UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 31, 1997
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, TX 75202-1234
(214) 777-1000
0-346 CENTRAL POWER AND LIGHT COMPANY 74-0550600
(A Texas Corporation)
539 North Carancahua Street
Corpus Christi, TX 78401-2802
(512) 881-5300
This combined Form 8-K is separately filed by Central and South West
Corporation and Central Power and Light Company. Information contained herein
relating to an individual company is filed by such company on its own behalf.
Each company makes no representation as to information relating to the other
company.
ITEM 5. OTHER EVENTS
CENTRAL POWER AND LIGHT COMPANY (CPL)
REGULATORY MATTERS
CPL RATE CASE FINAL ORDER
OVERVIEW
On March 31, 1997, the Public Utility Commission of Texas (Texas
Commission) issued its final order (Final Order) in CPL's Rate Review Docket No.
14965. The Final Order lowers the annual base rates of CPL by approximately $27
million, or approximately 3.5% in 1997, from CPL's existing rate level prior to
CPL's May 1996 implementation of bonded rates. The Texas Commission also
introduced a Glide Path Methodology (Glide Path) whereby CPL's rates will be
reduced by an additional $16 million in 1998 and another $16 million in 1999.
The preliminary estimated financial impact of the Final Order is described
below.
As previously reported, CPL had originally sought to increase its
annual retail base rates by $71 million in this rate proceeding and had
implemented bonded rates in May 1996, subject to refund. For further information
and earlier developments related to CPL's regulatory matters, reference is made
to CSW's and CPL's 1996 Combined Annual Report on Form 10-K and Combined Current
Reports on Form 8-K dated March 31, 1997 and filed April 2, and April 4, 1997.
MAJOR PROVISIONS OF THE FINAL ORDER
There are numerous contributing factors to the difference between the
$71 million retail base rate increase originally requested by CPL and the $27
million retail base rate reduction included in the Texas Commission's Final
Order. These factors include the reduction of CPL's requested return on equity
from 12.25% to 10.9% and the disallowance of certain costs and expenses.
A major provision of the Final Order was the Texas Commission's
categorization of approximately $859 million or 32% of CPL's investment in the
South Texas Project Nuclear Generating Station (STP), including mirror CWIP and
deferred accounting, as Excess Cost Over Market (ECOM). The term ECOM has been
used to refer to the amount of costs that potentially would become "stranded" if
retail competition were mandated and prices were set in the market, rather than
the price being determined by current regulatory standards of reasonable and
necessary cost of providing service. The Final Order reduced CPL's return on the
ECOM portion of CPL's investment in STP to 7.96%, as compared with the 10.9%
return on common equity approved for all other invested capital, resulting in a
$17.6 million decrease in CPL's rate request. At the same time, the Final Order
accelerated the recovery of the $859 million designated as ECOM to 20 years from
the remaining 32-year life of STP, resulting in a $16.8 million increase in
CPL's rate request. Although the Texas Commission ordered the accelerated
recovery of $859 million as ECOM, the revenue requirement reflects an additional
reduction of $185 million in the depreciable base of STP being recovered over 32
years. CPL has a 25.2% ownership interest in STP. Houston Lighting & Power
Company, which owns 30.8 % of STP, manages the facility. In addition, City
Public Service of San Antonio and the City of Austin own 28% and 16%,
respectively.
As previously discussed, the Final Order decreased CPL's requested
return on equity of 12.25% on its retail rate base to a 10.9% return on equity
for all non-ECOM invested capital, which results in an approximately $30 million
decrease in CPL's rate request. The Final Order provides for the disallowance of
approximately $22 million of affiliate transactions. In addition, the Final
Order denied CPL's request to use straight line amortization for CPL's deferred
accounting costs. Instead, the Final Order requires CPL to continue to use the
mortgage amortization method to amortize its deferred accounting costs,
resulting in a reduction of $14 million from CPL's rate request. The Final Order
also decreases other depreciation and amortization by $21 million from CPL's
rate request.
The Texas Commission's Final Order established a separate docket to
consider the recoverability of $19 million of rate case expenses incurred in the
current rate case and in two prior dockets. The hearing is scheduled for April
14, 1997 and the Texas Commission's order is expected by May 30, 1997.
Based upon management's preliminary evaluation of the Final Order,
management believes there is a possibility that certain consistency provisions
(otherwise referred to as normalization rules) of the Internal Revenue Code may
have been violated. If CPL's final analysis indicates the Final Order may cause
a normalization violation, CPL will recommend to the Texas Commission that the
relevant portion of the Final Order be held in abeyance until a private letter
ruling addressing the issue is obtained from the Internal Revenue Service.
If the Internal Revenue Service determines that a normalization
violation has occurred and no changes to the Final Order are made to remedy the
violation, the Internal Revenue Service could disallow certain significant
accelerated tax deductions and investment tax credits previously taken by CPL.
PRELIMINARY ESTIMATED FINANCIAL IMPACT OF FINAL ORDER
If ultimately upheld after rehearing and any appeals, management
expects the Final Order to have a material adverse impact on CSW's and CPL's
results of operations for the next several years, beginning with an estimated
reduction of 1997 earnings by approximately $61.7 million and reductions in
succeeding years due to the effects of applying the Glide Path methodology in
1998 and in 1999. The estimated reduction in 1997 earnings includes the annual
impact of the Final Order for 1997 as well as the recognition in 1997 of the
retroactive impact of the Final Order on 1996 results of operations from when
bonded rates were implemented in May 1996, subject to refund. The timing and
amount of recognition of the effect of the Final Order in 1997 has not yet been
determined. Although CSW and CPL are unable to predict how the final resolution,
through the rehearing and any appeals process or otherwise, of the issues raised
in the Final Order will ultimately impact CSW's and CPL's results of operations
and financial condition, the preliminary estimate of the financial impact of the
Final Order on CPL is presented in the table below.
Preliminary Estimated Financial Impact
of Final Order 1997 1998 1999
-----------------------------------
(millions)
Decrease in revenue $(27.1) $(38.0) $(54.4)
-----------------------------------
Items included in decrease in revenue with
an offsetting effect on expense
Accelerated recovery of STP (ECOM) (42.9) (42.9) (42.9)
Change in depreciation\amortization 26.1 26.1 26.1
Other (1.1) (1.1) (1.1)
-----------------------------------
(17.9) (17.9) (17.9)
-----------------------------------
Additional expenses not included in
decrease in revenue
Depreciation (4.6) (4.6) (4.6)
Other (3.9) 4.3 4.3
-----------------------------------
(8.5) (0.3) (0.3)
-----------------------------------
Change in current year income before tax (53.5) (56.2) (72.6)
Federal income taxes 15.8 16.8 22.5
-----------------------------------
Current year impact on net income (37.7) (39.4) (50.1)
-----------------------------------
1996 effect (24.0)
-----------------------------------
Total current year impact on net income $(61.7) $ (39.4) $(50.1)
-----------------------------------
A preliminary reconciliation of revenues between CPL's original filing
and the Final Order is attached as Exhibit 99.1 and incorporated by reference
herein. For the years ended December 31, 1996 and 1995, CSW reported net income
for common stock of $429 million and $402 million, respectively. For the years
ended December 31, 1996 and 1995, CPL reported net income for common stock of
$133 million and $192 million, respectively. In the event that the Final Order
is ultimately upheld after rehearing and any appeals, CSW and CPL would
experience a material adverse effect on their results of operations and
financial condition.
IMPLEMENTATION OF NEW RATES
As previously stated, CPL implemented bonded rates subject to refund in
May 1996. Based upon the Texas Commission's Final Order, which is still subject
to change resulting from CPL's and any other party's motion for rehearing, CPL's
refund obligation through March 1997, including interest, is approximately $95
million. The ultimate amount subject to refund will depend upon the final rates
ordered by the Texas Commission after any rehearing. Refunds will be applied to
customers' bills over one or more months as ordered by the Texas Commission.
RATE CASE PROCEDURAL SCHEDULE
CPL will file a motion for rehearing on April 21, 1997. A final
appealable order, which would include any changes resulting from the motion for
rehearing, is not likely to be issued prior to May 1997. Unless revisions in the
level of rates are made on rehearing, CPL expects to place the new rates into
effect in mid-June 1997. Under this schedule, CPL would likely begin making
refunds of bonded rates in August 1997.
APPEAL OF THE FINAL ORDER
CPL believes the Texas Commission has exceeded its statutory authority
in establishing a lower rate of return for the portion of CPL's investment in
STP categorized as ECOM and in establishing the Glide Path methodology. In
addition, CPL believes the Texas Commission made an error in reducing the
depreciable balance of STP by $185 million more than the $859 million designated
as ECOM. CPL intends to file a motion for rehearing and will take other legal
steps, as appropriate, in response to the Final Order. CSW and CPL are
continuing to analyze the ultimate financial impact of the Final Order.
OTHER MATTERS
LEGISLATION IN TEXAS
Utility restructuring legislation has been introduced, and additional
legislation may be proposed in the current session of the Texas Legislature
which, if enacted into law, could significantly affect the electric utility
industry in Texas. Retail competition legislation has been introduced in the
Texas Legislature and other electric utility-related legislation may be
proposed, as efforts continue to deregulate the electric utility industry in
Texas. CSW is unable to predict whether any electric utility-related legislation
will be enacted by the Texas Legislature, and if enacted, the ultimate form and
effects of such legislation.
DIVIDEND POLICY
In January 1997, CSW's board of directors elected to maintain the
quarterly dividend, payable on February 28, 1997, in the amount of $0.435 per
share, or an indicated rate of $1.74 per year. CSW continuously monitors factors
that could affect its dividend policy, including the regulatory and legislative
issues currently facing CSW and the electric utility industry. Decisions as to
future dividends will continue to be made quarterly by CSW's board of directors
based upon CSW's earnings, financial condition and other factors. Traditionally,
the CSW board of directors has declared dividends to be payable on the last
business day of February, May, August, and November.
ACCOUNTING POLICIES
CSW and CPL currently account for the economic effects of regulation in
accordance with Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation." Pursuant to the
provisions of SFAS No. 71, CPL had recorded approximately $1.2 billion of
regulatory related assets at December 31, 1996.
The application of SFAS No. 71 is conditioned upon CPL's rates being
set based on the cost of providing service. In the event that management
concludes that as a result of changes in regulation, legislation, the
competitive environment, or other factors, including the Final Order, CPL no
longer meets the criteria for following SFAS No. 71, a write-off of regulatory
assets would be required. In addition, CPL would be required to determine any
impairment to carrying costs of plant investments.
If CPL no longer met the criteria for following SFAS No. 71 and a
write-off of regulatory assets was required, CPL and CSW could experience,
depending on the timing and amount of any write-off, a material adverse effect
on their results of operations and financial condition.
CSW STOCK PLANS
CSW can issue CSW Common Stock, either through open market
purchases or original issue shares, through a long-term incentive plan, the
PowerShare plan and the ThriftPlus plan. Following issuance of the Final Order
and the decline in the market price of CSW Common Stock, which CSW management
believes is attributable in part to the Final Order, CSW management determined
that it was appropriate for CSW to begin funding these plans through open market
purchases, effective April 1, 1997. CSW raised approximately $76 million in new
equity through the PowerShare plan and ThriftPlus plan in 1996.
SPECIAL MEETING OF CPL STOCKHOLDERS
CPL announced on April 7, 1997 the results of its proxy solicitation of
preferred and common shareholders at a special meeting of shareholders held at
CPL's offices in Corpus Christi, Texas on April 7, 1997.
At the special meeting, the shareholders of CPL approved and adopted an
amendment to CPL's Restated Articles of Incorporation to eliminate a provision
restricting the amount of unsecured debt issuable by CPL. Shareholders who own
more than 86% of the outstanding preferred shares of CPL voted in favor of the
amendment, which is more than the two-thirds of outstanding shares needed for
approval. All of the outstanding shares of common stock of CPL, which are owned
by CSW, were voted in favor of the amendment.
FORWARD LOOKING INFORMATION
This report, the attached letter to the financial community, and other
presentations made by CSW and CPL contain forward looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934. Although CSW and
CPL believe that, in making any such statements, its expectations are based on
reasonable assumptions, any such statements may be influenced by factors that
could cause actual outcomes and results to be materially different from those
projected. Important factors that could cause actual results to differ
materially from those in the forward looking statements include, but are not
limited to: the impact of general economic changes in the U.S.; the impact of
deregulation on the U.S. electric utility business; increased competition and
electric utility industry restructuring in the U.S.; federal and state
regulatory developments and changes in law which may have a substantial adverse
impact on the value of CSW System assets; timing and adequacy of rate
proceedings and relief; the ultimate impact of the CPL rate case Final Order;
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; and decommissioning costs associated with
nuclear generating facilities.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits.
Exhibit 99.1 Letter to financial community dated April 3, 1997,
relating to the Final Order.
Exhibit 99.2 CSW letter to shareholders dated April 9, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrants have duly caused this report to be signed on its behalf by the
undersigned hereunto 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: April 10, 1997
By: /S/ LAWRENCE B. CONNORS
Lawrence B. Connors
Controller
CENTRAL POWER AND LIGHT COMPANY
Date: April 10, 1997
By: /S/ R. RUSSELL DAVIS
R. Russell Davis
Controller
CSW
=========================================
CENTRAL AND SOUTH WEST CORPORATION
=========================================
1616 Woodall Rodgers Freeway
P.O. Box 660164 * Dallas, Texas 75266-0164
214-777-1277
Becky Hall
Director, Investor Relations
April 3, 1997
Dear Financial Community,
On March 31, 1997, the Public Utility Commission of Texas (PUCT) issued a Final
Order that lowered the retail base rates of Central Power and Light Company
(CPL) by approximately $27 million from the level existing prior to CPL placing
into effect higher bonded rates in May 1996. The PUCT also ordered CPL to lower
its rates by an additional $16 million in 1998 and another $16 million in 1999.
In addition, rate case expenses are currently scheduled for hearing on April 14,
1997 with a final order due no later than May 30, 1997.
The financial impact of the Final Order is currently being analyzed. We plan to
provide the financial impact of the rate order as soon as the effect has been
determined. The following information is based upon CPL's preliminary review of
the PUCT final order, PUCT staff's workpapers and CPL's understanding of
relevant underlying assumptions in those documents and materials.
REVENUE
I. RECONCILIATION FROM CPL FILING TO PUCT FINAL ORDER IMPACT
--------------
(millions)
CPL REQUESTED RETAIL BASE INCREASE $71.0
Return on Equity (12.25% to 10.9%) (30.0)
Deferred Accounting (straight line vs. mortgage) (14.0)
Depreciation Rate Reduction (11.0)
Affiliate Transactions (4.0)
Decommissioning (5.0)
Other 5.0
--------------
RETAIL BASE REVENUE IMPACT OF PROPOSAL FOR DECISION 12.0
--------------
IMPACT OF PUCT FINAL ORDER
ECOM ROE (10.9% to 7.96%) (17.6)
ECOM Amortization (change from 32 to 20 years) 16.8
Deferred Accounting Return (2.0)
Affiliate Transactions (18.1)
Consolidated Tax Savings (9.5)
Decommissioning (2.5)
Rate Case Expenses (1) (6.3)
DSM (6.4)
Other 1.3
--------------
NON-INTERRUPTIBLE RETAIL BASE REVENUE REDUCTION (32.3)
--------------
Interruptible Customers 1.7
Miscellaneous Revenue 3.5
--------------
TOTAL RETAIL BASE REVENUE REDUCTION $(27.1)
--------------
REVENUE
II. RECONCILIATION OF ALJ PROPOSAL IMPACT
--------------
(millions)
ALJ Initial Proposal $(10)
Service Charges 5
Additional Transmission Charge for Interruptible
Customers 6
Rate Case Expense Surcharge 4
DSM Surcharge 8
Other (1)
--------------
ALJ Final Proposal $12
--------------
WEIGHTED
III. COST OF CAPITAL CALCULATION WEIGHTING COST COST
---------------------------------------
Non-ECOM
Long-Term Debt 46.81% 7.96% 3.73%
Preferred Stock 7.80% 5.89% 0.46%
Common Stock 45.39% 10.90% 4.94%
--------
Total 9.13%
--------
ECOM
Long-Term Debt 46.81% 7.96% 3.73%
Preferred Stock 7.80% 5.89% 0.46%
Common Stock 45.39% 7.96% 3.61%
--------
Total 7.80%
--------
Blended Rate
Long-Term Debt 46.81% 7.96% 3.73%
Preferred Stock 7.80% 5.89% 0.46%
Common Stock 45.39% 10.02% 4.54%
--------
Total 8.73%
--------
IV. GLIDE PATH CALCULATION (MILLIONS)
Annual Depreciation/Amortization Expenses $141.8
Pre-Tax Blended Rate of Return on Common Equity 11.43%
----------
Glide Path Before Income Tax $16.2
Tax Gross-up on Revenue 102.69%
Glide Path After Revenue Tax $16.6
Rounding (.2)
----------
PUCT Glide Path - 1998/1999 $16.4
----------
As previously reported, CPL intends to vigorously pursue all legal remedies.
CPL and CSW could experience a material adverse effect on results of operations
if the PUCT's final order is ultimately implemented.
This document contains forward-looking information intended to qualify for the
safe harbors from liability established by the Private Securities Litigation
Reform of 1995. Actual results may differ materially from such projected
information due to changes in the underlying assumptions. See Forward Looking
Information in the Combined Form 8-K dated March 31, 1997 and filed April 3,
1997.
Sincerely,
Becky Hall
CSW
----------------------------------
Central and South West Corporation
----------------------------------
1616 Woodall Rodgers Freeway
P.O. Box 660164 * Dallas, Texas 75266-0164
E.R. Brooks
Chairman, President and Chief Executive Officer
April 9, 1997
Dear Shareholder:
Many of you have called or written with questions and concerns about the recent
movement in Central and South West Corporation's stock price. We appreciate your
taking the time to communicate with us about this disappointing development. We
share your concern, and CSW management is taking steps to respond to the
situation. These steps are designed to protect the interests of our
shareholders.
Although our normal corporate policy is to not comment on changes in our stock
price, we believe a major factor contributing to the decline is the uncertainty
about the ultimate outcome of the Central Power and Light Company (CPL) rate
case. Recent developments relating to CPL's rate case and orders by the Public
Utility Commission of Texas (PUCT) have been reported in our news releases and
filings with the Securities and Exchange Commission.
On March 5, a PUCT Commissioner, when discussing the then-pending CPL rate case,
suggested that the PUCT was not bound by the prior decisions of the Commission.
Since then, CSW's stock price has dropped significantly, as have the stock
prices of other investor-owned utilities in Texas. In fact, the combined market
value of the four largest investor-owned utilities in Texas has dropped by more
than $3.7 billion since March 5.
On March 31, the PUCT issued a final order in the CPL case which would lower
CPL's base rates by approximately $27 million, retroactive to May 1996. The
final order requires CPL to refund the difference between the higher rates
customers have paid since May and the rate decrease. The Commissioners also put
into place a mechanism to lower CPL's rates by an additional $16 million in 1998
and another $16 million on top of the prior reductions in 1999. These
reductions, if ultimately upheld, would have a material adverse effect on the
earnings of CPL and CSW.
We will file a motion for rehearing on April 21, and we also are evaluating
other legal remedies. The Commissioners indicated that their action is designed
to prepare CPL for retail competition, a scenario where customers could choose
their electric supplier from among a number of competitors. However, retail
competition currently is not permitted under Texas law.
We support competition that is fair for all of our customers and our
shareholders. At the same time, we are committed to protecting the interests of
both groups as the transition to increased competition occurs within our
industry. We are therefore participating in state and federal policy discussions
to voice our concern that any new legislation meets this requirement.
As you know, in January 1997, CSW's board of directors elected to maintain the
quarterly dividend payable on February 28, 1997, of $0.435 per share, or an
indicated rate of $1.74 per year. CSW continuously monitors factors that could
affect its dividend policy, including the regulatory and legislative issues
currently facing CSW and the electric utility industry. Decisions as to future
dividends will continue to be made quarterly by CSW's board of directors, based
upon CSW's earnings, financial condition and other factors.
Traditionally, the CSW board of directors has declared dividends to be payable
on the last business day of February, May, August and November.
As one of more than 74,000 individual CSW shareholders, your opinion is
important to us and can make a difference to lawmakers. I URGE YOU TO BECOME
MORE INVOLVED IN STATE AND FEDERAL ISSUES THAT AFFECT YOU A SHAREHOLDER,
ESPECIALLY IF YOU ARE A TEXAS SHAREHOLDER. IF ARE WILLING TO HELP INFLUENCE
LEGISLATION, PLEASE COMPLETE THE ENCLOSED POSTAGE-PAID CARD AND RETURN IT TO US
AS SOON AS POSSIBLE. WE WILL ALERT YOU WHEN CONTACTING YOUR FEDERAL OR STATE
LAWMAKERS ABOUT A PARTICULAR ISSUE MIGHT BE HELPFUL TO YOUR INTERESTS AS A CSW
SHAREHOLDER.
Thank you for your continued support of Central and South West.
Yours very truly,
E.R. Brooks
Return Card
[ ] Please alert me when contacting my federal or state lawmakers about a
particular issue might be helpful to my interests as a CSW shareholder.
My E-Mail address is _______________________________________________
My FAX address is _________________________________________________
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