 $8 $9
Interest cost on APBO 19 18 19
Actual return on plan assets (7) (8) (1)
Amortization of transition obligation 9 9 9
Net amortization and deferral (2) 2 (4)
----------------------------
$27 $29 $32
----------------------------
RECONCILIATION OF FUNDED
STATUS OF PLAN TO AMOUNTS
RECOGNIZED ON THE BALANCE SHEETS 1996 1995
----------------------
(millions)
APBO
Retirees $163 $175
Other fully eligible participants 18 13
Other active participants 55 57
---- ----
Total 236 245
Plan assets at fair value 123 100
---- ----
APBO in excess of plan assets 113 145
Unrecognized transition obligation (144) (153)
Unrecognized gain or (loss) 32 8
---- ----
Accrued Cost $1 $--
---- ----
Tax Rate for
ASSUMPTIONS USED IN THE Discount Return on Taxable
ACCOUNTING FOR SFAS NO. 106 Rate Plan Assets Trusts
------------------------------------
1996 8.00% 9.50% 39.6%
1995 8.00% 9.50% 39.6%
1994 8.25% 9.50% 39.6%
Health care cost trend rates
1996 Average Rate of 9.0% grading down .75% per year to an ultimate
average rate of 5.25% in 2001.
1995 Average Rate of 10.25% grading down .75% per year to an ultimate
average rate of 5.75% in 2001.
<PAGE> 54
Increasing the assumed health care cost trend rates by one percentage
point in each year would increase the APBO by approximately $24.4 million and
the aggregate of the service and interest costs components by approximately $3.4
million.
HEALTH AND WELFARE PLANS
CSW provides medical, dental, group life insurance, dependent life
insurance, and accidental death and dismemberment insurance plans for
substantially all active CSW System employees in the United States. The total
contributions, recorded on a pay-as-you-go basis, for the years ended December
31, 1996, 1995 and 1994 were $28.4 million, $27.0 million, and $17.0 million,
respectively. Employer provided health care benefits are not common in the
United Kingdom due to the country's national health care system. Accordingly,
SEEBOARD does not provide health care benefits to the majority of its employees.
6. JOINTLY OWNED ELECTRIC UTILITY PLANT
The U.S. Electric Operating Companies are parties to various joint
ownership agreements with other non-affiliated entities. Such agreements provide
for the joint ownership and operation of generating stations and related
facilities, whereby each participant bears its share of the project costs. At
December 31, 1996, the U.S. Electric Operating Companies had undivided interests
in five such generating stations and related facilities as shown in the
following table.
<TABLE>
<CAPTION>
STP
NUCLEAR FLINT CREEK PIRKEY DOLET HILLS OKLAUNION
PLANT COAL PLANT LIGNITE PLANT LIGNITE PLANT COAL PLANT
---------------------------------------------------------------
($ in millions)
<S> <C> <C> <C> <C> <C>
Plant in service $2,333 $79 $435 $227 $397
Accumulated depreciation $503 $44 $162 $77 $113
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
</TABLE>
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 or any
of the U.S. Electric Operating Companies' liabilities unless the issues are
redeemed prior to their maturity dates.
CASH, TEMPORARY CASH INVESTMENTS, SPECIAL DEPOSITS, ACCOUNTS RECEIVABLE
AND SHORT-TERM DEBT
The fair value equals the carrying amount as stated
on the balance sheets because of the short maturity of those instruments.
LONG-TERM DEBT
The fair value of CSW's long-term debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
CSW for debt of the same remaining maturities.
PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
The fair value of SWEPCO's 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.
<PAGE> 55
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.
CARRYING VALUE AND
ESTIMATED FAIR VALUE 1996 1995
------ ------
(millions)
LONG-TERM DEBT
Carrying amount $4,024 $3,914
Fair value 4,065 4,090
PREFERRED STOCK SUBJECT TO
MANDATORY REDEMPTION
Carrying amount 33 34
Fair value 34 35
LONG-TERM DEBT AND PREFERRED
STOCK DUE WITHIN 12 MONTHS
Carrying amount 204 30
Fair value 204 30
8. LONG-TERM DEBT
CSW's long-term debt outstanding as of the end of the last two years is
presented in the following table.
Maturities Interest Rates December 31,
From To From To 1996 1995
- ------------------------------------------------------------------------
(millions)
Secured bonds
1997 2025 5.25% 7.75% $2,108 $2,308
Unsecured bonds
2001 2030 4.135% (1) 8.875% 1,384 754
Notes and Lease
Obligations
1997 2003 5.503% 9.75% 724 321
CSW Credit Agreement floating -- 731
Unamortized discount (12) (13)
Unamortized cost of
reacquired debt (180) (187)
------ ------
$4,024 $3,914
------ ------
(1) Variable rate
The mortgage indentures, as amended and supplemented, securing FMBs
issued by the U.S. Electric Operating Companies, constitute a direct first
mortgage lien on substantially all electric utility plant. The U.S. Electric
Operating Companies may offer additional FMBs, MTNs 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
1996 and 1995, and 7.7% for 1994.
<PAGE> 56
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, 1996, the annual sinking
fund requirements and annual maturities (including sinking fund requirements)
for all long-term debt for the next five years are presented in the following
table.
Sinking Fund Annual
Requirements Maturities
----------------------------------------
(millions)
1997 $1 $204
1998 1 31
1999 1 195
2000 1 258
2001 1 517
DIVIDENDS
The U.S. 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,
1996, approximately $1.5 billion of the subsidiary companies' retained earnings
were available for payment of cash dividends by such subsidiaries to CSW.
REACQUIRED LONG-TERM DEBT
During 1996, 1995 and 1994, the U.S. Electric Operating Companies
reacquired $205 million, $355 million and $27 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 balance sheets and are being amortized over periods consistent with their
expected ratemaking treatment. The remaining amortization periods for such items
range from 1 to 31 years.
Reference is made to MD&A for further information related to long-term
debt, including new issues and reacquisitions of long-term debt during 1996 as
well as information related to the financing of the SEEBOARD acquisition.
9. PREFERRED STOCK
The outstanding preferred stock of the U.S. Electric Operating
Companies as of the end of the last two years is presented in the following
table.
Current
Redemption
Dividend Rate December 31, Price
From - To 1996 1995 From - To
--------------------------------------------------
(millions)
Not subject to mandatory redemption
1,352,900 shares 4.00% - 8.72% $135 $135 $100.00 - $109.00
1,600,000 shares auction 160 160 100.00
Issuance expenses/premiums (3) (3)
---- ----
$292 $292
---- ----
Subject to mandatory redemption
340,000 shares 6.95% $34 $35
To be redeemed within one
year (1) (1)
---- ----
$33 $34
---- ----
Total authorized shares
6,405,000
<PAGE> 57
All of the outstanding preferred stock is redeemable at the option of
the U.S. Electric Operating Companies upon 30 days notice at the current
redemption price per share. Since 1994, when CPL, SWEPCO and WTU collectively
redeemed $33 million of preferred stock including redemption premiums and
sinking fund requirements, the only preferred stock redemptions have been for
SWEPCO's $1.2 million annual sinking fund requirement.
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 4.1%, 4.5% and 3.5% during 1996, 1995 and 1994, respectively. The
minimum annual sinking fund requirement for SWEPCO's preferred stock subject to
mandatory redemption is $1.2 million for the years 1997 through 2001. This
sinking fund retires 12,000 shares annually.
10. SHORT-TERM FINANCING
The CSW System uses short-term debt to meet fluctuations in working
capital requirements and other interim capital needs. CSW has established a
money pool to coordinate short-term borrowings for certain subsidiaries and also
incurs borrowings outside the money pool for other subsidiaries through the
issuance of its commercial paper. As of December 31, 1996, CSW had revolving
credit facilities totaling $1.2 billion to back up its commercial paper program
which, at December 31, 1996, had $364 million outstanding. The maximum amount of
such commercial paper outstanding during the year, which had a weighted average
interest rate for the year of 5.6%, was $815 million during April 1996.
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 $830 million to back up its commercial paper program which, at
December 31, 1996, had $579 million outstanding. The maximum amount of such
commercial paper outstanding during the year, which had a weighted average
interest rate for the year of 5.4%, was $878 million during August 1996.
11. COMMON STOCK
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.
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, 1996 and approximately 1.3 million shares were
reserved for issuance upon exercise of options which were outstanding at
December 31, 1996. 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, to encourage executive retention and to focus on the long-term
perspective. This grant vests in 25 percent increments in 1997, 1998, 1999 and
2000. Beginning in 1997, non-employee directors will receive an annual award of
600 phantom stock shares which vest upon termination as a director and are then
converted one for one into shares of CSW Common.
<PAGE> 58
After receipt of an order from the SEC in March 1996, the PowerShare
plan is now available to CSW shareholders, employees, eligible retirees and
other residents of legal age in the fifty states of the United States and
District of Columbia. The SEC approval also allows CSW to issue and sell an
additional five million shares of CSW Common through the PowerShare plan. Plan
participants are able to make optional cash payments and reinvest all or any
portion of their dividends in additional CSW Common. Beginning in 1996, CSW is
able to raise new common stock equity through its ThriftPlus plan, whereby the
plan trustee purchases CSW Common directly from CSW instead of on the open
market. Information concerning new CSW Common equity related to these two plans
and stock options for 1996 and 1995 is presented in the table below. PowerShare
and ThriftPlus were the primary contributors in 1996 while PowerShare was the
main contributor in 1995. See MD&A-LIQUIDITY AND CAPITAL RESOURCES for
additional detail on these two plans.
1996 1995
-------------------------------------
Number of new shares issued (millions) 2.9 2.3
Range of stock price for new shares $24 3/8 - $28 7/8 $22 5/8 - $28 3/8
New common stock equity (millions) $79 $57
12. STOCK-BASED COMPENSATION PLANS
CSW has a key employee incentive plan. This plan is accounted for under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized. Had compensation cost for this plan been determined consistent
with SFAS No. 123, pro forma calculations of CSW's net income for common stock
and earnings per share as required by SFAS No. 123 would not have changed from
amounts reported.
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in the future years.
CSW may grant options for up to 4.0 million shares of CSW Common under
the stock option plan. Under the stock option plan, the option exercise price
equals the stock's market price on the date of grant. The grant vests over three
years, one-third on each of the three anniversary dates of the grant, and
expires 10 years after the original grant date. CSW has granted 2.1 million
shares through December 31, 1996.
A summary of the status of CSW's stock option plan at December 31, 1996
and 1995 and the changes during the years then ended is presented in the
following table.
1996 1995
----------------------------------------------------------
Shares Weighted Average Shares Weighted Average
(thousands) Exercise Price (thousands) Exercise Price
----------------------------------------------------------
Outstanding at beginning
of year 1,564 $26 1,616 $26
Granted 70 27 -- --
Exercised (147) 24 (23) 22
Canceled (75) 27 (29) 27
----- -----
Outstanding at end of
year 1,412 26 1,564 26
Exercisable at end of
year 1,004 n/a 828 n/a
Weighted average fair
value of options $2.66 - $2.82
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996: (i) risk-free interest rate of 6.4%; (ii)
<PAGE> 59
expected dividend rate of 6.8%; (iii) and expected volatility of 17%. The
expected life of the options granted did not materially impact the values
produced.
13. BUSINESS SEGMENTS
CSW's business segments at December 31, 1996 included the U.S. Electric
Operations (CPL, PSO, SWEPCO, WTU) and the United Kingdom Electric Operations
(CSW Investments Group). The United Kingdom Electric Operations includes the
activities of SEEBOARD, as well as the purchase accounting adjustments and
financing activities included in the CSW Investments Group. See NOTE 1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES for a discussion of the accounting for the
SEEBOARD acquisition. 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). Gas
Operations (Transok) were sold on June 6, 1996. See NOTE 14. TRANSOK
DISCONTINUED OPERATIONS for additional information. CSW's business segment
information is presented in the following tables.
1996 1995 1994
--------------------------------
(millions)
OPERATING REVENUES
Electric Operations
United States $3,248 $2,883 $3,065
United Kingdom (1) 1,848 208 --
Corporate items and Other 59 52 40
-------- -------- --------
$5,155 $3,143 $3,105
-------- -------- --------
OPERATING INCOME
Electric Operations
United States $768 $719 $728
United Kingdom (1) 236 21 --
Corporate items and Other 15 (27) 6
-------- -------- --------
Operating income before taxes 1,019 713 734
Income taxes (224) (92) (179)
-------- -------- --------
$795 $621 $555
-------- -------- --------
DEPRECIATION AND AMORTIZATION
Electric Operations
United States $362 $335 $316
United Kingdom (1) 88 7 --
Corporate items and Other 14 11 8
-------- -------- --------
$464 $353 $324
-------- -------- --------
IDENTIFIABLE ASSETS
Electric Operations
United States $9,417 $9,201 $9,066
United Kingdom (1) 3,061 2,821 --
Corporate items and Other 854 1,081 1,276
-------- -------- --------
13,332 13,103 10,342
Gas Operations (Discontinued) -- 766 724
-------- -------- --------
$13,332 $13,869 $11,066
-------- -------- --------
<PAGE> 60
1996 1995 1994
--------------------------------
(millions)
CAPITAL EXPENDITURES AND
ACQUISITIONS
Electric Operations
United States $356 $398 $493
United Kingdom (1), (2) 1,543 731 --
Corporate items and Other (3) 109 19 114
-------- -------- --------
2,008 1,148 607
Gas Operations (Discontinued) 23 66 65
-------- -------- --------
$2,031 $1,214 $672
-------- -------- --------
(1) Represents equity method of accounting for November 1995
(27.6%) and full consolidation accounting for December 1995
(76.45%).
(2) Includes $1,394 million and $731 million in 1996 and 1995,
respectively, used to purchase SEEBOARD.
(3) Includes CSW Energy and CSW International equity investments.
14. TRANSOK DISCONTINUED OPERATIONS (UNAUDITED)
On June 6, 1996, CSW sold Transok to Tejas. Accordingly, the results of
operations for Transok have been reported as discontinued operations and prior
periods have been restated for consistency.
Transok is an intrastate natural gas gathering, transmission, marketing
and processing company that provides natural gas services to the U.S. Electric
Operating Companies, predominantly PSO, and to other gas customers throughout
the United States. Transok's natural gas facilities are located in Oklahoma,
Louisiana and Texas. After the sale, Transok has continued to supply gas to the
U.S. Electric Operating Companies.
CSW sold Transok to Tejas for approximately $890 million, consisting of
$690 million in cash and $200 million in existing long-term debt that remained
with Transok after the sale. A portion of the cash proceeds was used to repay
the CSW Credit Agreement and the remaining proceeds were used to repay
commercial paper borrowings. CSW recorded an after tax gain on the sale of
Transok of approximately $120 million in 1996. As a result of the gain, CSW
incurred a current tax liability of approximately $195 million. Approximately
two-thirds of the current tax liability results from taxes previously deferred
by Transok. The deferred taxes were generated primarily by the excess of
Transok's tax depreciation over its book depreciation.
Transok's operating results for 1996, 1995 and 1994 are summarized in
the following table (transactions with CSW have not been eliminated).
1996 1995 1994
------------------------
Total revenue $362 $721 $647
Operating income before income taxes 23 52 49
Earnings before income taxes 18 38 35
Income taxes (6) (13) (10)
----- ----- -----
Net income from discontinued operations $12 $25 $25
----- ----- -----
<PAGE> 61
Since Transok was sold on June 6, 1996, the results of operations for
1996 do not reflect a full year's earnings from Transok. The net assets of
Transok included in CSW's Consolidated Balance Sheet at December 31, 1995, are
summarized in the following table.
December 31, 1995
-----------------
(millions)
Net gas fixed assets $632
Current assets 81
Deferred charges and other assets 52
Current liabilities (123)
Long-term debt (200)
Deferred credits and other liabilities (116)
-----
Net assets $326
-----
15. PRO FORMA INFORMATION (UNAUDITED)
CSW secured effective control of SEEBOARD in December 1995. 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
(pound)1.00=$1.58 and (pound)1.00=$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
EPS of Common Stock $2.15 $2.13
<PAGE> 62
16. QUARTERLY INFORMATION (UNAUDITED)
The following unaudited quarterly information includes, in the opinion
of management, all adjustments necessary for a fair presentation of such
amounts. Information for quarterly periods is affected by seasonal variations in
sales, rate changes, timing of fuel expense recovery and other factors.
QUARTER ENDED 1996 1995
- ---------------------------------------------------------------------------
(millions, except EPS)
March 31
Operating Revenues $1,215 $523
Operating Income 144 82
Income from Continuing Operations 47 39
Net Income for Common Stock 51 39
EPS of Common Stock from Continuing
Operations $0.22 $0.18
EPS of Common Stock $0.26 $0.20
June 30
Operating Revenues $1,267 $786
Operating Income 214 164
Income from Continuing Operations 15 104
Net Income for Common Stock 128 103
EPS of Common Stock from Continuing
Operations $0.05 $0.52
EPS of Common Stock $0.61 $0.54
September 30
Operating Revenues $1,438 $948
Operating Income 284 259
Income from Continuing Operations 194 198
Net Income for Common Stock 190 199
EPS of Common Stock from Continuing
Operations $0.90 $1.01
EPS of Common Stock $0.90 $1.04
December 31
Operating Revenues $1,235 $886
Operating Income 153 116
Income from Continuing Operations 59 55
Net Income for Common Stock 60 61
EPS of Common Stock from Continuing
Operations $0.26 $0.26
EPS of Common Stock $0.28 $0.32
Total
Operating Revenues $5,155 $3,143
Operating Income 795 621
Income from Continuing Operations 315 396
Net Income for Common Stock 429 402
EPS of Common Stock from Continuing
Operations $1.43 $1.97
EPS of Common Stock $2.07 $2.10
(1) Earnings were significantly impacted by the establishment of reserves for
certain investments at the U.S. Electric Operating Companies and the
write-off of certain investments at CSW Energy.
(2) In 1996, CSW EPS of Common Stock for the year do not sum to the total of
the individual quarters' EPS of Common Stock due to different levels of
average shares outstanding for the different periods.
<PAGE> 63
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, 1996 and 1995, and the related consolidated statements of
income, stockholders' equity and cash flows, for each of the three years ended
December 31, 1996. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the financial
statements of CSW Investments, which statements reflect total assets and total
revenues of 23 percent and 36 percent in 1996 and 20 percent and 6 percent in
1995, respectively, of the consolidated totals. Those statements were audited by
other auditors whose report has been furnished to us and our opinion, insofar as
it relates to the amounts included for those entities, is based solely on the
report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of Central and South West Corporation and
subsidiary companies as of December 31, 1996 and 1995, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years ended December 31, 1996, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Dallas, Texas
February 28, 1997
<PAGE> 64
AUDITOR'S REPORT TO THE MEMBERS OF CSW INVESTMENTS
We have audited the consolidated balance sheets of CSW Investments and
subsidiaries as of 31 December 1996 and the related consolidated statement of
earnings and statements of cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used in and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CSW Investments and
subsidiaries at 31 December 1996 and the result of their operations and cash
flows for the year then ended in conformity with generally accepted accounting
principles in the United Kingdom.
Generally accepted accounting principles in the United Kingdom vary in certain
significant respects from generally accepted accounting principles in the United
States. Application of generally accepted accounting principles in the United
States would have affected results of operations and shareholders' equity as of
and for the year ended 31 December 1996 to the extent summarised in the notes to
the consolidated financial statements.
KPMG Audit Plc
Chartered Accountants London, England
Registered Auditor 22 January 1997
<PAGE> 65
REPORT OF MANAGEMENT
Management is responsible for the preparation, integrity and
objectivity of the consolidated financial statements of Central and South West
Corporation and subsidiary companies as well as other information contained in
this Annual Report. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis and, in some cases, reflect amounts based on the best estimates and
judgments of management, giving due consideration to materiality. Financial
information contained elsewhere in this Annual Report is consistent with that in
the consolidated financial statements.
The consolidated financial statements have been audited by CSW's
independent public accountants who were given unrestricted access to all
financial records and related data, including minutes of all meetings of
stockholders, the board of directors and committees of the board. CSW and its
subsidiaries believe that representations made to the independent public
accountants during their audit were valid and appropriate. The reports of
independent public accountants are presented elsewhere in this report.
CSW, together with its subsidiary companies, maintains a system of
internal controls to provide reasonable assurance that transactions are executed
in accordance with management's authorization, that the consolidated financial
statements are prepared in accordance with generally accepted accounting
principles and that the assets of CSW and its subsidiaries are properly
safeguarded against unauthorized acquisition, use or disposition. The system
includes a documented organizational structure and division of responsibility,
established policies and procedures including a policy on ethical standards
which provides that the companies will maintain the highest legal and ethical
standards, and the careful selection, training and development of our employees.
Internal auditors continuously monitor the effectiveness of the
internal control system following standards established by the Institute of
Internal Auditors. Actions are taken by management to respond to deficiencies as
they are identified. The board, operating through its audit committee, which is
comprised entirely of directors who are not officers or employees of CSW or its
subsidiaries, provides oversight to the financial reporting process.
Due to the inherent limitations in the effectiveness of internal
controls, no internal control system can provide absolute assurance that errors
will not occur. However, management strives to maintain a balance, recognizing
that the cost of such a system should not exceed the benefits derived.
CSW and its subsidiaries believe that, in all material respects, its
system of internal controls over financial reporting and over safeguarding of
assets against unauthorized acquisition, use or disposition functioned
effectively as of December 31, 1996.
E. R. Brooks Glenn D. Rosilier Lawrence B. Connors
Chairman, President and Senior Vice President and Controller
Chief Executive Officer Chief Financial Officer
<PAGE> 66
GLOSSARY OF TERMS
The following abbreviations or acronyms used in this Financial Report are
defined below:
ABBREVIATION OR ACRONYM DEFINITION
APBO................................Accumulated Postretirement Benefit
Obligation
AFUDC...............................Allowance for funds used during construction
ALJ.................................Administrative Law Judge
Alpek...............................Alpek S.A. de C.V.
ANI.................................American Nuclear Insurance
Arkansas Commission.................Arkansas Public Service Commission
Ash Creek...........................Ash Creek Mining Company, a wholly owned
subsidiary of PSO
Big Cajun I.........................A two unit, natural gas-fired power plant
owned and operated by Cajun and located in
New Roads, Louisiana
Big Cajun II........................A three unit, coal fired power plant owned
and operated by Cajun and located in New
Roads, Louisiana
Burlington Northern.................Burlington Northern Railroad Company
Cajun...............................Cajun Electric Power Cooperative, Inc.
CERCLA..............................Comprehensive Environmental Response,
Compensation and Liability Act of 1980
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
CPL 1996 Fuel Agreement.............Fuel settlement agreement entered into by
CPL and other parties to CPL's current rate
review 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
previously entered into by CSW with a
consortium of banks to partially fund the
SEEBOARD acquisition which has since been
repaid in full
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 through
which CSW International owns SEEBOARD
CSW Investments Credit Facility.....(pound)1.0 billion senior credit facility
previously arranged by CSW Investments with
a consortium of banks to partially fund the
SEEBOARD acquisition which has since been
repaid in full
CSW Investments Group...............Consolidated SEEBOARD, SEEBOARD Group plc
(which has replaced CSW (UK) plc.) and
CSW Investments converted to U.S. Generally
Accepted Accounting Principles
CSW Leasing.........................CSW Leasing, Inc., Dallas, Texas
CSW Services........................CSW Services, Inc., Dallas, Texas and Tulsa,
Oklahoma
CSW System..........................CSW and its subsidiaries
DGES................................Director General Electricity Supply
DOE.................................United States Department of Energy
El Paso.............................El Paso Electric Company
El Paso Merger......................The proposed merger whereby El Paso would
have become a wholly owned subsidiary of CSW
Energy Policy Act...................National Energy Policy Act of 1992
EnerShop............................EnerShopSM Inc., Dallas, Texas
Entergy Gulf States.................Gulf States Utilities Company
EPA.................................United States Environmental Protection
Agency
EPS.................................Earnings per share
ERCOT...............................Electric Reliability Council of Texas
ERISA...............................Employee Retirement Income Security Act of
1974, as amended
Exchange Act........................Securities Exchange Act of 1934, as amended
EWG.................................Exempt Wholesale Generator
FERC................................Federal Energy Regulatory Commission
First Amended SWEPCO Plan...........The plan of reorganization for Cajun filed
by the Members Committee, SWEPCO and Entergy
Gulf States on September 30, 1996 with the
U.S. Bankruptcy Court for the Middle
District of Louisiana
FMB.................................First Mortgage Bond
HLP.................................Houston Lighting & Power Company
Holding Company Act.................Public Utility Holding Company Act of 1935,
as amended
<PAGE> 67
GLOSSARY OF TERMS (CONTINUED)
The following abbreviations or acronyms used in this Financial Report are
defined below:
ABBREVIATION OR ACRONYM DEFINITION
HVdc................................High-voltage direct-current
IBEW................................International Brotherhood of Electrical
Workers
ISO.................................Independent System Operator
ITC.................................Investment tax credit
KW..................................Kilowatt
KWH.................................Kilowatt-hour
Louisiana Commission................Louisiana Public Service Commission
MD&A................................Management's Discussion and Analysis of
Financial Condition and Results of
Operations
MDEQ................................Mississippi Department of Environmental
Quality
Members Committee...................The members committee of Cajun, which
currently represents 8 of the 12 Louisiana
member distribution cooperatives that are
served by Cajun
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 (British thermal units)
Mmcf/d..............................Million cubic feet of gas per day
MTN.................................Medium-term note
MW..................................Megawatt
MWH.................................Megawatt-hour
National Grid.......................National Grid Group plc
NEIL................................Nuclear Electric Insurance Limited
NRC.................................Nuclear Regulatory Commission
Oklahoma Commission.................Corporation Commission of the State of
Oklahoma
Oklaunion...........................Oklaunion Power Station Unit No. 1
OPEB................................Other Postretirement Benefits (other than
pension)
Original SWEPCO Plan................The plan of reorganization for Cajun filed
by the Members Committee, SWEPCO and Entergy
Gulf States on April 19, 1996 with the U.S.
Bankruptcy Court for the Middle District
of Louisiana
PCB.................................Polychlorinated biphenyl
PCRB................................Pollution Control Revenue Bond
PowerShare..........................CSW's PowerShareSM Dividend Reinvestment and
Stock Purchase Plan
PRP.................................Potentially responsible party
PSO.................................Public Service Company of Oklahoma, Tulsa,
Oklahoma
PURA................................Public Utility Regulatory Act of Texas
(including amendments to the law in 1995)
PURPA...............................Public Utility Regulatory Policies Act of
1978
Red River...........................Red River Authority of Texas pollution
control revenue bond issuing authority
Registrant(s).......................CSW, CPL, PSO, SWEPCO and WTU
RUS.................................Rural Utilities Service of the federal
government
SEEBOARD............................SEEBOARD plc., Crawley, West Sussex, United
Kingdom
SEC.................................Securities and Exchange Commission
Second Amended SWEPCO Plan..........The plan of reorganization for Cajun filed
by the Members Committee, SWEPCO and Entergy
Gulf States on October 26, 1996 with the
U.S. Bankruptcy Court for the Middle
District of Louisiana (amends both the
Original SWEPCO Plan and the First Amended
SWEPCO Plan)
SFAS................................Statement of Financial Accounting Standards
SFAS No. 52.........................Foreign Currency Translation
SFAS No. 71.........................Accounting for the Effects of Certain Types
of Regulation
SFAS No. 106........................Employers' Accounting for Postemployment
Benefits
SFAS No. 121........................Accounting for the Impairment of Long-Lived
Assets
SFAS No. 123........................Accounting for Stock-Based Compensation
SFAS No. 125........................Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of
Liabilities
SFAS No. 128........................Earnings Per Share
SPP.................................Southwest Power Pool
STP.................................South Texas Project nuclear electric
generating station
Supreme Court.......................Supreme Court of Texas
SWEPCO..............................Southwestern Electric Power Company,
Shreveport, Louisiana
<PAGE> 68
GLOSSARY OF TERMS (CONTINUED)
The following abbreviations or acronyms used in this Financial Report are
defined below:
ABBREVIATION OR ACRONYM DEFINITION
Tender Offer........................CSW (UK)'s approximately $2.12 billion
tender offer in the United Kingdom for all
the outstanding share capital of SEEBOARD
Tejas...............................Tejas Gas Corporation
Texas Commission....................Public Utility Commission of Texas
Transok.............................Transok, Inc. and subsidiaries, Tulsa,
Oklahoma
U.S. Electric or U.S. Electric
Operating Companies............CPL, PSO, SWEPCO and WTU
WTU.................................West Texas Utilities Company, Abilene, Texas
WTU 1995 Stipulation and Agreement..Stipulation and Agreement to settle certain
WTU regulatory matters
- ------------------------------------------------------------------------------
Central and South West Corporation
-------------------------------------
APPENDIX B
AMENDED AND RESTATED
1992 LONG-TERM INCENTIVE PLAN
--------------------------------------
March 7, 1997
- ------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
Contents
- -------------------------------------------------------------------------------
Page
Article 1. Purpose 1
Article 2. Definitions 1
Article 3. Administration 3
Article 4. Term of Plan/Common Stock Subject to Plan 4
Article 5. Eligibility 5
Article 6. Stock Options 5
Article 7. Stock Appreciation Rights 7
Article 8. Restricted Awards 8
Article 9. Performance Units 10
Article 10. Deferral Elections 12
Article 11. Dividend Equivalents 12
Article 12. Termination of Employment 12
Article 13. Nontransferability of Awards 14
Article 14. Changes in Capitalization and Other Matters 14
Article 15. Change in Control 15
Article 16. Amendments, Suspension, and Termination 18
Article 17. Miscellaneous 19
<PAGE> B-1
Central and South West Corporation
Amended and Restated 1992 Long-Term Incentive Plan
Article 1. Purpose
The purpose of the Amended and Restated 1992 Long-Term Incentive Plan (the
"Plan") is to further and promote the interests of Central and South West
Corporation (the "Company"), its Subsidiaries, and its shareholders by enabling
the Company to attract, retain, and motivate key employees and to align the
interests of such key employees and the Company's shareholders. To do this, the
Plan offers performance-based stock and cash incentives and other equity-based
incentive awards and opportunities to provide such key employees with a
proprietary interest in maximizing the growth, profitability, and overall
success of the Company.
Article 2. Definitions
For purposes of the Plan, the following terms shall have the meanings set
forth below:
2.1. "Award" means an award or grant made to a Participant under Sections
6, 7, 8, and/or 9 of the Plan. "Award Agreement" means the agreement executed by
a Participant pursuant to Sections 3.2 and 17.7 of the Plan in connection with
the granting of an Award.
2.2 "Board" means the Board of Directors of the Company, as constituted
from time to time.
2.3 "Code" means the Internal Revenue Code of 1986, as in effect and as
amended from time to time, or any successor statute thereto, together with any
rules, regulations, and interpretations promulgated thereunder or with respect
thereto.
2.4 "Committee" means the Executive Compensation Committee of the Board.
2.5 "Common Stock" means the Common Stock, $3.50 par value, of the
Company or any security of the Company issued by the Company in substitution or
exchange therefor.
2.6 "Company" means Central and South West Corporation, a Delaware
corporation, or any successor corporation to Central and South West Corporation.
2.7 "Disability" means disability as determined by the Committee in
accordance with standards and procedures similar to those under the Company's
long-term disability plan, if any. At any time that the Company does not
maintain a long-term disability plan, Disability shall mean the inability of a
Participant, as determined by the Committee, substantially to perform such
Participant's regular duties and responsibilities due to a medically
determinable physical or mental illness which has lasted (or can reasonably be
expected to last) for a period of six (6) consecutive months.
2.8 "Exchange Act" means the Securities Exchange Act of 1934, as in
effect and as amended from time to time, or any successor statute thereto,
together with any rules, regulations, and interpretations promulgated thereunder
or with respect thereto.
<PAGE> B-2
2.9 "Fair Market Value" means on, or with respect to, any given date, the
average of the highest and lowest market prices of the Common Stock, as reported
on the consolidated transaction reporting system for the New York Stock Exchange
for such date or, if the Common Stock was not traded on such date, on the next
preceding day on which the Common Stock was traded.
2.10 "Incentive Stock Option" means any stock option granted pursuant to
the provisions of Section 6 of the Plan (and the relevant Award Agreement) that
is intended to be (and is specifically designated as) an "incentive stock
option" within the meaning of Section 422 of the Code.
2.11 "Nonqualified Stock Option" means any stock option granted pursuant
to the provisions of Section 6 of the Plan that is not an Incentive Stock Option
and the relevant Award Agreement.
2.12 "Participant" means a key employee of the Company or any Subsidiary
who is selected under Section 5 to receive an Award by the Committee under the
Plan.
2.13 "Performance Units" means the monetary units granted under Section 9
of the Plan and the relevant Award Agreement.
2.14 "Phantom Stock" means the phantom stock units granted pursuant to the
provisions of Section 8 of the Plan and the relevant Award Agreement.
2.15 "Plan" means the Central and South West Corporation 1992 Long-Term
Incentive Plan, as set forth herein and as in effect and as amended from time to
time (together with any rules and regulations promulgated by the Committee with
respect thereto).
2.16 "Reload Stock Option" means any Nonqualified Stock Option
automatically granted pursuant to the provisions of Section 6.7 of the Plan and
the relevant Award Agreement.
2.17 "Restricted Award" means an Award of Restricted Stock and/or Phantom
Stock pursuant to the provisions of Section 8 of the Plan and the relevant Award
Agreement.
2.18 "Restricted Stock" means the restricted shares of Common Stock
granted pursuant to the provisions of Section 8 of the Plan and the relevant
Award Agreement.
2.19 "Retirement" means retirement from active employment with the Company
and its Subsidiaries on or after the normal retirement date specified in the
Company's qualified retirement plans or such earlier date as approved in writing
by the Committee for the purposes of this Plan.
2.20 "Stock Appreciation Right" means an Award described in Section 7.2 of
the Plan and granted pursuant to the provisions of Section 7 of the Plan.
2.21 "Subsidiary(ies)" means any corporation (other than the Company) in
an unbroken chain of corporation, beginning with the Company, if each of such
corporation, other than the last corporation in the unbroken chain, owns,
directly or indirectly, fifty percent (50%) or more of the voting stock in one
of the other corporations in such chain.
<PAGE> B-3
Article 3. Administration
3.1. The Committee. The Plan shall be administered by the Committee.
Consistent with the By-Laws of the Company, the Committee shall be appointed
from time to time by the Board. Consistent with the By-Laws of the Company,
members of the Committee shall serve at the pleasure of the Board, and the Board
may at any time and from time to time remove members from the Committee, or,
subject to the immediately preceding sentence, add members to the Committee.
Consistent with the By-Laws of the Corporation, a majority of the members of the
Committee shall constitute a quorum for the transaction of business, and any act
or acts approved in writing by all of the members of the Committee then serving
shall be the act or acts of the Committee (as if taken by unanimous vote at a
meeting of the Committee duly called and held).
3.2 Plan Administration and Plan Rules. The Committee is authorized to
construe and interpret the Plan and to promulgate, amend, and rescind rules and
regulations relating to the implementation, administration, and maintenance of
the Plan. Subject to the terms and conditions of the Plan, the Committee shall
make all determinations necessary or advisable for the implementation,
administration, and maintenance of the Plan including, without limitation, (a)
selecting the Plan's Participants; (b) making Awards in such amounts and form as
the Committee shall determine; and (c) imposing any technical defect or
technical omission, or reconciling any technical inconsistency, in the Plan
and/or any Award Agreement. The Committee may designate persons other than
members of the Committee to carry out the day-to-day administration of the Plan
under such conditions and limitations as it may prescribe, except that the
Committee shall not delegate its authority with regard to selection for
participation in the Plan and/or the granting of any Awards to Participants. The
Committee's determinations under the Plan need not be uniform and may be made
selectively among Participants, whether or not such Participants are similarly
situated. Any determination, decision, or action of the Committee in connection
with the construction, interpretation, administration, implementation, or
maintenance of the Plan shall be final, conclusive, and binding upon all
Participants and any person(s) claiming under or through any Participants. The
Company shall effect the granting of Awards under the Plan, in accordance with
the determinations made by the Committee, by execution of written agreements
and/or other instruments in such form as is approved by the Committee.
3.3 Liability Limitation. Neither the Board nor the Committee, nor any
member of either, shall be liable for any act, omission, interpretation,
construction, or determination made in good faith in connection with the Plan
(or any Award Agreement), and the members of the Board and the Committee shall
be entitled to indemnification and reimbursement by the Company in respect of
any claim, loss, damage, or expense (including, without limitation, attorneys'
fees) arising or resulting therefrom to the fullest extent permitted by law
and/or under any directors and officers liability insurance coverage which may
be in effect from time to time.
Article 4. Term of Plan/Common Stock Subject to Plan
4.1.Term. The Plan shall terminate on April 17, 2007, except with
respect to Awards then outstanding. After such date no further Awards shall be
granted under the Plan.
4.2 Common Stock. The maximum number of shares of Common Stock in respect
for which Awards may be granted under the Plan, subject to adjustment as
provided in Section 14 of the Plan, shall be four million (4,000,000) shares.
Notwithstanding the foregoing, the maximum number of shares of Common Stock
which may be issued as Restricted Awards granted pursuant to Article 8 herein
shall be an amount equal to thirty percent (30%) of the total number of shares
of Common Stock in respect for which Awards may be granted under the Plan.
In the event of a change in the Common Stock of the Company that is limited
to a change in the designation thereof to "Capital Stock" or other similar
designation, or to a change in the par value thereof, or from par value to no
par value, without increase or decrease in the number of issued shares, the
shares resulting from any such change shall be deemed to the Common Stock for
purposes of the Plan. Common Stock which may be issued under the Plan may be
either authorized and unissued shares or issued shares which have been
reacquired by the Company and which are being held as treasury shares. No
fractional shares of Common Stock shall be issued under the Plan, unless the
Committee determines otherwise.
4.3 Computation of Available Shares. The Committee shall determine the
appropriate methodology for calculating the number of shares of Common Stock
available for Awards under the Plan. If any Awards expire unexercised or are
forfeited, surrendered, canceled, terminated, or settled in cash in lieu of
Common Stock, the shares of Common Stock which were theretofore subject (or
potentially subject) to such Awards shall again be available for Awards under
the Plan to the extent of such expiration, forfeiture, surrender, cancellation,
termination, or settlement of such Awards.
Article 5. Eligibility
Employees eligible for Awards under the Plan shall consist of key employees
of the Company and/or its Subsidiaries who are responsible for the management,
growth, and protection of the business of the Company and/or its Subsidiaries
and whose performance or contribution, in the sole discretion of the Committee,
benefits or will benefit the Company in a significant manner.
Article 6. Stock Options
6.1 Terms and Conditions. Stock options granted under the Plan may be in
the form of Incentive Stock Options, Nonqualified Stock Options, or Reload Stock
Options (sometimes referred to collectively herein as the "Stock Option(s)").
Such Stock Options shall be subject to the terms and conditions set forth in
this Section 6 and any additional terms and conditions, not inconsistent with
the express terms and provisions of the Plan, as the Committee shall set forth
in the relevant Award Agreement. The maximum aggregate number of shares of
Common Stock that may be granted in the form of Stock Options, pursuant to any
Award granted in any one fiscal year to any one Participant shall be two hundred
fifty thousand (250,000), including any Reload Stock Options granted in
connection with such an Award.
6.2 Grant. Stock Options may be granted under the Plan in such form as
the Committee may from time to time approve. Subject to Section 5 of the Plan,
Stock Options may be granted alone or in addition to other Awards under the Plan
or in tandem with Stock Appreciation Rights. Notwithstanding the above, no
Incentive Stock Options shall be granted to any employee who owns more than ten
percent (10%) of the combined total voting power of all classes of stock of the
Company or any Subsidiary.
<PAGE> B-4
6.3 Exercise Period. The exercise price per share of Common Stock subject
to a Stock Option shall be determined by the Committee at the time of grant;
provided, however, that the exercise price of an Incentive Stock Option or a
Reload Stock Option shall not be less than one hundred percent (100%) of the
Fair Market Value of the Common Stock on the date of the grant of such Incentive
Stock Option or Reload Stock Option.
6.4 Term. The term of each Stock Option shall be such period of time as
is fixed by the Committee at the time of grant; provided, however, that the term
of any Incentive Stock Option shall not exceed ten (10) years after the date the
Incentive Stock Option is granted.
6.5 Method of Exercise. A Stock Option may be exercised, in whole or in
part, by giving written notice of exercise to the Secretary of the Company
specifying the number of shares to be purchased. Such notice shall be
accompanied by payment in full of the exercise price in cash, by certified
check, bank draft, or money order payable to the order of the Company or, if
permitted by the terms of the relevant Award Agreement and applicable law, by
delivery of, alone or in conjunction with a partial cash or instrument payment,
(a) a fully secured, recourse promissory note; or (b) shares of Common Stock
already owned by the Participant for a minimum of six (6) months. The Committee
may, in the relevant Award Agreement, also permit Participants (either on a
selective or group basis) to simultaneously exercise Stock Options and sell the
shares of Common Stock thereby acquired, pursuant to a brokerage "cashless
exercise" arrangement, selected by and approved of in all respects in advance by
the Committee, and use the proceeds from such sale as payment of the exercise
price of such Stock Options. Payment instruments shall be received by the
Company subject to collection. The proceeds received by the Company upon
exercise of any Stock Option may be used by the Company for general corporate
purposes.
6.6 Date of Exercise. Unless otherwise provided in the Award Agreement,
in respect of any Stock Option, such Stock Option may be exercised in whole or
in part at any time and from time to time during its specified term.
Notwithstanding the preceding sentence, in no event shall any Stock Option
granted under the Plan be exercisable prior to the date which is one (1) year
after the date on which the Stock Option is granted.
6.7 Reload Stock Options. The Committee may, in its sole discretion,
provide in any Award Agreement in respect of any Nonqualified Stock Option that
if the Participant delivers shares of the Company's Common Stock already owned
by such Participant in full or partial payment of the exercise price of such
Nonqualified Stock Option, the Participant shall automatically and immediately
thereupon be granted a Reload Stock Option to purchase that number of shares of
Common Stock delivered by the Participant to the Company (on such terms as the
Committee may prescribe under and in accordance with the Plan).
6.8 Tandem Grants. If Nonqualified Stock Options and Stock Appreciation
Rights are granted in tandem, as designated in the relevant Award Agreements,
the right of a Participant to exercise any tandem Stock Option shall terminate
to the extent that the shares of Common Stock subject to such Stock Option are
used to calculate amounts or shares receivable upon the exercise of the related
tandem Stock Appreciation Right.
<PAGE> B-5
Article 7. Stock Appreciation Rights
7.1 Terms and Conditions. The grant of Stock Appreciation Rights under
the Plan shall be subject to the terms and conditions set forth in this Section
7, and any additional terms and conditions not consistent with the express terms
and provisions of the Plan, as the Committee shall set forth in the relevant
Award Agreement. The maximum aggregate number of shares of Common Stock that may
be granted in the form of Stock Appreciation Rights, pursuant to any Award
granted in any one fiscal year to any one Participant shall be two hundred fifty
thousand (250,000).
7.2 Stock Appreciation Rights. A Stock Appreciation Right is an Award
granted with respect to a specified number of shares of Common Stock entitling a
Participant to receive an amount equal to the excess of the Fair Market Value of
a share of Common Stock on the date of exercise over the Fair Market Value of a
share of Common Stock on the date of grant of the Stock Appreciation Right, or
such other value as set forth in the relevant Award Agreement by the Committee,
multiplied by the number of shares of Common Stock with respect to which the
Stock Appreciation Right shall have been exercised.
7.3 Grant. Subject to Section 5 of the Plan, a Stock Appreciation Right
may be granted in addition to any other Award under the Plan or in tandem with
or completely independent of a Nonqualified Stock Option.
7.4 Date of Exercise. Unless otherwise provided in the Award Agreement in
respect of any Stock Appreciation Right, a Stock Appreciation Right may be
exercised by a Participant, in accordance with and subject to all of the
procedures established by the Committee, in whole or in part at any time and
from time to time during its specified term. Notwithstanding the preceding
sentence, in no event shall any Stock Appreciation Right be exercisable prior to
the date which is one (1) year after the date on which the Stock Appreciation
Right was granted. The Committee may also provide, as set forth in the relevant
Award Agreement and without limitation, that some Stock Appreciation Rights
shall be automatically exercised on one or more dates specified therein by the
Committee.
7.5 Form of Payment. Upon exercise of a Stock Appreciation Right, payment
may be made in cash, in Restricted Stock, or in shares of unrestricted Common
Stock, as the Committee, in its sole discretion, shall determine and provide in
the relevant Award Agreement.
7.6 Tandem Grant. The right of a Participant to exercise a tandem Stock
Appreciation Right shall terminate to the extent such Participant exercises the
Nonqualified Stock Option to which such Stock Appreciation Right is related.
Article 8. Restricted Awards
8.1 Terms and Conditions. Restricted Awards under the Plan may be in the
form of grants of Restricted Stock or Phantom Stock. Restricted Awards shall be
subject to the terms and conditions set forth in this Section 8 and any
additional terms and conditions, not inconsistent with the express terms and
provisions of the Plan, as the Committee shall set forth in the relevant Award
Agreement. The maximum aggregate grant with respect to Awards of Restricted
Stock or Phantom Stock granted in any one fiscal year to any one Participant
shall be one hundred thousand (100,000) shares.
<PAGE> B-7
8.2 Restricted Stock Grants. A grant of Restricted Stock is an Award of
shares of Common Stock issued to and registered in the name of a Participant,
subject to such restrictions, terms, and conditions as the Committee deems
appropriate, including, without limitation, restrictions on the sale,
assignment, transfer, hypothecation, or other disposition of such shares and the
requirement that the Participant deposit such shares with the Company while such
shares are subject to such restrictions and that such shares be forfeited upon
termination of employment for specified reasons within a specified period of
time.
8.3 Phantom Stock Grants. A grant of Phantom Stock is an Award of units
(with each unit having a value equivalent to the Fair Market Value from time to
time of one (1) share of Common Stock) granted to a Participant, subject to such
restrictions, terms, and conditions as the Committee deems appropriate,
including, without limitation, the requirement that the Participant forfeit such
units upon termination of employment for specified reasons within a specified
period of time.
8.4 Grants of Awards
8.4.1 Subject to Section 5 of the Plan, Restricted Awards may be
granted alone or in addition to any other Awards under the Plan. Subject to
the terms of the Plan, the Committee shall determine the number of
Restricted Awards to be granted to a Participant, and the Committee may
impose different terms and conditions of any particular Restricted Award
made to any Participant.
8.4.2 With respect to each Participant receiving an Award of
Restricted Stock, there shall be issued a stock certificate (or
certificates) in respect of such shares of Restricted Stock. Such stock
certificate(s) shall be registered in the name of such Participant, shall
be accompanied by a stock power duly executed by such Participant, and
shall bear, among other required legends, the following legend referring to
certain terms, conditions, and restrictions applicable to such Award:
"The transferability of this certificate and the shares of stock
represented hereby are subject to the terms and conditions (including,
without limitation, forfeiture events) contained in the Central and
South West Corporation Amended and Restated 1992 Long-Term Incentive
Plan and an Award Agreement entered into between the registered owner
hereof and Central and South West Corporation. Copies of such Plan and
Award Agreement are on file in the office of the Secretary of Central
and South West Corporation, Dallas, Texas, and the Corporation will
furnish to the record holder of the certificate, without charge, upon
written request to the Corporation at its principal place of business,
a copy of such Plan and Award Agreement."
Such stock certificate evidencing such shares shall be deposited with and
held in custody by the Company until the restrictions thereon shall have
lapsed and all of the terms and conditions applicable to such grant shall
have been satisfied.
8.5 Restriction Period. In accordance with Sections 8.1, 8.2, and/or 8.3
of the Plan, Restricted Awards shall only become unrestricted and vest in the
Participant in accordance with the vesting schedule relating to the service
performance restriction applicable to such Restricted Award, as the Committee
may establish at the time of the Award in the relevant Award Agreement (the
"Restriction Period"). Notwithstanding the immediately preceding sentence, in no
event shall the Restriction Period be less than one (1) year after the date on
which such Restricted Award is granted. During the Restriction Period applicable
to a Restricted Award, such Award shall be unvested, and a Participant may not
sell, assign, transfer, pledge, encumber, otherwise dispose of or hypothecate
such Award. Upon satisfaction of the vesting schedule and any other applicable
restrictions, terms, and conditions, the Participant shall be entitled to
receive payment of the Restricted Award or a portion thereof, as the case may
be, as provided in Section 8.6 of the Plan.
<PAGE> B-7
8.6 Payment of Awards
8.6.1 Restricted Stock Grants. After the satisfaction and/or lapse
of the restrictions, terms and conditions set by the Committee in respect
of a grant of Restricted Stock, a new certificate, without the legend set
forth in Section 8.4 of the Plan, for the number of shares of Common Stock
which are no longer subject to such restrictions, terms and conditions
shall, as soon as practicable thereafter, be delivered to the Participant.
The remaining shares, if any, issued in respect of such Restricted Stock,
shall either be forfeited and canceled, or shall continue to be subject to
the restrictions, terms, and conditions set by the Committee, as the case
may be.
8.6.2 Phantom Stock Grants. After the satisfaction and/or lapse of
the restrictions, terms and conditions set by the Committee in respect of a
grant of Phantom Stock, a Participant shall be entitled to receive payment
in respect of such Phantom Stock (or a portion thereof) in an amount equal
to the aggregate Fair Market Value of the vested portion of the shares of
Common Stock covered by such Award. Payment in settlement of vested Phantom
Stock shall be made as soon as practicable thereafter in cash, in
unrestricted Common Stock, in Restricted Stock, or Stock Option grants, as
the Committee, in its sole discretion, shall determine and provide in the
relevant Award Agreement.
8.7 Shareholder Rights. A Participant shall have, with respect to the
shares of Common Stock received under a grant of Restricted Stock, after
expiration of the relevant Restriction Period, all of the rights of a
shareholder of the Company, including, without limitation, the right to vote the
shares, to receive any cash dividends, and to participate, in respect of such
Restricted Stock, the Corporation's Dividend Reinvestment Plan. During the
Restriction Period, a Participant shall have such shareholder rights, including
the right to vote shares and receive dividends, as may be determined by the
Committee and set forth in the relevant Award Agreement. Stock dividends issued
with respect to such Restricted Stock shall be treated as additional Restricted
Stock grants and shall be subject to the same restrictions and other terms and
conditions that apply to the shares of Restricted Stock with respect to which
such stock dividends are issued.
Article 9. Performance Units
9.1 Terms and Conditions. Performance Units shall be subject to the terms
and conditions set forth in this Section 9, and any additional terms and
conditions not inconsistent with the express provisions of the Plan, as the
Committee shall set forth in the relevant Award Agreement. The maximum aggregate
payout with respect to Awards of Performance Units granted in any one fiscal
year to any one Participant shall be the value of one hundred thousand (100,000)
shares of Common Stock at the end of the Performance Period.
<PAGE>B-9
9.2 Performance Unit Grants. A Performance Unit is an Award expressed in
terms of units (with each unit representing such monetary amount as is
designated by the Committee in the Award Agreement) or shares (with each share
having a value equal to the Fair Market Value of a share of Common Stock)
granted to a Participant, subject to such terms and conditions as the Committee
deems appropriate, including, without limitation, the requirement that the
Participant forfeit such units (or a portion thereof) in the event certain
performance criteria are not met within a designated period of time.
9.3 Grants. Subject to Section 5 of the Plan, Performance Units may be
granted alone or in addition to any other Awards under the Plan. Subject to the
terms of the Plan, the Committee shall determine the number of Performance Units
to be granted to a Participant, and the Committee may impose different terms and
conditions on any particular Performance Units granted to any Participant.
9.4 Performance Goals and Performance Periods. Participants receiving a
grant of Performance Units shall only earn into and be entitled to payment in
respect of such Awards if the Company and/or the Participant achieves certain
performance goals (the "Performance Goals") during and in respect of a
designated performance period equal in length to at least three (3) years (the
"Performance Period"). The Performance Goals and the Performance Period shall be
established by the Committee, in its sole discretion. The Committee shall
establish Performance Goals for each Performance Period prior to, or as soon as
practicable after, the commencement of such Performance Period. The Committee
shall also establish a schedule or schedules for Performance Units setting forth
the portion of the Award which will be earned or forfeited based on the degree
of achievement, or lack thereof, of the Performance Goals at the end of the
relevant Performance Period. In setting Performance Goals, the Committee may
use, but shall not be limited to, such performance measures as cash value added,
earnings per share, economic value added, net earnings growth, net income,
operating income, return on assets, return on equity, sales or revenue growth,
total shareholder return, comparisons to peer companies, individual or aggregate
Participant performance, corporate or subsidiary performance, or such other
measure or measures of performance as the Committee, in its sole discretion, may
deem appropriate. Such performance measures shall be defined as to their
respective components and meaning by the Committee (in its sole discretion).
During any Performance Period, the Committee shall have the authority to adjust
the Performance Goals in such manner as the Committee, in its sole discretion,
deems appropriate with respect to such Performance Period; provided, however,
that Awards which are designed to qualify for the performance-based exception of
162(m), and which are held by "covered employees" (as such term is defined in
the regulations promulgated under Code Section 162(m)), may not be adjusted
upward (the Committee shall retain the discretion to adjust the Awards
downward).
9.5 Payment of Units. With respect to each Performance Unit, the
Participant shall, if the applicable Performance Goals have been achieved by the
Company during the relevant Performance Period, be entitled to receive payment
in an amount equal to the designated value of each Performance Unit times the
number of such units so earned. Payment in settlement of earned Performance
Units shall be made as soon as practicable following the conclusion of the
respective Performance Period in cash, in unrestricted Common Stock, in
Restricted Stock or Phantom Stock, or in Stock Option grants as the Committee,
in its sole discretion, shall determine and provide in the relevant Award
Agreement.
<PAGE> B-10
Article 10. Deferral Elections
The Committee may permit a Participant to elect to defer receipt of any
payment of cash or any delivery of shares of Common Stock that would otherwise
be due to such Participant by virtue of the exercise, earn out, or settlement of
any Award made under the Plan. If any such election is permitted, the Committee
shall establish rules and procedures for such deferrals, including, without
limitation, the payment or crediting of reasonable interest on such deferred
amounts credited in cash, and the payment or crediting of dividend equivalents
in respect of deferrals credited in units of Common Stock.
Article 11. Dividend Equivalents
In addition to the provisions of Section 8.7 of the Plan, Awards of Stock
Options, Stock Appreciation Rights, and/or Phantom Stock may, in the sole
discretion of the Committee and if provided for in the relevant Award Agreement,
earn dividend equivalents. In respect of any such Award which is outstanding on
a dividend record date for Common Stock, the Participant shall be credited with
an amount equal to the amount of cash or stock dividends that would have been
paid on the shares of Common Stock covered by such Award had such covered shares
been issued and outstanding on such dividend record date. The Committee shall
establish such rules and procedures governing the crediting of such dividend
equivalents, including, without limitation, the amount, the timing, form of
payment, and payment contingencies and/or restrictions of such dividend
equivalents, as it deems appropriate or necessary.
Article 12. Termination of Employment
12.1 General. Subject to the terms and conditions of Section 15 of the
Plan, if, and to the extent the terms and conditions under which an Award may be
exercised, earned out, or settled after a Participant's termination of
employment for any particular reason shall not have been set forth in the
relevant Award Agreement, by and as determined by the Committee, in its sole
discretion, the following terms and conditions shall apply as appropriate and as
not inconsistent with the terms and conditions, if any, of such Award Agreement:
12.1.1 If a Participant's employment by the Company or any of its
Subsidiaries is terminated for any reason other than death, Disability, or
Retirement, such Participant's rights, if any, to exercise any Stock
Options or Stock Appreciation Rights shall immediately terminate, and the
Participant (and such Participant's estate, designated beneficiary, or
other legal representative) shall forfeit any rights or interests in or
with respect to any such Stock Options or Stock Appreciation Rights. If a
Participant's employment by the Company or any of its Subsidiaries is
terminated due to death, Disability, or Retirement, such Participant's
Stock Options or Stock Appreciation Rights shall immediately vest upon such
termination, shall remain exercisable until the earlier of: (i) the
termination of the Stock Options or Stock Appreciation Rights as set forth
in the Relevant Award Agreement; or (ii) one (1) year after a termination
due to death or Disability or three (3) years after a termination due to
Retirement.
12.1.2 If a Participant's employment with the Company or any of its
Subsidiaries is terminated for any reason other than death, Disability, or
Retirement prior to the satisfaction and/or lapse of the Restrictions,
terms and conditions applicable to a grant of Restricted Stock or Phantom
Stock, such Restricted Award or Awards shall immediately be canceled, and
the Participant (and such Participant's estate, designated beneficiary, or
other legal representative) shall forfeit any rights or interests in and
with respect to any such Restricted Award. If a Participant's employment
with the Company or any of its Subsidiaries is terminated as a result of
death, Disability, or Retirement prior to the satisfaction and/or lapse of
the restrictions, terms, and conditions applicable to a grant of Restricted
Stock or Phantom Stock, the Participant shall be entitled to payment of the
Awards pursuant to Section 8.6 of the Plan.
<PAGE> B-11
12.1.3 If a Participant's employment with the Company or any of its
Subsidiaries is terminated for any reason other than death, Disability, or
Retirement prior to the completion of any Performance Period, any
Performance Units granted in respect of such Performance Period shall,
regardless of whether the relevant Performance Goals for such Performance
Period have been (or are expected to be) achieved (partially or otherwise),
immediately be canceled, and the Participant (and such Participant's
estate, designated beneficiary, and/or legal representative) shall forfeit
any rights or interests in and with respect to any such Performance Units.
If a Participant's employment with the Company or any of its Subsidiaries
is terminated as a result of death, Disability, or Retirement prior to the
completion of any Performance Period, such Awards shall not be affected by
the termination and shall continue in effect under the terms of the Plan
and the relevant Award Agreement.
Article 13. Nontransferability of Awards
Unless otherwise provided for in an Award Agreement, no Award under the
Plan, and no rights or interests herein or therein, shall or may be assigned,
transferred, sold, exchanged, pledged, disposed of, or otherwise hypothecated or
encumbered by a Participant or any beneficiary thereof, except by testamentary
disposition or the laws of descent and distribution. No such interest shall be
subject to seizure for the payment of the Participant's (or any beneficiary's)
debts, judgments, alimony, or separate maintenance or be transferable by
operation of law in the event of the Participant's (or any beneficiary's)
bankruptcy or insolvency. During the lifetime of a Participant, Stock Options
and Stock Appreciation Rights are exercisable only by the Participant.
Article 14. Changes in Capitalization and Other Matters
14.1 No Corporate Action Restriction. The existence of the Plan, any Award
Agreement, and/or the Award granted hereunder shall not limit, affect, or
restrict in any way the right or power of the Board or the shareholders of the
Company to make or authorize (a) any adjustment, recapitalization,
reorganization, or other change in the Company's or Subsidiary's capital
structure or its business; (b) any merger, consolidation, or change in the
ownership of the Company or any Subsidiary; (c) any issue of bonds, debentures,
capital, preferred or prior preference stocks ahead of or affecting the
Company's or any Subsidiary's capital stock or the rights thereof; (d) any
dissolution or liquidation of the Company or any Subsidiary; (e) any sale or
transfer of all or any part of the Company's or any Subsidiary's assets or
business; or (f) any other corporate act or proceeding by the Company or any
Subsidiary. No Participant, beneficiary, or any other person shall have any
claim against any member of the Board or the Committee, the Company, or any
Subsidiary as a result of any such action.
14.2 Recapitalization Adjustments. In the event of any change in
capitalization affecting the Common Stock of the Company, including, without
limitation, a stock dividend or other distribution, stock split, reverse stock
split, recapitalization, merger, consolidation, subdivision, split-up, spin-off,
split-off, combination or exchange of shares, or other form of reorganization,
or any other change affecting the Common Stock, the Board, in its sole
discretion, may authorize and make such proportionate adjustments, if any, as
the Board may deem appropriate to reflect such change, including, without
limitation, with respect to the aggregate number of shares of the Common Stock
for which Awards in respect thereof may be granted under the Plan, the maximum
number of shares of the Common Stock which may be sold or awarded to any
Participant, the number of shares of the Common Stock covered by each
outstanding Award, and the exercise price or other price per share of Common
Stock in respect of any outstanding Awards.
<PAGE> B-12
Article 15. Change in Control
15.1 Acceleration of Awards Vesting. Except as otherwise provided in
Section 15.2 of the Plan, if a Change in Control of the Company occurs, (a) all
Stock Options and/or Stock Appreciation Rights then unexercised and outstanding
shall become fully exercisable as of the date of the Change in Control; (b) all
restrictions, terms, and conditions applicable to all Restricted Stock and/or
Phantom Stock then outstanding shall be deemed lapsed and satisfied as of the
date of the Change in Control; and (c) all Performance Units shall be deemed to
have been fully earned as of the date of the Change in Control.
15.2 Payment After Change in Control. Within thirty (30) days after a
Change in Control occurs, (a) the holder of an Award of Restricted Stock shall
receive a new certificate for such shares without the legend set forth in
Section 8.4.2. of the Plan; and (b) the holder of an Award of Phantom Stock
and/or Performance Units shall receive payment of the value of such grants in
cash.
15.3 Termination as a Result of a Potential Change in Control. In
determining the applicability of Section 15.2 of the Plan, if (a) a
Participant's employment is terminated by the Company or any Subsidiary prior to
a Change in Control without Cause at the request of a Person who has entered
into an agreement with the Company, the consummation of which will constitute a
Change in Control; or (b) the Participant terminates his employment with the
Company or any Subsidiary for Good Reason prior to a Change in Control, and the
circumstance or event which constitutes Good Reason at the request of the Person
described in Section 15.4(a) of the Plan, then for purposes of this Section 15,
a Change in Control shall be deemed to have occurred immediately prior to such
Participant's termination of employment.
15.4 Definitions. For purposes of this Section 15, the following words and
phrases shall have the meaning specified:
15.4.1 "Beneficial Owner" shall have the meaning defined in Rule
13d-3 of the Exchange Act.
15.4.2 "Cause" shall mean, unless otherwise defined in the
Participant's individual employment agreement with the Company or any
Subsidiary (in which case such employment agreement definition shall
govern), (a) the indictment of the Participant for any serious crime; (b)
the willful and continued failure by the Participant to substantially
perform the Participant's duties, as they may be defined from time to time,
with the Participant's primary employer or to abide by the written policies
of the Company or the Participant's primary employer (other than any such
failure resulting from the Participant's incapacity due to physical or
mental illness); or (c) the willful engaging by the Participant in conduct
which is demonstrably and materially injurious to the Company or any
Subsidiary, monetarily or otherwise. For purposes of the preceding
sentence, no act shall be considered "willful" unless done, or omitted to
be done, by the Participant not in good faith and without reasonable belief
that such act, or failure to act, was in the best interests of the Company
and its Subsidiaries.
<PAGE> B-13
15.4.3 A "Change in Control" shall mean the occurrence of one of
the following events:
(a) Any Person or entity, including a "group" as contemplated by
Section 13(d)3) of the Exchange Act acquires or gains
ownership or control (including, without limitation, power to
vote) of twenty-five percent (25%) or more of the outstanding
shares of the Company's voting stock (based upon voting
power); or
(b) A period of twenty-four (24) consecutive months during which
two-thirds (2/3) of the individuals who are directors of the
Company at the beginning of such period cease to be directors
of the Company for any reason; or
(c) The Closing of any merger, acquisition, or consolidation
following which the shareholders of the Company own less than
seventy-five percent (75%) of the surviving entity; or
(d) The Closing of a sale or disposition (other than to a
subsidiary) of more than eighty-five percent (85%) of the
Company's assets.
"Closing" shall mean a meeting at which all documents
necessary to consummate a transaction are executed and
delivered; provided that a transaction shall not be considered
closed for purposes of this Plan until all conditions
precedent to the consummation of the transaction, including
but not limited to, all required regulatory approvals have
been fulfilled.
Notwithstanding the foregoing, with respect to a particular Participant, a
Change in Control shall not include any event, circumstance, or transaction
which results from the action of any entity or group which includes, is
affiliated with, or is wholly or partly controlled by one or more executive
officers of the Company or any Subsidiary and in which entity or group the
Participant participates.
15.4.4 "Good Reason" for termination by a Participant of the
Participant's employment shall mean, for purposes of this Section 15,
unless otherwise defined in the Participant's individual employment
agreement with the Company or any Subsidiary (in which case such employment
agreement definition shall govern), the occurrence (without the
Participant's consent) of any one of the following:
(a) the assignment to the participant of any duties and/or
responsibilities and significantly inconsistent with the
nature and status of the participant's duties and/or
responsibilities immediately prior to any potential change
in control, or a substantial and significant adverse
alteration in the nature or status of the employee's duties
and/or responsibilities from those in effect immediately
prior to any such potential change in control; provided,
however, that a redesignation of the Participant's title
shall not under any circumstances constitute Good Reason if
the Participant's overall status among the Company and its
Subsidiaries is not substantially and significantly
adversely affected; or
<PAGE> B-14
(b) A reduction in the Participant's rate of annual base salary
as in effect on January 1, 1992, as the same may be
increased from time to time, where "annual base salary" is
the Participant's regular basic annual compensation prior to
any reduction therein under a salary reduction agreement
pursuant to Section 401(k) or Section 125 of the Code, and,
without limitation, shall not include cost-of-living
allowances and post allowances for foreign service, fees,
retainers, reimbursements, bonuses, incentive awards,
prizes, or similar payments.
15.4.5 "Person" shall have the meaning given in Section 3(a)(9) of
the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof;
provided, however, a Person shall not include (a) the Company or any
Subsidiary; (b) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or a Subsidiary qualified under
Section 401(a) of the Code; (c) an underwriter temporarily holding
securities pursuant to an offering of such securities; or (d) a corporation
owned, directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the
Company.
15.4.6 "Potential Change in Control" shall be deemed to have
occurred if any one of the following conditions shall have been satisfied:
(a) The Company enters into an agreement, the consummation of
which would result in the occurrence of a Change in Control;
or
(b) Any Person files a Schedule 13D under the Exchange Act
announcing an intention to take action which, if consummated,
would constitute a Change in Control.
15.4.7 "Surviving Entity" shall mean only an entity in which
substantially all of the Company's stockholders immediately before any
merger, consolidation, or liquidation become stockholders by the terms of
such merger, consolidation, or liquidation.
Article 16. Amendments, Suspension, and Termination
16.1 In General. The Board may suspend or terminate the Plan (or any
portion thereof) at any time and may amend the Plan at any time and from time to
time in such respects as the Board may deem advisable to insure that any and all
Awards conform to or otherwise reflect any change in applicable laws or
regulations, or to permit the Company or the Participants to benefit from any
change in applicable laws or regulations, or in any other respect the Board may
deem to be in the best interests of the Company or any subsidiary; provided,
however, that no such amendment shall, without majority (or such greater
percentage if required by law, charter, by-law, or other regulation or rule)
stockholder approval to the extent required by law or the rules of any exchange
upon which the Common stock is listed, (a) except as provided in Section 14 of
the Plan, materially increase the number of shares of Common Stock which may be
issued under the Plan; (b) materially modify the requirements as to eligibility
for participation in the plan; (c) materially increase the benefits accruing to
Participants under the Plan; or (d) extend the termination date of the Plan. No
such amendment, suspension, or termination shall (i) materially adversely affect
the rights of any Participant under any outstanding Stock Option, Stock
Appreciation Rights, Performance Units, or Restricted Stock or Phantom Stock
grants, without the consent of such Participant; or (ii) make any change that
would disqualify the Plan, or any other plan of the Company or any Subsidiary
intended to be so qualified, from (A) the exemption provided by Rule 16b-3,
promulgated under the Exchange Act, or any successor rule or regulation to such
rule 16b-3, as such rule is applicable from time to time; or (B) the benefits
provided under section 422 of the Code, or any successor thereto.
<PAGE> B-15
16.2 Award Agreements. The Committee may amend or modify at any time and
from time to time any outstanding Stock Options, Stock Appreciation Rights,
Performance Units, or Restricted Stock or Phantom stock grants, in any manner to
the extent that the Committee would have had the authority under the Plan to
initially determine the restrictions, terms, and provisions of such Stock
Options, Stock Appreciation Rights, Performance Units, and/or Restricted Stock
or Phantom Stock grants, including, without limitation, to change the date or
dates as of which such Options or Stock Appreciation Rights may be exercised. No
such amendment or modification shall, however, materially adversely affect the
rights of any Participant under any such Award without the consent of such
Participant.
Article 17. Miscellaneous
17.1 Tax Withholding. The Company shall have the right to deduct from any
payment or settlement under the Plan, including, without limitation, the
exercise of any Stock Option or Stock Appreciation Right, or the delivery or
vesting of any shares of Common Stock, Restricted Stock, or Phantom Stock, any
federal, state, local, or other taxes of any kind which the Committee, in its
sole discretion, deems necessary to be withheld to comply with the Code and/or
any other applicable law, rule, or regulation. If the Committee, in its sole
discretion, permits shares of Common Stock to be used to satisfy any such tax
withholding, such Common Stock shall be valued based on the Fair Market Value of
such stock as of the date the tax withholding is required to be made, such date
to be determined by the Committee. The Committee may establish rules limiting
the use of Common Stock to meet withholding requirements by Participants who are
subject to Section 16 of the Exchange Act.
17.2 No Right to Employment. Neither the adoption of the Plan, the
granting of any Award, nor the execution of any Award Agreement, shall confer
upon any employee of the Company or any Subsidiary any right to continued
employment with the Company or any Subsidiary, as the case may be, nor shall it
interfere in any way with the right, if any, of the Company or any Subsidiary to
terminate the employment of any employee at any time for any reason.
17.3 Unfunded Plan. The Plan shall be unfunded, and the Company shall not
be required to segregate any assets in connection with any Awards under the
Plan. Any liability of the Company to any person with respect to any Award under
the Plan or any Award Agreement shall be based solely upon the contractual
obligations that may be created as a result of the Plan or any such award or
agreement. No such obligation of the Company shall be deemed to be secured by
any pledge of, encumbrance on, or other interest in, any property or asset of
the Company or any Subsidiary. Nothing contained in the Plan or any Award
Agreement shall be construed as creating in respect of any Participant (or
beneficiary thereof or any other person) any equity or other interest of any
kind in any assets of the Company or any Subsidiary or creating a trust of any
kind or a fiduciary relationship of any kind between the Company, any
Subsidiary, and/or any such Participant, any beneficiary, or any other person.
17.4 Payments to a Trust. The Committee is authorized to cause to be
established a trust agreement or several trust agreements or similar
arrangements from which the Committee may make payments of amounts due or to
become due to any Participants under the Plan.
<PAGE> B-16
17.5 Other Company Benefit and Compensation Programs. Payments and other
benefits received by a Participant under an Award made pursuant to the Plan
shall not be deemed a part of a Participant's compensation for purposes of the
determination of benefits under any other employee welfare or benefit plans or
arrangements, if any, provided by the Company or any Subsidiary unless expressly
provided in such other plans or arrangements, or except where the Board
expressly determined in writing that including of an Award or portion of an
Award should be included to accurately reflect competitive compensation
practices or to recognize that an Award has been made in lieu of a portion of
competitive annual base salary or other cash compensation. Awards under the Plan
may be made in addition to, in combination with, or as alternatives to, grants,
awards, or payments under any other plans or arrangements of the Company or its
Subsidiaries. The existence of the Plan notwithstanding, the Company or any
Subsidiary may adopt such other compensation plans or programs and additional
compensation arrangements as it deems necessary to attract, retain, and motivate
employees.
17.6 Listing, Registration, and Other Legal Compliance. No shares of the
Common Stock shall be issued under the Plan unless legal counsel of the Company
shall be satisfied that such issuance will be in compliance with all applicable
federal and state securities laws and regulations and any other applicable laws
or regulations. The Committee may require, as a condition of any payment or
share issuance, that certain agreements, undertakings, representations,
certificates, and/or information, as the Committee may deem necessary or
advisable, be executed or provided to the Company to assure compliance with all
such applicable laws or regulations. Certificates for shares of the Restricted
Stock and/or Common Stock delivered under the Plan may be subject to such
stock-transfer orders and such other restrictions as the Committee may deem
advisable under the rules, regulations, or other requirements of the Securities
and Exchange Commission, any stock exchange upon which the common Stock is then
listed, and any applicable federal or state securities law. The Committee may
cause a legend or legends to be put on any such share certificates to make
appropriate reference to such restrictions. In addition, if, at any time
specified herein (or in any Award Agreement) for (a) the making of
determination; (b) the issuance or other distribution of Restricted Stock and/or
Common Stock; or (c) the payment of amounts to or through a Participant with
respect to any Award, any law, rule, regulation, or other requirement of any
governmental authority or agency shall require either the Company, any
Subsidiary, or any Participant (or any designated beneficiary or other legal
representative) to take any action in connection with any such determination,
any such shares to be issued or distributed, any such payment, or the making of
any such determination, as the case may be, shall be deferred until such
required action is taken. If at any time and from time to time the Committee
determines, in its sole discretion, that the listing, registration, or
qualification of any Award, or any Common Stock or property covered by or
subject to such Award, upon any securities exchange or under any foreign,
federal, state, or local securities or other law, rule, or regulation is
necessary or desirable as a condition to or in connection with the granting of
such Award or the issuance or delivery of Restricted Stock and/or Common Stock
or other property under such Award or otherwise, no such Award may be exercised
or settled or paid in Restricted Stock, Common Stock, or other property unless
such listing, registration, or qualification shall have been effected free of
any conditions that are not acceptable to the Committee.
17.7 Award Agreements. Each Participant receiving an Award under the Plan
shall enter into an Award Agreement with the Company in a form specified by the
Committee. Each such Participant shall agree to the restrictions, terms, and
conditions of the Award set forth therein.
<PAGE> B-17
17.8 Designation of Beneficiary. Each Participant to whom an Award has
been made under the Plan may designate a beneficiary or beneficiaries to receive
any payment which under the terms of the Plan and the relevant Award Agreement
may become payable on or after the Participant's death. At any time, and from
time to time, any such designation may be changed or canceled by the Participant
without the consent of any such beneficiary. Any such designation, change, or
cancellation must be on a form provided for that purpose by the Committee and
shall not be effective until received by the Committee. If no beneficiary has
been designated by a deceased Participant, or if the designated beneficiaries
have predeceased the Participant, the beneficiary shall be the Participant's
estate. If the Participant designates more than one beneficiary, any payments
under the Plan to such beneficiaries shall be made in equal shares unless the
Participant has expressly designated otherwise, in which case the payments shall
be made in the shares designated by the Participant.
17.9 Leaves of Absence/Transfers. The Committee shall have the power to
promulgate rules and regulations and to make determinations, as it deems
appropriate, under the Plan in respect of any leave of absence from the Company
or any Subsidiary granted to a Participant. Without limiting the generality of
the foregoing, the Committee may determine whether any such leave of absence
shall be treated as if the Participant has terminated employment with the
Company or any such Subsidiary. If a Participant transfers within the Company,
or to or from any Subsidiary, such Participant shall not be deemed to have
terminated employment as a result of such transfers.
17.10 Loans. Subject to applicable law, the Committee may provide, pursuant
to Plan rules, for the Company or any Subsidiary to make loans to Participants
to finance the exercise price of any Stock Options, as well as the withholding
obligation under Section 17.1 of the Plan and/or the estimated or actual taxes
payable by the Participant as a result of the exercise of such Stock Option, and
the Committee may prescribe the terms and conditions of any such loan.
17.11 Governing Law. The Plan and all actions taken thereunder shall be
governed by and construed in accordance with the laws of the State of Texas,
without regard to principles of conflict of laws. Any titles and headings herein
are for reference purposes only and shall in no way limit, define, or otherwise
affect the meaning, construction, or interpretation of any provisions of the
Plan.
17.12 Effective Date. The Plan shall be effective as of April 17, 1997,
subject to approval by the Securities and Exchange Commission and by a majority
of the Company's shareholders at the 1992 annual meeting of shareholders or any
proper adjournment thereof.
<PAGE>
