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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-346
Central Power and Light Company
(Exact name of registrant as specified in its charter)
Texas 74-0550600
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
539 North Carancahua Street, Corpus Christi, Texas 78401-2802
(Address of principal executive offices)
(Zip Code)
(512) 881-5300
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has 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 registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
Number of shares of Common Stock outstanding at July 31, 1994: 6,755,535
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CENTRAL POWER AND LIGHT COMPANY
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. (unaudited)
Statements of Income for the Three and Six
Months Ended June 30, 1994 and 1993 3
Balance Sheets as of June 30, 1994 and
December 31, 1993 4 - 5
Statements of Cash Flows for the Six
Months Ended June 30, 1994 and 1993 6
Notes to Financial Statements 7 - 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations. 13 - 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 17
Item 2. Changes in Securities. Inapplicable
Item 3. Defaults Upon Senior Securities. Inapplicable
Item 4. Submission of Matters to a Vote of
Security Holders. Inapplicable
Item 5. Other Information. Inapplicable
Item 6. Exhibits and Reports on Form 8-K. 17
Signature. 18
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements.
CENTRAL POWER AND LIGHT COMPANY
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1994 1993 1994 1993
(Thousands) (Thousands)
ELECTRIC OPERATING REVENUES $333,169 $316,053 $596,398 $554,307
OPERATING EXPENSES AND TAXES
Fuel 88,052 84,363 166,076 152,897
Purchased power 14,049 22,667 29,848 30,847
Other operating 54,907 53,338 109,681 105,127
Maintenance 19,169 23,467 37,728 38,057
Depreciation and amortization 34,939 32,162 69,240 64,977
Taxes, other than Federal income 21,398 17,815 41,317 36,575
Federal income taxes 25,585 15,496 30,495 19,489
258,099 249,308 484,385 447,969
OPERATING INCOME 75,070 66,745 112,013 106,338
OTHER INCOME AND DEDUCTIONS
Mirror CWIP liability amortization 17,000 18,925 34,000 37,851
Other 328 274 1,366 796
17,328 19,199 35,366 38,647
INCOME BEFORE INTEREST CHARGES 92,398 85,944 147,379 144,985
INTEREST CHARGES
Interest on long-term debt 27,953 29,338 54,632 58,985
Interest on short-term debt
and other 1,975 2,927 5,291 5,476
29,928 32,265 59,923 64,461
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES 62,470 53,679 87,456 80,524
Cumulative Effect of Changes in
Accounting Principles - - - 27,715
62,470 53,679 87,456 108,239
NET INCOME
Preferred stock dividends 3,641 3,453 7,099 7,033
NET INCOME FOR COMMON STOCK $ 58,829 $ 50,226 $ 80,357 $101,206
The accompanying notes to financial
statements are an integral part of these statements.
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CENTRAL POWER AND LIGHT COMPANY
BALANCE SHEETS
(Unaudited)
June 30, December 31,
1994 1993
(Thousands)
ASSETS
ELECTRIC UTILITY PLANT
Production $3,065,097 $3,061,911
Transmission 386,467 351,584
Distribution 800,910 765,266
General 215,661 209,170
Construction work in progress 156,319 168,421
Nuclear fuel 160,399 160,326
4,784,853 4,716,678
Less - Accumulated depreciation
and amortization 1,326,253 1,263,372
3,458,600 3,453,306
CURRENT ASSETS
Cash and temporary cash investments 583 2,435
Special deposits 1,251 1,967
Accounts receivable 20,165 23,850
Materials and supplies, at average cost 61,274 64,359
Fuel inventory, at average cost 24,857 16,934
Deferred income taxes - 4,831
Unrecovered fuel costs 77,863 52,959
Prepayments 5,390 2,255
191,383 169,590
DEFERRED CHARGES AND OTHER ASSETS
Deferred STP costs 489,388 489,773
Mirror CWIP asset 326,835 331,845
Income tax related regulatory assets 279,697 266,597
Other 78,060 70,634
1,173,980 1,158,849
$4,823,963 $4,781,745
The accompanying notes to financial
statements are an integral part of these statements.
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CENTRAL POWER AND LIGHT COMPANY
BALANCE SHEETS
(Unaudited)
June 30, December 31,
1994 1993
(Thousands)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock, $25 par value, authorized
12,000,000 shares; issued and
outstanding 6,755,535 shares $ 168,888 $ 168,888
Paid-in capital 405,000 405,000
Retained earnings 900,608 850,307
Total Common Stock Equity 1,474,496 1,424,195
Preferred stock
Not subject to mandatory redemption 250,351 250,351
Subject to mandatory redemption - 22,021
Long-term debt 1,463,440 1,362,799
TOTAL CAPITALIZATION 3,188,287 3,059,366
CURRENT LIABILITIES
Long-term debt and preferred stock
due within twelve months 23,107 3,928
Advances from affiliates 99,192 171,165
Accounts payable 67,080 79,604
Accrued taxes 26,648 33,769
Accrued interest 24,512 24,683
Accrued restructuring charges 22,542 29,365
Deferred income taxes 6,043 -
Other 31,483 28,020
300,607 370,534
DEFERRED CREDITS
Income taxes 1,086,496 1,057,453
Investment tax credits 161,428 164,322
Mirror CWIP liability and other 87,145 130,070
1,335,069 1,351,845
$4,823,963 $4,781,745
The accompanying notes to financial
statements are an integral part of these statements.
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CENTRAL POWER AND LIGHT COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
1994 1993
(Thousands)
OPERATING ACTIVITIES
Net Income $ 87,456 $108,239
Non-cash Items Included in Net Income
Depreciation and amortization 80,107 70,279
Deferred income taxes and
investment tax credits 23,922 42,102
Mirror CWIP liability amortization (34,000) (37,851)
Cumulative effect of changes in
accounting principles - (27,715)
Changes in Assets and Liabilities
Fuel inventory (7,923) 10,418
Accounts payable (12,524) 8,787
Accrued taxes (7,121) (17,516)
Unrecovered fuel costs (24,904) (27,667)
Restructuring charges (6,823) -
Other (7,769) (21,914)
90,421 107,162
INVESTING ACTIVITIES
Construction expenditures (77,366) (55,102)
Other (1,096) (557)
(78,462) (55,659)
FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 99,190 321,131
Reacquisition of long-term debt (459) (433,794)
Retirement of preferred stock (3,581) (6,578)
Special deposits for reacquisition of
long-term debt - 145,482
Change in short-term debt (71,973) (3,247)
Payment of dividends (36,988) (77,265)
(13,811) (54,271)
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,852) (2,768)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,435 3,666
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 583 $ 898
SUPPLEMENTARY INFORMATION
Interest paid less amounts capitalized $ 57,599 $ 61,154
Income taxes paid $ 26 $ -
The accompanying notes to financial
statements are an integral part of these statements.
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CENTRAL POWER AND LIGHT COMPANY
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1994
(Unaudited)
(1) PRINCIPLES OF PREPARATION
The condensed financial statements included herein have been
prepared by Central Power and Light Company (Company or CPL) pursuant to
the rules and regulations of the Securities and Exchange Commission
(SEC). Certain information and footnote 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 the Company believes that the
disclosures are adequate to make the information presented not
misleading. It is suggested that these condensed financial statements
be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1993, and the Quarterly Report on Form 10-Q for the quarter
ended March 31, 1994.
The unaudited financial information furnished herewith reflects all
adjustments (consisting only of normal recurring adjustments, except for
the 1993 cumulative effect of changes in accounting principles as
discussed below) which are, in the opinion of management, 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 and other factors.
Certain financial statement items for the prior year have been
restated to conform to the 1994 presentation. Pursuant to changes in
accounting principles made in December 1993, but effective January 1,
1993, the Company has restated 1993 financial information to reflect the
change in its method of accounting for unbilled revenues, for
electricity used by customers but not yet billed, and the adoption of
Statement of Financial Accounting Standards (SFAS) No. 112, Employers'
Accounting for Postemployment Benefits. The effect of restating the
second quarter and six months ended June 30, 1993, is as follows:
Electric
Operating Operating Net
Revenues Income Income
(thousands)
1993
Second Quarter - Reported $298,863 $ 55,400 $ 42,334
Adjustment 17,190 11,345 11,345
Second Quarter - Restated $316,053 $ 66,745 $ 53,679
Six Months - Reported $539,773 $ 96,746 $ 70,932
Adjustment 14,534 9,592 37,307
Six Months - Restated $554,307 $106,338 $108,239
(2) SOUTH TEXAS PROJECT
Reference is made to the Company's Annual Report on Form 10-K for
the year ended December 31, 1993, and the Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994, for a discussion of regulatory and
other issues involving the South Texas Project (STP) nuclear electric
generating station that are in various stages of appeal.
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STP Outage
The Company owns 25.2% of STP, a two unit nuclear power plant. In
February 1993, Units 1 and 2 of STP were shut down by Houston Lighting &
Power Company (HLP), the Project Manager, in an unscheduled outage
resulting from mechanical problems relating to two auxiliary feedwater
pumps. HLP determined that the units would not be restarted until the
equipment failures had been corrected and the Nuclear Regulatory
Commission (NRC) was briefed on the causes of these failures and the
corrective actions that were taken. The NRC formalized that commitment
in a confirmatory action letter.
During the outage, the necessary improvements were made by HLP to
address the issues in the confirmatory action letter, as supplemented.
On February 15, 1994, the NRC agreed that the confirmatory action letter
issues had been resolved with respect to Unit 1, and that it supported
HLP's recommendation that Unit 1 was ready to restart. Unit 1 restarted
in late February 1994 and operated at low power for three days. The
Project Manager then shut down Unit 1 due to a problem with a steam
generator feedwater valve and a steam generator tube leak. The Project
Manager made the necessary repairs and restarted Unit 1, which reached
the 100 percent output level in early April and has been operating
substantially at or near that level since that time.
Following the NRC's support of HLP's plans to restart Unit 2, the
unit was restarted in late May, 1994. After Unit 2 reached the 100
percent output level in mid-June 1994, the unit was taken out of service
June 25 when a faulty signal from a monitoring system indicated a
problem with the unit's main transformer, which resulted in shutting the
unit down from operation. After completion of necessary repairs, Unit 2
was returned to service on June 29, 1994, and it has been operating
substantially at 100 percent output level since that time.
The units' outage has not affected the Company's ability to meet
customer demands because of existing capacity and the Company's ability
to purchase additional energy from affiliates and nonaffiliates.
The NRC placed STP on its "watch list" of plants with "weaknesses
that warrant increased NRC attention" in June 1993. Plants on the watch
list are subject to closer NRC oversight. On June 24, 1994, the NRC
voted to keep STP on its watch list while observing that conditions at
STP are slowly improving. The NRC noted that management has established
better communications with workers, including faster correction of
problems found by workers. A dual unit plant will remain on the watch
list until both units have returned to service and have demonstrated a
period of good performance. The Company's management believes that the
first reasonable opportunity for STP to be removed from the watch list
will be the NRC's plant review meeting in January 1995. The NRC has
commenced an inspection at STP to provide input for a Systematic
Assessment of Licensee Performance evaluation to be completed after
September 1994. The inspection is expected to continue until mid-August
1994.
See Note (3) of the Notes to Financial Statements for a discussion
of increased fuel costs arising out of the STP outage and proceedings
relating to the recovery of such costs.
Management believes that the operating outage at STP will not have
a material adverse effect on the Company's financial condition or on its
results of operations.
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(3) RATE AND REGULATORY MATTERS
Rate Cases
During December 1993 and January 1994, several cities (Cities) in
the Company's service territory exercised their rights to require the
Company to file rate cases to determine if its rates are fair, just and
reasonable. The Cities informed the Company that this rate review was
precipitated by the outage at STP, leading the Cities to question
whether STP should continue to be included in the Company's rate base.
Further, the Cities question whether the Company is earning an excessive
return on equity. The governing bodies of these Cities have original
jurisdiction over rates only within their incorporated limits.
In February and March 1994, and thereafter, most of the cities
served by CPL passed resolutions ordering the Company to reduce rates by
amounts ranging from $73 million to $137 million, if applied on a total
company basis. The rate reductions are based on removal of a portion of
STP costs from base rates. The orders only affect the rates of
customers who take service within the cities' limits. The Company has
appealed all of these actions to the Public Utility Commission of Texas
(Texas Commission), which has stayed their effectiveness.
Similar challenges to the Company's rates were filed with the Texas
Commission by the Office of Public Utility Counsel (OPUC), the Texas
Commission General Counsel, and affected customers (collectively,
Customer Cases). In its complaint, OPUC has alleged that the Company is
overearning by amounts ranging from $16 million to $214 million
annually, if applied on a total company basis, based on a range of
returns on common equity, removal of the investment in STP Unit 2 from
rate base and certain other matters. The Texas Commission has exclusive
original jurisdiction over the rates and services of the Company in the
areas outside municipal limits of cities who retain original
jurisdiction. The Customer Cases have been consolidated with the
appealed cities' cases.
On March 31, 1994, a scheduling and procedural settlement agreement
(Agreement), relating to the above matters, was filed with the Texas
Commission. The Agreement was executed by the Company and each of the
parties to the proceedings at that time. On April 1, 1994, a Texas
Commission administrative law judge approved the Agreement. Under the
Agreement the Company filed its rate case on July 1, 1994. Hearings are
scheduled to start on October 31, 1994.
The parties also agreed that the Company's existing rates will
remain in effect until the Texas Commission's final order in the case.
The other parties thus agreed not to pursue lower interim rates in an
interim rate proceeding. As part of the Agreement, the Company agreed
that any reductions in rates, if any are implemented as a result of the
rate case, would be effective retroactive to June 15, 1994. The Company
also agreed not to seek a base rate increase in the proceeding. The
rate case will be based on a test year ending September 30, 1993.
The Company submitted a rate filing package on July 1, 1994 to the
Texas Commission justifying its current base rate structure. In that
filing, the Company indicated a need to increase its base rates but
asked that the Company's rates remain at the same levels approved in
1990 and 1991. CPL maintained that its rates are reasonable and its
earnings are within established regulatory guidelines. The rate filing
package showed that CPL currently has a $111 million retail revenue
deficiency and would be justified in seeking a base rate increase.
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However, the Company is seeking to maintain its current base rate
structure as agreed in the settlement of its two last rate cases. The
filing also noted that the litigation expenses associated with the rate
hearings are expected to total $7 million and requested such costs be
deferred for recovery some time in the future.
Three residential customers represented by the same counsel have
recently requested the administrative law judge to order an interim rate
reduction. One of the residential customers was a signatory to the
March 31, 1994 agreement and motion which called for the cancellation of
interim rate proceedings and a June 15, 1994 effective date for
implementation of any ordered rate reduction. As noted above, the
Company's July 1 filing supports a $111 million retail revenue
deficiency and the administrative law judge approved the prior agreement
which canceled interim rate proceedings. The administrative law judge
has not ruled on this new motion.
The Company contends that both units of STP belong in rate base.
This contention is based on Units 1 and 2 providing electrical output at
a 100 percent level beginning in April and June 1994, respectively.
Additionally, the long-term benefits nuclear generation provides to
customers further supports their inclusion in rate base. There are no
Texas Commission precedents addressing the removal of a nuclear plant
from rate base. The Company's base rates were last set in 1990. Based
on inclusion of both units of STP in rate base, the Company believes it
is not collecting excessive revenues, even when considering market rates
of return on common equity that are generally lower than they were in
1990 when base rates were last set.
In April 1994, the General Counsel and Staff of the Texas
Commission issued a Request for Proposal for an audit of the STP outage,
and in July a consultant was selected to perform the audit. The purpose
of the audit is to evaluate the prudence of management activities at
STP, including the actions of HLP and the STP management committee, of
which CPL is a participant. Such review will include the time from
original commercial operation of each unit until they were returned from
the outage to full commercial operation. The Company and HLP will pay
the costs of the audit but will have no control over the ultimate work
product of the consultant.
In June 1994, General Counsel of the Texas Commission initiated an
inquiry into the operation and management of STP. The purpose of the
proceeding is to develop a record and make findings on STP operation and
management issues to be used in base rate and fuel reconciliation
proceedings for HLP and CPL. Under a schedule agreed to by CPL, the
Company will provide its STP-related prudence testimony on October 1,
1994. Staff testimony, including the report of the Texas Commission's
consultant, is scheduled for early February 1995, with hearings
tentatively set to begin on March 15, 1995.
All of the parties to CPL's base rate proceeding, except for the
three residential customers previously mentioned, have filed a motion
with the administrative law judge requesting the STP prudence issues to
be addressed in the inquiry docket initiated by General Counsel and to
be applied in subsequent proceedings and not in CPL's current base rate
proceeding. If the motion is granted, the current base rate case could
proceed to a final Texas Commission determination near the end of the
first quarter of 1995. If the motion is denied and prudence issues are
tried in the existing base rate case instead of the next base rate
proceeding, a Texas Commission decision in the pending base rate case is
not likely until late in 1995. The primary issue affected by this
decision is whether the present or a future base rate proceeding will
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determine if there should be any adjustment to the Company's allowed
rate of return for the circumstances associated with the STP outage.
Management cannot predict the ultimate outcome of these rate
proceedings, although management believes that their ultimate resolution
will not have a material adverse effect on the Company's results of
operations or financial condition. However, if the Company ultimately
is unsuccessful in maintaining rates at their current level, the Company
could experience a material adverse effect on its results of operations
and financial condition.
Fuel Costs and Reconciliation
During the STP outage, the Company's fuel and purchased power costs
were increased as the power normally generated by STP was replaced
through sources with higher costs. It is unclear how the Texas
Commission will address the reasonableness of higher costs associated
with the outage. At January 31, 1993, before the start of the STP
outage, the Company had an over-recovered fuel balance of $5.2 million,
exclusive of interest. At June 30, 1994, the Company's under-recovered
fuel balance was $77.9 million, exclusive of interest. This under-
recovery of fuel costs, while due primarily to the STP outage, was also
affected by changes in fuel prices and timing differences. The Company
cannot accurately estimate the amount of any future under- or over-
recoveries due to the unpredictable nature of the above factors.
Although there is the potential for disallowance of fuel-related costs,
such determination cannot be made until fuel costs are reconciled with
the Texas Commission. If a significant portion of fuel costs were
disallowed by the Texas Commission, the Company could experience a
material adverse effect on its results of operations in the year of
disallowance. However, any disallowance would not be expected to
materially affect the Company's financial condition. The Company is
required to file a reconciliation of its fuel costs by November 15,
1994, in accordance with a Texas Commission order.
Deferred Accounting
On June 22, 1994, the Supreme Court of Texas issued a decision in
the Company's deferred accounting case. In a 5-4 vote, the Supreme
Court of Texas sustained deferred accounting as an appropriate mechanism
for the Texas Commission to use in preserving the financial integrity of
utilities. The Supreme Court of Texas held that the Texas Commission
can authorize utilities to defer those costs that are incurred between
the in-service date of a plant and the effectiveness of new rates, which
include such costs.
The Supreme Court of Texas upheld the portion of the 1992 Third
Court of Appeals, Austin, Texas (Court of Appeals) decision that
permitted CPL to include in rate base deferred post-in-service
operations and maintenance costs from Unit 1 of STP. The Supreme Court
of Texas also reversed the portion of the Court of Appeals decision
providing that deferred post-in-service carrying costs could not be
included in rate base. In addition, the Supreme Court of Texas remanded
the case to the Court of Appeals for consideration of specific
unresolved arguments. In July 1994, the State of Texas filed a motion
for rehearing of the Company's deferred accounting matter and the
Company filed its response to that motion, both of which are pending.
The Company's total pre-tax STP deferrals for the periods affected were
approximately $492 million, of which $270 million are carrying costs.
While management cannot predict the ultimate outcome of CPL's
deferred accounting proceedings, management believes that CPL will
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successfully sustain approval of its deferred accounting orders or will
be successful in renegotiation of its rate settlement, so there will be
no material adverse effect on the Company's financial position or on its
results of operations.
(4) DIVIDENDS
The Company's mortgage indenture, as amended and supplemented,
contains certain restrictions on the payment of common stock dividends.
At June 30, 1994, approximately $709 million of retained earnings were
available for payment of cash dividends to its parent company, Central
and South West Corporation (CSW).
(5) NUCLEAR DECOMMISSIONING
In May 1994, CPL received a new study updating the cost estimates
to decommission STP that indicated that CPL's share of such costs would
increase from $85 million, as stated in 1986 dollars, to $251 million,
as stated in 1994 dollars. The increase in costs occurred primarily as
a result of extended on-site storage of high level nuclear waste and
increased labor costs since the prior study. These costs are expected
to be incurred during the period of 2027 to 2062. While this is the
best estimate available at this time, these costs may change between now
and when the funds are actually expended because of changes in the
assumptions used to derive the estimates, including the prices of the
goods and services required to accomplish the decommissioning.
Additional studies will be completed periodically to update this
information.
The Company currently is recovering through rates $4.2 million of
decommissioning costs. With the cost increases discussed above the
annual cost necessary to fund the external trusts to provide for the
future expenditures would increase to $10.0 million. The annual cost
estimates are based on an assumed escalation rate of 5.5% and earnings
on trust assets of 6.7%. CPL has filed a rate case as discussed in Note
(3) of the Notes to Financial Statements, and the increases in costs are
a part of the filing in that case. The Company is seeking to have the
higher level of costs determined as reasonable and necessary expenses by
the Texas Commission, and that recovery from customers and funding to
the external trust be deferred until a subsequent proceeding when rates
can be adjusted to recover the higher costs. The Company also is
seeking that the deferred amounts be determined as recoverable over a
reasonable future period.
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CENTRAL POWER AND LIGHT COMPANY
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 Company's
1993 Annual Report on Form 10-K and the Quarterly Report on Form 10-Q
for the quarter ended March 31, 1994. Reference is also made to the
unaudited Financial Statements and related Notes to Financial Statements
included herein. The information included therein should be read in
conjunction with, and is essential in understanding, the following
discussion and analysis.
REGULATORY MATTERS
Reference is made to Notes 2 and 3 of the Notes to Financial
Statements for a discussion of the Company's regulatory matters.
CONSTRUCTION PROGRAM
Construction expenditures including allowance for funds used during
construction for the first six months of 1994 totaled $78.4 million as
compared to $55.7 million for the same period in 1993. The largest
portion of construction expenditures has been for the improvement and
expansion of transmission and distribution facilities. Construction of
a 345-kilovolt transmission line between the Company's Lon C. Hill and
Coleto Creek power stations represents approximately 18% of the 1994
construction expenditures. This new $51 million transmission line,
which was completed in July 1994, provides much needed capability to
move power from the northeastern area of the Company's service territory
to the southern areas. In addition, the new line is expected to provide
up to $6 million annually in line-loss savings. Improvements and
additions to transmission and distribution assets are required to ensure
reliable electric service, to meet the needs of new customers and to
satisfy changing requirements of existing customers.
FINANCING
The Company expects to obtain a majority of its 1994 capital
requirements from internal sources. The Company utilizes short-term
debt to meet fluctuations in working capital requirements due to the
seasonal nature of electric sales. If funds are needed, the financial
condition of the Company should allow the required permanent financing
to be obtained from capital markets. At June 30, 1994, the Company's
capitalization ratios were 46% common stock equity, 8% preferred stock
and 46% long-term debt.
On May 18, 1994, the Company issued $100 million of 7-1/2% First
Mortgage Bonds, Series JJ, due May 1, 1999 and used the net proceeds to
repay a portion of the Company's short-term borrowings, to provide
working capital and for other general corporate purposes. Additionally,
the Company has $260 million remaining for the issuance of first
mortgage bonds under a shelf registration statement filed with the SEC
in 1993. The Company may offer additional first mortgage bonds subject
to market conditions and other factors. The proceeds of any such
offerings will be used principally to redeem all or a portion of one or
more series of the Company's outstanding first mortgage bonds in order
to lower the Company's embedded cost of long-term debt.
In July and August 1994, the Company reacquired $0.6 million of
9-3/8% First Mortgage Bonds, Series Z, due December 1, 2019, with
internal funds.
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On August 1, 1994, the Company redeemed the remaining outstanding
$22.4 million of its 10.05% series preferred stock at the price of
$104.76 a share. The related premiums and redemption costs are treated
as a reduction of retained earnings.
RESTRUCTURING
As previously reported, CPL and CSW have undertaken a restructuring
and early retirement program designed to consolidate and restructure
their operations in order to meet the challenges of the changing
electric utility industry and to compete effectively in the years ahead.
The underlying goal of restructuring is to enable the electric operating
companies to focus on and be accountable for serving the customer.
CPL's portion of the costs for the restructuring is expected to be
approximately $29.4 million and was expensed in 1993. The Company does
not expect any material additional restructuring costs in 1994.
Approximately $21.6 million of the restructuring costs will be paid from
general corporate funds. The remaining $7.8 million represents the
present value of enhanced benefit amounts to be paid from the benefit
plan trusts to participants over future years in accordance with the
early retirement program. This amount will be funded from general
corporate funds to the benefit plan trusts over future years. The
restructuring is expected to be substantially completed in 1994.
Certain aspects of the restructuring may be subject to SEC approval.
The Company expects to realize a number of benefits from the
restructuring. Beginning in 1994 and continuing into the future,
increased efficiencies and synergies are expected to be realized with
the elimination of previously duplicated functions. This leads to
enhanced communication and efficiency, which should translate into a
reduction in the rate of growth in operating and maintenance costs. All
restructuring costs are expected to be recovered within 18 to 24 months
after implementation of the restructuring changes.
A number of assumptions and judgments are built into these expected
benefits. These assumptions may become inaccurate as a result of other
costs and circumstances which are beyond the Company's control. If
projections of future operation and maintenance costs are too low, the
restructuring should mitigate any future increases in cost of service
but may not result in any net operating and maintenance cost reduction.
It is also assumed that staffing will be adequate at the new levels.
The reductions in staff will increase the need for automation, with
resulting increases in capital and maintenance costs. The Company is
continuing to re-engineer its business practices.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1994 COMPARED TO THE QUARTER ENDED JUNE 30, 1993
Net Income For Common Stock. Net income for common stock increased
17.1% during the second quarter of 1994 to $58.8 million from $50.2
million in the same quarter of 1993. The increase was due primarily to
increased base revenues, reduced interest expense, and decreased STP
maintenance expenses. Partially offsetting the effects of the above
items were additional depreciation and amortization, higher taxes, and a
decline in Mirror CWIP liability amortization.
Electric Operating Revenues. Total operating revenues for the
second quarter of 1994 increased $17.1 million or 5.4% over the same
period last year. The increase reflects greater base revenues of $20.9
million, which includes an approximate $6.9 million increase in unbilled
revenues, offset by a decrease in fuel-related revenues of $3.8 million.
Unbilled revenues represent electricity used by customers but not yet
billed. Fuel-related revenues were down because of the decline in
average unit cost of fuel and purchased power costs, as discussed below.
Total Kwh sales were up 10.6%, reflecting growth in retail sales of 9.3%
<PAGE> 15
and a 37.4% increase in lower margin sales for resale. An 11.6%
increase in residential and a 2.9% increase in commercial consumption
reflected continued customer growth and warmer spring and summer
weather. Industrial sales were up 12.2% on higher demand in the
petrochemical and petroleum industries with increased load requirements.
Fuel and Purchased Power. The 4.4% increase in fuel expense is
attributable to a 29.8% increase in fuel consumption associated with
higher generation from greater Kwh sales, partially offset by the lower
average unit cost of fuel. The average unit cost for the second quarter
of 1994 was $1.88 per million Btu down $.46 per million Btu for the same
period last year. The decline in per unit fuel costs reflects the lower
unit cost of nuclear fuel since STP Units 1 and 2 restarted and reached
the 100 percent output level in April and June of 1994, respectively.
STP Units 1 and 2 had not operated at full capacity since February 1993
as discussed in Note 2 of the Notes to Financial Statements. Purchased
power decreased $8.6 million for the second quarter of 1994 when
compared to the same quarter of 1993. This was a result of increased
nuclear generation at STP that replaced purchases.
Other Operating Expenses and Taxes. Other operating expenses
increased $1.6 million for the second quarter of 1994 when compared to
the same quarter of 1993. This was due primarily to an increase in
administrative and general expenses largely associated with increased
salary expenses and outside services. Partially offsetting the increase
in administrative and general expenses was a slight decrease in
production, transmission, and distribution expenses.
Maintenance expense decreased $4.3 million for the second quarter
of 1994 when compared to the same quarter of 1993, due primarily to a
$4.5 million decrease in maintenance activities at STP. The decline
reflects the higher maintenance expense in 1993 associated with the STP
outage, as discussed in Note 2 of the Notes to Financial Statements.
Depreciation and amortization increased $2.8 million due mainly to
the addition of transmission and distribution capital assets and to a
decline in amortization credits related to power plant inventory.
Taxes, other than Federal income, increased $3.6 million primarily as a
result of increasing ad valorem taxes related to public school financing
in Texas. The increase in Federal income taxes is due mainly to the
increase in pre-tax income.
Mirror CWIP Liability Amortization. This amortization has
decreased from the same period in 1993 because CPL is amortizing its
Mirror CWIP liability, in declining amounts, over the years 1991 through
1995.
Interest Expense and Preferred Stock Dividends. Total interest
expense decreased $2.3 million or 7.2% due to the Company's refinancing
of higher cost long-term debt with lower cost debt, partially offset by
increases in short-term interest expense associated with higher levels
of short-term borrowings from the CSW System money pool. Preferred
dividends increased 5.4% due to higher dividend rates on auction
preferred stocks, partially offset by a decrease due to the retirement
of $3.5 million of the 10.05% Series preferred stock in February 1994.
SIX MONTHS ENDED JUNE 30, 1994 COMPARED TO SIX MONTHS ENDED JUNE 30,
1993.
Net Income For Common Stock. Net income for common stock decreased
20.6% during the first six months of 1994 to $80.4 million from $101.2
million in the same period of 1993. The decline is substantially due to
the $27.7 million positive effect on 1993's earnings from the cumulative
effect of changes in accounting principles. Additionally, the decline
was because of increased administrative and general expenses, additional
depreciation and amortization, higher taxes, and a decline in Mirror
CWIP liability amortization. When removing the effect of the change in
accounting, the Company's earnings were $6.9 million above last year's,
primarily due to increased base revenues and reduced interest expense.
<PAGE> 16
Electric Operating Revenues. Total operating revenues for the
first six months of 1994 increased $42.1 million or 7.6% over the same
period last year. The increase reflects greater base revenues of $28.3
million which includes an approximate $7.8 million increase in unbilled
revenues and higher fuel-related revenues of $13.8 million. Fuel-
related revenues were up because of the rise in fuel expense associated
with increased fuel consumption on greater Kwh sales. Total Kwh sales
were up 9.8%, reflecting growth in retail sales of 8.8% and a 31.2%
increase in lower margin sales for resale. An 8.8% increase in
residential and a 3.5% increase in commercial consumption resulted from
continued customer growth and warmer spring and summer weather.
Industrial sales were up 12.5% on higher demand in the petrochemical and
petroleum industries with increased load requirements.
Fuel and Purchased Power. The 8.6% increase in fuel expense is
attributable to a 14.0% increase in fuel consumption associated with
higher generation from greater Kwh sales, partially offset by the lower
average unit cost of fuel. The average unit cost for the first six
months of 1994 was $2.03 per million Btu down $.10 per million Btu for
the same period last year. The decline in per unit fuel costs reflects
the lower unit costs of nuclear fuel since STP Units 1 and 2 restarted
and reached the 100 percent output level in April and June of 1994,
respectively. STP Units 1 and 2 had not operated at full capacity since
February 1993 as discussed in Note 2 of the Notes to Financial
Statements. Purchased power decreased $1.0 million for the first six
months of 1994 when compared to the same period last year. This was a
result of increased nuclear generation at STP that replaced purchases.
Other Operating Expenses and Taxes. Other operating expenses
increased $4.6 million for the first six months of 1994 when compared to
the same period last year. This was due primarily to an increase in
administrative and general expenses largely associated with increased
salary expenses and outside services.
Depreciation and amortization increased $4.3 million due mainly to
the addition of transmission and distribution capital assets and to a
decline in amortization credits related to power plant inventory.
Taxes, other than Federal income increased $4.7 million primarily as a
result of increasing ad valorem taxes, partially offset by a state
franchise tax refund applicable to prior years' taxes. The increase in
Federal income taxes is due mainly to the increase in pre-tax income.
Mirror CWIP Liability Amortization. This amortization has
decreased from the same period in 1993 because CPL is amortizing its
Mirror CWIP liability, in declining amounts, over the years 1991 through
1995.
Interest Expense and Preferred Stock Dividends. Total interest
expense decreased $4.5 million or 7.0% due to the Company's refinancing
of higher costs long-term debt with lower cost debt, partially offset by
increases in short-term interest expense associated with higher levels
of short-term borrowings from the CSW System money pool. Preferred
dividends slightly increased due to higher dividend rates on auction
preferred stocks, partially offset by a decrease due to the retirement
of $3.5 million of the 10.05% Series preferred stock in February 1994.
<PAGE>
<PAGE> 17
PART II - OTHER INFORMATION
For background and earlier developments relating to Part II
information, reference is made to the Company's 1993 Annual Report on
Form 10-K and Part II information, Item 1 Legal Proceedings, in the
Company's Form 10-Q for the quarter ended March 31, 1994.
Item 1. Legal Proceedings.
Reference is made to Notes 2 and 3 of the Notes to Financial
Statements for a discussion of developments in certain of the
Company's legal matters.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Computation of Ratio of Earnings to Fixed Charges
(Exhibit 1).
Computation of Ratio of Earnings to Combined Fixed
Charges and Preferred Stock Dividends (Exhibit 2).
(b) Reports on Form 8-K
The Company filed a Form 8-K dated April 7, 1994
(Item 5, Other Events) relating to the status of
rate cases.
The Company filed a Form 8-K dated May 6, 1994
(Item 5, Other Events) reporting the Company's
selected financial information in anticipation
of possible securities issuances.
The Company filed a Form 8-K dated July 5, 1994
(Item 5, Other Events) reporting the Supreme
Court of Texas' decision in the Company's deferred
accounting case.
<PAGE>
<PAGE> 18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
CENTRAL POWER AND LIGHT COMPANY
Date August 12, 1994 By: DAVID P. SARTIN
David P. Sartin
Controller, Secretary and
Chief Accounting Officer
<PAGE>
EXHIBIT 1
CENTRAL POWER AND LIGHT COMPANY
RATIO OF EARNINGS TO FIXED CHARGES
FOR THE TWELVE MONTHS ENDED JUNE 30, 1994
(Thousands Except Ratio)
(Unaudited)
Operating Income $195,754
Adjustments:
Federal income taxes 8,453
Provision for deferred Federal income taxes 73,546
Deferred investment tax credits (5,806)
Other income and deductions 1,864
Allowance for borrowed and equity funds
used during construction 3,069
Mirror CWIP amortization 71,851
Earnings $348,731
Fixed Charges:
Interest on long-term debt $108,587
Interest on short-term debt and other 12,347
Fixed Charges $120,934
Ratio of Earnings to Fixed Charges 2.88
<PAGE>
EXHIBIT 2
CENTRAL POWER AND LIGHT COMPANY
RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
FOR THE TWELVE MONTHS ENDED JUNE 30, 1994
(Thousands Except Ratio)
(Unaudited)
Operating Income $195,754
Adjustments:
Federal income taxes 8,453
Provision for deferred Federal income taxes 73,546
Deferred investment tax credits (5,806)
Other income and deductions 1,864
Allowance for borrowed and equity funds
used during construction 3,069
Mirror CWIP amortization 71,851
Earnings $348,731
Fixed Charges:
Interest on long-term debt $108,587
Interest on short-term debt and other 12,347
Preferred stock dividend requirements 21,126
Fixed Charges and Preferred Requirements $142,060
Ratio of Earnings to Combined Fixed Charges
and Preferred Stock Dividends 2.45
