UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) COMBINED QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____to_____
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address and Telephone Number Identification
No.
1-1443 Central and South West Corporation 51-0007707
(A Delaware Corporation)
1616 Woodall Rodgers Freeway
Dallas, Texas 75202-1234
(214) 777-1000
0-346 Central Power and Light Company 74-0550600
(A Texas Corporation)
539 North Carancahua Street
Corpus Christi, Texas 78401-2802
(512) 881-5300
0-343 Public Service Company of Oklahoma 73-0410895
(An Oklahoma Corporation)
212 East 6th Street
Tulsa, Oklahoma 74119-1212
(918) 599-2000
1-3146 Southwestern Electric Power Company 72-0323455
(A Delaware Corporation)
428 Travis Street
Shreveport, Louisiana 71156-0001
(318) 222-2141
0-340 West Texas Utilities Company 75-0646790
(A Texas Corporation)
301 Cypress Street
Abilene, Texas 79601-5820
(915) 674-7000
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
Common Stock Outstanding at November 10, 1998 Shares
Central and South West Corporation 212,601,915
Central Power and Light Company 6,755,535
Public Service Company of Oklahoma 9,013,000
Southwestern Electric Power Company 7,536,640
West Texas Utilities Company 5,488,560
This Combined Form 10-Q is separately filed by Central and South West
Corporation, Central Power and Light Company, Public Service Company of
Oklahoma, Southwestern Electric Power Company and West Texas Utilities Company.
Information contained herein relating to any individual Registrant is filed by
such Registrant on its own behalf. Each Registrant makes no representation as to
information relating to the other Registrants.
<PAGE>
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
TABLE OF CONTENTS TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 1998
PAGE
GLOSSARY OF TERMS............................................................3
FORWARD-LOOKING INFORMATION..................................................5
PART I. FINANCIAL INFORMATION...............................................6
ITEM 1. FINANCIAL STATEMENTS
CENTRAL AND SOUTH WEST CORPORATION.......................................6
CENTRAL POWER AND LIGHT COMPANY.........................................17
PUBLIC SERVICE COMPANY OF OKLAHOMA......................................25
SOUTHWESTERN ELECTRIC POWER COMPANY.....................................33
WEST TEXAS UTILITIES COMPANY............................................41
NOTES TO FINANCIAL STATEMENTS...........................................49
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...................................................67
PART II - OTHER INFORMATION.................................................78
ITEM 1. LEGAL PROCEEDINGS................................................78
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................78
SIGNATURES..................................................................80
<PAGE>
GLOSSARY OF TERMS
The following abbreviations or acronyms used in this text are defined below:
Abbreviation or Acronym Definition
AEP........................American Electric Power Company, Inc.
AEP Merger.................Proposed Merger between AEP and CSW as a result of
which CSW would become a wholly owned subsidiary of
AEP
ALJ........................Administrative Law Judge
Alpek......................Alpek S.A. de C.V.
Ameren System..............Ameren Corporation, parent of recently merged Union
Electric Company and Central Illinois Public Service
Company
Anglo Iron.................Anglo Iron and Metal, Inc.
Arkansas Commission........Arkansas Public Service Commission
C3 Communications..........C3 Communications, Inc., Austin, Texas (formerly CSW
Communications, Inc.)
Cajun......................Cajun Electric Power Cooperative, Inc.
Cajun Members Committee....A committee which represents 7 of the 12 Louisiana
member distribution cooperatives that are served by
Cajun
CERCLA.....................Comprehensive Environmental Response, Compensation
and Liability Act of 1980
ChoiceCom..................CSW/ICG ChoiceCom, L..P., a joint venture between C3
Communications and ICG Communications
CPL........................Central Power and Light Company, Corpus Christi,
Texas
CPL 1997 Final Order.......Final orders received from the Texas Commission in
CPL's rate case Docket No. 14965
CSW........................Central and South West Corporation, Dallas, Texas
CSW Credit.................CSW Credit, Inc., Dallas, Texas
CSW Energy.................CSW Energy, Inc., Dallas, Texas
CSW International..........CSW International, Inc., Dallas, Texas
CSW Services...............Central and South West Services, Inc., Dallas, Texas
and Tulsa, Oklahoma
CSW System.................CSW and its subsidiaries
CWIP.......................Construction work in progress
ECOM.......................Excess cost over market
El Paso....................El Paso Electric Company
EnerShop...................EnerShop Inc., Dallas, Texas
Enertek....................Co-generation power plant, Tampico, Mexico
EPA........................Environmental Protection Agency
ERCOT......................Electric Reliability Council of Texas
Exchange Act...............Securities Exchange Act of 1934, as amended
FASB.......................Financial Accounting Standards Board
FERC.......................Federal Energy Regulatory Commission
FMB........................First mortgage bond
Holding Company Act........Public Utility Holding Company Act of 1935, as
amended
ICG Communications.........ICG Communications, Inc.
ITC........................Investment tax credit
LIFO.......................Last-in First-out (inventory accounting method)
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
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 unit)
MW.........................Megawatt
MWH........................Megawatt-hour
NEIL.......................Nuclear Electric Insurance Limited
NRC........................Nuclear Regulatory Commission
Oklahoma Commission........Corporation Commission of the State of Oklahoma
Phillips Sweeny............Cogeneration power plant, Sweeny, Texas
PRP........................Potentially responsible party
<PAGE>
GLOSSARY OF TERMS (continued)
Abbreviation or Acronym Definition
PSO........................Public Service Company of Oklahoma, Tulsa, Oklahoma
PSO 1997 Rate Settlement
Agreement...............Joint stipulation agreement reached by PSO and other
parties to settle PSO's 1997 rate inquiry
Registrant(s)..............CSW, CPL, PSO, SWEPCO and WTU
RUS........................Rural Utilities Service of the federal government
SEC........................United States Securities and Exchange Commission
SEEBOARD...................SEEBOARD plc., Crawley, West Sussex, United Kingdom
SEEBOARD U.S.A.............CSW's investment in SEEBOARD consolidated and
converted to U.S. Generally Accepted Accounting
Principles
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. 130...............Reporting Comprehensive Income
SFAS No. 133...............Accounting for Derivative Instruments and Hedging
Activities
SOP........................Statement of Position (accounting standard)
SOP 98-5...................Reporting on the Costs of Start-Up Activities
STP........................South Texas Project nuclear electric generating
station, jointly owned by CPL, Houston Lighting and
Power Company, City of Austin, and City of San
Antonio
SWEPCO.....................Southwestern Electric Power Company, Shreveport,
Louisiana
SWEPCO Plan................The amended plan of reorganization for Cajun filed by
the Members Committee and SWEPCO on March 18, 1998
with the U.S. Bankruptcy Court for the Middle
District of Louisiana
Texas Commission...........Public Utility Commission of Texas
Transok....................Transok, Inc., a former wholly-owned subsidiary of
CSW
Trust Preferred Securities.Collective term for securities issued by business
trusts of CPL, PSO and SWEPCO classified on the
balance sheet as "Certain Subsidiary (or
CPL/PSO/SWEPCO)- obligated, mandatorily redeemable
preferred securities of subsidiary trusts holding
solely Junior Subordinated Debentures of such
Subsidiaries (or CPL/PSO/SWEPCO)"
U.S. Electric(s) or U.S.
Electric Operating
Companies................CPL, PSO, SWEPCO and WTU
Valero.....................Valero Refining Company-Texas, Valero Refining
Company and Valero Energy
Company
WTU........................West Texas Utilities Company, Abilene, Texas
Yorkshire..................Yorkshire plc, a regional electricity company in the
United Kingdom
<PAGE>
FORWARD-LOOKING INFORMATION
This report made by CSW and certain of its subsidiaries contains 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, their
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.; the impact of the proposed AEP Merger including any regulatory
conditions imposed on the merger, the inability to consummate the AEP Merger, or
other merger and acquisition activity including the SWEPCO Plan; 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; costs associated with any year 2000 failure
either within the CSW System or supplier failures that adversely affect the CSW
System; 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 previously mentioned factors would
apply and also include, but are not limited to: 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>
CSW
CENTRAL AND SOUTH WEST CORPORATION
AND SUBSIDIARY COMPANIES
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
<PAGE>
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -------------------------
1998 1997 1998 1997
---------- ---------- ----------- -----------
(millions, except per share amounts)
<S> <C> <C> <C> <C>
Operating Revenues
U.S. Electric $ 1,172 $ 1,054 $ 2,746 $ 2,562
United Kingdom 352 401 1,288 1,324
Other diversified 57 22 148 53
---------- ---------- ----------- -----------
1,581 1,477 4,182 3,939
Operating Expenses and Taxes
U.S. Electric fuel 388 370 939 892
U.S. Electric purchased power 39 18 86 61
United Kingdom cost of sales 224 276 879 927
Other operating 232 216 705 658
Maintenance 41 38 114 111
Provision for CPL 1997 Final Order -- 3 -- 18
El Paso merger litigation -- -- -- 35
Depreciation and amortization 126 121 375 360
Taxes, other than income 44 49 145 143
Income taxes 143 83 218 135
---------- ---------- ----------- -----------
1,237 1,174 3,461 3,340
---------- ---------- ----------- -----------
Operating Income 344 303 721 599
---------- ---------- ----------- -----------
Other Income and Deductions
Other 5 11 33 24
Non-operating income taxes 3 (1) 2 3
---------- ---------- ----------- -----------
8 10 35 27
---------- ---------- ----------- -----------
Income Before Interest and Other Charges 352 313 756 626
---------- ---------- ----------- -----------
Interest and Other Charges
Interest on long-term debt 78 84 238 251
Interest on short-term debt and other 33 23 92 59
Distributions on trust preferred securities 7 7 20 11
Preferred dividend requirements of subsidiaries 1 3 6 10
(Gain)/loss on reacquired preferred stock -- -- 1 (10)
---------- ---------- ----------- -----------
119 117 357 321
---------- ---------- ----------- -----------
Income Before Extraordinary Item 233 196 399 305
Extraordinary Item - United Kingdom windfall profits tax -- (176) -- (176)
========== ========== =========== ===========
Net Income for Common Stock $ 233 $ 20 $ 399 $ 129
========== ========== =========== ===========
Average Common Shares Outstanding 212.5 212.2 212.3 212.1
Basic and Diluted Earnings per Share before Extraordinary Item 1.10 0.93 1.88 1.44
Basic and Diluted Loss per Share from Extraordinary Item -- (0.83) -- (0.83)
========== ========== =========== ===========
Basic and Diluted Earnings per Share $ 1.10 $ 0.10 $ 1.88 $ 0.61
========== ========== =========== ===========
Dividends Paid per Share of Common Stock $ 0.435 $ 0.435 $ 1.305 $ 1.305
========== ========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE>
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
1998 1997 1998 1997
------- ------- ------- -------
(millions) (millions)
<S> <C> <C> <C> <C>
Net Income for Common Stock $ 233 $ 20 $ 399 $ 129
------- ------- ------- -------
Other Comprehensive Income, Net of Tax
Foreign currency translation adjustment 10 (7) 20 (46)
Unrealized gains or losses on securities:
Unrealized gains/(losses) occurring during period (9) 2 (18) 3
Adjustments for gains/(losses) included in net income -- -- (8) --
------- ------- ------- -------
1 (5) (6) (43)
Comprehensive Income $ 234 $ 15 $ 393 $ 86
======= ======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited) (audited)
--------------- --------------
(millions)
ASSETS
<S> <C> <C>
Fixed Assets
Electric
Production $ 5,852 $ 5,824
Transmission 1,589 1,558
Distribution 4,659 4,453
General 1,371 1,381
Construction work in progress 174 184
Nuclear fuel 202 196
--------------- --------------
13,847 13,596
Other diversified 348 250
--------------- --------------
14,195 13,846
Less - Accumulated depreciation and amortization 5,592 5,264
--------------- --------------
8,603 8,582
--------------- --------------
Current Assets
Cash and temporary cash investments 183 75
Accounts receivable 1,407 916
Materials and supplies, at average cost 174 172
Electric utility fuel inventory 84 65
Under-recovered fuel costs 18 84
Notes receivable 105 --
Prepayments and other 75 78
--------------- --------------
2,046 1,390
--------------- --------------
Deferred Charges and Other Assets
Deferred plant costs 499 503
Mirror CWIP asset 275 285
Other non-utility investments 416 448
Securities available for sale 61 103
Income tax related regulatory assets, net 321 329
Goodwill 1,445 1,428
Other 439 383
--------------- --------------
3,456 3,479
--------------- --------------
$ 14,105 $ 13,451
=============== ==============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE>
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited) (audited)
-------------- --------------
CAPITALIZATION AND LIABILITIES (millions)
<S> <C> <C> <C> <C>
Capitalization
Common stock: $3.50 par value
Authorized shares: 350.0 million
Issued and outstanding shares: 212.3 million
in 1998 and 212.1 million in 1997 $ 744 $ 743
Paid-in capital 1,046 1,039
Retained earnings 1,871 1,750
Accumulated other comprehensive income 18 24
-------------- --------------
3,679 47% 3,556 45%
-------------- --------- -------------- ----------
Preferred stock
Not subject to mandatory redemption 176 176
Subject to mandatory redemption -- 26
-------------- --------------
176 2% 202 2%
Certain Subsidiary-obligated, mandatorily redeemable
preferred securities of subsidiary trusts holding solely
Junior Subordinated Debentures of such Subsidiaries 335 4% 335 4%
Long-term debt 3,702 47% 3,898 49%
-------------- --------- -------------- ----------
Total Capitalization 7,892 100% 7,991 100%
-------------- --------- -------------- ----------
Current Liabilities
Long-term debt and preferred stock due within twelve months 144 32
Short-term debt 794 721
Short-term debt - CSW Credit 929 636
Loan notes 59 56
Accounts payable 650 573
Accrued taxes 379 171
Accrued interest 109 87
Other 190 238
-------------- --------------
3,254 2,514
-------------- --------------
Deferred Credits
Accumulated deferred income taxes 2,436 2,431
Investment tax credits 270 278
Other 253 237
-------------- --------------
2,959 2,946
-------------- --------------
$ 14,105 $ 13,451
============== ==============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<PAGE>
CENTRAL AND SOUTH WEST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- ----------
OPERATING ACTIVITIES (millions)
<S> <C> <C>
Net Income for Common Stock $ 399 $ 129
Non-cash Items and Adjustments
Depreciation and amortization 436 385
Deferred income taxes and investment tax credits (19) (11)
Preferred stock dividends included in Net income for common stock 6 10
(Gain)/loss on reacquired preferred stock 1 (10)
Provision for CPL 1997 Final Order -- 18
Changes in Assets and Liabilities
Accounts receivable (486) (383)
Accounts payable 62 5
Accrued taxes 211 125
Fuel inventory (19) 30
Fuel recovery 73 (53)
Refund due customers -- 29
Other (40) 131
----------- ----------
624 405
----------- ----------
INVESTING ACTIVITIES
Construction expenditures (339) (341)
CSW Energy/CSW International projects (143) (187)
Other 1 --
----------- ----------
(481) (528)
----------- ----------
FINANCING ACTIVITIES
Common stock sold 8 20
Long-term debt sold 5 --
Reacquisition/Retirement of long-term debt (181) (52)
Reacquisition of preferred stock (28) (114)
Proceeds from the issuance of Subsidiary obligated,
mandatorily redeemable, trust preferred securities -- 323
Change in short-term debt 365 344
Payment of dividends (279) (290)
Other 73 35
----------- ----------
(37) 266
----------- ----------
Effect of exchange rate changes on cash and cash equivalents 2 (7)
Net Change in Cash and Cash Equivalents 108 136
Cash and Cash Equivalents at Beginning of Period 75 254
=========== ==========
Cash and Cash Equivalents at End of Period $ 183 $ 390
=========== ==========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $ 249 $ 282
=========== ==========
Income taxes paid $ 49 $ 247
=========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
<PAGE>
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
Set forth below is information concerning the consolidated results of
operations of CSW for the three month and nine month periods ended September 30,
1998 and September 30, 1997. For information concerning the results of
operations for each of the U.S. Electric Operating Companies, see the discussion
under the heading RESULTS OF OPERATIONS following the financial statements of
each of the U.S. Electric Operating Companies.
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
Net income for common stock increased to $233 million in the third quarter
of 1998 from $20 million in 1997. The largest single factor that increased
earnings was the absence in 1998 of the United Kingdom windfall profits tax of
$176 million that was recorded in 1997.
Earnings in 1998 from the U.S. Electric Operating Companies were
substantially higher. Hotter than normal weather added $25 million to earnings
and increased customer usage and growth added another $21 million. Also
contributing to the increase in earnings at the U.S. Electric companies was
lower operations and maintenance expense of $6 million and the absence of the
provision for rate refund associated with the PSO rate case settlement that
lowered 1997 earnings by $16 million. The increase in earnings from the U.S.
Electric Operating Companies was partially offset by lower base rates at CPL and
PSO related to the CPL 1997 Final Order and the PSO 1997 Rate Settlement
Agreement.
SEEBOARD U.S.A. earnings increased due primarily to lower operations and
maintenance expenses in the third quarter of 1998 when compared to a year
earlier and increased earnings from its Medway power plant. The increase in
earnings at SEEBOARD U.S.A. was offset in part by a $4 million decrease in
deferred tax expenses related to United Kingdom corporation tax rate reductions
that affected both periods. C3 Communications' earnings were $3 million below
the same period last year because of increased operating costs for new
telecommunications activities. Corporate expenses were higher than the same
period last year due primarily to tax provisions. Other factors affecting
earnings are discussed below.
In the third quarter of 1998, the U.S. Electric Operating Companies and
SEEBOARD U.S.A. contributed the following percentages to CSW's results of
operations.
Corporate
U.S. SEEBOARD Total Items
and
Electric U.S.A. Electric Other Total
---------------------------------------------
Operating Revenues 74% 22% 96% 4% 100%
Operating Income 83% 17% 100% --% 100%
Net Income for Common
Stock 99% 13% 112% (12)% 100%
U.S. Electric revenues increased $118 million, or 11%, in the third
quarter of 1998 compared to the same period a year ago. The increase was due
primarily to higher non-fuel revenues of $88 million. Non-fuel revenues
increased as a result of hotter weather and the absence in 1998 of the $26
million provision for rate refund at PSO. Also contributing to the increase in
U.S. Electric revenues were higher fuel revenues of $30 million due primarily to
increased weather-related usage. The increases in fuel and non-fuel electric
revenues were partially offset by rate reductions associated with both the CPL
1997 Final Order and the PSO 1997 Rate Settlement Agreement.
<PAGE>
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
Revenues from SEEBOARD U.S.A. decreased $49 million due to the loss of
revenues associated with the sale of its retail stores in the second quarter of
1998 and lower business volumes. Other diversified revenues increased $35
million to $57 million during the comparison periods. A CSW Energy power plant
project which began operations in February 1998 was responsible for $29 million
of the increase. However, CSW Energy also experienced a significant increase in
other operating expenses, as discussed below.
U.S. Electric fuel expenses increased $18 million, or 5%, during the third
quarter of 1998 compared to the same period last year due primarily to a $16
million increase in the recovery of deferred fuel costs at PSO and hotter
weather. The increase in fuel expenses was offset in part by a decrease in the
average unit fuel cost to $1.70 per MMbtu in 1998 from $1.87 per MMbtu in 1997.
The average unit fuel cost declined as a result of lower spot market natural gas
and coal prices during the quarter. Purchased power increased $21 million during
the comparison periods due primarily to increases in off-system energy purchases
resulting from the effects of hotter weather. United Kingdom cost of sales
decreased $52 million, or 19%, during the third quarter of 1998 compared to the
same period last year due primarily to lower cost of sales associated with the
sale of SEEBOARD's retail stores and a decrease in the cost of purchased power
reflecting lower business volumes.
Other operating expenses increased $16 million in the third quarter of
1998 compared to the same period a year ago. As previously discussed, a CSW
Energy power plant went into service in February 1998 resulting in a $25 million
increase in other operating expenses in the third quarter of 1998 compared to
the same period last year. Reductions in operating expenses at the U.S. Electric
Operating Companies and SEEBOARD U.S.A. partially offset this increase.
Depreciation and amortization expenses increased $5 million in the third
quarter of 1998 compared to the same period last year due primarily to
accelerated recovery of ECOM property recorded in 1998 related to the CPL 1997
Final Order, as well as increases in depreciable property. Partially offsetting
this increase is reduced depreciation rates as a result of the CPL 1997 Final
Order (on non-ECOM property) and the PSO 1997 Rate Settlement Agreement.
Operating income taxes increased $60 million in the third quarter of 1998
compared to the same period last year due primarily to increased taxable income
partially offset by the recognition of foreign tax benefits at SEEBOARD U.S.A.
Interest on long-term debt decreased $6 million due primarily to the
repayment of a $60 million variable rate bank loan due December 1, 2001 and the
maturity of $228 million of FMBs at CPL. Short-term debt was used to repay the
variable rate bank loan in two $30 million installments on January 28, 1998 and
April 27, 1998. Interest on short-term debt and other increased $10 million when
compared to the same period last year due primarily to higher levels of
borrowings.
<PAGE>
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net income for common stock for the first nine months of 1998 increased to
$399 million from $129 million for the comparable period in 1997. The largest
single factor that contributed to this increase in earnings was the absence in
1998 of the United Kingdom windfall profit tax of $176 million that was recorded
at SEEBOARD U.S.A. in 1997.
Earnings in 1998 from the U.S. Electric Operating Companies were higher
due primarily to increased MWH sales from hotter than normal weather which added
about $40 million to earnings, and increased customer usage and growth added
another $32 million. Also contributing to the increase in earnings at the U.S.
Electric Operating Companies was lower operations and maintenance expenses of
$26 million. Earnings for the first nine months of 1998 also improved due to the
absence in 1998 of a provision for rate refund related to the PSO 1997 Rate
Settlement Agreement that lowered 1997 earnings by $18 million and the absence
of a provision for the CPL 1997 Final Order. The increase in earnings from the
U.S. Electric Operating Companies was partially offset by lower base rates at
CPL and PSO related to the CPL 1997 Final Order and the PSO 1997 Rate Settlement
Agreement.
Earnings at SEEBOARD U.S.A. in the first nine months of 1998 increased
due primarily to foreign tax benefits, lower operations and maintenance expenses
and increased earnings from its Medway power plant. The increase in earnings at
SEEBOARD U.S.A. was offset in part by a $4 million decrease in deferred tax
expenses related to United Kingdom corporation tax rate reductions that affected
both periods. C3 Communications' earnings were $3 million below the same period
last year because of increased operating costs for new telecommunications
activities. Corporate expenses were lower than the same period last year due
primarily to the absence in 1998 of the impact of CSW's final settlement of
litigation with El Paso, which cost $23 million, after tax. Other factors
affecting earnings are discussed below.
In the first nine months of 1998, the U.S. Electric Operating Companies
and SEEBOARD U.S.A. contributed the following percentages to CSW's results of
operations.
Corporate
U.S. SEEBOARD Total Items and
Electric U.S.A. Electric Other Total
---------------------------------------------
Operating Revenues 65% 31% 96% 4% 100%
Operating Income 76% 22% 98% 2% 100%
Net Income for Common
Stock 91% 21% 112% (12)% 100%
U.S. Electric revenues increased $184 million, or 7%, in the first nine
months of 1998 compared to the same period a year ago. The increase was due
primarily to higher non-fuel related revenues of $137 million. Non-fuel revenues
increased as a result of hotter weather and the absence in 1998 of the CPL 1997
Final Order and the $26 million provision for rate refund at PSO. Also
contributing to the increase in U.S. Electric revenues were higher fuel-related
revenues of $47 million due primarily to increased weather-related demand. The
increases in fuel and non-fuel electric revenues were partially offset by rate
reductions associated with the CPL 1997 Final Order and the PSO 1997 Rate
Settlement Agreement.
<PAGE>
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
Revenues from SEEBOARD U.S.A. decreased $36 million due to the loss of
revenues associated with the sale of its retail stores in the second quarter of
1998. Other diversified revenues increased $95 million to $148 million during
the comparison periods. A CSW Energy power plant project which began operations
in February 1998 was responsible for $79 million of the increase. However, CSW
Energy also experienced a significant increase in other operating expenses, as
discussed below. Also contributing to the increase in other diversified revenues
was increased business activity at C3 Communications, CSW Credit and EnerShop.
U.S. Electric fuel expenses increased $47 million, or 5%, during the first
nine months of 1998 compared to the same period last year due primarily to a $25
million increase in the recovery of deferred fuel costs at PSO and hotter
weather. The increase in fuel expenses was offset in part by a decrease in the
average unit fuel cost from $1.80 per MMbtu in the first nine months of 1997 to
$1.71 per MMbtu in the first nine months of 1998 due to lower priced spot market
natural gas and coal. Purchased power expenses increased $25 million, or 41%,
during the comparison periods due primarily to increases in off-system energy
purchases resulting from the effects of hotter weather. United Kingdom cost of
sales decreased $48 million, or 5%, during the first nine months of 1998
compared to the same period last year due primarily to lower cost of sales
associated with the sale of SEEBOARD's retail stores and a decrease in the cost
of purchased power reflecting lower business volumes.
Other operating expenses increased $47 million in the first nine months of
1998 compared to the same period a year ago. As previously discussed, a CSW
Energy power plant went into service in February 1998 resulting in a $67 million
increase in other operating expense in the first nine months of 1998 compared to
the same period last year. Partially offsetting this increase were reductions in
operating expenses at the U.S. Electric Operating Companies and SEEBOARD U.S.A.
In the first quarter of 1997, CPL recorded a $41 million provision related
to the CPL 1997 Final Order. In the second and third quarters of 1997, CPL
reclassified $23 million of the provision to reflect the effects of the CPL 1997
Final Order in its specific accounts. Approximately $18 million remained as a
Provision for the CPL 1997 Final Order at the end of the first nine months of
1997.
Another item for which there is no corresponding amount in 1998 was the
$35 million accrual for settlement of the El Paso merger litigation recorded in
the first nine months of 1997.
Depreciation and amortization expenses increased $15 million in the first
nine months of 1998 compared to the same period last year due primarily to
accelerated recovery of ECOM property recorded in 1998 related to the CPL 1997
Final Order, as well as increases in depreciable property. Partially offsetting
this increase are reduced depreciation rates as a result of the CPL 1997 Final
Order (on non-ECOM property) and the PSO 1997 Rate Settlement Agreement.
Operating income taxes increased $83 million in the first nine months of
1998 compared to the same period last year due primarily to increased taxable
income, which was partially offset by the recognition of foreign tax benefits at
SEEBOARD U.S.A.
<PAGE>
CENTRAL AND SOUTH WEST CORPORATION AND SUBSIDIARY COMPANIES
RESULTS OF OPERATIONS
Other income and deductions increased $8 million to $35 million in the
first nine months of 1998 compared to the same period in 1997. In 1998, SEEBOARD
U.S.A. recorded a $4 million gain from the sale of its retail stores and $4
million of increased earnings from its Medway power plant. Also, in the first
nine months of 1998, C3 Communications recorded a $5 million dollar after-tax
gain on the sale of a telecommunications investment. These increases were
partially offset by the absence in 1998 of a litigation settlement that CSW
Energy recorded in 1997 in the amount of $3 million.
Interest and other charges increased $36 million in the first nine months
of 1998 compared to the same period last year due primarily to a $33 million
increase in interest on short-term debt due to higher levels of borrowings. Also
contributing to the increase was an additional $9 million in distributions on
Trust Preferred Securities at CPL, PSO and SWEPCO as a result of the securities
being outstanding for a full nine months in 1998 compared to only five months in
1997. Also contributing to the increase in 1998 was the absence of a $10 million
gain on reacquired preferred stock which lowered the interest and other charges
in 1997. Interest on long-term debt decreased $13 million due to the repayment
of a $60 million variable rate bank loan due December 1, 2001 and the maturity
of $228 million of FMBs at CPL. Short-term debt was used to repay the variable
rate bank loan in two $30 million installments on January 28, 1998 and April 27,
1998.
<PAGE>
CPL
CENTRAL POWER AND LIGHT COMPANY
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
<PAGE>
CENTRAL POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -----------------------------------
1998 1997 1998 1997
------------- ------------- --------------- ---------------
(thousands) (thousands)
<S> <C> <C> <C> <C>
Electric Operating Revenues $ 454,403 $ 444,964 $ 1,092,506 $ 1,060,746
Operating Expenses and Taxes
Fuel 121,129 129,296 302,406 291,492
Purchased power 12,198 11,705 28,733 39,856
Other operating 55,276 66,489 178,030 212,413
Provision for CPL 1997 Final Order -- 3,122 -- 18,160
Maintenance 15,361 16,985 42,886 46,418
Depreciation and amortization 42,903 39,349 126,892 117,256
Taxes, other than income 14,664 20,455 55,719 61,383
Income taxes 64,369 45,753 104,541 66,524
------------- ------------- --------------- ---------------
325,900 333,154 839,207 853,502
------------- ------------- --------------- ---------------
Operating Income 128,503 111,810 253,299 207,244
------------- ------------- --------------- ---------------
Other Income and Deductions
Allowance for equity funds used
during construction 59 849 51 1,622
Other (3,141) 2,360 (592) 1,269
Non-operating income taxes 1,964 195 3,055 2,788
------------- ------------- --------------- ---------------
(1,118) 3,404 2,514 5,679
------------- ------------- --------------- ---------------
Income Before Interest Charges 127,385 115,214 255,813 212,923
------------- ------------- --------------- ---------------
Interest Charges
Interest on long-term debt 23,331 26,864 70,397 80,982
Distributions on Trust Preferred Securities 3,000 2,985 9,000 4,533
Interest on short-term debt and other 1,200 3,783 16,025 11,994
Allowance for borrowed funds used
during construction (607) (644) (1,948) (1,770)
------------- ------------- --------------- ---------------
26,924 32,988 93,474 95,739
------------- ------------- --------------- ---------------
Net Income 100,461 82,226 162,339 117,184
Less: preferred stock dividends 1,320 2,039 4,929 7,649
Gain/(loss) on reacquired preferred stock -- (284) -- 2,422
============= ============= =============== ===============
Net Income for Common Stock $ 99,141 $ 79,903 $ 157,410 $ 111,957
============= ============= =============== ===============
</TABLE>
The accompanying notes to consolidated financial statements as they relate to
CPL are an integral part of these statements.
<PAGE>
CENTRAL POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited) (audited)
---------------- ----------------
(thousands)
<S> <C> <C>
ASSETS
Electric Utility Plant
Production $ 3,116,812 $ 3,106,576
Transmission 525,866 517,903
Distribution 1,078,421 1,021,759
General 302,596 295,974
Construction work in progress 76,598 77,390
Nuclear fuel 202,639 196,147
---------------- ----------------
5,302,932 5,215,749
Less - Accumulated depreciation 2,026,835 1,891,406
---------------- ----------------
3,276,097 3,324,343
---------------- ----------------
Current Assets
Cash -- --
Accounts receivable 102,155 61,311
Materials and supplies, at average cost 58,468 65,290
Fuel inventory 19,095 14,816
Under-recovered fuel costs -- 43,229
Prepayments 490 2,595
---------------- ----------------
180,208 187,241
---------------- ----------------
Deferred Charges and Other Assets
Deferred STP costs 482,984 484,277
Mirror CWIP asset 275,229 285,431
Income tax related regulatory assets, net 376,703 390,149
Nuclear decommissioning trust 56,272 45,676
Other 94,859 96,193
---------------- ----------------
1,286,047 1,301,726
---------------- ----------------
$ 4,742,352 $ 4,813,310
================ ================
</TABLE>
The accompanying notes to consolidated financial statements as they
relate to CPL are an integral part of these statements.
<PAGE>
CENTRAL POWER AND LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited) (audited)
----------------------- ----------------------
(thousands)
<S> <C> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock: $25 par value
Authorized shares: 12,000,000
Issued and outstanding shares: 6,755,535 $ 168,888 $ 168,888
Paid-in capital 405,000 405,000
Retained earnings 818,692 833,282
--------------- --------------
Total Common Stock Equity 1,392,580 48% 1,407,170 47%
--------------- ------- -------------- -------
Preferred stock 163,204 6% 163,204 5%
CPL-obligated, mandatorily redeemable preferred securities of
subsidiary trust holding solely Junior Subordinated
Debentures of CPL 150,000 5% 150,000 5%
Long-term debt 1,170,325 41% 1,302,266 43%
--------------- ------- -------------- -------
Total Capitalization 2,876,109 100% 3,022,640 100%
--------------- ------- -------------- -------
Current Liabilities
Long-term debt due within twelve months 100,000 28,000
Advances from affiliates 127,781 142,781
Accounts payable 85,108 84,160
Accrued taxes 98,626 13,558
Accumulated deferred income taxes 4,686 21,382
Accrued interest 27,340 28,379
Refund due customers -- 63,713
Over-recovered fuel 6,184 --
Other 20,035 14,551
--------------- --------------
469,760 396,524
--------------- --------------
Deferred Credits
Accumulated deferred income taxes 1,239,306 1,237,386
Investment tax credits 139,815 142,371
Other 17,362 14,389
--------------- --------------
1,396,483 1,394,146
--------------- --------------
$ 4,742,352 $ 4,813,310
=============== ==============
</TABLE>
The accompanying notes to consolidated financial statements as they relate
to CPL are an integral part of these statements.
<PAGE>
CENTRAL POWER AND LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
------------- -------------
(thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 162,339 $ 117,184
Non-cash Items Included in Net Income
Depreciation and amortization 181,237 133,610
Deferred income taxes and investment tax credits (3,886) (11,230)
Provision for CPL 1997 Final Order -- 18,160
Refund due customers (63,713) 62,865
Changes in Assets and Liabilities
Accounts receivable (40,844) (12,490)
Material and supplies 6,822 5,051
Fuel inventory (4,279) 1,713
Fuel recovery 49,413 (27,877)
Accounts payable 10 15,535
Accrued interest 1,039 3,373
Accrued taxes 85,068 14,711
Other (30,774) 13,134
------------- -------------
342,432 333,739
------------- -------------
INVESTING ACTIVITIES
Construction expenditures (84,348) (101,164)
Other (6,400) 6,870
------------- -------------
(90,748) (94,294)
------------- -------------
FINANCING ACTIVITIES
Retirement of long-term debt (28,000) --
Reacquisition of preferred stock (36,000) (84,725)
Trust Preferred Securities -- 144,706
Change in advances from affiliates (15,000) (52,525)
Payment of dividends (172,684) (119,577)
Other -- (41)
------------- -------------
(251,684) (112,162)
------------- -------------
Net Change in Cash and Cash Equivalents -- 127,283
Cash and Cash Equivalents at Beginning of Period -- 3,299
============= =============
Cash and Cash Equivalents at End of Period $ -- $ 130,582
============= =============
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on Trust Preferred Securities) $ 88,021 $ 82,716
============= =============
Income taxes paid $ 19,364 $ 61,510
============= =============
</TABLE>
The accompanying notes to consolidated financial statements as they relate
to CPL are an integral part of these statements.
<PAGE>
CENTRAL POWER AND LIGHT COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 1998 and 1997
Net income for common stock increased $19.2 million to $99.1 million
during the third quarter of 1998 from $79.9 million in the third quarter of
1997. This increase was due primarily to higher non-fuel related revenues as
well as the absence of the impact of the provision for the CPL 1997 Final Order.
The increase in net income for common stock was partially offset by a reduction
in base rates associated with the CPL 1997 Final Order. See NOTE 2. LITIGATION
AND REGULATORY PROCEEDINGS and MD&A, RATES AND REGULATORY MATTERS for more
information related to the CPL 1997 Final Order.
Electric operating revenues increased $9.4 million, or 2%, to $454.4
million during the third quarter of 1998 from $445.0 million during the third
quarter of 1997. The increase was due primarily to higher non-fuel revenues of
$25.4 million as a result of a 9% increase in retail MWH sales relating to
weather-related demand, as well as the absence in 1998 of the provision for the
CPL 1997 Final Rate Order. In addition, electric operating revenues were
affected by a transmission service agreement adjustment related to the final
order in Texas Commission Docket No. 17285. See NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS - CPL and WTU Complaint versus Texas Utilities Electric
Company (Docket No. 17285). These increases were partially offset by lower base
rates as a result of the CPL 1997 Final Rate Order and decreased fuel recovery
of $16.0 million.
Fuel expenses decreased $8.2 million, or 6%, due primarily to a decrease
in average unit fuel costs from $1.90 per MMbtu in 1997 to $1.60 per MMbtu in
1998, which was the result of lower priced spot market natural gas and coal
during the quarter.
Other operating expenses were $55.3 million during the third quarter of
1998, a decrease of $11.2 million from the same period of 1997. The decrease was
due primarily to a reduction in transmission expenses and a reduction in general
and administrative expenses. The decrease in transmission expenses resulted
primarily from a transmission service agreement adjustment related to the final
order in Texas Commission Docket No. 17285. See NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS - CPL and WTU Complaint versus Texas Utilities Electric
Company (Docket No. 17285). Depreciation and amortization expenses increased
$3.6 million for the third quarter of 1998 due primarily to the accelerated
recovery of ECOM property recorded in 1998 related to the CPL 1997 Final Order
as well as increases in depreciable and amortizable plant. Partially offsetting
the increase in depreciation and amortization expenses was reduced depreciation
rates on non-ECOM property related to the CPL 1997 Final Order.
Taxes other than income decreased $5.8 million in the third quarter of
1998 due to a decrease in Texas ad valorem taxes. Operating income taxes
increased $18.6 million in the third quarter of 1998 as compared to the third
quarter of 1997 as a result of an increase in taxable income.
Other income and deductions decreased due primarily to net losses from
equity investments in the nuclear decommissioning trust. The net earnings of the
nuclear decommissioning trust are offset by a like amount of interest expense
shown as interest charges in short-term debt and other. See NOTE 1. PRINCIPLES
OF PREPARATION - CPL Nuclear Decommissioning of STP.
<PAGE>
CENTRAL POWER AND LIGHT COMPANY
RESULTS OF OPERATIONS
Interest charges decreased $6.1 million in the third quarter of 1998
compared to the same period last year due primarily to the maturity of CPL's
$200 million Series BB, 6% First Mortgage Bonds in October 1997 and $28 million
Series J, 6-5/8% First Mortgage Bonds that matured January 1, 1998.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net income for common stock increased $45.5 million to $157.4 million
during the first nine months of 1998 from $112.0 million in the first nine
months of 1997. This increase was due primarily to increased non-fuel revenues
and the absence in 1998 of the 1997 provision for the CPL 1997 Final Order. The
increase in net income for common stock was partially offset by a reduction in
base rates associated with the CPL 1997 Final Order. See NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS and MD&A, RATES AND REGULATORY MATTERS for more
information related to the CPL 1997 Final Order.
Electric operating revenues increased $31.8 million, or 3%, to $1,092.5
million during the first nine months of 1998 from $1,060.7 million during the
first nine months of 1997. This increase was due primarily to increased non-fuel
revenue of $46.3 million as a result of increased weather-related demand and the
absence in 1998 of the provision for rate refund in 1997. In addition, electric
operating revenues were affected by a transmission service agreement adjustment
related to the final order in Texas Commission Docket No. 17285. See NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint versus Texas
Utilities Electric Company (Docket No. 17285). The increase was partially offset
by decreased fuel revenues of $14.5 million and by lower base rates resulting
from the CPL 1997 Final Order.
Fuel and purchased power expenses decreased approximately $0.2 million in
the first nine months of 1998 compared to the first nine months of 1997. Fuel
expenses increased $10.9 million as a result of an 11% increase in generation,
which was offset in part by a reduction in the average unit cost of fuel. The
average unit cost of fuel declined from $1.76 per MMbtu in the first nine months
of 1997 to $1.61 per MMbtu in the first nine months of 1998 due to lower spot
market natural gas prices. Purchased power expenses decreased approximately 28%
from $39.9 million in the first nine months of 1997 to $28.7 million in the
first nine months of 1998 due primarily to decreases in economy energy
purchases.
Other operating expenses were $178.0 million during the first nine months
of 1998, a decrease of $34.4 million compared to the same period in 1997. The
decrease was due to a reduction in transmission expenses and a reduction in
general and administrative expenses. The decrease in transmission expenses
resulted primarily from a transmission service agreement adjustment related to
the final order in Texas Commission Docket No. 17285. See NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS - CPL and WTU Complaint versus Texas Utilities Electric
Company (Docket No. 17285). Maintenance expenses decreased $3.5 million due to
the scheduled refueling of STP Unit 2 during the first half of 1997.
Depreciation and amortization expenses increased $9.6 million, or 8%, for the
first nine months of 1998 compared to the same period last year due primarily to
the accelerated recovery of ECOM property recorded in 1998 related to the CPL
1997 Final Order as well as increases in depreciable and amortizable plant.
Partially offsetting the increase in depreciation and amortization expenses was
lower depreciation rates on non-ECOM property related to the CPL 1997 Final
Order.
<PAGE>
CENTRAL POWER AND LIGHT COMPANY
RESULTS OF OPERATIONS
Taxes, other than income decreased $5.7 million for the first nine months
of 1998 due to a decrease in Texas ad valorem taxes. Operating income taxes
increased $38.0 million in the first nine months of 1998 compared to the first
nine months of 1997 resulting primarily from an increase in taxable income.
Other income and deductions decreased approximately $3.2 million due
primarily to net losses from equity investments in the nuclear decommissioning
trust. The net earnings of the nuclear decommissioning trust are offset by a
like amount of interest expense shown as interest charges in short-term debt and
other. See NOTE 1. PRINCIPLES OF PREPARATION - CPL Nuclear Decommissioning of
STP.
Interest charges decreased $2.3 million during the first nine months of
1998 when compared to the same period of 1997 primarily as a result of the
maturity of CPL's $200 million Series BB, 6% First Mortgage Bonds in October
1997 and $28 million Series J, 6-5/8%, First Mortgage Bonds that matured January
1, 1998. The decrease was offset in part by increased levels of short-term
borrowing and distributions on Trust Preferred Securities.
<PAGE>
PSO
PUBLIC SERVICE COMPANY OF OKLAHOMA
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
<PAGE>
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
1998 1997 1998 1997
-------------- ------------- ------------- --------------
(thousands) (thousands)
<S> <C> <C> <C> <C>
Electric Operating Revenues $ 279,833 $ 222,235 $ 623,110 $ 544,092
Operating Expenses and Taxes
Fuel 104,704 89,577 242,891 211,385
Purchased power 17,594 9,979 44,891 34,419
Other operating 20,102 28,707 75,478 86,782
Maintenance 8,014 7,732 23,899 23,088
Depreciation and amortization 18,202 20,412 54,358 60,229
Taxes, other than income 7,363 6,953 22,583 21,357
Income taxes 40,282 18,738 52,564 28,406
-------------- ------------- ------------- --------------
216,261 182,098 516,664 465,666
-------------- ------------- ------------- --------------
Operating Income 63,572 40,137 106,446 78,426
-------------- ------------- ------------- --------------
Other Income and Deductions
Allowance for equity funds used during construction 293 395 519 652
Other 242 (253) 24 (128)
Non-operating income taxes 56 560 430 1,045
-------------- ------------- ------------- --------------
591 702 973 1,569
-------------- ------------- ------------- --------------
Income Before Interest Charges 64,163 40,839 107,419 79,995
-------------- ------------- ------------- --------------
Interest Charges
Interest on long-term debt 7,287 7,618 22,524 22,855
Interest on short-term debt and other 736 683 3,200 3,349
Distributions on Trust Preferred Securities 1,500 1,499 4,500 2,467
Allowance for borrowed funds used
during construction (281) (221) (943) (1,141)
-------------- ------------- ------------- --------------
9,242 9,579 29,281 27,530
-------------- ------------- ------------- --------------
Net Income 54,921 31,260 78,138 52,465
Less: preferred stock dividends 54 53 160 310
Gain/(loss) on reacquired preferred stock -- (217) -- 4,227
-------------- ------------- ------------- --------------
Net Income for Common Stock $ 54,867 $ 30,990 $ 77,978 $ 56,382
============== ============= ============= ==============
</TABLE>
The accompanying notes to consolidated financial statements as they relate
to PSO are an integral part of these statements.
<PAGE>
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited) (audited)
-------------- --------------
ASSETS (thousands)
<S> <C> <C>
Electric Utility Plant
Production $ 916,581 $ 907,735
Transmission 378,495 375,111
Distribution 852,010 818,806
General 207,885 197,264
Construction work in progress 31,889 40,992
-------------- --------------
2,386,860 2,339,908
Less - Accumulated depreciation and amortization 1,083,543 1,031,322
-------------- --------------
1,303,317 1,308,586
-------------- --------------
Current Assets
Cash 7,524 2,171
Advances to affiliates 8,366 --
Accounts receivable 34,349 34,974
Materials and supplies, at average cost 33,781 32,211
Fuel inventory 13,477 11,427
Accumulated deferred income taxes 6,297 --
Prepayments and other 1,027 3,366
-------------- --------------
104,821 84,149
-------------- --------------
Deferred Charges and Other Assets 57,555 54,946
-------------- --------------
$ 1,465,693 $ 1,447,681
============== ==============
</TABLE>
The accompanying notes to consolidated financial statements as they relate to
PSO are an integral part of these statements.
<PAGE>
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited) (audited)
--------------- ----------------
CAPITALIZATION AND LIABILITIES (thousands)
<S> <C> <C> <C> <C>
Capitalization
Common stock: $15 par value
Authorized shares: 11,000,000
Issued shares: 10,482,000
Outstanding shares: 9,013,000 $ 157,230 $ 157,230
Paid-in capital 180,000 180,000
Retained earnings 172,974 136,996
--------------- ----------------
Total Common Stock Equity 510,204 53% 474,226 49%
--------------- --------- ---------------- ---------
Preferred stock 5,287 1% 5,287 --%
PSO-obligated, mandatorily redeemable preferred securities of
subsidiary trust holding solely Junior Subordinated
Debentures of PSO 75,000 8% 75,000 8%
Long-term debt 367,724 38% 421,821 43%
--------------- --------- ---------------- ---------
Total Capitalization 958,215 100% 976,334 100%
--------------- --------- ---------------- ---------
Current Liabilities
Advances from affiliates -- 4,874
Payables to affiliates 5,378 29,011
Accounts payable 45,268 55,179
Payables to customers 17,939 18,837
Accrued taxes 49,009 --
Accumulated deferred income taxes -- 2,262
Accrued interest 10,396 9,090
Other 9,170 4,178
--------------- ----------------
137,160 123,431
--------------- ----------------
Deferred Credits
Accumulated deferred income taxes 279,177 258,848
Investment tax credits 39,812 41,160
Income tax related regulatory liabilities, net 39,235 41,793
Other 12,094 6,115
--------------- ----------------
370,318 347,916
--------------- ----------------
$1,465,693 $1,447,681
=============== ================
</TABLE>
The accompanying notes to consolidated financial statements as they relate
to PSO are an integral part of these statements.
<PAGE>
PUBLIC SERVICE COMPANY OF OKLAHOMA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
---------------------------
1998 1997
------------ -----------
OPERATING ACTIVITIES (thousands)
<S> <C> <C>
Net Income $78,138 $52,465
Non-cash Items Included in Net Income
Depreciation and amortization 56,616 64,417
Deferred income taxes and investment tax credits 7,864 (9,814)
Refund due customers -- 29,000
Changes in Assets and Liabilities
Accounts receivable 625 (16,050)
Prepayments and other 2,339 2,562
Accounts payable (34,929) (17,439)
Accrued taxes 49,696 26,641
Other 5,604 (2,960)
------------ -----------
165,953 128,822
------------ -----------
INVESTING ACTIVITIES
Construction expenditures (45,004) (55,851)
Other (4,966) (4,734)
------------ -----------
(49,970) (60,585)
------------ -----------
FINANCING ACTIVITIES
Change in advances from affiliates (4,874) (42,867)
Proceeds from the issuance of Trust Preferred Securities -- 72,506
Reacquisition of long-term debt (55,231) --
Reacquisition of preferred stock -- (10,312)
Payment of dividends (42,159) (40,461)
------------ -----------
(102,264) (21,134)
------------ -----------
Net Change in Cash and Cash Equivalents 13,719 47,103
Cash and Cash Equivalents at Beginning of Period 2,171 1,479
============ ===========
Cash and Cash Equivalents at End of Period $15,890 $48,582
============ ===========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on Trust Preferred Securities) $26,713 $24,501
============ ===========
Income taxes paid $ 6,606 $22,095
============ ===========
</TABLE>
The accompanying notes to consolidated financial statements as they
relate to PSO are an integral part of these statements.
<PAGE>
PUBLIC SERVICE COMPANY OF OKLAHOMA
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
Net income for common stock was $54.9 million for the third quarter of
1998, a 77% increase, or $23.9 million above the equivalent period of 1997. The
increase resulted primarily from higher non-fuel revenues, the absence in 1998
of a provision for rate refund and decreased depreciation expenses. The increase
in net income was offset in part by lower base rates in 1998 as a result of the
PSO 1997 Rate Settlement Agreement.
Electric operating revenues were $279.8 million during the third quarter
of 1998, a 26% increase from $222.2 million in the third quarter of 1997. This
increase was due primarily to increases in non-fuel and fuel-related revenues of
$26.4 million and $19.4 million, respectively. The increase in non-fuel revenues
was due primarily to a 15% increase in retail MWH sales resulting from warmer
weather as well as the absence in 1998 of a $25.9 million provision for rate
refund. Additionally, this increase was partially offset by lower base rates
resulting from the PSO 1997 Rate Settlement Agreement in the amount of $14.1
million and a decrease in transmission related revenues resulting from changes
to CSW's Transmission Coordination Agreement pending before the FERC. See NOTE
2. LITIGATION AND REGULATORY PROCEEDINGS - Transmission Coordination Agreement.
The increase in fuel revenues was due primarily to higher fuel expenses, as
discussed below.
Fuel expenses increased $15.1 million, or 17%, during the third quarter of
1998 compared to the third quarter of 1997 due primarily to a $15.5 million
increase in the recovery of deferred fuel costs and a 10% increase in generation
due primarily to higher weather-related demand. The increase in fuel expenses
was offset in part by lower average unit fuel costs. The average unit costs of
fuel for the quarter declined from $2.02 per MMbtu in 1997 to $1.82 per MMbtu in
1998 due primarily to lower spot market natural gas and coal prices. Purchased
power expenses increased to $17.6 million in the third quarter of 1998 from
$10.0 million for the same period in 1997. This increase was due primarily to
more off-system and emergency pool energy purchases as well as increased
capacity commitments due primarily to higher weather-related demand.
Other operating expenses were $20.1 million during the third quarter of
1998, a decrease of $8.6 million from the comparable period of 1997. The
decrease in other operating expenses was due primarily to lower transmission
expenses resulting primarily from a transmission service agreement adjustment
related to the final order in Texas Commission Docket 17285. See NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint versus Texas
Utilities Electric Company (Docket No. 17285). Depreciation and amortization
expenses decreased 11% to $18.2 million in the third quarter of 1998 from $20.4
million in the third quarter of 1997. This decrease was due primarily to lower
depreciation rates as a result of the PSO 1997 Rate Settlement Agreement, offset
in part by an increase in depreciable property. Operating income taxes increased
to $40.3 million in the third quarter 1998 compared to $18.7 million in the
third quarter of 1997 due primarily to higher taxable income in 1998.
<PAGE>
PUBLIC SERVICE COMPANY OF OKLAHOMA
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net income for common stock was $78.0 million for the first nine months of
1998, a 38% increase when compared to $56.4 million for the equivalent period of
1997. The increase resulted from higher non-fuel revenues, the absence in 1998
of a provision for rate refund and decreased depreciation expenses. The increase
in net income was offset in part by lower base rates in 1998 as a result of the
PSO 1997 Rate Settlement Agreement and the absence in 1998 of a $4.2 million
gain on the reacquisition of preferred stock.
Electric operating revenues were $623.1 million during the first nine
months of 1998, a 15% increase from $544.1 million during the same period of
1997. This increase was due primarily to higher non-fuel revenues of $40.4
million and fuel-related revenues of $39.3 million. The increase in non-fuel
revenues was due primarily to an 11% increase in retail MWH sales resulting from
warmer weather as well as the absence in 1998 of a $29.0 million provision for
rate refund. Additionally, this increase was partially offset by lower base
rates resulting from the PSO 1997 Rate Settlement Agreement in the amount of
$29.8 million and a decrease in transmission related revenues resulting from
changes to CSW's Transmission Coordination Agreement pending before the FERC.
See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - Transmission Coordination
Agreement. The increase in fuel revenues was due primarily to higher fuel
expenses, as discussed below.
Fuel expenses increased $31.5 million, or 15%, during the first nine
months of 1998 when compared to the same period of 1997 due primarily to a $25.2
million increase in the recovery of deferred fuel costs and a 10% increase in
generation due primarily to higher weather-related demand. The increase in fuel
expenses was offset in part by lower average unit fuel costs. The average unit
cost of fuel declined from $1.95 per MMbtu in the first nine months of 1997 to
$1.80 per MMbtu in the first nine months of 1998 due primarily to lower spot
market natural gas and coal prices. Purchased power expenses increased 30% to
$44.9 million for the first nine months of 1998 from $34.4 million in the same
period of 1997. This increase was due primarily to higher off-system and
emergency pool energy purchases associated with higher weather-related demand in
the first nine months of 1998 and a plant outage in the first quarter of 1998,
partially offset by lower cogeneration purchases.
Other operating expenses were $75.5 million for the first nine months of
1998, a decrease of $11.3 million from the $86.8 million for the same period in
1997. The decrease in other operating expenses was due primarily to lower
transmission expenses resulting primarily from a transmission service agreement
adjustment related to the final order in Texas Commission Docket 17285. See NOTE
2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint versus Texas
Utilities Electric Company (Docket No. 17285). Additionally, lower employee
benefit expenses offset in part by higher meter and overhead line expenses
contributed to the decline in other operating expenses. Depreciation and
amortization expenses decreased 10% to $54.4 million in 1998 from $60.2 million
in 1997. This decrease was due primarily to lower depreciation rates as a result
of the PSO 1997 Rate Settlement Agreement offset in part by an increase in
depreciable property.
Taxes other than income were $1.2 million higher in the first nine months
of 1998 when compared to the same period in 1997 as a result of higher ad
valorem tax expenses. Operating income taxes were $52.6 million in the first
nine months of 1998 compared to $28.4 million in the same period in 1997 due
<PAGE>
PUBLIC SERVICE COMPANY OF OKLAHOMA
RESULTS OF OPERATIONS
primarily to higher taxable income in 1998. Interest charges increased $1.8
million, or 6%, during the first nine months of 1998 when compared to the same
period of 1997 as a result of higher distributions on Trust Preferred
Securities.
<PAGE>
SWEPCO
SOUTHWESTERN ELECTRIC POWER COMPANY
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
<PAGE>
SOUTHWESTERN ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------- ------------- -------------
(thousands) (thousands)
<S> <C> <C> <C> <C>
Electric Operating Revenues $311,549 $291,539 $756,044 $722,146
------------ ------------- ------------- -------------
Operating Expenses and Taxes
Fuel 124,210 116,294 298,530 294,876
Purchased power 12,230 7,456 30,234 17,895
Other operating 36,168 35,318 100,490 101,074
Maintenance 12,341 9,984 35,770 31,424
Depreciation and amortization 24,675 24,138 74,303 71,166
Taxes, other than income 14,239 14,339 43,320 40,432
Income taxes 28,164 22,561 45,416 39,399
------------ ------------- ------------- -------------
252,027 230,090 628,063 596,266
------------ ------------- ------------- -------------
Operating Income 59,522 61,449 127,981 125,880
------------- ------------- ------------- -------------
Other Income and Deductions
Allowance for equity funds used during construction 219 413 925 589
Other (462) 1,902 (564) 1,109
Non-operating income taxes 522 (12) 1,734 1,162
------------- ------------- ------------- -------------
279 2,303 2,095 2,860
------------- ------------- ------------- -------------
Income Before Interest Charges 59,801 63,752 130,076 128,740
------------- ------------- ------------- -------------
Interest Charges
Interest on long-term debt 9,808 9,811 29,426 30,631
Distributions on Trust Preferred Securities 2,166 2,167 6,497 3,565
Interest on short-term debt and other 1,566 1,028 5,763 4,619
Allowance for borrowed funds used during construction (369) (202) (1,066) (944)
------------- ------------- ------------- -------------
13,171 12,804 40,620 37,871
------------- ------------- ------------- -------------
Net Income 46,630 50,948 89,456 90,869
Less: preferred stock dividends 57 589 648 1,922
Gain/(loss) on reacquired preferred stock -- (528) (855) 1,652
============= ============= ============= =============
Net Income for Common Stock $ 46,573 $ 49,831 $ 87,953 $ 90,599
============= ============= ============= =============
</TABLE>
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
<PAGE>
SOUTHWESTERN ELECTRIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited) (audited)
---------------- -----------------
(thousands)
<S> <C> <C>
ASSETS
Electric Utility Plant
Production $ 1,399,156 $ 1,391,676
Transmission 471,442 456,401
Distribution 909,790 870,378
General 320,644 311,323
Construction work in progress 37,016 51,665
---------------- -----------------
3,138,048 3,081,443
Less - Accumulated depreciation 1,300,827 1,225,865
---------------- -----------------
1,837,221 1,855,578
---------------- -----------------
Current Assets
Cash 5,077 2,298
Accounts receivable 87,555 81,507
Materials and supplies, at average cost 24,261 24,523
Fuel inventory 37,916 26,415
Under-recovered fuel cost 7,697 13,013
Prepayments and other 18,385 13,678
---------------- -----------------
180,891 161,434
---------------- -----------------
Deferred Charges and Other Assets 78,948 77,734
---------------- -----------------
$ 2,097,060 $ 2,094,746
================ =================
</TABLE>
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
<PAGE>
SOUTHWESTERN ELECTRIC POWER COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited) (audited)
----------------- -----------------
(thousands)
<S> <C> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock: $18 par value
Authorized shares: 7,600,000
Issued and outstanding shares: 7,536,640 $ 135,660 $ 135,660
Paid-in capital 245,000 245,000
Retained earnings 334,003 324,050
---------------- ----------------
Total Common Stock Equity 714,663 54% 704,710 51%
---------------- --------- ---------------- ---------
Preferred stock
Not subject to mandatory redemption 4,707 4,709
Subject to mandatory redemption -- 25,930
---------------- ----------------
4,707 --% 30,639 2%
SWEPCO-obligated, mandatorily redeemable preferred securities
of subsidiary trust holding solely Junior Subordinated
Debentures of SWEPCO 110,000 8% 110,000 8%
Long-term debt 506,304 38% 547,751 39%
--------- ---------
---------------- ----------------
Total Capitalization 1,335,674 100% 1,393,100 100%
---------------- --------- ---------------- ---------
Current Liabilities
Long-term debt and preferred stock due within twelve months 43,932 3,555
Advances from affiliates 11,917 25,175
Accounts payable 70,104 73,582
Payables to affiliates 53,705 63,583
Customer deposits 14,400 14,359
Accrued taxes 57,093 12,884
Accumulated deferred income taxes 4,187 4,594
Accrued interest 12,727 13,425
Other 14,017 9,551
---------------- ----------------
282,082 220,708
---------------- ----------------
Deferred Credits
Accumulated deferred income taxes 395,695 395,909
Investment tax credits 63,371 66,845
Income tax related regulatory liabilities, net 5,930 10,072
Other 14,308 8,112
---------------- ----------------
479,304 480,938
---------------- ----------------
$ 2,097,060 $ 2,094,746
================ ================
</TABLE>
The accompanying notes to consolidated financial statements as they relate
to SWEPCO are an integral part of these statements.
<PAGE>
SOUTHWESTERN ELECTRIC POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1998 1997
------------ -------------
(thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 89,456 $ 90,869
Non-cash Items Included in Net Income
Depreciation and amortization 78,353 74,775
Deferred income taxes and investment tax credits (8,237) 1,956
Changes in Assets and Liabilities
Accounts receivable (6,048) 17,146
Fuel inventory (11,501) 27,001
Fuel recovery 5,316 (9,862)
Deferred charges and other assets (1,214) (15,835)
Accounts payable (2,403) 10,126
Payables to affiliates (9,878) (8,416)
Accrued taxes 44,209 16,488
Other current liabilities 4,466 (15,151)
Other deferred credits 6,196 (1,206)
Other (3,209) 2,975
------------ -------------
185,506 190,866
------------ -------------
INVESTING ACTIVITIES
Construction expenditures (55,690) (73,268)
Other (4,456) (2,990)
------------ -------------
(60,146) (76,258)
------------ -------------
FINANCING ACTIVITIES
Redemption of preferred stock (27,988) (16,210)
Retirement of long-term debt (2,209) (52,278)
Change in advances from affiliates (13,258) (57,495)
Trust Preferred Securities -- 106,245
Payment of dividends (79,126) (65,134)
------------ -------------
(122,581) (84,872)
------------ -------------
Net Change in Cash and Cash Equivalents 2,779 29,736
Cash and Cash Equivalents at Beginning of Period 2,298 1,879
============ =============
Cash and Cash Equivalents at End of Period $ 5,077 $ 31,615
============ =============
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on Trust Preferred Securities) $ 39,257 $ 39,119
============ =============
Income taxes paid $ 30,849 $ 33,507
============ =============
</TABLE>
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
<PAGE>
SOUTHWESTERN ELECTRIC POWER COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
Net income for common stock for the third quarter of 1998 was $46.6
million, a decrease of $3.3 million, or 7%, from the same period of 1997. The
decrease resulted primarily from increased operating expenses and taxes and the
absence in 1998 of the gain on the sale of lignite properties recorded in the
third quarter of 1997. The decrease was offset in part by increased non-fuel
revenues.
Electric operating revenues increased $20.0 million, or 7%, to $311.5
million during the third quarter of 1998 from $291.5 million during the third
quarter of 1997. The increase was due primarily to a $17.0 million increase in
non-fuel revenues as a result of an 8% increase in retail MWH sales attributable
to warmer weather. Fuel revenues increased $6.7 million as discussed below. The
increase in electric operating revenues was partially offset by a $3.7 million
transmission service agreement adjustment related to the final order in Texas
Commission Docket No. 17285. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS -
CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No.
17285).
Fuel expenses increased $7.9 million, or 7%, for the third quarter of 1998
compared to the third quarter of 1997 due primarily to increased natural gas
generation associated with weather-related demand. The increase in fuel expenses
was offset in part by a decrease in average unit fuel cost for natural gas from
$2.45 per MMbtu in 1997 to $2.08 per MMbtu in 1998 as a result of lower priced
spot-market natural gas. Fuel expenses also increased as a result of a
transmission service agreement adjustment related to the final order in Texas
Commission Docket No. 17285. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS -
CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No.
17285). Purchased power expenses for the third quarter of 1998 increased $4.8
million compared to the same period of 1997 due primarily to an increase in
economy energy purchases.
Other operating and maintenance expenses increased approximately $1.0
million as a result of increased production steam generation expenses and higher
administrative and general expenses, offset in part by decreased customer
assistance expenses and lower transmission expenses. The decrease in
transmission expenses resulted from a transmission service agreement adjustment
related to the final order in Texas Commission Docket No. 17285. See NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint versus Texas
Utilities Electric Company (Docket No. 17285). The decrease in transmission
expenses was offset in part by the accrual of expenses related to CSW's
transmission coordination agreement currently pending before the FERC. See NOTE
2. LITIGATION AND REGULATORY PROCEEDINGS - Transmission Coordination Agreement.
Maintenance expenses increased $2.4 million, or 24%, due primarily to increased
power plant maintenance. Operating income taxes increased $5.6 million, or 25%,
due primarily to increased taxable income.
Other income and deductions decreased $2.0 million for the third quarter
of 1998 compared to the same period of 1997 due primarily to the absence in 1998
of a gain on the sale of lignite properties recorded in the third quarter of
1997.
<PAGE>
SOUTHWESTERN ELECTRIC POWER COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net income for common stock for the nine months ended September 30, 1998
was $88.0 million, a decrease of $2.6 million, or 3%, from $90.6 million for the
same period in 1997. The decrease in net income resulted primarily from an
increase in operating and maintenance expenses, increased interest charges, a
loss on reacquisition of preferred stock in 1998 and the absence in 1998 of the
gain on reacquisition of preferred stock recorded in 1997. The decrease in net
income was offset in part by increased non-fuel revenues.
Electric operating revenues increased $33.9 million, or 5%, to $756.0
million for the nine months ended September 30, 1998 from $722.1 million during
the same period in 1997. The increase was due primarily to higher non-fuel
revenues of $33.2 million resulting from a 7% increase in weather-related retail
MWH sales and increased fuel revenues of $11.2 million. The increase in electric
operating revenues was offset in part by a transmission service agreement
adjustment related to the final order in Texas Commission Docket No. 17285, a
provision for rate refund of $3.6 million in connection with the annual
determination of cost of service formula rates for SWEPCO's wholesale customers
and a $3.2 million reduction in fuel revenues in accordance with a Texas
Commission order in SWEPCO's fuel reconciliation regarding transmission
equalization expense recovery. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS
- - CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No.
17285).
Fuel expenses increased $3.7 million for the nine months ended September
30, 1998 when compared to the same period in 1997 due primarily to an increase
in weather-related natural gas generation. The increase in fuel expenses was
offset in part by a decrease in the average unit fuel cost for natural gas from
$2.49 per MMbtu in 1997 to $2.19 per MMbtu in 1998 which resulted from purchases
of lower priced spot-market natural gas. Fuel expenses increased due in part to
a transmission service agreement adjustment related to the final order in Texas
Commission Docket No. 17285. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS -
CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No.
17285). Purchased power expenses for the nine months ended September 30, 1998
increased $12.3 million when compared to the same period in 1997 due primarily
to an increase in economy energy purchases.
Other operating expenses decreased slightly during the first nine months
of 1998 from the comparable period of 1997. The decrease was due primarily to
decreased transmission expenses and decreased customer assistance expenses,
offset in part by increased steam generation expenses. The decrease in
transmission expenses resulted from a transmission service agreement adjustment
related to the final order in Texas Commission Docket No. 17285. See NOTE 2.
LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint versus Texas
Utilities Electric Company (Docket No. 17285). The decrease in transmission
expenses was offset in part by increased expenses related to CSW's transmission
coordination agreement currently pending before the FERC. See NOTE 2. LITIGATION
AND REGULATORY PROCEEDINGS - Transmission Coordination Agreement. Maintenance
expenses increased $4.3 million, or 14%, as a result of increased overhead lines
expenses from additional tree-trimming maintenance expenses, wind storm damage
and increased power station maintenance expenses. Depreciation and amortization
expenses increased $3.1 million, or 4%, for the first nine months of 1998 due
primarily to increases in depreciable and amortizable plant.
<PAGE>
SOUTHWESTERN ELECTRIC POWER COMPANY
RESULTS OF OPERATIONS
Taxes, other than income increased $2.9 million, or 7%, as a result of
increased ad valorem taxes due to higher assessed values. Operating income taxes
increased $6.0 million, or 15%, due primarily to increased taxable income.
Other income and deductions decreased in the first nine months of 1998
compared to the same period of 1997 due primarily to the absence in 1998 of a
gain on the sale of lignite properties recorded in the third quarter of 1997,
offset in part by charges associated with the write-off of certain plant
development costs recorded in the first quarter of 1997.
Interest charges increased $2.7 million due primarily to distributions on
Trust Preferred Securities, which were outstanding for only five months in 1997.
<PAGE>
WTU
WEST TEXAS UTILITIES COMPANY
PART I. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
<PAGE>
WEST TEXAS UTILITIES COMPANY
STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------- ------------- ------------
(thousands) (thousands)
<S> <C> <C> <C> <C>
Electric Operating Revenues $ 147,343 $ 124,984 $ 335,644 $ 308,867
Operating Expenses and Taxes
Fuel 38,546 34,450 95,231 94,361
Purchased power 17,169 16,559 37,831 34,984
Other operating 19,637 20,920 62,496 64,038
Maintenance 4,911 3,239 11,816 10,393
Depreciation and amortization 10,719 10,741 32,108 31,067
Taxes, other than income 5,827 6,347 18,008 18,148
Income taxes 16,623 9,139 21,705 12,425
------------ ------------- ------------- ------------
113,432 101,395 279,195 265,416
------------ ------------- ------------- ------------
Operating Income 33,911 23,589 56,449 43,451
------------ ------------- ------------- ------------
Other Income and Deductions
Allowance for equity funds used during construction 193 26 421 125
Other (22) (48) 1,476 176
Non-operating income taxes 259 198 282 373
------------ ------------- ------------- ------------
430 176 2,179 674
------------ ------------- ------------- ------------
Income Before Interest Charges 34,341 23,765 58,628 44,125
------------ ------------- ------------- ------------
Interest Charges
Interest on long-term debt 5,088 5,088 15,264 15,264
Interest on short-term debt and other 1,319 1,127 3,405 3,912
Allowance for borrowed funds used
during construction (182) (132) (469) (599)
------------ ------------- ------------- ------------
6,225 6,083 18,200 18,577
------------ ------------- ------------- ------------
Net Income 28,116 17,682 40,428 25,548
Less: preferred stock dividends 26 26 78 118
Gain/(loss) on reacquired preferred stock -- (101) -- 1,082
------------ ------------- ------------- ------------
Net Income for Common Stock $ 28,090 $ 17,555 $ 40,350 $ 26,512
============ ============= ============= ============
</TABLE>
The accompanying notes to financial statements as they relate to WTU
are an integral part of these statements.
<PAGE>
WEST TEXAS UTILITIES COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited) (audited)
-------------- --------------
ASSETS (thousands)
<S> <C> <C>
ELECTRIC UTILITY PLANT
Production $ 419,302 $ 417,849
Transmission 212,887 208,905
Distribution 378,129 363,911
General 107,911 104,026
Construction work in progress 24,076 14,154
---------- ----------
1,142,305 1,108,845
Less - Accumulated depreciation 466,493 441,281
---------- ----------
675,812 667,564
---------- ----------
CURRENT ASSETS
Cash 3,160 811
Advances to affiliates 14,618 19,802
Accounts receivable 42,747 10,570
Materials and supplies, at average cost 13,266 14,246
Fuel inventory 13,215 12,471
Under-recovered fuel costs 10,597 11,968
Prepayments and other 6,889 4,006
---------- ----------
104,492 73,874
---------- ----------
DEFERRED CHARGES AND OTHER ASSETS
Deferred Oklaunion costs 15,842 18,637
Restructuring costs 7,550 8,966
Other 33,605 33,107
---------- ----------
56,997 60,710
---------- ----------
$ 837,301 $ 802,148
========== ==========
</TABLE>
The accompanying notes to financial statements as they relate to WTU
are an integral part of these statements.
<PAGE>
WEST TEXAS UTILITIES COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(unaudited) (audited)
------------- -------------
CAPITALIZATION AND LIABILITIES (thousands)
<S> <C> <C> <C> <C>
CAPITALIZATION
Common stock: $25 par value
Authorized shares: 7,800,000
Issued and outstanding shares: 5,488,560 $ 137,214 $ 137,214
Paid-in capital 2,236 2,236
Retained earnings 141,829 119,479
------------- -------------
281,279 50% 258,929 48%
------------- --------- ------------- ----------
Preferred stock 2,482 --% 2,483 --%
Long-term debt 281,318 50% 278,640 52%
------------- --------- ------------- ----------
565,079 100% 540,052 100%
------------- --------- ------------- ----------
CURRENT LIABILITIES
Payables to affiliates 20,496 21,569
Accounts payable 29,208 29,521
Accrued taxes 25,136 11,375
Accumulated deferred income taxes 908 203
Accrued interest 8,024 4,525
Other 5,492 3,859
------------- -------------
89,264 71,052
------------- -------------
DEFERRED CREDITS
Accumulated deferred income taxes 141,064 149,346
Investment tax credits 26,927 27,918
Income tax related regulatory liabilities, net 10,673 9,482
Other 4,294 4,298
------------- -------------
182,958 191,044
------------- -------------
$ 837,301 $ 802,148
============= =============
</TABLE>
The accompanying notes to financial statements as they relate to WTU
are an integral part of these statements.
<PAGE>
WEST TEXAS UTILITIES COMPANY
STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------------
1998 1997
-------------- --------------
OPERATING ACTIVITIES (thousands)
<S> <C> <C>
Net Income $ 40,428 $ 25,548
Non-cash Items Included in Net Income
Depreciation and amortization 32,890 32,286
Deferred income taxes and investment tax credits (7,377) 3,077
Changes in Assets and Liabilities
Accounts receivable (32,177) (6,741)
Accounts payable (313) (1,163)
Accrued taxes 13,761 103
Fuel recovery 1,371 (6,581)
Other (3,241) 9,149
-------------- --------------
45,342 55,678
-------------- --------------
INVESTING ACTIVITIES
Construction expenditures (33,049) (21,448)
Other 2,950 (1,008)
-------------- --------------
(30,099) (22,456)
-------------- --------------
FINANCING ACTIVITIES
Change in advances from affiliates -- (11,503)
Redemption of preferred stock -- (2,727)
Payment of dividends (18,078) (18,159)
-------------- --------------
(18,078) (32,389)
-------------- --------------
Net Change in Cash and Cash Equivalents (2,835) 833
Cash and Cash Equivalents at Beginning of Period 20,613 664
============== ==============
Cash and Cash Equivalents at End of Period $ 17,778 $ 1,497
============== ==============
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $ 9,813 $ 11,773
============== ==============
Income taxes paid $ 15,042 $ 9,407
============== ==============
</TABLE>
The accompanying notes to financial statements as they relate to WTU are an
integral part of these statements.
<PAGE>
WEST TEXAS UTILITIES COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
Net Income for common stock was $28.1 million for the third quarter of
1998 compared to $17.6 million in the third quarter of 1997. The increase in net
income was primarily a result of an increase in non-fuel revenues, a
transmission service agreement adjustment and a transmission coordination
agreement accrual, as discussed below. The increase in net income was partially
offset by an increase in operating expenses and taxes.
Electric operating revenues were $147.3 million in the third quarter of
1998, an 18% increase from $125.0 million in the third quarter of 1997. This
increase was due primarily to increases in non-fuel revenues of $12.0 million
and fuel revenues of $10.4 million. The increase in non-fuel revenues was due
primarily to a 9% increase in retail MWH sales resulting from favorable weather.
Included in non-fuel revenues were additional transmission revenues resulting
from changes to CSW's Transmission Coordination Agreement currently pending
before the FERC. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS -
Transmission Coordination Agreement. Fuel revenues were higher as a result of
higher fuel costs, as discussed below.
Fuel expenses were $38.5 million for the third quarter of 1998, an
increase of $4.1 million, or 12%, when compared to the third quarter of 1997 due
primarily to a 16% increase in generation. The increase in generation was due
primarily to favorable weather conditions. Partially offsetting the increase in
fuel expenses was a lower average unit cost of fuel. The average unit cost of
fuel declined from $1.97 per MMbtu in the third quarter of 1997 to $1.81 per
MMbtu in the third quarter of 1998. This decline in the average unit cost of
fuel was due primarily to lower spot market natural gas and coal prices.
Other operating expenses declined $1.3 million in the third quarter of
1998 when compared to third quarter of 1997 as a result of lower employee
related expenses as well as a decrease in transmission expenses. The decrease in
transmission expenses resulted primarily from a transmission service agreement
adjustment related to the final order in Texas Commission Docket No. 17285. See
NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS - CPL and WTU Complaint versus
Texas Utilities Electric Company (Docket No. 17285). Maintenance expenses rose
$1.7 million from the comparable period in 1997. This increase was primarily a
result of the re-activation of generating stations due primarily to increased
customer demand.
Operating income taxes increased $7.5 million in the third quarter of 1998
as compared to the third quarter in 1997 due primarily to higher taxable income.
<PAGE>
WEST TEXAS UTILITIES COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net income for common stock was $40.4 million during the first nine months
of 1998 compared to $26.5 million in the first nine months of 1997, an increase
of $13.8 million, or 52%. The rise in net income was due largely to increases in
non-fuel revenues, interest income, a transmission service agreement adjustment
and a transmission coordination agreement accrual, as discussed below. The
increase in net income was partially offset by an increase in operating expenses
and taxes. The change also reflects the recognition of the gain on reacquired
preferred stock recorded in the first nine months of 1997.
Electric operating revenues were $335.6 million for the first nine months
of 1998, an increase of $26.8 million, or 9%, when compared to the first nine
months of 1997. This increase was due primarily to an increase in non-fuel
revenues of $18.6 million and fuel revenues of $8.2 million. The increase in
non-fuel revenues was due primarily to a 5% increase in retail MWH sales
resulting from favorable weather. Included in non-fuel revenues were additional
transmission revenues resulting from changes to CSW's Transmission Coordination
Agreement currently pending before the FERC. See NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS Transmission Coordination Agreement. Fuel revenues were
higher as a result of higher fuel costs, as discussed below.
Fuel costs increased to $95.2 million in the first nine months of 1998
from $94.4 million in the first nine months of 1997 due primarily to a 6%
increase in generation. The increase in generation was due largely to favorable
weather conditions and increase retail sales. Partially offsetting the increase
in fuel expenses was a lower average unit cost of fuel. The average unit cost of
fuel declined from $2.04 per MMbtu in the first nine months of 1997 to $1.87 per
MMbtu in the first nine months of 1998. This decline in the average unit cost of
fuel was due primarily to lower spot market natural gas and coal prices.
Purchased power expenses increased $2.8 million, or 8%, for the first nine
months of 1998 compared to the first nine months of 1997 as a result of
additional economy energy purchases.
Other operating expenses declined $1.5 million in the first nine months of
1998 when compared to the same period of 1997 resulting from a reduction in
transmission expenses due to a transmission service agreement adjustment related
to the final order in Texas Commission Docket No. 17285. See NOTE 2. LITIGATION
AND REGULATORY PROCEEDINGS - CPL and WTU Complaint versus Texas Utilities
Electric Company (Docket No. 17285). Additionally, other operating expenses were
affected by lower employee related expenses. The decrease in other operating
expenses was offset in part by higher production expenses resulting from the
re-activation of generating stations due primarily to increased customer demand.
Maintenance expenses rose $1.4 million from the comparable period in 1997 as a
result of the previously mentioned re-activation of generating stations.
Operating income taxes increased to $21.7 million for the first nine
months of 1998 compared to $12.4 million in the first nine months of 1997 as a
result of higher taxable income. Other income and deductions increased $1.5
million for the first nine months of 1998 compared to the same period in 1997
due primarily to an increase in interest income.
<PAGE>
INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS
BY REGISTRANTS
NOTE 1. PRINCIPLES OF PREPARATION CSW, CPL, PSO, SWEPCO, WTU
NOTE 2. LITIGATION AND REGULATORY
PROCEEDINGS CSW, CPL, PSO, SWEPCO, WTU
NOTE 3. COMMITMENTS AND CONTINGENT
LIABILITIES CSW, CPL, PSO, SWEPCO, WTU
NOTE 4. COMMON STOCK AND DIVIDENDS CSW, CPL, PSO, SWEPCO, WTU
NOTE 5. INCOME TAXES CSW, CPL, PSO, SWEPCO, WTU
NOTE 6. PROPOSED AEP MERGER CSW, CPL, PSO, SWEPCO, WTU
NOTE 7. LONG-TERM FINANCING CSW, CPL, PSO
NOTE 8. NEW ACCOUNTING STANDARDS CSW, CPL, PSO, SWEPCO, WTU
NOTE 9. EXTRAORDINARY ITEM CSW
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. PRINCIPLES OF PREPARATION
The condensed financial statements of the Registrants have been prepared
by each Registrant pursuant to the rules and regulations of the SEC. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although each
Registrant believes that the disclosures are adequate to make the information
presented not misleading. These condensed financial statements should be read in
conjunction with the financial statements and the notes included in the
Registrants' Combined Annual Report on Form 10-K for the year ended December 31,
1997 and the Registrants' Combined Quarterly Reports on Form 10-Q for the
quarters ended March 31, 1998 and June 30, 1998.
The unaudited financial information reflects all adjustments which are, in
the opinion of management of such Registrant, necessary for a fair statement of
the results of operations for the interim periods. Information for quarterly
periods is affected by seasonal variations in sales, rate changes, timing of
fuel expense recovery and other factors.
The financial statements of foreign operations have been translated from
the local currency to U.S. dollars in accordance with SFAS No. 52. SFAS No. 52
requires the translation of income statement items at average exchange rates and
balance sheet accounts at current exchange rates. All balance sheet translation
adjustments are recorded directly to Accumulated other comprehensive income 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 is shown on
CSW's consolidated statements of cash flows in Effect of exchange rate changes
on cash and cash equivalents.
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 condition.
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 escalation 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
$258 million in 1995 dollars based on a site specific study completed in 1995.
CPL is accruing and recovering these decommissioning costs through rates based
on the service life of STP at a rate of $8.2 million per year. The funds are
deposited with a trustee under the terms of an irrevocable trust and are
reflected in CPL's consolidated balance sheets as Nuclear decommissioning trust
with a corresponding amount accrued in Accumulated depreciation. On CSW's
consolidated balance sheets, the irrevocable trust is included in Deferred
<PAGE>
Charges and Other Assets, Other with a corresponding amount accrued in
Accumulated depreciation. In CSW's and CPL's consolidated statements of income,
the interest income related to the irrevocable trust is recorded in Other Income
and Deductions, Other. In CPL's consolidated statements of income, the interest
expense related to the irrevocable trust is recorded in Interest Charges,
Interest on short-term debt and other. In CSW's consolidated statements of
income the interest expense related to the irrevocable trust is recorded in
Interest and Other Charges, Interest on short-term debt and other.
Inventory
CPL, PSO and WTU utilize the LIFO method for the valuation of all fossil
fuel inventories. SWEPCO continues to utilize the weighted average cost method
pending approval of the Arkansas Commission to utilize the LIFO method. At
October 31, 1998, none of the U.S. Electric Operating Companies had LIFO
reserves. LIFO reserves are the excess of the inventory replacement cost over
the carrying amount on the balance sheet.
Cash Equivalents
Cash equivalents are considered to be highly liquid debt instruments
purchased with a maturity of three months or less. Accordingly, temporary cash
investments and advances to affiliates are considered cash equivalents.
Comprehensive Income
Consistent with the requirements of SFAS No. 130, CSW has presented
consolidated statements of comprehensive income. Comprehensive income is defined
as the change in equity (net assets) of a business enterprise during a period
from transactions and other events and circumstances from non-owner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners.
Reclassifications
Certain financial statement items for prior periods have been reclassified
to conform to the 1998 presentation.
2. LITIGATION AND REGULATORY PROCEEDINGS
See the Registrants' Combined Annual Report on Form 10-K for the year
ended December 31, 1997 and Combined Quarterly Reports on Form 10-Q for the
quarters ended March 31, 1998 and June 30, 1998 for additional discussion of
litigation and regulatory proceedings. Reference is also made to NOTE 3.
COMMITMENTS AND CONTINGENT LIABILITIES, MD&A - RATES AND REGULATORY MATTERS and
PART II - OTHER INFORMATION, ITEM 1. LEGAL PROCEEDINGS for additional discussion
of litigation and regulatory matters.
CPL Rate Review - Docket No. 14965
In November 1995, CPL filed with the Texas Commission a request to
increase its retail base rates by $71 million. On October 16, 1997 the Texas
Commission issued the CPL 1997 Final Order. The CPL 1997 Final Order lowered the
annual retail base rates of CPL by approximately $19 million, or 2.5%, from
CPL's rate level existing prior to May 1996. The Texas Commission also included
a "Glide Path" rate methodology in the CPL 1997 Final Order pursuant to which
CPL's annual rates were reduced by $13 million beginning May 1, 1998 and will be
reduced an additional $13 million on May 1, 1999.
<PAGE>
CPL has appealed the CPL 1997 Final Order to the State District Court of
Travis County to challenge the resolution of several issues in the rate case.
The primary issues include: (i) the classification of $800 million of invested
capital in STP as ECOM which was also assigned a lower return on equity than
non-ECOM property, (ii) the Texas Commission's use of the "Glide Path" rate
reduction methodology applied on May 1, 1998 and to be applied on May 1, 1999,
and (iii) the $18 million of disallowed affiliate transactions from CSW
Services. As part of the appeal, CPL sought a temporary injunction to prohibit
the Texas Commission from implementing the "Glide Path" rate reduction
methodology. The court denied the temporary injunction and the "Glide Path" rate
reduction was implemented in May 1998. Hearings on the appeal were held during
the third quarter of 1998. A decision from the State District Court of Travis
County has not yet been received. Management is unable to predict how the final
resolution of these issues will ultimately affect CSW's and CPL's results of
operations and financial condition.
See MD&A - RATES AND REGULATORY MATTERS, CPL Rate Review - Docket No.
14965 for additional discussion of the CPL 1997 Final Order.
CPL Fuel Proceeding
In January 1998, CPL filed a request with the Texas Commission to recover
approximately $41.4 million in uncollected fuel and purchased power costs
including related interest from its retail customers and to increase its fixed
fuel factors used to recover fuel costs by approximately $23.4 million effective
with March 1998 bills. The primary cause of CPL's fuel cost under-recovery and
the need to increase its fuel factors was the result of the unanticipated
increase in the price of natural gas.
In February 1998, stipulated settlements were reached with intervenors in
CPL's fuel proceeding on both the fuel factor and surcharge. The fuel factor
increase was reduced to $15.4 million, and the fuel surcharge including interest
was reduced to $34.3 million. The reductions are not a disallowance and will be
considered as part of CPL's fuel reconciliation filing to be made in December
1998.
CPL Anglo Iron Litigation
In April 1998, CPL was sued by Anglo Iron in the United States District
Court for the Southern District of Texas, Brownsville Division, for claims
arising from the clean up of a site owned and operated by Anglo Iron in
Harlingen, Texas. Anglo Iron seeks reimbursement pursuant to CERCLA and common
law contribution and indemnity for alleged response and clean up costs of
$328,139 and damages of $150,000 for "loss of fair market value" of the site.
Management cannot predict the outcome of this litigation. However, management
believes that CPL has valid defenses to Anglo Iron'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 impact on CSW's or
CPL's consolidated results of operations or financial condition.
CPL Municipal Franchise Fee Litigation
In May 1996, the City of San Juan, Texas filed a purported class action in
Hidalgo County, Texas District Court on behalf of all cities served by CPL based
upon CPL's alleged underpayment of municipal franchise fees. The plaintiff's
petition asserts various contract and tort claims against CPL as well as certain
audit rights. The suit seeks unspecified damages and attorneys' fees. CPL filed
a counterclaim for any overpayment of franchise fees it may have made as well as
its attorneys' fees. CPL also filed a motion to transfer venue to Nueces County,
Texas, and a plea to the jurisdiction and pleas in abatement asserting that the
Texas Commission has primary jurisdiction over the claims. In May 1996 and
December 1996, respectively, the Cities of Pharr, Texas and San Benito, Texas
filed individual suits making claims virtually identical to those claimed by the
City of San Juan. In January, 1997, CPL filed an original petition at the Texas
<PAGE>
Commission requesting the Texas Commission to declare its jurisdiction over
CPL's collection and payment of municipal franchise fees.
In April 1997, the Texas Commission issued a declaratory order in which it
declined to assert jurisdiction over the claims of the City of San Juan. CPL
appealed the Texas Commission's decision to the Travis County, Texas District
Court. After the Texas Commission's order, the Hidalgo County, Texas District
Court overruled CPL's plea to the jurisdiction and plea in abatement. In July
1997, the Hidalgo County, Texas District Court entered an order certifying the
case as a class action. CPL appealed this order to the Corpus Christi Court of
Appeals. In February 1998, the Corpus Christi Court of Appeals affirmed the
trial court's order certifying the class. CPL appealed the Corpus Christi Court
of Appeals ruling to the Texas Supreme Court, which declined to hear the case.
In August, 1998, the Hidalgo County, Texas District Court ordered the case to
mediation and suspended all proceedings pending the completion of the mediation.
Although CPL believes that it has substantial defenses to the cities'
claims and intends to defend itself against the cities' claims and pursue its
counterclaims vigorously, CPL cannot predict the outcome of these lawsuits.
CPL Sinton Landfill Litigation
CPL, along with over 30 others, is named as a defendant in the district
court in San Patricio County, Texas. The plaintiffs, approximately 500 current
and former landowners in the vicinity of a landfill site near Sinton, Texas,
each of whom alleges $10 million property damage and personal injury as a result
of alleged contamination from the site. Plaintiffs have made a collective demand
upon CPL for $1.1 million. Trial for 20 of the plaintiffs' cases is set for
January 29, 1999. Management cannot predict the outcome of this litigation.
However, management believes that CPL has valid defenses to the plaintiffs'
claims and intends to defend the matter vigorously. Management also believes
that the ultimate resolution of this matter will not have a material adverse
impact on CSW's or CPL's consolidated results of operation or financial
condition.
CPL Valero Litigation
In April 1998, Valero filed suit against CPL in Nueces County, Texas
District Court, alleging claims for breach of contract and negligence. Valero's
suit seeks in excess of $11 million as damages for property loss and lost
profits allegedly incurred after an interruption of electricity to its facility
in Corpus Christi, Texas in April 1996. Management cannot predict the outcome of
this litigation. However, management believes that CPL has valid defenses to
Valero'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 impact on CSW's or CPL's consolidated results of operations or financial
condition.
CPL and WTU Complaint versus Texas Utilities Electric Company (Docket No.
17285)
A joint complaint filed by CPL and WTU with the Texas Commission asserted
that since January 1, 1997, Texas Utilities Electric Company has been
effectively double charging for transmission service within ERCOT. A proposal
for decision received in February 1998 recommended approval of a CPL and WTU
proposed reduction of $15.5 million annually of payments to Texas Utilities
Electric Company under FERC-approved transmission service agreements against
amounts that CPL and WTU would otherwise owe Texas Utilities Electric Company
pursuant to Texas Commission rules for transmission service in ERCOT. The Texas
Commission approved the proposal in June 1998. On September 30, 1998, the Texas
Commission denied Texas Utilities Electric Company's most recent motion for
rehearing. Based on this denial for rehearing, the U.S. Electric Operating
Companies recorded the effects of the final order. Prior to the Texas
Commission's September 1998 decision, the $15.5 million annual payment to Texas
<PAGE>
Utilities Electric Company was allocated to the U.S. Electric Operating
Companies. As a result of this order the payment is recorded on CPL's and WTU's
books as a reduction to ERCOT transmission expense.
Transmission Coordination Agreement
The Transmission Coordination Agreement provides the means by which the
U.S. Electric Operating Companies will operate, plan and maintain the four
separate transmission systems as a single system. The agreement also establishes
a process for the U.S. Electric Operating Companies to allocate revenues
received under open access transmission tariffs. On August 7, 1998, the FERC
accepted the Transmission Coordination Agreement for filing, suspended it for a
nominal period, and made it effective as of January 1, 1997, subject to refund
and investigation.
SWEPCO Fuel Proceeding
In April 1997, SWEPCO filed with the Texas Commission an application
concerning fuel cost under-recoveries and a possible fuel surcharge. The
application included a motion to either abate the requested interim surcharge
and consolidate the surcharge with a filed fuel reconciliation as discussed
below, or alternatively, implement an interim surcharge in the months of July
1997 through June 1998. The Texas Commission's Office of Policy Development, on
behalf of the Texas Commission, approved the consolidation.
In May 1997, SWEPCO filed with the Texas Commission an application to
reconcile fuel costs and implement a 12 month surcharge of fuel cost
under-recoveries. Because of the uncertainty as to when a surcharge may be
implemented, SWEPCO did not establish in its filing a proposed surcharge period
or a total surcharge amount which would reflect interest through the entire
surcharge period. However, SWEPCO indicated that it had an under-recovered Texas
jurisdictional fuel cost balance of $16.8 million, including interest through
December 1996. Included in the $16.8 million balance are fuel-related litigation
expenses of $5.0 million and an interest return of $2.0 million on the
unamortized balance of a fuel contract termination payment.
On December 8, 1997, SWEPCO and the other parties to the above
consolidated proceedings before the Texas Commission filed a settlement on all
issues except whether transmission equalization payments should be included in
fuel revenues or base revenues. Of the $16.8 million in under-recovered fuel
costs as of December 31, 1996, the settlement would result in a decrease of the
under-recovered fuel costs, and the resulting surcharge recovery, of $6.0
million. The settlement also provides that SWEPCO's fuel and fuel-related
expenses during the reconciliation period were reasonable and necessary and
would allow them to be reconciled as eligible fuel expense. Also, the settlement
provides that SWEPCO's actions in litigating and renegotiating certain fuel
contracts, together with the prices, terms and conditions of the renegotiated
contracts, were prudent. The $6.0 million reduction is not associated with any
particular activity or issue within the fuel proceedings.
On April 8, 1998, the ALJ assigned to this proceeding issued a proposal
for decision regarding the one outstanding issue, whether transmission
equalization payments should be included in eligible fuel expense. The proposal
for decision recommended that SWEPCO be allowed to include transmission
equalization expense in eligible fuel expense. On May 19, 1998, the Texas
Commission reversed the ALJ and did not allow SWEPCO to recover its transmission
equalization payments as a component of eligible fuel expense. This ruling
resulted in an earnings reduction of $1.8 million, which was recorded in the
second quarter of 1998. On June 8, 1998, SWEPCO filed a motion for rehearing on
the transmission equalization issue, which was denied through operation of law.
After the Texas Commission's order on May 19, 1998, SWEPCO still had
<PAGE>
under-recovered its fuel and fuel related expenses. On July 1, 1998, the Texas
Commission issued an order allowing SWEPCO to surcharge its Texas retail
customers $6.9 million of under-recovered fuel and fuel related expenses
including associated interest. The surcharge began in July 1998 and will end in
June 1999. SWEPCO has filed an appeal regarding this matter in the State
District Court of Travis County, Texas. Management believes that SWEPCO's
position is legally correct but is unable to predict the ultimate outcome of
this litigation.
WTU Fuel Proceedings
Fuel Reconciliation
On December 31, 1997, WTU filed with the Texas Commission an application
to reconcile fuel costs and to request authorization to carry the reconciled
balance forward into the next reconciliation period. WTU did not seek a
surcharge of the reconciled balance in the December 31, 1997 filing.
During the reconciliation period of July 1, 1994 through June 30, 1997,
WTU incurred approximately $422 million in eligible fuel and fuel-related
expenses to generate and purchase electricity. The Texas jurisdictional
allocation of such fuel and fuel-related expenses is approximately $295 million.
On June 11, 1998, WTU amended its application to reconcile fuel costs to
remove a credit from the calculation of eligible fuel in the amount of $3
million related to transmission equalization payments. This amendment was a
result of the Texas Commission's ruling concerning transmission equalization
payments in the SWEPCO fuel reconciliation described above.
On October 14, 1998, the general counsel of the Texas Commission and WTU
agreed to an non-unanimous stipulation regarding WTU's eligible fuel and
fuel-related expenses. One party does not accept the stipulation's proposed
treatment of transmission equalization payment, discussed above. Parties will
file briefs in November 1998, and a proposal for decision from the ALJ is
expected by early 1999 with a Texas Commission decision expected by the end of
the first quarter 1999. Management is unable to predict the outcome of the fuel
proceeding.
Fuel Factor Filing
In March 1998, WTU filed with the Texas Commission an Application for Authority
to Implement an increase in fuel factors of $7.4 million, or 7.3%, on an annual
basis. Additionally, WTU proposed to implement a fuel surcharge of $6.8 million,
including accumulated interest, over a six month period to collect its
under-recovered fuel costs. WTU implemented the revised fuel factors with its
June 1998 billings.
<PAGE>
Other Legal Claims and Proceedings
The CSW System is party to various other legal claims and proceedings
arising in the normal course of business. Management does not expect disposition
of these matters to have a material adverse effect on the Registrants' results
of operations or financial condition.
3. COMMITMENTS AND CONTINGENT LIABILITIES
Fuel and Related 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 September 30, 1998, the
maximum amount SWEPCO believes it could potentially assume is $93 million.
However, the maximum amount may vary as the mining contractor's need for funds
fluctuates. The contractor's actual obligation outstanding on September 30, 1998
was $73 million.
SWEPCO South Hallsville Lignite Mine
As part of the process to receive a renewal of a Texas Railroad Commission
permit for lignite mining at the South Hallsville lignite mine and expansion
into the Marshall South Lignite Project area, SWEPCO has agreed to provide
guarantees of mine reclamation in the amount of $85 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 1997. 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, for any one nuclear incident, payable at $10 million
per year per reactor. An additional surcharge of five percent of the maximum may
be payable if the total amount of public claims and legal costs exceed the
limit. CPL and each of the other STP owners are subject to such assessments,
which CPL and the 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.
<PAGE>
The owners of STP currently maintain on-site decontamination liability and
property damage insurance in the amount of $2.75 billion provided by NEIL.
Policies of insurance issued by 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 23 consecutive weeks. In the event of an outage of STP Units 1 and 2
as a result of the same accident, such insurance will reimburse CPL up to 80% of
the recovery. The maximum amount recoverable for a single unit outage is $133.8
million for both Units 1 and 2. CPL is subject to an additional assessment of up
to $1.54 million for the current policy year in the event that insured losses at
a nuclear facility covered under the NEIL I policy exceed the accumulated funds
available under the policy. CPL renewed its current NEIL I Business Interruption
and/or Extra Expense policy on October 1, 1998.
SWEPCO Cajun Asset Purchase Proposal
As previously reported, 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 March 18, 1998, SWEPCO, together with the Cajun Members Committee,
which currently represents 7 of the 12 Louisiana member distribution
cooperatives that are served by Cajun, filed the SWEPCO Plan in the bankruptcy
court. The SWEPCO Plan replaces plans filed previously by SWEPCO. Under the
SWEPCO Plan, a SWEPCO affiliate or subsidiary would acquire all of the
non-nuclear assets of Cajun, comprised of the two-unit Big Cajun I natural
gas-fired plant, the three-unit Big Cajun II coal-fired plant, and related
non-nuclear assets. The purchase price under the SWEPCO Plan is $940.5 million
in cash, subject to adjustment pursuant to the terms of the asset purchase
agreement proposed as part of the SWEPCO Plan. The SWEPCO Plan incorporates the
terms of a settlement between the RUS, Cajun Members Committee, Claiborne
Electric Cooperative, Inc. and SWEPCO. In addition, the SWEPCO Plan provides for
SWEPCO and the Cajun member cooperatives to enter into long-term power supply
agreements which will provide the Cajun member cooperatives with rate plan
options and market access provisions designed to ensure the long-term
competitiveness of the cooperatives. Eight cooperatives and Central Louisiana
Electric Company, Inc., successor to Teche Electric Cooperative, agreed to
purchase power from SWEPCO, if SWEPCO's plan is confirmed by the bankruptcy
court.
Two competing plans of reorganization for the non-nuclear assets of Cajun
were filed with the bankruptcy court. On September 25, 1998, Enron Capital and
Trade Resource Corporation, a subsidiary of Enron Corporation, withdrew its bid.
The trustee for Cajun supports the sole remaining competing bid of $1.19 billion
by Louisiana Generating LLC, a partnership of subsidiaries of Southern Energy,
Inc., Northern States Power Company and Zeigler Coal Holding Company.
Confirmation hearings in Cajun's bankruptcy case were completed in May 1998.
SWEPCO and the Cajun Members Committee are co-plaintiffs in litigation
regarding a central issue in the bankruptcy case, whether a competing plan
supported by the Cajun trustee can force the cooperatives to buy power for 25
years under the nonconsensual arrangements contained in that plan.
<PAGE>
As previously reported, on August 11, 1998 , the U.S. Fifth Circuit Court
of Appeals overturned a U.S. District Court for the Middle District of Louisiana
ruling that disqualified the SWEPCO Plan from being considered in the Cajun
bankruptcy reorganization process. The U.S. Fifth Circuit Court of Appeals said
the U.S. District Court for the Middle District of Louisiana erred in reversing
the bankruptcy court, which had originally had determined that $1 million in
assistance payments from SWEPCO to the Cajun Members Committee did not
constitute vote-buying and were legal. On October 30, 1998, the U.S. Fifth
Circuit Court of Appeals rejected requests for rehearing by the Cajun Trustee,
the RUS and others of its decision to overturn a U.S. District Court for the
Middle District of Louisiana ruling that disqualified the SWEPCO Plan from
competing in the Cajun bankruptcy reorganization process.
On October 13, 1998, the trustee for Cajun sought an injunction preventing
the Louisiana Commission from acting on a rate case involving Cajun, contending
that the Louisiana Commission's involvement in the rate case was a violation of
the bankruptcy court's jurisdiction over Cajun's assets and thus by extension,
its rates. The bankruptcy court enjoined individual commissioners of the
Louisiana Commission from acting on issues related to possible changes in
wholesale electric rates of Cajun. The bankruptcy court dismissed the Louisiana
Commission as a defendant in the case, but permitted the action to continue
against the commissioners of the Louisiana Commission and the executive
secretary of the Louisiana Commission.
Consummation of the 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 their respective board of directors
approvals. If the SWEPCO Plan is confirmed, the $940.5 million required to
consummate the acquisition of Cajun's non-nuclear assets is expected to be
financed through a combination of external borrowings and internally generated
funds with approximately 70% of the external borrowings funded with non-recourse
debt. There can be no assurance that the SWEPCO Plan will be confirmed by the
bankruptcy court or, if it is confirmed, that it will be approved by federal and
state regulators. As of September 30, 1998, SWEPCO had deferred $10.4 million in
costs related to the SWEPCO Plan on its consolidated balance sheet which would
be expensed if the SWEPCO plan is not ultimately successful.
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, which was 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 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, and the MDEQ requested
that a future residential exposure scenario be evaluated for comparison with
commercial and industrial exposure scenarios. However, Mississippi Power and
SWEPCO do not believe that cleanup to a residential usage scenario is
appropriate since this site has been industrial/commercial for more than 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. Resolution of this issue is still
pending.
Currently, a feasibility study is being conducted to more definitively
evaluate remedial strategies for the property. The feasibility study process
will require public input prior to a final decision and will result in a
remediation strategy along with associated costs.
<PAGE>
SWEPCO has incurred approximately $200,000 to date for its portion of the
cleanup of this site, and, based on its preliminary estimates, anticipates that
an additional $2 million may be incurred. Accordingly, SWEPCO has accrued $2.2
million for the cleanup of the site.
The State of Mississippi has passed Brownsfield legislation which provides
for levels of cleanup standards. Although regulations implementing this
legislation are not expected to be finalized until the summer of 1999, the MDEQ
has indicated that it will work with SWEPCO in the interim within the
legislation's intent to allow the project to move forward.
SWEPCO Voda Petroleum Superfund Site
In April 1996, SWEPCO received correspondence from the EPA notifying
SWEPCO that it is a PRP to a cleanup action planned for the Voda Petroleum
Superfund Site located in Clarksville, Texas. SWEPCO is conducting a records
review to compile documentation relating to SWEPCO's past use of the Voda
Petroleum site. The proposed cleanup of the site is estimated by the EPA to cost
approximately $2 million and to take approximately twelve months to complete.
SWEPCO is considering an option where over 30 PRPs would conduct the cleanup in
lieu of EPA. Any SWEPCO liability associated with this project is not expected
to have a material adverse effect on SWEPCO's results of operations or financial
condition.
SWEPCO Wilkes Power Plant Copper Limit Compliance
The EPA has issued Wilkes power plant, which is owned by SWEPCO, an
administrative order for wastewater permit violations related to copper limits.
The administrative order is initially for a show cause meeting only. Past and
future compliance activities including activities that have been conducted to
determine the source of copper will be presented by SWEPCO during this meeting.
The show cause meeting with the EPA held on August 13, 1998, resulted in
continued negotiations. The EPA has not issued an administrative penalty order
or referral to the United States Department of Justice for judicial action with
monetary fines.
CSW Energy Loans and Commitments
In June 1998, the 325 MW Phillips Sweeny cogeneration facility, an entity
50% owned by CSW Energy, obtained permanent project financing. The $149 million
of debt, with an effective interest rate of 7.4%, is unconditionally guaranteed
by the project and is non-recourse to CSW Energy and CSW. Concurrently, the
project repaid its outstanding note to CSW Energy for construction financing.
CSW Energy obtained the funds for this project from CSW's short-term borrowing
program, which were also repaid.
CSW, CSW Energy and CSW International have provided letters of credit and
guarantees on behalf of independent power projects, including Phillips Sweeny,
of approximately $254 million, $1 million, and $200 million, respectively, as of
September 30, 1998.
4. COMMON STOCK AND DIVIDENDS
CSW's basic earnings per share of common stock are computed by dividing
net income for common stock by the average number of common shares outstanding
for the respective periods. CSW's dividends per common share reflect per share
amounts paid for each of the periods. See MD&A - LIQUIDITY AND CAPITAL
RESOURCES, Capital Structure for information related to CSW's common stock.
<PAGE>
At September 30, 1998, approximately $1.6 billion of CSW's subsidiary
companies' retained earnings were available for payment of cash dividends by
such subsidiaries to CSW. The CPL and PSO 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 currently
limit the ability of CSW to pay dividends to its shareholders. The amounts of
retained earnings available for dividends attributable to each of the U.S.
Electric Operating Companies at September 30, 1998 are as follows.
CPL - $819 million PSO - $173 million SWEPCO - $334 million WTU - $142 million
<PAGE>
5. INCOME TAXES
The following tables provide a reconciliation of the differences between
total income tax expense (income taxes included in Operating Expenses and Taxes
as well as Other Income and Deductions) at the federal statutory tax rate and
the effective tax rate for the Registrants.
CSW CPL PSO SWEPCO WTU
---------------------------------------------
(millions) (thousands)
------------------------------------
Quarter Ended September 30, 1998
Income before taxes attributable
to:
Domestic operations $353
Foreign operations 21
---------
Income before taxes $374 $162,865 $95,147 $74,272 $44,480
Tax at U.S. statutory rate $131 $57,003 $33,301 $25,995 $15,568
Differences
Amortization of ITC (3) (1,302) (448) (1,142) (330)
Mirror CWIP 1 1,285 -- -- --
Non-deductible goodwill
Amortization 3 -- -- -- --
Foreign tax benefit (16) -- -- -- --
Other 24 5,419 7,373 2,789 1,126
---------------------------------------------
Tax expense $140 $62,405 $40,226 $27,642 $16,364
---------------------------------------------
Effective tax rate 37% 38% 42% 37% 37%
Quarter Ended September 30, 1997
Income before taxes attributable
to:
Domestic operations $269
Foreign operations 15
---------
Income before taxes $284 $127,785 $49,597 $73,521 $26,620
Tax at U.S. statutory rate $99 $44,725 $17,359 $25,732 $9,317
Differences
Amortization of ITC (2) (622) (46) (1,165) (330)
Non-deductible goodwill
Amortization 3 -- -- -- --
Foreign tax benefit (15) -- -- -- --
Other (1) 1,455 865 (1,994) (46)
---------------------------------------------
Tax expense $84 $45,558 $18,178 $22,573 $8,941
---------------------------------------------
Effective tax rate 30% 36% 37% 31% 34%
Nine Months Ended September 30, 1998
Income before taxes attributable to:
Domestic operations $543
Foreign operations 80
---------
Income before taxes $623 $263,824 $130,271 $133,139 $61,850
Tax at U.S. statutory rate $218 $92,338 $45,595 $46,599 $21,648
Differences
Amortization of ITC (10) (3,905) (1,347) (3,474) (991)
Mirror CWIP 4 3,571 -- -- --
Non-deductible goodwill
Amortization 9 -- -- -- --
Foreign tax benefit (29) -- -- -- --
Other 24 9,482 7,886 557 766
---------------------------------------------
Tax expense $216 $101,486 $52,134 $43,682 $21,423
---------------------------------------------
Effective tax rate 35% 38% 40% 33% 35%
<PAGE>
CSW CPL PSO SWEPCO WTU
---------------------------------------------
(millions) (thousands)
------------------------------------
Nine Months Ended September 30, 1997
Income before taxes attributable to:
Domestic operations $363
Foreign operations 74
---------
Income before taxes $437 $180,921 $79,826 $129,107 $37,598
Tax at U.S. statutory rate $153 $63,322 $27,939 $45,187 $13,159
Differences
Amortization of ITC (9) (3,517) (1,438) (3,497) (991)
Non-deductible goodwill
Amortization 9 -- -- -- --
Foreign tax benefit (15) -- -- -- --
Other (6) 3,931 860 (3,453) (116)
---------------------------------------------
Tax expense $132 $63,736 $27,361 $38,237 $12,052
---------------------------------------------
Effective tax rate 30% 35% 34% 30% 32%
6. PROPOSED AEP MERGER
Background Information
On December 22, 1997, CSW and AEP announced that their boards of directors
had approved a definitive merger agreement for a tax-free, stock-for-stock
transaction creating a company with a total market capitalization of
approximately $28.1 billion ($16.5 billion in equity; $11.6 billion in debt and
preferred stock). The combined company would serve more than 4.6 million
customers in 11 states and approximately 4 million customers outside the United
States. On May 27, 1998, AEP shareholders approved the issuance of the
additional shares of stock required to complete the merger. On May 28, 1998, CSW
shareholders approved the merger.
Under the merger agreement, each common share of CSW will be converted
into 0.6 shares of AEP common stock. Based upon AEP's closing price immediately
prior to the merger announcement, this represented a premium of 20% over the CSW
closing price. AEP will issue approximately $6.6 billion in stock to CSW
stockholders to complete the transaction. CSW stockholders will own
approximately 40% of the combined company. Both companies anticipate continuing
their current dividend policies until the close of the transaction.
Under the merger agreement, there will be no changes required with respect
to the public debt issues, the outstanding preferred stock or the Trust
Preferred Securities of CSW's subsidiaries.
The companies anticipate net savings related to the merger of
approximately $2 billion over a 10-year period from the elimination of
duplication in corporate and administrative programs, greater efficiencies in
operations and business processes, increased purchasing efficiencies, and the
combination of the two work forces. At the same time, the companies will
continue their commitment to high quality, reliable service. Job reductions
related to the merger are expected to be approximately 1,050 out of a total
domestic workforce of approximately 25,000. The combined company will use a
combination of growth, reduced hiring and attrition to minimize the need for
employee separations. Organizational and staffing recommendations will be made
by transition teams of employees from both companies.
<PAGE>
The electric systems of AEP and CSW will operate on an integrated and
coordinated basis as required by the Holding Company Act. Any fuel savings
resulting from the coordinated operation of the combined company will be passed
on to customers.
The merger agreement contains covenants and agreements that restrict the
manner in which the parties may operate their respective businesses until the
time of closing of the merger. In particular, without the prior written consent
of AEP, CSW may not engage in a number of activities that could affect its
sources and uses of funds. Pending closing of the merger, CSW's and its
subsidiaries' strategic investment activity, capital expenditures and non-fuel
operating and maintenance expenditures are restricted to specific agreed upon
projects or agreed upon amounts. In addition, prior to consummation of the
merger, CSW and its subsidiaries are restricted from (i) issuing shares of
common stock other than pursuant to employee benefit plans, (ii) issuing shares
of preferred stock or similar securities other than to refinance existing
obligations or to fund permitted investment or capital expenditures and (iii)
incurring indebtedness other than pursuant to existing credit facilities, in the
ordinary course of business or to fund permitted projects or capital
expenditures. These restrictions are not expected to limit the ability of CSW
and its subsidiaries to make investments and expenditures in amounts previously
budgeted.
Merger Regulatory Approvals
The proposed AEP merger has a targeted completion date in the first half
of 1999. The merger is conditioned, among other things, upon the approval of
several state and federal regulatory agencies.
On April 30, 1998, AEP and CSW jointly filed a request with the FERC for
approval of their proposed merger. On July 15, the FERC approved a draft order
accepting the proposed transmission service agreements between the Ameren System
and PSO. The draft order confirms that PSO's 250 MW firm contract path is
available for AEP and CSW to meet the Holding Company Act's requirement that the
two systems operate on an integrated and coordinated basis. On November 10,
1998, the FERC issued an order to establish a procedural schedule for its review
of the proposed merger between AEP and CSW. A scheduling conference will be held
in November 1998. The order indicated that the review of the proposed merger
will address the issues of competition and market power and instructed AEP and
CSW to refile an updated market power study. The outcome of the FERC scheduling
conference could extend the targeted completion date of the merger.
On April 30, 1998, AEP and CSW jointly filed a request with the Texas
Commission for a finding that the merger is in the public interest. On July 2,
1998, the Texas Commission issued a preliminary order setting forth the issues
the Texas Commission will consider in the merger application. In its preliminary
order, the Texas Commission also determined that (i) the merger application was
not a rate proceeding, (ii) restructuring issues should not be addressed and
(iii) matters in the jurisdiction of other regulatory bodies should not be
addressed.
AEP and CSW have reached a settlement in principle with the Texas Office
of Public Utility Counsel and several cities in Texas. The settlement resolves
all issues in principle and anticipates the submission of a more detailed filing
outlining specific terms of the settlement along with supporting testimony.
As a result of the settlement, the ALJ for the merger proceeding suspended
the procedural schedule on November 10, 1998 and announced that a pre-hearing
conference will be held November 17, 1998. The purpose of that pre-hearing
conference will be to determine the schedule for consideration of the settlement
<PAGE>
by other parties relating to AEP and CSW's application for merger approval by
the Texas Commission. The hearing to consider merger approval was originally
scheduled to begin December 2, 1998.
On May 15, 1998, AEP and CSW jointly filed a request with the Louisiana
Commission for approval of their proposed merger and for a finding that the
merger is in the public interest. Hearings in Louisiana are scheduled to begin
January 18, 1999.
On June 12, 1998, AEP and CSW jointly filed a request with the Arkansas
Commission for approval of their proposed merger. On August 17, 1998, the
Arkansas Commission approved the merger, subject to a number of conditions
including the approval of a regulatory plan for sharing net merger savings. On
November 3, 1998, AEP, CSW and SWEPCO filed a settlement agreement for approval
with the Arkansas Commission outlining a regulatory plan, agreed to with the
Arkansas Commission general staff, which provides for a sharing of net merger
savings through a reduction of rates for Arkansas retail customers.
On June 19, 1998, CPL filed a license transfer application with the NRC
requesting the NRC's consent to the indirect transfer of control of CPL's
interests in the NRC licenses issued for STP, which would result from the
proposed merger between CSW, CPL's parent company, and AEP. CPL would continue
to own its 25.2% interest in STP and CPL's name would remain on the NRC
operating license. On November 5, 1998, the NRC approved the license transfer
application.
On August 14, 1998, AEP and CSW jointly filed a request with the Oklahoma
Commission for approval of their proposed merger. The merger filing in Oklahoma
is similar to requests currently before the Arkansas Commission, Louisiana
Commission, Texas Commission, FERC and SEC. Testimony submitted in these merger
filings outlines the expected combined company benefits of the merger to AEP and
CSW customers and shareholders, which include:
- $2 billion in net non-fuel cost savings over 10 years;
- $98 million in net fuel savings over 10 years;
- Improved capital structure and increased financial strength;
- Increased diversity in customer base, generating resources and service
territory;
- Optimization of business practices and continued high-quality service;
- Support for restructuring of retail electric markets; and
- Support for an independent system operator.
AEP and CSW have proposed a regulatory plan in Oklahoma that provides for:
- Approximately $11.8 million in fuel cost savings to Oklahoma customers of
CSW's PSO subsidiary during the 10 years following completion of the
merger;
- A commitment not to raise base rates above current levels prior to Jan. 1,
2002, for PSO retail customers in Oklahoma and to share approximately
one-half of the savings from synergies created by the merger during the
first 10 years following the merger. Under this plan, approximately $78.6
million of these non-fuel merger-related savings will be used to reduce
future costs to PSO's retail customers; and
- A commitment to continue the current high level of customer service and to
identify opportunities and implement measures to further improve service
quality.
<PAGE>
On October 1, 1998, an Oklahoma Commission ALJ issued an oral ruling
recommending to the Oklahoma Commission that the merger filing be dismissed
without prejudice for lack of information regarding the potential impact of the
merger on the retail electric market in Oklahoma, in response to comments
received from intervenors to the merger. A dismissal without prejudice would
allow AEP and CSW to submit an amended application with the added information.
Subsequent meetings with the parties to the merger proceeding resulted in
an agreement on criteria for the additional studies. On October 21, 1998, the
ALJ approved these criteria, as well as AEP and CSW's plans to file an amended
application along with the additional studies.
Submission of the amended application would reset Oklahoma's 90-day
statutory time period for Oklahoma Commission action on the merger. All other
material in the written record in the merger case will be preserved since the
docket is not being dismissed. AEP and CSW anticipate that the Oklahoma
Commission will establish a procedural schedule that will result in a final
order in Oklahoma in the first quarter of 1999. The revision to the Oklahoma
proceeding schedule should not impact the timing of the merger closing, which is
targeted for completion during the first half of 1999.
On October 13, 1998, AEP and CSW jointly filed an application with the SEC
for approval of their proposed merger. The SEC merger filing is similar to
requests currently before other jurisdictions and outlines the expected combined
company benefits of the merger to AEP and CSW customers and shareholders. On
November 9, 1998, AEP and CSW filed an amendment to the application.
AEP and CSW plan to make other required federal merger filings with the
Federal Communications Commission and the Department of Justice and/or the
Federal Trade Commission later in 1998.
CSW has a 100% interest in SEEBOARD, and AEP has a 50% interest in
Yorkshire. The proposed merger of CSW into AEP would result in common ownership
of the United Kingdom entities. As a result, the common ownership of the United
Kingdom entities could be referred by the United Kingdom Secretary of State for
Trade and Industry for an investigation by the United Kingdom Monopolies and
Mergers Commission. CSW is unable to predict the outcome of any such regulatory
proceeding.
The merger is conditioned, among other things, upon the approval of
several state and federal regulatory agencies. The transaction must satisfy many
conditions, including the condition that it must be a pooling. Some of these
conditions may not be waived by the parties. AEP and CSW have initiated the
process of seeking regulatory approvals, but there can be no assurances as to
when, on what terms or whether the required approvals will be received or
whether there will be any regulatory proceedings in the United Kingdom. There
can be no assurance that the AEP merger will be consummated.
Merger Costs
As of September 30, 1998, CSW had deferred $22 million in costs related to
the merger on its consolidated balance sheet, which will be charged to expense
if AEP and CSW are not successful in completing their proposed merger.
<PAGE>
7. LONG-TERM FINANCING
On September 1, 1998, PSO called $25 million principal amount outstanding
of Series K and $30 million principal amount outstanding of Series L FMBs, in
their entirety, at call prices of 100 and 100.77, respectively. On September 1,
1998, CPL called $36 million principal amount outstanding of Series L FMBs, in
its entirety, at a call price of 100.53.
8. NEW ACCOUNTING STANDARDS
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument (including derivative instruments embedded in other contracts) be
recorded on the balance sheet as either an asset or liability measured at fair
value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows gains and losses associated
with a derivative to offset related results on the hedged item in the income
statement and requires that a company must formally document, designate and
assess the effectiveness of transactions that receive hedge accounting
treatment.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement SFAS No. 133 for any fiscal quarter beginning June
16, 1998 and thereafter. SFAS No. 133 cannot be applied retroactively. SFAS No.
133 must be applied to derivative instruments and certain derivative instruments
embedded in hybrid contracts that were issued, acquired or substantially
modified after December 31, 1997.
The Registrants have not yet quantified the impact of adopting SFAS No. 133
on their financial statements and have not determined the timing or the method
of adopting SFAS No. 133.
SOP 98-5, Reporting on the Costs of Start-Up Activities
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants has issued SOP 98-5, Reporting on the Costs of
Start-Up Activities. SOPs are included in the hierarchy of generally accepted
accounting principals and must be followed unless a transaction or event is
covered by a more specific pronouncement.
SOP 98-5 defines start-up activities very broadly, including activities
related to organizing a new entity (commonly referred to as start-up costs). SOP
98-5 provides that the cost of start-up activities, including organization
costs, should be expensed as incurred.
SOP 98-5 is effective for financial statements for fiscal years beginning
after December 15, 1998. SOP 98-5 requires that start-up costs be identified and
that upon adoption of the SOP, a retroactive adjustment be made to expense these
amounts.
CSW is currently reviewing amounts capitalized on its books as
organization or start-up costs. Any amounts identified as subject to SOP 98-5
would have to be expensed in the first quarter of 1999. The Registrants have not
yet quantified the impact of adopting SOP 98-5 on their financial statements.
<PAGE>
9. EXTRAORDINARY ITEM
In the third quarter of 1997, a one-time windfall profits tax was enacted
in the United Kingdom. Accordingly, during the third quarter of 1997, SEEBOARD
U.S.A. accrued, as an extraordinary item, $176 million for the one-time,
windfall profits tax.
The windfall profits tax is payable in two equal installments, the first
of which was paid December 1, 1997 and the second of which will be paid December
1, 1998. The tax was charged at a rate of 23% on the difference between nine
times the average profits after tax for the four years following the
privatization of SEEBOARD and the public sale of its shares in 1990, and
SEEBOARD's market capitalization calculated as the number of shares issued
multiplied by the price per share.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Registrants' Combined Annual
Report on Form 10-K for the year ended December 31, 1997 and the Registrants'
Combined Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998
and June 30, 1998. Reference is also made to each Registrant's unaudited
Financial Statements and related Notes to Financial Statements. The information
should be read in conjunction with, and is essential to understanding, the
following discussion and analysis.
RESULTS OF OPERATIONS
Reference is made to ITEM 1. FINANCIAL STATEMENTS for each of the
Registrants' RESULTS OF OPERATIONS for the three and nine month periods ended
September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Overview of CSW Operating, Investing, and Financing Activities
Net cash inflows from operating activities increased $219 million to $624
million for the first nine months of 1998 compared to the same period last year.
The increase in net cash inflows is due primarily to the absence in 1998 of $190
million of federal and state income tax payments made in the first half of 1997
for the gain on CSW's 1996 sale of Transok. However, these payments were offset
in part by the utilization of Alternative Minimum Tax credits that CSW had
previously generated. Also contributing to the increase were better fuel
recovery positions and a higher accounts payable balance. The increase in net
cash inflows was also offset in part by decreases in other working capital
accounts.
Net cash outflows from investing activities decreased $47 million to an
outflow of $481 million for the first nine months of 1998 compared to an outflow
of $528 million for the same period last year. CSW Energy obtained permanent
external financing during the first half of 1997 for the Orange cogeneration
project and subsequently reduced its equity investment in the project. In
addition, CSW Energy made its final purchase agreement payment on the Ft. Lupton
cogeneration project in the first half of 1997. CSW Energy also experienced a
decrease in construction expenditures for the Phillips Sweeny project which went
into operation in the first quarter of 1998. Further reducing the cash outflows
from investing activities was a cash inflow resulting from CSW International's
Enertek partner, Alpek, assuming its 50% obligation of that power plant project.
Also contributing to the lower net cash outflows from investing activities was
reduced spending at the U.S. Electric Operating Companies for facilities. The
decrease in net cash outflows was partially offset by an increase in investment
for telecommunications projects at C3 Communications.
Net cash flows from financing activities decreased $303 million to an
outflow of $37 million for the first nine months of 1998 compared to an inflow
of $266 million for the same period last year. In September 1998, CPL and PSO
called bonds, which contributed $91 million to the decline in cash flows from
financing activities. In the second quarter of 1997, CSW received proceeds from
the issuance of Trust Preferred Securities. The proceeds were used primarily to
reacquire preferred stock and pay down short-term debt in the second quarter of
1997. In April 1997, CSW made changes to its common stock plans and stopped
<PAGE>
issuing original shares. The decrease in net cash from financing activities was
due in part to funding these common stock plans through open market purchases.
Construction Expenditures
CSW's construction expenditures, including allowance for funds used during
construction, totaled $345 million for the nine months ended September 30, 1998.
Construction expenditures for the U.S. Electric Operating Companies totaled $86
million, $46 million, $58 million and $34 million, for CPL, PSO, SWEPCO and WTU,
respectively. Construction expenditures at the U.S. Electric Operating Companies
were primarily for improvements to existing production, transmission and
distribution facilities. The improvements are required to meet the needs of new
customers and to satisfy the changing requirements of existing customers. CSW
anticipates that all funds required for construction for the remainder of the
year will be provided from internal sources.
Other Financing Issues
CSW provides common stock, either through the purchase of shares from the
open market or original issue shares, to fund its long-term incentive plan, the
CSW PowerShare Dividend Reinvestment and Stock Purchase Plan and the CSW
Retirement Savings Plan. CSW began funding these plans through open market
purchases effective April 1, 1997.
The CSW System uses short-term debt to meet fluctuations in working
capital requirements and other interim capital needs. CSW has established a
system money pool to coordinate short-term borrowings for certain of its
subsidiaries, primarily the U.S. Electric Operating Companies and CSW Services.
In addition, CSW also incurs borrowings for other subsidiaries that are not
included in the money pool. As of September 30, 1998, CSW had revolving credit
facilities totaling $1.4 billion to back up its commercial paper program.
As of September 30, 1998, CSW Credit's revolving credit agreement totaled
$1.2 billion.
On September 1, 1998, PSO called $25 million principal amount outstanding
of Series K and $30 million principal amount outstanding of Series L FMBs, in
their entirety, at call prices of 100 and 100.77, respectively. On September 1,
1998, CPL called $36 million principal amount outstanding of Series L FMBs, in
its entirety, at a call price of 100.53.
The final installment of (pound)55 million, or an estimated $91 million
using an exchange rate of (pound)1.00 = $1.65, for the windfall profits tax is
payable by SEEBOARD on December 1, 1998.
RATES AND REGULATORY MATTERS
CPL Rate Review - Docket No. 14965
In November 1995, CPL filed with the Texas Commission a request to
increase its retail base rates by $71 million. On October 16, 1997, the Texas
Commission issued the CPL 1997 Final Order. The CPL 1997 Final Order lowered the
annual retail base rates of CPL by approximately $19 million, or 2.5%, from
CPL's rate level existing prior to May 1996. The Texas Commission also included
a "Glide Path" rate methodology in the CPL 1997 Final Order pursuant to which
CPL's annual rates were reduced by an additional $13 million beginning May 1,
1998 and will be reduced an additional $13 million on May 1, 1999.
<PAGE>
CPL has appealed the CPL 1997 Final Order to the State District Court of
Travis County to challenge the resolution of several issues in the rate case.
The primary issues include: (i) the classification of $800 million of invested
capital in STP as ECOM which was also assigned a lower return on equity than
non-ECOM property, (ii) the Texas Commission's use of the "Glide Path" rate
reduction methodology applied on May 1, 1998 and to be applied again on May 1,
1999, and (iii) the $18 million of disallowed affiliate transactions from CSW
Services. As part of the appeal, CPL sought a temporary injunction to prohibit
the Texas Commission from implementing the "Glide Path" rate reduction
methodology. The court denied the injunction, and the "Glide Path" rate
reduction was implemented in May 1998. Hearings on the appeal were held during
the third quarter of 1998. A decision from the State District Court of Travis
County has not yet been received. Management is unable to predict how the final
resolution of these issues will ultimately affect CSW's and CPL's results of
operations and financial condition.
CPL currently accounts for the economic effects of regulation in
accordance with SFAS No. 71. Pursuant to the provisions of SFAS No. 71, CPL had
recorded approximately $1.3 billion of regulatory-related assets at March 31,
1998. The application of SFAS No. 71 is conditioned upon CPL's rates being set
based on the cost of providing service. In the event management concludes that
as a result of changes in regulation, legislation, the competitive environment,
or other factors, including the CPL 1997 Final Order, CPL, or some portion of
its business, no longer meets the criteria for following SFAS No. 71, a
write-off of regulatory assets and liabilities would be required, absent a means
of recovering such assets or settling such liabilities in a continuing regulated
segment of the business. CPL would also be required to evaluate whether there
was any impairment of any deregulated plant assets. In addition, CPL and CSW
could experience, depending on the timing and amount of any write-off, a
material adverse effect on their results of operations and financial condition.
The foregoing discussion of CPL Rate Review - Docket No. 14965 contains
forward-looking information within the meaning of Section 21E of the Exchange
Act. Actual results may differ materially from such projected information. See
FORWARD-LOOKING INFORMATION. See NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS
for additional information on the CPL 1997 Final Order.
SWEPCO Louisiana Rate Review
In 1993, the Louisiana Commission issued an order initiating a review of
the rates of all investor-owned utilities in the state. Since that time, each of
the other investor-owned utilities in Louisiana has been reviewed. In December
1997, the Louisiana Commission announced it would review SWEPCO's rates and
service. SWEPCO's last rate activity was an $8.2 million rate decrease,
initiated by SWEPCO and approved for its small and large industrial customers in
January 1988. Prior to that, SWEPCO's last rate increase was in 1985.
The Louisiana Commission has selected consultants and legal counsel to
perform a review of SWEPCO's rates and charges and to review SWEPCO's quality of
service. The Louisiana Commission's legal counsel will issue a report in May
1999, and hearings will begin in September 1999. Management cannot predict the
outcome of this review.
SWEPCO Arkansas Rate Review
In June 1998, the Arkansas Commission indicated that it would conduct a
review of SWEPCO's earnings. The review began in July 1998, but no case has yet
been docketed. Management cannot predict the outcome of this review.
<PAGE>
Other
Reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for
information regarding fuel proceedings at CPL, SWEPCO and WTU.
STRATEGIC INITIATIVES
A vital part of CSW's future strategy involves the pursuit of initiatives
that are outside the traditional United States electric utility business 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 combined with the previously mentioned industry factors have resulted
in CSW pursuing other initiatives. These initiatives have taken a variety of
forms; however, they are all consistent with the overall plan for CSW to develop
a global energy business. CSW also has restrictions on the amounts it may spend
on these activities under the AEP merger agreement as discussed below. 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 also
restrict its ability to successfully pursue some of these 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 and RECENT DEVELOPMENTS AND TRENDS.
PROPOSED AEP MERGER
Background Information
On December 22, 1997, CSW and AEP announced that their boards of directors
had approved a definitive merger agreement for a tax-free, stock-for-stock
transaction creating a company with a total market capitalization of
approximately $28.1 billion ($16.5 billion in equity; $11.6 billion in debt and
preferred stock). The combined company would serve more than 4.6 million
customers in 11 states and approximately 4 million customers outside the United
States. On May 27, 1998, AEP shareholders approved the issuance of the
additional shares of stock required to complete the merger. On May 28, 1998, CSW
shareholders approved the merger.
Under the merger agreement, each common share of CSW will be converted
into 0.6 shares of AEP common stock. Based upon AEP's closing price immediately
prior to the merger announcement, this represented a premium of 20% over the CSW
closing price. AEP will issue approximately $6.6 billion in stock to CSW
stockholders to complete the transaction. CSW stockholders will own
approximately 40% of the combined company. Both companies anticipate continuing
their current dividend policies until the close of the transaction.
Under the merger agreement, there will be no changes required with respect
to the public debt issues, the outstanding preferred stock or the Trust
Preferred Securities of CSW's subsidiaries.
The companies anticipate net savings related to the merger of
approximately $2 billion over a 10-year period from the elimination of
duplication in corporate and administrative programs, greater efficiencies in
operations and business processes, increased purchasing efficiencies, and the
combination of the two work forces.
<PAGE>
The electric systems of AEP and CSW will operate on an integrated and
coordinated basis as required by the Holding Company Act. Any fuel savings
resulting from the coordinated operation of the combined company will be passed
on to customers.
The merger agreement contains covenants and agreements that restrict the
manner in which the parties may operate their respective businesses until the
time of closing of the merger. In particular, without the prior written consent
of AEP, CSW may not engage in a number of activities that could affect its
sources and uses of funds. Pending closing of the merger, CSW's and its
subsidiaries' strategic investment activity, capital expenditures and non-fuel
operating and maintenance expenditures are restricted to specific agreed upon
projects or agreed upon amounts. In addition, prior to consummation of the
merger, CSW and its subsidiaries are restricted from (i) issuing shares of
common stock other than pursuant to employee benefit plans, (ii) issuing shares
of preferred stock or similar securities other than to refinance existing
obligations or to fund permitted investment or capital expenditures and (iii)
incurring indebtedness other than pursuant to existing credit facilities, in the
ordinary course of business or to fund permitted projects or capital
expenditures. These restrictions are not expected to limit the ability of CSW
and its subsidiaries to make investments and expenditures in amounts previously
budgeted.
Merger Regulatory Approvals
The proposed AEP merger has a targeted completion date in the first half
of 1999. The merger is conditioned, among other things, upon the approval of
several state and federal regulatory agencies.
AEP and CSW have jointly filed a request with the FERC, the Arkansas
Commission, the Louisiana Commission, the Oklahoma Commission and the SEC for
approval of their proposed merger. AEP and CSW jointly filed a request with the
Texas Commission for a finding that the merger is in the public interest.
On August 17, 1998, the Arkansas Commission issued a conditional order
approving the proposed merger between CSW and AEP, subject to the findings
issued when the Arkansas Commission reviews the proposed regulatory plan
associated with the merger. The Arkansas Commission had previously divided the
merger application into one phase to review the merger and another phase to
review the proposed regulatory plan.
CPL filed a license transfer application with the NRC requesting the NRC's
consent to the indirect transfer of control of CPL's interests in the NRC
licenses issued for STP, which would result from the proposed merger between
CSW, CPL's parent company, and AEP. CPL would continue to own its 25.2% interest
in STP and CPL's name would remain on the NRC operating license. On November 5,
1998, the NRC approved the license transfer application.
AEP and CSW plan to make other required federal merger filings with the
Federal Communications Commission and the Department of Justice and/or the
Federal Trade Commission later in 1998.
CSW has a 100% interest in SEEBOARD, and AEP has a 50% interest in
Yorkshire. The proposed merger of CSW into AEP would result in common ownership
of the United Kingdom entities. As a result, the common ownership of the United
<PAGE>
Kingdom entities could be referred by the United Kingdom Secretary of State for
Trade and Industry for an investigation by the United Kingdom Monopolies and
Mergers Commission. CSW is unable to predict the outcome of any such regulatory
proceeding.
The merger is conditioned, among other things, upon the approval of
several state and federal regulatory agencies. The transaction must satisfy many
conditions, including the condition that it must be a pooling. Some of these
conditions may not be waived by the parties. AEP and CSW have initiated the
process of seeking regulatory approvals, but there can be no assurances as to
when, on what terms or whether the required approvals will be received or
whether there will be any regulatory proceedings in the United Kingdom. There
can be no assurance that the AEP merger will be consummated. See NOTE 6.
PROPOSED AEP MERGER.
The preceding discussion contains forward-looking information 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.
Merger Costs
As of September 30, 1998, CSW had deferred $22 million in costs related to
the merger on its consolidated balance sheet, which will be charged to expense
if AEP and CSW are not successful in completing their proposed merger.
OTHER MERGER AND ACQUISITION ACTIVITY
SWEPCO Cajun Asset Purchase Proposal
As previously reported, 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 March 18, 1998, SWEPCO, together with the Cajun Members Committee,
which currently represents 7 of the 12 Louisiana member distribution
cooperatives that are served by Cajun, filed the SWEPCO Plan in the bankruptcy
court. The SWEPCO Plan replaces plans filed previously by SWEPCO. Under the
SWEPCO Plan, a SWEPCO affiliate or subsidiary would acquire all of the
non-nuclear assets of Cajun, comprised of the two-unit Big Cajun I natural
gas-fired plant, the three-unit Big Cajun II coal-fired plant, and related
non-nuclear assets. The purchase price under the SWEPCO Plan is $940.5 million
in cash, subject to adjustment pursuant to the terms of the asset purchase
agreement proposed as part of the SWEPCO Plan.
Two competing plans of reorganization for the non-nuclear assets of Cajun
were filed with the bankruptcy court. On September 25, 1998, Enron Capital and
Trade Resource Corporation, a subsidiary of Enron Corporation, withdrew its bid.
The trustee for Cajun supports the sole remaining competing bid of $1.19 billion
by Louisiana Generating LLC, a partnership of subsidiaries of Southern Energy,
Inc., Northern States Power Company and Zeigler Coal Holding Company.
Confirmation hearings in Cajun's bankruptcy case were completed in May 1998.
Consummation of the 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 their respective board of directors
approvals. If the SWEPCO Plan is confirmed, the $940.5 million required to
consummate the acquisition of Cajun's non-nuclear assets is expected to be
financed through a combination of external borrowings and internally generated
funds with approximately 70% of the external borrowings funded with non-recourse
<PAGE>
debt. There can be no assurance that the SWEPCO Plan will be confirmed by the
bankruptcy court or, if it is confirmed, that it will be approved by federal and
state regulators. As of September 30, 1998, SWEPCO had deferred $10.4 million in
costs related to the SWEPCO Plan on its consolidated balance sheet which would
be expensed if the SWEPCO plan is not ultimately successful. See NOTE 3.
COMMITMENTS AND CONTINGENT LIABILITIES.
Frontera Project
CSW Energy began construction in August 1998 of a 500 MW power plant,
known as Frontera, in the Rio Grande Valley, near the city of Mission, Texas. At
September 30, 1998, CSW Energy had spent approximately $50 million, including
development, construction and financing of the projected $210 million project
costs. The natural gas-fired facility should begin partial operation in the
summer of 1999 and full operation by the end of 1999. Although the Frontera
project is being built as a merchant power plant without long-term purchase
power contracts, it will supply power to the rapidly growing Rio Grande Valley
and customers throughout Texas.
Shoreham Project
CSW International and Scottish Power plc. commenced construction of a 400
MW combined cycle gas turbine power station in southeast England. Commercial
operation is expected to begin in the year 2000. The joint venture partners will
provide interim construction financing with third party financing expected in
early 1999. Project costs are expected to total approximately $320 million. CSW
International has a 50% interest in the joint venture.
C3 Communications
On October 8, 1998, C3 Communications announced that it had signed an
agreement with ICG Communications, Inc. to end their CSW\ICG ChoiceComSM
partnership. The agreement, anticipated to close by the end of 1998 or early
1999, is subject to the approval of the Texas Commission and the Federal
Communications Commission and to certain other conditions, some of which may not
be waived by the parties. ChoiceCom was formed in January 1997 to market
telecommunications services, including local exchange telephone service, in a
four-state region in the southwest.
C3 Communications plans to form a new division, C3 Networks, from the
fiber assets of the partnership that C3 Communications will receive under the
agreement. C3 Networks will use this city-to-city fiber network to deliver
state-of-the-art optical networking to the wholesale telecommunications market.
The preceding two sentences contains forward-looking information 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. Also, as part of the agreement, ICG
Communications is expected to own and operate ChoiceCom's telephone business in
several Texas cities.
Under the terms of the agreement, ICG Communications will pay, upon
closing, approximately $50 million for certain ChoiceCom assets comprising
ChoiceCom's telephone business. C3 Communications will also receive the fiber
network assets from the partnership at closing. The agreement is expected to
result in a one-time gain, which is not expected to be material to CSW's annual
earnings. During the remainder of 1998 and thereafter, C3 Communications'
operating expenses and capital investments to develop its city-to-city fiber
optic network are expected to be significantly lower than the previously
expected expenses and investments that would have been required to support the
ChoiceCom partnership.
<PAGE>
RECENT DEVELOPMENTS AND TRENDS
Industry Restructuring Initiatives
Several initiatives regarding restructuring the electric utility industry
have recently been undertaken in the four states in which the U.S. Electric
Operating Companies operate. Legislation was enacted in Oklahoma while
legislative activity in Texas, Louisiana and Arkansas stopped short of any
definitive action. The regulatory commissions in Arkansas, Louisiana and Texas
are currently studying various restructuring issues. In April 1997, the Oklahoma
Legislature enacted legislation dealing with industry restructuring in Oklahoma,
which provides for retail competition by July 1, 2002. The legislation directs
the Oklahoma Commission to study all relevant issues relating to restructuring
and develop a framework for a restructured industry. A bill was passed in the
1998 Oklahoma legislative session that accelerates the completion date for the
restructuring studies but does not change the date for retail competition.
Electricity Deregulation in the United Kingdom
On October 28, 1998, the market for the supply of electricity was opened
to competition in part of the United Kingdom, and competition is to be extended
to the rest of the country in subsequent phases. Customers in SEEBOARD's region
will be able to choose their power supplier, but SEEBOARD will also be able to
win customers in areas previously supplied by other regional electricity
companies.
RISK MANAGEMENT
In October 1997, CSW's board of directors adopted a risk management
resolution authorizing CSW to engage in currency, interest rate and energy spot
and forward transactions and related derivative transactions on behalf of CSW
with foreign and domestic parties. The risk management program is necessary to
meet the growing demands of CSW's customers for competitive prices as well as
price stability, to enable CSW to compete in a deregulated power industry, to
manage the risks associated with domestic and foreign investments and to take
advantage of strategic investment opportunities.
The U.S. Electric Operating Companies experience commodity price exposures
related to the purchase of fuel supplies for the generation of electricity and
for the purchase of power and energy from other generation sources. Contracts
that provide for the future delivery of these commodities can be considered
forward contracts which contain pricing and/or volume terms designed to
stabilize the cost of the commodity. The U.S. Electric Operating Companies
manage their price exposure for the benefit of customers by balancing their
commodity purchases through a combination of long-term and short-term
(spot-market) agreements. In addition, SEEBOARD has entered into contracts for
differences to reduce exposure to fluctuations in the price of electricity
purchased from the electricity power pool of England and Wales. This pool was
established upon privatization of the United Kingdom's electric industry for the
bulk trading of electricity between generators and suppliers.
Since CSW's purchase of SEEBOARD in 1995, it has been exposed to currency
and interest rate risks which reflect the floating exchange rate that exists
between the U.S. dollar and the British pound. CSW has utilized certain risk
management tools to manage potential adverse changes in exchange rates and to
facilitate financing transactions resulting from CSW's acquisition of SEEBOARD.
At September 30, 1998, CSW had positions in two cross currency swap contracts to
hedge its interest rate and exchange rate risks associated with these U.S.
denominated debts. The following table presents information relating to these
contracts. The market value represents the foreign exchange/interest rate terms
inherent in the cross currency swaps at current market pricing. CSW expects to
<PAGE>
hold these contracts to maturity. At current exchange rates, this liability is
included in long-term debt on the balance sheet at a carrying value of
approximately $431 million.
Expected Expected
Cash Inflows Cash
Contract Maturity (Maturity Outflows
Date Value) (Market Value)
--------------------------------------------------------------------------
Cross currency swap August 1, 2001 $200 million $219.7 million
Cross currency swap August 1, 2006 $200 million $229.0 million
The decline in value of the currency swaps reflects the strengthening of
the British pound versus the U.S. dollar. Consequently, CSW's investment in
SEEBOARD's assets at September 30, 1998 is worth more in U.S. dollars than when
the acquisition was made. This gain in asset value offsets the change in market
value of the currency swaps.
CSW Energy or its affiliates use interest rate swap agreements to hedge
exposure to fluctuations in the interest rates to be paid on outstanding
indebtedness. CSW Energy or its affiliates have entered into swaps on debt
totaling $87 million with expiration dates through the year 2013. The interest
rate of these instruments is 6.02%.
CSW Energy or its affiliates are exposed to credit risk in the event of
nonperformance by the counter parties. An analysis of the financial condition of
each counter party is made prior to entering into an agreement, credit limits
are established and the appropriateness of these limits are monitored on an
on-going basis.
ENVIRONMENTAL
State of Texas
Pursuant to legislation passed in the 1997 Texas legislature, the Texas
Natural Resources Conservation Commission is developing a program that will
allow effected parties to obtain permits for grandfathered facilities on a
voluntary basis. Grandfathered facilities are generally defined as those
facilities with air emissions that began operation before the requirements of
the 1971 Clean Air Act took effect. These facilities were not required to obtain
construction or operation permits for their air emissions. Grandfathered
facilities include a wide range of sources, including refineries, chemical
plants, power plants, cotton gins, paint shops, bakeries, and dry cleaners.
Constituents in Texas are working with the Texas Natural Resources
Conservation Commission to develop the rules for the voluntary program, which
are currently in draft form. The proposed draft rules call for grandfathered
facilities to employ "best available retrofit technology" where appropriate and
reasonable. CSW estimates the cost to obtain permits for its grandfathered units
under the voluntary program to be $3 to $15 million over the next ten years. All
of CSW's grandfathered units are gas units which are less expensive to upgrade
than coal units.
OTHER MATTERS
Year 2000
In 1996, CSW initiated a system-wide program to prepare CSW's computer
systems and applications for the year 2000. The year 2000 activities are a top
priority of CSW. CSW expects to incur internal staff costs as well as consulting
<PAGE>
and other expenses related to infrastructure and facilities enhancements
necessary to prepare the systems for the year 2000. Costs related to the year
2000 program are being expensed as incurred. The estimated historical costs
incurred to date for the year 2000 project are $13 million, $11 million of which
has been incurred in 1998. Testing and conversion is expected to cost an
additional $32 million to $37 million over the next eighteen months, including
both domestic and foreign operations. Approximately 29% of the expected costs
are to be covered through the redeployment of existing resources. Approximately
39% of the projected costs are for contract labor. The remaining 32% of the
projected costs is for computer hardware and software purchases. The funds for
year 2000 project expenditures are included in CSW's operating budget. At
present, no CSW computer information system projects have been affected by the
year 2000 project, but that may change as the year 2000 approaches. Accordingly,
no estimate has been made for the financial impact of any future forgone
projects. CSW has completed a review of its year 2000 project. The purpose of
this review was to assess the project plans and processes to ensure that the
significant risks to CSW associated with the year 2000 are prudently managed.
Several changes have been incorporated into the year 2000 project as a result of
the review findings.
The year 2000 project includes all management information systems that
support business functions such as customer billing, payroll and other business
functions. Other systems with computer-based controls such as
telecommunications, elevators, building environmental management, metering,
plant, transmission, distribution and substations are included in this project
as well. The greatest financial risk to CSW would be a total inability to
generate and deliver electricity. Many primary systems and backup systems would
have to fail in order for that total inability to occur. The probability of a
total inability by CSW to generate and deliver electricity is very low because
only 50% of its power generation systems operate with date sensitive logic and
less than 15% of the transmission and distribution systems contain date
sensitive logic. The potential problems related to this worse case scenario
include electric service interruptions to customers, interrupted revenue data
gathering and poor customer relations resulting from delayed billing. Currently,
no cost estimate exists related to CSW's year 2000 risks.
CSW's system-wide year 2000 program began with the naming of an executive
sponsor and project manager and the formation of a program management office.
CSW has hired a consultant to assist the project team. Status is checked
bi-weekly including weekly updates to the senior management team, monthly review
by an executive oversight committee comprised of the functional vice presidents,
and quarterly review by the board of directors' audit committee. Key milestones
for the CSW system-wide year 2000 program excluding SEEBOARD are listed below.
(i) Inventory and assessment of business applications and vendor supplied
software were completed in the first quarter of 1997. Only 25% of the
business application programs were determined to be non-compliant and in
need of remediation by December 1999.
(ii) Plans for modification and certification testing of business
application software was completed in the third quarter of 1997.
(iii) Remediation plans and schedules for business applications were
established in the fourth quarter of 1997, and conversion and certification
activities were initiated. All but three applications are targeted for
completion by December 31, 1998 and the remainder by mid-year 1999. The
conversion and certification activities are approximately 60% complete.
<PAGE>
(iv) A detailed inventory and assessment of other critical systems was
completed in the third quarter of 1998. This includes switchboards,
elevators, environmental controls, vehicles, metering systems, and embedded
logic or real time control systems in support of generation and delivery of
electricity. The findings have shown that less than 15% of installed
controls have microprocessors, very few have date logic and over 90% of
those with date logic already process new millennium dates correctly. The
need for additional functionality in the early 1990's resulted in the
modernization of several electric operation systems that has reduced the
conversion requirements. Corrective and certification measures are well
underway for these systems and completion is targeted for all systems by
the second quarter of 1999.
(v) Contingency plans are currently in development to address year 2000
issues internally, as well as within the national electric delivery system,
and with our suppliers. Contingency plans will be completed in the first
quarter of 1999, and most of calendar year 1999 has been reserved for final
verification of all external interfaces and rehearsal of contingency plans.
SEEBOARD is on schedule to complete an inventory and assessment of all
critical systems by year-end 1998 and remediation of those systems in the first
quarter of 1999. Final verification of those systems is scheduled for completion
by mid-year 1999.
The preceding discussion contains forward-looking information 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.
New Accounting Standards
The FASBoard has issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for fiscal years
beginning after June 15, 1999.
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants has issued Statement of Position 98-5, Reporting on
the Costs of Start-Up Activities, which is effective for fiscal years beginning
after December 15, 1998.
See NOTE 8. ACCOUNTING STANDARDS for additional information on the new
accounting standards.
<PAGE>
PART II - OTHER INFORMATION
For background and earlier developments relating to PART II information,
reference is made to the Registrants' Combined Annual Report on Form 10-K for
the year ended December 31, 1997 and Combined Quarterly Reports on Form 10-Q for
the quarters ended March 31, 1998 and June 30, 1998.
ITEM 1. LEGAL PROCEEDINGS.
Legal Claims and Proceedings
The CSW System is party to various legal claims and proceedings arising in
the normal course of business. Management does not expect disposition of these
matters to have a material adverse effect on the Registrants' results of
operations or financial condition. See PART I - NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS and NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
(12) Computation of Ratio of Earnings to Fixed Charges
CPL - (Exhibit 12.1), filed herewith.
PSO - (Exhibit 12.2), filed herewith.
SWEPCO - (Exhibit 12.3), filed herewith.
WTU - (Exhibit 12.4), filed herewith.
<PAGE>
(27) Financial Data Schedules
CSW - (Exhibit 27.1), filed herewith.
CPL - (Exhibit 27.2), filed herewith.
PSO - (Exhibit 27.3), filed herewith.
SWEPCO - (Exhibit 27.4), filed herewith.
WTU - (Exhibit 27.5), filed herewith.
(b) REPORTS FILED ON FORM 8-K:
CSW, PSO, and SWEPCO
Date of earliest event reported: August 17, 1998
Date of Report: August 20, 1998
Item 5. Other Events and Item 7. Financial Statements and Exhibits, reporting
information related to the proposed merger between CSW and AEP (requested merger
approval from the Oklahoma Commission and conditional approval of the merger by
the Arkansas Commission).
CSW and PSO
Date of earliest event reported: October 1, 1998
Date of Report: October 9, 1998
Item 5. Other Events and Item 7. Financial Statements and Exhibits, reporting
information related to the proposed merger between CSW and AEP (recommendation
from an administrative law judge that the merger filing be dismissed for lack of
information).
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
Registrant shall be deemed to relate only to matters having reference to such
Registrant or its subsidiaries.
CENTRAL AND SOUTH WEST CORPORATION
Date: November 16, 1998 /s/ Lawrence B. Connors
-------------------------------------------
Lawrence B. Connors
Controller and Chief Accounting Officer
(Principal Accounting Officer)
CENTRAL POWER AND LIGHT COMPANY
PUBLIC SERVICE COMPANY OF OKLAHOMA
SOUTHWESTERN ELECTRIC POWER COMPANY
WEST TEXAS UTILITIES COMPANY
Date: November 16, 1998 /s/ R. Russell Davis
--------------------------------
R. Russell Davis
Controller and Chief Accounting Officer
(Principal Accounting Officer)
EXHIBIT 12.1
CENTRAL POWER AND LIGHT COMPANY (CONSOLIDATED)
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1998
(Thousands Except Ratio)
(Unaudited)
Operating Income $297,422
Adjustments:
Income taxes 69,735
Provision for deferred income taxes 40,865
Deferred investment tax credits (3,859)
Other income and deductions 4,959
Allowance for borrowed and equity funds
used during construction 2,385
----------
Earnings $411,507
==========
Fixed Charges:
Interest on long-term debt $94,496
Interest on short-term debt and other 22,666
Nuclear Decommissioning Trust 1,978
Distributions on Trust Preferred Securities 12,000
----------
Fixed Charges $131,140
Ratio of Earnings to Fixed Charges 3.14
==========
EXHIBIT 12.2
PUBLIC SERVICE COMPANY OF OKLAHOMA (CONSOLIDATED)
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1998
(Thousands Except Ratio)
(Unaudited)
Operating Income $109,796
Adjustments:
Income taxes 19,407
Provision for deferred income taxes 26,036
Deferred investment tax credits (2,188)
Other income and deductions 191
Allowance for borrowed and equity funds
used during construction 1,984
-------
Earnings $155,226
=======
Fixed Charges:
Interest on long-term debt $30,142
Interest on short-term debt and other 3,950
Distributions on Trust Preferred Securities 6,000
-------
Fixed Charges $40,092
=======
Ratio of Earnings to Fixed Charges 3.87
=======
EXHIBIT 12.3
SOUTHWESTERN ELECTRIC POWER COMPANY (CONSOLIDATED)
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1998
(Thousands Except Ratio)
(Unaudited)
Operating Income $141,510
Adjustments:
Income taxes 60,035
Provision for deferred income taxes (12,461)
Deferred investment tax credits (4,639)
Other income and deductions 1,994
Allowance for borrowed and equity funds
used during construction 2,614
Interest portion of financing leases 652
---------
Earnings $189,705
=========
Fixed Charges:
Interest on long-term debt $39,235
Distributions on Trust Preferred Securities 8,514
Interest on short-term debt and other 6,880
Interest portion of financing leases 652
---------
Fixed Charges $55,281
=========
Ratio of Earnings to Fixed Charges 3.43
========
EXHIBIT 12.4
WEST TEXAS UTILITIES COMPANY
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 1998
(Thousands Except Ratio)
(Unaudited)
Operating Income $57,567
Adjustments:
Income taxes 31,117
Provision for deferred income taxes (11,407)
Deferred investment tax credits (1,321)
Other income and deductions 2,445
Allowance for borrowed and equity funds
used during construction 1,087
--------
Earnings $79,488
========
Fixed Charges:
Interest on long-term debt $20,352
Interest on short-term debt and other 4,406
--------
Fixed Charges $24,758
========
Ratio of Earnings to Fixed Charges 3.21
========
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<NAME> CENTRAL AND SOUTH WEST CORPORTION
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<NAME> CENTRAL AND SOUTH WEST CORPORATION
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176
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<NAME> CENTRAL POWER AND LIGHT COMPANY
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<NAME> CENTRAL POWER AND LIGHT COMPANY
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163,204
<LONG-TERM-DEBT-NET> 1,320,325
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<LONG-TERM-DEBT-CURRENT-PORT> 100,000
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<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,638,462
<TOT-CAPITALIZATION-AND-LIAB> 4,742,352
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<OTHER-OPERATING-EXPENSES> 734,666
<TOTAL-OPERATING-EXPENSES> 839,207
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<OTHER-INCOME-NET> 2,514
<INCOME-BEFORE-INTEREST-EXPEN> 255,813
<TOTAL-INTEREST-EXPENSE> 93,474
<NET-INCOME> 162,339
4,929
<EARNINGS-AVAILABLE-FOR-COMM> 157,410
<COMMON-STOCK-DIVIDENDS> 172,000
<TOTAL-INTEREST-ON-BONDS> 70,397
<CASH-FLOW-OPERATIONS> 342,432
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<EPS-DILUTED> 0.00
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<CIK> 0000081027
<NAME> PUBLIC SERVICE COMPANY OF OKLAHOMA
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<NAME> PUBLIC SERVICE COMPANY OF OKLAHOMA
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<PERIOD-END> SEP-30-1998
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<OTHER-PROPERTY-AND-INVEST> 20,590
<TOTAL-CURRENT-ASSETS> 104,821
<TOTAL-DEFERRED-CHARGES> 2,607
<OTHER-ASSETS> 34,358
<TOTAL-ASSETS> 1,465,693
<COMMON> 157,230
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<RETAINED-EARNINGS> 172,974
<TOTAL-COMMON-STOCKHOLDERS-EQ> 510,204
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5,287
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<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 507,478
<TOT-CAPITALIZATION-AND-LIAB> 1,465,693
<GROSS-OPERATING-REVENUE> 623,110
<INCOME-TAX-EXPENSE> 52,564
<OTHER-OPERATING-EXPENSES> 464,100
<TOTAL-OPERATING-EXPENSES> 516,664
<OPERATING-INCOME-LOSS> 106,446
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<TOTAL-INTEREST-EXPENSE> 29,281
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160
<EARNINGS-AVAILABLE-FOR-COMM> 77,978
<COMMON-STOCK-DIVIDENDS> 42,000
<TOTAL-INTEREST-ON-BONDS> 21,666
<CASH-FLOW-OPERATIONS> 165,953
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
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<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000092487
<NAME> SOUTHWESTERN ELECTRIC POWER COMPANY
<SUBSIDIARY>
<NUMBER> 005
<NAME> SOUTHWESTERN ELECTRIC POWER COMPANY
<MULTIPLIER> 1,000
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
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<OTHER-PROPERTY-AND-INVEST> 6,052
<TOTAL-CURRENT-ASSETS> 180,891
<TOTAL-DEFERRED-CHARGES> 19,024
<OTHER-ASSETS> 53,872
<TOTAL-ASSETS> 2,097,060
<COMMON> 135,660
<CAPITAL-SURPLUS-PAID-IN> 245,000
<RETAINED-EARNINGS> 334,003
<TOTAL-COMMON-STOCKHOLDERS-EQ> 714,663
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<CAPITAL-LEASE-OBLIGATIONS> 2,212
<LEASES-CURRENT> 3,337
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<OTHER-OPERATING-EXPENSES> 582,647
<TOTAL-OPERATING-EXPENSES> 628,063
<OPERATING-INCOME-LOSS> 127,981
<OTHER-INCOME-NET> 2,095
<INCOME-BEFORE-INTEREST-EXPEN> 130,076
<TOTAL-INTEREST-EXPENSE> 40,620
<NET-INCOME> 89,456
648
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<COMMON-STOCK-DIVIDENDS> 78,000
<TOTAL-INTEREST-ON-BONDS> 29,426
<CASH-FLOW-OPERATIONS> 185,506
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
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<CIK> 0000105860
<NAME> WEST TEXAS UTILITIES COMPANY
<SUBSIDIARY>
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<NAME> WEST TEXAS UTILITIES COMPANY
<MULTIPLIER> 1,000
<S> <C>
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<PERIOD-END> SEP-30-1998
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<OTHER-PROPERTY-AND-INVEST> 1,054
<TOTAL-CURRENT-ASSETS> 104,492
<TOTAL-DEFERRED-CHARGES> 18,004
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<TOTAL-ASSETS> 837,301
<COMMON> 137,214
<CAPITAL-SURPLUS-PAID-IN> 2,236
<RETAINED-EARNINGS> 141,829
<TOTAL-COMMON-STOCKHOLDERS-EQ> 281,279
0
2,482
<LONG-TERM-DEBT-NET> 281,318
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 272,222
<TOT-CAPITALIZATION-AND-LIAB> 837,301
<GROSS-OPERATING-REVENUE> 335,644
<INCOME-TAX-EXPENSE> 21,705
<OTHER-OPERATING-EXPENSES> 257,490
<TOTAL-OPERATING-EXPENSES> 279,195
<OPERATING-INCOME-LOSS> 56,449
<OTHER-INCOME-NET> 2,179
<INCOME-BEFORE-INTEREST-EXPEN> 58,628
<TOTAL-INTEREST-EXPENSE> 18,200
<NET-INCOME> 40,428
78
<EARNINGS-AVAILABLE-FOR-COMM> 40,350
<COMMON-STOCK-DIVIDENDS> 18,000
<TOTAL-INTEREST-ON-BONDS> 15,264
<CASH-FLOW-OPERATIONS> 45,342
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
