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 June 30, 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 August 6, 1999 Shares
Central and South West Corporation 212,648,293
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
JUNE 30, 1999
GLOSSARY OF TERMS..............................................................3
FORWARD-LOOKING INFORMATION....................................................5
PART I. - FINANCIAL INFORMATION................................................6
ITEM 1. FINANCIAL STATEMENTS................................................6
CENTRAL AND SOUTH WEST CORPORATION.........................................6
CENTRAL POWER AND LIGHT COMPANY...........................................15
PUBLIC SERVICE COMPANY OF OKLAHOMA........................................22
SOUTHWESTERN ELECTRIC POWER COMPANY.......................................29
WEST TEXAS UTILITIES COMPANY..............................................36
NOTES TO FINANCIAL STATEMENTS.............................................44
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..............................................62
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........81
PART II. - OTHER INFORMATION..................................................83
ITEM 1. LEGAL PROCEEDINGS..................................................83
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................83
SIGNATURES....................................................................84
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
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.
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
ERCOT ..................Electric Reliability Council of Texas
ESPS....................Electricity Supply Pension Scheme
Exchange Act ...........Securities Exchange Act of 1934, as amended
EWG ....................Exempt Wholesale Generator
FASB....................Financial Accounting Standards Board
FCC.....................Federal Communications Commission
FERC ...................Federal Energy Regulatory Commission
FUCO ...................Foreign utility company as defined by the Holding
Company Act
FMBs....................First Mortgage Bonds
Holding Company Act ....Public Utility Holding Company Act of 1935, as amended
IBEW ...................International Brotherhood of Electrical Workers
ISO ....................Independent system operator
July 1999 SWEPCO Plan...The amended plan of reorganization for Cajun filed by
the Members Committee and SWEPCO on July 28, 1999 with
the U.S. Bankruptcy Court for the Middle District of
Louisiana
Legislative Joint Electric
Utility Task Force....Task force created by the Oklahoma Legislature to study
electric utility industry restructuring issues in the
state of Oklahoma
LIFO ...................Last-in first-out (inventory accounting method)
Louisiana Commission ...Louisiana Public Service Commission
MD&A ...................Management's Discussion and Analysis of Financial
Condition and Results of Operations
MDEQ ...................Mississippi Department of Environmental Quality
MGP ....................Manufactured gas plant or coal gasification plant
Mirror CWIP ............Mirror construction work in progress
Mississippi Power ......Mississippi Power Company
MMbtu ..................Million Btu
MW .....................Megawatt
MWH ....................Megawatt-hour
National Grid Group ....National Grid Group plc
National Power..........National Power plc
Northeastern Power
Station...............Northeastern Power Station, Oologah, Oklahoma
NRC ....................Nuclear Regulatory Commission
Numanco.................Numanco, LLC and Numanco, Inc.
3
<PAGE>
GLOSSARY OF TERMS (continued)
The following abbreviations or acronyms used in this text are defined below:
Abbreviation or Acronym Definition
OFGEM...................The Office of Gas and Electricity Markets, United
Kingdom
Oklahoma Commission ....Corporation Commission of the State of Oklahoma
Oklaunion...............Oklaunion Power Plant, Vernon, Texas
PCB ....................Polychlorinated biphenyl
PRP ....................Potentially responsible party
PSO ....................Public Service Company of Oklahoma, Tulsa, Oklahoma
Registrant(s) ..........CSW, CPL, PSO, SWEPCO and WTU
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. 133............Accounting for Derivative Instruments and Hedging
Activities
SFAS No. 137............Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB
Statement No. 133 - an Amendment of FASB Statement
No. 133
STP ....................South Texas Project nuclear electric generating station
SWEPCO .................Southwestern Electric Power Company, Shreveport,
Louisiana
Texas Commission .......Public Utility Commission of Texas
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
UWUA....................Utility Workers Union of America
Vale ...................Empresa De Electricidade Vale Paranapanema S/A, a
Brazilian Electric Distribution 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 July
1999 SWEPCO Plan,
- - 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 I. - FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
6
<PAGE>
CSW
Consolidated Statements of Income (unaudited)
Central and South West Corporation
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1999 1998 1999 1998
------- ------- -------- -------
(millions, except per share amounts)
Operating Revenues
U.S. Electric $ 892 $ 885 $1,589 $1,574
United Kingdom 362 403 837 935
Other diversified 65 56 118 92
------- ------- -------- -------
1,319 1,344 2,544 2,601
Operating Expenses and Taxes
U.S. Electric fuel 292 315 522 551
U.S. Electric purchased power 36 26 64 47
United Kingdom cost of sales 214 270 536 654
Other operating 269 244 519 472
Maintenance 61 40 102 74
Depreciation and amortization 133 126 265 249
Taxes, other than income 56 55 113 101
Income taxes 52 54 69 76
------- ------- -------- -------
1,113 1,130 2,190 2,224
------- ------- -------- -------
Operating Income 206 214 354 377
------- ------- -------- -------
Other Income and (Deductions)
Other 11 11 24 29
Non-operating income taxes (3) 1 (7) (2)
------- ------- -------- -------
8 12 17 27
------- ------- -------- -------
Income Before Interest and Other Charges 214 226 371 404
------- ------- -------- -------
Interest and Other Charges
Interest on long-term debt 75 80 153 160
Interest on short-term debt and other 27 30 53 61
Distributions on Trust Preferred
Securities 7 7 13 13
Preferred dividend requirements of
subsidiarie 2 2 4 4
------- ------- -------- -------
111 119 223 238
Net Income for Common Stock $ 103 $ 107 $ 148 $ 166
======= ======= ======== =======
Average Common Shares Outstanding 212.6 212.3 212.6 212.3
Basic and Diluted Earnings per Share $ 0.49 $ 0.50 $ 0.70 $ 0.78
======= ======= ======== =======
Dividends Paid per Share of Common Stock $0.435 $0.435 $0.870 $0.870
======= ======= ======== =======
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 $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 -- 2 -- -- 2
Common stock dividends -- -- (186) -- (186)
--------
3,440
Comprehensive Income:
Foreign currency translation adjustment
(net of tax of $41) -- -- -- (76) (76)
Unrealized gain on securities (net
of tax of $4) -- -- -- 8 8
Net Income -- -- 148 -- 148
--------
Total comprehensive income 80
--------------------------------------- --------
Ending Balance -- June 30, 1999 $744 $1,051 $1,785 ($60) $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
June 30, December 31,
1999 1998
(unaudited) (audited)
--------- ---------
(millions)
ASSETS
Fixed Assets
Electric
Production $ 5,877 $ 5,887
Transmission 1,613 1,594
Distribution 4,711 4,681
General 1,389 1,380
Construction work in progress 203 166
Nuclear fuel 210 207
--------- ---------
14,003 13,915
Other diversified 399 333
--------- ---------
14,402 14,248
Less - Accumulated depreciation and amortization 5,773 5,652
--------- ---------
8,629 8,596
--------- ---------
Current Assets
Cash and temporary cash investments 128 157
Accounts receivable 1,119 1,110
Materials and supplies, at average cost 209 191
Electric utility fuel inventory 117 90
Under-recovered fuel costs 5 4
Notes receivable 116 109
Prepayments and other 108 90
--------- ---------
1,802 1,751
--------- ---------
Deferred Charges and Other Assets
Deferred plant costs 494 497
Mirror CWIP asset 250 257
Other non-utility investments 418 432
Securities available for sale 72 66
Income tax related regulatory assets, net 305 308
Other regulatory assets 191 204
Goodwill 1,315 1,402
Other 418 384
--------- ---------
3,463 3,550
--------- ---------
$ 13,894 $ 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
June 30, December 31,
1999 1998
(unaudited) (audited)
-------- --------
CAPITALIZATION AND LIABILITIES (millions)
Capitalization
Common stock: $3.50 par value
Authorized shares: 350.0 million
Issued and outstanding shares: 212.6
million $ 744 $ 744
Paid-in capital 1,051 1,049
Retained earnings 1,785 1,823
Accumulated other comprehensive income/(loss) (60) 8
-------- --------
3,520 45% 3,624 45%
-------- ---- -------- ----
Preferred stock 176 2% 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 3,802 49% 3,938 49%
-------- ---- -------- ----
Total Capitalization 7,833 100% 8,073 100%
-------- ---- -------- ----
Current Liabilities
Long-term debt and preferred stock due within
twelve months 165 169
Short-term debt 1,088 811
Short-term debt - CSW Credit 818 749
Loan notes 29 32
Accounts payable 474 624
Accrued taxes 218 190
Accrued interest 95 84
Other 234 218
-------- --------
3,121 2,877
-------- --------
Deferred Credits
Accumulated deferred income taxes 2,370 2,410
Investment tax credits 260 267
Other 310 270
-------- --------
2,940 2,947
-------- --------
$ 13,894 $ 13,897
-------- --------
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
- ---------------------------------------------------------------------------
Six Months Ended
June 30,
----------------
1999 1998
------- -------
OPERATING ACTIVITIES (millions)
Net Income for Common Stock $ 148 $ 166
Non-cash Items and Adjustments
Depreciation and amortization 278 256
Deferred income taxes and investment tax credits (20) 14
Preferred stock dividends included in Net Income
for Common Stock 4 4
Loss on reacquired preferred stock -- 1
Changes in Assets and Liabilities
Accounts receivable (18) (135)
Accounts payable (87) 61
Accrued taxes 32 61
Fuel inventory (27) (18)
Fuel recovery 2 50
Refund due customers -- (64)
Other (64) 7
------- -------
248 403
------- -------
INVESTING ACTIVITIES
Construction expenditures (270) (252)
CSW Energy/CSW International projects (60) (74)
Other (35) (9)
------- -------
(365) (335)
------- -------
FINANCING ACTIVITIES
Common stock sold 3 6
Long-term debt sold -- 5
Reacquisition/retirement of long-term debt (127) (89)
Reacquisition of preferred stock -- (28)
Change in short-term debt 347 346
Payment of dividends (189) (186)
Other 58 26
------- -------
92 80
------- -------
Effect of exchange rate changes on cash and cash equivalents (4) (5)
Net Change in Cash and Cash Equivalents (29) 143
Cash and Cash Equivalents at Beginning of Period 157 75
======= =======
Cash and Cash Equivalents at End of Period $ 128 $ 218
======= =======
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $ 192 $ 210
======= =======
Income taxes paid $ 72 $ 53
======= =======
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 and six month periods ended June 30, 1999 and
June 30, 1998. For information concerning the results of operations for each of
the U.S. Electric Operating Companies, see the discussion under the heading
RESULTS OF OPERATIONS following the financial statements of each of the U.S.
Electric Operating Companies.
COMPARISON OF THE QUARTERS ENDED JUNE 30, 1999 AND 1998
CSW's net income for common stock decreased to $103 million in the second
quarter of 1999 compared to $107 million in 1998. The earnings decrease was due
primarily to increased operations and maintenance expenses. Higher depreciation
and amortization, reflecting higher levels of depreciable plant also contributed
to the decrease in earnings. The decrease in earnings was offset in part by
higher non-fuel revenue due primarily to increased non-MWH related revenue and
off-system sales. Various factors affecting second quarter earnings are
discussed below.
In the second 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 68% 27% 95% 5% 100%
Operating Income 78% 20% 98% 2% 100%
Net Income for Common Stock 93% 17% 110% (10)% 100%
Operating revenues decreased $25 million, or 2%, in the second quarter of
1999 compared to the same period a year ago due primarily to lower revenues from
United Kingdom operations partially offset by an increase in other diversified
revenue. U.K. Electric revenues decreased $41 million in the second quarter of
1999 compared to the same period last year due primarily to the absence of
revenues in 1999 from SEEBOARD's retail business that was sold in the second
quarter of 1998, lower sales volumes in the business market following the
extension of competition to the small business and domestic markets in the
fourth quarter of 1998 and unfavorable British pound to U.S. dollar exchange
rate movements. Also contributing to the decline in operating revenues was lower
fuel related revenues due to lower combined fuel expense and purchased power,
discussed in the following paragraph. Partially offsetting the decrease in
operating revenues was an increase in other diversified revenues of $9 million
for the comparison periods due primarily to increased business activity at CSW
Energy and CSW Credit. Higher non-fuel revenue of $8 million due primarily to
increased non-MWH related revenue and off-system sales further offset the
decrease in operating revenues.
U.S. Electric fuel expense decreased $23 million, or 7%, during the second
quarter of 1999 compared to the same period a year ago due primarily to a
decrease in the average unit fuel cost to $1.75 per MMbtu from $1.78 per MMbtu.
The decrease resulted from lower coal, lignite and nuclear fuel costs. Purchased
power expense increased $10 million, or 38%, for the comparison periods due
primarily to the refueling and the 10-year inspection of STP Unit 1 at CPL as
well as scheduled maintenance at several other CSW System power plants. United
Kingdom cost of sales decreased $56 million, or 21%, in the second quarter of
1999 compared to the same period a year ago. The decrease was due primarily to a
lower level of sales of electricity and the absence in 1999 of SEEBOARD's retail
business.
12
<PAGE>
Other operating expense increased $25 million, or 10%, in the second
quarter of 1999 compared to the same period a year ago due primarily to
increased expenses of $14 million at SEEBOARD. Expenses increased at SEEBOARD
primarily as a result of additional operating costs related to SEEBOARD's
Powerlink joint venture to operate the London Underground Rail System as well as
increased expenses associated with operating in the competitive electricity
market in the United Kingdom. Maintenance expense increased $21 million, or 53%,
due primarily to the 10-year inspection of STP Unit 1 as well as scheduled
maintenance at other CSW System power plants.
Depreciation and amortization expense increased $7 million, or 6%, in the
second quarter of 1999 compared to the same period a year ago due to higher
levels of depreciable plant.
Other income and deductions decreased $4 million in the second quarter of
1999 compared to the second quarter of 1998 due primarily to the absence in 1999
of the $5 million gain from C3 Communications' sale of an investment available
for sale.
Interest and other charges decreased $8 million, or 7%, in the second
quarter of 1999 compared to the same period a year ago due primarily to the
reacquisition of FMBs.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Net income for common stock decreased to $148 million in the first six
months of 1999 from $166 million for the same period in 1998 due primarily to
increased operations and maintenance expenses. Higher taxes other than income,
which reflects increased franchise and ad valorem taxes, and higher depreciation
and amortization, reflecting higher levels of depreciable plant, also
contributed to the decrease in earnings. The decrease in earnings was offset in
part by higher non-fuel revenue for U.S. Electric operations due primarily to
increased customer usage and growth and increased off-system sales, which were
partially offset by milder weather. Various factors affecting earnings are
discussed below.
In the first six months 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 62% 33% 95% 5% 100%
Operating Income 73% 25% 98% 2% 100%
Net Income for Common Stock 86% 30% 116% (16)% 100%
Operating revenues decreased $57 million, or 2%, in the first six months
of 1999 compared to the same period in 1998 due to lower revenues from United
Kingdom operations. U.K. Electric revenues decreased $98 million in the first
six months of 1999 compared to the same period a year ago due primarily to the
absence in 1999 of regulatory allowed revenues in the first quarter of 1998.
Also contributing to the decrease in United Kingdom revenues were lower sales
volumes in the business market, the absence of revenues in 1999 from SEEBOARD's
retail business and unfavorable British pound to U.S. dollar exchange rate
movements. Also contributing to the decline in operating revenues was lower fuel
revenues due to lower combined fuel expense and purchased power, discussed in
the following paragraph. Partially offsetting the decrease in operating revenues
was an increase in other diversified revenues of $26 million for the comparison
periods due primarily to increased business activity at CSW Energy and CSW
13
<PAGE>
Credit. Further offsetting the decrease in operating revenues was higher
non-fuel revenue due primarily to increased customer usage and growth and
increased off-system sales.
U.S. Electric fuel expense decreased $29 million, or 5%, during the first
six months of 1999 compared to the same period a year ago due primarily to a
decrease in the average unit fuel cost to $1.66 per MMbtu in 1999 from $1.71 per
MMbtu in 1998. The decrease resulted primarily from lower natural gas, coal,
lignite and nuclear fuel prices. Purchased power expenses increased $17 million,
or 36%, for the comparison periods primarily at CPL and WTU. Purchased power
expense increased at CPL due primarily to the refueling and 10-year inspection
of STP Unit 1 as well as scheduled maintenance at other CSW System power plants.
Purchased power expense increased at WTU due primarily to scheduled maintenance
at power plants. United Kingdom cost of sales decreased $118 million, or 18%, in
the first six months of 1999 compared to the same period a year ago due
primarily to a lower level of sales of electricity, the absence in 1999 of cost
of sales for SEEBOARD's retail business and a lower British pound to U.S. dollar
exchange rate compared to 1998.
Other operating expense increased $47 million, or 10%, in the first six
months of 1999 compared to the same period a year ago due primarily to increased
expenses of $23 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 as well as increased expenses
associated with operating in the competitive electricity market in the United
Kingdom. Maintenance expense increased $28 million, or 38%, due primarily to
increased expenses from the 10-year inspection of STP Unit 1, as well as
scheduled maintenance at other CSW System power plants.
Depreciation and amortization expense increased $16 million, or 6%, in the
first six months of 1999 compared to the same period a year ago due to higher
levels of depreciable plant.
Taxes other than income increased $12 million, or 12%, in the first six
months of 1999 compared to the same period a year ago due primarily to increased
ad valorem taxes reflecting higher assessed property values and Texas state
franchise taxes. Operating income taxes decreased $7 million, or 9%, due
primarily to lower taxable income.
Interest and other charges decreased $15 million, or 6%, in the first six
months of 1999 compared to the same period a year ago. This resulted primarily
from lower interest on long-term debt of $7 million resulting from the
reacquisition of FMBs. Interest on short-term debt and other decreased $8
million due primarily to the absence in 1999 of the interest expense related to
the CPL 1998 bonded rate refund, and lower interest rates on short-term
financing.
14
<PAGE>
CPL
CENTRAL POWER AND LIGHT COMPANY
PART I. - FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
15
<PAGE>
CPL
Consolidated Statement of Income (unaudited)
Central Power and Light Company
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(thousands)
<S> <C> <C> <C> <C>
Electric Operating Revenues $ 383,783 $ 363,651 $ 666,060 $ 638,104
-------- -------- -------- --------
Operating Expenses and Taxes
Fuel 106,397 108,330 174,312 181,277
Purchased power 16,247 7,976 29,394 16,534
Other operating 65,698 62,259 127,524 122,754
Maintenance 19,956 14,468 35,183 27,525
Depreciation and amortization 43,257 42,276 86,370 83,989
Taxes, other than income 22,971 21,573 46,296 41,056
Income taxes 29,216 28,352 40,320 40,172
-------- -------- -------- --------
303,742 285,234 539,399 $ 513,307
-------- -------- -------- --------
Operating Income 80,041 78,417 126,661 $ 124,797
-------- -------- -------- --------
Other Income and (Deductions)
Allowance for equity funds used
during construction -- (8) -- (8)
Other (650) 723 (1,380) (12)
Non-operating income taxes 1,849 707 3,527 1,091
-------- -------- -------- --------
1,199 1,422 2,147 1,071
-------- -------- -------- --------
Income Before Interest Charges 81,240 79,839 128,808 125,868
-------- -------- -------- --------
Interest Charges
Interest on long-term debt 21,598 23,567 44,427 47,066
Distributions on Trust Preferred
Securities 3,000 3,000 6,000 6,000
Interest on short-term debt and other 6,001 5,436 11,064 12,265
Allowance for borrowed funds used
during construction (745) (654) (1,618) (1,341)
-------- -------- -------- --------
29,854 31,349 59,873 63,990
-------- -------- -------- --------
Net Income 51,386 48,490 68,935 61,878
Less: Preferred stock dividends 1,735 1,801 3,547 3,609
-------- -------- -------- --------
Net Income for Common Stock $ 49,651 $ 46,689 $ 65,388 $ 58,269
======== ======== ======== ========
</TABLE>
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
- --------------------------------------------------------------------------------
June 30, December 31,
1999 1998
(unaudited) (audited)
------------ -------------
(thousands)
ASSETS
Electric Utility Plant
Production $3,147,497 $ 3,146,269
Transmission 538,693 527,146
Distribution 1,115,599 1,090,175
General 297,168 298,352
Construction work in progress 84,673 67,300
Nuclear fuel 209,597 206,949
------------ -------------
5,393,227 5,336,191
Less - Accumulated depreciation 2,145,236 2,072,686
------------ -------------
3,247,991 3,263,505
------------ -------------
Current Assets
Cash and temporary investments 9,341 5,195
Accounts receivable 59,810 51,056
Materials and supplies, at average cost 57,088 59,814
Fuel inventory, at LIFO costs 23,780 20,340
Accumulated deferred income taxes 995 713
Prepayments and other 11,692 2,952
------------ -------------
162,706 140,070
------------ -------------
Deferred Charges and Other Assets
Deferred STP costs 481,281 482,447
Mirror CWIP asset 250,019 256,702
Income tax related regulatory assets, net 353,517 360,482
Nuclear decommissioning trust 76,187 65,972
Other 161,874 167,011
------------ -------------
1,322,878 1,332,614
------------ -------------
$4,733,575 $ 4,736,189
============ =============
The accompanying notes to consolidated financial statements as they relate
to CPL are an integral part of these statements.
17
<PAGE>
CPL
Consolidated Balance Sheets
Central Power and Light Company
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(unaudited) (audited)
----------- -----------
(thousands)
<S> <C> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock: $25 par value
Authorized shares: 12,000,000
Issued and outstanding shares: 6,755,535 $ 168,888 $ 168,888
Paid-in capital 405,000 405,000
Retained earnings 730,419 739,031
----------- -----------
1,304,307 48% 1,312,919 46%
----------- ---- ----------- ----
Preferred stock 163,204 6% 163,204 6%
CPL-obligated, mandatorily redeemable preferred
securities of subsidiary trust holding
solely Junior Subordinated Debentures of CPL 150,000 5% 150,000 5%
Long-term debt 1,101,056 41% 1,225,706 43%
----------- ---- ----------- ----
Total Capitalization 2,718,567 100% 2,851,829 100%
----------- ---- ----------- ----
Current Liabilities
Long-term debt due within twelve months 125,000 125,000
Advances from affiliates 300,635 160,298
Accounts payable 88,816 86,998
Payables to affiliates 28,354 38,331
Customer deposits 11,152 9,272
Accrued taxes 61,458 46,855
Accrued interest 26,647 27,036
Over-recovered fuel costs 11,915 9,135
Other 11,024 9,547
----------- -----------
665,001 512,472
----------- -----------
Deferred Credits
Accumulated deferred income taxes 1,203,224 1,221,561
Investment tax credits 135,910 138,513
Other 10,873 11,814
----------- -----------
1,350,007 1,371,888
----------- -----------
$ 4,733,575 $ 4,736,189
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements as they relate
to CPL are an integral part of these statements.
18
<PAGE>
CPL
Consolidated Statements of Cash Flows (unaudited)
Central Power and Light Company
Six Months Ended
June 30,
1999 1998
--------- --------
(thousands)
OPERATING ACTIVITIES
Net Income $ 68,935 $61,878
Non-cash Items Included in Net Income
Depreciation and amortization 95,659 86,011
Deferred income taxes and investment tax credit (14,257) 5,376
Refund due customers -- (63,713)
Changes in Assets and Liabilities
Accounts receivable (8,754) 6,403
Fuel inventory (3,440) (1,570)
Material and supplies 2,726 2,255
Accounts payable (8,508) 18,152
Accrued taxes 14,603 12,978
Fuel recovery 2,780 41,627
Other (2,289) 1,166
--------- --------
147,455 170,563
--------- --------
INVESTING ACTIVITIES
Construction expenditures (78,524) (63,530)
Other (2,199) (3,070)
--------- --------
(80,723) (66,600)
--------- --------
FINANCING ACTIVITIES
Retirement of long-term debt (125,000) (28,000)
Change in advances from affiliates 140,337 2,615
Payment of dividends (77,923) (72,683)
--------- --------
(62,586) (98,068)
--------- --------
Net Change in Cash and Cash Equivalents 4,146 5,895
Cash and Cash Equivalents at Beginning of Year 5,195 --
--------- --------
Cash and Cash Equivalents at End of Period $ 9,341 $ 5,895
========= ========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on Trust Preferred Securities) $ 51,241 $52,700
========= ========
Income taxes paid $ 29,987 $23,021
========= ========
The accompanying notes to consolidated financial statements as they relate
to CPL are an integral part of these statements.
19
<PAGE>
CENTRAL POWER AND LIGHT COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED JUNE 30, 1999 AND 1998
CPL's net income for common stock for the second quarter of 1999 was $49.7
million, which was $3.0 million, or 6%, higher than the comparable period in
1998. This resulted primarily from increased non-fuel related revenues which
were partially offset by higher maintenance expenses, other operating expenses
and taxes.
Electric operating revenues during the second quarter of 1999 were $383.8
million, which was $20.1 million, or 6%, higher than the comparable period in
1998. The increase was attributable to higher fuel-related revenue of $5.3
million due to higher combined fuel expense and purchased power as discussed in
the following paragraph, and non-fuel revenue of $14.8 million as a result of a
6% MWH increase in customer demand.
Purchased power expense during the second quarter of 1999 was $16.2
million, which was $8.3 million, or 104%, higher than the comparable period in
1998. The increase was due primarily to a reduction in generation created by the
refueling and 10-year inspection of STP Unit 1 as well as scheduled maintenance
on several other CPL power plants. As a result, fuel expense during the second
quarter of 1999 was $106.4 million, which was $1.9 million, or 2%, lower than
the comparable period in 1998 due to these factors.
Other operating expense during the second quarter of 1999 was $65.7
million, which was $3.4 million, or 6%, higher than the same period in 1998. The
increase was due primarily to higher outside services expense which was
partially offset by lower transmission expenses resulting from 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 expense during the second quarter of 1999 was $20 million,
which was $5.5 million, or 38%, higher than the comparable period in 1998. This
was largely due to the scheduled power plant repairs and maintenance, including
the refueling and 10-year inspection of STP Unit 1.
Taxes, other than income during the second quarter of 1999 was $23
million, which were $1.4 million, or 6%, higher than the comparable period in
1998. The increase was attributable to higher ad valorem taxes based on
projected increases in property values and increased state franchise taxes.
Interest charges during the second quarter of 1999 was $29.9 million,
which was $1.5 million, or 5%, lower than the comparable period in 1998. The
decrease was due primarily to the reacquisition of FMBs.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
CPL's net income for common stock for the six months ended June 30, 1999
was $65.4 million, which was $7.1 million, or 12%, higher than the comparable
period in 1998. This resulted from increased non-fuel related revenue which was
partially offset by higher maintenance expenses and taxes, other than income.
20
<PAGE>
Electric operating revenues for the six months ended June 30, 1999 were
$666.1 million, which was $28.0 million, or 4%, higher than the comparable
period in 1998. This increase was attributable to higher fuel-related revenue of
$6.1 million due to higher combined fuel expense and purchased power as
discussed in the following paragraph, and non-fuel revenue of $21.8 million
resulting from an 8% MWH increase in customer demand.
Purchased power expense for the six months ended June 30, 1999 was $29.4
million, which is $12.9 million, or 78%, higher than the comparable period in
1998. The increase resulted primarily from a combination of several scheduled
power plant outages for routine maintenance, including STP Unit 1 refueling and
10-year inspection, and an 8% increase in customer demand. As a result, fuel
expense for the six months ended June 30, 1999 was $174.3 million, which was $7
million, or 4%, lower than the comparable period in 1998.
Other operating expense for the six months ended June 30, 1999 were $127.5
million, which was $4.8 million, or 4%, higher than the comparable period in
1998. The increase was due primarily to higher outside services expense,
partially offset by lower transmission expenses resulting from 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 expense for the six months ended June 30, 1999 was $35.2
million, which was $7.7 million, or 28%, higher than the comparable period in
1998. This was largely due to the scheduled power plant repairs and maintenance,
including the refueling and 10-year inspection of STP Unit 1.
Taxes, other than income for the six months ended June 30, 1999 were $46.3
million, which was $5.2 million, or 13%, higher than the comparable period of
1998. The increase was attributable to higher ad valorem taxes based on
projected increases in property values and increased state franchise taxes.
Interest charges for the six months ended June 30, 1999 were $59.9
million, which was $4.1 million, or 6%, lower than the comparable period of
1998. The decrease was due primarily to the reacquisition and maturity of FMBs.
In addition, interest charges in 1998 were higher related to the one time 1998
bonded rate refund.
21
<PAGE>
PSO
PUBLIC SERVICE COMPANY OF OKLAHOMA
PART I. - FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
22
<PAGE>
PSO
Consolidated Statements of Income (unaudited)
Public Service Company of Oklahoma
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(thousands)
<S> <C> <C> <C> <C>
Electric Operating Revenues $178,699 $191,866 $329,729 $343,277
-------- -------- -------- --------
Operating Expenses and Taxes
Fuel 64,916 76,667 126,797 138,187
Purchased power 16,128 13,700 30,172 27,297
Other operating 26,837 28,229 52,550 55,376
Maintenance 12,720 8,312 21,927 15,885
Depreciation and amortization 18,544 18,061 36,999 36,156
Taxes, other than income 8,160 8,576 16,219 15,220
Income taxes 8,035 10,250 9,178 12,282
-------- -------- -------- --------
155,340 163,795 293,842 300,403
-------- -------- -------- --------
Operating Income 23,359 28,071 35,887 42,874
-------- -------- -------- --------
Other Income and (Deductions)
Allowance for equity funds used
during construction -- 71 81 226
Other (484) 398 (1,795) (218)
Non-operating income taxes 495 (129) 1,204 374
-------- -------- -------- --------
11 340 (510) 382
-------- -------- -------- --------
Income Before Interest Charges 23,370 28,411 35,377 43,256
-------- -------- -------- --------
Interest Charges
Interest on long-term debt 6,612 7,619 13,222 15,237
Distributions on Trust Preferred
Securities 1,500 1,500 3,000 3,000
Interest on short-term debt and other 1,508 1,234 2,677 2,464
Allowance for borrowed funds
used during construction (392) (330) (584) (662)
-------- -------- -------- --------
9,228 10,023 18,315 20,039
-------- -------- -------- --------
Net Income 14,142 18,388 17,062 23,217
Less: Preferred stock dividends 53 53 106 106
-------- -------- -------- --------
Net Income for Common Stock $ 14,089 $ 18,335 $ 16,956 $ 23,111
======== ======== ======== ========
</TABLE>
The accompanying notes to consolidated financial statements as they relate
to PSO are an integral part of these statements.
23
<PAGE>
PSO
Consolidated Balance Sheets
Public Service Company of Oklahoma
- --------------------------------------------------------------------------------
June 30, December 31,
1999 1998
(unaudited) (audited)
---------------- ---------------
(thousands)
ASSETS
Electric Utility Plant
Production $ 911,160 $ 913,083
Transmission 380,804 378,719
Distribution 864,687 855,277
General 211,232 211,124
Construction work in progress 47,146 33,519
---------------- ---------------
2,415,029 2,391,722
Less - Accumulated depreciation 1,093,278 1,082,081
---------------- ---------------
1,321,751 1,309,641
---------------- ---------------
Current Assets
Cash 3,229 4,670
Accounts receivable 29,933 32,916
Materials and supplies, at average cost 33,025 33,006
Fuel inventory, at LIFO cost 18,708 16,441
Accumulated deferred income taxes 9,228 11,789
Prepayments and other 4,984 2,881
---------------- ---------------
99,107 101,703
---------------- ---------------
Deferred Charges and Other Assets 76,808 71,384
---------------- ---------------
$ 1,497,666 $ 1,482,728
================ ===============
The accompanying notes to consolidated financial statements as they relate
to PSO are an integral part of these statements.
24
<PAGE>
PSO
Consolidated Balance Sheets
Public Service Company of Oklahoma
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(unaudited) (audited)
------------ ------------
(thousands)
<S> <C> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
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 131,583 144,626
------------ ------------
468,813 51% 481,856 51%
------------ ----- ------------ ------
Preferred stock 5,286 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 374,224 40% 384,064 41%
------------ ----- ------------ ------
Total Capitalization 923,323 100% 946,207 100%
------------ ----- ------------ ------
Current Liabilities
Long-term debt due within twelve months 10,000 --
Advances from affiliates 53,273 15,892
Payables to affiliates 28,846 33,489
Accounts payable 49,909 52,888
Customer deposits 17,265 17,368
Accrued taxes 15,621 23,095
Accrued interest 7,427 7,606
Over-recovered fuel costs 14,988 15,240
Other 7,756 6,599
------------ ------------
205,085 172,177
------------ ------------
Deferred Credits
Accumulated deferred income taxes 279,521 277,181
Investment tax credits 38,469 39,365
Income tax related regulatory liabilities, net 34,497 35,818
Other 16,771 11,980
------------ ------------
369,258 364,344
------------ ------------
$ 1,497,666 $1,482,728
============ ============
</TABLE>
The accompanying notes to consolidated financial statements as they relate
to PSO are an integral part of these statements.
25
<PAGE>
PSO
Consolidated Statements of Cash Flows (unaudited)
Public Service Company of Oklahoma
- --------------------------------------------------------------------------------
Six Months Ended
June 30,
--------------------------
1999 1998
---------- ---------
(thousands)
OPERATING ACTIVITIES
Net Income $ 17,062 $ 23,217
Non-cash Items Included in Net Income
Depreciation and amortization 37,488 37,698
Deferred income taxes and investment tax credit 2,684 10,592
Changes in Assets and Liabilities
Accounts receivable 2,983 (10,763)
Fuels inventory (2,267) (3,535)
Prepayments and other (2,103) 1,742
Equity and other investments (4,831) (1,741)
Accounts payable (3,924) (1,572)
Payables to affiliates (4,643) (4,378)
Accrued taxes (7,474) (292)
Other deferred credits 4,791 272
Other 197 2,864
---------- ---------
39,963 54,104
---------- ---------
INVESTING ACTIVITIES
Construction expenditures (47,911) (27,574)
Other (768) (3,074)
---------- ---------
(48,679) (30,648)
FINANCING ACTIVITIES
Change in advances from affiliates 37,381 (1,134)
Payment of dividends (30,106) (18,106)
---------- ---------
7,275 (19,240)
---------- ---------
Net Change in Cash and Cash Equivalents (1,441) 4,216
Cash and Cash Equivalents at Beginning of Year 4,670 2,171
---------- ---------
Cash and Cash Equivalents at End of Period $ 3,229 $ 6,387
========== =========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on Trust Preferred Securities) $ 17,649 $ 19,348
========== =========
Income taxes paid $ 13,603 $ 7,524
========== =========
The accompanying notes to consolidated financial statements as they relate to
PSO are an integral part of these statements.
26
<PAGE>
PSO
PUBLIC SERVICE COMPANY OF OKLAHOMA
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED JUNE 30, 1999 AND 1998
PSO's net income for common stock for the second quarter of 1999 was $14.1
million, which was $4.2 million, or 23%, lower than the comparable period in
1998. The decrease resulted primarily from lower non-fuel related revenues and
higher maintenance expenses, which were partially offset by lower interest
charges.
Electric operating revenues during the second quarter of 1999 were $178.7
million, which was $13.2 million, or 7%, lower than the comparable period in
1998. Non-fuel related revenues decreased $6.6 million due primarily to a 3%
decrease in retail MWH sales attributable to milder weather in 1999.
Fuel-related revenues decreased $6.6 million due to lower combined fuel expense
and purchased power as discussed in the following paragraph.
Fuel expense during the second quarter of 1999 was $64.9 million, which
was $11.8 million, or 15%, lower than the comparable period in 1998. This
decline was due primarily to an $11.6 million decrease in the recovery of
deferred fuel costs resulting from a significant difference in fuel factors.
Purchased power expense during the second quarter of 1999 was $16.1 million,
which was $2.4 million, or 18%, higher than the comparable period in 1998 due
primarily to an increase in firm contract purchases.
Maintenance expense during the second quarter of 1999 was $12.7 million,
which was $4.4 million, or 53%, higher than the comparable period in 1998 due
primarily to higher production and distribution maintenance expenses. The
increase in production maintenance expenses related primarily to scheduled power
plant maintenance as well as the restart of a power plant generating unit and an
unscheduled outage. The distribution maintenance expense increase resulted
primarily from an increase in tree trimming activities in 1999.
Income tax expense associated with utility operations during the second
quarter of 1999 was $8.0 million, which was $2.2 million, or 22%, lower than the
comparable period in 1998. This was the result of lower taxable income in the
second quarter of 1999.
Interest charges during the second quarter of 1999 were $9.2 million,
which was $0.8 million, or 8%, lower than the comparable period in 1998. This
decrease was due primarily to the reacquisition of $55 million of FMBs during
the third quarter of 1998.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
PSO's net income for common stock for the six months ended June 30, 1999
was $17.0 million, which was $6.2 million, or 27%, lower than the comparable
period in 1998. The decrease resulted primarily from lower non-fuel related
revenues and higher maintenance expenses, which were offset in part by lower
other operating expenses and interest charges.
Electric operating revenues for the six months ended June 30, 1999 were
$329.7 million, which was $13.5 million, or 4%, lower than the comparable period
in 1998. Non-fuel related revenues decreased $3.7 million due primarily to a 4%
27
<PAGE>
decrease in residential MWH sales attributable to milder weather in 1999. Fuel
related revenues decreased $9.9 million for the first six months of 1999
compared to 1998 due to lower combined fuel expense and purchased power as
discussed in the following paragraph.
Fuel expense for the six months ended June 30, 1999 was $126.8 million,
which was $11.4 million, or 8%, lower than the comparable period in 1998. This
decline resulted primarily from an $11.0 million decrease in the recovery of
deferred fuel costs due to a significant difference in fuel factors. Purchased
power expense for the six months ended June 30, 1999 was $30.2 million, which
was $2.9 million, or 11%, higher than the comparable period in 1998 due
primarily to an increase in firm contract purchases.
Other operating expenses for the six months ended June 30, 1999 were $52.6
million, which was $2.8 million, or 5%, lower than the comparable period in
1998. This decrease was due primarily to lower transmission, customer accounting
and administrative expenses. Transmission expenses declined due to the absence
in 1999 of certain transmission wheeling charges. Customer accounting expenses
were lower due to a decrease in bad debt charges. Administrative expenses
declined as a result of lower employee related expenses.
Maintenance expenses for the six months ended June 30, 1999 was $21.9
million, which was $6.0 million, or 38%, higher than the comparable period in
1998 due primarily to higher production and distribution maintenance expenses.
The production maintenance increase was related to scheduled power plant
maintenance as well as the restart of a power plant generating unit and an
unscheduled outage. The distribution maintenance increase was due primarily to
an increase in tree trimming activities in 1999.
Income tax expense associated with utility operations for the six months
ended June 30, 1999 was $9.2 million, which was $3.1 million, or 25%, lower than
the comparable period in 1998 due primarily to lower taxable income in 1999.
Interest charges for the six months ended June 30, 1999 were $18.3
million, which was $1.7 million, or 9%, lower than the comparable period in
1998. This decrease was due primarily to the reacquisition of $55 million of
FMBs during the third quarter of 1998.
28
<PAGE>
SWEPCO
SOUTHWESTERN ELECTRIC POWER COMPANY
PART I. - FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
29
<PAGE>
SWEPCO
Consolidated Statements of Income (unaudited)
Southwestern Electric Power Company
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -------------------
1999 1998 1999 1998
---------- --------- --------- ---------
(thousands)
Electric Operating Revenues $ 242,888 $ 246,936 $ 439,952 $ 444,495
---------- --------- --------- ---------
Operating Expenses and Taxes
Fuel 91,690 98,087 167,961 174,320
Purchased power 10,573 11,664 16,766 18,003
Other operating 32,890 33,228 63,071 64,322
Maintenance 22,018 13,160 34,262 23,429
Depreciation and amortization 25,319 24,826 51,524 49,629
Taxes, other than income 15,791 15,558 31,584 29,080
Income taxes 9,120 11,087 12,928 17,253
---------- --------- --------- ---------
207,401 207,610 378,096 376,036
---------- --------- --------- ---------
Operating Income 35,487 39,326 61,856 68,459
---------- --------- --------- ---------
Other Income and (Deductions)
Allowance for equity funds used
during construction (5) 44 42 706
Other (459) 197 (913) (102)
Non-operating income taxes 973 343 1,656 1,212
---------- --------- --------- ---------
509 584 785 1,816
---------- --------- --------- ---------
Income Before Interest Charges 35,996 39,910 62,641 70,275
---------- --------- --------- ---------
Interest Charges
Interest on long-term debt 9,802 9,808 19,604 19,617
Distributions on Trust Preferred
Securities 2,165 2,166 4,331 4,331
Interest on short-term debt and
other 2,772 2,478 5,162 4,197
Allowance for borrowed funds used
during construction (372) (437) (739) (697)
---------- --------- --------- ---------
14,367 14,015 28,358 27,448
---------- --------- --------- ---------
Net Income 21,629 25,895 34,283 42,827
Less: Preferred stock dividends 57 57 115 591
Loss on reacquired preferred stock -- (856) -- (855)
---------- --------- --------- ---------
Net Income for Common Stock $ 21,572 $ 24,982 $ 34,168 $ 41,381
========== ========= ========= =========
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
30
<PAGE>
SWEPCO
Consolidated Balance Sheets
Southwestern Electric Power Company
- --------------------------------------------------------------------------------
June 30, December 31,
1999 1998
(unaudited) (audited)
------------ ------------
(thousands)
ASSETS
Electric Utility Plant
Production $ 1,391,946 $1,397,924
Transmission 477,668 474,035
Distribution 933,433 916,293
General 330,468 321,136
Construction work in progress 50,062 48,523
------------ ------------
3,183,577 3,157,911
Less - Accumulated depreciation 1,350,847 1,317,057
------------ ------------
1,832,730 1,840,854
------------ ------------
Current Assets
Cash 3,783 4,444
Accounts receivable 59,620 40,430
Materials and supplies, at average cost 25,275 25,135
Fuel inventory, at average cost 60,785 40,238
Accumulated deferred income taxes 2,773 4,869
Prepayments and other 16,242 16,651
------------ ------------
168,478 131,767
------------ ------------
Deferred Charges and Other Assets 115,177 113,701
------------ ------------
$ 2,116,385 $2,086,322
============ ============
The accompanying notes to consolidated financial statements as they relate
to SWEPCO are an integral part of these statements.
31
<PAGE>
SWEPCO
Consolidated Balance Sheets
Southwestern Electric Power Company
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(unaudited) (audited)
----------- -----------
(thousands)
<S> <C> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock: $18 par value
Authorized: 7,600,000 shares
Issued and outstanding: 7,536,640 shares $ 135,660 $ 135,660
Paid-in capital 245,000 245,000
Retained earnings 280,760 300,592
----------- -----------
Total Common Stock Equity 661,420 52% 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 9% 110,000 8%
Long-term debt 496,104 39% 543,741 41%
----------- ------- ----------- -----
Total Capitalization 1,272,230 100% 1,339,700 100%
----------- ------- ----------- -----
Current Liabilities
Long-term debt due within twelve months 89,959 43,932
Advances from affiliates 87,354 40,705
Accounts payable 71,680 73,507
Payables to affiliates 31,205 37,795
Customer deposits 13,777 13,316
Accrued taxes 40,803 23,189
Accrued interest 14,218 14,275
Over-recovered fuel costs 5,797 5,378
Other 13,126 12,538
----------- -----------
367,919 264,635
----------- -----------
Deferred Credits
Accumulated deferred income taxes 391,961 398,664
Investment tax credits 59,931 62,213
Income tax related regulatory liabilities, net 2,848 4,931
Other 21,496 16,179
----------- -----------
476,236 481,987
----------- -----------
$2,116,385 $ 2,086,322
=========== ===========
</TABLE>
The accompanying notes to consolidated financial statements as they relate
to SWEPCO are an integral part of these statements.
32
<PAGE>
SWEPCO
Consolidated Statements of Cash Flows (unaudited)
Southwestern Electric Power Company
- --------------------------------------------------------------------------------
Six Months Ended
June 30,
------------------------
1999 1998
--------- ---------
(thousands)
OPERATING ACTIVITIES
Net Income $ 34,283 $ 42,827
Non-cash Items Included in Net Income
Depreciation and amortization 54,337 52,156
Deferred income taxes and investment tax credits (8,972) (3,163)
Changes in Assets and Liabilities
Accounts receivable (19,190) (5,561)
Fuel inventory (20,547) (11,160)
Accounts payable (1,413) (10,201)
Payables to affiliates (6,590) (1,620)
Accrued taxes 17,614 17,248
Other deferred credits 5,317 1,412
Other 186 (4,625)
--------- ---------
55,025 77,313
--------- ---------
INVESTING ACTIVITIES
Construction expenditures (45,250) (41,869)
Other (1,335) (2,466)
--------- ---------
(46,585) (44,335)
--------- ---------
FINANCING ACTIVITIES
Redemption of preferred stock (1) (27,988)
Retirement of long-term debt (1,635) (1,079)
Change in advances from affiliates 46,649 35,047
Payment of dividends (54,114) (29,067)
--------- ---------
(9,101) (23,087)
--------- ---------
Net Change in Cash and Cash Equivalents (661) 9,891
Cash and Cash Equivalents at Beginning of Year 4,444 2,298
--------- ---------
Cash and Cash Equivalents at End of Period $ 3,783 $ 12,189
========= =========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized (includes
distributions on Trust Preferred Securities) $ 26,152 $ 25,660
========= =========
Income taxes paid $ 18,031 $ 16,781
========= =========
The accompanying notes to consolidated financial statements as they relate to
SWEPCO are an integral part of these statements.
33
<PAGE>
SOUTHWESTERN ELECTRIC POWER COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED JUNE 30, 1999 AND 1998
SWEPCO's net income for common stock for the second quarter of 1999 was
$21.6 million, which was $3.4 million, or 14%, lower than the comparable period
in 1998. The decrease resulted primarily from decreased non-fuel related
revenues and increased maintenance expenses.
Electric operating revenues for the second quarter of 1999 were $242.9
million, which was $4 million, or 2%, lower than the comparable period in 1998.
The decrease resulted from lower fuel related revenues of $4.8 million due to
lower combined fuel expense and purchased power as discussed in the following
paragraph, and decreased non-fuel related revenues of $2.8 million. Non-fuel
related revenues were affected by a 4% decrease in retail MWH sales due
primarily to decreased weather related customer demand. These reductions were
partially offset by a provision for rate refund of $3.6 million recorded in the
second quarter of 1998. The provision for rate refund resulted from the annual
determination of cost of service formula rates for SWEPCO's wholesale customers.
Fuel and purchased power expense decreased for the second quarter of 1999
compared to the same period in 1998. Fuel expense decreased $6.4 million, or 7%,
due primarily to a decrease in average unit fuel costs. Average unit fuel costs
declined from $1.83 per MMbtu in 1998 to $1.70 per MMbtu in 1999 due to lower
spot market natural gas and coal prices. Purchased power expenses for the second
quarter of 1999 decreased $1.1 million, or 9%, compared to the same period in
1998 due primarily to a decrease in economy energy purchases.
Maintenance expenses increased during the second quarter of 1999 to $22.0
million, which was $8.9 million, or 67%, higher than the comparable period in
1998. The increase in maintenance expense resulted from increased power station
maintenance, tree trimming and overhead lines maintenance.
Income tax expenses associated with utility operations during the second
quarter of 1999 were $9.1 million, which was $2 million, or 18%, lower than the
comparable period in 1998 due to lower taxable income for the second quarter of
1999.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
SWEPCO's net income for common stock for the six months ended June 30,
1999 was $34.2 million, which was $7.2 million, or 17%, lower than the
comparable period in 1998. This decrease resulted primarily from decreased
non-fuel related revenues and increased maintenance expenses.
Electric operating revenues for the six months ended June 30, 1999 were
$440.0 million, which was $4.5 million, or 1%, lower than the comparable period
in 1998. This decrease was due primarily to decreased fuel revenues of $5.4
million due to lower combined fuel expense and purchased power as discussed in
the following paragraph, and decreased non-fuel related revenues of $2.7
million. Non-fuel related revenues were affected by a 3% decrease in retail MWH
sales due primarily to decreased weather-related customer demand. These
reductions were partially offset by a provision for a rate refund of $3.6
34
<PAGE>
million recorded in the second quarter of 1998. The provision for rate refund
resulted from the annual determination of cost of service formula rates for
SWEPCO's wholesale customers.
Fuel and purchased power expense decreased for the six months ended June
30, 1999 when compared to the same period in 1998. Fuel expense decreased $6.4
million, or 4%, due primarily to a decrease in average unit fuel costs from
$1.70 per MMbtu in 1998 to $1.66 per MMbtu in 1999, partially offset by
increased natural gas generation. The change in average unit fuel costs resulted
lower spot market natural gas and coal prices. Purchased power expenses for the
six months ended June 30, 1999 decreased $1.2 million, or 7%, compared to the
same period of 1998 due primarily to a decrease in economy energy purchases.
Maintenance expenses for the six months ended June 30, 1999 were $34.3
million, which was $10.8 million, or 46%, higher than the comparable period in
1998. This was due to increased power station maintenance, increased
tree-trimming maintenance and increased overhead lines maintenance.
Taxes, other than income for the six-month period ended June 30, 1999,
were $31.6 million, an increase of $2.5 million, or 9%, over the comparable
period in 1998. This increase was due to increased ad valorem taxes based upon
projected increases in property values and increased state franchise taxes.
Income tax expenses for the six months ended June 30, 1999 were $12.9 million,
which is $4.3 million, or 25%, lower than the comparable period of 1998, as a
result of lower taxable income.
35
<PAGE>
WTU
WEST TEXAS UTILITIES COMPANY
PART I. - FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
36
<PAGE>
WTU
Statements of Income (unaudited)
West Texas Utilities Company
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ---------------------
1999 1998 1999 1998
---------- --------- --------- ---------
(thousands)
<S> <C> <C> <C> <C>
Electric Operating Revenues $ 107,782 $104,353 $188,834 $188,301
---------- --------- --------- ---------
Operating Expenses and Taxes
Fuel 29,208 31,454 52,343 56,684
Purchased power 12,474 12,754 20,768 20,663
Other operating 20,039 20,474 40,172 42,861
Maintenance 6,282 3,720 10,460 6,906
Depreciation and amortization 10,850 10,719 21,624 21,389
Taxes, other than income 7,097 6,626 14,585 12,180
Income taxes 5,259 4,137 5,012 5,081
---------- --------- --------- ---------
91,209 89,884 164,964 165,764
---------- --------- --------- ---------
Operating Income 16,573 14,469 23,870 22,537
---------- --------- --------- ---------
Other Income and (Deductions)
Allowance for equity funds used
during construction -- 97 96 229
Other (152) 719 (350) 1,498
Non-operating income taxes 207 (68) 426 23
---------- --------- --------- ---------
55 748 172 1,750
---------- --------- --------- ---------
Income Before Interest Charges 16,628 15,217 24,042 24,287
---------- --------- --------- ---------
Interest Charges
Interest on long-term debt 5,088 5,088 10,176 10,176
Interest on short-term debt and other 1,369 1,085 2,531 2,088
Allowance for borrowed funds used
during construction (157) (177) (300) (288)
---------- --------- --------- ---------
6,300 5,996 12,407 11,976
---------- --------- --------- ---------
Net Income 10,328 9,221 11,635 12,311
Less: Preferred stock dividends 26 26 52 52
---------- --------- --------- ---------
Net Income for Common Stock $ 10,302 $ 9,195 $ 11,583 $ 12,259
========== ========= ========= =========
</TABLE>
The accompanying notes to financial statements as they relate to WTU
are an integral part of these statements.
37
<PAGE>
WTU
Balance Sheets
West Texas Utilities Company
- --------------------------------------------------------------------------------
June 30, December 31,
1999 1998
(unaudited) (audited)
------------ -------------
(thousands)
ASSETS
Electric Utility Plant
Production $ 426,209 $ 429,896
Transmission 215,965 213,630
Distribution 390,144 382,373
General 112,335 108,878
Construction work in progress 20,095 11,805
------------ -------------
1,164,748 1,146,582
Less - Accumulated depreciation 483,047 473,503
------------ -------------
681,701 673,079
------------ -------------
Current Assets
Cash 8,397 2,093
Accounts receivable 22,109 31,689
Materials and supplies, at average cost 14,077 14,191
Fuel inventory, at LIFO cost 14,022 13,186
Accumulated deferred income taxes -- 366
Under-recovered fuel costs 5,022 3,980
Prepayments and other 7,734 5,988
------------ -------------
71,361 71,493
------------ -------------
Deferred Charges and Other Assets
Deferred Oklaunion costs 13,046 14,910
Other 58,566 60,330
------------ -------------
71,612 75,240
------------ -------------
$ 824,674 $ 819,812
============ =============
The accompanying notes to financial statements as they relate to WTU
are an integral part of these statements.
38
<PAGE>
WTU
Balance Sheets
West Texas Utilities Company
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(unaudited) (audited)
------------ ----------
(thousands)
<S> <C> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
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 114,772 117,189
------------ ----------
254,222 49% 256,639 46%
------------ ------- ---------- -------
Preferred stock 2,482 --% 2,482 --%
Long-term debt 263,603 51% 303,519 54%
------------ ------- ---------- -------
Total Capitalization 520,307 100% 562,640 100%
------------ ------- ---------- -------
Current Liabilities
Long-term debt due within twelve months 40,000 --
Advances from affiliates 9,109 4,573
Payables to affiliates 18,893 19,917
Accounts payable 36,981 31,473
Accrued taxes 8,842 10,031
Accumulated deferred income taxes 17 --
Accrued interest 4,230 4,125
Other 3,713 3,797
------------ ----------
121,785 73,916
------------ ----------
Deferred Credits
Accumulated deferred income taxes 141,057 140,731
Investment tax credits 25,960 26,597
Income tax related regulatory liabilities, net 11,433 12,088
Other 4,132 3,840
------------ ----------
182,582 183,256
------------ ----------
$ 824,674 $ 819,812
============ ==========
</TABLE>
The accompanying notes to financial statements as they relate to WTU
are an integral part of these statements.
39
<PAGE>
WTU
Statements of Cash Flows (unaudited)
West Texas Utilities Company
- --------------------------------------------------------------------------------
Six Months Ended
June 30,
--------------------
1999 1998
--------- ---------
(thousands)
OPERATING ACTIVITIES
Net Income $ 11,635 $ 12,311
Non-cash Items Included in Net Income
Depreciation and amortization 22,086 21,919
Deferred income taxes and investment tax credits (583) (4,484)
Changes in Assets and Liabilities
Accounts receivable 9,580 (13,180)
Accounts payable 5,459 5,452
Payables to affiliates (1,024) (8,427)
Accrued taxes (1,189) 1,643
Fuel recovery (1,042) (244)
Other (1,280) 757
--------- ---------
43,642 15,747
--------- ---------
INVESTING ACTIVITIES
Construction expenditures (25,226) (22,864)
Other (2,596) (3,029)
--------- ---------
(27,822) (25,893)
--------- ---------
FINANCING ACTIVITIES
Payment of dividends (14,052) (8,052)
Change in advances from affiliates 4,536 1,690
--------- ---------
(9,516) (6,362)
--------- ---------
Net Change in Cash and Cash Equivalents 6,304 (16,508)
Cash and Cash Equivalents at Beginning of Year 2,093 20,613
--------- ---------
Cash and Cash Equivalents at End of Period $ 8,397 $ 4,105
========= =========
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $ 9,022 $ 8,714
========= =========
Income taxes paid $ 4,589 $ 5,540
========= =========
The accompanying notes to financial statements as they relate to WTU
are an integral part of these statements.
40
<PAGE>
WEST TEXAS UTILITIES COMPANY
RESULTS OF OPERATIONS
COMPARISON OF THE QUARTERS ENDED JUNE 30, 1999 AND 1998
WTU's net income for common stock for the second quarter in 1999 was $10.3
million, which was $1.1 million, or 12%, higher than the comparable period in
1998. The increase was due primarily to increased electric operating revenues as
a result of higher off-system sales, partially offset by increases in
maintenance expense and income taxes.
Electric operating revenues during the second quarter were $107.8 million,
which was $3.4 million, or 3%, higher than the comparable period in 1998. The
increase during the quarter was a result of higher off-system sales. The
increase was offset by a decline in residential sales as a result of milder
weather conditions and a decline in industrial sales due primarily to curtailed
oilfield-related activity.
Fuel expense during the second quarter of 1999 was $29.2 million, which
was $2.2 million, or 7%, lower than the comparable period in 1998, due primarily
to a change in the fuel mix. Generation shifted from more expensive gas
generation to less expensive coal generation.
Maintenance expense during the second quarter of 1999 was $6.3 million,
which was $2.6 million, or 69%, higher than the comparable period in 1998, due
to regularly scheduled generating plant maintenance, overhead lines maintenance
and an unscheduled generating plant outage.
Income tax expense associated with utility operations during the second
quarter of 1999 was $5.3 million, which was $1.1 million, or 27%, higher than
the comparable period in 1998, due to higher taxable income for the second
quarter of 1999.
Other income and deductions decreased 93% in the second quarter of 1999,
or $0.7 million. compared to the second quarter of 1998 partly due to a $0.4
million loss on disposition of property. Interest income also declined $0.3
million due to a decline in the balance of under-recovered fuel costs.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
WTU's net income for common stock for the six months ended June 30, 1999
was $11.6 million, which was $0.7 million, or 6%, lower than the comparable
period in 1998. The decrease resulted primarily from increased maintenance
expenses, interest expenses, and taxes, other than income as well as a reduction
in the amount of other income and deductions partially offset by a reduction of
other operating expense.
Electric operating revenues for the six months ended June 30, 1999 were
$188.8 million, which was $0.5 million higher than the comparable period in
1998. The increase resulted primarily from higher sales to wholesale customers.
The increase was offset by a decline in residential sales as a result of milder
weather conditions and a decline in industrial sales that occurred due primarily
to curtailed oilfield-related activity.
Fuel expense for the six months ended June 30, 1999 decreased $4.3
million, or 8%, from the comparable period in 1998. WTU's average unit fuel
costs declined from $1.89 per MMbtu in 1998 to $1.80 per MMbtu in 1999 as a
result of a decline in the spot market price of natural gas.
41
<PAGE>
Other operating expenses for the six months ended June 30, 1999 were $40.2
million, which was $2.7 million, or 6%, lower than the comparable period in
1998. The decrease was due to lower transmission expenses (See NOTE 2 LITIGATION
AND REGULATORY PROCEEDINGS - CPL and WTU complaint Versus Texas Utilities
Electric Company - Docket 17285) and administrative expenses.
Maintenance expenses for the six months ended June 30, 1999 were $10.5
million, which was $3.6 million, or 51%, higher than the comparable period in
1998. The increase was the result of scheduled generating plant maintenance
activities, overhead lines maintenance activities and an unscheduled generating
plant outage.
Taxes, other than income, for the six months ended June 30, 1999 were
$14.6 million, which was $2.4 million, or 20%, higher than the comparable period
in 1998, due to increased ad valorem taxes based on higher assessed property
values and higher state franchise taxes.
Other income and deductions for the six months ended June 30, 1999
decreased $1.6 million from the comparable period in 1998. The decrease is the
result of a $0.6 million in interest income associated with the outstanding
balance of under-recovered fuel costs. In addition, there was a decline of $0.6
million in income from merchandise operations and a $0.4 million loss on
disposition of property.
Interest expense for the six months ended June 30, 1999 was $12.4 million,
which was $0.4 million, or 4%, higher than the comparable period in 1998. The
increase in interest expense was associated with higher levels of short-term
debt.
42
<PAGE>
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
NOTE 8. LONG-TERM DEBT CSW, CPL, PSO
43
<PAGE>
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 and the Registrants' Combined Quarterly Report on Form 10-Q for the quarter
ended March 31, 1999.
The unaudited financial information reflects all adjustments of a normal
recurring nature which are, in the opinion of management of each 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.
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
accepted by 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 original condition.
CPL's decommissioning costs are accrued and paid to an external trust over
the expected service life of the STP units. The existing NRC operating licenses
permit the operation of STP Unit 1 until 2027 and Unit 2 until 2028. CPL pays
its decommissioning costs on an annual level cost based on the estimated future
cost to decommission STP, including escalation for expected inflation to the
expected time of decommissioning net of expected earnings on the trust fund.
CPL estimates its portion of the costs of decommissioning STP to be $289
million in 1999 dollars based on a study completed this year. CPL is accruing
and recovering 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 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. On June 30, 1999, the nuclear trust balance was $76.2
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
44
<PAGE>
statement items are translated at the average exchange rate for the applicable
period. 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.
One British pound equals the following U.S. Dollar amounts:
1999 1998
------------- --------------
At June 30 $1.58 $1.67
Average for 3 months
ended June 30 $1.60 $1.65
Average for 6 months
ended June 30 $1.61 $1.65
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 utilizes 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 upon privatization of the
United Kingdom's electric industry for the bulk trading of electricity between
generators and suppliers.
CSW also utilizes a variety of other derivative instruments including
swaps, forwards and options.
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.
45
<PAGE>
2. LITIGATION AND REGULATORY PROCEEDINGS
See the Registrants' Combined Annual Report on Form 10-K for the year
ended December 31, 1998 and the Registrants' Combined Quarterly Report on Form
10-Q for the quarter ended March 31, 1999 for additional discussion of
litigation and regulatory proceedings. Reference is also made to NOTE 3.
COMMITMENTS AND CONTINGENT LIABILITIES and ITEM 2. MD&A - RATES AND REGULATORY
MATTERS, CPL Rate Review - Docket No. 14965 for additional discussion of
litigation and regulatory matters.
Texas Legislation
In June 1999, legislation was enacted that will ultimately restructure the
electric utility industry in Texas. The new law gives Texas customers of
investor-owned utilities the opportunity to choose their electric provider
beginning on January 1, 2002. CSW is currently analyzing the impact of the Texas
electric utility industry restructuring legislation and expects to complete its
analysis of the legislation during the third quarter of 1999. The Texas
Commission has established numerous task forces, including representatives from
CPL, SWEPCO and WTU, to address various issues associated with the restructuring
legislation and to provide further guidance regarding implementation of the
restructuring. Based on the overall framework and objective of the legislation
regarding recovery of stranded costs and regulatory assets, no adjustments to
earnings were recorded in the second quarter of 1999 and no significant
adjustments to earnings are anticipated.
The foregoing 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.
Also see ITEM 2. MD&A - RECENT DEVELOPMENTS AND TRENDS, Texas for
additional information on legislation.
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 would be reduced by $13 million on May 1, 1998 with
an additional reduction on $13 million on May 1, 1999.
CPL filed an appeal of 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. Although CPL filed an
appeal of 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. 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
related to the AEP/CSW merger case. If the stipulated agreement is approved by
46
<PAGE>
the Texas Commission, and the AEP Merger is ultimately consummated, 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.
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 authority to carry the reconciled balance
forward into the next reconciliation period. During the reconciliation period of
July 1, 1995 through June 30, 1998, CPL incurred $828.5 million of 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 authority from the Texas
Commission to recover the reward 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%, resulting in a reward of $19.2
million.
CPL proposed that it be authorized to recover the Texas portion of 50% of
the reward by including 1/36th of this amount in Texas retail eligible fuel
expense each month for the three-year period following the Texas Commission's
order in this case. CPL further requested that it be authorized to apply the
amounts of the reward recovered through Texas retail eligible fuel expense
toward additional amortization of its STP deferred accounting regulatory asset.
The remaining 50% of the reward would be "banked" to be used against potential
future penalties or other disallowance of fuel costs. Hearings were held before
an ALJ in June 1999. In July 1999, all parties reached a settlement in
principle. The settlement includes a disallowance of $7.44 million and no STP
performance standard going forward. CPL will recognize such amounts at the time
Texas Commission approval is obtained. The settlement resolves all disputed
issues. The settlement documents are expected to be executed in August 1999.
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 alleging
underpayment of municipal franchise fees. The plaintiffs' petition asserts
various contract and tort claims against CPL and requests certain audit rights.
Although the plaintiffs' pleading seeks unspecified damages and attorneys' fees;
plaintiffs' attorneys have asserted in public statements that CPL's liability in
this matter could exceed $100 million plus punitive damages. 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 filed by the
City of San Juan. In January 1997, CPL filed an original petition at the Texas
Commission requesting the Texas Commission 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
47
<PAGE>
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 without a resolution.
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 underpayment of franchise fees,
CPL will extend the principles of that decision 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 currently cannot predict the outcome of the
municipal franchise fee litigation or its ultimate impact on CPL's results of
operations or financial position.
CPL and WTU Complaint vs. Texas Utilities Electric Company (Docket No.
17285)
A joint complaint filed by CPL and WTU with the Texas Commission asserted
that since January 1, 1997, Texas Utilities Electric Company had been
effectively double charging for transmission service within ERCOT. A proposal
for decision in February 1998 recommended approval of a CPL and WTU proposed
reduction of $15.5 million annually of payments to Texas Utilities Electric
Company. The Texas Commission approved the proposal in September 1998. Although
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.
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 fourth quarter of 1998, the U.S. Electric Operating
Companies and supporting intervenor signatories filed an uncontested offer of
settlement. The FERC issued an order on June 18, 1999, accepting the offer of
settlement. The FERC further ordered that appropriate refunds be made to reflect
the revised transmission coordination agreement. In the second quarter of 1999,
the FERC also issued an order accepting the U.S. Electric Operating Companies'
compliance filing of their open access transmission tariff. The FERC previously
ordered the compliance filing to review the method by which certain open access
transmission tariff customers were to be charged for transmission service. As a
result of that order, the transmission coordination agreement's current process
to allocate open access transmission tariff revenues required certain
corrections to ensure that each U.S. Electric Operating Company will be
allocated revenue in proportion to each company's respective revenue requirement
for the service it provides under the revised open access transmission tariff.
The U.S. Electric Operating Companies requested and received from the FERC a
deferral to make refunds under the transmission coordination agreement until
such time as the FERC issues an order accepting the revised transmission
48
<PAGE>
coordination agreement. Management believes that the revised transmission
coordination agreement will not have a material effect on CSW's or the U.S.
Electric Operating Companies' results of operations or financial condition.
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. The first trial date has been set for
September 1999. 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 effect on CSW's or PSO's results of
operations or financial condition.
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 propose a surcharge period or a total surcharge
amount, which would include interest through the entire surcharge period.
However, SWEPCO indicated that it had under-recovered Texas jurisdictional fuel
costs of approximately $16.8 million, including interest through December 1996.
Included in the $16.8 million balance are fuel related litigation expenses of
$5.0 million and an interest return of $2.0 million on the unamortized balance
of a fuel contract termination payment.
On December 8, 1997, SWEPCO and the other parties to the 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. 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 recoverable as 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.
On April 8, 1998, the ALJ issued a proposal for decision regarding the
only outstanding issue, recommending that SWEPCO be allowed to include
transmission equalization expense in eligible fuel expense. On May 19, 1998, the
Texas Commission reversed the ALJ and ordered an earnings reduction of
approximately $1.8 million, 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 ended 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 has agreed
to withdraw the appeal if the stipulated AEP merger settlement is approved by
the Texas Commission and the merger is consummated. See AEP MERGER for
additional information on the stipulated agreement.
49
<PAGE>
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 sued 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 contained in the counterclaims. On January 8, 1999,
SWEPCO and CLECO amended the claims against DHMV in the lawsuit to include a
request that the lignite mining agreement be terminated. This federal court suit
is set for trial beginning in January 2000.
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 effect on SWEPCO's results of
operations or financial condition.
WTU Fuel Reconciliation
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 the fuel and fuel-related expenses was approximately $295 million.
On December 31, 1997, WTU filed with the Texas Commission an application to
reconcile fuel costs and carry the reconciled balance. WTU did not seek a
surcharge of the reconciled balance.
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 proceeding 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. On April 29, 1999, the Texas Commission issued a final
order approving recovery of all eligible fuel and fuel-related expenses
requested by WTU except for $70,000, or approximately 0.02%, of the amount
requested.
Regulatory Draft Price Proposal for SEEBOARD
On August 12, 1999, OFGEM published its draft price proposals and results
from its current United Kingdom electricity distribution review. OFGEM has
recommended revenue reductions in SEEBOARD's distribution business. If adopted,
these proposals would reduce net income for SEEBOARD in the year 2000 by $40
million to $50 million, and $60 million to $75 million on an annual basis,
dependent upon the level of further cost reductions that can be achieved. CSW's
net income from SEEBOARD USA, its United Kingdom business segment, was $107
million for the twelve months ended June 30, 1999. In addition, OFGEM has
proposed the re-allocation of a further 13%, or $45 million of pre-tax costs out
of SEEBOARD's distribution business into its supply business, the impact of
which is expected to be broadly earnings neutral.
50
<PAGE>
SEEBOARD continues to analyze the draft recommendations and their
potential effects on earnings and to seek a reduction in the severity of OFGEM's
proposed recommendations. SEEBOARD is also currently analyzing future potential
cost reductions that can partially mitigate the impact of these proposals. OFGEM
is expected to finalize its recommendations in November 1999, which would take
effect in April 2000 for five years. SEEBOARD cannot predict whether the draft
price proposals ultimately will be adopted by OFGEM and, if they are adopted,
the final form of the proposals.
If OFGEM's draft price proposals for SEEBOARD ultimately were adopted
without change, implementation of the price proposals would have a material
adverse effect on the future results of operations of SEEBOARD USA and CSW. In
addition, implementation of the price proposals as drafted could adversely
affect the financial condition of SEEBOARD USA, but would not be expected to
adversely affect the financial condition of CSW.
3. COMMITMENTS AND CONTINGENT LIABILITIES
PSO Guarantee of Numanco Obligations
In April 1999, PSO received an order from the SEC authorizing an increase
in its guarantee authority related to the outstanding debt of Numanco, a PSO
business venture. PSO has guaranteed obligations for Numanco in the amount of
$29 million.
SWEPCO Henry W. Pirkey Power Plant
In connection with the South Hallsville lignite-mining contract for its
Henry W. Pirkey Power Plant, SWEPCO agreed, under certain conditions, to assume
the obligations of the mining contractor. As of June 30, 1999, the amount SWEPCO
may have to assume is approximately $68 million, which is the contractor's
actual obligation outstanding at June 30, 1999.
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 agreed to guarantee the
costs of mine reclamation up to $85 million in the event the work is not
completed by the third party miner. At June 30, 1999, the 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.
Both SWEPCO and Louisiana Generating LLC raised their offers for Cajun's
non-nuclear assets as the bankruptcy court confirmation hearings concluded on
June 25, 1999. A ruling in the case is expected sometime after the July 30, 1999
deadline for final legal briefs.
On June 22, 1999, SWEPCO increased its base bid to $990.5 million (from
the previous bid of $940.5 million). On June 24, 1999, Louisiana Generating LLC
raised its base bid to $995 million (from its previous bid of $960 million).
Subsequently, on July 28, 1999, SWEPCO increased its base bid from $990.5
million to $1.0255 billion. The July 1999 SWEPCO Plan replaces all previous
plans filed by SWEPCO. The SWEPCO and Louisiana Generating LLC bids have the
same interest adjustment mechanism. Under the July 1999 SWEPCO Plan, a SWEPCO
affiliate would acquire all the non-nuclear assets of Cajun. On July 30, 1999,
Louisiana Generating LLC filed an objection to SWEPCO's latest bid, claiming
that no further bids were permitted after the confirmation hearings concluded on
June 25, 1999. In order to be confirmed by the bankruptcy court, a plan must
51
<PAGE>
meet more than a dozen specific criteria of the U.S. Bankruptcy Code. The
trustee for the Cajun Electric estate, who formally sponsored the Louisiana
Generating LLC bid for the past three years, withdrew as plan proponent on June
22, 1999.
Consummation of the July 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 July 1999 SWEPCO Plan is ultimately confirmed by the
bankruptcy court, SWEPCO expects to finance the $1.0255 billion required to
consummate the acquisition of Cajun's non-nuclear assets through a combination
of external non-recourse borrowings and internally generated funds. There can be
no assurance that the bankruptcy court will confirm the July 1999 SWEPCO Plan
or, if it is confirmed, that federal and state regulators will approve it. As of
June 30, 1999, SWEPCO had deferred $12.7 million in costs related to the Cajun
acquisition on its consolidated balance sheet, which would be expensed if the
July 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. Since then, SWEPCO has worked with Mississippi
Power investigating the extent of contamination at the site. The sampling
results indicate contamination at the property as well as the possible
contamination of an adjacent property. After submitting a risk assessment, 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 the site has been an industrial/commercial site
for more than 100 years, and Mississippi Power plans to continue this type of
usage. Mississippi Power and SWEPCO presented a report to the MDEQ demonstrating
that the ground water on the site is not potable, 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 a projection of cost to remediate the property.
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 has incurred approximately $200,000 for its portion of the cleanup
of this site and based on 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.
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. Planned
compliance activities, including activities that have been conducted to
determine the source of copper, were presented by SWEPCO to the EPA during an
administrative meeting, held on August 13, 1998. Negotiations continue between
SWEPCO and the EPA. Although the EPA has issued an administrative order and
imposed a penalty in the range of $40 thousand to $50 thousand, the amount of
the ultimate penalty has not been determined by the EPA.
SEEBOARD London Underground Commitment
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 transportation system. Power Asset Development Company, an associate
52
<PAGE>
of SEEBOARD, has committed (pound)73 million, or $115 million, for costs
associated with its contract related to the London Underground transportation
system.
SEEBOARD Third Party Pension Litigation
In the U.K., National Grid Group and National Power have been involved in
continuing litigation regarding their use of actuarial surpluses set forth in
the electricity industry's occupational pension plan, the ESPS. A High Court
decision in favor of the National Grid Group and National Power was appealed. On
February 10, 1999 the U.K. Court of Appeal ruled that the particular
arrangements made by these corporations to dispose of part of the surplus were
invalid due to procedural defects. This decision was confirmed at a later
hearing of the U.K. Court of Appeal held in May 1999, although an opportunity
for an appeal to be taken to the House of Lords, the highest court of appeal in
the U.K., was granted.
SEEBOARD employees are members of the ESPS, and SEEBOARD has made similar
use of its actuarial surplus. As a result of subsequent legal clarification of
certain issues arising from the hearing held in May 1999, the potential impact
of the ruling on SEEBOARD has increased. The amount of the payments cancelled by
SEEBOARD, both for past and future liabilities, amounts, in the aggregate, to
approximately $70 million, excluding interest.
The U.K. Court of Appeal did not order the National Grid Group or National
Power to make payment into the ESPS, and the court indicated that any
requirement to make such payments would be extreme since the ESPS already is in
surplus. In the event that the court finally decides a payment by SEEBOARD into
the ESPS is necessary, such a payment is likely to create additional pension
fund surplus, which the company should then be able to utilize over the next
several years.
The National Grid Group has indicated its intention to appeal to the House
of Lords. The final outcome of this appeal cannot presently be determined.
Management is unable currently to predict the amount of any payment that it may
be required to make to ESPS or the effect, if any, of the ultimate outcome of
the appeal on CSW's results of operations and financial condition.
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.
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. In addition to funds already spent, at June 30,
1999, CSW Energy had committed costs of approximately $20 million, including
development, construction and financing costs. The natural gas-fired facility
began simple cycle operation of 330 MW in July 1999 and is scheduled to commence
combined cycle operation by the end of 1999. Pursuant to AEP's and CSW's
stipulated settlement with several intervenors in the state of Texas related to
the AEP Merger, CSW Energy will sell 250 MW of Frontera after 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 Eastman Chemical Company to
construct and operate a 440-MW cogeneration facility in Longview, Texas. This
facility will be known as the Eastex Cogeneration Project. Construction of the
facility is scheduled to begin in the fourth quarter of 1999, with expected
operation in 2001. Excess electricity generated by the plant will be sold by CSW
Energy in the wholesale electricity market. Since Eastex will be built as a
qualifying facility, CSW Energy will be required to sell 50% of the plant prior
to commercial operation.
CSW International and its 50% partner, Scottish Power plc, have entered
into a joint venture to construct and operate the South Coast power project, a
400-MW combined cycle gas turbine power station in Shoreham, United Kingdom. CSW
53
<PAGE>
International has guaranteed approximately (pound)19 million of the (pound)190
million projected construction costs, and the permanent financing is
unconditionally guaranteed by the project. Construction of the project began in
March 1999, and 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 totaling approximately $29
million, $11 million, and $233 million, respectively, as of June 30, 1999.
4. COMMON STOCK AND DIVIDENDS
CSW's basic earnings per share of common stock for a period are computed
by dividing net income for common stock by the average number of common shares
outstanding for the period. CSW's dividends per common share reflect the
dividend paid for each period.
At June 30, 1999, approximately $1.3 billion of CSW subsidiary company
retained earnings were available for payment of cash dividends to CSW. The
amount of retained earnings available for dividends from each of the U.S.
Electric Operating Companies at June 30, 1999 is as follows:
CPL - $730 million PSO - $132 million SWEPCO - $281 million WTU - $115 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 share 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.
54
<PAGE>
The electric systems of AEP and CSW will operate on an integrated and
coordinated basis as required by the Holding Company Act. AEP and CSW project
fuel savings of approximately $98 million over a 10-year period resulting from
the coordinated operation of the combined company, which will be passed through
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.
Cook Nuclear Plant Announcement
On June 25, 1999, AEP announced a comprehensive plan to restart the idle
Cook nuclear power plant. Unit 2 is scheduled to return to service in April
2000, and Unit 1 is scheduled to return to service in September 2000. AEP stated
that its announcement follows a comprehensive systems readiness review of all
operating systems at Cook nuclear power plant and a cost/benefit analysis of
whether to restart the plant or shut it down completely. Plant officials
originally shut down both units of the facility, located in Bridgman, Michigan,
in September 1997 because of questions raised during a design inspection by the
NRC. AEP estimated that its costs to restart the idle plant should be
approximately $574 million, of which it already had incurred $192 million.
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.
FERC
On April 30, 1998, AEP and CSW jointly filed a request with the FERC for
approval of their proposed merger.
On May 25, 1999, AEP and CSW announced they had reached a settlement with
the FERC trial staff resolving competition and rate issues relating to the
proposed merger. On July 13, 1999, AEP and CSW reached an additional settlement
with the FERC trial staff resolving additional issues. The settlement has been
submitted to the FERC for approval.
Under the terms of the settlements, in June 1999 AEP filed with the FERC a
regional transmission organization proposal whereby it will transfer the
operation and control of AEP's bulk transmission facilities. The transmission
facilities subject to this commitment are located in Indiana, Kentucky,
Michigan, Ohio, Tennessee, Virginia and West Virginia.
55
<PAGE>
The settlements also cover rates for transmission services and ancillary
services as well as resolving issues related to the system integration
agreement, the transmission reassignment tariff and the system transmission
integration agreement. The settlements confirm, subject to FERC guidance on
certain elements, that the proposed generation divestiture will satisfy the
market power concerns of the FERC staff. In their merger filing with the FERC,
AEP and CSW proposed divesting ownership of 300 MW of generation capacity at
CSW's Northeastern Power Station Units 3 and 4 in Oklahoma and 250 MW of
generation capacity at the Frontera power plant, a merchant plant being
constructed in Texas by a CSW subsidiary.
On June 28, 1999, AEP and CSW filed a motion asking the FERC to
waive the requirement for a post-hearing decision by the ALJ and consideration
of the matter by the FERC based on the hearing record and briefs. The FERC
subsequently issued an order requiring the ALJ to issue an initial decision as
soon as possible, but no later than November 24, 1999. The FERC order also set a
procedural schedule that should allow the FERC to issue a final order in the
first quarter of 2000.
AEP and CSW have reached settlements with the Missouri Public Service
Commission and three CPL wholesale customers in the FERC merger proceeding.
Hearings at the FERC concluded July 19, 1999.
Arkansas
On June 12, 1998, AEP and CSW jointly filed a request with the Arkansas
Commission for approval of the proposed merger. The Arkansas Commission issued
an order approving the merger on August 13, 1998, subject to approval of the
associated regulatory plan. 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 conditioned its final order 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 the proposed merger and for a finding that the merger
is in the public interest.
On July 29, 1999, the Louisiana Commission granted conditional approval of
the pending merger between AEP and CSW. In granting approval the Louisiana
Commission also approved a stipulated settlement with the Louisiana Commission
staff.
Under the stipulated settlement, AEP and CSW have agreed to share with
SWEPCO's Louisiana customers merger savings created as a result of the merger
over the eight years following its completion. A savings mechanism will be
implemented to calculate merger savings annually. AEP and CSW estimate that the
customer rate credits in Louisiana will total more than $18 million during that
eight-year period. During the second year following completion of the merger,
customers will begin receiving a monthly rate credit for 50% of calculated
merger savings. This credit will be updated annually and continue for the
remainder of the eight-year period following the merger's completion. The
settlement also includes:
- - A base rate ceiling set at current rate levels for a five year period
subject to certain conditions;
- - Sharing of the benefits for off-system sales;
56
<PAGE>
- - Establishment of conditions for affiliate transactions with other AEP and
CSW subsidiaries;
- - Provisions to ensure continued quality of service; and
- - Provisions to hold SWEPCO's Louisiana customers harmless from adverse
effects of the merger, if any.
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, PSO and AEP
and CSW. The Oklahoma Commission order is currently the subject of appeals filed
by the Municipal Electric Systems of Oklahoma, Inc. and the Oklahoma Association
of Electric Cooperatives.
Under the partial settlement agreement, AEP and CSW would: (i) share
merger savings with Oklahoma customers as well as AEP shareholders, effective
with the merger closing; (ii) not increase Oklahoma base rates prior to January
1, 2003; (iii) file by December 31, 2001 with the FERC an application to join a
regional transmission organization; and (iv) 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 would be split between Oklahoma customers and AEP
shareholders, with customers receiving approximately 55% of the savings.
The Oklahoma Commission has withdrawn its opposition to the merger at the
FERC.
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, the
merger is completed as planned and issues are resolved associated with CPL,
SWEPCO and WTU rate and fuel 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.
57
<PAGE>
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.
Hearings on the merger in Texas began August 9, 1999 and concluded on
August 10, 1999. As the hearings began, settlements were reached with all but
one of the parties in the case. The settling parties are all wholesale electric
customers of CSW's Texas U.S. Electric Operating Companies, and the settlements
call for the withdrawal of their opposition to the merger in all regulatory
approval proceedings. A final order is expected in the fourth quarter of 1999 or
early 2000.
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. CPL will request an extension for a license transfer with the NRC since
the merger will not close by year-end.
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 pending 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 filed petitions opposing the proposed
merger at the SEC. On July 23, 1999, AEP and CSW filed a brief in response to
the intervenor petitions at the SEC.
On July 29, 1999, applications were made with the FCC to authorize the
transfer of control of licenses of several CSW entities to AEP. The granting of
such authority is expected by the completion of the proposed merger.
On July 25, 1999 AEP and CSW submitted filings to the Department of
Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
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
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
58
<PAGE>
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 related to the pending merger between
AEP and CSW. As part of the settlement, the IBEW local unions have withdrawn
their opposition to the merger.
On May 26, 1999, AEP and CSW announced that they had reached a settlement
agreement with the Kentucky Attorney General and several AEP customers in
Kentucky addressing matters pertinent to Kentucky regarding the pending merger
between AEP and CSW. The Kentucky Public Service Commission has approved the
settlement.
On August 6, 1999, AEP announced that they ratified a settlement agreement
with local unions of the UWUA representing employees of AEP. The settlement
agreement covered issues raised in the pending merger between AEP and CSW. As
part of the settlement, the UWUA local unions will not oppose the merger.
Completion of the Merger
AEP and CSW have targeted consummation of the AEP Merger in the first
quarter of 2000. 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 assurance 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 June 30, 1999, CSW had deferred $34.5 million in costs related to
the AEP 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
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 each business segment
for the three-month and six-month periods of 1999 and 1998, respectively,
covered is set forth below.
59
<PAGE>
U.S. U.K. Other and CSW
Electric Electric Reconciling Consolidated
-----------------------------------------------
(millions)
Three months ended June 30, 1999
Operating Revenues $892 $362 $65 $1,319
Income/(Loss) from Continuing
Operations 97 17 (11) 103
Three months ended June 30, 1998
Operating Revenues $885 $403 $56 $1,344
Income/(Loss) from Continuing
Operations 102 20 (15) 107
U.S. U.K. Other and CSW
Electric Electric Reconciling Consolidated
-----------------------------------------------
(millions)
Six months ended June 30, 1999
Operating Revenues $1,589 $837 $118 $2,544
Income/(Loss) from Continuing
Operations 132 44 (28) 148
Total Assets at June 30, 1999 9,008 2,856 2,030 13,894
Total Assets at December 31, 1998 8,994 3,032 1,871 13,897
Six months ended June 30, 1998
Operating Revenues $1,574 $935 $92 $2,601
Income/(Loss) from Continuing
Operations 140 53 (27) 166
Total Assets at June 30, 1998 9,105 2,997 1,840 13,942
Total Assets at December 31, 1997 9,186 2,931 1,499 13,616
7. SOUTH AMERICAN INVESTMENTS
Through June 30, 1999, CSW International had purchased a 36% equity
interest in Vale for $80 million. 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 of debt as a loan.
In mid-January 1999, amid market instability, the Brazilian government
abandoned its policy of pegging the Brazilian Real in a broad range against the
dollar. This action resulted in a 48% devaluation of the Brazilian currency by
the end of June 1999. Vale is unfavorably affected by the devaluation primarily
due to the revaluation of foreign denominated debt.
CSW International has a put option, which, if exercised, requires Vale to
purchase CSW International shares at a minimum price equal to the purchase price
for Vale. 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 are recognized. At June 30, 1999, CSW International had deferred
losses, after tax, of approximately $19 million. CSW International views its
investment in Vale as a long-term investment, which has significant long-term
value. Management will continue to closely evaluate the changes in the Brazilian
economy and its impact on CSW International's investment in Vale.
As of June 30, 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
June 30, 1999 was $72 million. The reduction in the carrying value of this
investment has been reflected in Other Comprehensive Income in CSW's
60
<PAGE>
Consolidated Statements of Stockholders' Equity. Management views its investment
in Chile as a long-term investment strategy and believes this investment
continues to have significant long-term value and that it is recoverable.
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.
8. LONG-TERM DEBT
During the second quarter of 1999, CPL reacquired $125 million of FMBs.
CPL used short-term borrowings and internally generated cash to fund this
redemption.
In July 1999, the Oklahoma Development Finance Authority sold for the
benefit of PSO $33.7 million of 4-7/8% unsecured tax exempt pollution control
revenue bonds. The bonds mature in fifteen years but will be subject to
remarketing and an interest rate reset in five years. In late August 1999, the
proceeds will be used to refund $33.7 million aggregate principal amount of
outstanding PSO 5.9% Series A bonds due December 1, 2007.
61
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Reference is made to Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Registrants' Combined Annual
Report on Form 10-K for the year ended December 31, 1998 and the Registrants'
Combined Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
Reference is also made to each Registrant's unaudited Financial Statements and
related Notes to Financial Statements included in this document. The information
should be read in conjunction with, and is essential to understanding, the
following discussion and analysis.
RESULTS OF OPERATIONS
Reference is made to ITEM 1. FINANCIAL STATEMENTS for each of the
Registrants' RESULTS OF OPERATIONS for the three month and six month periods
ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Overview of CSW Operating, Investing, and Financing Activities
Net cash inflows from operating activities decreased $155 million to $248
million for the six month period ended June 30, 1999 compared to the same period
last year. The decrease was due primarily to increased payments on accounts
payable. Also contributing to the decrease in cash flows from operating
activities were decreased fuel recoveries from customers. Partially offsetting
the decrease in cash flows from operating activities was a lower accounts
receivable balance in 1999 compared to 1998 resulting from more favorable
collections. Further offsetting the decrease in cash flows from operating
activities was the absence in 1999 of a refund paid to CPL customers in the
first six months of 1998.
Net cash outflows from investing activities increased $30 million to $365
million during the first six months of 1999 compared to the same period a year
ago. The increase in net cash outflows from investing activities resulted
primarily from higher levels of spending in 1999 for CSW Energy projects and
U.S. Electric Operating Companies' construction expenditures. Also contributing
to the increase in net cash outflows from investing activities was the absence
in 1999 of CSW International's Altamira partner, Alpek, which assumed a 50%
obligation related to the power plant project. Partially offsetting the increase
in cash outflows from investing activities was the absence in 1999 of a CSW
International loan to Vale.
Net cash inflows from financing activities increased $12 million to $92
million for the first six months of 1999 compared to the same period in 1998.
The increase was due primarily to the absence in 1999 of the repayment of a $60
million variable rate bank loan at CSW Services and the redemption of $28
million of preferred stock at SWEPCO. Partially offsetting the increase in net
cash inflows was a higher level of FMB reacquisitions in 1999 compared to 1998.
Construction Expenditures
CSW's construction expenditures, including allowance for funds used during
construction, totaled $331 million for the six months ended June 30, 1999. Such
expenditures for the U.S. Electric Operating Companies totaled $80 million, $49
million, $46 million and $26 million, for CPL, PSO, SWEPCO and WTU,
respectively. Construction expenditures at the U.S. Electric Operating Companies
were due primarily to improvements to existing production, transmission and
distribution facilities. The improvements are required to meet the needs of new
customers and the changing requirements of existing customers. CSW anticipates
that substantially all funds required for construction for the remainder of the
year will be provided from internal sources.
62
<PAGE>
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 June 30, 1999, CSW had revolving credit facilities totaling $1.4
billion to back up its commercial paper program. On June 25, 1999, CSW Credit
closed its third amended and restated secured revolving credit agreement. The
$1.2 billion facility will expire on June 23, 2000.
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.
In July 1999, the Oklahoma Development Finance Authority sold for the
benefit of PSO $33.7 million of 4-7/8% unsecured tax-exempt pollution control
revenue bonds. The bonds mature in fifteen years but will be subject to
remarketing and an interest rate reset in five years. In late August 1999, the
proceeds will be used to refund $33.7 million aggregate principal amount
outstanding of PSO's 5.9% Series A bonds due December 1, 2007.
The foregoing discussion of liquidity and capital resources 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.
During the second quarter of 1999, CPL reacquired $125 million of FMBs.
CPL used short-term borrowings and internally generated cash to fund this
reacquisition.
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 share 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
63
<PAGE>
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. AEP and CSW project
fuel savings of approximately $98 million over a 10-year period resulting from
the coordinated operation of the combined company, which will be passed through
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.
Cook Nuclear Plant Announcement
On June 25, 1999, AEP announced a comprehensive plan to restart the idle
Cook nuclear power plant. Unit 2 is scheduled to return to service in April
2000, and Unit 1 is scheduled to return to service in September 2000. AEP stated
that its announcement follows a comprehensive systems readiness review of all
operating systems at Cook nuclear power plant and a cost/benefit analysis of
whether to restart the plant or shut it down completely. Plant officials
originally shut down both units of the facility, located in Bridgman, Michigan,
in September 1997 because of questions raised during a design inspection by the
NRC. AEP estimated that its costs to restart the idle plant should be
approximately $574 million, of which it already had incurred $192 million.
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.
FERC
On April 30, 1998, AEP and CSW jointly filed a request with the FERC for
approval of their proposed merger.
On May 25, 1999, AEP and CSW announced they had reached a settlement with
the FERC trial staff resolving competition and rate issues relating to the
proposed merger. On July 13, 1999, AEP and CSW reached an additional settlement
with the FERC trial staff resolving additional issues. The settlement has been
submitted to the FERC for approval.
64
<PAGE>
Under the terms of the settlements, in June 1999 AEP filed with the FERC a
regional transmission organization proposal whereby it will transfer the
operation and control of AEP's bulk transmission facilities. The transmission
facilities subject to this commitment are located in Indiana, Kentucky,
Michigan, Ohio, Tennessee, Virginia and West Virginia.
The settlements also cover rates for transmission services and ancillary
services as well as resolving issues related to the system integration
agreement, the transmission reassignment tariff and the system transmission
integration agreement. The settlements confirm, subject to FERC guidance on
certain elements, that the proposed generation divestiture will satisfy the
market power concerns of the FERC staff. In their merger filing with the FERC,
AEP and CSW proposed divesting ownership of 300 MW of generation capacity at
CSW's Northeastern Power Station Units 3 and 4 in Oklahoma and 250 MW of
generation capacity at the Frontera power plant, a merchant plant being
constructed in Texas by a CSW subsidiary.
On June 28, 1999, AEP and CSW filed a motion asking the FERC to
waive the requirement for a post-hearing decision by the ALJ and consideration
of the matter by the FERC based on the hearing record and briefs. The FERC
subsequently issued an order requiring the ALJ to issue an initial decision as
soon as possible, but no later than November 24, 1999. The FERC order also set a
procedural schedule that should allow the FERC to issue a final order in the
first quarter of 2000.
AEP and CSW have reached settlements with the Missouri Public Service
Commission and three CPL wholesale customers in the FERC merger proceeding.
Hearings at the FERC concluded July 19, 1999.
Arkansas
On June 12, 1998, AEP and CSW jointly filed a request with the Arkansas
Commission for approval of the proposed merger. The Arkansas Commission issued
an order approving the merger on August 13, 1998, subject to approval of the
associated regulatory plan. 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 conditioned its final order 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 the proposed merger and for a finding that the merger
is in the public interest.
On July 29, 1999, the Louisiana Commission granted conditional approval of
the pending merger between AEP and CSW. In granting approval the Louisiana
Commission also approved a stipulated settlement with the Louisiana Commission
staff.
Under the stipulated settlement, AEP and CSW have agreed to share with
SWEPCO's Louisiana customers merger savings created as a result of the merger
over the eight years following its completion. A savings mechanism will be
implemented to calculate merger savings annually. AEP and CSW estimate that the
customer rate credits in Louisiana will total more than $18 million during that
eight-year period. During the second year following completion of the merger,
customers will begin receiving a monthly rate credit for 50% of calculated
65
<PAGE>
merger savings. This credit will be updated annually and continue for the
remainder of the eight-year period following the merger's completion. The
settlement also includes:
- - A base rate ceiling set at current rate levels for a five year period
subject to certain conditions;
- - Sharing of the benefits for off-system sales;
- - Establishment of conditions for affiliate transactions with other AEP and
CSW subsidiaries;
- - Provisions to ensure continued quality of service; and
- - Provisions to hold SWEPCO's Louisiana customers harmless from adverse
effects of the merger, if any.
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, PSO and AEP
and CSW. The Oklahoma Commission order is currently the subject of appeals filed
by the Municipal Electric Systems of Oklahoma, Inc. and the Oklahoma Association
of Electric Cooperatives.
Under the partial settlement agreement, AEP and CSW would: (i) share
merger savings with Oklahoma customers as well as AEP shareholders, effective
with the merger closing; (ii) not increase Oklahoma base rates prior to January
1, 2003; (iii) file by December 31, 2001 with the FERC an application to join a
regional transmission organization; and (iv) 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 would be split between Oklahoma customers and AEP
shareholders, with customers receiving approximately 55% of the savings.
The Oklahoma Commission has withdrawn its opposition to the merger at the
FERC.
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, the
merger is completed as planned and issues are resolved associated with CPL,
SWEPCO and WTU rate and fuel 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
66
<PAGE>
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.
Hearings on the merger in Texas began August 9, 1999 and concluded on
August 10, 1999. As the hearings began, settlements were reached with all but
one of the parties in the case. The settling parties are all wholesale electric
customers of CSW's Texas U.S. Electric Operating Companies, and the settlements
call for the withdrawal of their opposition to the merger in all regulatory
approval proceedings. A final order is expected in the fourth quarter of 1999 or
early 2000.
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. CPL will request an extension for a license transfer with the NRC since
the merger will not close by year-end.
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 pending 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 filed petitions opposing the proposed
merger at the SEC. On July 23, 1999, AEP and CSW filed a brief in response to
the intervenor petitions at the SEC.
On July 29, 1999, applications were made with the FCC to authorize the
transfer of control of licenses of several CSW entities to AEP. The granting of
such authority is expected by the completion of the proposed merger.
On July 25, 1999 AEP and CSW submitted filings to the Department of
Justice under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
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.
67
<PAGE>
AEP
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 related to the pending merger between
AEP and CSW. As part of the settlement, the IBEW local unions have withdrawn
their opposition to the merger.
On May 26, 1999, AEP and CSW announced that they had reached a settlement
agreement with the Kentucky Attorney General and several AEP customers in
Kentucky addressing matters pertinent to Kentucky regarding the pending merger
between AEP and CSW. The Kentucky Public Service Commission has approved the
settlement.
On August 6, 1999, AEP announced that they ratified a settlement agreement
with local unions of the UWUA representing employees of AEP. The settlement
agreement covered issues raised in the pending merger between AEP and CSW. As
part of the settlement, the UWUA local unions will not oppose the merger.
Completion of the Merger
AEP and CSW have targeted consummation of the AEP Merger in the first
quarter of 2000. 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 assurance 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 June 30, 1999, CSW had deferred $34.5 million in costs related to
the AEP Merger on its consolidated balance sheet, which will be charged to
expense if AEP and CSW are not successful in completing their proposed merger.
The foregoing 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.
68
<PAGE>
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.
Both SWEPCO and Louisiana Generating LLC raised their offers for Cajun's
non-nuclear assets as the bankruptcy court confirmation hearings concluded on
June 25, 1999. A ruling in the case is expected sometime after the July 30, 1999
deadline for final legal briefs.
On June 22, 1999, SWEPCO increased its base bid to $990.5 million (from
the previous bid of $940.5 million). On June 24, 1999, Louisiana Generating LLC
raised its base bid to $995 million (from its previous bid of $960 million).
Subsequently, on July 28, 1999, SWEPCO increased its base bid from $990.5
million to $1.0255 billion. The July 1999 SWEPCO Plan replaces all previous
plans filed by SWEPCO. The SWEPCO and Louisiana Generating LLC bids have the
same interest adjustment mechanism. Under the July 1999 SWEPCO Plan, a SWEPCO
affiliate would acquire all the non-nuclear assets of Cajun. On July 30, 1999,
Louisiana Generating LLC filed an objection to SWEPCO's latest bid, claiming
that no further bids were permitted after the confirmation hearings concluded on
June 25, 1999. In order to be confirmed by the bankruptcy court, a plan must
meet more than a dozen specific criteria of the U.S. Bankruptcy Code. The
trustee for the Cajun Electric estate, who formally sponsored the Louisiana
Generating LLC bid for the past three years, withdrew as plan proponent on June
22, 1999.
Consummation of the July 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 July 1999 SWEPCO Plan is ultimately confirmed by the
bankruptcy court, SWEPCO expects to finance the $1.0255 billion required to
consummate the acquisition of Cajun's non-nuclear assets through a combination
of external non-recourse borrowings and internally generated funds. There can be
no assurance that the bankruptcy court will confirm the July 1999 SWEPCO Plan
or, if it is confirmed, that federal and state regulators will approve it. As of
June 30, 1999, SWEPCO had deferred $12.7 million in costs related to the Cajun
acquisition on its consolidated balance sheet, which would be expensed if the
July 1999 SWEPCO Plan is not ultimately successful.
The foregoing 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 and legislative initiatives in the U.S. Congress
Several bills have been introduced in the 106th U.S. Congress which
provide for the restructuring and/or deregulating of the electric utility
industry. Most of the bills seek to clarify state authority to mandate retail
choice, repeal the Holding Company Act, repeal prospectively the Public Utility
Regulatory Policies Act of 1978, expand the FERC authority over public power
entities, address transmission reliability, and other issues. No legislation has
been reported out of any committee at this time. Management cannot predict the
ultimate outcome of any legislative initiatives.
Holding Company Act
Holding Company Act repeal legislation has been introduced again this
Congress in both the U.S. Senate and the U.S. House of Representatives. The
Senate Bill (S. 313) has been reported out of the U.S. Senate Banking committee
69
<PAGE>
and awaits final consideration by the full U.S. Senate. The House Bill (H.R.
2363) is being considered by the U.S. House Commerce Committee. Management
cannot predict the ultimate outcome of these, or similar, legislative
initiatives.
Industry Restructuring Legislation 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 Texas and Arkansas in 1999. Legislative activity in
Louisiana has, to date, stopped short of any such definitive action.
Oklahoma
In 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 Oklahoma Legislature based
on the work performed by these working groups. The Task Force's final report
will be provided to the Oklahoma 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.
Arkansas
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 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.
Texas
On June 18, 1999, legislation was signed into law in Texas that will
restructure the electric utility industry in that state. The new law gives Texas
customers of investor-owned utilities the opportunity to choose their electric
provider beginning January 1, 2002. The legislation also provides a rate freeze
until that date followed by a 6% rate reduction for residential and small
commercial customers, additional rate reductions for low income customers and a
number of customer protections. Rural electric cooperatives and municipal
electric systems can choose whether to participate in retail competition.
70
<PAGE>
Some of the key provisions of the legislation include:
- - Beginning January 1, 2002, retail customers of investor-owned electric
companies will be able to choose their electric provider. The affiliated
retail electric provider of the utility that serves the customer on December
31, 2001 will continue to serve the customer unless the customer chooses
another retail electric provider. Delivery of the electricity will continue
to be the responsibility of the local electric utility company at regulated
prices. Each utility must unbundle its business activities into a retail
electric provider, a power generation company and a transmission and
distribution utility.
- - Retail electric cooperatives and municipal electric systems can choose
whether to participate in retail competition.
- - Investor-owned utilities must freeze their rates effective September 1, 1999,
through the start of competition on January 1, 2002. Investor-owned utilities
at January 1, 2002 will lower rates for residential and small commercial
customers by 6%. This reduced rate is known as the "Price to Beat," which
will be available to those customers for five years.
- - The legislation establishes a system benefit fund for low-income customer
assistance, customer education and to offset reductions in school property
tax revenues. The fund will be funded through a charge on retail electric
providers that can be set by the Texas Commission at up to 65 cents per MWH.
- - Electric utilities are allowed to recover all of their net, verifiable,
non-mitigable stranded costs that otherwise may not be recoverable in the
future competitive market. A majority of those regulatory assets and stranded
costs can be recovered through securitization, which is a financing process
to recover regulatory assets and stranded costs through the use of debt that
lowers the carrying cost of assets compared to conventional utility financing
methods.
- - Each year during the 1999 through 2001 rate freeze period, utilities with
stranded costs are required to apply any earnings in excess of the most
recently approved cost of capital (if issued on or after January 1, 1992) to
reduce stranded costs. Utilities without stranded costs must either flow such
amounts back to customers or make capital expenditures to improve
transmission or distribution facilities or to improve air quality.
- - Investor-owned utilities will be required to auction entitlements to at least
15 percent of their generating capacity for five years or until 40% of the
residential and small commercial consumption of electricity in the utility's
service area is provided by nonaffiliated retail electric providers.
- - Grandfathered power plants, those built or started prior to implementation of
the Texas Clean Air Act of 1972, must reduce emissions of Nitrogen Oxide
(NOx) by 50% and Sulfur Dioxide (SO2) by 25 percent by May 2003. The law also
requires an additional 2,000 MW of renewable power generation in Texas by
2009 from retail electric providers, municipally owned utilities and electric
cooperatives.
- - A legislative oversight committee will be established to monitor the
implementation and effectiveness of electric utility restructuring and make
recommendations for any necessary further legislative action.
The Texas Commission has established numerous task forces to address
various issues associated with the restructuring legislation and to provide for
further guidance regarding implementation of the restructuring.
71
<PAGE>
CSW expects to complete its analysis of the Texas legislation in the third
quarter of 1999 and its impact on CPL, SWEPCO and WTU, its regulated Texas
electric utilities.
Louisiana
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
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 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 Staff decides to move forward with the electric industry
restructuring and retail competition. The Louisiana Commission voted to begin
additional study and analysis of the issues associated with restructuring and
has adopted a procedural schedule that will result in a final restructuring plan
by January 1, 2001.
Management cannot predict the ultimate outcome of the initiatives
concerning restructuring and retail competition in Arkansas, Louisiana and
Oklahoma, or their ultimate impact on the results of operations, financial
condition, or competitive position of CSW, PSO and SWEPCO.
The foregoing 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.
SEEBOARD Third Party Pension Litigation
In the U.K., National Grid Group and National Power have been involved in
continuing litigation regarding their use of actuarial surpluses set forth in
the electricity industry's occupational pension plan, the ESPS. A High Court
decision in favor of the National Grid Group and National Power was appealed. On
February 10, 1999 the U.K. Court of Appeal ruled that the particular
arrangements made by these corporations to dispose of part of the surplus were
invalid due to procedural defects. This decision was confirmed at a later
hearing of the U.K. Court of Appeal held in May 1999, although an opportunity
for an appeal to be taken to the House of Lords, the highest court of appeal in
the U.K., was granted.
SEEBOARD employees are members of the ESPS, and SEEBOARD has made similar
use of its actuarial surplus. As a result of subsequent legal clarification of
certain issues arising from the hearing held in May 1999, the potential impact
of the ruling on SEEBOARD has increased. The amount of the payments cancelled by
SEEBOARD, both for past and future liabilities, amounts, in the aggregate, to
approximately $70 million, excluding interest.
The U.K. Court of Appeal did not order the National Grid Group or National
Power to make payment into the ESPS, and the court indicated that any
requirement to make such payments would be extreme since the ESPS already is in
surplus. In the event that the court finally decides a payment by SEEBOARD into
the ESPS is necessary, such a payment is likely to create additional pension
fund surplus, which the company should then be able to utilize over the next
several years.
72
<PAGE>
The National Grid Group has indicated its intention to appeal to the House
of Lords. The final outcome of this appeal cannot presently be determined.
Management is unable currently to predict the amount of any payment that it may
be required to make to ESPS or the effect, if any, of the ultimate outcome of
the appeal on CSW's results of operations and financial condition.
The foregoing 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.
RATES AND REGULATORY MATTERS
Texas Legislation
In June 1999, legislation was enacted that will ultimately restructure the
electric utility industry in Texas. The new law gives Texas customers of
investor-owned utilities the opportunity to choose their electric provider
beginning on January 1, 2002. CSW is currently analyzing the impact of the Texas
electric utility industry restructuring legislation and expects to complete its
analysis of the legislation during the third quarter of 1999. Based on the
overall framework and objective of the legislation regarding recovery of
stranded costs and regulatory assets, no adjustments to earnings were recorded
in the second quarter of 1999 and no significant adjustments to earnings are
anticipated. The Texas Commission has established numerous task forces,
including representatives from CPL, SWEPCO and WTU, to address various issues
associated with the restructuring legislation and to provide further guidance
regarding implementation of the restructuring.
The foregoing 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.
Also see ITEM 2. MD&A - RECENT DEVELOPMENTS AND TRENDS, Texas for
additional information on legislation.
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 would be reduced by $13 million on May 1, 1998 and
an additional $13 million on May 1, 1999.
CPL filed an appeal of 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. Although CPL filed an
appeal of this most recent order to the Court of Appeals, management is unable
73
<PAGE>
to predict how the final resolution of these issues will ultimately affect CSW's
and CPL's results of operations and financial 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
related to the AEP/CSW merger case. If the stipulated agreement is approved by
the Texas Commission and the AEP Merger is ultimately consummated, 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.
Also see ITEM 1 - NOTE 2. LITIGATION AND REGULATORY PROCEEDINGS, CPL Rate
Review Docket No. 14965 for a discussion of the CPL 1997 Final Order.
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
issued a report in June 1999, reflecting a Louisiana revenue excess of $28
million. SWEPCO believes the report contains significant theoretical and
mathematical errors and filed its rebuttal testimony on August 10, 1999.
Hearings are scheduled to 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. SWEPCO has entered
into a settlement with the general staff of the Arkansas Commission and the
Arkansas Attorney General's Office. The settlement was filed on July 30, 1999
and reduces base rates $5.3 million, or 5%. SWEPCO continues discussions with
the other remaining party. Management cannot predict the outcome of this review.
Regulatory Draft Price Proposal for SEEBOARD
On August 12, 1999, OFGEM published its draft price proposals and results
from its current United Kingdom electricity distribution review. OFGEM has
recommended revenue reductions in SEEBOARD's distribution business. If adopted,
these proposals would reduce net income for SEEBOARD in the year 2000 by $40
million to $50 million, and $60 million to $75 million on an annual basis,
dependent upon the level of further cost reductions that can be achieved. CSW's
net income from SEEBOARD USA, its United Kingdom business segment, was $107
million for the twelve months ended June 30, 1999. In addition, OFGEM has
proposed the re-allocation of a further 13%, or $45 million of pre-tax costs out
of SEEBOARD's distribution business into its supply business, the impact of
which is expected to be broadly earnings neutral.
SEEBOARD continues to analyze the draft recommendations and their
potential effects on earnings and to seek a reduction in the severity of OFGEM's
proposed recommendations. SEEBOARD is also currently analyzing future potential
cost reductions that can partially mitigate the impact of these proposals. OFGEM
is expected to finalize its recommendations in November 1999, which would take
effect in April 2000 for five years. SEEBOARD cannot predict whether the draft
price proposals ultimately will be adopted by OFGEM and, if they are adopted,
the final form of the proposals.
If OFGEM's draft price proposals for SEEBOARD ultimately were adopted
without change, implementation of the price proposals would have a material
adverse effect on the future results of operations of SEEBOARD USA and CSW. In
addition, implementation of the price proposals as drafted could adversely
affect the financial condition of SEEBOARD USA, but would not be expected to
adversely affect the financial condition of CSW.
74
<PAGE>
The foregoing 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
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 seven operating power projects
totaling 1,308 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 began simple cycle operation of 330 MW in July 1999 and is
scheduled to commence combined cycle operation by the end of 1999. Pursuant to
AEP's 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.
CSW Energy has entered into an agreement with Eastman Chemical Company to
construct and operate a 440-MW cogeneration facility in Longview, Texas. This
facility will be known as the Eastex Cogeneration Project. Construction of the
facility is scheduled to begin in the fourth quarter of 1999, with expected
operation in 2001. Excess electricity generated by the plant will be sold by CSW
Energy in the wholesale electricity market. Since Eastex will be built as a
qualifying facility, CSW Energy will be required to sell 50% of the plant prior
to commercial operation.
In addition to these projects, CSW Energy has other projects in various
stages of development.
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. 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.
CSW International and its 50% partner, Scottish Power plc, have entered
into a joint venture to construct and operate the South Coast power project, a
400-MW combined cycle gas turbine power station in Shoreham, United Kingdom. CSW
International has guaranteed approximately (pound)19 million of the (pound)190
million construction financing, and the permanent financing is unconditionally
guaranteed by the project. Construction of the project began in March 1999 and
commercial operation is expected to begin in 2000.
Through June 30, 1999, CSW International had purchased a 36% equity
interest, in Vale for $80 million. 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 of debt as a loan.
75
<PAGE>
In mid-January 1999, amid market instability, the Brazilian government
abandoned its policy of pegging the Brazilian Real in a broad range against the
dollar. This action resulted in a 48% devaluation of the Brazilian currency by
the end of June 1999. Vale is unfavorably affected by the devaluation primarily
due to the revaluation of foreign denominated debt.
CSW International has a put option, which, if exercised, requires Vale to
purchase CSW International shares at a minimum price equal to the purchase price
for Vale. 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 are recognized. At June 30, 1999, CSW International had deferred
losses, after tax, of approximately $19 million. CSW International views its
investment in Vale as a long-term investment, which has significant long-term
value. Management will continue to closely evaluate the changes in the Brazilian
economy and its impact on CSW International's investment in Vale.
As of June 30, 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
June 30, 1999 was $72 million. The reduction in the carrying value of this
investment has been reflected in Other Comprehensive Income in CSW's
Consolidated Statements of Stockholders' Equity. Management views its investment
in Chile as a long-term investment strategy and believes this investment
continues to have significant long-term value and that it is recoverable.
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 contains forward-looking information within the
meaning of Section 21E of the Exchange Act. Actual results may differ materially
from such projected information. See FORWARD-LOOKING INFORMATION.
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 were initiated and they have completed the readiness activities
for critical systems. Those teams represent the equivalent of about 90 full-time
employee positions working on year 2000 readiness. The teams used a formal
approach that included inventory, assessment, remediation, testing of systems
and development of contingency plans. Formal progress checkpoints continue on a
biweekly basis. An executive oversight council comprised of the functional vice
presidents continues to convene monthly to review progress and address issues.
The project executive sponsor provides updates to top management on a weekly
basis and at every Board of Directors' Audit Committee meeting.
76
<PAGE>
CSW has completed a review of its year 2000 project in 1998. 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 were
incorporated into the year 2000 project as a result of the 1998 review findings.
Internal reviews of the remediation and testing processes, continuing readiness
processes, and contingency plans are being conducted in the third quarter of
1999.
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 of several electric operation
systems that has reduced the conversion requirements. On June 2, 1999, CSW
announced it had completed year 2000 readiness activities within its critical
power production and delivery systems at its four U.S. Electric Operating
Companies.
- - Inventory and assessment of business applications and vendor-supplied
software were completed in the first quarter of 1997. Only 25% of the
business application programs were determined to 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 June 30, 1999, all business critical applications of the
U.S. Electric Operating Companies and shared services organizations were
converted and certified.
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 were
completed in March 1999. The remediation of all other critical path systems is
on schedule for completion in July 1999. Final verification of those systems is
scheduled for completion in the third quarter of 1999. The most recent survey in
June 1999 by the U.K. Office of the Gas and Electric Markets indicates a 96%
completion in relation to electric operations in the electricity industry.
Vale completed an inventory of date dependent assets and critical systems
in the fourth quarter of 1998. As of June 30, 1999, Vale had also completed the
remediation and testing of all critical systems. Only non-critical items and
some contingency remains. The target completion for those items is September
30, 1999.
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 costs related to the project are expensed as
incurred. As of June 30, 1999, historical cost incurred to date for the year
77
<PAGE>
2000 project is approximately $20 million, $10 million of which was incurred in
the first six months of 1999. Remaining activities are expected to cost an
additional $14 million to $16 million over the next 9 months. Approximately 36%
of the projected cost is for redeployment of existing labor resources.
Approximately 30% of the projected cost is for outside contract labor. The
remaining 34% 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 of 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.
On May 31, 1999, CSW completed year 2000 readiness activities within its
critical power production and delivery systems at its U.S. Electric Operating
Companies and no year 2000 issues were 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 were 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 for which 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% were 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. Most of those microprocessors process dates correctly and those
that did not have been modified and certified year 2000 ready.
The systems that required the greatest amount of work are the software
applications that support business functions such as customer billing and
accounting. CSW completed all year 2000 readiness activities on these critical
business support systems on June 30, 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, 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 have been
updated to include year 2000 issues. Contingency planning is engineered into the
transmission and distribution systems as it is designed with the capability to
bypass failed equipment. A margin of power generation reserve above what is
needed is normally maintained. This reserve is a customary operating contingency
78
<PAGE>
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 has coordinated 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 were 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 while using backup or alternative communication means.
Additionally, CSW will participate in an industry-wide drill to test its
operational preparedness in the third quarter of 1999. This drill will be a
rehearsal of December 31, 1999 and January 1, 2000 operations and will further
validate the contingency plans. Final verification of external interfaces will
be performed over the remainder of 1999. Contingency plans will continue to be
revised as needed.
The CSW supply chain has contacted over 6,000 suppliers to determine their
organization readiness and over 70% responded. Approximately 250 of those 6,000
are mission critical suppliers, of which 100% have responded that their
organizations are either ready for the year 2000 or will be before December 31,
1999. Contingency plans have been developed to cover the possible failure of any
critical suppliers that may not achieve their readiness goals on time.
Additionally, mission critical inventories will be increased.
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 service business
areas and are being updated to include year 2000 scenarios. Each service
provider group within SEEBOARD has presented their plans for coverage over the
millennium period to the rest of the organization. The business contingency
planners appointed within each business are now incorporating this information
in the business continuity plans. These plans are continually being reviewed by
SEEBOARD's year 2000 central team. SEEBOARD is working with other utilities
through interest groups and the national grid on interface contingency plans and
testing. In addition to contingency plans, business areas are identifying key
tasks that will be performed during the year-end roll-over period to ensure
continuity of business.
In view of a pending merger, the CSW and AEP year 2000 project management
teams engage in frequent communication to share best practices and to exchange
information on progress, obstacles and issues relative to the year 2000 efforts.
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.
ACCOUNTING STANDARDS
SFAS No. 137
SFAS No. 137, an amendment to SFAS No. 133, defers the effective date for
implementation of SFAS No. 133 to fiscal years beginning after June 15, 2000,
which makes this statement applicable for CSW in 2001. CSW is currently
analyzing the effects of SFAS No. 133 on its results of operations and financial
condition.
79
<PAGE>
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 sale and purchase of power and energy. Contracts that provide for the
future delivery of these commodities may contain spot and forward pricing,
volume and/or derivative terms designed to manage price exposure for the benefit
of customers and to take advantage of strategic opportunities.
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 entered into natural gas
swaps and futures contracts. These agreements cover natural gas deliveries
through year-end 2000. 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 contracts that are
sensitive to changes in commodity prices. The swaps hedge commodity price
exposure through the year 2000. 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 2000. The average contract price for
forward purchases is $68 per MWH, and the average contract price for forward
sales is $83 per MWH. The option contract facilitated management with respect
to power price and volume volatility.
Contractual commitments at June 30, 1999 are as follows:
Products Net Notional Fair Value of Fair Value of
Amount Assets Liabilities
----------------------------------------------------------------------------
(millions)
Swaps 7,010,000 MMbtu $1 $--
Forwards: purchases 513,600 MWH -- 8
sales 291,200 MWH 6 --
Option sale 73,600 MWH -- 1
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 June 30, 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
80
<PAGE>
current market pricing. CSW expects to hold these contracts to maturity. At
exchange rates on June 30, 1999, this liability is included in long-term debt on
the balance sheet at a carrying value of approximately $407 million.
Expected Expected Cash
Cash Inflows Outflows
Contract Maturity Date (Maturity Value) (Market Value)
- -----------------------------------------------------------------------------
Cross currency swaps August 1, 2001 $200 million $208.9 million
Cross currency swaps August 1, 2006 $200 million $224.5 million
For information related to currency risk in South America see ITEM 1. -
NOTE 7. 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.
81
<PAGE>
PART II. - OTHER INFORMATION
For background and earlier developments relating to PART II information,
reference is made to the Registrants' Combined Annual Report on Form 10-K for
the year ended December 31, 1998 and Combined Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999.
ITEM 1. LEGAL PROCEEDINGS.
Other Legal Claims and Proceedings
The CSW System is party to various other legal claims and proceedings
arising in the normal course of business. Management does not expect disposition
of these matters to have a material adverse effect on the Registrants' results
of operations or financial condition. See PART I. - NOTE 2. LITIGATION AND
REGULATORY PROCEEDINGS and NOTE 3 COMMITMENTS AND CONTINGENT LIABILITIES.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS:
(2) Plan of Acquisition, reorganization, arrangement, liquidation or
succession.
Third Amendment to Joint Plan of Reorganization for Cajun Electric Power
Cooperative, Inc. submitted by the Committee of Certain Members,
Southwestern Electric Power Company and Washington-St. Tammany, Dated May
14, 1999 (Exhibit 2.1), 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.
(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: June 18, 1999
Date of report: July 7, 1999
Item 5. Other Events and Item 7 Financial Statements and Exhibits, reporting
developments related to Texas Electric restructuring legislation, July 1999
SWEPCO Plan and the proposed AEP/CSW merger.
82
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The signature for each undersigned
Registrant shall be deemed to relate only to matters having reference to such
Registrant or its subsidiaries.
CENTRAL AND SOUTH WEST CORPORATION
Date: August 13, 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: August 13, 1999 /s/ R. Russell Davis
R. Russell Davis
Controller and Chief Accounting Officer
(Principal Accounting Officer)
EXHIBIT 12.1
CENTRAL POWER AND LIGHT COMPANY (CONSOLIDATED)
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED JUNE 30,1999
(Thousands Except Ratio)
(Unaudited)
Operating Income $284,789
Adjustments:
Income taxes 144,084
Provision for deferred income taxes (27,886)
Deferred investment tax credits (3,858)
Other income and deductions (783)
Allowance for borrowed and equity funds
used during construction 3,108
---------
Earnings $399,454
=========
Fixed Charges:
Interest on long-term debt $ 90,662
Interest on short-term debt and other 15,746
Distributions on Trust Preferred Securities 12,000
---------
Fixed Charges $118,408
=========
Ratio of Earnings to Fixed Charges 3.37
=========
EXHIBIT 12.2
PUBLIC SERVICE COMPANY OF OKLAHOMA (CONSOLIDATED)
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED JUNE 30,1999
(Thousands Except Ratio)
(Unaudited)
Operating Income $108,021
Adjustments:
Income taxes 56,470
Provision for deferred income taxes (9,607)
Deferred investment tax credits (1,791)
Other income and deductions (1,698)
Allowance for borrowed and equity funds
used during construction 1,806
-----------
Earnings $153,201
===========
Fixed Charges:
Interest on long-term debt $ 27,121
Interest on short-term debt and other 4,320
Distributions on Trust Preferred Securities 6,000
-----------
Fixed Charges $ 37,441
===========
Ratio of Earnings to Fixed Charges 4.09
===========
EXHIBIT 12.3
SOUTHWESTERN ELECTRIC POWER COMPANY (CONSOLIDATED)
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED JUNE 30,1999
(Thousands Except Ratio)
(Unaudited)
Operating Income $144,184
Adjustments:
Income taxes 63,634
Provision for deferred income taxes (17,707)
Deferred investment tax credits (4,582)
Other income and deductions 748
Allowance for borrowed and equity funds
used during construction 2,065
Interest portion of financing leases 486
-----------
Earnings $188,828
===========
Fixed Charges:
Interest on long-term debt $39,220
Interest on short-term debt and other 9,556
Distributions on Trust Preferred Securities 8,662
Interest portion of financing leases 486
-----------
Fixed Charges $ 57,924
===========
Ratio of Earnings to Fixed Charges 3.26
===========
EXHIBIT 12.4
WEST TEXAS UTILITIES COMPANY
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED JUNE 30,1999
(Thousands Except Ratio)
(Unaudited)
Operating Income $60,698
Adjustments:
Income taxes 23,715
Provision for deferred income taxes (2,701)
Deferred investment tax credits (1,297)
Other income and deductions 589
Allowance for borrowed and equity funds
used during construction 1,226
-----------
Earnings $82,230
===========
Fixed Charges:
Interest on long-term debt $20,352
Interest on short-term debt and other 5,023
-----------
Fixed Charges $25,375
===========
Ratio of Earnings to Fixed Charges 3.24
===========
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
THIRD AMENDMENT TO JOINT PLAN OF REORGANIZATION
FOR CAJUN ELECTRIC POWER COOPERATIVE, INC.
SUBMITTED BY THE COMMITTEE OF CERTAIN MEMBERS,
SOUTHWESTERN ELECTRIC POWER COMPANY
AND WASHINGTON-ST. TAMMANY, DATED MAY 14,1999
The Committee of Certain Members of Cajun Electric Power Cooperative,
Inc. ("CCM"), Southwestern Power Electric Power Company ("SWEPCO") and
Washington-St. Tammany ("WST"), (collectively, the "Proponents") hereby propose
the following Third Amendment to the Joint Plan of Reorganization For Cajun
Electric Power Cooperative, Inc. Submitted by The Committee of Certain Members,
Southwestern Electric Power Company and Washington St. Tammany, Dated May 14,
1999 (the "Joint Plan").
1. This Third Amendment is being made prior to confirmation of the Joint Plan
pursuant to section 1127(a) of the Bankruptcy Code. Section 1127(a) allows
for amendments to plans without need of Court Order or further hearings
prior to confirmation of a plan.
2. The only modification being made by this Third Amendment is to increase
the base purchase price in the Asset Purchase Agreement and Joint Plan by
$35 million to $1,025.5 million. This increase is being made as a result
of recently negotiated additional value provided in Swepco's agreement
<PAGE>
with a fuel chain supplier. There are no changes to the Power Supply
Agreement or the rate path proposed to the members.
3. The only impact of this amendment is to increase the amount of dollars
being paid to the estate. No creditor or interest holder is adversely
affected by this amendment.
AMENDMENT TO THE JOINT PLAN AND ASSET PURCHASE AGREEMENT
All references in the Joint Plan and the accompanying Asset Purchase
Agreement incorporated in the Joint Plan to the base purchase price (subject to
adjustments as provided in the Asset Purchase Agreement and the Plan which
adjustments remain unchanged) shall be changed from $990,500,000 to
$1,025,500,000.
<PAGE>
Respectfully submitted this 28th day of July 1999.
WILKINSON, CARMODY & GILLIAM
/s/ Bobby S. Gilliam
Bobby S. Gilliam
Louisiana Bar No. 6227
1700 Beck Building
Shreveport Louisiana 71101
Telephone: (318) 221-4196
Telecopy: (318) 221-3705
-and-
SHEINFELD, MALEY & KAY, P.C.
/s/ Henry J. Kaim
Henry J, Kaim (Texas Bar #11075400)
Edward L. Ripley (Texas Bar #16935950)
Patricia B. Tomasco (Texas Bar #01797600)
1001 Fannin Street, Suite 3700
Houston, Texas 77002-6797
Telephone: (713) 658-8881
Telecopy: (713) 658-9756
ATTORNEYS FOR SOUTHWESTERN
ELECTRIC POWER COMPANY
<PAGE>
THE COMMITTEE OF CERTAIN MEMBERS
OF CAJUN ELECTRIC
By: /s/ Benjamin D. Schwartz
Benjamin D. Schwartz, One of Its
Attorneys
Melanie Rovner Cohen (ARDC No. 00476056)
Benjamin D. Schwartz (ARDC No- 02522276)
Christopher Combest (ARDC No 06224701)
ALTHEIMER & GRAY
10 S. Wacker Drive, Suite 4000
Chicago, IL. 60606
312-715-4000
ATTORNEYS FOR THE COMMITTEE OF
CERTAIN MEMBERS OF CAJUN ELECTRIC
<PAGE>
TALLEY, ANTHONY, HUGHES & KNIGHT, L.L.C.
/s/ Charles M. Hughes, Jr.
Charles M. Hughes, Jr.
(Louisiana Bar # 14382)
Union Planters Bank Building
4565 LaSalle St., Suite 300
Mandeville, LA 70471
504/624-5010
ATTORNEYS FOR WASHINGTON ST. TAMMANY
ELECTRIC COOPERATIVE INC.
<PAGE>
SHARP, HENRY, CERNIGLIA, COLVIN & WEAVER
/s/ John M. Sharp
John M. Sharp, (Bar No. 19149)
15171 S. Harrell's Ferry Road, Suite C
Baton Rouge,Louisiana 70816
Telephone: (225) 755-1060
Fax: (225) 755-1065
ATTORNEYS FOR THE COMMITTEE OF
CERTAIN MEMBERS
<PAGE>
CERTIFICATE OF SERVICE
This is to certify that a true and correct copy of Third Amendment to
Joint Plan of Reorganization for Cajun Electric Power Cooperative, Inc.
Submitted By The Committee of Certain Members, Southwestern Electric Power
Company and Washington-St. Tammany, Dated May 14, 1999 has been served on the
parties listed on that attached list by facsimile transmission this 28th day of
July, 1999.
/s/ Henry J. Kaim
Henry J. Kaim
1001 Fannin, Suite 3700
Houston, Texas 77001
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000018540
<NAME> CENTRAL AND SOUTH WEST CORPORTION
<SUBSIDIARY>
<NUMBER> 001
<NAME> CENTRAL AND SOUTH WEST CORPORATION
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 8,232
<OTHER-PROPERTY-AND-INVEST> 397
<TOTAL-CURRENT-ASSETS> 1,802
<TOTAL-DEFERRED-CHARGES> 494
<OTHER-ASSETS> 2,969
<TOTAL-ASSETS> 13,894
<COMMON> 744
<CAPITAL-SURPLUS-PAID-IN> 1,051
<RETAINED-EARNINGS> 1,725
<TOTAL-COMMON-STOCKHOLDERS-EQ> 3,520
0
176
<LONG-TERM-DEBT-NET> 4,097
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 40
<COMMERCIAL-PAPER-OBLIGATIONS> 1,906
<LONG-TERM-DEBT-CURRENT-PORT> 161
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 4
<OTHER-ITEMS-CAPITAL-AND-LIAB> 3,990
<TOT-CAPITALIZATION-AND-LIAB> 13,894
<GROSS-OPERATING-REVENUE> 2,544
<INCOME-TAX-EXPENSE> 69
<OTHER-OPERATING-EXPENSES> 2,121
<TOTAL-OPERATING-EXPENSES> 2,190
<OPERATING-INCOME-LOSS> 354
<OTHER-INCOME-NET> 17
<INCOME-BEFORE-INTEREST-EXPEN> 371
<TOTAL-INTEREST-EXPENSE> 223
<NET-INCOME> 148
4
<EARNINGS-AVAILABLE-FOR-COMM> 148
<COMMON-STOCK-DIVIDENDS> 185
<TOTAL-INTEREST-ON-BONDS> 100
<CASH-FLOW-OPERATIONS> 248
<EPS-BASIC> 0.70
<EPS-DILUTED> 0.70
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000018734
<NAME> CENTRAL POWER AND LIGHT COMPANY
<SUBSIDIARY>
<NUMBER> 003
<NAME> CENTRAL POWER AND LIGHT COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,247,991
<OTHER-PROPERTY-AND-INVEST> 3,163
<TOTAL-CURRENT-ASSETS> 162,706
<TOTAL-DEFERRED-CHARGES> 4,275
<OTHER-ASSETS> 1,315,440
<TOTAL-ASSETS> 4,733,575
<COMMON> 168,888
<CAPITAL-SURPLUS-PAID-IN> 405,000
<RETAINED-EARNINGS> 730,419
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,304,307
0
163,204
<LONG-TERM-DEBT-NET> 1,251,056
<SHORT-TERM-NOTES> 300,635
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 125,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,589,373
<TOT-CAPITALIZATION-AND-LIAB> 4,733,575
<GROSS-OPERATING-REVENUE> 666,060
<INCOME-TAX-EXPENSE> 40,320
<OTHER-OPERATING-EXPENSES> 499,079
<TOTAL-OPERATING-EXPENSES> 539,399
<OPERATING-INCOME-LOSS> 126,661
<OTHER-INCOME-NET> 2,147
<INCOME-BEFORE-INTEREST-EXPEN> 128,808
<TOTAL-INTEREST-EXPENSE> 59,873
<NET-INCOME> 68,935
3,547
<EARNINGS-AVAILABLE-FOR-COMM> 65,388
<COMMON-STOCK-DIVIDENDS> 74,000
<TOTAL-INTEREST-ON-BONDS> 44,427
<CASH-FLOW-OPERATIONS> 147,455
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000081027
<NAME> PUBLIC SERVICE COMPANY OF OKLAHOMA
<SUBSIDIARY>
<NUMBER> 004
<NAME> PUBLIC SERVICE COMPANY OF OKLAHOMA
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,321,751
<OTHER-PROPERTY-AND-INVEST> 24,495
<TOTAL-CURRENT-ASSETS> 99,107
<TOTAL-DEFERRED-CHARGES> 2,047
<OTHER-ASSETS> 50,266
<TOTAL-ASSETS> 1,497,666
<COMMON> 157,230
<CAPITAL-SURPLUS-PAID-IN> 180,000
<RETAINED-EARNINGS> 131,583
<TOTAL-COMMON-STOCKHOLDERS-EQ> 468,813
0
5,286
<LONG-TERM-DEBT-NET> 419,224
<SHORT-TERM-NOTES> 53,273
<LONG-TERM-NOTES-PAYABLE> 30,000
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 10,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 511,070
<TOT-CAPITALIZATION-AND-LIAB> 1,497,666
<GROSS-OPERATING-REVENUE> 329,729
<INCOME-TAX-EXPENSE> 9,178
<OTHER-OPERATING-EXPENSES> 284,664
<TOTAL-OPERATING-EXPENSES> 293,842
<OPERATING-INCOME-LOSS> 35,887
<OTHER-INCOME-NET> (510)
<INCOME-BEFORE-INTEREST-EXPEN> 35,377
<TOTAL-INTEREST-EXPENSE> 18,315
<NET-INCOME> 17,062
106
<EARNINGS-AVAILABLE-FOR-COMM> 16,956
<COMMON-STOCK-DIVIDENDS> 30,000
<TOTAL-INTEREST-ON-BONDS> 12,007
<CASH-FLOW-OPERATIONS> 39,963
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000092487
<NAME> SOUTHWESTERN ELECTRIC POWER COMPANY
<SUBSIDIARY>
<NUMBER> 005
<NAME> SOUTHWESTERN ELECTRIC POWER COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,832,730
<OTHER-PROPERTY-AND-INVEST> 5,937
<TOTAL-CURRENT-ASSETS> 168,478
<TOTAL-DEFERRED-CHARGES> 19,839
<OTHER-ASSETS> 89,401
<TOTAL-ASSETS> 2,116,385
<COMMON> 135,660
<CAPITAL-SURPLUS-PAID-IN> 245,000
<RETAINED-EARNINGS> 280,760
<TOTAL-COMMON-STOCKHOLDERS-EQ> 661,420
0
4,706
<LONG-TERM-DEBT-NET> 606,104
<SHORT-TERM-NOTES> 87,354
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 85,595
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 4,364
<OTHER-ITEMS-CAPITAL-AND-LIAB> 666,842
<TOT-CAPITALIZATION-AND-LIAB> 2,116,385
<GROSS-OPERATING-REVENUE> 439,952
<INCOME-TAX-EXPENSE> 12,928
<OTHER-OPERATING-EXPENSES> 365,168
<TOTAL-OPERATING-EXPENSES> 378,096
<OPERATING-INCOME-LOSS> 61,856
<OTHER-INCOME-NET> 785
<INCOME-BEFORE-INTEREST-EXPEN> 62,641
<TOTAL-INTEREST-EXPENSE> 28,358
<NET-INCOME> 34,283
115
<EARNINGS-AVAILABLE-FOR-COMM> 34,168
<COMMON-STOCK-DIVIDENDS> 54,000
<TOTAL-INTEREST-ON-BONDS> 19,604
<CASH-FLOW-OPERATIONS> 55,025
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<CIK> 0000105860
<NAME> WEST TEXAS UTILITIES COMPANY
<SUBSIDIARY>
<NUMBER> 006
<NAME> WEST TEXAS UTILITIES COMPANY
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 681,701
<OTHER-PROPERTY-AND-INVEST> 945
<TOTAL-CURRENT-ASSETS> 71,361
<TOTAL-DEFERRED-CHARGES> 11,334
<OTHER-ASSETS> 59,333
<TOTAL-ASSETS> 824,674
<COMMON> 137,214
<CAPITAL-SURPLUS-PAID-IN> 2,236
<RETAINED-EARNINGS> 114,772
<TOTAL-COMMON-STOCKHOLDERS-EQ> 254,222
0
2,482
<LONG-TERM-DEBT-NET> 263,603
<SHORT-TERM-NOTES> 9,109
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 40,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 255,258
<TOT-CAPITALIZATION-AND-LIAB> 824,674
<GROSS-OPERATING-REVENUE> 188,834
<INCOME-TAX-EXPENSE> 5,012
<OTHER-OPERATING-EXPENSES> 159,952
<TOTAL-OPERATING-EXPENSES> 164,964
<OPERATING-INCOME-LOSS> 23,870
<OTHER-INCOME-NET> 172
<INCOME-BEFORE-INTEREST-EXPEN> 24,042
<TOTAL-INTEREST-EXPENSE> 12,407
<NET-INCOME> 11,635
52
<EARNINGS-AVAILABLE-FOR-COMM> 11,583
<COMMON-STOCK-DIVIDENDS> 14,000
<TOTAL-INTEREST-ON-BONDS> 10,176
<CASH-FLOW-OPERATIONS> 43,642
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
