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 March 31, 1999
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) 673-3000
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 May 7, 1999 Shares
Central and South West Corporation 212,613,935
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
MARCH 31, 1999
GLOSSARY OF TERMS..............................................................3
FORWARD-LOOKING INFORMATION....................................................5
PART 1. FINANCIAL INFORMATION..................................................6
ITEM 1. FINANCIAL STATEMENTS.................................................6
.........................................6
CENTRAL POWER AND LIGHT COMPANY...........................................14
PUBLIC SERVICE COMPANY OF OKLAHOMA........................................20
SOUTHWESTERN ELECTRIC POWER COMPANY.......................................26
WEST TEXAS UTILITIES COMPANY..............................................32
NOTES TO FINANCIAL STATEMENTS.............................................39
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................................56
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........72
PART II -OTHER INFORMATION....................................................74
ITEM 1. LEGAL PROCEEDINGS...................................................74
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................74
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................75
SIGNATURES....................................................................77
2
<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 where CSW would
become a wholly-owned subsidiary of AEP
ALJ ....................Administrative Law Judge
Alpek ..................Alpek S.A. de C.V.
Altamira................CSW International cogeneration project in Altamira,
Tamaulipas, Mexico
April 1999 SWEPCO Plan..The amended plan of reorganization for Cajun filed by
the Members Committee and SWEPCO on April 16, 1999 with
the U.S. Bankruptcy Court for the Middle District of
Louisiana
Arkansas Commission ....Arkansas Public Service Commission
Btu ....................British thermal unit
C3 Communications ......C3 Communications, Inc., Austin, Texas (formerly CSW
Communications, Inc.)
Cajun ..................Cajun Electric Power Cooperative, Inc.
Cajun Members Committee.Committee represented by 7 of the 12 Louisiana member
distribution cooperatives that are served by Cajun
CLECO ..................Central Louisiana Electric Company, Inc.
Court of Appeals .......Court of Appeals, Third District of Texas, Austin, Texas
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, including both the order
received on September 10, 1997 and the revised order
received on October 16, 1997
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
DHMV ...................Dolet Hills Mining Venture
Diversified Electric ...CSW Energy and CSW International
ECOM ...................Excess cost over market
EPA ....................United States Environmental Protection Agency
EPS ....................Earnings per share of common stock
ERCOT ..................Electric Reliability Council of Texas
Exchange Act ...........Securities Exchange Act of 1934, as amended
EWG ....................Exempt Wholesale Generator
FERC ...................Federal Energy Regulatory Commission
FUCO ...................Foreign utility company as defined by the Holding
Company Act
Holding Company Act ....Public Utility Holding Company Act of 1935, as amended
IBEW ...................International Brotherhood of Electrical Workers
ISO ....................Independent system operator
ITC ....................Investment tax credit
KW .....................Kilowatt
KWH ....................Kilowatt-hour
LIFO ...................Last-in first-out (inventory accounting method)
Louisiana Commission ...Louisiana Public Service Commission
Market Method...........The five year average market-related method to determine
pension costs
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
MW .....................Megawatt
MWH ....................Megawatt-hour
National Grid Group ....National Grid Group plc
NEIL ...................Nuclear Electric Insurance Limited
NLRB ...................National Labor Relations Board
NRC ....................Nuclear Regulatory Commission
3
<PAGE>
GLOSSARY OF TERMS (continued)
The following abbreviations or acronyms used in this text are defined below:
Abbreviation or Acronym Definition
Oklahoma Commission ....Corporation Commission of the State of Oklahoma
PCB ....................Polychlorinated biphenyl
PRP ....................Potentially responsible party
PSO ....................Public Service Company of Oklahoma, Tulsa, Oklahoma
Registrant(s) ..........CSW, CPL, PSO, SWEPCO and WTU
Retirement Plan ........CSW's tax-qualified Cash Balance Retirement Plan
Rights Plan ............Stockholders Rights Agreement between CSW and CSW
Services, as Rights Agent
RUS ....................Rural Utilities Service of the federal government
SEC ....................United States Securities and Exchange Commission
SEEBOARD ...............SEEBOARD Group 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. 87.............Employers' Accounting for Pensions
SFAS No. 115 ...........Accounting for Certain Investments in Debt and Equity
Securities
SFAS No. 130 ...........Reporting Comprehensive Income
SFAS No. 131............Disclosure about Segments of an Enterprise and Related
Information
STP ....................South Texas Project nuclear electric generating station
Sweeny..................A CSW Energy cogeneration facility located in Sweeny,
Texas
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 wit
the U.S. Bankruptcy Court for the Middle District of
Louisiana
Texas Commission .......Public Utility Commission of Texas
Texas Eastman...........Eastman Chemical Company
TNRCC ..................Texas Natural Resource Conservation Commission
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.K. Electric...........SEEBOARD U.S.A.
U.S. Electric Operating
Companies or U.S.
Electric ..............CPL, PSO, SWEPCO and WTU
Vale ...................Empresa De Electricidade Vale Paranapanema S/A, a
Brazilian Electric Distribution Company
Valero..................Valero Refining Company-Texas, Valero Refining Company
and Valero Energy Company
WTU ....................West Texas Utilities Company, Abilene, Texas
Yorkshire ..............Yorkshire Electricity Group plc, a regional electricity
company in the United Kingdom
4
<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 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 United States and in countries
in which CSW either currently has made or in the future may make
investments,
- - 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 April
1999 SWEPCO Plan,
- - the impact of deregulation on the United States electric utility business,
- - increased competition and electric utility industry restructuring in the
United States,
- - federal and state regulatory developments and changes in law which may
have a substantial adverse impact on the value of CSW System generating
and other 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 computer related failure(s) 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,
- - the timing and success of efforts to develop domestic and international
power projects, and
- - risks associated with hedging and other risk management techniques.
In the non-utility area, the previously mentioned factors 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, and
- - 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.
5
<PAGE>
CSW
CENTRAL AND SOUTH WEST CORPORATION
PART 1. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
6
<PAGE>
CSW
Consolidated Statements of Income (unaudited)
Central and South West Corporation
Three Months Ended March 31,
---------------------------------------
1999 1998
-------------- ---------------
(in millions, except per share amounts)
Operating Revenues
U.S. Electric $ 697 $ 689
United Kingdom 476 533
Other diversified 52 35
------- -------
1,225 1,257
------- -------
Operating Expenses and Taxes
U.S. Electric fuel 229 236
U.S. Electric purchased power 29 21
United Kingdom cost of sales 322 385
Other operating 251 228
Maintenance 41 34
Depreciation and amortization 132 123
Taxes, other than income 57 46
Income taxes 17 21
------- -------
1,078 1,094
------- -------
Operating Income 147 163
------- -------
Other Income and Deductions
Other 13 15
Non-operating income taxes (4) (3)
------- -------
9 12
------- -------
Income Before Interest and Other Charges 156 175
------- -------
Interest and Other Charges
Interest on long-term debt 78 80
Interest on short-term debt and other 24 26
Distributions on Trust Preferred Securities 7 7
Preferred dividend requirements of
subsidiaries 2 2
------- -------
111 115
------- -------
Net Income for Common Stock $ 45 $ 60
======= =======
Average Common Shares Outstanding 212.6 212.3
Basic and Diluted EPS $0.21 $0.28
======= =======
Dividends Paid per Share of Common Stock $0.435 $0.435
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
7
<PAGE>
CSW
Consolidated Statements of Stockholders' Equity
Central and South West Corporation
(millions)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income (Loss) Total
<S> <C> <C> <C> <C> <C>
(audited)
Beginning Balance - January 1, 1998 $743 $1,039 $1,751 $23 $3,556
Sale of common stock 1 10 -- -- 11
Common stock dividends -- -- (370) -- (370)
Other -- -- 2 -- 2
-------
3,199
Comprehensive Income:
Foreign currency translation
adjustment (net of tax of $2) -- -- -- 7 7
Unrealized loss on securities
(net of tax of $8) -- -- -- (14) (14)
Adjustment for gain included in
net income (net of tax of $4) -- -- -- (7) (7)
Minimum pension liability
(net of tax of $0.6) -- -- -- (1) (1)
Net Income -- -- 440 -- 440
-------
Total comprehensive income 425
-----------------------------------------------------
Ending Balance -- December 31, 1998 $744 $1,049 $1,823 $8 $3,624
=====================================================
(unaudited)
Beginning Balance -- January 1, 1999 $744 $1,049 $1,823 $8 $3,624
Sale of common stock -- 1 -- -- 1
Common stock dividends -- -- (93) -- (93)
-------
3,532
Comprehensive Income:
Foreign currency translation
adjustment (62) (62)
Unrealized gain on securities
(net of tax of $2) -- -- -- 5 5
Net Income -- -- 45 -- 45
-------
Total comprehensive income (12)
-----------------------------------------------------
Ending Balance -- March 31, 1999 $744 $1,050 $1,775 ($49) $3,520
=====================================================
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
8
<PAGE>
CSW
Consolidated Balance Sheets
Central and South West Corporation
- --------------------------------------------------------------------------------
March 31, December 31,
1999 1998
(unaudited) (audited)
------------ -----------
(millions)
ASSETS
Fixed Assets
Electric
Production $ 5,895 $ 5,887
Transmission 1,598 1,594
Distribution 4,686 4,681
General 1,385 1,380
Construction work in progress 172 166
Nuclear fuel 209 207
------------ -----------
13,945 13,915
Other diversified 375 333
------------ -----------
14,320 14,248
Less - Accumulated depreciation and amortization 5,717 5,652
------------ -----------
8,603 8,596
------------ -----------
Current Assets
Cash and temporary cash investments 123 157
Accounts receivable 901 1,110
Materials and supplies, at average cost 195 191
Electric utility fuel inventory 108 90
Under-recovered fuel costs -- 4
Notes receivable 113 109
Prepayments and other 103 90
------------ -----------
1,543 1,751
------------ -----------
Deferred Charges and Other Assets
Deferred plant costs 496 497
Mirror CWIP asset 253 257
Other non-utility investments 448 432
Securities available for sale 74 66
Income tax related regulatory assets, net 306 308
Other regulatory assets 198 204
Goodwill 1,353 1,402
Other 400 384
------------ -----------
3,528 3,550
------------ -----------
$ 13,674 $ 13,897
============ ===========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
9
<PAGE>
CSW
Consolidated Balance Sheets
Central and South West Corporation
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(unaudited) (audited)
----------- -----------
<S> <C> <C> <C> <C>
CAPITALIZATION AND LIABILITIES (millions)
Capitalization
Common stock: $3.50 par value
Authorized: 350.0 million shares
Issued and outstanding: 212.6 million shares
in 1999 and in 1998 $ 744 $ 744
Paid-in capital 1,050 1,049
Retained earnings 1,775 1,823
Accumulated other comprehensive income (49) 8
----------- -----------
3,520 44% 3,624 45%
----------- ------ ----------- -----
Preferred Stock 176 3% 176 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 3,925 49% 3,938 49%
----------- ------ ----------- -----
7,956 100% 8,073 100%
----------- ------ ----------- -----
Current Liabilities
Long-term debt and preferred stock due within twelve months 170 169
Short-term debt 960 811
Short-term debt - CSW Credit, Inc. 567 749
Loan notes 29 32
Accounts payable 518 624
Accrued taxes 187 190
Accrued interest 105 84
Other 230 218
----------- -----------
2,766 2,877
----------- -----------
Deferred Credits
Accumulated deferred income taxes 2,391 2,410
Investment tax credits 263 267
Other 298 270
----------- -----------
2,952 2,947
----------- -----------
$ 13,674 $ 13,897
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
10
<PAGE>
CSW
Consolidated Statements of Cash Flows (unaudited)
Central and South West Corporation
Three Months Ended
March 31,
---------------------
1999 1998
(millions)
OPERATING ACTIVITIES
Net income for common stock $ 45 $ 60
Non-cash Items and Adjustments
Depreciation and amortization 139 127
Deferred income taxes and investment tax credits (14) (10)
Preferred stock dividends 2 2
Changes in Assets and Liabilities
Accounts receivable 185 88
Accounts payable (72) (90)
Accrued taxes (1) 4
Fuel inventory (18) (5)
Fuel recovery 23 51
Refund due customers -- (59)
Other (40) (21)
------ ------
249 147
------ ------
INVESTING ACTIVITIES
Construction expenditures (125) (119)
CSW Energy/CSW International projects (41) 19
Other (17) (10)
------ ------
(183) (110)
------ ------
FINANCING ACTIVITIES
Common stock sold 1 1
Long-term debt sold -- 5
Reacquisition/Maturity of long-term debt (1) (59)
Other financing activities 29 19
Change in short-term debt (32) 110
Payment of dividends (95) (95)
------ ------
(98) (19)
------ ------
Effect of exchange rate changes on cash and cash
equivalent (2) --
------ ------
Net Change in Cash and Cash Equivalents (34) 18
Cash and Cash Equivalents at Beginning of Year 157 75
------ ------
Cash and Cash Equivalents at End of Period $ 123 $ 93
====== ======
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $ 86 $ 101
====== ======
Income taxes paid $ 13 $ --
====== ======
The accompanying notes to consolidated financial statements are an
integral part of these statements.
11
<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 periods ended March 31, 1999 and March 31,
1998. For information concerning the results of operations for each of the U.S.
Electric Operating Companies, see the discussions under the heading RESULTS OF
OPERATIONS following the financial statements of each of the U.S. Electric
Operating Companies.
COMPARISON OF THE QUARTERS ENDED MARCH 31, 1999 AND 1998
Net income for common stock decreased to $45 million in the first quarter
of 1999 from $60 million in 1998 due primarily to the absence in 1999 of the
recovery in the first quarter of 1998 of certain regulatory allowed revenues in
the United Kingdom. Also contributing to the decrease in earnings was the
absence in 1999 of the gain from an investment available for sale by C3
Communications in the first quarter of 1998. Other factors affecting earnings
are discussed below.
In the first quarter of 1999, the U.S. Electric Operating Companies and
U.K. Electric contributed the following percentages to CSW's results of
operations.
Corporate
U.S. U.K. Total Items and
Electric Electric Electric Other Total
---------------------------------------------------
Operating Revenues 57% 39% 96% 4% 100%
Operating Income 66% 34% 100% --% 100%
Net Income for Common 72% 59% 131% (31)% 100%
Stock
Operating revenues decreased $32 million, or 3% in the first quarter of
1999 compared to the same period a year ago due to the following factors. United
Kingdom revenues decreased $57 million in the first quarter of 1999 compared to
the same period last year due primarily to the absence in 1999 of the recovery
of regulatory allowed revenues in 1998, which represented allowed but
unrecovered revenues for previous years. Also contributing to the decrease in
United Kingdom revenues were lower sales volumes in the low-margin business
market and the absence of revenues in 1999 from SEEBOARD's retail business,
which was sold in the second quarter of 1998. Also contributing to the decline
in operating revenues was lower fuel revenues of $2 million in the first quarter
of 1999 due to lower fuel expense, discussed below. Partially offsetting the
decrease in operating revenues was an increase in other diversified revenues of
$17 million for the comparison periods due primarily to increased business
activity at CSW Energy and CSW Credit. Further offsetting the decrease in
operating revenues was an $8 million increase in non-fuel revenues, due
primarily to higher weather-related demand.
U.S. Electric fuel expense decreased $7 million, or 3%, during the first
quarter of 1999 compared to the same period last year due primarily to a
decrease in the average unit fuel cost to $1.54 per MMbtu from $1.63 per MMbtu.
The decrease resulted from lower spot market natural gas prices. Purchased power
expense increased $8 million, or 38%, for the comparison periods primarily at
CPL and WTU. Purchased power expense increased at CPL due primarily to increased
demand and scheduled power plant outages for routine maintenance. Purchased
power expense increased at WTU due primarily increased purchases resulting from
scheduled maintenance on a generating plant. United Kingdom cost of sales
decreased $63 million, or 16%, during the first quarter of 1999 compared to the
same period last year due primarily to a lower level of sales of electricity and
the absence in 1999 of cost of sales for SEEBOARD's retail business, which were
sold in the second quarter of 1998.
12
<PAGE>
Other operating expense increased $23 million in the first quarter of 1999
compared to the same period a year ago due primarily to increased expenses of $9
million at SEEBOARD. Expenses increased at SEEBOARD as a result of additional
operating costs related to SEEBOARD's Powerlink joint venture to operate the
London Underground rail system associated with running SEEBOARD's systems for
operating in the competitive electricity market in the United Kingdom. Other
operating expense also increased $8 million at CSW Energy reflecting a full
quarter of operations of the Sweeny cogeneration facility, which began service
in February 1998.
Depreciation and amortization expense increased $9 million in the first
quarter of 1999 compared to the same period last year due primarily to an
increase of depreciable property at most CSW subsidiaries.
Taxes other than income increased $11 million in the first quarter of 1999
compared to the corresponding period last year due primarily to higher franchise
and ad valorem taxes at the U.S. Electric Operating Companies. Operating income
taxes decreased $4 million in the first quarter of 1999 compared to the same
period last year due primarily to lower taxable income.
Other income and deductions decreased $3 million in the first quarter of
1999 compared to the first quarter of 1998 due primarily to the absence in 1999
of the $5 million gain from the sale by C3 Communications of an investment
available for sale.
Interest and other charges decreased $4 million in the first quarter of
1999 compared to the same period last year due primarily to the absence in 1999
of $5 million in decreased interest expenses from a bonded rate refund related
to the CPL 1997 Final Order. In addition, interest on long-term debt decreased
$2 million from the reacquisition of long-term debt of $55 million at PSO and
$36 million at CPL in the third quarter of 1998.
13
<PAGE>
CPL
CENTRAL POWER AND LIGHT COMPANY
PART 1. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS
14
<PAGE>
CPL
Consolidated Statements of Income (unaudited)
Central Power and Light Company
Three Months Ended March 31,
----------------------------
1999 1998
--------- ----------
(thousands)
Electric Operating Revenues $ 282,278 $ 274,453
--------- ---------
Operating Expenses and Taxes
Fuel 67,915 72,948
Purchased power 13,147 8,558
Other operating 61,827 60,496
Maintenance 15,226 13,057
Depreciation and amortization 43,114 41,712
Taxes, other than income 23,324 19,482
Income taxes 11,105 11,820
--------- ---------
235,658 228,073
--------- ---------
Operating Income 46,620 46,380
--------- ---------
Other Income and Deductions
Other (730) (735)
Non-operating income taxes 1,678 384
--------- ---------
948 (351)
--------- ---------
Income Before Interest Charges 47,568 46,029
--------- ---------
Interest Charges
Interest on long-term debt 22,829 23,500
Distributions on Trust Preferred Securities 3,000 3,000
Interest on short-term debt and other 5,064 6,828
Allowance for borrowed funds used during
construction (873) (688)
--------- ---------
30,020 32,640
--------- ---------
Net Income 17,548 13,389
Less: Preferred stock dividends 1,812 1,808
--------- ---------
Net Income for Common Stock $ 15,736 $ 11,581
========= =========
The accompanying notes to consolidated financial statements as they relate
to CPL are an integral part of these statements.
15
<PAGE>
CPL
Consolidated Balance Sheets
Central Power and Light Company
March 31, December 31,
1999 1998
(unaudited) (audited)
----------- ------------
(thousands)
ASSETS
Electric Utility Plant
Production $3,147,129 $ 3,146,269
Transmission 527,863 527,146
Distribution 1,101,920 1,090,175
General 299,210 298,352
Construction work in progress 79,456 67,300
Nuclear fuel 208,957 206,949
----------- ------------
5,364,535 5,336,191
Less - accumulated depreciation 2,111,785 2,072,686
----------- ------------
3,252,750 3,263,505
----------- ------------
Current Assets
Cash 9,773 5,195
Accounts receivable 54,724 51,056
Materials and supplies, at average cost 58,101 59,814
Fuel inventory 22,993 20,340
Accumulated deferred income taxes 3,436 713
Prepayments and other 3,879 2,952
----------- ------------
152,906 140,070
----------- ------------
Deferred Charges and Other Assets
Deferred STP costs 481,883 482,447
Mirror CWIP asset 253,380 256,702
Income tax related regulatory assets, net 357,013 360,482
Nuclear decommissioning trust 71,982 65,972
Other 164,497 167,011
----------- ------------
1,328,755 1,332,614
----------- ------------
$ 4,734,411 $ 4,736,189
=========== ============
The accompanying notes to consolidated financial statements as they relate
to CPL are an integral part of these statements.
16
<PAGE>
CPL
Consolidated Balance Sheets
Central Power and Light Company
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(unaudited) (audited)
----------- ------------
CAPITALIZATION AND LIABILITIES (thousands)
<S> <C> <C> <C> <C>
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 717,767 739,031
--------- ----------
1,291,655 46% 1,312,919 46%
--------- ---- ---------- ----
Preferred stock 163,204 6% 163,20 6%
CPL-obligated, mandatorily redeemable preferred
securities of subsidiary trust holding solely
Junior Subordinated Debentures of CPL 150,000 5% 150,00 5%
Long-term debt 1,225,798 43% 1,225,70 43%
--------- ---- ---------- ----
2,830,657 100% 2,851,829 100%
--------- ---- ---------- ----
Current Liabilities
Long-term debt due within twelve months 125,000 125,000
Advances from affiliates 192,638 160,298
Accounts payable 71,087 86,998
Payables to affiliates 31,964 38,331
Accrued taxes 53,342 46,855
Accrued interest 30,522 27,036
Over-recovered fuel costs 18,244 9,135
Other 19,574 18,819
--------- ----------
542,371 512,472
--------- ----------
Deferred Credits
Accumulated deferred income taxes 1,212,331 1,221,561
Investment tax credits 137,212 138,513
Other 11,840 11,814
--------- ----------
1,361,383 1,371,888
--------- ----------
$ 4,734,411 $ 4,736,189
========= ==========
</TABLE>
The accompanying notes to consolidated financial statements as they relate
to CPL are an integral part of these statements.
17
<PAGE>
CPL
Consolidated Statements of Cash Flows (unaudited)
Central Power and Light Company
Three Months Ended
March 31,
-------------------
1999 1998
--------- --------
(thousands)
OPERATING ACTIVITIES
Net Income $ 17,548 $ 13,389
Non-cash Items Included in Net Income
Depreciation and amortization 48,110 42,944
Deferred income taxes and investment
tax credits (9,785) (6,559)
Refund due customers -- (59,153)
Changes in Assets and Liabilities
Accounts receivable (3,668) 9,114
Fuel inventory (2,653) (4,248)
Material and supplies 1,713 2,075
Accrued interest 3,486 1,677
Accounts payable (22,523) 4,592
Accrued taxes 6,487 (1,407)
Fuel recovery 9,109 42,150
Other 2,088 10,975
--------- --------
49,912 55,549
--------- --------
INVESTING ACTIVITIES
Construction expenditures (37,018) (32,504)
Other (1,600) (1,462)
--------- --------
(38,618) (33,966)
--------- --------
FINANCING ACTIVITIES
Repayment of long-term debt -- (28,000)
Change in advances from affiliates 32,340 49,825
Payment of dividends (39,056) (41,945)
--------- --------
(6,716) (20,120)
--------- --------
Net Change in Cash and Cash Equivalents 4,578 1,463
Cash and Cash Equivalents at Beginning of Year 5,195 --
--------- --------
Cash and Cash Equivalents at End of Period $ 9,773 $ 1,463
========= ========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on Trust Preferred Securities) $ 22,327 $ 30,057
========= ========
Income taxes paid/(refund received) $ (3,727) $ --
========= ========
The accompanying notes to consolidated financial statements as they relate
to CPL are an integral part of these statements.
18
<PAGE>
CENTRAL POWER AND LIGHT COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED MARCH 31, 1999 AND 1998
Net income for common stock for the first quarter of 1999 was $15.7
million, an increase of $4.1 million, or 36%, from the first quarter of 1998.
The increase resulted primarily from an increase in non-fuel revenues, which was
offset in part by an increase in taxes, other than income.
Electric operating revenues increased $7.8 million, or 3%, to $282.3
million during the first quarter of 1999 compared to the same period of 1998.
The increase is mainly attributable to an $8.7 million increase in non-fuel
revenues partially offset by a $0.9 million decrease in fuel-related revenues.
The increase in non-fuel related revenues resulted from a 9% increase in MWH
sales due to customer demand.
Fuel expense decreased $5.0 million, or 7%, due primarily to a decrease in
average unit fuel costs from $1.54 per MMbtu in 1998 to $1.33 per MMbtu in the
first quarter of 1999, resulting from purchases of lower-priced spot market
natural gas. Purchased power expenses for the first quarter of 1999 increased
$4.6 million, or 54%, compared to the same period of 1998 due primarily to
increased demand and scheduled power plant outages for routine maintenance.
Other operating expenses were $61.8 million during the first quarter of
1999, an increase of $1.3 million from the same period in 1998. The increase was
due primarily to higher outside services expense, which was offset in part by
lower transmission expenses resulting from the transmission service agreement
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 increased
$2.1 million, or 17% over 1998 largely due to the scheduled refueling of STP
Unit No. 1, flood damage and storm repairs.
Taxes, other than income, were $23.3 million in the first quarter of 1999,
a $3.8 million increase above 1998. This increase was due to a combination of
higher ad valorem taxes, which reflect higher assessed values and state
franchise taxes which are calculated based on a higher 1998 taxable income.
Other income and deductions increased due primarily to a higher
non-operating income tax benefit resulting from $1.6 million in consolidated tax
savings from CSW in 1999.
Other interest expense decreased in the first quarter of 1999 due
primarily to the absence in 1999 of interest expense related to the 1998 bonded
rate refund and the reacquisition of long-term debt in 1998.
19
<PAGE>
PSO
PUBLIC SERVICE COMPANY OF OKLAHOMA
PART 1. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
20
<PAGE>
PSO
Consolidated Statements of Income (unaudited)
Public Service Company of Oklahoma
Three Months Ended March 31,
----------------------------
1999 1998
---------- ----------
(thousands)
Electric Operating Revenues $ 151,030 $ 151,411
---------- ----------
Operating Expenses and Taxes
Fuel 61,881 61,520
Purchased power 14,044 13,597
Other operating 25,713 27,147
Maintenance 9,207 7,573
Depreciation and amortization 18,455 18,095
Taxes, other than income 8,059 6,644
Income taxes 1,143 2,032
---------- ----------
138,502 136,608
---------- ----------
Operating Income 12,528 14,803
---------- ----------
Other Income and Deductions
Allowance for equity funds used during construction 81 155
Other (1,311) (616)
Non-operating income taxes 709 503
---------- ----------
(521) 42
---------- ----------
Income Before Interest Charges 12,007 14,845
---------- ----------
Interest Charges
Interest on long-term debt 6,610 7,618
Distributions on Trust Preferred Securities 1,500 1,500
Interest on short-term debt and other 1,169 1,230
Allowance for borrowed funds used during
construction (192) (332)
---------- ----------
9,087 10,016
---------- ----------
Net Income 2,920 4,829
Less: Preferred stock dividends 53 53
---------- ----------
Net Income for Common Stock $ 2,867 $ 4,776
========== ==========
The accompanying notes to consolidated financial statements as they relate
to PSO are an integral part of these statements.
21
<PAGE>
PSO
Consolidated Balance Sheets
Public Service Company of Oklahoma
March 31, December 31,
1999 1998
(unaudited) (audited)
----------- -----------
(thousands)
ASSETS
Electric Utility Plant
Production $ 915,594 $ 913,083
Transmission 379,157 378,719
Distribution 855,897 855,277
General 216,502 211,124
Construction work in progress 35,912 33,519
----------- -----------
2,403,062 2,391,722
Less - Accumulated depreciation 1,091,811 1,082,081
----------- -----------
1,311,251 1,309,641
----------- -----------
Current Assets
Cash 1,253 4,670
Accounts receivable 31,692 32,916
Materials and supplies, at average cost 33,654 33,006
Fuel inventory, at LIFO cost 17,411 16,441
Accumulated deferred income taxes 12,969 11,789
Prepayments and other 5,871 2,881
----------- -----------
102,850 101,703
----------- -----------
Deferred Charges and Other Assets 71,809 71,384
----------- -----------
$ 1,485,910 $ 1,482,728
=========== ===========
The accompanying notes to consolidated financial statements as they relate to
PSO are an integral part of these statements.
22
<PAGE>
PSO
Consolidated Balance Sheets
Public Service Company of Oklahoma
- -------------------------------------------------------------------------
March 31, December 31,
1999 1998
(unaudited) (audited)
----------- -----------
CAPITALIZATION AND LIABILITIES (thousands)
Capitalization
Common stock: $15 par value
Authorized: 11,000,000 shares
Issued 10,482,000 shares and
outstanding 9,013,000 shares $157,230 $157,230
Paid-in capital 180,000 180,000
Retained earnings 132,493 144,626
----------- -----------
469,723 50% 481,856 51%
----------------------------- ------
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 384,144 41% 384,064 41%
----------------------------- ------
934,154 100% 946,207 100%
----------------------------- ------
Current Liabilities
Advances from affiliates 46,793 15,892
Payables to affiliates 20,767 33,489
Accounts payable 46,396 52,888
Payables to customers 41,926 32,608
Accrued taxes 14,073 23,095
Accrued interest 10,187 7,606
Other 7,005 6,599
----------- -----------
187,147 172,177
----------- -----------
Deferred Credits
Accumulated deferred income taxes 277,528 277,181
Investment tax credits 38,917 39,365
Income tax related regulatory liabilities,
net 35,132 35,818
Other 13,032 11,980
----------- -----------
364,609 364,344
----------- -----------
$ 1,485,910 $ 1,482,728
=========== ===========
The accompanying notes to consolidated financial statements as they relate
to PSO are an integral part of these statements.
23
<PAGE>
PSO
Consolidated Statements of Cash Flows (unaudited)
Public Service Company of Oklahoma
Three Months Ended
March 31,
--------------------
1999 1998
--------- --------
(thousands)
OPERATING ACTIVITIES
Net Income $ 2,920 $ 4,829
Non-cash Items Included in Net Income
Depreciation and amortization 18,700 18,832
Deferred income taxes and investment tax
credits (1,967) (3,635)
Changes in Assets and Liabilities
Accounts receivable 1,224 (4,542)
Prepayments and other (2,990) (97)
Accounts payable (10,479) (28,502)
Accrued taxes (9,022) 3,723
Other 1,873 6,021
--------- --------
259 (3,371)
--------- --------
INVESTING ACTIVITIES
Construction expenditures (21,299) (12,096)
Other 1,775 (1,164)
--------- --------
(19,524) (13,260)
--------- --------
FINANCING ACTIVITIES
Change in advances from affiliates 30,901 26,959
Payment of dividends (15,053) (9,053)
--------- --------
15,848 17,906
--------- --------
Net Change in Cash and Cash Equivalents (3,417) 1,275
Cash and Cash Equivalents at Beginning of Year 4,670 2,171
--------- --------
Cash and Cash Equivalents at End of Period $ 1,253 $ 3,446
========= ========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on Trust Preferred Securities) $ 6,125 $ 7,892
========= ========
Income taxes paid $ 5,510 $ --
========= ========
The accompanying notes to consolidated financial statements as they relate
to PSO are an integral part of these statements.
24
<PAGE>
PUBLIC SERVICE COMPANY OF OKLAHOMA
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED MARCH 31, 1999 AND 1998
Net income for common stock for the first quarter of 1999 was $2.9
million, a decrease of $1.9 million compared to 1998. The decrease resulted
primarily from higher maintenance expenses as well as a decrease in other income
and deductions, which was offset in part by lower other operating expenses and
interest on long-term debt.
Electric operating revenues were relatively stable during the first
quarter of 1999 compared to the first quarter of 1998. Non-fuel related revenues
increased $2.9 million during the first quarter of 1999 primarily from changes
in the average price of retail sales by customer rate class. Fuel-related
revenues decreased $3.3 million as discussed below.
Fuel expense was relatively stable for the first quarter of 1999 compared
to the first quarter of 1998. Deferred fuel costs increased slightly in 1999. A
change in fuel mix due to more gas generation and less coal generation occurred
in the first quarter of 1999. The average unit fuel costs declined from $1.72
per MMbtu in the first quarter of 1998 to $1.70 per MMbtu in the first quarter
of 1999 due primarily to lower spot market gas prices.
Other operating expenses were $25.7 million in the first three months of
1999, a 5% decrease compared to 1998, due primarily to lower transmission and
customer accounting expenses. The reduction in transmission expenses was due
primarily 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 vs. Texas Utilities Electric
Company (Docket No. 17285). The decline in customer accounting expenses was due
primarily to lower customer collections-related expenses. Maintenance expense
increased by $1.6 million, or 22%, during the first quarter of 1999 when
compared to the same period in 1998 due primarily to higher expenses related to
scheduled power plant maintenance.
Operating income taxes decreased to $1.1 million in the first quarter of
1999 from $2.0 million in the same period of 1998, due primarily to lower
taxable income in 1999.
Other income and deductions decreased $0.6 million in the first three
months of 1999 primarily as a result of losses on equity investments in 1999.
Interest charges decreased $0.9 million, or 9%, during the first quarter of 1999
when compared to the same period of 1998 primarily as a result of the
reacquisition of long-term debt in the third quarter of 1998.
25
<PAGE>
SWEPCO
SOUTHWESTERN ELECTRIC POWER COMPANY
PART 1. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
26
<PAGE>
SWEPCO
Consolidated Statements of Income (unaudited)
Southwestern Electric Power Company
Three Months Ended March 31,
----------------------------
1999 1998
----------- -----------
(thousands)
Electric Operating Revenues $ 197,064 $ 197,560
----------- -----------
Operating Expenses and Taxes
Fuel 76,271 76,233
Purchased power 6,193 6,339
Other operating 30,180 31,094
Maintenance 12,244 10,270
Depreciation and amortization 26,206 24,803
Taxes, other than income 15,794 13,522
Income taxes 3,807 6,166
----------- -----------
170,695 168,427
----------- -----------
Operating Income 26,369 29,133
----------- -----------
Other Income and Deductions
Allowance for equity funds used during
construction 47 662
Other (454) (299)
Non-operating income taxes 683 869
----------- -----------
276 1,232
----------- -----------
Income Before Interest Charges 26,645 30,365
----------- -----------
Interest Charges
Interest on long-term debt 9,802 9,808
Distributions on Trust Preferred Securities 2,166 2,166
Interest on short-term debt and other 2,391 1,719
Allowance for borrowed funds used during
construction (367) (259)
----------- -----------
13,992 13,434
----------- -----------
Net Income 12,653 16,931
Less: Preferred stock dividends 57 534
Gain on reacquired preferred stock -- 1
----------- -----------
Net Income for Common Stock $ 12,596 $ 16,398
=========== ===========
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
27
<PAGE>
SWEPCO
Consolidated Balance Sheets
Southwestern Electric Power Company
March 31, December 31,
1999 1998
(unaudited) (audited)
---------- ------------
(thousands)
ASSETS
Electric Utility Plant
Production $ 1,399,130 $ 1,397,924
Transmission 476,320 474,035
Distribution 923,986 916,293
General 327,437 321,136
Construction work in progress 40,195 48,523
---------- ------------
3,167,068 3,157,911
Less - Accumulated depreciation 1,337,269 1,317,057
---------- ------------
1,829,799 1,840,854
---------- ------------
Current Assets
Cash 2,597 4,444
Accounts receivable 44,560 40,430
Materials and supplies, at average cost 25,762 25,135
Fuel inventory 53,347 40,238
Accumulated deferred income taxes 2,983 4,869
Prepayments and other 18,024 16,651
---------- ------------
147,273 131,767
---------- ------------
Deferred Charges and Other Assets 114,352 113,701
---------- ------------
$ 2,091,424 $ 2,086,322
========== ============
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
28
<PAGE>
Consolidated Balance Sheets
Southwestern Electric Power Company
- --------------------------------------------------------------------
March 31, December 31,
1999 1998
(unaudited) (audited)
---------- ----------
CAPITALIZATION AND LIABILITIES (thousands)
Capitalization
Common stock: $18 par value
Authorized: 7,600,000 shares
Issued and outstanding: 7,536,640 $ 135,660 $ 135,660
Paid-in capital 245,000 245,000
Retained earnings 286,188 300,592
-------- --------
Total Common Stock Equity 666,848 51% 681,252 51%
-------- --- -------- ---
Preferred stock 4,706 --% 4,707 --%
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 541,092 41% 543,741 41%
-------- --- -------- ----
1,322,646 100% 1,339,700 100%
-------- ---- ------- ----
Current Liabilities
Long-term debt and preferred stock due
within twelve months 44,959 43,932
Advances from affiliates 88,501 40,705
Accounts payable 46,547 73,507
Payables to affiliates 29,006 37,795
Customer deposits 13,600 13,316
Accrued taxes 34,310 23,189
Accrued interest 12,756 14,275
Over-recovered fuel costs 6,397 5,378
Other 12,529 12,538
--------- ---------
288,605 264,635
--------- ---------
Deferred Credits
Accumulated deferred income taxes 394,579 398,664
Investment tax credits 61,072 62,213
Income tax related regulatory liabilities,
net 3,761 4,931
Other 20,761 16,179
--------- ---------
480,173 481,987
--------- ----------
$ 2,091,424 $ 2,086,322
========= =========
The accompanying notes to consolidated financial statements as they relate t
SWEPCO are an integral part of these statements.
29
<PAGE>
SWEPCO
Consolidated Statements of Cash Flows (unaudited)
Southwestern Electric Power Company
Three Months Ended
March 31,
---------------------
1999 1998
--------- ---------
(thousands)
OPERATING ACTIVITIES
Net Income $ 12,653 $ 16,931
Non-cash Items Included in Net Income
Depreciation and amortization 27,403 25,850
Deferred income taxes and investment tax
credits (4,510) (3,181)
Changes in Assets and Liabilities
Accounts receivable (4,130) 11,344
Fuel inventory (13,109) (782)
Accounts payable (26,393) (21,282)
Payables to affiliates (8,789) (6,129)
Accrued taxes 11,121 13,431
Other deferred credits 4,582 2,225
Other (2,909) 1,734
--------- ---------
(4,081) 40,141
--------- ---------
INVESTING ACTIVITIES
Construction expenditures (17,250) (18,078)
Other 383 (1,246)
--------- ---------
(16,867) (19,324)
--------- ---------
FINANCING ACTIVITIES
Redemption of preferred stock (1) (2)
Retirement of long-term debt (1,637) (1,079)
Change in advances from affiliates 47,796 492
Payment of dividends (27,057) (14,534)
--------- ---------
19,101 (15,123)
--------- ---------
Net Change in Cash and Cash Equivalents (1,847) 5,694
Cash and Cash Equivalents at Beginning of Year 4,444 2,298
--------- ---------
Cash and Cash Equivalents at End of Period $ 2,597 $ 7,992
========= =========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on Trust Preferred Securities) $ 14,485 $ 14,195
========= =========
Income taxes paid $ 1,676 $ 307
========= =========
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
30
<PAGE>
SOUTHWESTERN ELECTRIC POWER COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED MARCH 31, 1999 AND 1998
Net income for common stock for the first quarter of 1999 was $12.6
million, a decrease of $3.8 million, or 23%, from the same period of 1998. The
decrease resulted primarily from increased maintenance expenses, depreciation
and amortization expense and taxes, other than income.
Electric operating revenues decreased $0.5 million to $197.1 million
during the first quarter of 1999 compared to the first quarter of 1998. The
decrease was due primarily to lower fuel revenue of $0.6 million which was
offset in part by increased non-fuel revenue of $0.2 million.
Fuel expense for the first quarter of 1999 was relatively stable when
compared to the same period of 1998. Fuel expense for 1999 was affected by
increased natural gas generation, offset in part by a decrease in average unit
fuel costs for natural gas.
Other operating expenses were $30.2 million during the first quarter of
1999, a decrease of $0.9 million from the comparable period of 1998. The
decrease was due primarily to decreases in employee-related expenses and
decreased customer assistance expenses. Maintenance expenses increased $2.0
million, or 19%, due primarily to scheduled power plant maintenance expenses and
increases in tree-trimming maintenance activities.
Taxes, other than income increased $2.3 million, or 17%, as a result of
increased ad valorem taxes, which reflect higher assessed values, and increased
state franchise taxes which are calculated on a higher 1998 taxable income.
Operating income taxes decreased $2.4 million, or 38%, as a result of lower
taxable income for the first quarter of 1999.
Interest charges increased $0.6 million for the first quarter of 1999, due
primarily to increases in the levels of short-term debt.
31
<PAGE>
WTU
WEST TEXAS UTILITIES COMPANY
PART 1. FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
32
<PAGE>
WTU
Statements of Income (unaudited)
West Texas Utilities Company
Three Months Ended March 31,
----------------------------
1999 1998
--------- ---------
(thousands)
Electric Operating Revenues $ 81,052 $ 83,948
--------- ---------
Operating Expenses and Taxes
Fuel 23,134 25,231
Purchased power 8,294 7,908
Other operating 20,133 22,386
Maintenance 4,178 3,186
Depreciation and amortization 10,774 10,669
Taxes, other than income 7,488 5,555
Income taxes (247) 945
--------- ---------
73,754 75,880
--------- ---------
Operating Income 7,298 8,068
--------- ---------
Other Income and Deductions
Allowance for equity funds used during
construction 96 133
Other (199) 779
Non-operating income taxes 219 91
--------- ---------
116 1,003
--------- ---------
Income Before Interest Charges 7,414 9,071
--------- ---------
Interest Charges
Interest on long-term debt 5,088 5,088
Interest on short-term debt and other 1,162 1,004
Allowance for borrowed funds used during
construction (143) (111)
--------- ---------
6,107 5,981
--------- ---------
Net Income 1,307 3,090
Less: Preferred stock dividends 26 26
--------- ---------
Net Income for Common Stock $ 1,281 $ 3,064
========= =========
The accompanying notes to financial statements as they relate to WTU
are an integral part of these statements.
33
<PAGE>
WTU
Balance Sheets
West Texas Utilities Company
March 31, December 31,
1999 1998
(unaudited) (audited)
------------ ------------
(thousands)
ASSETS
Electric Utility Plant
Production $ 433,170 $ 429,896
Transmission 214,729 213,630
Distribution 386,086 382,373
General 110,125 108,878
Construction work in progress 10,834 11,805
------------ ------------
1,154,944 1,146,582
Less - Accumulated depreciation 476,852 473,503
------------ ------------
678,092 673,079
------------ ------------
Current Assets
Cash 2,700 2,093
Accounts receivable 31,322 31,689
Materials and supplies, at average cost 14,580 14,191
Fuel inventory 14,093 13,186
Accumulated deferred income taxes 1,722 366
Under-recovered fuel costs 238 3,980
Prepayments and other 6,976 5,988
------------ ------------
71,631 71,493
------------ ------------
Deferred Charges and Other Assets
Deferred Oklaunion costs 13,978 14,910
Restructuring costs 6,607 7,079
Other 53,145 53,251
------------ ------------
73,730 75,240
------------ ------------
$ 823,453 $ 819,812
============ ============
The accompanying notes to financial statements as they relate to WTU
are an integral part of these statements.
34
<PAGE>
WTU
Balance Sheets
West Texas Utilities Company
March 31, December 31,
1999 1998
(unaudited) (audited)
----------- -----------
CAPITALIZATION AND LIABILITIES (thousands)
Capitalization
Common stock: $25 par value
Authorized: 7,800,000 shares
Issued and outstanding: 5,488,560
shares $ 137,214 $ 137,214
Paid-in capital 2,236 2,236
Retained earnings 111,470 117,189
----------- -----------
250,920 45% 256,639 46%
----------- ----- ----------- ------
Preferred stock 2,482 --% 2,482 --%
Long-term debt 303,561 55% 303,519 54%
----------- ----- ----------- ------
556,963 100% 562,640 100%
----------- ----- ----------- ------
Current Liabilities
Advances from affiliates 18,634 4,573
Payables to affiliates 15,794 19,917
Accounts payable 31,017 31,473
Accrued taxes 5,488 10,031
Accrued interest 8,000 4,125
Other 4,918 3,797
----------- -----------
83,851 73,916
----------- -----------
Deferred Credits
Accumulated deferred income taxes 141,145 140,731
Investment tax credits 26,078 26,597
Income tax related regulatory
liabilities, net 11,627 12,088
Other 3,789 3,840
----------- -----------
182,639 183,256
----------- -----------
$ 823,453 $ 819,812
=========== ===========
The accompanying notes to financial statements as they relate to WTU
are an integral part of these statements.
35
<PAGE>
WTU
Statements of Cash Flows (unaudited)
West Texas Utilities Company
Three Months Ended
March 31,
------------------
1999 1998
------- -------
(thousands)
OPERATING ACTIVITIES
Net Income $ 1,307 $ 3,090
Non-cash Items Included in Net Income
Depreciation and amortization 11,051 10,924
Deferred income taxes and investment tax
credits (1,922) (2,200)
Changes in Assets and Liabilities
Accounts receivable 367 (11,746)
Fuel inventory (907) 228
Accounts payable (456) 10,090
Payables to affiliates (4,123) (7,788)
Accrued taxes (4,543) (2,864)
Accrued interest 3,875 3,568
Fuel recovery 3,742 (398)
Other deferred credits (51) (13,336)
Other (246) 960
------- -------
8,094 (9,472)
------- -------
INVESTING ACTIVITIES
Construction expenditures (12,445) (9,886)
Other (2,077) (345)
------- -------
(14,522) (10,231)
------- -------
FINANCING ACTIVITIES
Payment of dividends (7,026) (4,026)
Change in advances from affiliates 14,061 6,037
------- -------
7,035 2,011
------- -------
Net Change in Cash and Cash Equivalents 607 (17,692)
Cash and Cash Equivalents at Beginning of Year 2,093 20,613
------- -------
Cash and Cash Equivalents at End of Period $ 2,700 $ 2,921
======= =======
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $ 1,200 $ 1,134
======= =======
Income taxes paid $ 295 $ --
======= =======
The accompanying notes to financial statements as they relate to WTU
are an integral part of these statements.
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WEST TEXAS UTILITIES COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED MARCH 31, 1999 AND 1998
Net income for common stock decreased to $1.3 million for the first
quarter of 1999 from $3.1 million in the first quarter of 1998. The decline in
net income was due to decreases in electric operating revenues and other income.
These decreases were partially offset by a decline in operating expenses and
taxes.
Electric operating revenues decreased $2.9 million, or 3%, in the first
quarter of 1999 compared to the first quarter of 1998. The decrease was due
primarily to lower non-fuel related revenues of $2.6 million in 1999 due to less
favorable weather in the first quarter of 1999 as compared to 1998.
Fuel expense decreased $2.1 million, or 8%, in the first quarter of 1999
compared to the first quarter of 1998 due primarily to a reduction in average
unit fuel costs from $1.95 per MMbtu in 1998 to $1.75 per MMbtu in 1999. The
decrease was due primarily to a decline in the spot market price of natural gas.
The decrease in fuel expense was partially offset by an increase in purchased
power of $0.4 million from the first quarter of 1998 to the first quarter of
1999 due to increased purchases resulting from scheduled maintenance for a
generating plant.
Other operating expenses declined $2.3 million for the first quarter of
1999 compared to the same period of 1998 due to a $2.2 million reduction in
transmission expenses. This reduction 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
vs. Texas Utilities Electric Company (Docket No. 17285). Maintenance expense
rose $1.0 million from the comparable period in 1998 due primarily to scheduled
maintenance occurring in the first quarter of 1999.
Taxes, other than income increased $1.9 million in the first quarter of
1999 compared to the first quarter of 1998 due to an increase in ad valorem
taxes, which reflect higher assessed values, and state franchise taxes, which
are calculated based on a higher 1998 taxable income.
Operating income taxes decreased $1.2 million as a result of lower taxable
income for the first quarter of 1999 compared to the first quarter of 1998.
Other income and deductions declined $0.9 million in the first quarter of
1999 compared to the same time period in 1998. Income from merchandise
operations decreased $0.5 million from 1998 to 1999 for the respective time
periods. Interest and dividend income also declined $0.3 million for the first
quarter of 1999 compared to the same quarter of 1998.
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INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS BY REGISTRANT
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. PROPOSED AEP MERGER CSW, CPL, PSO, SWEPCO, WTU
NOTE 6. BUSINESS SEGMENTS CSW
NOTE 7. SOUTH AMERICAN INVESTMENTS CSW
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NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. PRINCIPLES OF PREPARATION
General
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,
1998.
The unaudited financial information reflects all adjustments of a normal
recurring nature 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.
Benefit Plans
During the first quarter of 1999, CSW changed to the Market Method to
determine pension costs. Prior to January 1, 1999, CSW utilized the market value
of the pension assets at September 30 in its calculation of pension costs. The
change was made to minimize the plan asset market value volatility effect on
recorded pension costs. Adopting the Market Method did not have a material
effect on first quarter 1999 results of operations or financial position on CSW
or its subsidiaries. The cumulative effect of the accounting change to the
Market Method was not material to first quarter 1999 results of operations or
financial position on CSW or its subsidiaries.
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 was 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 Charges and Other
Assets, Other, with a corresponding amount accrued in Accumulated Depreciation.
In CSW's and CPL's consolidated statements of income, the 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
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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. At March 31, 1999, the nuclear trust
balance was $72.0 million.
Foreign Currency Translation
The financial statements of SEEBOARD U.S.A., which are included in CSW's
consolidated financial statements, have been translated from British pounds to
U.S. dollars in accordance with SFAS No. 52. All balance sheet accounts are
translated at the exchange rate at the end of the period and all income
statement items are translated at the average exchange rate for the applicable
period. At March 31, 1999, the current exchange rate was approximately
(pound)1.00=$1.61, and the average exchange rate for the three month period
ended March 31, 1999 was approximately (pound)1.00=$1.62. At March 31, 1998, the
current exchange rate was approximately (pound)l.00=$1.68, and the average
exchange rate for the three month period ended March 31, 1998 was approximately
(pound)l.00=$1.65. All the resulting 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, resulting from the translation of
items at the different exchange rates, is shown on CSW's Consolidated Statements
of Cash Flows in Effect of exchange rate changes on cash and cash equivalents.
See NOTE 7. SOUTH AMERICAN INVESTMENTS for information regarding CSW's
investments in Brazil.
Risk Management
CSW has, at times, 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, including cross
currency swaps, foreign currency futures and foreign currency options, to manage
adverse changes in exchange rates and to facilitate financing transactions
resulting from CSW's acquisition of SEEBOARD.
SEEBOARD has entered into contracts for differences to reduce exposure to
fluctuations in the price of electricity purchased from the United Kingdom's
electricity power pool. This pool was established at privatization of the United
Kingdom's electric industry for the bulk trading of electricity between
generators and suppliers.
CSW accounts for these transactions as hedge transactions and any gains or
losses associated with the risk management tools are recognized in the financial
statements at the time the hedge transactions are settled. CSW believes its
credit risk in these contracts is negligible.
Reclassifications
Certain financial statement items for prior periods have been reclassified
to conform to the 1999 presentation.
2. LITIGATION AND REGULATORY PROCEEDINGS
See the Registrants' Combined Annual Report on Form 10-K for the year
ended December 31, 1998 for additional discussion of litigation and regulatory
proceedings. Reference is also made to NOTE 3. COMMITMENTS AND CONTINGENT
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LIABILITIES and ITEM 2. MD&A - RATES AND REGULATORY MATTERS, CPL Rate Review -
Docket No. 14965 for additional discussion of litigation and regulatory matters.
Litigation Related to the Rights Plan and AEP Merger
Two lawsuits were filed in Delaware state court seeking to enjoin the AEP
Merger. CSW and each of its directors were named as defendants in both cases.
The first suit alleged that the Rights Plan, approved by the CSW Board of
Directors on September 27, 1997, constituted a "poison pill" precluding
acquisition offers and resulting in a heightened fiduciary duty on the part of
the CSW Board of Directors to pursue an auction-type sales process to obtain the
best value for CSW stockholders. This suit was voluntarily dismissed on April
12, 1999. The second suit alleged that the AEP Merger was unfair to CSW
stockholders in that it did not recognize the underlying intrinsic value of
CSW's assets and its future profitability. The plaintiffs have filed a notice of
dismissal in that case.
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 reduction methodology in the CPL 1997 Final Order pursuant
to which CPL's annual rates were reduced by $13 million beginning May 1, 1998
and an additional $13 million on May 1, 1999.
CPL 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 assigned a lower return on equity than non-ECOM
property; (ii) the Texas Commission's application of the "Glide Path" rate
reduction methodology applied on May 1, 1998 and May 1, 1999; and (iii) the $18
million of disallowed affiliate expenses 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 reductions were implemented in
May 1998 and May 1999. Hearings on the appeal were held during the third quarter
of 1998, and a judgment was issued in February 1999 affirming the Texas
Commission order, except for a consolidated tax issue in the amount of $6
million, which was remanded to the Texas Commission. While CPL appealed this
most recent order to the Court of Appeals, 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. Regarding the AEP/CSW merger
case, on May 4, 1999, AEP and CSW announced that they had reached a stipulated
agreement with the general counsel of the Texas Commission and other intervenors
in the state of Texas. If the stipulated agreement is approved by the Texas
Commission and the AEP Merger is ultimately consummated, the agreement states
that CSW will withdraw its appeal with respect to the "glide path" rate
reduction methodology. See NOTE 5. PROPOSED AEP MERGER and ITEM 2. MD&A -
PROPOSED AEP MERGER for additional information on the stipulated agreement.
CPL currently accounts for the economic effects of regulation in
accordance with SFAS No. 71. Pursuant to the provisions of SFAS No. 71, CPL has
recorded approximately $1.2 billion of regulatory-related assets at March 31,
1999. 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, 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
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deregulated plant assets. 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 constitutes
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.
Also see ITEM 2. MD&A - RATES AND REGULATORY MATTERS, CPL Rate Review -
Docket No. 14965 for a discussion of the CPL 1997 Final Order.
CPL Fuel Proceeding
On December 31, 1998, CPL 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. CPL did not seek a
surcharge of the reconciled balance in the filing.
During the reconciliation period of July 1, 1995 through June 30, 1998,
CPL incurred $828.5 million in eligible fuel and fuel-related expenses. The
Texas jurisdictional allocation of such fuel and fuel-related expenses is $783.4
million.
In addition to requesting reconciliation of its fuel and fuel-related
expenses for the reconciliation period, CPL requested the Texas Commission to
authorize CPL to recover the reward that was earned during the reconciliation
period under the performance standard adopted in Docket No. 14965 for CPL's
share of STP. In Docket No. 14965, the Texas Commission adopted a three-year
average capacity factor of 83% performance standard for STP. During the
reconciliation period, STP operated at a net capacity factor of 93.1%, saving
customers $28.4 million in fuel and purchased power costs. CPL proposed an equal
sharing with its customers of the benefit, or reward, resulting from STP
operation during the reconciliation period above the 83% capacity factor target,
net of any reduction of eligible fuel expense as a result of this case. CPL
requested that it be authorized to recover the Texas retail amount, or $13.4
million, of its 50% share of the performance standard reward, by including 1/36
of this amount, or $373,003, in retail eligible fuel expense each month for the
three-year period following the Texas Commission's order in this case. These
amounts will be included in calculating the monthly over-recovery or
under-recovery balances. CPL further requested that it be authorized to apply
the amounts of the reward recovered through Texas retail eligible fuel expense
as additional amortization of its STP deferred accounting regulatory asset.
CPL also made an alternative proposal if consistent and uniform equal
sharing of potential penalties and rewards is not intended by the Texas
Commission. CPL proposed that it be authorized to recover the Texas portion of
50% of the reward by including 1/36 of this amount, or $373,003, in Texas retail
eligible fuel expense each month for three years following the Texas Commission
order in this case and that the remaining 50% of the reward be "banked" to be
used against potential future penalties or other disallowance of fuel costs. CPL
will recognize such amounts at the time Texas Commission approval is obtained.
CPL Municipal Franchise Fee Litigation
In May 1996, the City of San Juan, Texas filed a 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 plaintiffs' 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
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City of San Juan. In January 1997, CPL filed an original petition at the Texas
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, which affirmed the Texas Commission ruling on February 19, 1999. After
the Texas Commission's order, the Hidalgo County District Court overruled CPL's
plea to the jurisdiction and plea in abatement. In July 1997, the Hidalgo County
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 District Court ordered the case to mediation and suspended all
proceedings pending the completion of the mediation. The mediation was completed
in December 1998, but the case was not resolved.
On January 5, 1999, a class notice was mailed to each of the cities served
by CPL. Over 90 of the 128 cities declined to participate in the lawsuit.
However, CPL has pledged that if any final, non-appealable court decision in the
litigation awards a judgement against CPL for a franchise underpayment, CPL will
extend the principles of that decision, with regard to the franchise
underpayment, to the cities that decline to participate in the litigation. The
plaintiffs have filed a motion to extend the time for the cities to decide
whether to participate in the lawsuit.
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 the municipal
franchise fee litigation or its impact on CPL's results of operations or
financial position.
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 vs. Texas Utilities Electric Company Complaint
(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 had 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 September 1998. Even though Texas Utilities
Electric Company has appealed the Texas Commission final order, it refunded
$26.6 million to CPL and WTU in November 1998. Prior to the Texas Commission's
September 1998 decision, the $15.5 million annual payment to Texas Utilities
Electric Company had been allocated to the U.S. Electric Operating Companies. As
a result of this order, the payment will continue to be recorded on CPL's and
WTU's books as a reduction to ERCOT transmission expense with no future expenses
on the books of PSO and SWEPCO.
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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 unit. The agreement also establishes a
process for the U.S. Electric Operating Companies to allocate revenues received
under open access transmission tariffs. In August 1998, the FERC accepted the
transmission coordination agreement for filing, suspended it for a nominal
period, and made it effective retroactive to January 1, 1997, subject to refund
and investigation. In the first quarter of 1999, U.S. Electric Operating
Companies and supporting intervenor signatories filed an uncontested offer of
settlement, which is awaiting approval from the FERC. Management cannot predict
if FERC will approve the offer of settlement.
PSO PCB Cases
PSO has been named a defendant in petitions filed in state court in
Oklahoma in February and August 1996. The petitions allege that the plaintiffs
suffered personal injury and fear future injury as a result of contamination by
PCBs from a transformer malfunction that occurred in April 1982 at the Page
Belcher Federal Building in Tulsa, Oklahoma. Each of the plaintiffs seeks actual
and punitive damages in excess of $10,000. Other claims arising from this
incident have been settled and the suits dismissed. Management believes that PSO
has defenses to the remaining complaints and intends to defend the suits
vigorously. Management believes that the remaining claims, excluding claims for
punitive damages, are covered by insurance. Management also believes that the
ultimate resolution of the remaining lawsuits will not have a material adverse
effect on CSW's or PSO's results of operations or financial condition.
PSO Union Negotiations
In March 1999, PSO and its Local Union 1002 of the IBEW reached an
agreement to contract negotiations, which began in July 1996. In December 1996,
PSO had implemented portions of its then final proposal after declaring an
impasse. The principal issue of disagreement involved PSO's need for flexibility
in a deregulated environment. In April 1997, Oklahoma's governor signed into law
an electric industry-restructuring bill. The law mandates the implementation of
retail competition to begin on July 1, 2002. Following passage of the law, PSO
resumed negotiations with the union. The new contract allows PSO to be in a
better position to compete as the electric utility industry in Oklahoma
restructures. The effective of the new agreement was on April 4, 1999, and it
will remain in effect until September 30, 2000.
PSO and the union continued discussions to resolve issues related to a
recent NLRB ruling against PSO. In October 1998, PSO received an adverse ruling
from a NLRB ALJ on the union's unfair labor practice charge against PSO. The ALJ
upheld PSO's right to cease collecting union dues through payroll deductions.
The ALJ ruled that PSO did negotiate in good faith but that PSO's position on
some issues was too harsh, and therefore the December 1996 implementation should
be rolled back and employees made whole. Additionally, the ALJ ruled that PSO
improperly solicited employees to withdraw from the union. In December 1998, PSO
appealed the ALJ's ruling to the NLRB. At this time, PSO cannot predict the
ultimate outcome of the NLRB matter. However, PSO believes that it will not have
a material adverse effect on its results of operations or financial condition.
As a result of the agreement, the union agreed to withdraw its opposition to the
AEP merger proceedings.
SWEPCO Fuel Proceeding
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 under-recovered Texas
jurisdictional fuel costs in the amount balance of approximately $16.8 million,
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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 as to whether transmission equalization payments should be
included in fuel or base revenues. Of the $16.8 million in under-recovered fuel
costs as of December 31, 1996, the settlement resulted in a decrease of the
under-recovered fuel costs, and the resulting surcharge recovery, by $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 was not associated with any
particular activity or issue within the fuel proceedings.
On April 8, 1998, the ALJ 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 declined to allow
SWEPCO to recover its transmission equalization payments as a component of
eligible fuel expense. This ruling resulted in an earnings reduction of
approximately $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 had still 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 and 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 is unable to predict the ultimate outcome of this litigation.
However, SWEPCO will withdraw the appeal if the stipulated AEP merger settlement
is approved and the merger is consummated.
SWEPCO Lignite Mining Agreement Litigation
SWEPCO and CLECO are each a 50% owner of Dolet Hills Power Station Unit 1
and jointly own lignite reserves in the Dolet Hills area of northwestern
Louisiana. In 1982, SWEPCO and CLECO entered into a lignite mining agreement
with the DHMV, a partnership for the mining and delivery of lignite from a
portion of these reserves.
On April 15, 1997, SWEPCO and CLECO filed suit against DHMV and its
partners in the United States District Court for the Western District of
Louisiana seeking to enforce various obligations of DHMV to SWEPCO and CLECO
under the lignite mining agreement, including provisions relating to the quality
of the delivered lignite, pricing, and mine reclamation practices. On June 15,
1997, DHMV filed an answer denying the allegations in the suit and filed a
counterclaim asserting various contract-related claims against SWEPCO and CLECO.
SWEPCO and CLECO have denied the allegations in the counterclaims on the grounds
the counterclaims have no merit. On January 8, 1999, SWEPCO and CLECO amended
the claims against DHMV in the lawsuit to include a request that, if the court
determines that DHMV has breached the lignite mining agreement, the lignite
mining agreement be terminated. This federal court suit is set for trial
beginning in November 1999.
SWEPCO intends to vigorously prosecute the claims against DHMV and defend
against the counterclaims which DHMV has asserted. Although SWEPCO cannot
predict the ultimate outcome of this matter, management believes that the
resolution of this matter will not have a material adverse effect on SWEPCO's
results of operations or financial condition.
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WTU 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 resulted
from 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 a 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. Parties filed briefs in November
1998, and a proposal for decision from the ALJ was received on January 29, 1999.
In the proposal for decision, the ALJ recommends recovery of all eligible fuel
and fuel-related expenses requested by WTU except for $70,000, or approximately
0.02%, of the amount requested. On March 26, 1999, the Texas Commission issued a
final order accepting the ALJ's proposal for decision. The final order provided
for the recovery of ERCOT ISO transaction fees in eligible fuel expense, which
the ALJ had previously disallowed. On April 14, 1999, certain cities served by
WTU filed motions for rehearing at the Texas Commission. The motions for
rehearing were considered by the Texas Commission on April 29, 1999, and no
material change was made to the March 26, 1999 final order. The period for
motions for rehearing has not yet lapsed.
3. COMMITMENTS AND CONTINGENT LIABILITIES
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 March 31, 1999, the
maximum amount SWEPCO believes it may have to assume is $92 million. However,
the maximum amount may vary as the mining contractor's need for funds
fluctuates. The contractor's actual obligation outstanding at March 31, 1999 was
$70 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 guarantee the
costs of mine reclamation of up to $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.
SWEPCO Cajun Asset Purchase Proposal
Cajun filed a petition for reorganization under Chapter 11 of the United
States Bankruptcy Code on December 21, 1994 and is currently operating under the
supervision of the United States Bankruptcy Court for the Middle District of
Louisiana.
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On April 16, 1999, the April 1999 SWEPCO Plan was filed with the
bankruptcy court. The April 1999 SWEPCO Plan replaces all previous plans filed
by SWEPCO. Under the April 1999 SWEPCO Plan, a SWEPCO affiliate would acquire
all the non-nuclear assets of Cajun for $1.017 billion. SWEPCO's bid is based on
interest rate adjustments to its base bid of $940.5 million. The April 1999
SWEPCO Plan incorporates the terms of a settlement between the RUS, the Cajun
Members Committee, Clairborne Electric Cooperative, Inc. and SWEPCO. In
addition, the April 1999 SWEPCO Plan provides for SWEPCO and the Cajun member
cooperatives to enter into long-term power supply agreements with rate plan
options and market access provisions designed to ensure long-term
competitiveness of the cooperatives. Eight cooperatives and Central Louisiana
Electric Company, Inc. agreed to purchase power from SWEPCO, if the bankruptcy
court confirms the April 1999 SWEPCO Plan.
The trustee for Cajun supports a revised competing bid of $960 million, on
an interest-adjusted basis, filed by the Cajun trustee and Louisiana Generating
LLC on April 16, 1999. The Cajun trustee filed additional changes to the
proposed purchase price on April 19, 1999. On April 22, 1999, the Cajun trustee
and Louisiana Generating LLC then filed additional changes to the proposed
purchase price. The interest-adjusted purchase price under the amended Louisiana
Generating LLC bid is now approximately $1.037 billion.
The bankruptcy court has ordered mediation to occur among the parties in
an effort to resolve the bankruptcy case. Final confirmation hearings are
scheduled to begin June 22, 1999.
Consummation of the April 1999 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
boards of directors approvals. If the April 1999 SWEPCO Plan is ultimately
confirmed by the bankruptcy court, the $1.017 billion required to consummate the
acquisition of Cajun's non-nuclear assets is expected to be financed through a
combination of external non-recourse borrowings and internally generated funds.
There can be no assurance that the bankruptcy court will confirm the April 1999
SWEPCO Plan or, if it is confirmed, that federal and state regulators will
approve it. As of March 31, 1999, SWEPCO had deferred $12.1 million in costs
related to the Cajun acquisition on its consolidated balance sheet, which would
be expensed if the April 1999 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 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 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.
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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 an
additional $2 million for the cleanup of the site.
The State of Mississippi has passed Brownfield 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 to allow the cleanup
project to move forward.
SWEPCO Wilkes Power Plant Copper Limit Compliance
The EPA has cited SWEPCO's Wilkes power plant in an administrative order
for wastewater permit violations related to copper level limits. Past and
planned compliance activities, including activities that have been conducted to
determine the source of copper, were presented by SWEPCO to EPA during an
administrative meeting, which was held on August 13, 1998. Negotiations continue
between SWEPCO and the EPA. The EPA has not issued an administrative penalty
order nor a referral to the United States Department of Justice for judicial
action with monetary fines. On December 29, 1998, the TNRCC fined SWEPCO $8,250
for the same issue on the state permit, which was paid in February 1999.
SEEBOARD London Underground Commitment
SEEBOARD has committed (pound)79 million, or $127 million, for costs
associated with its contract related to the London Underground transportation
system. In 1998, SEEBOARD, through its subsidiary, SEEBOARD Powerlink, signed a
$1.6 billion, 30 year contract as a joint venture partner to operate, maintain,
finance and renew the high-voltage power distribution network of the London
Underground.
SEEBOARD Third Party Pension Litigation
In the U.K., National Grid Group and National Power have been involved in
continuing litigation in respect of their use of actuarial surpluses declared in
the electricity industry's occupational pension scheme, the Electricity Supply
Pension Scheme. A high court decision in favor of the National Grid Group and
National Power was appealed and on February 10, 1999 the Court of Appeal ruled
that the particular arrangements made by these corporations to dispose of the
surplus, partly by canceling liabilities relating to additional pension payments
resulting from early retirement, were invalid due to procedural defects.
SEEBOARD employees are members of the Electricity Supply Pension Scheme and
SEEBOARD has made similar use of actuarial surplus. For SEEBOARD, the amount of
the cancelled payments was approximately $33 million. The Court of Appeal did
not order the National Grid Group and National Power to make payment to the
Electricity Supply Pension Scheme but will hold a further hearing to decide what
action to take. It is likely that the case will then be referred to the U.K.
House of Lords. The final outcome of the hearing, or any referral to the U.K.
House of Lords, cannot be determined and therefore it is not possible for
management to quantify the potential impact, if any, on the results of
operations and financial condition of CSW and/or SEEBOARD.
Diversified Electric Loans and Commitments
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.
In addition to funds already spent, at March 31, 1999, CSW Energy had committed
costs of approximately $36 million, including development construction and
financing of the projected $210 million project costs. The natural gas-fired
facility should begin simple cycle operation in the summer of 1999 and combined
cycle operation by the end of 1999. The Frontera project is being built as a
merchant power plant. Frontera is expected to supply power to the rapidly
growing Rio Grande Valley and to supply customers throughout Texas. Pursuant to
AEP and CSW's stipulated settlement with several intervenors in the state of
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Texas related to the AEP merger, CSW Energy willsell 250 MW of Frontera upon
completion of the merger. See NOTE 5. PROPOSED AEP MERGER and ITEM 2. MD&A,
PROPOSED AEP MERGER for additional information including timing of the sale.
CSW Energy has entered into an agreement with Texas Eastman to construct
and operate a 440-MW cogeneration facility in Longview, Texas. This facility
will be known as the Eastex Cogeneration Project. At March 31, 1999, CSW Energy
had construction obligations of $72 million. Construction of the facility is
scheduled to begin in mid-1999, with expected operation in 2001. Excess
electricity generated by the plant will be sold by CSW Energy in the wholesale
electricity market.
During the first quarter of 1999, CSW International and its 50% joint
venture partner, Scottish Power, obtained construction financing of (pound)190
million (at March 31, 1999, $306 million) for the South Coast power project, a
400-MW combined cycle gas turbine power station in Shoreham, United Kingdom. The
permanent financing of (pound)152 million (at March 31, 1999, $245 million) of
debt was also arranged. CSW International has guaranteed approximately $31
million of the (pound)190 million construction financing, and the permanent
financing is unconditionally guaranteed by the project. Commercial operation is
expected to begin in 2000.
CSW, CSW Energy and CSW International have provided letters of credit and
guarantees on behalf of independent power projects of approximately $26 million,
$23 million, and $237 million, respectively, as of March 31, 1999.
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
At March 31, 1999, approximately $1.3 billion of CSW's subsidiary
companies' retained earnings were available for payment of cash dividends by
such subsidiaries to CSW. The amounts of retained earnings available for
dividends attributable to each the U.S. Electric Operating Companies at March
31, 1999 is as follows.
CPL-$718 million PSO-$132 million SWEPCO-$286 million WTU-$111 million
5. PROPOSED AEP MERGER
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. 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 stockholders
approved the merger.
Under the merger agreement, each common share of CSW will be converted
into 0.6 shares of AEP common stock. CSW stockholders will own approximately 40%
of the combined company. CSW plans to continue to pay dividends on its common
stock until the closing of the AEP Merger at approximately the same times and
rates per share as in 1998, subject to continuing evaluation of CSW's financial
condition, earnings, prospects and other factors by the CSW board of directors.
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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.
AEP and CSW 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 expect to 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 expects to use a combination of
growth, reduced hiring and attrition to minimize the need for employee
separations. Transition teams of employees from both companies will make
organizational and staffing recommendations.
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 limited to specific agreed upon
projects and in 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 limitations do not preclude CSW and its subsidiaries from
making investments and expenditures in amounts previously budgeted.
Merger Regulatory Approvals
The merger is conditioned, among other things, upon the approval of
several state and federal regulatory agencies.
General
Testimony submitted in the filings in Arkansas, Louisiana, Oklahoma, Texas
and at the FERC outlined the expected company-wide benefits of the merger to AEP
and CSW customers and shareholders. These expected benefits include $2 billion
in non-fuel savings over 10 years and $98 million in net fuel savings over 10
years.
FERC
On April 30, 1998, AEP and CSW jointly filed a request with the FERC for
approval of their proposed merger.
Hearings at the FERC are scheduled to begin June 29, 1999. A final order
is expected in the fourth quarter of 1999.
Arkansas
On June 12, 1998, AEP and CSW jointly filed a request with the Arkansas
Commission for approval of their proposed merger. The Arkansas Commission issued
an order approving the merger subject to approval of the associated regulatory
plan on August 13, 1998. On December 17, 1998, the Arkansas Commission issued a
final order granting conditional approval of a stipulated agreement related to a
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proposed merger regulatory plan. The stipulated agreement calls for SWEPCO to
reduce rates through a net merger savings rider for its Arkansas retail
customers by $6 million over the five-year period following completion of the
merger. The Arkansas Commission order notes the possibility of decisions in
other jurisdictions adversely affecting provisions of the stipulated agreement.
Consequently, the Arkansas Commission final order is conditioned on its
consideration of approval of the merger in other state and federal
jurisdictions.
Louisiana
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.
In Louisiana, hearings have been postponed as AEP and CSW negotiate with
all parties in an attempt to settle all issues in that state.
Oklahoma
On August 14, 1998, AEP and CSW jointly filed a request with the Oklahoma
Commission for approval of their proposed merger.
An amended application was filed with the Oklahoma Commission on February
25, 1999. On May 11, 1999, the Oklahoma Commission approved the proposed merger
between AEP and CSW. The approval follows a partial settlement between the
Oklahoma Commission Utility Division Staff, the Oklahoma Commission Consumer
Services Division, the Office of the Attorney General for Oklahoma, and AEP and
CSW.
Under the partial settlement agreement, AEP and CSW would share merger
savings with Oklahoma customers as well as AEP shareholders, effective with the
merger closing; not increase Oklahoma base rates prior to January 1, 2003; file
by December 31, 2001 with the FERC an application to join a regional
transmission organization; and establish additional quality of service standards
for PSO's retail customers. Oklahoma's share of the $50.2 million in guaranteed
net merger savings over the first five years after the merger is consummated
will be split between Oklahoma customers and AEP shareholders, with customers
receiving approximately 55% of the savings.
The partial settlement agreement includes a recommendation by the Oklahoma
Commission Staff that the Oklahoma Commission file a position statement with
FERC indicating that it does not oppose the merger while reserving the right to
ensure that there are no adverse impacts on the Oklahoma transmission system.
Texas
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 May 4, 1999, AEP and CSW announced a proposed settlement with several
intervenor groups for the proposed merger between AEP and CSW and to resolve
issues associated with CPL, SWEPCO and WTU rate and fuel reconciliation
proceedings. The settlement would result in combined rate reductions totaling
$221 million over a six-year period for Texas customers of the three CSW Texas
electric operating companies (CPL, SWEPCO and WTU) if the settlement is approved
by the Texas Commission and the merger is completed as planned.
The settlement was reached with the General Counsel of the Texas
Commission, the State of Texas, the Texas Industrial Energy Consumers, the Low
Income Intervenors, the Office of Public Utility Counsel of Texas and the
steering committee of the Cities of McAllen, Corpus Christi, Victoria, Abilene,
Big Lake, Vernon and Paducah. The settlement expands upon a previous Texas
settlement announced on November 12, 1998, with the Office of Public Utility
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Counsel of Texas and the cities' steering committee. That prior settlement
agreement provided for Texas retail rate reductions of $180 million over the six
years following completion of the merger. The new settlement agreement proposes
additional rate reductions totaling $41 million for a total of $221 million. The
settlement also calls for the divestiture of a total of 1,604 MW of existing
and proposed generating capacity within Texas.
The first rate-reduction rider provides for $84.4 million in net-merger
savings. The amounts are to be credited to Texas customers' bills through a
net-merger-savings rate-reduction rider over six years following completion of
the merger.
Additional rate-reduction riders will be implemented to resolve issues
associated with CPL, WTU and SWEPCO rate and fuel reconciliation proceedings and
court appeals in Texas. The settlement provides for an additional reduction of
$136.6 million, which will be implemented over the six years following
completion of the merger.
The cumulative amount of the rate-reduction riders proposed in the
settlement will result in total reductions over the six-year period in the
following amounts.
Cumulative Reduction Annual Reduction
(millions)
CPL $142.8 $23.8
SWEPCO $42.1 $7.0
WTU $36.1 $6.0
AEP and CSW also agree to divest a total of 1,604 MW of generation capacity in
the ERCOT, while retaining the right to purchase power from the CPL plants
during peak periods. The generation to be divested includes the previously
announced plan to divest 250 MW of CSW Energy's Frontera Plant, which is
currently under construction near Mission, Texas, as well as the following power
plants currently owned by CPL.
Lon C. Hill Power Station Corpus Christi 546 MW
Nueces Bay Power Station Corpus Christi 559 MW
Ennis S. Joslin Power Station Point Comfort 249 MW
If it is determined that the divestiture can proceed immediately after the
merger closes without jeopardizing pooling of interests accounting treatment for
the merger, sale of the plants would begin no later than 90 days after the
merger closes. Without that determination, the divestiture would occur
consistent with SEC pooling of interests requirements, approximately two years
after the merger closes.
Other provisions of the proposed settlement include:
- - Accelerate depreciation and amortization by CPL of $60 million over the
six-year period to reduce its amount of potentially stranded cost.
- - Quality-of-service standards that the newly merged company must meet.
- - Continuation of programs for low-income and elderly customers and expansion
of these programs by $4.5 million over the six-year period.
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- - In the absence of legislative or regulatory initiatives establishing
affiliate standards, AEP and CSW have agreed to affiliate standards that will
be observed by their subsidiaries.
- - As provided in the earlier settlement, CSW has agreed to withdraw its appeal
of the CPL glide-path rate reduction of $13 million implemented in May 1998
as well as the second glide-path rate reduction of $13 million implemented in
May 1999 if the settlement is approved and the AEP/CSW merger is completed.
- - AEP and CSW commit to file prior to December 31, 2000, with the FERC an
application to transfer the operational control of bulk transmission
facilities located in the Southwest Power Pool to a FERC-approved Regional
Transmission Organization directly interconnected with AEP's existing
Southwest Power Pool transmission facilities.
- - CPL, SWEPCO and WTU agree not to seek an increase in base rates before
January 1, 2003 or three years from the effective date of the merger,
whichever is later. All signatories to the agreement except the Texas
Commission General Counsel have agreed not to initiate rate reviews that
would result in a change in base rates prior to January 1, 2001.
- - The settlement proposal also provides for a sharing of margins from
off-system sales on the wholesale electricity market after the effective date
of the merger.
Hearings on the merger proceedings in Texas are scheduled to begin August
9, 1999 and a final order is expected in the fourth quarter of 1999.
NRC
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 from CSW to 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 with a condition that the merger must be completed by December 31,
1999.
Other Federal
On October 13, 1998, AEP and CSW jointly filed an application with the SEC
for approval of the 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. In
November 1998 and March 1999, AEP and CSW filed amendments to the application.
Several parties have intervened in the proceedings at the SEC.
AEP and CSW plan to make a merger filing with the Department of Justice in
the near future.
United Kingdom
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. Although the merger of CSW into AEP is not
subject to approval of United Kingdom regulatory authorities, 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 Competition Commission. CSW is unable to predict the ultimate outcome of
any such regulatory proceeding.
AEP
AEP has received a request from the staff of the Kentucky Public Service
Commission to file an application seeking Kentucky Public Service Commission
approval for the indirect change in control of Kentucky Power Company that will
occur as a result of the proposed merger. CSW understands that although AEP does
not believe that the Kentucky Public Service Commission has the jurisdictional
authority to approve the merger, AEP prepared a merger application filing, which
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was filed April 15, 1999, with the Kentucky Public Service Commission. Under the
governing statute the Kentucky Public Service Commission must act on the
application within 60 days.
On April 20, 1999, AEP reached a settlement with the Indiana Utility
Regulatory Commission staff addressing matters pertinent to Indiana regarding
the proposed merger. The Indiana Utility Regulatory Commission approved the
settlement on April 26, 1999. The settlement agreement resulted from an
investigation of the proposed merger between AEP and CSW initiated by the
Indiana Utility Regulatory Commission.
On April 21, 1999, AEP and CSW announced that they had reached separate
settlements with six wholesale customers that address issues related to the
proposed merger.
On April 28, 1999, AEP and CSW announced that they ratified a settlement
agreement with local unions of the IBEW representing employees of AEP and CSW.
The settlement agreement covered issues raised in the pending merger between AEP
and CSW. As part of the settlement, the IBEW local unions will withdraw their
opposition to the merger.
Completion of the Merger
The proposed AEP merger has a targeted completion date in the fourth
quarter of 1999. 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 accounted for
as a pooling of interests. The parties may not waive some of these conditions.
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. After December 31, 1999, either CSW or AEP may terminate
the merger agreement if all of the conditions to its obligation to close have
not been satisfied, provided that either party may extend the merger agreement,
under certain circumstances, through June 30, 2000. There can be no assurance
that the AEP merger will be consummated.
Merger Costs
As of March 31, 1999, CSW had deferred $31 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.
6. BUSINESS SEGMENTS
Effective December 31, 1998, CSW adopted SFAS No. 131. CSW's business
segments include the U.S. Electric and U.K. Electric segments. The U.S. Electric
segment is comprised of CSW's four domestic electric operating companies, CPL,
PSO, SWEPCO and WTU. The U.K. Electric segment is comprised of CSW's foreign
electric operating company, SEEBOARD, U.S.A. The U.S. Electric segment's primary
business is the generation, transmission and distribution of electricity. The
U.K. Electric segment's primary business is the supply and distribution of
electricity. Financial data for the business segments for the periods covered in
this form 10-Q is in the following table.
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<TABLE>
<CAPTION>
Other and CSW
U.S. U.K. Reconciling Consolidated
Electric Electric
(millions)
<S> <C> <C> <C> <C>
Three months ended March 31, 1999
Operating Revenues $697 $476 $52 $1,225
Income/(Loss) from Continuing Operations 34 27 (16) 45
Total Assets at March 31, 1999 9,146 2,966 1,562 13,674
Total Assets at December 31, 1998 9,151 3,032 1,714 13,897
Three months ended March 31, 1998
Operating Revenues $689 $533 $35 $1,257
Income/(Loss) from Continuing Operations 38 33 (11) 60
Total Assets at March 31, 1998 9,235 3,035 1,276 13,546
Total Assets at December 31, 1997 9,338 2,931 1,347 13,616
</TABLE>
7. SOUTH AMERICAN INVESTMENTS
Through March 31, 1999, CSW International has invested $80 million in Vale
to obtain a 36% equity interest. CSW International also issued $100 million of
debt to Vale, convertible to equity by the end of 1999. CSW International
accounts for its $80 million investment in Vale on the equity method of
accounting, and the $100 million debt as a loan.
In mid-January 1999, amid market instability, the Brazilian government
abandoned its policy of pegging the Real in a broad range against the dollar.
This resulted in a 37% devaluation of the Brazilian currency, by the end of
April 1999. Vale is unfavorably impacted by the devaluation primarily due to the
revaluation of foreign denominated debt.
CSW International has a put option which requires that Vale purchase CSW
International's shares, upon CSW International exercising the put, at a minimum
price equal to the purchase price paid for the shares ($80 million). As a result
of the put option arrangement, management has concluded that CSW International's
investment carrying amount will not be reduced below the put option value unless
there is deemed to be a permanent impairment. Pursuant to the put option
arrangement, CSW International will not recognize its proportionate share of any
future earnings until its proportionate share of any losses of Vale, that are
not recognized as a result of the floor established by the put option, are
recouped. At March 31, 1999, CSW International had deferred losses of
approximately $19 million. CSW International views its investment in Vale as a
long-term investment strategy and believes that the investment in Vale continues
to have significant long-term value and is recoverable. Management will continue
to closely evaluate the changes in the Brazilian economy, and its impact on CSW
International's investment in Vale.
As of March 31, 1999, CSW International had invested $110 million in stock
of a Chilean electric company. The investment is classified as securities
available for sale and accounted for by the cost method. Based on the market
value of the shares and foreign exchange rates, the value of the investment at
March 31, 1999 is $74 million. The reduction in the carrying value of this
investment has been reflected in Other Comprehensive Income in CSW's
Consolidated Statements of Stockholder's Equity. Management views its investment
in Chile as a long-term investment strategy. Management will continue to closely
evaluate the changes in the South American economy and its impact on CSW
International's investment in the Chilean electric company.
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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, 1998. Reference is also made
to each Registrant's unaudited Financial Statements and related Notes to
Financial Statements included herein. The information included therein 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 month period ended March 31,
1999.
LIQUIDITY AND CAPITAL RESOURCES
Overview of CSW Operating, Investing, and Financing Activities
Net cash inflows from operating activities increased $102 million to $249
million for the first quarter of 1999 compared to the same period last year. The
increase in net cash inflows is due primarily to a lower accounts receivable
balance, which increased cash flows $97 million, and the absence in 1999 of a
$59 million refund paid to CPL customers in the first quarter of 1998. Partially
offsetting the increase in net cash inflows were lower levels of fuel recovery,
which decreased cash flows $28 million, and higher levels of fuel inventories
that decreased cash flows $13 million.
Net cash outflows from investing activities increased $73 million to $183
million for the first quarter of 1999 compared to the same period a year ago.
The increase in investing activity cash outflows was due primarily to higher
levels of spending in 1999 for CSW Energy and CSW International projects. Also
affecting the increase in cash outflows were lower levels of spending in 1999
for CSW Energy's Sweeny power plant, which began commercial operation in the
first quarter of 1998, and a cash inflow in 1998 from CSW International's
Altamira partner, Alpek, which assumed its 50% obligation of that power plant
project.
Net cash outflows from financing activities increased $79 million to $98
million for the first quarter of 1999 compared to the first quarter 1998 due
primarily to a $142 million change in short-term debt from a cash inflow of $110
million in 1998 to a cash outflow of $32 million in 1999. This change is due
primarily to the absence in 1999 of short-term debt borrowings in the first
quarter of 1998 used to repay a $60 million variable bank loan at CSW Services
and to redeem $28 million of preferred stock at SWEPCO. The increase in cash
outflows from investing activities was offset in part by the absence in 1999 of
the retirement and reacquisition of long-term debt in the first quarter of 1998.
Construction Expenditures
CSW's construction expenditures, including allowance for funds used during
construction, totaled $167 million for the three months ended March 31, 1999.
Such expenditures for the U.S. Electric Operating Companies totaled $38 million,
$22 million, $18 million and $13 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.
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Other Financing Issues
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. In addition, CSW
also incurs borrowings for other subsidiaries that are not included in the money
pool. As of March 31, 1999, CSW had revolving credit facilities totaling $1.4
billion to back up its commercial paper program.
On April 2, 1999, C3 Communications announced a major expansion of C3
Networks, its long haul fiber network division. C3 Networks plans to invest over
$50 million in existing routes and new construction in 1999. C3 Networks
delivers networking and services in Texas and Louisiana and plans to expand the
network to Oklahoma and Louisiana (the foregoing statement constitutes
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).
PROPOSED AEP MERGER
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. 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 stockholders
approved the merger.
Under the merger agreement, each common share of CSW will be converted
into 0.6 shares of AEP common stock. CSW stockholders will own approximately 40%
of the combined company. CSW plans to continue to pay dividends on its common
stock until the closing of the AEP Merger at approximately the same times and
rates per share as in 1998, subject to continuing evaluation of CSW's financial
condition, earnings, prospects and other factors by the CSW board of directors.
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.
AEP and CSW 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 expect to 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 expects to use a combination of
growth, reduced hiring and attrition to minimize the need for employee
separations. Transition teams of employees from both companies will make
organizational and staffing recommendations.
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
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operating and maintenance expenditures are limited to specific agreed upon
projects and in 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 limitations do not preclude CSW and its subsidiaries from
making investments and expenditures in amounts previously budgeted.
Merger Regulatory Approvals
The merger is conditioned, among other things, upon the approval of
several state and federal regulatory agencies.
General
Testimony submitted in the filings in Arkansas, Louisiana, Oklahoma, Texas
and at the FERC outlined the expected company-wide benefits of the merger to AEP
and CSW customers and shareholders. These expected benefits include $2 billion
in non-fuel savings over 10 years and $98 million in net fuel savings over 10
years.
FERC
On April 30, 1998, AEP and CSW jointly filed a request with the FERC for
approval of their proposed merger.
Hearings at the FERC are scheduled to begin June 29, 1999. A final order
is expected in the fourth quarter of 1999.
Arkansas
On June 12, 1998, AEP and CSW jointly filed a request with the Arkansas
Commission for approval of their proposed merger. The Arkansas Commission issued
an order approving the merger subject to approval of the associated regulatory
plan on August 13, 1998. On December 17, 1998, the Arkansas Commission issued a
final order granting conditional approval of a stipulated agreement related to a
proposed merger regulatory plan. The stipulated agreement calls for SWEPCO to
reduce rates through a net merger savings rider for its Arkansas retail
customers by $6 million over the five-year period following completion of the
merger. The Arkansas Commission order notes the possibility of decisions in
other jurisdictions adversely affecting provisions of the stipulated agreement.
Consequently, the Arkansas Commission final order is conditioned on its
consideration of approval of the merger in other state and federal
jurisdictions.
Louisiana
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.
In Louisiana, hearings have been postponed as AEP and CSW negotiate with
all parties in an attempt to settle all issues in that state.
Oklahoma
On August 14, 1998, AEP and CSW jointly filed a request with the Oklahoma
Commission for approval of their proposed merger.
An amended application was filed with the Oklahoma Commission on February
25, 1999. On May 11, 1999, the Oklahoma Commission approved the proposed merger
between AEP and CSW. The approval follows a partial settlement between the
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Oklahoma Commission Utility Division Staff, the Oklahoma Commission Consumer
Services Division, the Office of the Attorney General for Oklahoma, and AEP and
CSW.
Under the partial settlement agreement, AEP and CSW would share merger
savings with Oklahoma customers as well as AEP shareholders, effective with the
merger closing; not increase Oklahoma base rates prior to January 1, 2003; file
by December 31, 2001 with the FERC an application to join a regional
transmission organization; and establish additional quality of service standards
for PSO's retail customers. Oklahoma's share of the $50.2 million in guaranteed
net merger savings over the first five years after the merger is consummated
will be split between Oklahoma customers and AEP shareholders, with customers
receiving approximately 55% of the savings.
The partial settlement agreement includes a recommendation by the Oklahoma
Commission Staff that the Oklahoma Commission file a position statement with
FERC indicating that it does not oppose the merger while reserving the right to
ensure that there are no adverse impacts on the Oklahoma transmission system.
Texas
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 May 4, 1999, AEP and CSW announced a proposed settlement with several
intervenor groups for the proposed merger between AEP and CSW. The settlement
would result in combined rate reductions totaling $221 million over a six-year
period for Texas customers of the three CSW Texas electric operating companies
(CPL, SWEPCO and WTU) if the settlement is approved by the Texas Commission and
the merger is completed as planned and resolve issues associated with CPL,
SWEPCO and WTU rate and fule reconciliation proceedings.
The settlement was reached with the General Counsel of the Texas
Commission, the State of Texas, the Texas Industrial Energy Consumers, the Low
Income Intervenors, the Office of Public Utility Counsel of Texas and the
steering committee of the Cities of McAllen, Corpus Christi, Victoria, Abilene,
Big Lake, Vernon and Paducah. The settlement expands upon a previous Texas
settlement announced on November 12, 1998, with the Office of Public Utility
Counsel of Texas and the cities' steering committee. That prior settlement
agreement provided for Texas retail rate reductions of $180 million over the six
years following completion of the merger. The new settlement agreement proposes
additional rate reductions totaling $41 million for a total of $221 million. The
settlement also calls for the divestiture of a total of 1,604 MW of existing
and proposed generating capacity within Texas.
The first rate-reduction rider provides for $84.4 million in net-merger
savings. The amounts are to be credited to Texas customers' bills through a
net-merger-savings rate-reduction rider over six years following completion of
the merger.
Additional rate-reduction riders will be implemented to resolve issues
associated with CPL, WTU and SWEPCO rate and fuel reconciliation proceedings and
court appeals in Texas. The settlement provides for an additional reduction of
$136.6 million, which will be implemented over the six years following
completion of the merger.
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The cumulative amount of the rate-reduction riders proposed in the
settlement will result in total reductions over the six-year period in the
following amounts.
Cumulative Reduction Annual Reduction
(millions)
CPL $142.8 $23.8
SWEPCO $42.1 $7.0
WTU $36.1 $6.0
AEP and CSW also agree to divest a total of 1,604 MW of generation capacity in
the ERCOT, while retaining the right to purchase power from the CPL plants
during peak periods. The generation to be divested includes the previously
announced plan to divest 250 MW of CSW Energy's Frontera Plant, which is
currently under construction near Mission, Texas, as well as the following power
plants currently owned by CPL.
Lon C. Hill Power Station Corpus Christi 546 MW
Nueces Bay Power Station Corpus Christi 559 MW
Ennis S. Joslin Power Station Point Comfort 249 MW
If it is determined that the divestiture can proceed immediately after the
merger closes without jeopardizing pooling of interests accounting treatment for
the merger, sale of the plants would begin no later than 90 days after the
merger closes. Without that determination, the divestiture would occur
consistent with SEC pooling of interests requirements, approximately two years
after the merger closes.
Other provisions of the proposed settlement include:
- - Accelerate depreciation and amortization by CPL of $60 million over the
six-year period to reduce its amount of potentially stranded cost.
- - Quality-of-service standards that the newly merged company must meet.
- - Continuation of programs for low-income and elderly customers and expansion
of these programs by $4.5 million over the six-year period.
- - In the absence of legislative or regulatory initiatives establishing
affiliate standards, AEP and CSW have agreed to affiliate standards that will
be observed by their subsidiaries.
- - As provided in the earlier settlement, CSW has agreed to withdraw its appeal
of the CPL glide-path rate reduction of $13 million implemented in May 1998
as well as the second glide-path rate reduction of $13 million implemented in
May 1999 if the settlement is approved and the AEP/CSW merger is completed.
- - AEP and CSW commit to file prior to December 31, 2000, with the FERC an
application to transfer the operational control of bulk transmission
facilities located in the Southwest Power Pool to a FERC-approved Regional
Transmission Organization directly interconnected with AEP's existing
Southwest Power Pool transmission facilities.
- - CPL, SWEPCO and WTU agree not to seek an increase in base rates before
January 1, 2003 or three years from the effective date of the merger,
whichever is later. All signatories to the agreement except the Texas
Commission General Counsel have agreed not to initiate rate reviews that
would result in a change in base rates prior to January 1, 2001.
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- - The settlement proposal also provides for a sharing of margins from
off-system sales on the wholesale electricity market after the effective date
of the merger.
Hearings on the merger proceedings in Texas are scheduled to begin August
9, 1999 and a final order is expected in the fourth quarter of 1999.
NRC
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 from CSW to 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 with a condition that the merger must be completed by December 31,
1999.
Other Federal
On October 13, 1998, AEP and CSW jointly filed an application with the SEC
for approval of the 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. In
November 1998 and March 1999, AEP and CSW filed amendments to the application.
Several parties have intervened in the proceedings at the SEC.
AEP and CSW plan to make a merger filing with the Department of Justice in
the near future.
United Kingdom
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. Although the merger of CSW into AEP is not
subject to approval of United Kingdom regulatory authorities, 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 Competition Commission. CSW is unable to predict the ultimate outcome of
any such regulatory proceeding.
AEP
AEP has received a request from the staff of the Kentucky Public Service
Commission to file an application seeking Kentucky Public Service Commission
approval for the indirect change in control of Kentucky Power Company that will
occur as a result of the proposed merger. CSW understands that although AEP does
not believe that the Kentucky Public Service Commission has the jurisdictional
authority to approve the merger, AEP prepared a merger application filing, which
was filed April 15, 1999, with the Kentucky Public Service Commission. Under the
governing statute the Kentucky Public Service Commission must act on the
application within 60 days.
On April 20, 1999, AEP reached a settlement with the Indiana Utility
Regulatory Commission staff addressing matters pertinent to Indiana regarding
the proposed merger. The Indiana Utility Regulatory Commission approved the
settlement on April 26, 1999. The settlement agreement resulted from an
investigation of the proposed merger between AEP and CSW initiated by the
Indiana Utility Regulatory Commission. The settlement agreement resulted from an
investigation of the proposed merger between AEP and CSW initiated by the
Indiana Utility Regulatory Commission.
On April 21, 1999, AEP and CSW announced that they had reached separate
settlements with six wholesale customers that address issues related to the
proposed merger.
On April 28, 1999, AEP and CSW announced that they ratified a settlement
agreement with local unions of the IBEW representing employees of AEP and CSW.
The settlement agreement covered issues raised in the pending merger between AEP
and CSW. As part of the settlement, the IBEW local unions will withdraw their
opposition to the merger.
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Completion of the Merger
The proposed AEP merger has a targeted completion date in the fourth
quarter of 1999. 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 accounted for
as a pooling of interests. The parties may not waive some of these conditions.
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. After December 31, 1999, either CSW or AEP may terminate
the merger agreement if all of the conditions to its obligation to close have
not been satisfied, provided that either party may extend the merger agreement,
under certain circumstances, through June 30, 2000. There can be no assurance
that the AEP merger will be consummated.
Merger Costs
As of March 31, 1999, CSW had deferred $31 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
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 April 16, 1999, the April 1999 SWEPCO Plan was filed with the
bankruptcy court. The April 1999 SWEPCO Plan replaces all previous plans filed
by SWEPCO. Under the April 1999 SWEPCO Plan, a SWEPCO affiliate would acquire
all the non-nuclear assets of Cajun for $1.017 billion. SWEPCO's bid is based on
interest rate adjustments to its base bid of $940.5 million. The April 1999
SWEPCO Plan incorporates the terms of a settlement between the RUS, the Cajun
Members Committee, Clairborne Electric Cooperative, Inc. and SWEPCO. In
addition, the April 1999 SWEPCO Plan provides for SWEPCO and the Cajun member
cooperatives to enter into long-term power supply agreements with rate plan
options and market access provisions designed to ensure long-term
competitiveness of the cooperatives. Eight cooperatives and Central Louisiana
Electric Company, Inc. agreed to purchase power from SWEPCO, if the bankruptcy
court confirms the April 1999 SWEPCO Plan.
The trustee for Cajun supports a revised competing bid of $960 million, on
an interest-adjusted basis, filed by the Cajun trustee and Louisiana Generating
LLC on April 16, 1999. The Cajun trustee filed additional changes to the
proposed purchase price on April 19, 1999. On April 22, 1999, the Cajun trustee
and Louisiana Generating LLC then filed additional changes to the proposed
purchase price. The interest-adjusted purchase price under the amended Louisiana
Generating LLC bid is now approximately $1.037 billion.
The bankruptcy court has ordered mediation to occur among the parties in
an effort to resolve the bankruptcy case. Final confirmation hearings are
scheduled to begin June 22, 1999.
Consummation of the April 1999 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
boards of directors approvals. If the April 1999 SWEPCO Plan is ultimately
confirmed by the bankruptcy court, the $1.017 billion required to consummate the
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acquisition of Cajun's non-nuclear assets is expected to be financed through a
combination of external non-recourse borrowings and internally generated funds.
There can be no assurance that the bankruptcy court will confirm the April 1999
SWEPCO Plan or, if it is confirmed that federal and state regulators will
approve it. As of March 31, 1999, SWEPCO had deferred $12.1 million in costs
related to the Cajun acquisition on its consolidated balance sheet, which would
be expensed if the April 1999 SWEPCO Plan was not ultimately successful. See
NOTE 3. COMMITMENTS AND CONTINGENT LIABILITIES. The preceding discussion
constitutes 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.
RECENT DEVELOPMENTS AND TRENDS
Industry Restructuring Initiatives in Texas, Louisiana, Oklahoma and
Arkansas
Several initiatives to restructure the electric utility industry and enact
retail competition have been undertaken in the four states in which the U. S.
Electric Operating Companies operate. Legislation was enacted in Oklahoma in
1997 and 1998, and in Arkansas in 1999. Legislative activity in Texas and
Louisiana has, to date, stopped short of any such definitive action.
In April 1997, the Oklahoma Legislature passed restructuring legislation
providing for retail access by July 1, 2002. That legislation called for a
number of studies to be completed on a variety of restructuring issues,
including independent system operator issues, technical issues, financial
issues, transition issues, and consumer issues. The study on independent system
operator issues was completed in January 1998.
In 1998, the Oklahoma Legislature passed Senate Bill 888, which
accelerated the schedule for completion of the remaining studies to October
1999. Those studies are to be conducted under the direction of the Legislative
Joint Electric Utility Task Force, rather than by the Oklahoma Commission as the
previous legislation required. The Task Force has organized the study effort
into several working groups, which have been directed to evaluate assigned
issues. The Task Force will develop its report to the Legislature based on the
work performed by these working groups. The Task Force's final report will be
provided to the Legislature by October 1, 1999. Management is unable to predict
the outcome of these studies or their ultimate impact on the results of
operations and financial condition of CSW and PSO.
In April 1999, the Arkansas Legislature passed, and the Arkansas Governor
signed, legislation for electric utility restructuring in Arkansas. Some major
provisions of that legislation include:
- - Retail competition begins January 1, 2002. The Arkansas Commission can
delay implementation, but not beyond June 30, 2003.
- - Companies with transmission lines must submit those facilities to
operation by a transmission organization approved by the FERC.
- - A one-year rate freeze after restructuring will be implemented for
default service customers of companies that do not apply for stranded
cost recovery. A three-year rate freeze will be implemented for
companies with stranded costs.
- - The Arkansas Commission is given broad authority to address market
power issues.
In 1998, a special legislative committee created by the Louisiana Senate
studied the impact of retail competition on the state of Louisiana. No
legislation has been enacted as a result of that effort. In addition, during
1998 and 1999, the Louisiana Commission conducted a proceeding to study
restructuring and retail competition. Parties submitted comments, and hearings
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were held on a number of specific restructuring topics. Also, as a part of that
proceeding, utilities filed rate unbundling information with the Louisiana
Commission staff.
As a result of that proceeding, the Louisiana Commission staff recently
released its report on industry restructuring, including its recommendations
regarding retail competition in Louisiana. In its report, the Louisiana
Commission staff recommended that electric industry restructuring should not
proceed at this time because it is not in the public interest. However, the
Louisiana Commission Staff proposed a restructuring plan as an alternative, in
the event the Louisiana Commission decides to move forward with electric
industry restructuring and retail competition. The Louisiana Commission voted to
begin additional study and analysis of the issues associated with restructuring.
The Louisiana Commission has adopted a procedural schedule to further review
restructuring issues and to have a final restructuring plan by January 1, 2001.
Several bills addressing industry restructuring and retail competition
have been filed in the 1999 session of the Texas legislature. In March 1999, the
Texas Senate passed Senate Bill No. 7, which would begin retail competition in
qualifying power regions on January 1, 2002, although municipal utilities and
retail electric cooperatives can choose whether to participate in retail
competition. The bill provides for a rate freeze until January 1, 2002 for
utilities participating in retail competition. The bill further provides for a
price freeze period for residential and small commercial customers, starting on
January 1, 2002, after a five percent reduction in rates for such customers. The
bill also provides for stranded cost recovery. The Texas House of
Representatives is currently considering several restructuring bills. The Texas
Legislative session concludes on May 31, 1999.
Management cannot predict the ultimate outcome of the initiatives
concerning restructuring and retail competition in Arkansas, Louisiana, Oklahoma
and Texas, or their ultimate impact on the results of operations, financial
condition, or competitive position of CSW, CPL, SWEPCO and WTU.
PSO Union Negotiations
In March 1999, PSO and its Local Union 1002 of the IBEW reached an
agreement to contract negotiations, which began in July 1996. In December 1996,
PSO had implemented portions of its then final proposal after declaring an
impasse. The principal issue of disagreement involved PSO's need for flexibility
in a deregulated environment. In April 1997, Oklahoma's governor signed into law
an electric industry-restructuring bill. The law mandates the implementation of
retail competition to begin on July 1, 2002. Following passage of the law, PSO
resumed negotiations with the union. The new contract allows PSO to be in a
better position to compete as the electric utility industry in Oklahoma
restructures. The effective of the new agreement was on April 4, 1999, and it
will remain in effect until September 30, 2000.
PSO and the union continued discussions to resolve issues related to a
recent NLRB ruling against PSO. In October 1998, PSO received an adverse ruling
from a NLRB ALJ on the union's unfair labor practice charge against PSO. The ALJ
upheld PSO's right to cease collecting union dues through payroll deductions.
The ALJ ruled that PSO did negotiate in good faith but that PSO's position on
some issues was too harsh, and therefore the December 1996 implementation should
be rolled back and employees made whole. Additionally, the ALJ ruled that PSO
improperly solicited employees to withdraw from the union. In December 1998, PSO
appealed the ALJ's ruling to the NLRB. At this time, PSO cannot predict the
ultimate outcome of the NLRB matter. However, PSO believes that it will not have
a material adverse effect on its results of operations or financial condition.
As a result of the agreement, the union agreed to withdraw its opposition to the
AEP merger proceedings. The preceding discussion constitutes 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.
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SWEPCO - Texas Eastman
Texas Eastman, one of SWEPCO's largest customers, and CSW Energy announced
an agreement to construct and operate a 440 MW cogeneration facility in
Longview, Texas. Construction of the facility is scheduled to begin in mid-1999
with expected operation in March 2001. The plant will provide a significant
portion of the steam and all electricity requirements needed by Texas Eastman.
It is anticipated that Texas Eastman will remain a SWEPCO customer until the
cogeneration facility is operational. Texas Eastman currently provides
approximately 3% of SWEPCO's total electric operating revenues. See NOTE 3.
COMMITMENTS AND CONTINGENT LIABILITIES- Diversified Electric Loans and
Commitments.
SEEBOARD - Third Party Pension Litigation
In the U.K., National Grid Group and National Power have been involved in
continuing litigation in respect of their use of actuarial surpluses declared in
the electricity industry's occupational pension scheme, the Electricity Supply
Pension Scheme. A high court decision in favor of the National Grid Group and
National Power was appealed and on February 10, 1999, the Court of Appeal ruled
that the particular arrangements made by these corporations to dispose of the
surplus, partly by canceling liabilities relating to additional pension payments
resulting from early retirement, were invalid due to procedural defects.
SEEBOARD employees are members of the Electricity Supply Pension Scheme, and
SEEBOARD has made similar use of actuarial surplus. For SEEBOARD, the amount of
the cancelled payments was approximately $33 million. The Court of Appeal did
not order the National Grid Group and National Power to make payment to the
Electricity Supply Pension Scheme but will hold a further hearing to decide what
action to take. It is likely that the case will then be referred to the U.K.
House of Lords. The final outcome of the hearing, or any referral to the U.K.
House of Lords, cannot be determined and therefore it is not possible for
management to quantify the impact, on the results of operations and financial
condition of CSW and SEEBOARD.
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 $13 million on May 1, 1998 and an additional
$13 million on May 1, 1999.
CPL 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 assigned a lower return on equity than non-ECOM
property; (ii) the Texas Commission's application of the "Glide Path" rate
reduction methodology applied on May 1, 1998 and May 1, 1999; and (iii) $18
million of disallowed affiliate expenses 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 reductions were implemented in
May 1998 and May 1999. Hearings on the appeal were held during the third quarter
of 1998, and a judgment was issued in February 1999 affirming the Texas
Commission order, except for a consolidated tax issue in the amount of $6
million, which was remanded to the Texas Commission. While CPL appealed this
most recent order to the Court of Appeals, management is unable to predict how
the final resolution of these issues will ultimately affect CSW's and CPL's
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results of operations andfinancial condition. On May 4, 1999, AEP and CSW
announced that they had reached a stipulated agreement with the general counsel
of the Texas Commission and other intervenors in the state of Texas. If the
stipulated agreement is approved by the Texas Commission and the AEP Merger is
ultimately consummated, the agreement states that CSW will withdraw its appeal
with respect to the "glide path" rate reduction methodology. See ITEM 1. NOTE 5.
PROPOSED AEP MERGER and ITEM 2. MD&A - PROPOSED AEP MERGER for additional
information on the stipulated agreement.
CPL currently accounts for the economic effects of regulation in
accordance with SFAS No. 71. Pursuant to the provisions of SFAS No. 71, CPL has
recorded approximately $1.2 billion of regulatory-related assets at March 31,
1999. 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, 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 constitutes
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.
SWEPCO Louisiana Rate Review
In December 1997, the Louisiana Commission announced it would review
SWEPCO's rates and service. 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 June 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. Management cannot
predict the outcome of this review.
Other
Reference is made to NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS for
information regarding fuel proceedings at CPL, SWEPCO and WTU.
DIVERSIFIED ELECTRIC
CSW Energy
CSW Energy presently owns interests in six operating power projects
totaling 978 MW which are located in Colorado, Florida and Texas. CSW Energy
began construction in August 1998 of a 500 MW merchant power plant, known as
Frontera, in the Rio Grande Valley, near the city of Mission, Texas. The natural
gas-fired facility should begin simple cycle operation in the summer of 1999 and
combined cycle operation by the end of 1999. Pursuant to AEP and CSW's
stipulated agreement with several intervenors in the state of Texas related to
the AEP Merger, CSW Energy will sell 250 MW of Frontera upon completion of the
merger. See ITEM 1. NOTE 5. PROPOSED AEP MERGER and MD&A, PROPOSED AEP MERGER
for additional information including timing of the sale.
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CSW Energy has entered into an agreement with Texas Eastman to construct
and operate a 440-MW cogeneration facility in Longview, Texas. This facility
will be known as the Eastex Cogeneration Project. At March 31, 1999, CSW Energy
had construction obligations of $72 million related to the project. Construction
of the facility is scheduled to begin in mid-1999, with expected operation in
2001. Excess electricity generated by the plant will be sold by CSW Energy in
the wholesale electricity market.
In addition to these projects, CSW Energy has other projects in various
stages of development.
The preceding discussion constitutes 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.
CSW International
CSW International was organized to pursue investment opportunities in EWGs
and FUCOs and currently holds investments in the United Kingdom, Mexico and
South America. In the first quarter of 1998, CSW International and its joint
venture partner, Alpek, commenced commercial operations of a 109 MW, gas fired
cogeneration project at Alpek's Petrocel industrial complex in Altamira,
Tamaulipas, Mexico.
During the first quarter of 1999, CSW International and its 50% joint
venture partner, Scottish Power, obtained construction financing of (pound)190
million (at March 31, 1999, $306 million) for the South Coast power project, a
400-MW combined cycle gas turbine power station in Shoreham, United Kingdom. The
permanent financing of (pound)152 million (at March 31, 1999, $245 million) of
debt was also arranged. CSW International has guaranteed approximately $31
million of the (pound)190 million construction financing, and the permanent
financing is unconditionally guaranteed by the project. Commercial operation is
expected to begin in 2000.
Through March 31, 1999, CSW International has invested $80 million in Vale
to obtain a 36% equity interest. CSW International also issued $100 million of
debt to Vale, convertible to equity by the end of 1999. CSW International
accounts for its $80 million investment in Vale on the equity method of
accounting, and the $100 million as a loan.
In mid-January 1999, amid market instability, the Brazilian government
abandoned its policy of pegging the Real in a broad range against the dollar.
This resulted in a 37% devaluation of the Real by the end of January 1999. Vale
is unfavorably impacted by the devaluation primarily due to the revaluation of
foreign denominated debt.
CSW International has a put option which requires that Vale purchase CSW
International's shares, upon CSW International exercising the put, at a minimum
price equal to the purchase price paid for the shares ($80 million). As a result
of the put option arrangement, management has concluded that CSW International's
investment carrying amount will not be reduced below the put option value unless
there is deemed to be a permanent impairment. Pursuant to the put option
arrangement, CSW International will not recognize its proportionate share of any
future earnings until its proportionate share of any losses of Vale, that are
not recognized as a result of the floor established by the put option, are
recouped. At March 31, 1999, CSW International had deferred losses of
approximately $19 million. CSW International views its investment in Vale as a
long-term investment strategy and believes that the investment in Vale continues
to have significant long-term value and is recoverable. Management will continue
to closely evaluate the changes in the Brazilian economy, and its impact on CSW
International's investment in Vale.
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As of March 31, 1999, CSW International had invested $110 million in stock
of a Chilean electric company. The investment is classified as securities
available for sale and accounted for by the cost method. Based on the market
value of the shares and foreign exchange rates, the value of the investment at
March 31, 1999 is $74 million. The reduction in the carrying value of this
investment has been reflected in Other Comprehensive Income in CSW's
Consolidated Statements of Stockholder's Equity. Management views its investment
in Chile as a long-term investment strategy. Management will continue to closely
evaluate the changes in the South American economy and its impact on CSW
International's investment in the Chilean electric company.
In addition to these projects, CSW International has other projects in
various stages of development.
The preceding discussion constitutes 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.
OTHER MATTERS
Year 2000
On a system-wide basis, CSW initiated a year 2000 project to prepare
internal computer systems and applications for the year 2000. These systems and
applications include management information systems that support business
operations such as customer billing, payroll, inventory and maintenance. 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.
Year 2000 readiness is a top priority for CSW. The formal project was
initiated in late 1996 at which time an executive sponsor and project manager
were named and a centralized project management office was formed. More than 30
Readiness Teams have been initiated and are in various phases of the project.
Currently, those teams represent the equivalent of about 90 full-time employee
positions working on year 2000 readiness. The teams are using a formal approach
that includes inventory, assessment, remediation, testing of systems and
development of contingency plans. Formal progress checkpoints are conducted
biweekly by the project management team. An executive oversight council
comprising the functional vice presidents convenes monthly to review progress
and address issues. The project executive sponsor updates top management on a
weekly basis and at every Board of Directors' Audit Committee meeting.
CSW has completed a review of its year 2000 project. External consultants
assisted in the review. The purpose of the 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.
State of Readiness
Key milestones for the CSW system-wide year 2000 program excluding
SEEBOARD and Vale are listed below:
- - A detailed inventory and assessment of 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 indicate 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
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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 June 30, 1999.
- - Inventory and assessment of business applications and vendor-supplied
software was completed in the first quarter of 1997. Only 25% of the business
application programs were determined to require remediation by December 1999.
- - Plans for modification and certification testing of business application
software were completed in the third quarter of 1997.
- - Remediation plans and schedules for business applications were established in
the fourth quarter of 1997, and conversion and certification activities were
initiated. As of the end the first quarter of 1999, 82% of business critical
applications were converted and certified. The remaining 18% of applications
are targeted for completion by mid-year 1999.
SEEBOARD completed an inventory of date dependent assets including, but
not limited to, embedded chip technology, software, hardware, applications,
telecommunications, access and security systems in the third quarter of 1998.
SEEBOARD completed an assessment of all critical systems in January 1999.
Remediation and testing of mission critical distribution and safety systems was
completed in March 1999. The remediation of all other critical path systems is
on schedule for completion by July 1999. Final verification of those systems is
scheduled for completion by the third quarter of 1999. As of March 31, 1999, 74%
of the work to be performed in electric operations has been completed.
Vale completed an inventory of date dependent assets and critical systems
in the fourth quarter of 1998. Vale is on schedule for remediation of these
assets and systems by the third quarter of 1999. Most business system
remediation has been completed.
Cost to Address Year 2000 Issues
Work related to the year 2000 project is being performed using a mix of
internal and external resources. The funds for year 2000 project expenditures
are included in CSW's budget. The majority of costs related to the project are
expensed as incurred. The historical cost incurred to date for the year 2000
project is approximately $14 million, $4 million of which was incurred in the
first quarter of 1999. Remaining testing and conversion is expected to cost an
additional $22 million to $24 million over the next 12 months. Approximately 33%
of the projected cost is to be covered through the redeployment of existing
labor resources. Approximately 37% of the projected cost is for outside contract
labor. The remaining 30% of the projected cost is for computer hardware and
software purchases.
In the first quarter of 1999 a software version upgrade to provide
contract management features to the materials management information system was
deferred until calendar year 2000 in order to minimize risk. The financial
impact on this deferment is minimal, as minor enhancements to the current design
have provided an alternative, interim solution for the needed functionality. No
other planned CSW computer information system projects have been affected by the
year 2000 project, but that may change as the year 2000 approaches and change
freezes are implemented to further minimize risk. Accordingly, no estimate has
been made for the financial impact of any future projects foregone due to
resources allocated to the year 2000 project.
Risk of Year 2000 Issues
The greatest financial risk to the CSW domestic operation 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 to generate and deliver electricity by CSW is
very low.
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To date at CSW System power plants, no year 2000 issues have been found
that would have caused power plants to fail. Risk of power plant failure is
limited because 50% of power plant controls do not operate with date sensitive
logic. Additionally, the year 2000 issues, which have been identified in the
plants, are generally minor issues typically affecting reporting systems.
The vast majority of the transmission and distribution system consists of
wires, poles, transformers, switches and fuses where year 2000 is not an issue.
Fewer than 15% of control systems that operate transmission and distribution
equipment are micro-processor based, and of those, 95% have been found to
process year 2000 dates correctly. The standard residential meter is not
affected; however, about 10% of industrial and large commercial meters have
microprocessors. So far most of those microprocessors process dates correctly.
The areas requiring the greatest amount of work are the computers that
operate business systems such as customer billing and accounting. CSW is on
schedule to have year 2000 issues in these systems resolved by the summer of
1999.
Currently, no cost estimate exists related to CSW's year 2000 risk.
The greatest risk to SEEBOARD is that it is part of a large supplier
chain. While SEEBOARD is confident of its ability to ensure that there will be
no year 2000 impact to the distribution network, it is reliant upon both the
generators and the National Grid in the U.K. However, through very close
relationships within the electricity industry the risk is considered minimal.
To date at SEEBOARD, the year 2000 testing on embedded chip technology has
revealed a less than 2% failure rate.
Contingency Plans
Contingency plans have been in place in CSW's domestic electric operation
for years to address problems resulting from weather. These plans are being
updated to include year 2000 issues. Contingency planning is engineered into the
transmission and distribution systems as it is designed with the capability to
by-pass failed equipment. A margin of power generation reserve above what is
needed is normally maintained. This reserve is a customary operating contingency
plan that allows CSW to operate normally even when a power plant unexpectedly
quits operating. Backup supplies of fuels are normally maintained at CSW power
plants. Natural gas plants have fuel oil as a backup and multiple pipelines
provide redundant supplies. At coal plants about 40-45 days of extra coal is
kept on hand.
The North American Electric Reliability Council is coordinating with all
national power regions to assess the risks and to develop contingency plans
within the national electric delivery system. During the fourth quarter of 1998,
CSW developed first drafts of the contingency plans to address year 2000 issues.
These contingency plans are currently being further developed and will be
completed in the second quarter of 1999. CSW participated in an industry-wide
drill focused on sustaining reliable operations with a simulated partial loss of
voice and data communications on April 9, 1999. The drill results clearly
demonstrated CSW's ability to successfully sustain reliable operations by
utilizing alternative means to acquire net generation and transmission tie-flow
readings, communicate those readings to transmission dispatch operation centers,
and communicate those readings to CSW's central control center who in turn
communicated those readings to the regional power reliability councils.
Additionally, CSW will participate in an industry-wide drill to test its
operational preparedness in the third quarter of 1999. Final verification of
external interfaces will be performed in the last half of 1999. Contingency
plans will continue to be revised as needed as a result of the drills.
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The CSW supply chain has contacted over 6,000 suppliers to determine their
organization readiness and 70% responded. Approximately 250 of those 6,000 are
mission critical suppliers, of which 96% have responded that their organizations
are either already year 2000 ready or will be before December 31, 1999.
Contingency plans have been developed to cover the possible failure of those 8
to 10 critical suppliers that have not responded with positive statements on
their year 2000 readiness.
Like CSW's U.S. operations, SEEBOARD also has contingency plans that have
been in place for years to address problems resulting from weather. These plans
are covered effectively within the distribution and customer services business
areas and are being updated to include Year 2000 scenarios. Contingency planning
is considered essential by SEEBOARD and also other external bodies such as the
government who are proposing legislation that key infrastructure utilities and
industries make readily available their contingency plans for external viewing.
These plans are continually being reviewed by SEEBOARD's year 2000 central team.
In addition, SEEBOARD is working with other utilities through interest groups
and the National Grid on interface contingency plans and testing.
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In 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 as deemed appropriate by executive officers of CSW. The
risk management program is necessary to meet the growing demands of CSW's
customers for competitive prices and 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. Consequently, 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 response to the development of a more competitive electric energy
market, CSW has received regulatory approval which authorizes the four U.S.
Electric Operating Companies to conduct a pilot program involving power sales
agreements at tariffed rates with a fixed fuel cost. To offset the commodity
price risk associated with these contracts, CSW has purchased natural gas swaps.
These swaps cover natural gas deliveries beginning in January and continuing for
the remainder of 1999. Natural gas volumes purchased to perform these contracts
for which CSW has secured swap agreements represents approximately 1% of annual
natural gas purchases.
The table below provides information about CSW's natural gas swaps and
electricity forward contracts that are sensitive to changes in commodity prices.
The swaps hedge commodity price exposure for the year 1999. Cash outflows on the
swap agreements should be offset by increased margins on electricity sales to
customers under tariffed rates with fixed fuel costs. The electricity forward
contracts hedge a portion of CSW's energy requirements through September 1999.
The average contract price for forward purchases is $75 per MWH, and the average
contract price for forward sales is $81 per MWH.
Contractual commitments at March 31, 1999 are as follows.
Products Net Notional Fair Value of Assets Fair Value of
Amount Liabilities
----------------------------------------------------------------------------
(millions)
Swaps 5,140,000 MMbtu $-- $--
Forwards: purchases 430,400 MWH -- 3
sales 361,600 MWH 4 --
CSW has, at times, 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 adverse
changes in exchange rates and to facilitate financing transactions resulting
from CSW's acquisition of SEEBOARD. At March 31, 1999, CSW had positions in two
cross currency swap contracts, which were used to eliminate currency
fluctuations in respect of the $400 million of debt. 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 hold these contracts to maturity. At
exchange rates on March 31, 1999, this liability is included in long-term debt
on the balance sheet at a carrying value of approximately $416 million.
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Expected Expected Cash
Cash Inflows Outflows
Contract Maturity Date (Maturity Value) (Market Value)
- --------------------------------------------------------------------------------
Cross currency swaps August 1, 2001 $200 million $215.0 million
Cross currency swaps August 1, 2006 $200 million $234.2 million
For information related to currency risk in South America see ITEM 1.,
NOTE 8 SOUTH AMERICAN INVESTMENTS.
The preceding discussion constitutes 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.
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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, 1998.
ITEM 1. LEGAL PROCEEDINGS.
Other Legal Claim 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. See PART I - NOTE 2 LITIGATION AND
REGULATORY PROCEEDINGS and NOTE 3 COMMITMENTS AND CONTINGENT LIABILITIES.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
CPL
(i) The annual meeting of stockholders of CPL was held on April 8, 1999.
(ii) Directors elected at the annual meeting were:
John F. Brimberry Robert A. McAllen
E. R. Brooks Pete Morales, Jr.
Glenn Files H. Lee Richards
Ruben M. Garcia J. Gonzalo Sandoval
Alphonso Jackson Gerald E. Vaughn
(iii) No other matters (other than procedural matters) were voted upon at the
annual meeting.
PSO
(i) The annual meeting of stockholders of PSO was held on April 20, 1999.
(ii) Directors elected at the annual meeting were:
E. R. Brooks Paul K. Lackey, Jr.
T.D. Churchwell Paula Marshall-Chapman
Harry A. Clarke William R. McKamey
Glenn Files Dr. Robert B. Taylor, Jr.
(iii) No other matters (other than procedural matters) voted upon at the annual
meeting.
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SWEPCO
(i) The annual meeting of stockholders of SWEPCO was held on April 14, 1999.
(ii) Directors elected at the annual meeting were:
Karen C. Adams John M. Lewis
E. R. Brooks Michael H. Madison
James E. Davison William C. Peatross
Glenn Files Maxine P. Sarpy
Dr. Frederick E. Joyce
(iii) No other matters (other than procedural matters) were voted upon at the
annual meeting.
WTU
(i) The annual meeting of stockholders of WTU was held on March 30, 1999.
(ii) Directors elected at the annual meeting were:
E. R. Brooks Tommy Morris
Paul J. Brower Dian G. Owen
Glenn Files James M Parker
Alphonso Jackson F.L. Stephens
(iii) No other matters (other than procedural matters) were voted upon at the
annual meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
(2) Plan of Acquisition, reorganization, arrangement, liquidation or succession.
Second Amended and Restated Joint Plan of Reorganization for Cajun
Electric Power Cooperative, Inc. submitted jointly by the Committee of
Certain Member, Washington-St. Tammany Electric Cooperative, Inc. and
Southwestern Electric Power Company Dated April 19, 1999 (Exhibit 2.1),
filed herewith.
Supplemental Disclosure Statement in support of the Second Amended and
Restated Joint Plan of Reorganization for Cajun Electric Power
Cooperative, Inc. submitted by the Committee of Certain Member,
Washington-St.Tammany Electric Cooperative, Inc. and Southwestern Electric
Power Company Dated April 19, 1999 (Exhibit 2.2), filed herewith.
(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.
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(18)Letter re: Change in Accounting Principle
CSW - (Exhibit 18.1), filed herewith.
CPL - (Exhibit 18.2), filed herewith.
PSO - (Exhibit 18.3), filed herewith.
SWEPCO - (Exhibit 18.4), filed herewith.
WTU - (Exhibit 18.5), filed herewith.
(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, CPL, PSO, SWEPCO and WTU
Date of earliest event reported: December 17, 1998
Date of report: January 5, 1999
Item 5. Other Events and Item 7. Financial Statements and Exhibits, reporting
developments in the CSW and AEP merger proceedings in Arkansas as well as the
current status of other regulatory proceedings.
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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: May 14, 1999 /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: May 14, 1999 /s/ R. Russell Davis
-----------------------------
R. Russell Davis
Controller and Chief Accounting Officer
(Principal Accounting Officer)
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EXHIBIT 12.1
CENTRAL POWER AND LIGHT COMPANY (CONSOLIDATED)
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED MARCH 31,1999
(Thousands Except Ratio)
(Unaudited)
Operating Income $283,166
Adjustments
Income taxes 127,956
Provision for deferred income taxes (11,480)
Deferred investment tax credits (3,858)
Other income and deductions (1,041)
Allowance for borrowed and equity funds
Used during construction 3,007
---------
Earnings $397,750
=========
Fixed Charges:
Interest on long-term debt $ 92,630
Interest on short-term debt and other 14,963
Distributions on Trust Preferred Securities 12,000
---------
Fixed Charges $119,593
=========
Ratio of Earnings to Fixed Charges 3.33
=========
EXHIBIT 12.2
PUBLIC SERVICE COMPANY OF OKLAHOMA (CONSOLIDATED)
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED MARCH 31,1999
(Thousands Except Ratio)
(Unaudited)
Operating Income $112,733
Adjustments
Income taxes 49,732
Provision for deferred income taxes (58)
Deferred investment tax credits (1,763)
Other income and deductions (1,440)
Allowance for borrowed and equity funds
used during construction 1,815
-----------
Earnings $161,019
===========
Fixed Charges:
Interest on long-term debt $28,128
Interest on short-term debt and other 4,046
Distributions on Trust Preferred Securities 6,000
-----------
Fixed Charges $38,174
===========
Ratio of Earnings to Fixed Charges 4.22
===========
EXHIBIT 12.3
SOUTHWESTERN ELECTRIC POWER COMPANY (CONSOLIDATED)
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED MARCH 31,1999
(Thousands Except Ratio)
(Unaudited)
Operating Income $148,023
Adjustments
Income taxes 61,751
Provision for deferred income taxes (13,203)
Deferred investment tax credits (4,607)
Other income and deductions 774
Allowance for borrowed and equity funds
used during construction 2,180
Interest portion of financing leases 543
-----------
Earnings $195,461
===========
Fixed Charges:
Interest on long-term debt $39,227
Interest on short-term debt and other 9,263
Distributions on Trust Preferred Securities 8,662
Interest portion of financing leases 543
-----------
Fixed Charges $57,695
===========
Ratio of Earnings to Fixed Charges 3.39
===========
EXHIBIT 12.4
WEST TEXAS UTILITIES COMPANY
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED MARCH 31,1999
(Thousands Except Ratio)
(Unaudited)
Operating Income $ 58,595
Adjustments
Income taxes 26,490
Provision for deferred income taxes (6,111)
Deferred investment tax credits (1,510)
Other income and deductions 1,184
Allowance for borrowed and equity funds
used during construction 1,342
-----------
Earnings 79,990
===========
Fixed Charges:
Interest on long-term debt 20,352
Interest on short-term debt and other 4,738
-----------
Fixed Charges 25,090
===========
Ratio of Earnings to Fixed Charges 3.19
===========
EXHIBIT 18.1
LETTER RE: CHANGE IN ACCOUNTING PRINCIPLE
Central and South West Corporation (CSW)
Form 10-Q Report for the quarter ended March 31, 1999
Ladies and Gentlemen:
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrant's independent accountants whenever there has been a
change in accounting principle or practice.
As stated in Note 1 to the financial statements of this Form 10-Q, effective
January 1, 1999, CSW incorporated the five-year average market related method
(the "Market Method") in its calculation of pension costs. Prior to January 1,
1999, CSW utilized the market value of the pension assets at September 30th in
its calculation of pension costs. The change was made to minimize the plan asset
market value volatility effect on CSW's recorded pension costs. Adopting the
Market Method did not have a material effect on first quarter results of
operations or financial position. The cumulative effect of the accounting change
to the Market Method was not material to first quarter results of operations or
financial position.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is to a preferable method. However, we have
reviewed the pertinent factors, including those related to financial reporting,
in this particular case on a subjective basis, and our opinion stated below is
based on our determination made in this manner.
We are of the opinion that CSW's change in method of accounting is to an
acceptable alternative method of accounting, which based upon the reasons stated
for the change and our discussions with you is also preferable under the
circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgement and business planning of your management. We
have not audited the application of the change to the financial statements of
any period subsequent to December 31, 1998. Further, we have not examined and do
not express any opinion with respect to your financial statements for the three
months ended March 31, 1999.
Very Truly Yours
Arthur Andersen LLP
EXHIBIT 18.2
LETTER RE: CHANGE IN ACCOUNTING PRINCIPLE
Central Power and Light Company (CPL)
Form 10-Q Report for the quarter ended March 31, 1999
Ladies and Gentlemen:
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrant's independent accountants whenever there has been a
change in accounting principle or practice.
As stated in Note 1 to the financial statements of this Form 10-Q, effective
January 1, 1999, CPL incorporated the five-year average market related method
(the "Market Method") in its calculation of pension costs. Prior to January 1,
1999, CPL utilized the market value of the pension assets at September 30th in
its calculation of pension costs. The change was made to minimize the plan asset
market value volatility effect on CPL's recorded pension costs. Adopting the
Market Method did not have a material effect on first quarter results of
operations or financial position. The cumulative effect of the accounting change
to the Market Method was not material to first quarter results of operations or
financial position.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is to a preferable method. However, we have
reviewed the pertinent factors, including those related to financial reporting,
in this particular case on a subjective basis, and our opinion stated below is
based on our determination made in this manner.
We are of the opinion that CPL's change in method of accounting is to an
acceptable alternative method of accounting, which based upon the reasons stated
for the change and our discussions with you is also preferable under the
circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgement and business planning of your management. We
have not audited the application of the change to the financial statements of
any period subsequent to December 31, 1998. Further, we have not examined and do
not express any opinion with respect to your financial statements for the three
months ended March 31, 1999.
Very Truly Yours
Arthur Andersen LLP
EXHIBIT 18.3
LETTER RE: CHANGE IN ACCOUNTING PRINCIPLE
Public Service Company of Oklahoma (PSO)
Form 10-Q Report for the quarter ended March 31, 1999
Ladies and Gentlemen:
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrant's independent accountants whenever there has been a
change in accounting principle or practice.
As stated in Note 1 to the financial statements of this Form 10-Q, effective
January 1, 1999, PSO incorporated the five-year average market related method
(the "Market Method") in its calculation of pension costs. Prior to January 1,
1999, PSO utilized the market value of the pension assets at September 30th in
its calculation of pension costs. The change was made to minimize the plan asset
market value volatility effect on PSO's recorded pension costs. Adopting the
Market Method did not have a material effect on first quarter results of
operations or financial position. The cumulative effect of the accounting change
to the Market Method was not material to first quarter results of operations or
financial position.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is to a preferable method. However, we have
reviewed the pertinent factors, including those related to financial reporting,
in this particular case on a subjective basis, and our opinion stated below is
based on our determination made in this manner.
We are of the opinion that PSO's change in method of accounting is to an
acceptable alternative method of accounting, which based upon the reasons stated
for the change and our discussions with you is also preferable under the
circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgement and business planning of your management. We
have not audited the application of the change to the financial statements of
any period subsequent to December 31, 1998. Further, we have not examined and do
not express any opinion with respect to your financial statements for the three
months ended March 31, 1999.
Very Truly Yours
Arthur Andersen LLP
EXHIBIT 18.4
LETTER RE: CHANGE IN ACCOUNTING PRINCIPLE
Southwestern Electric Power Company (SWEPCO)
Form 10-Q Report for the quarter ended March 31, 1999
Ladies and Gentlemen:
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrant's independent accountants whenever there has been a
change in accounting principle or practice.
As stated in Note 1 to the financial statements of this Form 10-Q, effective
January 1, 1999, SWEPCO incorporated the five-year average market related method
(the "Market Method") in its calculation of pension costs. Prior to January 1,
1999, SWEPCO utilized the market value of the pension assets at September 30th
in its calculation of pension costs. The change was made to minimize the plan
asset market value volatility effect on SWEPCO's recorded pension costs.
Adopting the Market Method did not have a material effect on first quarter
results of operations or financial position. The cumulative effect of the
accounting change to the Market Method was not material to first quarter results
of operations or financial position.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is to a preferable method. However, we have
reviewed the pertinent factors, including those related to financial reporting,
in this particular case on a subjective basis, and our opinion stated below is
based on our determination made in this manner.
We are of the opinion that SWEPCO's change in method of accounting is to an
acceptable alternative method of accounting, which based upon the reasons stated
for the change and our discussions with you is also preferable under the
circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgement and business planning of your management. We
have not audited the application of the change to the financial statements of
any period subsequent to December 31, 1998. Further, we have not examined and do
not express any opinion with respect to your financial statements for the three
months ended March 31, 1999.
Very Truly Yours
Arthur Andersen LLP
EXHIBIT 18.5
LETTER RE: CHANGE IN ACCOUNTING PRINCIPLE
West Texas Utilities Company (WTU)
Form 10-Q Report for the quarter ended March 31, 1999
Ladies and Gentlemen:
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrant's independent accountants whenever there has been a
change in accounting principle or practice.
As stated in Note 1 to the financial statements of this Form 10-Q, effective
January 1, 1999, WTU incorporated the five-year average market related method
(the "Market Method") in its calculation of pension costs. Prior to January 1,
1999, WTU utilized the market value of the pension assets at September 30th in
its calculation of pension costs. The change was made to minimize the plan asset
market value volatility effect on WTU's recorded pension costs. Adopting the
Market Method did not have a material effect on first quarter results of
operations or financial position. The cumulative effect of the accounting change
to the Market Method was not material to first quarter results of operations or
financial position.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is to a preferable method. However, we have
reviewed the pertinent factors, including those related to financial reporting,
in this particular case on a subjective basis, and our opinion stated below is
based on our determination made in this manner.
We are of the opinion that WTU's change in method of accounting is to an
acceptable alternative method of accounting, which based upon the reasons stated
for the change and our discussions with you is also preferable under the
circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgement and business planning of your management. We
have not audited the application of the change to the financial statements of
any period subsequent to December 31, 1998. Further, we have not examined and do
not express any opinion with respect to your financial statements for the three
months ended March 31, 1999.
Very Truly Yours
Arthur Andersen LLP
Exhibit 2.1
UNITED STATES BANKRUPTCY COURT
MIDDLE DISTRICT OF LOUISIANA
IN RE:
CASE NO. 94-11474
CAJUN ELECTRIC POWER
COOPERATIVE, INC.,
Chapter 11
DEBTOR.
USDC NO. 94-CV-2763-B2
SECOND AMENDED AND RESTATED JOINT PLAN OF REORGANIZATION FOR
CAJUN ELECTRIC POWER COOPERATIVE, INC.
SUBMITTED JOINTLY BY THE COMMITTEE OF CERTAIN MEMBERS,
WASHINGTON - ST. TAMMANY ELECTRIC COOPERATIVE, INC.
AND SOUTHWESTERN ELECTRIC POWER COMPANY DATED APRIL 19,1999
The Committee of Certain Members of Cajun Electric Power Cooperative Inc.
("Committee of Certain Members"), Washington - St. Tammany Electric Cooperative,
Inc., and Southwestern Electric Power Company (" SWEPCO ")(collectively the
"Proponents") hereby propose the following plan of reorganization ("Plan") which
provides for the liquidation of Cajun Electric Power Cooperative, Inc., the
debtor herein ("Debtor" or "Cajun"):
SUMMARY OF THE PLAN
The Proponents have joined together to present to the creditors of Cajun
and the Court a Plan that will resolve Cajun's bankruptcy through the sale of
Cajun's non-nuclear assets to a SWEPCO affiliate, and the voluntary initiation
of new power supply arrangements by and between a SWEPCO affiliate and Cajun's
former members. The Plan has the goal of offering competitive wholesale rates to
the Cajun member cooperatives ("Members"), while maximizing value to the Cajun
estate.
The Plan provides for the acquisition of Cajun's non-nuclear assets by a
subsidiary or affiliate of SWEPCO. The consideration paid under the Plan will be
$1.02 billion (subject to adjustments as provided in the Asset Purchase
Agreement and this Plan) at current treasury yields. The Plan, in addition,
includes a settlement of a variety of pending litigation involving the lien
claims of the Rural Utilities Service ("RUS"). This Plan relies on the execution
of consensual agreements with the Members for the purchase of wholesale power.
In addition, the Plan incorporates the River Bend Settlement negotiated among
the Proponents and Entergy Gulf States, Inc. ("GSU"). The Plan is the only plan
that has the potential to harmonize the distinct perspectives of the Members,
the LPSC and the RUS. In short, the Proponents' Plan is the only feasible plan
that can be confirmed without years of litigation.
The distinguishing attribute of the Plan is that it produces competitive
wholesale rates to cooperatives serving over one million Louisiana residents and
maximizes the value of the Cajun estate. The cooperatives cannot and will not
remain viable at non-competitive rates, as evidenced by the bankruptcy of
Washington St. Tammany Electric Cooperative, Inc., the insolvency and
<PAGE>
SWEPCO/Members Page 2
Second Amended and Restated Joint Plan of Reorganization
acquisition of Bossier Rural Electric Membership Corporation, the sale of Teche
Electric Cooperative. Inc. to Central Louisiana Electric Company. Inc., and the
financial difficulties currently experienced by other cooperatives.
The Plan includes consensually negotiated average wholesale rates at a
competitive level, which would immediately provide significant rate relief to
Louisiana ratepayers while also maximizing the value of the estate. Any plan
that unilaterally proposes higher, non-competitive and non-consensual rates in
an effort to extract excessive value from Louisiana ratepayers would not provide
a permanent solution to the substantial rate disparity between cooperatives on
the one hand, and investor-owned and municipal utilities on the other hand.
The Plan provides for an enterprise (hereinafter "SWECO") to be formed by
SWEPCO as a wholly owned subsidiary or affiliate to acquire Cajun's non-nuclear
assets more specifically defined in the Asset Purchase Agreement (hereinafter
the "Acquired Assets"). Under the Plan, SWECO will purchase the Acquired Assets
for a price of $1.02 billion (subject to adjustments as set forth in the Asset
Purchase Agreement and this Plan) payable in cash (the "Purchase Price")
pursuant to the terms and conditions proposed in an Asset Purchase Agreement at
current treasury yields.
The Asset Purchase Agreement that will be executed by SWECO shall be
substantially in the form of the Asset Purchase Agreement which is attached as
Exhibit 1 to the Plan. On the Effective Date of the Plan, the Members and SWECO
shall voluntarily enter into new Power Supply Agreements substantially in the
form of Exhibit 2 attached to the Plan, whereby pursuant to the terms and
conditions of the Power Supply Agreements, SWECO shall be obligated to supply
the Members, and the Members electing to enter into the Power Supply Agreements
shall be obligated to purchase their power requirements from SWECO. To the
extent that there are any conflicts between the terms of the Plan and the Asset
Purchase Agreement, the provisions of the Asset Purchase Agreement shall
control. Unless specifically provided otherwise in the Plan, the Plan generally
contemplates that any assets remaining in Cajun after the consummation of the
Asset Purchase Agreement and the River Bend Settlement will be (i) liquidated by
the Trustee with the proceeds of such liquidation distributed in accordance with
the Plan; or (ii) conveyed by the Trustee to the holder of the lien on such
assets. The Purchase Price, liquid assets and any proceeds of other assets
liquidated by the Trustee shall be distributed in accordance with the terms of
this Plan.
On August 26, 1996, Judge Frank J. Polozola signed an Order and Judgment
Approving Settlement by and among Cajun Electric Power Cooperative, Inc.,
Entergy Gulf States, Inc., Entergy Corporation, and the Rural Utilities Service
of the Department of Agriculture (the "Order"). The settlement approved by the
Order (hereinafter the "River Bend Settlement"), among other things: puts an end
to years of expensive litigation among Cajun, GSU, and the RUS; provides for the
transfer of Cajun's River Bend Interest at the discretion of the RUS to a
bidder, the RUS or GSU; provides for the establishment of a Decommissioning
Trust Fund; and settles the claims of GSU that put at issue the Trustee's
ability to transfer Cajun's non-River Bend assets apart from the River Bend
assets and obligations and free and clear of all liens and encumbrances. The
Order provides that the settlement could be consummated independent of any plan
of reorganization. The Order has been affirmed by the United States Court of
Appeals for the Fifth Circuit and GSU has acquired Cajun's River Bend Interest
pursuant to the terms of the River Bend Settlement.
<PAGE>
SWEPCO/Members Page 3
Second Amended and Restated Joint Plan of Reorganization
The Committee of Certain Members. SWEPCO and the RUS reached a settlement
of certain issues concerning the validity of the liens and security interests of
the RUS against the estate. The Amended and Restated Settlement Agreement (which
was approved by the Bankruptcy Court per Order docketed on February 11, 1999) is
attached as Exhibit 3 and incorporated in this Plan. Certain terms of the
Amended and Restated Settlement Agreement are effective without court approval.
The terms of paragraph 4 and 7 required court approval.
TERMS OF THE PLAN
Article 1: Definitions
1.1 "Acquired Assets"" is defined in the Asset Purchase Agreement.
1.2 "Administrative Expense Claim" means any Claim constituting a cost or
expense of administration of Cajun's Chapter 11 case incurred on or after the
Petition Date of the kind described in Section 503(b) of the Bankruptcy Code,
including, without limitation, any fees or charges assessed against Cajun's
estate under Chapter 123 of title 28, United States Code, fees and expenses of
the Trustee and professionals employed by the Estate, costs and expenses of
preserving the Estate, taxes described in Section 503(b)(1)(B) of the Bankruptcy
Code, certain employee claims arising after the Petition Date, cure amounts for
executory contracts and unexpired leases assumed or assumed and assigned by the
Trustee under the Plan.
1.3 "Allowed Administrative Expense Claim" means any Administrative
Expense Claim which, after notice and hearing, is determined by Final Order of
the Court to be an Administrative Expense Claim entitled to payment in
accordance the Bankruptcy Code.
1.4 "Allowed Claim" means any Claim against the Debtor, (i) the proof of
which was filed on or before the Bar Date; or (ii) that was scheduled by the
Debtor as liquidated in amount and not disputed or contingent; and (iii) in
either case, a Claim to which no objection is timely filed or that is allowed by
a Final Order of the Court.
1.5 "Allowed Convenience Claim" means any Allowed Claim originally
scheduled by the Debtor in the amount of $20,000 or less.
1.6 "Allowed Secured Claim" means any Allowed Claim to the extent of the
value of (i) a lien on the assets which are property of the estate, or (ii) a
right of set-off under Code Section 553.
1.7 "Allowed Unsecured Claim" means any Allowed Claim to the extent it is
not secured either by a valid, enforceable and unavoidable lien on the Debtor's
assets or a right of set-off under Code Section 553.
1.8 "Asset Purchase Agreement" means the agreement by and between the
Trustee and SWEC0 providing for the sale of the Acquired Assets to SWECO
substantially in the form as attached hereto as Exhibit 1.
<PAGE>
SWEPCO/Members Page 4
Second Amended and Restated Joint Plan of Reorganization
1.9 "Avoidance Actions" means all direct or derivative rights, claims and
causes of action which constitute property of the Estate, including but not
limited to claims under Code Sections 506, 510, 542, 543, 544, 545, 546, 547,
548, 549, 550, 551 and 553 and any state laws corresponding thereto.
1.10 "Bar Date" means October 1, 1995, the date designated by the Court in
its Order dated August 21, 1995 as the last day for filing a proof of Claim.
1.11 "Big Cajun II, Unit 3 JOPOA" means that Joint Ownership Participation
and Operating Agreement by and between Debtor and GSU, dated as of November 14,
1980.
1.12 "Cajun" means Cajun Electric Power Cooperative, Inc., the debtor in
this Chapter 11 Case.
1.13 "Chapter 11 Case" means this Chapter 11 case of Cajun (Case No.
94-11474; USDC No. 94CV-2763-B2).
1.14 "Claim" means a claim as defined in Code Section 101(5) against
Cajun.
1.15 "Claimant" means a person or entity who holds or asserts a Claim.
1.16 "Class 6 Fund" means a fund to be established by the Trustee for
distribution to holders of Class 6 Claims under section 6.3 hereof.
1.17 "CLECO" means Central Louisiana Electric Company, Inc., as successor
in interest to Teche Electric Cooperative, Inc.
1.18 "CoBank" means CoBank, N.A., formerly National Bank for Cooperatives.
1.19 "CoBank Class E Stock" means the Class E stock of CoBank owned by
Cajun.
1.20 "Code Section" means a section of the United States Bankruptcy Code,
11 U.S.C. ss. 101 et seq., as in effect with respect to the Reorganization Case.
1.21 "Committee of Certain Members" means the Committee of Certain Members
of Cajun Electric Power Cooperative, Inc., an unofficial committee currently
composed of the following seven Members: Beauregard Electric Cooperative, Inc.,
Dixie Electric Membership Corporation, Jefferson Davis Electric Cooperative,
Inc., Northeast Louisiana Power Cooperative, Inc., South Louisiana Electric
Cooperative Association and Valley Electric Membership Corporation.
1.22 "Confirmation Date" means the date of entry by the Court or other
court of competent jurisdiction of the Confirmation Order.
1.23 "Confirmation Order" means the order of the Court confirming this
Plan.
<PAGE>
SWEPCO/Members Page 5
Second Amended and Restated Joint Plan of Reorganization
1.24 "Court" means the United States District Court for the Middle
District of Louisiana exercising its original bankruptcy jurisdiction pursuant
to 28 U.S.C. ss.1334, or the United State Bankruptcy Court for the Middle
District of Louisiana to the extent any proceeding was referred to it by said
Court.
1.25 "Debtor" means Cajun Electric Power Cooperative, Inc., the debtor in
this Chapter 11 Case.
1.26 "Decommissioning Trust Fund" means a segregated trust fund to be
established to satisfy obligations for Decommissioning Costs (as defined in the
River Bend Settlement).
1.27 "Disbursement Accounts" means that certain interest bearing accounts
to be established under the supervision of the Trustee pursuant to section 6.4
hereof, into which the Purchase Price, Net Proceeds of Excluded Assets, Net
Proceeds of Avoidance Actions and the Class 6 Fund are deposited.
1.28 "Disputed Claim" means a Claim which is not an Allowed Claim.
1.29 "Effective Date" means a date selected by the Proponents for this
Plan to become effective, for documents to be executed to implement the
provisions of the Plan, and for the Acquired Assets to be transferred to SWECO
pursuant to the terms of the Asset Purchase Agreement which date shall be not
later than 90 days after the Confirmation Order becomes a Final Order and all
required conditions to closing set forth in the Asset Purchase Agreement and all
conditions to effectiveness specified herein are satisfied. As set forth in the
Asset Purchase Agreement, the Effective Date of the Plan shall be the same date
as the "Closing Date" of the Asset Purchase Agreement (as that term is defined
in the Asset Purchase Agreement), on which date the closing of the sale of the
Acquired Assets to SWECO and related transactions shall occur. The Effective
Date of the Plan shall occur on the same date as the Closing Date, but the
Effective Date of the Plan shall occur at the close of business on such date and
immediately after the closing of the sale of assets pursuant to the Plan.
1.30 "Estate" means the bankruptcy estate of the Debtor created by
Bankruptcy Code Section 541.
1.31 "Excess Funds" means (a) the funds contained in a certain segregated
account that are collected by Debtor pursuant to the Order Concerning Use of
Cash Collateral and Adequate Protection approved by the Court on February 13,
1995; (b) the funds contained in a certain segregated account (variously
referred to in Debtor's bankruptcy proceedings as the "Interest Escrow Account,"
the "Ratepayer Trust Fund," the "Debt Service Escrow Account," and the "LPSC
Escrow Account") that are collected pursuant to LPSC Order No. U-17735-F, as
amended by LPSC Order No. U-17735-H; and (c) all interest on the funds described
in (a) and (b) immediately preceding, less any sums necessary to fund the
Decommissioning Trust Fund as provided in the River Bend Settlement.
1.32 "Excluded Assets" is defined in the Asset Purchase Agreement.
1.33 "Final Order" means an order or judgment (a) as to which the time has
expired within which a proceeding for review (whether by way of rehearing,
appeal, certiorari or otherwise) may be commenced, without any such proceeding
having been commenced, or (b) which, if such a review proceeding was timely
<PAGE>
SWEPCO/Members Page 6
Second Amended and Restated Joint Plan of Reorganization
commenced, has been affirmed by the highest tribunal in which review was sought
or remains in effect without modification following termination of such
proceeding for review, and the time has expired within which any further
proceeding for review may be commenced.
1.34 "GSU" means Entergy Gulf States, Inc., a Texas corporation formerly
known as Gulf States Utilities Company.
1.35 "Hibernia" means Hibernia National Bank, acting as indenture trustee
for the Industrial Revenue Bonds (Cajun Electric Power Cooperative, Inc.
Project), Series 1982.
1.36 "Initial Distribution Date" shall mean a date no later than 30 days
after the Effective Date when the initial payments on account of Allowed Claims,
as set forth in this Plan, shall be made.
1.37 "LPSC " means the Louisiana Public Service Commission.
1.38 "Member Interests" means the Members' interests in Cajun as evidenced
by a Membership Certificate issued by Cajun to each Member pursuant to Section 2
of Cajun's Bylaws.
1.39 "Members" means Beauregard Electric Cooperative, Inc., Claiborne
Electric Cooperative, Inc., CLECO, Concordia Electric Cooperative, Inc., Dixie
Electric Membership Corporation, Jefferson Davis Electric Cooperative, Inc.,
Northeast Louisiana Power Cooperative, Inc., Pointe Coupee Electric Membership
Corporation, South Louisiana Electric Cooperative Association, Southwest
Louisiana Electric Membership Corporation, Valley Electric Membership
Corporation and Washington-St. Tammany Electric Cooperative, Inc.
1.40 "Net Proceeds" means as to any Excluded Asset or Avoidance Action the
total gross proceeds less all reasonable and necessary costs associated with the
liquidation of such Excluded Asset or prosecution of such Avoidance Action.
1.41 "Ordinary Course Administrative Expense Claims" shall be limited to
Administrative Expense Claims incurred in the ordinary course of Cajun's
business and shall not include: (i) any post-petition obligations which are past
due or cure payments; (ii) any fees or expenses of the Trustee or "professional
persons" (as that term is used in Section 327 of the Bankruptcy Code) and any
expenses, compensation, or reimbursement requested pursuant to subsections
503(b)(2), (3), (4) or (5) of the Bankruptcy Code; (iii) any Taxes (including
income, sales, use, property or other Taxes) except for sales and use Taxes
incurred other than in the sale of Cajun's assets pursuant to the Asset Purchase
Agreement or the River Bend Settlement; (iv) any claims for breach of contract
tort, or other actionable conduct; and (v) any post-petition obligations
incurred under executory contracts or unexpired leases which are rejected in
this Plan or prior to the Effective Date of the Plan.
1.42 "Petition Date" means December 21, 1994.
1.43 "Proponents" means the Committee of Certain Members, Washington - St.
Tammany Electric Cooperative, Inc., and SWEPCO.
<PAGE>
SWEPCO/Members Page 7
Second Amended and Restated Joint Plan of Reorganization
1.44 "Pro Rata" means the factor of the amount of the Allowed Claim
multiplied by the fraction of the funds available for distribution to a class
divided by total Allowed Claims in a class plus reserves determined in
accordance with section 6.6 of the Plan for all Disputed Claims in a class.
1.45 "Purchase Price" is defined in the Asset Purchase Agreement.
1.46 "Representative" means, with respect to any specified entity, the
officers, directors (or functional equivalent, if any), employees, agents,
attorneys, accountants, financial advisors, other representatives, subsidiaries,
affiliates or any person who controls any of these within the meaning of the
Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as
amended.
1.47 "River Bend" means River Bend Nuclear Station Unit 1, a 936MW nuclear
generating facility located in St. Francisville, Louisiana, which was co-owned
by Cajun and GSU and which is now owned and operated by GSU.
1.48 "River Bend JOA" means the River Bend Joint Operating Agreement
between GSU and Cajun.
1.49 "River Bend Settlement" means the settlement between Cajun, GSU and
the RUS as currently defined in the Order and Judgment Approving Settlement by
and among Cajun Electric Power Cooperative, Inc., Entergy Gulf States, Inc.,
Entergy Corporation, and the Rural Utilities Service of the Department of
Agriculture, signed by the Honorable Frank J. Polozola on August 26, 1996, in
Civil Action No. 94 2763-B2 in the United States District Court for the Middle
District of Louisiana.
1.50 "RUS" means the United States of America, acting through the Rural
Utilities Service (formerly the Rural Electrification Administration), an agency
within the United States Department of Agriculture.
1.51 "RUS Settlement" means the settlement terms described in paragraphs 4
and 7 of the Amended and Restated Settlement Agreement by and among SWEPCO, the
Committee of Certain members and the RUS, dated March 18, 1998, attached as
Exhibit 3 to the Plan and incorporated herein.
1.52 "Settlement Amount" means the amount of $20.24 million payable to
the Class 6 Fund pursuant to the RUS Settlement.
1.53 "Supply Contracts" means the long term all-requirements contracts
between the Debtor and each of its Members.
1.54 "SWECO" means Southwestern Wholesale Electric Company, an entity to
be formed as a wholly owned subsidiary or affiliate by SWEPCO to acquire the
Acquired Assets.
1.55 "SWEPCO" means Southwestern Electric Power Company, a Louisiana-based
investor owned utility.
<PAGE>
SWEPCO/Members Page 8
Second Amended and Restated Joint Plan of Reorganization
1.56 "'Taxes" means all taxes, charges, fees. imposts. levies or other
assessments. including, without limitation, all net income, gross receipts,
sales, use, ad valorem, value added, transfer, franchise, profits. inventory,
capital stock, license, withholding, payroll, employment, social security,
unemployment, excise, severance, stamp, occupation and property taxes, customs
duties, fees, assessments and charges of any kind whatsoever, together with any
interest and any penalties, additions to tax or additional amounts imposed by
any taxing authority (domestic or foreign) and any interest and penalties
imposed with respect to the filing, obligation to file or failure to file any
return for such tax, and shall include any transferee liability in respect to
Taxes.
1.57 "Trustee" means the Chapter 11 trustee appointed herein by the Court,
or any successor Trustee that may be subsequently appointed by the Court.
Article 11: Treatment of Unclassified Claims.
2.1 Treatment of Administrative Claims.
(a) Each holder of an Allowed Administrative Expense Claim shall receive,
on account of such Administrative Expense Claim, cash in the amount of such
Allowed Administrative Expense Claim on the later of the Effective Date or
within ten days after the date the Administrative Expense Claim becomes an
Allowed Administrative Expense Claim, except to the extent any holder agrees to
a different treatment. An Administrative Expense Claim which is subject to the
Administrative Expense Claim Bar Date and the Supplemental Administrative Claim
Bar Date shall be paid only to the extent such claim is timely filed and allowed
as Administrative Expense Claim by the Court by Final Order. Notwithstanding the
foregoing, the Trustee and professionals employed at the expense of the Estate
and entities which may be entitled to reimbursement or the allowance of fees and
expenses from the Estate pursuant to subparagraphs (2) through (6) of Code
Section 503 (b) shall receive cash in the amount awarded to such professionals
and entities at such times and only in accordance with a Final Order entered
pursuant to Code Sections 330, 331 or Code Sections 503 (b) (2) through (6).
(b) (1) On the Effective Date, all real (immovable) property and
personal (movable) property Taxes with respect to the Acquired Assets
for the tax years occurring prior to the Effective Date, which are
Ordinary Course Administrative Expense Claims and which have not
already been paid in the ordinary course of business, shall be paid
in full in cash by the Trustee, except to the extent that the holder
agrees to a different treatment. All immovable property and movable
property Taxes with respect to the Acquired Assets for the tax year
in which the Effective Date occurs, which are Ordinary Course
Administrative Expense Claims, shall be prorated through the
Effective Date based on the most current assessment information
available from the offices of the assessor and sheriff of the
respective parishes in which the Acquired Assets are located. Cajun's
share of such prorated Taxes shall be paid in cash on the Effective
Date by the Trustee, except to the extent the holder agrees to a
different treatment. All special assessments against the Acquired
Assets for utilities or otherwise, which are Ordinary Course
Administrative Expense Claims, shall be paid
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SWEPCO/Members Page 9
Second Amended and Restated Joint Plan of Reorganization
in full by the Trustee in cash prior to or on the Effective Date,
except to the extent a holder agrees to a different treatment.
(2) All real (immovable) property and personal (movable) property
Taxes with respect to Excluded Assets, which are Ordinary Course
Administrative Expense Claims shall be paid when due in cash in the
ordinary course of business.
(3) All Taxes with respect to Acquired Assets or Excluded Assets,
which are Administrative Expense Claims, but which are not Ordinary
Course Administrative Expense Claims, and all other Allowed
Administrative Expense Claims which are not Ordinary Course
Administrative Expense Claims, and which are therefore subject to
the Administrative Expense Claim Bar Date will be paid in cash only
to the extent such claims are timely filed and are Allowed as
Administrative Expense Claims by the Court by Final Order. Such
Allowed Administrative Expense Claims will be paid on the later of
the Effective Date or ten (10) days after the date such claims are
Allowed by the Court by Final Order, except to the extent a holder
agrees to a different treatment.
(4) For the tax year in which the Effective Date occurs, any income
Taxes which may be owing for that tax year shall be deemed to be
incurred by the Estate, for purposes of the application of Code
Section 503(b)(1)(B), to the extent that such Taxes would be owed if
the Effective Date was the date on which the tax year closed for
Cajun (the "Effective Date Tax Year"). For the tax year in which the
Petition Date occurred, any income Tax which may be owing for that
tax year shall be deemed to be incurred by the Estate, for the
purpose of Code Section 503(b)(1)(B), to the extent such Taxes would
be owed if the Petition Date was the date on which the tax year
began for Cajun (the "Petition Date Tax Year"). Any unpaid Allowed
Administrative Expense Claim for income Taxes through and including
the Effective Date Tax Year shall be paid from the Purchase Price.
(c) Ordinary Course Administrative Expense Claims shall be paid in the
ordinary course of business of Cajun as and when incurred and due. Any such
Ordinary Course Administrative Expense Claims incurred prior to the Effective
Date, and for which consideration has been provided to Cajun prior to the
Effective Date, but which are not yet due in the ordinary course of business on
the Effective Date, shall be paid by Cajun when due.
2.2 Administrative Expense Claim Bar Dates
(a) The Confirmation Order or a separate Court Order shall set a bar date
for the filing of Administrative Expense Claims arising prior to the
Confirmation Date (the "Administrative Expense Claim Bar Date"). Any
Administrative Expense Claims which are subject to the Administrative Expense
Claim Bar Date that are not filed on or prior to such bar date shall be
discharged under the Plan, but shall not be treated as an Administrative Expense
Claim or any other Claim for purposes of distribution under the Plan, whether or
not an objection is initiated.
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Second Amended and Restated Joint Plan of Reorganization
(b) The Confirmation Order or a separate Court Order shall set a bar date
for the filing of Administrative Expense Claims arising subsequent to the
Confirmation Date, but prior to the Effective Date (the "Supplemental
Administrative Expense Claim Bar Date"). Such Administrative Expense Claims
filed pursuant to the Supplemental Administrative Expense Claim Bar Date may
only include Claims for the period between the Confirmation Date and the
Effective Date, and may not allege any Claims arising out of or from the period
prior to the Confirmation Date. Any Administrative Expense Claims which are
subject to the Supplemental Administrative Expense Claim Bar Date that are not
filed on or prior to such bar date shall be discharged under the Plan, but shall
not be treated as an Administrative Expense Claim or any other Claim for
purposes of distribution under the Plan, whether or not an objection is
initiated.
(c) This subsection and not subsections 2.2(a) and (b) shall apply to
income Taxes described in Code Section 503(b)(1)(B). The Confirmation Order or a
separate Court Order will set a bar date for the filing of Administrative
Expense Claims arising from income Taxes for the period beginning on the
Petition Date and ending on the Effective Date (the "Tax Administrative Expense
Claim Bar Date"). The Tax Administrative Expense Claim Bar Date shall be ninety
(90) days after the Effective Date, provided that such ninety (90) day period
shall not begin to run until Cajun shall file an appropriate tax return or, in
the case of the Petition Date Tax Year or the Effective Date Tax Year, until
Cajun shall provide the equivalent tax return information for such tax years.
The tax return for information for the purpose of determining federal income
Taxes shall be signed under penalty of perjury, shall include all information
that a corporate income tax return would contain, and shall be provided to the
Internal Revenue Service within a reasonable time after the Effective Date. Any
Administrative Expense Claim arising out of an income Tax claim described in
Code Section 503(b)(1)(B) subject to the Tax Administrative Expense Claim Bar
Date that is not filed on or prior to such bar date shall be discharged under
the Plan, but shall not be treated as an Administrative Expense Claim or any
other Claim for purposes of distribution under the Plan, whether or not an
objection is initiated. Any Administrative Expense Claim timely filed pursuant
to this subsection 2.2(c) on or prior to the Tax Administrative Expense Claim
Bar Date shall be allowed as filed unless an objection to such Administrative
Expense Claim is filed and served not later than 180 days after the filing of
the Administrative Expense Claim, and, after notice and a hearing conducted
pursuant to the Bankruptcy Code and Rules, the Court allows such claim in a
lesser amount.
2.3 Treatment of Pre-Petition, Priority Tax Claims. The Trustee shall pay
in cash on the Initial Distribution Date the full amount of each Allowed
Unsecured Claim entitled to priority under Code Section 507(a)(8) from the
Disbursement Accounts either, at the option of the Trustee: (a) on the latest of
(i) the Effective Date; (ii) within 60 days after the date on which such Claim
becomes an Allowed Claim; or (iii) such other time as is agreed upon by the
holder of such Claim and the Trustee; or (b) through deferred cash payments over
a period to not exceed six (6) years after the date of assessment of such Claim,
of a value as of the date such Claim becomes an Allowed Claim or such other time
as is agreed upon by the holder of such Claim and the Trustee. If the Trustee
opts to make deferred cash payments, such payments shall be made in equal annual
installments of principal, plus simple interest accruing from the date such
Claim becomes an allowed Claim at 6% per annum. on the unpaid portion of the
Allowed Claim or such other rate as the Court may approve. The first such
payment shall be payable at the latest of (a) the Effective Date; (b) within 60
days after the date on which such Claim becomes an Allowed Claim; or (c) such
other time as is agreed upon by the holder of such Claim and the Trustee;
provided, however, that the Trustee shall have the right to prepay any such
Allowed Claim or any remaining balance of such Claim, in full or in part, at any
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SWEPCO/Members Page 11
Second Amended and Restated Joint Plan of Reorganization
time on or after the Effective Date without premium or penalty. The foregoing
treatment is consistent with the requirements of Code Section 1129(a)(9)(C). In
no event shall SWECO or SWEPCO be liable for the payment of any Tax claim
allowed under Code Section 507(a)(8) whether such claims are payable in cash or
through deferred cash payments.
Article III: Classification of Claims and Interests.
Claims required to be classified under Code Section 1123(a)(1) and Member
Interests are classified as follows:
3.1 Class 1. All Other Priority Claims. All Allowed Unsecured Claims
entitled to priority under Code Section 507(a) (other than 507(a)(1) and (8))
shall be treated in Class 1. Class 1 is unimpaired.
3.2 Class 2. Allowed Secured Claim of RUS. Class 2 consists of the Allowed
Secured Claim of the RUS. Class 2 is impaired.
3.3 Class 3. Allowed Secured Claim of CoBank. Class 3 consists of the
Allowed Secured Claim of CoBank. Class 3 is impaired.
3.4 Class 4. Allowed Secured Claim of Hibernia. Class 4 consists of the
Allowed Secured Claim of Hibernia. Class 4 is impaired.
3.5 Class 5. Allowed Other Secured Claims. Class 5 consists of all Allowed
Secured Claims not otherwise classified above, if any. Each secured claim will
be treated as a separate class for purposes of voting and treatment under the
Plan. Class 5 is impaired.
3.6.1 Class 6(a). Allowed Convenience Claims. The Allowed Convenience
Claims consist of all Claims listed by the Debtor's schedules as being in an
amount of $20,000 or less.
3.6.2 Class 6(b). Allowed Unsecured Claims. Class 6(b) consists of all
Allowed Unsecured Claims, not otherwise classified, including but not limited to
Members' claims,1 deficiency claims and claims arising from the rejection of
executory contracts. Class 6(b) is impaired.
3.7 Class 7. Member Interests. Class 7 consists of the interests of the
Members in the Debtor. Class 7 is impaired.
- -------------------------
1 The Trustee or other parties may contend that a portion or all of
the Members' Allowed Unsecured Claims are subordinated to other
Allowed Unsecured Claims. If the subordination is established by
Final Order, some or all of the Members' Allowed Unsecured Claims
will be treated as subordinate to Allowed Unsecured Claims not
otherwise subject to subordination.
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SWEPCO/Members Page 12
Second Amended and Restated Joint Plan of Reorganization
Article IV: Classes Impaired by the Plan.
Claimants in Class 1 are UNIMPAIRED under the Plan and, therefore, are not
being solicited to vote on the Plan pursuant to 11 U.S.C. ss. 1126(f). Claimants
and holders of Member Interests in Classes 2, 3, 4, 5, 6 and 7 are IMPAIRED
under the Plan and are being solicited to accept or reject the Plan.
The Proponents, however, specifically reserve the right to contest (1) the
impaired or unimpaired status of a class under the Plan; and (2) whether any
ballots cast by holders of claims or interests in of such class should be
allowed to be counted for purposes of confirmation of the Plan.
Article V: Treatment of Classified Claims.
5.1 Class 1. All Other Priority Claims. All Allowed Priority Claims
entitled to priority treatment under Code Section 507(a) (except Administrative
Expense Claims in ss. 2.1) shall be paid in cash on the Initial Distribution
Date.
5.2 Class 2. Allowed Secured Claim of the RUS. The claims of the RUS
include its contingent liability arising out of its guarantees of Cajun's
obligations arising from eight (8) promissory notes payable to First Interstate
Bank of Arizona, N.A., Trustee of Cooperative Utility Trust (Cajun Series)
("FIB"). FIB has filed proofs of claim totaling $982,648.00 constituting
non-priority, general unsecured claims (the "FIB Claims"). The RUS has made
payments to FIB pursuant to its guarantees of the FIB Claims and to the extent
that RUS has made payments pursuant to its guarantees, it is subrogated to the
FIB Claims. To the extent FIB has Claims which are not subrogated to RUS, unless
FIB and RUS agree otherwise, FIB will vote its unsubrogated Claim as a Unsecured
Claim in Class 6 and the amount of the RUS's Unsecured Claim will be reduced by
the amount of the unsubrogated FIB Claims. The Allowed Secured Claim of the RUS
shall be treated as follows:
(a) If the RUS Settlement is approved by separate order of the Court or as
part of the Confirmation Order, then in complete and full satisfaction of
the Allowed Secured Claim of the RUS, on the Initial Distribution Date,
the RUS will receive
(1) the Purchase Price less amounts necessary to pay all Allowed
Administrative Expense Claims, Allowed Ordinary Course
Administrative Expense Claims, Allowed Priority Tax Claims, Allowed
Other Priority Claims, the Allowed Secured Claim of Hibernia,
Allowed Other Secured Claims to the extent secured by the Acquired
Assets; and the Settlement Amount payable to the Class 6 Fund;
(2) all Excluded Assets (or the Net Proceeds thereof) not otherwise
subject to liens or interests securing Allowed Other Secured Claims;
and
(3) the RUS and the Committee of Certain Members have asserted
claims to Excess Funds. If a Final Order is entered in favor of the
Members, the funds, or a portion thereof, in accordance with the
terms of the Final Order will be disbursed to Members or to the
Members' constituents subject to the approval of the LPSC.
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SWEPCO/Members Page 13
Second Amended and Restated Joint Plan of Reorganization
Alternatively, if a Final Order is entered in favor of the RUS, the
funds or a portion thereof, in accordance with the Final Order will
be disbursed to the RUS as part of its Allowed Secured Claim.
5.3 Class 3. Allowed Secured Claim of CoBank. CoBank filed a proof of
claim asserting a secured claim in the amount of $25,486,702.50 plus interest,
renewal fees, and expenses. In June 1983, pursuant to a Tax Benefit Transfer
Agreement, Cajun transferred federal income tax ownership of certain property to
the Clorox Company ("Clorox"). In July 1983, Cajun entered into a similar
transaction with Eastman Kodak Company ("Kodak"). These Tax Benefit Transfer
Agreements (the "TBT Agreements") require Cajun to issue and maintain for the
benefit of Clorox and Kodak, respectively, letters of credit in scheduled
amounts which were expected to be sufficient to reimburse Clorox and Kodak for
any losses of tax benefits caused by Cajun.
In connection with each TBT Agreement, Cajun and New Orleans Bank for
Cooperatives ("NOBC"), CoBank's predecessor, executed a Letter of Credit and
Reimbursement Agreement (collectively the "Letter of Credit Agreements") for
Cajun to reimburse CoBank if draws were made under the letter of credit issued
for the benefit of Clorox and Kodak. CoBank and its predecessor have twice
renewed the letter of credit. The amounts available as of November 1996 to be
drawn by Clorox and Kodak are $10,632,750.00 and $11,309,847.50, respectively
(the "LC Debt").
The LC Debt is purportedly secured by a Supplemental Mortgage, a
Subordinated Mortgage, Security Agreement and Financing Statements as amended
and supplemented from time to time, an Act of Collateral Pledge dated January
23, 1988 and certain statutory liens. It is believed that this claim of CoBank
is largely contingent and matures only if a disqualifying event occurs under the
TBT Agreements or if the letter of credit is not renewed prior to its
expiration.
In a proof of claim, filed September 27, 1995 with the Court, CoBank made
a Claim for certain loan obligations owed it by Cajun, which Claim is
represented by the outstanding principal balances on four separate promissory
notes made by Cajun to CoBank, which notes were guaranteed by RUS. These notes
(collectively the "Incorporated Indebtedness") were incorporated into the
indebtedness owed RUS by Cajun pursuant to a certain Debt Restructure Agreement,
dated May 31, 1990, between RUS and Cajun. No distribution under the Plan shall
be made to CoBank, on account of the Incorporated Indebtedness, but all such
distributions shall be made to RUS. In addition, RUS shall have the sole right
to vote the Claims represented by the Incorporated Indebtedness as part of its
Class 2(a)(1) Allowed Secured Claim.
Under the Plan, liability for the contingent claims of CoBank shall be
assumed by SWECO on the Effective Date as and to the extent provided in the
Asset Purchase Agreement, and SWECO will execute with CoBank new Letter of
Credit Agreements to further evidence the purchaser's assumption. SWECO will
seek to structure the Asset Purchase Agreement in such a way as to avoid a
disqualifying event occurring under the TBT Agreements. However, in the event
that the sale of Cajun's assets to SWECO pursuant to the acquisition or the
implementation of the acquisition or the action or structure of the purchaser on
the Effective Date causes the indemnity obligation of Cajun to Kodak and/or
Clorox to mature and a subsequent draw on a letter of credit, SWECO will assume
the reimbursement obligation of the Estate to CoBank arising solely as a result
of an act or omission by SWECO (net of the existing cash collateral held by
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SWEPCO/Members Page 14
Second Amended and Restated Joint Plan of Reorganization
CoBank). If such indemnity obligation so matures, CoBank shall apply all cash
collateral it then holds against the reimbursement obligation, and SWECO shall
immediately pay the balance of the reimbursement obligation to CoBank, and SWECO
shall be entitled to Cajun's rights to the future retirement payments made by
CoBank to retire the Class E Stock from time to time, together with any CoBank
patronage dividends, etc. until such time as SWECO has been paid in full its
reimbursement obligation with interest. Following payment to SWECO of any
reimbursement obligation, all future retirement payments and patronage dividends
shall be paid by CoBank directly to the RUS.
If it is determined that a triggering event occurred such that Cajun's
indemnity obligation to CoBank matures and constitutes an Administrative Expense
Claim of the Estate, then CoBank shall apply all cash collateral it then holds
against the indemnity obligation, and the Estate shall immediately pay the
balance of the indemnity obligation to CoBank. The Estate shall then be entitled
to Cajun's rights in the future retirement payments made by CoBank to retire the
Class E Stock from time to time, together with future patronage dividends,
proceeds, etc., and SWECO shall not assume Cajun's indemnity obligation.
Subsequent to the Effective Date, if no disqualifying event has occurred
under the tax benefit transfer agreements on or prior to the Effective Date, the
contingent claims of CoBank shall continue to be secured by existing and future
CoBank Class E Stock, proceeds thereof and related collateral (including
patronage dividends, accumulated cash accounts, CoBank Class E Stock,
retirements and the proceeds thereof) ("CoBank Collateral") as more fully
described in the Pledge Agreement to be entered into between CoBank and the
owners and beneficial owners of such collateral, and CoBank's liens on CoBank
Collateral and its proceeds shall not be discharged or otherwise released or
extinguished by confirmation of the Plan, but shall be retained by CoBank
following the Effective Date. In addition, on the Effective Date, CoBank shall
be entitled to charge the existing cash collateral account it holds for all
unpaid letter of credit fees from the Petition Date through the Effective Date,
and SWECO shall pay all letter of credit fees thereafter. CoBank shall also be
entitled to charge the existing cash collateral account $250,000 for
reimbursement of a portion of its legal fees and expenses incurred since the
inception of the chapter 11 case. On the Effective Date, however, CoBank shall
be deemed to have released any other mortgage or lien on Cajun or reorganized
Cajun's assets securing CoBank's claims, except for the CoBank Collateral.
Accordingly, on and after the Effective Date, CoBank shall have no interest in
any other assets, including, but not limited to, the Acquired Assets and the
sales proceeds thereof.
In addition, on and after the Effective Date of the Plan, to the extent
that the sum of 75% of the face amount of the Class E Stock and the amount of
all funds accumulated in the cash account held by CoBank from time to time
(calculated quarterly) exceeds 110% of the then aggregate amount of the
indemnity obligation assumed by SWECO, the excess shall be paid by CoBank to the
RUS.
If, the RUS, the holder of the CoBank Class E Stock designated by the Plan
is not an "eligible borrower" of CoBank, then CoBank shall issue replacement
Participation Certificates with the only difference from the CoBank Class E
Stock being the right to vote. Nothing contained in the Plan is intended to
extinguish or reduce any rights of CoBank against RUS on any RUS guarantee, nor
any continuing obligations of RUS to make timely payments on such guarantees,
and such claims and obligations as between RUS and CoBank shall survive
confirmation of the Plan.
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SWEPCO/Members Page 15
Second Amended and Restated Joint Plan of Reorganization
To the extent any inconsistencies exist between (a) ss.3.11 of the Asset
Purchase Agreement and/or any other provisions of the Asset Purchase Agreement
and (b) this ss.5.3, ss.5.3 of this Plan shall control the treatment of CoBank's
Allowed Secured Claim.
5.4 Class 4. Allowed Secured Claim of Hibernia. The Allowed Secured Claim
of Hibernia representing the Industrial Development bonds, secured by the
Debtor's current headquarters, building and land, shall, unless Hibernia Bank
agrees otherwise, be paid in full in cash totaling the amount of its Allowed
Secured Claim on the later of (a) the Effective Date or (b) if an objection to
such claim has been filed, within ten days of the date on which an order
allowing such Claim becomes a Final Order. Hibernia shall retain its rights,
liens and security interests until its Allowed Secured Claim is paid in full.
The contingencies contained in previous orders of the Court, upon the occurrence
of which Hibernia would be required to return the funds previously paid to it
are eliminated. Therefore, Hibernia will unconditionally retain the funds that
have been paid to it and its claim will be $900,000 (minus any amounts applied
to principal when Hibernia received the payment pursuant to the June 19, 1997
Order, and any future principal payments received) plus, as allowed, interest,
fees, expenses and premiums and other amounts to Hibernia pursuant to the terms
of the agreements governing these obligations.
5.5 Class 5. Allowed Other Secured Claims. Each holder of an Allowed Other
Secured Claim shall, at the Trustee's option: (a) be paid, on the Initial
Distribution Date, on account of its Allowed Secured Claim, cash totaling the
amount of such Allowed Secured Claim; (b) be paid, on account of its Allowed
Secured Claim, the Net Proceeds of the sale of any property which is subject to
the lien or interest securing said Allowed Claim, which sales shall be made in
accordance with Code Section 1129(a)(2)(A)(ii); or (c) receive the property
which is subject to the lien or interest securing said Allowed Claim in full
satisfaction of the Allowed Claim of such holder. In the event of option (b)
above, such amount shall be paid on the last to occur of (1) the Effective Date,
(2) within ten (10) days after the date on which an order allowing such Allowed
Other Secured Claim becomes a Final Order, or (3) within ten (10) days after
closing of a sale of the property which is subject to the liens securing said
Allowed Claim. In the event of option (c) above, the property which is subject
to the liens securing said Allowed Other Secured Claim shall be transferred on
the later of (1) the Effective Date, or (2) as soon as practicable after the
date on which an order allowing such Secured Claim becomes a Final Order. Any
such property transferred to holders of Allowed Other Secured Claims under this
paragraph shall be transferred either by abandonment of such property by the
Trustee under Code Section 554 or by transfer of such property "as-is,
where-is," without representation or warranty by Debtor or the Trustee, at the
Trustee's sole option and discretion.
5.6 Class 6(a) and 6(b). Allowed Unsecured Claims and Allowed Convenience
Claims. In full and complete satisfaction of all Allowed Convenience Claims and
Allowed Unsecured Claims, holders of such Claims will be paid a Pro Rata share
of the Class 6 Fund. If the RUS Settlement is approved by Final Order or as part
of the Confirmation Order, the RUS shall waive its right to distribution from
the Class 6 Fund on account of its Allowed Unsecured Claim, and the members of
the Committee of Certain Members shall waive their right to distribution on
account of their Allowed Unsecured Claims. If, after payment in full of Allowed
Unsecured Claims and Allowed Convenience Claims under the Plan (other than the
deficiency claim of the RUS), funds remain from the liquidation of assets and
from successful avoidance actions, the RUS, as the sole remaining holder of an
Allowed Unsecured Claim, will receive such remaining funds until its unsecured
claim is paid in full.
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SWEPCO/Members Page 16
Second Amended and Restated Joint Plan of Reorganization
As a result of the Bankruptcy Court's Reasons for Decision entered on
February 11, 1999, no unsecured claims will be purchased or paid by SWEPCO or by
the RUS outside the Plan. The only consideration that unsecured claims will
receive is a pro rata share of the Class 6 Fund as set forth herein.
5.7 Class 7. Member Interests. The interests of the Members in the Debtor
shall be canceled as of the Effective Date.
Article VI: Means for Implementing Plan.
6.1 Consummation of the River Bend Settlement. The River Bend Settlement
shall be consummated pursuant to the Order and Judgment Approving Settlement by
and among Cajun Electric Power Cooperative, Inc., Entergy Gulf States, Inc.,
Entergy Corporation and the Rural Utilities Service of the Department of
Agriculture dated August 26, 1996 (the "Order"). The Order provides that the
River Bend Settlement may be consummated independent of any plan of
reorganization.
6.2 Sale of Acquired Assets to SWECO. On the Effective Date, SWECO shall
purchase the Acquired Assets and the Acquired Assets shall be transferred to
SWECO pursuant to the terms and conditions of the Asset Purchase Agreement, a
copy of which is attached hereto as Exhibit 1 and incorporated herein, for all
purposes. The Purchase Price shall be deposited in the Disbursement Accounts. On
the Effective Date, unless otherwise specifically provided in this Plan, the
Acquired Assets shall be transferred by the Trustee to SWECO free and clear of
all liens, claims and interests. The Trustee shall be deemed to have entered
into the Asset Purchase Agreement as of the date of the Confirmation Order.
6.3 Class 6 Fund. The Class 6 Fund shall be established and deposited in
one of the Disbursement Accounts for purposes of establishing a fund available
for Pro Rata distribution to Class 6. The amount of the Class 6 Fund shall be
the Settlement Amount of $20,240,000 plus all Net Proceeds from Avoidance
Actions.
6.4 Disbursement Accounts. On or prior to the Effective Date, the Trustee
shall set up one or more interest bearing accounts to be designated as the
Disbursement Accounts, which account or accounts, shall comply with Code Section
345 except as otherwise ordered by the Court. Except as otherwise provided in
the Plan, the Purchase Price and all Net Proceeds from the sale or other
disposition of Excluded Assets and Avoidance Actions shall be deposited in the
Disbursement Accounts with all valid liens and interests attaching to said Net
Proceeds.
6.5 Claims Objection Deadline. Each Claim as to which a proof of claim has
been filed prior to the Bar Date or that is listed as undisputed, liquidated and
non-contingent in the schedules filed by the Debtor shall be allowed without
order of the Court unless an objection thereto is filed and served in accordance
with Bankruptcy Rule 3007 no later than 180 days after the Confirmation Date or
180 days after such Claim is first filed, whichever is later.
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SWEPCO/Members Page 17
Second Amended and Restated Joint Plan of Reorganization
6.6 Disputed or Undetermined Claims and Reserves Therefor.
(1) No payments or distributions shall be made with respect to all or
any portion of a Claim which does not constitute an Allowed Claim.
The Trustee shall reserve funds for the payment of those Claims
which are to receive distributions under the Plan and which, as of
the date of any distribution, do not constitute an Allowed Claim.
Such reserve shall be made by retaining an amount equal to the
distribution such claim would have received from such distribution
based on the lesser of (i) the amount of the Claim, or (ii) the
amount in which the Claim shall be estimated by the Court pursuant
to Code Section 502(c) for the purpose of allowance, which amount
shall be the maximum amount in which such Claim may ultimately
become an Allowed Claim.
(2) In order to pay any Administrative Expense Claim for federal income
Taxes that may be Allowed and payable under this Plan, the Trustee
shall reserve the amount of $20 million until the allowed
Administrative Expense Claim, if any, for the Estate's federal
income Tax(es) is paid in full (the "Income Tax Reserve Fund"). Upon
the establishment of the Income Tax Reserve Fund, the Trustee may
distribute the remainder of the Purchase Price, in accordance with
the provisions of this Plan and shall be absolved and released from
any personal liability for the Estate's federal income Taxes;
notwithstanding the foregoing, the Trustee shall be obligated under
this Plan to distribute to the United States of America through the
Internal Revenue Service (the "IRS" any amounts necessary from the
Income Tax Reserve Fund to satisfy any Allowed Administrative
Expense Claim for the Estate's federal income Taxes. In the event
the Allowed Administrative Expense Claim for the Estate's federal
income Taxes exceeds the Income Tax Reserve Fund, the governmental
entities, the RUS and the IRS, will resolve any issues regarding
disgorgement of funds between themselves, in accordance with the
terms of this paragraph. If the allowed Administrative Expense Claim
for the Estate's federal income Taxes is less than the Income Tax
Reserve Fund, then, after payment of the allowed Administrative
Expense Claim for federal income taxes in full, the remainder of the
Income Tax Reserve Fund shall be distributed in accordance with the
provisions of this Plan. In the event the Allowed Administrative
Expense Claim for the Estate's federal income Taxes exceeds the
Income Tax Reserve Fund, the RUS shall disgorge part of the funds
distributed to it pursuant to this Plan sufficient to pay any
remaining amounts due to the IRS in order to satisfy the allowed
Administrative Expense Claim for the Estate's federal income Taxes
in Full. In the event that this subsection 6.6(2) is complied with
and a $20 million reserve fund is established, then, in no event
shall the IRS be entitled to disgorgement of, nor shall the Trustee
be required to recover by disgorgement, any funds distributed to
creditors other than the RUS under this Plan in order to satisfy the
Allowed Administrative Expense Claim for the Estate's federal income
Taxes.
6.7 Implementation. Pursuant to Code Section 1142(b) and Bankruptcy Rule
7070, the Trustee shall execute or deliver any and all documents or instruments,
or to perform any other act necessary to implement or consummate this Plan. If
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SWEPCO/Members Page 18
Second Amended and Restated Joint Plan of Reorganization
the Trustee refuses to comply with such direction, the Court may direct the
Trustee's compliance with the Plan, or direct the U.S. Trustee to appoint a new
trustee to implement and consummate this Plan.
Article VII: Executory Contracts.
7.1 Supply Contracts. With respect to Members Supply Contracts, Members
have the following options:
(a) Members who shall have agreed in writing by May 14, 1999, shall
execute new power supply agreements with SWECO substantially in the
form of Exhibit 2 or, alternatively, substantially in the form of
Louisiana Generating's consensual power supply agreement (excluding
Exhibits F and G to such agreement) filed March 18, 1998 which
agreement will supersede and replace such Member's Supply Contract;
(b) In the event a Member has not, on or before May 14, 1999, provided
SWEPCO with a written notice that it agrees to execute either power
supply agreement referenced in (a) above, then the Member's existing
Supply Contract will be rejected on the Effective Date;
(c) If a Member's Supply Contract is rejected per paragraph (b) above,
SWECO will provide power to the Member during a transition period
not to exceed sixty (60) months until the Member negotiates a power
supply agreement with another supplier. The power will be provided
on terms and conditions acceptable to SWECO and subject to
appropriate regulatory approval.
7.2 River Bend JOA. Cajun shall be deemed to have rejected the River Bend
JOA.
7.3 Big Cajun II, Unit 3 JOPOA. The Big Cajun II, Unit 3 JOPOA will be
assumed by the Trustee and assigned to SWECO on the Effective Date.
7.4 All Other Executory Contracts. On the Effective Date, the Trustee
shall be deemed to reject all other executory contracts of the Debtor, except as
may expressly be otherwise set forth in the Asset Purchase Agreement, and for
executory contracts identified on a list of assumed executory contracts which
has been filed by SWEPCO with the Court. The contracts so identified shall be
deemed assumed as of the Effective Date. All payments necessary to cure any
defaults on contracts to be assumed and assigned to SWECO, shall be paid as
Administrative Expense Claims under Section 2.1 on the Initial Distribution
Date.
Article VIII: Miscellaneous Provisions.
8.1 Voting. All of the classes (except Class 1) are eligible to vote on
the Plan.
8.2 Cramdown. In the event any class of creditors that is impaired does
not accept the Plan as provided in Code Section 1129(a)(8)(A), the Proponents
request that the Court confirm the Plan pursuant to Code Section 1129(b).
<PAGE>
SWEPCO/Members Page 19
Second Amended and Restated Joint Plan of Reorganization
8.3 Modifications of the Plan. The Proponents may jointly modify the Plan
in accordance with Code Section 1127.
8.4 U.S. Trustee Fees. All fees payable by the Debtor pursuant to 28
U.S.C.ss. 1930 have been paid or shall be paid as of the Effective Date by the
Trustee.
8.5 Release. In consideration for agreements made by each of the parties
set forth herein in connection with the terms and conditions of the Plan, the
Trustee shall, on the Effective Date, release and discharge all direct or
derivative rights, claims and causes of action which constitute property of the
Estate, including but not limited to claims under Code Sections 506, 510, 542,
543, 544, 545, 546, 547, 548, 549, 550, 551 and 553, and any state laws
corresponding thereto, arising prior to the Effective Date, against (i) SWEPCO,
SWECO, Central and South West Corporation, and their respective current and
former Representatives, and, (ii) if the RUS Settlement is approved by Final
Order or as part of the Confirmation Order, the RUS and its respective current
and former Representatives.
8.6 Setoffs. Subject to the limitations provided in Code Section 553, all
parties retain their rights of setoff or recoupment pursuant to applicable law.
Neither the failure to set off the Estate's claim nor the allowance of any Claim
hereunder shall constitute a waiver or release by the Estate of any such claim
that the Estate may have against the holder, nor shall it constitute a bar by
res judicata and/or collateral estoppel to the assertions of Claims, either
prepetition or postpetition, by the Estate as the case may be.
8.7 Surrender of Instruments and Release of Liens. Each claimant who is to
receive distributions under the Plan in satisfaction of a Claim shall not
receive such distributions until such claimant executes a release of any lien(s)
(in recordable form if appropriate) and delivers the same to the Trustee. Any
such claimant that fails to surrender such instrument or satisfactorily explain
its non-availability or to execute such release of liens shall be deemed to have
no further Claim and shall not participate in any distribution under the Plan.
8.8 Conditions to Effectiveness. This Plan shall not become effective and
the Effective Date will not occur until the following conditions have been met
or shall have been waived in writing by SWEPCO:
(a) All conditions specified in Article VI: "Conditions to the
Acquisition" in the Asset Purchase Agreement;
(b) Judgment(s) that are Final Order(s) shall have been entered
determining that GSU has no liability to Burlington Northern and
Santa Fe Railway Co., American Commercial Marine Service Company,
Triton Coal Company or Western Fuels Association relating to any
obligations, contractual or otherwise, owed or contracted for by
Cajun to or with such entities;
(c) No order or judgment shall have been entered in favor of any
entity determining that GSU has liability to such entity relating
to any obligations, contractual or otherwise, owed or contracted
for by Cajun to or with such entity; and
<PAGE>
SWEPCO/Members Page 20
Second Amended and Restated Joint Plan of Reorganization
(d) Court approval in the confirmation Order or by separate Order of
the RUS Settlement. Notwithstanding the first above sentence to
Section 8.8, this condition (d) may not be waived solely by
SWEPCO. without the written consent of the RUS.
8.9 Fees and Expenses. Pursuant to Code Section I 123(a)(4), fees for
services, costs and expenses incurred in connection with Cajun's bankruptcy case
or in connection with the Plan and incident to Cajun's bankruptcy case,
including, but not limited to the reasonable fees, costs and expenses of secured
creditors, parties to unexpired leases or executory contracts to be assumed, and
indenture trustees shall be subject to approval of the Court.
Article IX: Reservation of Rights and Property.
9.1 Causes of Action. Except for claims expressly settled or released
pursuant to this Plan, and claims set forth in the following sentence, the
Trustee shall retain all causes of action it may have under state or federal law
including the United States Bankruptcy Code, and the Trustee in his discretion
shall be authorized to prosecute (or not prosecute) any such actions as fully
and completely as if the same were being prosecuted by a trustee in bankruptcy.
The Trustee shall be provided with a litigation fund to pay fees and expenses in
pursuing such causes of action in the amount of $150,000 from the purchase
price, and such amount shall be reserved as an anticipated administrative
expense. Any reasonable fees and expenses incurred in pursuing avoidance actions
that exceed such $150,000, up to a maximum of $500,000, and that are allowed by
the Bankruptcy Court, may be paid as administrative expenses from the proceeds
of the avoidance actions and from the cash in the estate, other than the
purchase price cash. All claims and causes of action of the estate of any nature
or kind, known or unknown, asserted or unasserted which arise from or relate to
the assets purchased by and conveyed to SWECO, shall on the Effective Date be
deemed assigned and conveyed to SWECO.
9.2 Vesting of Property in Trustee and SWECO. On the Effective Date, all
of the property of the Estate that is not sold to SWECO, if any, or otherwise
liquidated shall be vested in the Trustee, free and clear of all Claims and
interests of creditors except as provided for in the Plan, and the Trustee at
his election shall be entitled to liquidate such assets without further order of
the Court pursuant to Code Section 114 1 (b) or transfer them to any lienholder
in full satisfaction of the secured claim on such assets. Upon the completion of
the liquidation of the assets or re-vesting in the Trustee, if any, the Trustee
shall cause and implement the dissolution of Cajun under Louisiana law. All
assets conveyed to SWECO (i.e. the Acquired Assets) shall be conveyed free and
clear of all liens, claims, interests and encumbrances, whether lien claims or
otherwise, unless otherwise specifically authorized by this Plan. The conveyance
to SWECO shall further be free and clear of any claims of successorship
liability, and SWECO shall have no successor liability as a result of its
purchase of the Acquired Assets, or as a result of any provisions of this Plan
or of the Asset Purchase Agreement.
Article X. Required Approvals.
The effectiveness of the Plan and the obligations of the Proponents
hereunder are subject to regulatory approvals by Final Order and all other
conditions as set forth in the Asset Purchase Agreement. The boards of directors
of the Proponents reserve the right to approve all final closing documents.
<PAGE>
SWEPCO/Members Page 21
Second Amended and Restated Joint Plan of Reorganization
Article XI. Retention of Jurisdiction.
After confirmation of the Plan, the Court shall retain Jurisdiction for the
following purposes:
(1) For the classification of Claims and for the re-examination of any Claims
that have been allowed for purposes of voting, and the determination of
such objections as may be filed to Claims. The failure to object to or to
examine any Claim for the purpose of voting shall not be deemed to be a
waiver of the right to object to, or re-examine the Claim in whole or in
part;
(2) For determination of all questions and disputes regarding title to the
assets of the estate, determination of all causes of action,
controversies, disputes, or conflicts, whether or not subject to action
pending as of the date the Confirmation Order is entered, between the
Trustee and any other party, including but not limited to, any rights of
the Trustee to prosecute Avoidance Actions, and to recover money or assets
pursuant to the provisions of the Bankruptcy Code;
(3) For the correction of any defect, the curing of any omission, or the
reconciliation of any inconsistency in this Plan or the Confirmation Order
as may be necessary to carry out the purposes and intent of this Plan;
(4) To consider any matters brought before the Court by an interested party
necessary to carry out the terms, conditions and intent of this Plan;
(5) For the modification of this Plan after confirmation pursuant to the
Bankruptcy Rules and the Bankruptcy Code;
(6) To enforce and interpret the terms and conditions of this Plan;
(7) To enter any order, including injunctions, necessary to enforce the title,
rights and powers of the Debtor and to impose such limitations,
restrictions, terms and conditions of such title, rights, and powers as
this Court may deem necessary;
(8) To determine whether a default has occurred under the Plan or the Asset
Purchase Agreement, and make such orders as the Court deems necessary to
enforce the provisions of the Plan or the Asset Purchase Agreement; and
(9) To enter an order concluding and terminating this case.
Respectfully submitted on this 19th day of April, 1999.
<PAGE>
COMMITTEE OF CERTAIN MEMBERS OF CAJUN
ELECTRIC POWER COOPERATIVE, INC.
By: /s/ John M. Sharp
John M. Sharp, One of its Counsel
Melanie Rovner Cohen
Benjamin D. Schwartz
Altheimer & Gray
10 South Wacker Drive, Suite 4000
Chicago, Illinois 60606-7482
312-715-4000
John M. Sharp (Bar No. 19149)
A Professional Law Corporation
14481 Old Hammond Highway, Suite 2
Baton Rouge, LA 70816
504-273-8510
SOUTHWESTERN ELECTRIC POWER
COMPANY, INC.
By: /s/ Bobby S. Gilliam
Bobby S. Gilliam, One of its Counsel
Bobby S. Gilliam (Bar No. 6227)
Wilkinson, Carmody & Gilliam
1700 Beck Building
Shreveport, La 71166
318-221-4196
Henry J. Kaim
Edward L. Ripley
Patricia B. Tomasco
Sheinfeld Maley & Kay, P.C.
100 1 Fannin, Suite 3700
Houston, TX 77002
713-658-8881 WASHINGTON-ST. TAMMANY ELECTRIC
COOPERATIVE, INC.
By: /s/ Charles M. Hughes, Jr.
Charles M. Hughes, Jr., One of its
Counsel
Charles M. Hughes, Jr.
Talley, Anthony, Hughes & Knight
4565 LaSalle Street
Suite 300 Acadian Bank Building
Mandeville, Louisiana 70448
504-624-5010
Exhibit 2.2
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE MIDDLE DISTRICT OF LOUISIANA
IN RE: ss. CIVIL ACTION NO. 94-2763-B2
CAJUN ELECTRIC POWER ss.
COOPERATIVE, INC., ss. BANKRUPTCY CASE NO. 94-11474
ss.
DEBTOR. ss. CHAPTER 11
ss.
Federal Tax Id. No. 72-0655799 ss.
SUPPLEMENTAL DISCLOSURE STATEMENT IN SUPPORT OF THE SECOND
AMENDED AND RESTATED JOINT PLAN OF REORGANIZATION FOR CAJUN
ELECTRIC POWER COOPERATIVE, INC. SUBMITTED BY THE COMMITTEE OF
CERTAIN MEMBERS WASHINGTON - ST. TAMMANY ELECTRIC COOPERATIVE,
INC. AND SOUTHWESTERN ELECTRIC POWER COMPANY
DATED APRIL 19,1999
<PAGE>
TABLE OF CONTENTS
SUMMARY OF MATERIAL CHANGES TO
SECOND AMENDED JOINT PLAN OF REORGANIZATION ................................1
SUMMARY OF AMENDMENTS
TO POWER SUPPLY AGREEMENT ..................................................2
I. INTRODUCTION AND OVERVIEW .................................................3
A. Introduction .............................................................3
B. Overview of Plan.........................................................4
1. Summary of transactions to occur pursuant to Plan....................4
2. Summary of events since November 1996................................4
3. Summary of classification, treatment, and likely
distributions under the Plan.........................................5
a. Unclassified Claims...............................................5
b. Classified Claims.................................................5
II. SUMMARY OF THE PLAN
A. Identification of Proponents and Purchaser ...............................7
B. Description of Proposed Asset Purchase Agreement..........................7
C. Liquidation of Cajun .....................................................7
D. Summary of Plan...........................................................8
1. Member Rates and the Proposed Power Sales Agreements..................8
2. Executory Contracts and Unexpired Leases..............................8
Supply Contracts......................................................8
3. Discharge of Cajun....................................................9
4. Conditions to Confirmation and Effectiveness of the Plan..............9
5. Reimbursement of Costs and Fees.......................................9
E. Means for Implementation of the Plan.....................................10
1. Sale of Acquired Assets to SWECO.....................................10
2. Disbursement Accounts................................................10
3. Other Causes of Action...............................................11
III. CONFIRMATION AND TECHNICAL
ISSUES RELATIVE TO THE PLAN.............................................11
A. Classification Issues under Section 1122.................................11
B. Confirmation Issues under Sections 1123 and 1129.........................12
i
<PAGE>
C. Risk Factors ............................................................13
Conditions Precedent ..................................................13
a. Regulatory Issues Applicable to SWECO............................14
b. Public Utility Holding Company Act ..............................14
4. Confirmation Objections.............................................15
5. Other lssues........................................................15
IV. POST CONFIRMATION DATE OFFICERS AND DIRECTORS.............................15
Trustee's Plan.........................................................16
VI. CONCLUSION................................................................16
ii
<PAGE>
SUMMARY OF MATERIAL CHANGES TO
SECOND AMENDED JOINT PLAN OF REORGANIZATION
In general, the structure and treatment under the Second Amended and
Restated Joint Plan of Reorganization (the "Plan") for most of the creditors and
members contained in these amendments remains the same from the March 18, 1998
Plan (as amended). The major changes are as follows.
(1) The treatment for unsecured claims under the Plan remains the
same, pro rata distribution from the Class 6 Fund without
dilution by the RUS's approximate $3 billion unsecured claim.
No trade claims will be purchased or paid by either SWEPCO or
the RUS outside the Plan (this is not a plan change).
(2) Members will have the option to enter into the Power Supply
Agreement attached as Exhibit 2 or the March 18, 1998
Louisiana Generating Consensual Power Supply Agreement
(excluding Exhibits F and G) with SWECO to supersede and
replace the existing Supply Contract. If a Member does not
provide written notice to SWEPCO on or before May 14, 1999
that it agrees to accept either of the foregoing power supply
agreements, such Member's existing Supply Contract shall be
rejected on the Effective Date. In the event of a rejection,
upon request, SWECO shall provide power to such Member for a
transition period not to exceed 60 months on terms and
conditions acceptable to SWECO, and subject to its approval by
the LPSC.
(3) To the extent that any of Cajun's assets are not owned by
Cajun directly but are owned by a joint venture in which Cajun
is a joint venturer, SWECO will be buying Cajun's joint
venture interest in such joint venture.
(4) WST which was previously part of the Committee of Certain
Members is now a Plan Proponent.
1
<PAGE>
SUMMARY OF AMENDMENTS
TO POWER SUPPLY AGREEMENT
The following is a summary of modifications to the Power Supply Agreement:
(1) A new levelized and fixed demand rate option was added.
(2) The demand rates were "rolled back" so that the same first-year rate
is available through year 2000.
(3) The fixed fuel factors were corrected so as to properly reflect a
reduction of 1/4 mill.
(4) The extended outage provision provides an offset to the Members for
power purchase costs during an outage down to SWECO's debt service
and provides that economic power purchased during the outage will
reduce the Member's fuel costs.
2
<PAGE>
1. INTRODUCTION AND OVERVIEW
A. Introduction
Pursuant to 11 U.S.C. ss. 1125, SWEPCO, the Committee of Certain Members
("CCM") and Washington - St. Tammany Electric Cooperative, Inc. ("WST") provide
this Supplemental Disclosure Statement to disclose adequate information to the
creditors of Cajun Electric Power Cooperative, Inc. ("Cajun"). A copy of the
SWEPCO/CCM/WST Plan dated April 19,1999 accompanies this Supplemental Disclosure
Statement. This Supplemental Disclosure Statement has been drafted in the spirit
of 11 U.S.C. ss. 1125(a)(1), which defines "adequate information" within the
context of the debtor's particular circumstances and typical creditors. In this
case, the creditors are sophisticated, have access to vast amounts of
information, and already possess a virtually complete understanding of Cajun and
its business. This Supplemental Disclosure Statement contains information that
is pertinent to the Plan, while not attempting to reproduce all the general
information relevant to Cajun and its business contained in the Master
Disclosure Statement submitted by the Trustee (the "Master Disclosure
Statement") or the Supplemental Disclosure Statement filed in November 1996 by
SWEPCO and the then Members Committee, and sent to you at that time. The
Proponents reserve the right under the Plan to ask that the Plan be confirmed by
the Court pursuant to 11 U.S.C. ss. 1129(b), notwithstanding the failure of all
impaired classes to vote in favor of the Plan.
All terms defined in Article I of the Plan shall have the same meanings
when used herein. The reader is advised to review such definitions prior to
reviewing this Supplemental Disclosure Statement. THE EFFECTIVE PURCHASE PRICE
(BASED UPON CURRENT TREASURY YIELDS) UNDER THE SWEPCO/CCM/WST PLAN IS
APPROXIMATELY $1.02 BILLION.
THIS SUPPLEMENTAL DISCLOSURE STATEMENT, THE PREVIOUS SUPPLEMENTAL DISCLOSURE
STATEMENT, THE TRUSTEE'S DISCLOSURE STATEMENT AND THE PLAN ARE AN INTEGRAL
PACKAGE AND ALL MUST BE CONSIDERED IN ORDER FOR THE CREDITOR TO BE ADEQUATELY
INFORMED.
3
<PAGE>
NO REPRESENTATIONS CONCERNING THE DEBTOR, ITS FUTURE BUSINESS OPERATIONS, THE
VALUE OF PROPERTY OR THE VALUE OF ANY PROMISSORY NOTES OR OTHER SECURITY OR
PROPERTY TO BE ISSUED OR EXCHANGED UNDER THE PLAN ARE AUTHORIZED OTHER THAN AS
SET FORTH IN THIS SUPPLEMENTAL DISCLOSURE, OR THE MASTER DISCLOSURE STATEMENT.
ANY REPRESENTATIONS OR INDUCEMENTS MADE TO INDUCE ANY ACTION BY YOU WHICH ARE
OTHER THAN AS CONTAINED IN THIS SUPPLEMENTAL DISCLOSURE STATEMENT, OTHER
APPROVED SUPPLEMENTAL DISCLOSURE STATEMENTS, AND THE MASTER DISCLOSURE STATEMENT
SHOULD NOT BE RELIED UPON BY YOU IN ARRIVING AT YOUR DECISION, AND SUCH
ADDITIONAL REPRESENTATIONS AND INDUCEMENTS SHOULD BE REPORTED TO COUNSEL FOR THE
PROPONENTS WHO IN TURN SHALL DELIVER SUCH INFORMATION TO THE BANKRUPTCY COURT
FOR SUCH ACTION AS MAY BE DEEMED APPROPRIATE.
NOT ALL OF THE INFORMATION CONTAINED HEREIN HAS BEEN SUBJECT TO A CERTIFIED
AUDIT. THE PROPONENTS DO NOT WARRANT OR REPRESENT THAT SUCH INFORMATION IS
WITHOUT INACCURACY, ALTHOUGH REASONABLE EFFORT HAS BEEN MADE TO BE ACCURATE.
B. Overview of Plan
1. Summary of transactions to occur pursuant to Plan.
The Plan provides for the acquisition of Cajun's non-nuclear assets
by a subsidiary or affiliate of SWEPCO. The consideration paid under the Plan
(subject to adjustments as provided in the Asset Purchase Agreement and the
Plan) is $1.02 billion (at current treasury yields). The Plan incorporates an
already Court-approved settlement of a variety of pending litigation involving
the lien claims of the Rural Utilities Service ("RUS"). In addition, the Plan
incorporates the River Bend Settlement negotiated among the Proponents and
Entergy Gulf States, Inc. ("GSU"). The Plan achieves the goal of offering
competitive wholesale rates to the Members, maximizing value to the Cajun
estate, and satisfying the concerns of the LPSC.
2. Summary of events since November 1996.
In November 1996 there were three plans competing for the purchase
of Cajun's non-nuclear assets. One of those bidders, Enron Capital & Trading
Resources has withdrawn. On December 6, 1996, creditors and members voted
overwhelmingly in numbers to support the SWEPCO plan of reorganization, dated
November 18, 1996. At that time, the RUS, which holds claims in excess of $4
4
<PAGE>
billion, voted against the SWEPCO plan. Creditors and members voted
overwhelmingly in numbers against the Trustee's November 1996 plan of
reorganization. Based upon a settlement the Trustee initially reached with the
RUS in November 1996, the RUS voted to support the Trustee's Plan. The hearings
to consider confirmation of the competing plans and related litigation started
in December 1996 and continued until May, 1998. During that time, the competing
plans have been amended several times and settlements have been reached by and
among some of the parties.
In February 1999, the Bankruptcy Court denied confirmation of the
Trustee's Plan and granted relief to SWEPCO and the CCM in Adversary Pro.
96-1052. The Court also denied confirmation of the SWEPCO/CCM Plan based upon
specifically identified grounds. At the same time, the Court approved
settlements reached between (i) the Trustee and the RUS and (ii) SWEPCO/CCM and
the RUS, on issues relating to the liens and security interests the RUS asserts
against substantially all of Cajun's property. The RUS has agreed to accept its
treatment under the Plan. By Order of the Court, the Plan proponents are to
serve out their amended plans on April 16, 1999 and file those amended plans on
April 19, 1999.
3. Summary of classification, treatment, and likely distributions under
the Plan.
Generally, the structure classification and treatment contained in this
Plan has not changed from the November 1996 Plan. The classification and
treatment of claims is noted below.
a. Unclassified Claims.
Allowed Administrative Expense Claims will be paid in full in
cash on the Effective Date. Allowed Priority Tax Claims will be paid in full in
cash on the Effective Date or through deferred cash payments over six years
after the date of assessment. No change from the previous plan.
b. Classified Claims.
The following summarizes the classification of the Claims and
Interests under the Plan. For a detailed description of each Class, see Section
II-Description of the Plan.
5
<PAGE>
Class 1: All Other Priority Claims
Class 2: Allowed Secured Claim of RUS
Class 3: Allowed Secured Claim of CoBank
Class 4: Allowed Secured Claim of Hibernia Bank
Class 5: Allowed Other Secured Claims
Class 6(a): Allowed Convenience Claims
Class 6(b): Allowed Unsecured Claims
Class 7: Member Interests
The following table summarizes the treatment of Allowed Claims against and
Allowed Interests in the Debtor and corresponding distributions as the
Proponents are best able to estimate at this time. Reference is made to the more
detailed descriptions in the Plan and in Section II hereof. Each class is
treated as a separate and distinct class for all purposes under the Plan,
including for voting purposes.
Impair-
Class Description of Class ment Treatment
- -------------------------------------------------------------------------------
1 All Other Priority Claims No Paid in full on Effective
Date
- -------------------------------------------------------------------------------
2 Allowed Secured Claim of RUS Yes All liquidation proceeds
less cash sufficient to pay
all administrative and
priority claims and pay
unsecured claims to the
extent provided for in the
RUS Settlement.
- -------------------------------------------------------------------------------
3 Allowed Secured Claim of CoBank Yes SWECO will enter into a new
agreement with CoBank
intended to avoid a
disqualifying even under the
Tax Benefit Transfer
Agreements, and to allow
SWECO to acquire the Debtor's
ownership in Big Cajun, Unit
3 and the Debtor's ownership
of equity in CoBank. CoBank
shall release its liens on
all assets other than the
equity in CoBank.
- -------------------------------------------------------------------------------
4 Allowed Secured Claim of Yes Payment in accordance with
Hibernia Bank payment schedule on
outstanding bonds; or from
cash upon sale of assets
securing such claim.
- -------------------------------------------------------------------------------
5 Allowed Other Secured Claims Yes Payment in cash upon sale
of assets, or transfer of
property securing such claim
in full satisfaction of
claim.
- -------------------------------------------------------------------------------
6
<PAGE>
- -------------------------------------------------------------------------------
6 (a) Allowed Convenience Claims Yes Share pro rata in Class 6
Fund which consists of
$20.24 million
(b) Allowed Unsecured Claims plus the net proceeds of
avoidance actions, without
dilution by RUS's unsecured
claim.
- -------------------------------------------------------------------------------
7 Member Interests Yes No distribution.
- -------------------------------------------------------------------------------
The amounts of Claims in the various classes and the number of
holders of such claims cannot be exactly determined. In addition, the actual
Distributions under the Plan may vary from the recoveries noted below for a
variety of reasons. The Trustee and SWEPCO estimates of unsecured claims,
including the potential rejection damages claims of the entities which supply
coal and coal transportation services to Cajun (the "Fuel Chain") are based upon
testimony during the hearings on the Trustee's settlements with the Fuel Chain
that took place in 1997. The Trustee's estimate at the time was $648 million for
Class 6 and SWEPCO's estimate at that time was $122 million for Class 6. Based
upon these estimates, the distribution for Class 6 could range from 3% to 16.5%
for Class 6 Claims, assuming no realization of net proceeds from avoidance
actions. These numbers have not been updated; however, the Fuel Chain claims
should be lower under both sets of estimates due to the passage of time. The
Fuel Chain claims have not been allowed at this time. The Proponents cannot
estimate with complete accuracy the amount of claims that ultimately will be
allowed distribution to Class 6 creditors.
II. SUMMARY OF THE PLAN
A. Identification of Proponents and Purchaser.
SWEPCO, CCM and WST are the proponents of the Plan. The CCM consists of 6
distribution cooperatives who are members of Cajun. Claiborne Electric
Cooperative ("Claiborne") also supports the Plan. Together, the CCM, Claiborne
and WST constitute approximately 70% of the total Cajun member load. In
addition, CLECO, as successor to Teche Electric, supports the Plan. The
prospective purchaser SWECO is an affiliate of SWEPCO.
B. Description of Proposed Asset Purchase Agreement.
Under the Plan, SWECO will purchase certain non-nuclear assets referred
to as the Acquired Assets at the Purchase Price of $940.5 million (with
adjustments) which, at current treasury yields, is $1.02 billion. A true and
correct copy of the Asset Purchase Agreement is attached as Exhibit "1" to the
Plan.
C. Liquidation of Cajun
The Plan contemplates that any assets remaining in Cajun after the
consummation of the Asset Purchase Agreement and the River Bend Settlement will
be (i) liquidated by the Trustee with the proceeds
7
<PAGE>
of such liquidation distributed in accordance with the Plan; or (ii) conveyed by
the Trustee to the lienholder of such assets.
D. Summary of Plan
The treatment of the Allowed Secured Claim of RUS has already been
approved by the Court. That settlement is incorporated into the Plan. The RUS
will receive all proceeds from the liquidation of Cajun's assets after deduction
of the funds necessary to (i) pay other secured claims in accordance with the
Plan; (ii) pay all Administrative and Priority Claims in full; and (iii) the
Class 6 Fund which consists of $20.24 million and the net proceeds from
avoidance actions. The holders of Allowed Unsecured Claims, other than the RUS,
will receive a Pro Rata share of the proceeds of the Class 6 Fund. Neither
SWEPCO nor the RUS will be purchasing or paying the claims of any trade
creditors outside the Plan, per the Court's ruling on February 11, 1999. Thus,
the pro rata distribution from the Class 6 Fund is the only distribution Class 6
creditors will receive. CoBank and Hibernia, the holders of the Class 3 and
Class 4 secured claims, respectively, have already agreed to their treatment and
the Plan incorporates that treatment as well.
1. Member Rates and the Proposed Power Sales Agreements
SWECO has reached an agreement on the terms of a new Power Supply
Agreement with the CCM, Claiborne and WST which is attached as Exhibit 2 to the
Plan. The contract reflects a long term commitment for competitive rates over a
25-year period.
2. Executory Contracts and Unexpired Leases
Supply Contracts. With respect to Members existing power supply
agreements, Members have the following options:
(a) Members who shall have agreed in writing by May 14, 1999, shall
execute new power supply agreements with SWECO substantially in the
form of Exhibit 2 or, alternatively, substantially in the form of
Louisiana Generating's consensual power supply agreement (excluding
Exhibits F and G to such agreement) filed March 18, 1998 which
agreement will supersede and replace such Member's Supply Contract;
(b) In the event a Member has not, on or before May 14, 1999, provided
SWEPCO with a written notice that it agrees to execute either power
supply agreement referenced in (a) above, then the Member's existing
Supply Contract will be rejected on the Effective Date;
(c) If a Member's Supply Contract is rejected per paragraph (b) above,
SWECO will provide power to the Member during a transition period
not to exceed sixty (60) months until the Member negotiates a power
supply agreement with another supplier. The power will be provided
on terms and conditions acceptable to SWECO and subject to
appropriate regulatory approval.
8
<PAGE>
3. Discharge of Cajun.
The Plan provides for the liquidation of substantially all of the
assets of Cajun. Consequently, Cajun will not receive a discharge of its debts.
However, all transfers of assets contemplated under the Plan are made free and
clear of all liens, claims and encumbrances unless otherwise specified in the
Plan. Distributions will be made from the proceeds of such transfers pursuant to
the terms of the Plan in full and complete satisfaction of such liens, claims
and encumbrances except as otherwise expressly specified in the Plan.
4. Conditions to Confirmation and Effectiveness of the Plan.
The sale transaction is contingent upon several conditions to
closing set forth in the Asset Purchase Agreement including, but not limited to,
obtaining the necessary regulatory approvals necessary to consummate the
transaction. The Asset Purchase Agreement contains covenants on the part of the
Trustee to cooperate in due diligence and to perform other acts required to
consummate the transaction contemplated under the agreement. The Trustee asserts
that he has not negotiated the Asset Purchase Agreement and is not bound
thereby, notwithstanding confirmation of the Plan, and that this is a "risk" to
be taken into account. The Proponents vigorously contest the ability of a
Trustee to renegotiate the terms of a confirmed plan of reorganization or
agreements made part of a confirmed plan, and believe the Trustee shall be bound
by the Plan and the Asset Purchase Agreement. Finally, SWEPCO anticipates that
80% of the Purchase Price under the Asset Purchase Agreement will be financed
with funds from outside sources.
5. Reimbursement of Costs and Fees.
(i) Pursuant to prior agreements that have been previously disclosed,
the CCM and WST received an aggregate of $1 million from SWEPCO for
reimbursement of legal fees and related expenses.
(ii) SWEPCO has agreed to reimburse the CCM and WST the reasonable legal
fees and expenses of Altheimer & Gray and Dann, Pecar and expert
expenses incurred in support of the Plan since January 1, 1997.
(iii)SWEPCO has also agreed in the event the Plan is confirmed, to
reimburse any remaining, unreimbursed reasonable legal fees and
expenses to the CCM and WST.
(iv) The aggregate amount of reimbursement in (i), (ii) and (iii) shall
not exceed $8 million.
9
<PAGE>
(v) SWEPCO has agreed that in the event of confirmation of the Joint
Plan, it will reimburse Claiborne's reasonable legal fees and
expenses in the same percentage of reimbursement as received by the
Members of the CCM, up to a maximum amount of $1.5 million.
(vi) To the extent required by law, all such reimbursements shall be
subject to Bankruptcy Court approval as to reasonableness.
(vii) There shall be no obligation on SWEPCO to reimburse the CCM, WST or
Claiborne for fees and expenses incurred after either (a) the
confirmation of any other plan of reorganization, or (b) denial of
confirmation of the Plan.
(viii)To the extent that the CCM, WST or Claiborne receive legal or expert
expense reimbursement under another confirmed plan, the CCM, WST and
Claiborne agree to refund to SWEPCO any such reimbursement up to the
total of any sums received from SWEPCO. In the event another plan is
confirmed, the CCM, WST and Claiborne agree to use their best
efforts to obtain such legal and expert reimbursement under such
other plan.
(ix) These are the only agreements as to reimbursement of fees and
expenses as of the date hereof, by and among SWEPCO, WST and the
CCM. In the event any other agreements are reached by SWEPCO and any
member, such agreements will promptly be disclosed to the Bankruptcy
Court.
E. Means for Implementation of the Plan
1. Sale of Acquired Assets to SWECO.
The Acquired Assets (or the Non-Nuclear Assets) will be transferred
to SWECO for the cash consideration of $ 1.02 billion (at current interest
rates) (the "Purchase Price") pursuant to an agreement substantially in the form
of that Asset Purchase Agreement attached as Exhibit "1" to the Plan. This sale
will have the effect of extinguishing all liens, claims and encumbrances
affecting the Acquired Assets except for as provided in section 5.4 (CoBank) and
5.5 (Hibernia Bank) of the Plan. The Trustee shall be deemed to have entered
into such Asset Purchase Agreement as of the date of the Confirmation Order.
2. Disbursement Accounts.
The Disbursement Accounts shall be funded with the Purchase Price,
and all other proceeds (if any) from the liquidation, sale or collection of
assets of the Debtor. The Trustee will make distributions from the Disbursement
Fund in accordance with the terms of the Plan, and, unless otherwise
10
<PAGE>
provided in the Plan, all Plan distributions shall be made from the Disbursement
Fund. The segregated Excess Funds shall not be transferred to the Disbursement
Fund, and shall only be disbursed as provided in an order resolving the
competing claims to such funds.
3. Other Causes of Action.
Pursuant to 11 U.S.C. ss. 1142(b) and Bankr. R. 7070, the Court
confirmin the Plan may direct the Trustee or any other party to execute or
deliver any and all documents or instruments or to perform any other act
necessary to implement or consummate this Plan.
In consideration for agreements made by each of the parties set
forth herein in connection with the terms and conditions of the Plan, the
Trustee shall, on the Effective Date, release and discharge all direct or
derivative rights, claims and causes of action which constitute property of the
Estate, including but not limited to claims under Bankruptcy Code Sections 506,
510, 542, 543, 544, 545, 546, 547, 548, 549, 550, 551 and 553, and any state
laws corresponding thereto, arising prior to the Effective Date, against (i)
SWEPCO, SWECO, Central and South West Corporation, and their respective current
and former Representatives, and, (ii) if the RUS Settlement is approved by Final
Order or as part of Confirmation Order, the RUS and its respective current and
former representatives (collectively, the "Released Parties"). Notwithstanding
the foregoing, the Proponents do not believe that the estate has any valid
claims or causes of action against the Released Parties and none have been
asserted.
As to claims against persons other than the Released Parties, to the
extent that such claims exist, they are left in the bankruptcy estate for the
Trustee to pursue. The Trustee is the representative of the estate and is
required to evaluate claims and causes of actions which are economically worthy
of liquidation for distributions to claimants. Reference is made to the
Trustee's Master Disclosure Statement for information regarding the Trustee's
analysis of the existence of such claims.
III. CONFIRMATION AND TECHNICAL
ISSUES RELATIVE TO THE PLAN
A. Classification Issues under Section 1122.
In accordance with 11 U.S.C. ss. 1122, the Plan classifies Claims and
Interests into eight (8) separate classes according to such creditors' and
interest holders' rights and priorities with respect to
11
<PAGE>
assets of Cajun. Section 1122 requires that each class contain claims which are
"substantially similar" to the other claims or interests of such class. The
Court has ruled that most of all the Members asserted pre-petition unsecured
claims were subordinated by the terms of the By Laws of the Debtor or
constituted equity interests.
B. Confirmation Issues under Sections 1123 and 1129.
The Bankruptcy Code defines acceptance of a plan by a class of creditors
as acceptance by holders of two-thirds in dollar amount and a majority in number
of the claims of that class which actually cast ballots for acceptance or
rejection of the plan. In other words, acceptance takes place only if two-thirds
in amount and majority in number of the creditors in a given class who vote cast
their ballots in favor of acceptance.
At the Confirmation Hearing, the Bankruptcy Court shall determine whether
the confirmation requirements of section 1129 of the Bankruptcy Code have been
satisfied, in which event the Bankruptcy Court shall enter an order confirming
the Plan. These applicable requirements are enumerated and explained in the
Trustee's Disclosure Statement.
At the Confirmation Hearing, the Bankruptcy Court must, among other
things, determine whether Claimants or Interest holders would receive at least
as much under the Plan as they would receive in a liquidation under chapter 7.
The Trustee has submitted his Liquidation Analysis which is attached to the
Master Disclosure Statement as an exhibit.
Certain provisions of the Bankruptcy Code permit confirmation of a plan
even if one or more Classes do not accept. These provisions set forth in
Bankruptcy Code ss. 1129(b), impose certain requirements and if these
requirements are satisfied, the Plan may be confirmed even though one or more
Classes vote to reject the Plan. The Court may still confirm the Plan if, as to
each impaired Class which has not accepted the Plan, the Plan "does not
discriminate unfairly" and is "fair and equitable."
If an impaired Class of Secured Claims rejects or is deemed to reject the
Plan, the Plan may still be confirmed if the Plan provides that (a) each holder
of a claim in the Class retains the liens securing such claim to the extent of
the amount of its Allowed claim and receives on account of such claim deferred
cash payments totaling at least the amount of its Allowed Claim with a present
value, as of the Effective Date of the Plan, of at least the value of such
holder's interest in Debtor's interest in the property; (b) if the property
subject to the liens of such holder is sold free and clear of those liens, such
liens are to be attached to the proceeds of such sale and such liens will be
12
<PAGE>
treated in accordance with (a)or (c) hereof, or (c) the holder of the impaired
Allowed Secured Claim realizes the "indubitable equivalent" of its claim under
the Plan.
Likewise, if an impaired Class of Unsecured Claims rejects or is deemed to
reject the Plan, the Plan may still be confirmed as long as the Plan provides
(a) for each holder of a Claim included in the rejecting Class to receive or
retain on account of that Claim property that has a value, as of the Effective
Date of the Plan, equal to the allowed amount of such Claim, or (b) that the
holder of any Claim or interest that is junior to the Claims of such Class will
not receive or retain on account of such junior Claim or interest any property
at all.
The Plan provides for claims to receive treatment consistent with Section
1129(b) of the Bankruptcy Code. If any class of claims does not accept the Plan,
the Proponents may either ask the Court to rule that the Plan may be confirmed
notwithstanding any vote of such class or may modify the Plan as necessary to
confirm the Plan under the provisions of 1129(b).
C. Risk Factors.
Certain risk factors are inherent in any plan of reorganization. The Plan
should be evaluated in much the same manner as a purchase of a security would be
evaluated. The advice and assistance of competent professionals should be
sought. The Proponents have attempted to discern foreseeable risks peculiar to
this reorganization and this Plan as discussed below.
Payments to Cajun's creditors will be made in cash from the proceeds of
the sale of Cajun's non-nuclear assets to SWECO and from other cash proceeds, if
any. Therefore, payments to creditors are not dependent upon any future
financial performance by any entity.
1. SWECO Operations.
The feasibility of continued operations in SWECO which, in turn, will
affect performance under the new power supply contracts, is subject to business,
economic and competitive uncertainties and contingencies, many of which are
beyond the control of the Proponents.
2. Conditions Precedent.
The Asset Purchase Agreement and the Plan contain certain conditions
precedent to confirmation and consummation of the Plan. There are no guaranties
that such conditions will occur. The Proponents are working to ensure that
conditions precedent in the Plan and in the Asset Purchase Agreement are met and
believe that such conditions can be met in a timely fashion.
3. Regulations.
13
<PAGE>
a. Regulatory Issues Applicable to SWECO.
As the owner of interstate transmission facilities to be acquired from
Cajun, SWECO will be subject to regulation as a public utility under the Federal
Power Act, 16 U.S.C. ss. 824 (1994) (FPA). Under the FPA, SWECO must file with
the Federal Energy Regulatory Commission ("FERC") the Supply Contracts with the
Members for review by the FERC for conformance with the rate making standards of
the FPA. Under the FPA, the rates for wholesale sales of electricity in
interstate commerce must be based on the costs incurred to provide service
unless the filing utility is permitted to charge rates negotiated in the
marketplace. SWECO expects to receive permission from the FERC to charge the
rates under the proposed Supply Contracts described above on the basis that such
rates have been set in a marketplace in which SWECO exercised no market power by
reason of its control of generating or interstate transmission facilities.
In order to obtain FERC permission to charge such "market-based" rates for
wholesale electric sales, SWECO must demonstrate to the FERC that neither SWECO
nor its affiliates, the operating electric utility subsidiaries of Central and
South West Corporation, exercise such market power. To reach this conclusion,
the FERC must first find that open access transmission service tariffs filed by
the CSW Operating Companies provide open comparable access to the transmission
facilities the CSW Operating Companies own or otherwise control. Under FERC's
Order No. 888, the CSW Operating Companies have filed a tariff for transmission
service that will provide such comparable open access. Accordingly, SWECO
expects to be able to make the necessary showing in support of a request for
"market-based" rate treatment for sales made under the proposed supply
contracts.
As a public utility, SWECO must also file a tariff offering open access
transmission service on the transmission facilities SWECO controls or seek a
waiver from the obligation to file such a tariff. SWECO anticipates seeking
waiver based on the nature of the transmission facilities it would control under
the Plan, if consummated.
b. Public Utility Holding Company Act
CSW, the parent of SWEPCO, is a public utility holding company registered
under the Public Utility Holding Company Act of 1935, as amended (the "1935
Act"). The 1935 Act requires, with certain exceptions, prior approval by the
Securities and Exchange Commission (the "SEC") for the direct or indirect
acquisition of any securities or utility assets or any other interest in any
business by a registered holding company or its subsidiaries. Additionally, with
certain exceptions, the 1935 Act prohibits the issuance of securities of a
registered holding company or its subsidiaries, without, in each case, prior SEC
14
<PAGE>
approval. Although a registered holding company or its subsidiaries may acquire
the securities, or an interest in the business, of an exempt wholesale generator
(an "EWG") without prior SEC approval, the issuance of securities by a
registered holding company for purposes of financing the acquisition of an EWG,
or the guarantee of securities of an EWG by a registered holding company,
requires prior SEC approval. At present, SWECO does not plan to seek
certification by the FERC as an EWG due to existing limitation on the aggregate
investment of CSW in EWGs and foreign utility components. However, SWECO may
nonetheless seek EWG status to avoid certain requirements of the 1935 Act.
It is a condition to SWEPCO's obligations under the Asset Purchase
Agreement that all required regulatory approvals shall have been received on or
prior to the Effective Date specified in the Plan. Required regulatory approvals
are set forth in the Asset Purchase Agreement.
4. Confirmation Objections.
The Fuel Chain or other creditors may object to the Plan, possibly
delaying confirmation and implementation of the Plan. However, the Proponents
believe that the Plan satisfies all of the requirements for confirmation, and
that the Plan may be confirmed over any objection.
5. Other Issues.
In addition to utility regulation, SWEPCO had received a civil information
request from the Justice Department in 1996 in connection with SWEPCO's proposed
acquisition of the assets of the Debtor. SWEPCO responded to the Department's
request for information when received. There has been no additional activity.
SWEPCO does not believe this request for information will affect its ability to
confirm this Plan. However, the Proponents submit this information in the
interest of full disclosure.
IV. POST CONFIRMATION DATE OFFICERS AND DIRECTORS
SWECO and SWEPCO assert that Code Section 1129(a)(5) does not apply to
them under this Plan. SWECO is not the debtor, an affiliate of the debtor
participating in a joint venture of the debtor or a successor to the debtor.
However, solely for the purpose of disclosure, although not required by the
Bankruptcy Code, the list of proposed officers and directors (and their current
affiliations with either SWEPCO or Central and South West Corporation), and
their current compensation by those companies is as follows:
(a) Mike Madison - President of SWECO and a director
15
<PAGE>
(b) Mike Smith - Vice President and Secretary of SWECO and a director.
(c) Tom Shockley - director.
Mike Madison is currently the President of SWEPCO. His salary is $180,000
and his bonus is $75,000.
Mike Smith is former President of SWEPCO and is currently Vice President
Business Opportunities at Central and South West Corporation. His salary is
$205,000 and his bonus is $ 100,000.
Tom Shockley is currently the President and Chief Operating Officer at
Central and South West Corporation. His salary is $520,000 and his bonus is
$430,000. The resumes of Mr. Madison, Mr. Smith and Mr. Shockley previously
filed are incorporated herein. It is not currently contemplated that SWECO will
pay or otherwise be obligated for any of these amounts.
There is no reorganized debtor under the SWEPCO Plan, therefore Code
Section 1129(a)(5)(B) is not applicable. Nonetheless SWECO discloses that no
insiders of the debtor will be employed or retained by the reorganized debtor
(as no such entity will exist under the SWEPCO Plan). SWECO is not aware of any
insider of the debtor that will be employed by or retained by SWECO if the Plan
is confirmed.
V. COMPARISON TO THE OTHER PLANS
Trustee's Plan.
The "cramdown" condition of the Trustee's prior plan has been rejected by
the Bankruptcy Court. Thus, if the Trustee's April 1999 Plan incorporates the
same non-consensual features and includes a "Reorganized Cajun," it should be
summarily denied. If the Trustee files a different plan, its contents are
unknown and cannot be compared at this time.
VI. CONCLUSION
The Proponents urge you to vote in favor of the Plan.
Respectfully submitted this 19th day of April, 1999.
16
<PAGE>
COMMITTEE OF CERTAIN MEMBERS OF
CAJUN ELECTRIC POWER COOPERATIVE, INC.
By: /s/ John M. Sharp
John M. Sharp, One of its Counsel
Melanie Rovner Cohen
Benjamin D. Schwartz
Altheimer & Gray
10 South Wacker Drive, Suite 4000
Chicago, Illinois 60606-7482
312-715-4000
John M. Sharp (Bar No. 19149)
A Professional Law Corporation
14481 Old Hammond Highway, Suite 2
Baton Rouge, LA 70816
504-273-8510
SOUTHWESTERN ELECTRIC POWER
COMPANY, INC.
By: /s/ Bobby S. Gilliam
Bobby S. Gilliam, One of its Counsel
Bobby S. Gilliam (Bar No. 6227)
Wilkinson, Carmody & Gilliam
1700 Beck Building
Shreveport, La 71166
318-221-4196
Henry J. Kaim
Edward L. Ripley
Patricia B. Tomasco
Sheinfeld Maley & Kay, P.C.
100 1 Fannin, Suite 3700
Houston, TX 77002
713-658-8881 WASHINGTON-ST. TAMMANY ELECTRIC
COOPERATIVE, INC.
By: /s/ Charles M. Hughes, Jr.
Charles M. Hughes, Jr., One of its
Counsel
Charles M. Hughes, Jr.
Talley, Anthony, Hughes & Knight
4565 LaSalle Street
Suite 300 Acadian Bank Building
Mandeville, Louisiana 70448
504-624-5010
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1,812
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53
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<SUBSIDIARY>
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</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000105860
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<SUBSIDIARY>
<NUMBER> 009
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
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<PERIOD-END> MAR-31-1999
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0
2,482
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0
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<TOT-CAPITALIZATION-AND-LIAB> 823,453
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<INCOME-TAX-EXPENSE> (247)
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<OPERATING-INCOME-LOSS> 7,298
<OTHER-INCOME-NET> 116
<INCOME-BEFORE-INTEREST-EXPEN> 7,414
<TOTAL-INTEREST-EXPENSE> 6,107
<NET-INCOME> 1,307
26
<EARNINGS-AVAILABLE-FOR-COMM> 1,281
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<TOTAL-INTEREST-ON-BONDS> 5,088
<CASH-FLOW-OPERATIONS> 8,094
<EPS-PRIMARY> 0
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</TABLE>
